Leadership change step one in this bank's modernization effort

Freedom Bank of Virginia in Fairfax is taking bold steps to stay relevant.

The $513 million-asset bank has a new chairman and brought in a CEO to help it modernize. Freedom has reduced branch staff, restructured its board and management and purged its securities book in moves that led to a spike in costs and a large third-quarter loss.

Joseph Thomas, who became CEO in August, is hopeful the bank will absorb the last remaining costs in the fourth quarter. Thomas, who recently served as president and CEO of Bay Bancorp before its sale to Old Line Bancshares, views the chance to create a new long-term strategy as an intriguing opportunity.

Establishing a more stable and predictable earnings profile will be the biggest challenge for Thomas and H. Jason Gold, a founding director and Freedom's new chairman, said Joe Gladue, an analyst at Merion Capital Group.

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“I think they’ve brought on some good people ... with strong backgrounds that can help improve the overall infrastructure," Gladue said. "But there hasn’t been much time for any of that to become apparent."

Thomas discussed his goals and vision for Freedom in a recent interview. Here is an edited transcript of that conversation.

Why were you interested in joining Freedom?
JOSEPH THOMAS: I was interested for a variety of reasons. The bank is in one of the greatest banking markets in the U.S. in the northern Virginia and Washington [area]. It’s affluent, diverse and resilient through economic cycles. Freedom, as it exists today, has a very strong and stable platform, proven C&I clients, strong credit quality, streamlined branch structure and abundant capital for growth. Lastly, the board made a decision that it wanted to restructure itself, hire new management and pursue a new strategic plan and, at this point in my career, that was an exciting proposition ... both as a meaningful investor making a big personal commitment. as well as the new CEO, to help collaborate with the board and existing management team to create a contemporary community bank of the future.

What does building a contemporary bank entail?
My commitment to the board is to work between now and year-end assessing our strengths and weaknesses and developing a new strategy and five-year plan. Our vision is kind of a catch phrase: Experience innovation, bank with Freedom. We will pursue lead relationships with businesses, real estate owners and professionals in the northern Virginia [and D.C. market] to grow loans, deposits and financial services with a team of very experienced bankers.

We're going to use innovation to pursue a strategy focused on industry verticals with our commercial banking teams. Today, we have three strong verticals in government contracting; professional practice acquisition finance, which includes insurance agents, dentists and doctors; and nonprofits, which includes philanthropies, associations and churches. We will be building out other industry verticals where we can be an adviser to our clients and where decisions remain locally made with sales offices, of which we have four. We will be deploying market executives to take the bank into the community, focused on small business lending, gathering demand deposit accounts, using innovative sales practices, as well as technology, to [bring in] loan applications and new account applications in a digital fashion. Lastly, the residential mortgage area, which is the single area we’ve had the greatest success with originating new consumer relationships — we will continue to operate in affordability niche grant programs and digitally with our clients.

What are Freedom’s biggest challenges?
The bank’s greatest challenge is building a culture of innovation and sales. The bank has come out of a period of some turmoil with the leadership and management changes that have occurred. We're trying to refocus and refresh our team, which involves building a stronger foundation in our infrastructure, continuing to align our technologies to support our sales activities, cleaning up some legacy balance sheet and deposit funding cost issues, and building the talent and the culture to build this new strategy.

Will you be hiring more executives?
Since I arrived we have hired one key person: Shaun Murphy, our new chief operating and credit officer. He will be working closely with me on all aspects of support services. We're hiring a variety of positions in his area — a credit executive, IT executive, compliance executive. That will complete the establishment of the infrastructure of our go-forward strategy. Then, as we look to build our industry verticals and new market executives in our geographic footprint, I would expect in the new year we will continue to add banking talent.

It sounds like this is a complete overhaul.
The bank is 17 years old. It’s been very successful following Sept. 11. Its name is Freedom. It emerged at that time and has continued to be a dedicated community bank serving local markets in northern Virginia, but we're at a juncture where we are taking a different path, just as we're at juncture in what a community bank has to do to be successful and at a juncture in the environment in which community banks operate. The regulatory pendulum is swinging, making the environment more conducive for community banks to be successful. The economic environment is certainly strong and we're also at a crossroads in the credit cycle. We are late to the cycle so we're being very cautious. Much more geared to C&I lending and much less focused on commercial real estate. We're trying to be smart about what our growth profile looks like.

Are there lessons that you learned from Bay Bancorp that could be applied to Freedom?
Definitely. I grew up and spent 20 year at legacy Wachovia and had a range of experiences working in all facets of banking. But in the role at Bay, as CEO we completed four successful bank acquisitions and integrated cultures of companies that were a bit problematic because of financial circumstances. We had a lot of success building a strong franchise with lots of C&I loans, low-cost core demand deposit accounts, abundant fee income, which enabled us to create outside financial performance and ultimately a very attractive sale to Old Line Bank. The experience of building that franchise created a ton of lessons and learning opportunities that I will definitely bring to the new role at Freedom.

Is the goal to get Freedom to the point where it could be a buyer or a seller?
In the near term we're going to try and to execute our new vision and strategy, which will entail huge opportunities for organic growth. The mergers that have occurred have created a series of dislocations among clients and bankers. That affords us a huge opportunity to drive that organic growth to higher levels. That’s what I see as the biggest opportunity for us in the near term.

Freedom is among the top five locally headquartered community banks in northern Virginia, even at a relatively small size. We think there are opportunities to grow rapidly upon the establishment of the strategy. Certainly over time scale ... we have a lot of experience consummating M&A transactions. With our capital position and conservative lending, there should there be opportunities in the future that we certainly want to be poised to take advantage of.

Are there plans to enter other markets?
Our industry verticals are much less geographically limiting. Even in the IT sub-segment of government contracting, there are tons of those in San Diego, Boston, Huntsville [Ala.] and other markets. On the other extreme, with our sales offices and market executives who are running the small business and deposit gathering strategy, we definitely see opportunities to extend our markets. There are dislocations occurring. Alexandria and Prince William County are [markets] where we are evaluating opportunities to identify banking teams, build a set of customer relationships and perhaps ultimately establish additional physical locations to augment our capacity to gather low-cost core deposits.

Where do you hope Freedom is a year from now?
What I have said to my board is regardless of near- or long-term aspirations, the fundamental premise we should drive toward is to create a business model and an operating plan that enables us to compound our tangible book value per share by 10% a year. If you can deliver that kind of performance then you’ve earned your right to be independent in the long run. I think the strategy we're enacting will enable us to get the scale and profitability to get to that level. We will not be there in the next 12 months, but we will be on our way.

What we we’ll be working on over the next year is a series of tactics to improve our franchise value, focus on increasing our level of core deposits, improving our level of origination C&I loans and continue to drive and augment our level of fee-based revenues so that we can be somewhat insulated from a faulty yield curve and net interest margin compression. If we can get those things right, that will improve our franchise value and that will get us on the path to driving a 10% increase of tangible book value per share.

How are employees handling the changes?
It has been incredibly heartening and rewarding to work with this new team of people who are very eager to be led. I have been overcommunicating about all of the changes and explaining them in weekly emails. I sent a survey to every employee to have them tell me what we should continue to do and what should we stop doing. I went through and formed five employee committees on culture, costs, community, clients and capabilities — the 5 Cs of how to operate a bank. The amount of ideas I’ve gotten and the degree to which employees have been heard has helped us to rally around and create this new vision.

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