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Conference of State Bank Supervisors
2016 Community Banking Competition Case Study
Freedom Bank: A Case Study
University of Missouri-Kansas City
Students: Maria Davis, Jacob Renner, Dakota Sommerfield, and Clara Stahl
Advisor: Dr. William Keeton
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I. Executive Summary
Freedom Bank is a community bank located in Johnson County, Kansas. Beloved by the
community, Freedom Bank reinvented the traditional banking customer interface to feel like a
coffee shop. Freedom Bank specializes in high-quality commercial lending to small businesses.
Non-Farm, Non-Residential Commercial Real Estate and C&I loans account for 70% of
Freedom Bank’s total loan portfolio. The financial success of small businesses in the region
directly contributes to the financial success of Freedom Bank. This symbiotic relationship sets
management’s philosophy for interacting with businesses in the community. Freedom Bank’s
ability to manage credit risk has helped them minimize losses and generate profits from high-
quality credit, evidenced by returns on assets and equity that consistently outperform the bank’s
peers.
It is expected that Freedom Bank’s continued growth and success into the future will not
only make them into a more well-known and respected bank, but also allow them to truly serve
their local community. Their three main stakeholders are employees, customers, and
shareholders. By ensuring that these three parts of the bank are in equilibrium, they achieve
“freedom”, which is the essence of small businesses’ spirit and core values. Freedom Bank is the
epitome of relationship lending and community banking done right, and upon further analysis of
their financials, management, and community involvement, you will see why.
II. Introduction
The Kansas City metropolitan area consists of 15 county districts and is situated on the
border of Missouri and Kansas. With a population of over 2 million and more than 50,000
privately held businesses, Kansas City residents have diverse banking needs. These needs are
met largely by locally owned banks, which control 76% of the Kansas City banking market.
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Despite a nationwide trend toward consolidation in the banking industry (FDIC, Community
Banking Study i), Kansas City is home to more banking operations per capita than any other
major city in the Midwest as a result of the late adoption of interstate branching provisions in
Kansas and Missouri ("KC Banking: Behind the Numbers"). Freedom Bank is a community bank
located in Johnson County, Kansas. Johnson County is one of the most affluent counties in the
nation and is the second largest in the Kansas City metropolitan area.
A community bank is usually defined as a bank with less than $1 billion in assets.
However, the FDIC notes that community banks are also characterized by limited geographic
scope, local ownership, local control, and local decision making. As of 2011, community banks
comprised 92% of FDIC-insured banks and 95% of all U.S. banking organizations (FDIC,
Community Banking Study i). Freedom Bank held $164 million in assets in 2015 (Uniform Bank
Performance Report) and utilizes a relationship banking strategy characteristic of community
banks (FDIC, Community Banking Study i). Chartered in 2005, Freedom Bank is a single-branch
de novo bank that weathered the Financial Crisis of 2008, a period in which 12.6% of de novo
banks chartered between 2000 and 2008 failed and 17.3% exited by merger or liquidation (Lee
and Yom).
Freedom Bank’s small size, highly customer-focused management, and high-quality
credit policies are critical components of its competitive success. They follow a relationship-
based lending strategy, which gives Freedom Bank an advantage over larger competitors. Large
banks have some advantages in transaction-based lending that relies on quantitative information
such as financial ratios, collateral, or credit scores. However, small banks like Freedom Bank
have advantages in relationship-based lending assessed on contextual or qualitative information,
such as the owner’s character and the demands of the local community (Brainard). Freedom
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Bank is able to compete with banks of similar size in the Kansas City metropolitan area through
its specialization in high quality commercial lending to small businesses. Other banks in the area
specialize in residential real estate lending; therefore, Freedom Bank is unique to this area. Of
the more than 50,000 private-sector businesses in the Kansas City metropolitan area, 97% are
small businesses, making community banks like Freedom Bank essential components of the local
economy (“51 Areas Have More than 25,000 Small Businesses”). Our analysis of Freedom Bank
for this case study assesses their effects on the community, their specific management practices,
and their overall financial performance, highlighting the importance of small business lending.
