Community Banker of the Year: Sussex Bancorp's Anthony Labozzetta
Anthony Labozzetta isn't afraid of change.
As president and chief executive of Sussex Bancorp in Franklin, N.J., he is just as willing to try a new strategy as to reinvent past ones.
That propensity isn't lost on the directors of the $809 million-asset company he helped salvage after the financial crisis.
On many occasions, Labozzetta has worked hard to sway the thinking of a board that was accustomed to moving forward at a much slower pace before his arrival in early 2010, said Edward Leppert, the company's chairman.
"That's a part of the job Tony relishes," Leppert said.
Labozzetta's powers of persuasion were tested after the financial crisis, when he convinced directors that his team should be allowed to keep investing in growth initiatives even as a handful of employees worked to build a firewall around bad assets.
His lobbying skills came in handy again in 2013, when Sussex decided it could no longer rely on its 40-year history of running branches in largely rural markets. To gain traction in the more populous and prosperous areas of New Jersey and New York, Labozzetta proposed resurrecting a hub-and-spoke model that other banks had used before the financial crisis.
However, he wanted to incorporate a twist. Rather than relying on traditional branch managers, he wanted business development professionals to oversee the expansion.
It was a lot for Sussex's conservative board to process.
"We were a little bit cautious because it was a radical change," Leppert said.
Still, Labozzetta prevailed in convincing the board, and so far the strategy has worked out well. Newly added branches, which are operating much more efficiently than traditional sites, also have shown the potential for accelerating deposit growth.
"The thing that has impressed me the most about Tony is that he's always thinking about the business and how he can make it better, change it and keep it nimble and flexible as the environment changes," said Collyn Gilbert, an analyst at Keefe, Bruyette & Woods. "He's very pragmatic in his approach."
Labozzetta's persistence and creativity, willingness to adopt and adapt past concepts, and credibility with investors and directors, have played a big role in Sussex's rebound while creating a blueprint for revitalizing the branch model. For those reasons, American Banker has selected Labozzetta as one of its three Community Bankers of the Year.
Road to Sussex
Before joining Sussex, Labozzetta had never gotten the chance to run a bank. He was close at Interchange Financial Services in Saddle Brook, N.J., where, as chief operating officer, he was arguably being groomed for the top job. Instead, the $1.6 billion-asset company sold itself to TD Bank in 2007 for more than four times book value.
Labozzetta, who eventually became TD's executive vice president of retail distribution for the mid-Atlantic division, enjoyed a three-year stint that would prove instrumental to his career development. Notably, it gave him an opportunity to try retail strategies that he never had a chance to implement at Interchange.
Those experiments would eventually influence how he would run Sussex.
TD, for instance, sought out entrepreneurial employees with the "right personalities" to sell products to customers. The model, which Labozzetta would eventually use at Sussex, favored identifying employees who were geared more toward business development on a regional scale rather than branch management.
It would take years for Labozzetta to implement that model at Sussex, where his first order of business involved cleaning up the balance sheet in the wake of the financial crisis.
Noncurrent loans had begun to increase, peaking at 8.6% of total assets by September 2011, according to data from the Federal Deposit Insurance Corp.
Many turnaround artists followed a tried-and-true approach to address credit issues after the crisis. They completed bulk loan sales, wrote off huge losses and raised millions in capital to plug the holes. Those "fresh slate" efforts, however, were highly dilutive and damaging to existing shareholders, said Joseph Fenech, an analyst at Hovde Group.
Labozzetta and his team decided to chart a more difficult course to recovery, pursuing parallel paths where one small team would focus on internally working out problem loans while everyone else focused on building for the future. The company would eventually raise a small amount of capital, bringing in about $7 million in 2013.
At one of his first board meetings, Labozzetta told Sussex's directors that his team would be reinvesting in the bank rather than simply grappling with bad assets and slashing costs. The pitch met with some resistance, but directors eventually gave Labozzetta their vote of confidence.
The approach made total sense to the company's new CEO.
"You're giving away shareholder capital if you do a bulk loan sale," Labozzetta said. "The key was to reignite the organization, solve legacy issues, bring in new talent and open regional offices."
Labozzetta held weekly Monday morning meetings with Chief Financial Officer Steven Fusco — a recruit from the Interchange days — and a credit workout team to discuss progress on loans, which were segmented into categories and subcategories. Everyone else was insulated from those problems so they could focus on generating income.
"It was overwhelming to look at when you saw the dollar amount and number of problem assets," Fusco said. "But failure was not an option and we both looked at it as an opportunity to fix something."
By shielding most employees from credit woes, Labozzetta kept morale high. He installed regional lenders, brought in new technology and reversed a decision by previous managers by investing in the company's insurance business. The insurance business, which had been losing money, generated nearly $2.8 million in commissions and fees in the first half of this year.
Labozzetta's approach is "much harder and that's why it is so impressive," Fenech said, adding that it positioned Sussex to "jump off the launching pad" once its credit issues were addressed.
Old Is New Again
In some ways the prolonged recovery was a blessing in disguise to Sussex, Labozzetta said. The company wanted to expand geographically, but doing so would require branches to drum up name recognition and new business.
The turnaround caused management to really think about what these new locations would look like, particularly at a time when banks of all sizes were beginning to rethink — and reduce — their dependency on branches.
That philosophical shift was top of mind as Labozzetta and his team began a more than yearlong process developing Sussex's new branch model. They determined that wholesale changes would be needed — not only to branch appearances, but also to job descriptions and employee requirements.
"The bank paradigm has shifted," Labozzetta said. "We see bank transactions no longer happening in the branches, but more on the digital side of the world."
Labozzetta's vision was built around his experience at TD. He wanted employees who would be far happier venturing out to meet with customers and prospects as opposed to staying inside the branch. Those managers would also need to oversee more than one location.
"The secret sauce is the business-development manager, who manages three locations and not just one," Fusco said. "They are sales motivated and they're out there getting new business."
Each manager is responsible for a hub location and several "spokes." Hubs aren't much larger than 1,000 square feet and are packed with technology such as tablet stations to help meet customers' needs. ATMs and full-service lending teams are also available. (Spokes are still in the works, but will be smaller.)
Labozzetta and his team have tapped into "the wave of the future," said Bob Kafafian, president and CEO of Kafafian Group. Branches generally are getting smaller in size and fewer in number and are being built around giving customers advice rather than completing transactions. Sussex's model hits on all of those notes.
"You still need some physical presence for your people to give advice and resolve issues and develop business and relationships," said Kafafian, who has known Labozzetta for years and has worked with him as a client. "He's one of the more forward-thinking CEOs that I know, and he is not afraid to make changes."
The preliminary results have been positive. Sussex has opened two hub locations — in Astoria, N.Y., and Oradell, N.J. – with spoke locations to come. Labozzetta believes Sussex will only need six to nine branches to provide the same level of service that Interchange provided when it had 28 branches in Bergen County.
The branches also improve efficiency, with Fenech noting that the salary paid to a business development sales manager is lower than what it would cost to compensate multiple branch managers.
Expense management is a welcomed plus, but Labozzetta is insistent that the model was largely geared toward growing the company over the long term. "If you go cost first, you will end up looking at a lot of data and you'll reduce staff — but you won't add the pieces that get you the business," he said.
Banks should instead look to "rethink costs so they're going to the right jobs," Labozzetta added. "And then along the way we got the cost saves."
Eye on the Future