III. Impact of Small Business Lending on the Community
As Freedom Bank nears its 10th anniversary, it has become an integral part of the Greater
Kansas City community and economic environment. The bank’s management team has a
thorough understanding of the local economy and has tailored the bank’s focus to suit the
market. As CEO Kurt Knutson explains, “The Kansas City market is made up predominantly of
privately held businesses. We’re not a Fortune 500 town. We do have a few large companies–for
example, Sprint, Garmin, and Hallmark–but for the most part, businesses in Kansas City are
privately held” (Knutson). Small businesses in particular rely on community banks for
commercial credit. “As of 2011, community banks held 14% of banking industry assets, but 46%
of the industry’s small loans to farms and businesses” (FDIC, Community Banking Study, ch. 5-
1). It is also estimated that 51% of small business loans originated from community banks in
2014 (Lux and Greene 11). Recognizing a need for a locally owned, locally managed bank to
serve Kansas City’s market of more than 50,000 small businesses, Freedom Bank’s lending team
extends commercial credit almost exclusively to customers located in and around the Kansas
City metropolitan area, supporting economic growth in the local community in a symbiotic
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relationship. Small business lending drives a critical component of the United States economy.
The importance of small businesses is highlighted by the majority of new jobs that they create,
which was approximately half of all jobs created in November 2014. Access to credit provided
by community banks like Freedom Bank is crucial to the success of these small businesses (Lux
and Greene 26).
Community banks are heavily dependent on the success of the local economies in which
they operate. “Banks are successful because their customers are successful. We are a reflection
of our customer and our community,” says Kansas State Bank Commissioner Deryl Schuster
(Schuster). Community banks foster economic growth and help to ensure that the financial
resources of the local community are put to work by carrying out the basic banking functions of
lending and deposit gathering on a local scale (FDIC, Community Banking Study, ch. 5).
Personal investment in the community leads to increased accountability for business decisions.
Accountability, in a community atmosphere of mutual respect and understanding, provides a
competitive advantage for community banks over larger banks, which may be far removed from
their customers and their businesses. Freedom Bank’s management team has virtually no
anonymity; the nature of the bank’s commercial lending business demands repeated face-to-face
interactions with customers and extensive engagement in the local community. CEO Kurt
Knutson explains,
We’re not taking deposits from one area and loaning it out in another part of the country. We’re loaning it out here. We don’t have the anonymity that you can find in larger organizations…This is the community that we live in. This is the community our kids go to school in…We’re doing things side-by-side with our customers and so we have a higher degree of accountability in the same fashion that our customers do. (Knutson) Building community relationships has been at the forefront of Freedom Bank’s
operations since its inception. Bank founders have redesigned the traditional banking experience
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to better meet customer needs and establish Freedom Bank as a space for community
engagements. As CEO Kurt Knutson explains, “From a banking perspective, the retail delivery
model has been broken for quite a while” (Knutson). The bank environment has traditionally
centered around a line of teller windows with velvet rope barriers between lanes as the only
means of separation between customers. Tellers typically have only a small fraction of the
windows open for service, and they monitor both the bank’s drive-through and lobby
simultaneously. This bank design is not conducive to the privacy often desired while conducting
financial business and gives an impression of distraction and inefficiency. In contrast, Freedom
Bank’s innovative Guest Plaza design is much more customer-friendly.
What we tried to do was look at it as a customer and say, ‘What do we not like about that delivery vehicle?’ and then start from scratch and design it out… [We’ve] created an environment that’s much more vibrant. When you come into the Guest Plaza, you’re greeted immediately. We’ve made the space warm and inviting. (Knutson)
Freedom Bank’s website touts the absence of velvet ropes. There are no tellers in sight in the
Guest Plaza. Rather than through a traditional teller-line format, all bank transactions are
conducted privately in small transaction spaces via a remote teller system that utilizes video
technology for communication. Sound-proof locked doors separate these private rooms from the
main plaza, ensuring uninterrupted privacy for customers.
Freedom Bank’s innovative Guest Plaza not only repairs the broken retail delivery model
of traditional banks, but it serves as a “third place” for many customers as well. “The phrase
‘third places’ derives from considering our homes to be the ‘first’ places in our lives, and our
workplaces the ‘second.’ [Third places] host the regular, voluntary, informal, and happily
anticipated gatherings of individuals beyond the realms of home and work” (Oldenburg). The
Guest Plaza is a comfortable space where customers can enjoy free coffee and snacks while
networking with other customers, using the Wi-Fi zone and guest computer for getting their
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work done, catching up on news from the numerous magazines and newspapers that are always
kept current, or taking a break to play Rock Band on the PlayStation 4. The Guest Plaza also
hosts community events in a relaxed atmosphere. As customer Whitney Elliott, CEO of Stallard
Technologies, Inc. (STI), explains,
We love a good Freedom Bank event. It’s a place where, because we are so involved in the community, and because of the relationships that Freedom Bank has with so many customers and companies and small business owners here, I consider so many of my good friends to be people that you just run into at the bank.” (Elliott)
Aside from creating a positive customer experience, the community interactions fostered by the
bank’s design are a key component of Freedom Bank’s relationship banking strategy.
IV. Evaluation of Freedom Bank’s Management of Small Business Lending
According to Freedom Bank’s Chief Lending Officer Dave Vander Veen, “Bank
management is focused on long-term growth, which comes from adding quality loans to the
portfolio and developing long-term customer relationships” (Vander Veen). To effectively
analyze which loan opportunities are high-quality, loan officers must have a thorough
understanding of the quantitative data and the qualitative aspects of their customers’ business.
This allows for the most informed decisions, detailed financial monitoring, and swift assistance
during times of hardship. This section will explain the quantitative tools and qualitative factors
that influence Freedom Bank’s extension of credit.
Perhaps the largest threat to any bank is the risk of its assets. To maintain a sound
financial condition, Freedom Bank’s management has implemented both formal procedures and
an informal “credit culture” that reduces their exposure to three types of risk–market risk, credit
risk, and solvency risk. This section will explain these types of risk and evaluate Freedom
Bank’s strategies to mitigate them.
Market Risk
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The small business lending market is extremely diverse. Small businesses range in size
from one employee to a few hundred and are involved in nearly every industry from plumbing to
dentistry (Brainard 2). This diversity limits bank exposure to market risk from industry-
concentrated assets. The Kansas City metropolitan statistical area economy is more diversified
than that of most other U.S. cities (Bernardo). Freedom Bank only loans to local businesses,
which means they share in that diversification. The benefits of small business lending due to
increased diversification are demonstrated in a 2006 study which found that increasing loans to
small businesses lowered loan portfolio risk and resulted in decreased bank failure rates (Kolari,
Ou, and Shin 13).
Credit Risk
Freedom Bank has effective strategies to manage credit risk from initial loan evaluation
to monitoring. Freedom Bank’s loan decision and support strategy is based on procedures
outlined in Commercial Loans to Business: Reference Guide, published by Robert Morris
Associates (Knutson). For example, a chapter on the loan decision side entitled “Business Risk
Analysis” explains how to evaluate a business's cost advantages over competition, systems for
controlling production and distribution, and control over prices to maintain margins (Robert
Morris Associates 15-19). Traditional financial statement analysis plays an important role in loan
decisions. Borrowers’ financial health is estimated through sales and operating profit, makeup of
current assets, type and time structure of liabilities, and ending retained earnings (Robert Morris
Associates 39-41). Business risk and financial health are two of the most important factors that
determine a borrower’s ability to repay debt. Once these have been analyzed, loan officers at
Freedom Bank consider the information within the decision making framework outlined in the
exhibit below.
9
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If the analysis shows ability to pay back a potential loan, indicates low overall business
risk, and inspires confidence in management’s ability to execute their business, loan officers can
then develop a loan structure. Freedom Bank’s management will only sign off on a loan if it
meets the customer’s needs–not just the bank’s. Freedom Bank’s philosophy is to structure loans
to help a business grow, because “as they grow, we grow” (Knutson).
Solvency Risk
A bank’s main protection against insolvency is high capital. Freedom Bank’s strategy to
increase capital is to avoid large loan losses by maintaining credit quality standards despite a
decrease in supply of high-quality loans. To simultaneously increase assets, management
purchased $27.6M in securities during 2015 (Uniform Bank Performance Report). This is not
abandoning businesses, but instead supplementing Freedom Bank’s growth safely, so that they
can continue to make the high-quality loans. Large loan losses not only eat away capital but
make it difficult for a bank to raise new capital through either selling stock or borrowing. By
using securities to diversify and supplement income, Freedom Bank can avoid these large losses.
V. Financial Performance
Freedom Bank’s careful attention to the management of its small business lending
directly translated to the bank’s financial performance. As of the end of 2015, Freedom Bank
held $164.3 million in assets. Because it specializes in commercial lending, Freedom Bank’s
assets are far more concentrated in commercial and industrial (C&I) loans and non-farm, non-
residential real estate loans in comparison to two peer groups–Peer Group 6, which is comprised
of similar-sized metro banks in the United States, and a peer group consisting of all Johnson
County Banks with assets less than $1 billion. C&I loans and non-residential real estate loans
account for 51.0% of total loans in the peer group of Johnson County banks, and 49.3% of total
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loans in Peer Group 6. In contrast, the two loan categories account for 70.3% of Freedom Bank’s
total loan portfolio. Freedom Bank focuses its lending on high-quality commercial loans rather
than residential construction and mortgage lending, unlike many of its competitors in Johnson
County, Kansas. Home mortgage loans comprise merely 13% of Freedom Bank’s total loans, in
comparison to 26% of total loans in the Johnson County peer group and 25% of total loans in
Peer Group 6 (Uniform Bank Performance Report).
C&I30%
Non-Residential Real Estate 41%
Other Commercial Real Estate12%
Home Mortgage Loans13%
All Other4%
Freedom Bank
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Within the commercial lending market (which includes C&I and Non-Farm, Non-
Residential Commercial Real Estate), Freedom Bank focuses specifically on issuing credit to
small businesses in the form of working capital lines of credit, term loans, and owner-occupied
real estate (Vander Veen, Knutson). These small business loans, typically defined as C&I loans
C&I23%
Non-Residential Real Estate28%Other Commercial Real Estate
14%
Home Mortgage Loans26%
Loans to Individuals3%
All Other6%
Johnson County Banks <$1B
C&I14%
Non-Residential Real Estate35%
Other Commercial Real Estate10%
Home Mortgage Loans25%
Loans to Individuals2%
All Other13%
Peer Group 6
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of $1 million or less, comprise more than half (51%) of Freedom Bank’s total C&I lending. As a
small community bank, Freedom Bank concentrates a much greater proportion of its commercial
lending activity in small business lending than larger banks, whose small C&I loans comprise
only 16% of total C&I lending, on average.
Freedom Bank’s total C&I lending increased steadily from founding until its seventh year
of operation. Since the 2013 peak, the bank has slightly scaled back business lending. The bank
decreased total business loans by 8.5% in 2014 and again by 1.3% in 2015 (Uniform Bank
Performance Report). The bank has also reduced small business loans (SBL), which fell by
11.7% in 2014 and 5.7% in 2015 (Call Report). The bank’s decrease in lending can be attributed
to the slower-than-expected economic growth in the U.S., which has hovered just above 2%
since the Financial Crisis of 2008 and has held back growth in Kansas City.
≤ $1 Million
51%
> $1 Million
49%
C&I Loan CompositionFreedom Bank
≤ $1 Million
16%
> $1 Million
84%
C&I Loan CompositionU.S. Banks > $1B
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0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Freedom Bank Total C&I Loans(thousands of dollars)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
Freedom Bank C&I Loans(thousands of dollars)
C&I Loans Total SBL
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Freedom Bank has maintained consistently conservative credit standards since before the
Financial Crisis of 2008, but the economic downturn left many small businesses unable to meet
those standards. As a result, the bank is limiting growth in small business credit rather than
sacrifice asset quality for returns. In the meantime, the bank is supplementing asset growth with
purchases of highly safe U.S. Agency securities.
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
United States GDP Growth
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
2011 2012 2013 2014 2015
Asse
ts (t
houa
nds)
Freedom Bank Asset Composition
U.S. Treasury & Agency Securities Net Loans & Leases Other
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Freedom Bank’s management strategy has effectively guided the bank through the
typically tumultuous early years of a de novo bank’s operations in addition to helping it survive
the Financial Crisis, a period during which 238 of the 629 de novo banks chartered in the five
years prior to 2008 failed or exited the market (Murphy and Wilder). Since the bank’s founding
in 2006, Freedom Bank has experienced rapid asset growth followed by a subsequent leveling
off around the fifth year of operations, a pattern typical of de novo banks (DeYoung). In
comparison to peers, Freedom Bank utilizes these assets more effectively, earning income on a
larger portion of its overall asset portfolio.
020,00040,00060,00080,000
100,000120,000140,000160,000180,000
12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
Freedom Bank Total Assets(thousands of dollars)
90%91%92%93%94%95%96%
2011 2012 2013 2014 2015
Average Earning Assets to Average Assets
Freedom Bank Peer Group 6
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In addition, the bank effectively manages costs, operating with a consistently better
efficiency ratio (non-interest expense divided by the sum of net interest income and non-interest
income) than banks in Peer Group 6. Freedom Bank’s relatively good efficiency ratio indicates
an ability to generate revenues with lower marginal overhead costs. The bank’s loan staff
provides a key advantage here, as it operates with far fewer employees than its peers (Vander
Veen).
Freedom Bank had no noncurrent loans on December 31, 2015, indicating highly
effective credit management practices (Uniform Bank Performance Report). Freedom Bank’s
impressive loan performance can be attributed to management’s focus on monitoring outstanding
small business loans to prevent defaults before they occur. This ability to issue and manage high-
quality credit has helped Freedom Bank reduce losses and generate profits, evidenced by returns
on assets and equity that generally outperform the bank’s peers.
50%
55%
60%
65%
70%
75%
80%
2011 2012 2013 2014 2015
Efficiency Ratio
Freedom Bank Peer Group 6
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One measure for evaluating the way a bank’s management employs its earning asset base
is the Net Interest Margin (NIM), or as it appears on the Uniform Bank Performance Report, the
Net Interest Income (Tax Equivalent) to Average Earnings Assets Ratio. NIM can change as a
result of changes in the ratios, Interest Income to Average Earnings Assets and Interest Expense
to Average Earning Assets. These ratios fluctuate as management restructures the balance sheet,
-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Return on Assets
Freedom Bank Johnson County Banks < $1 Billion
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Return on Equity
Freedom Bank Johnson County Banks < $1 Billion
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the interest rate environment changes, and bank loan and deposit pricing becomes less or
increasingly competitive (Koch and Macdonald). Although Freedom Bank’s NIM has decreased
over the past five years, its NIM of 3.39% at year-end 2015 is within the normal range of 2-5%
and is consistent with similar decreases in comparison peer groups. The two peer groups–Peer
Group 6 and Johnson County Banks with under $1 billion in assets–also appear to have a
gradually decreasing NIM (Uniform Bank Performance Report).
In order to continue issuing credit to borrowers and manage solvency risk, Freedom
Bank’s management team has made sure to maintain adequate capital. At year-end 2015, the
bank’s equity-to-assets ratio of 10.3% was on par with peers, and its Tier 1 risk-based capital
ratio of 15.4% was well above the regulatory minimum. Its total risk-based capital ratio of 16.3%
indicates strong financial health and more-than-adequate capitalization (Uniform Bank
Performance Report).
0.0%
5.0%
10.0%
15.0%
20.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Equity to Assets
Freedom Bank Johnson County Banks < $1 Billion
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Freedom Bank’s financial management strategy has successfully guided the bank through
the typically tumultuous early years of a de novo bank’s operations and the Financial Crisis, a
period during which nearly 30% of de novo banks chartered between 2000 and 2008 failed or
exited for other reasons (Lee and Yom). The bank’s management team effectively navigated the
challenges faced by de novo banks to create a business that is profitable and financially sound.
A 2014 FDIC study notes that a de novo bank’s asset growth and profitability do not
typically converge with established banks until at least the tenth year of operations. Median de
novo ROA is normally only about half as large as at established banks, and also tends to be more
variable (Lee and Yom). In addition, the study concludes that the slow rate at which de novo
bank profitability improves is likely due to cost factors rather than revenue, as de novo banks
tend to have trouble controlling expenses. Although most de novo banks operate at relatively
high efficiency ratios, Freedom Bank’s cost-management strategy has resulted in an efficiency
ratio that is consistently lower than those of its peers. This efficient use of resources drives
returns to the bottom line, and ensures the bank can continue growing and meet the demands of
its stakeholders. The initial rapid asset growth of de novo tends to quickly erode equity-to-assets
ratios. In contrast, Freedom Bank’s leadership has stabilized the bank’s equity-to-assets ratio,
reaching a level on par with its peers and effectively managing solvency risk.
As economic growth in the U.S. accelerates in the coming years, Freedom Bank expects
growth in its small business lending to resume. President Dave Vander Veen projects bank assets
to reach $400 million by 2020 (Vander Veen). As the economy improves, Kansas City’s small
businesses will look for expansion opportunities, and new businesses will enter the market,
creating ideal opportunities for Freedom Bank to expand its support of local small businesses.
VI. Conclusion
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Freedom Bank’s core values balance the demands of its primary stakeholders: customers,
employees, and shareholders. Keeping these demands in balance allows the bank freedom to
operate effectively; thus derives the bank’s name, “Freedom” (Knutson). This freedom in
decision-making unique to a locally owned, locally managed bank has served Freedom Bank
well thus far, and it will be essential to its continued success going forward.
With a combined 53 years of experience in commercial banking, Freedom Bank founder
and CEO Kurt Knutson and President Dave Vander Veen have played to their strengths in
managing the bank’s focus and direction. While founding the bank, Kurt realized that there was a
real need for a bank like Freedom Bank and noticed “that the market, while it had a growing
number of banks, had a shrinking number of locally owned, locally managed commercial banks”
(Knutson).
In the years immediately preceding the Financial Crisis of 2008, residential mortgage
lending and construction lending were booming. When asked why they chose to not pursue
mortgage and construction lending during this time, Kurt Knutson said, “Our answer then was
the same as it is now–that is not what we know.” Top management’s ability to make
independent and knowledgeable lending decisions helped them grow during the crisis with their
concentration of commercial loans across a wide array of business sectors.
The emphasis on relationship lending has translated into success for Freedom Bank as
well as their customers. Commercial loan customers benefit from the attention and coaching that
Freedom Bank provides them that larger transactional banks cannot provide. They can truly
understand a small business and its needs, being a relatively new business themselves. The focus
on relationship lending and understanding of their customer’s needs has allowed Freedom Bank
to enjoy low default rates because they know and understand their customers' businesses.
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Freedom Bank has strong financial condition, effective management of small business
loans, and ability to connect with small business clients. Other banks in the community do not
have the same relationships as Freedom Bank does to its small business customers. Freedom
Bank is able to ensure high quality commercial loans, which enables it to be profitable, and
because of this relationship, Freedom Bank will continue to grow and be a part of small business
lending in the Kansas City area.
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Lux, Marshall, and Robert Greene. "The State and Fate of Community Banking."-, Harvard Kennedy School, Mossavar-Rahmani Center for Business and Government. February 2015.
Murphy, Patrick, and Peter Wilder. “A New Dawn for De Novo Banks?” Bank Director.
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Francisco: Omega Performance Corporation, 1984. “Schuster, Deryl Interview.” Personal Interview. 18 Apr. 2016 "Uniform Bank Performance Report." Federal Financial Institutions Examination
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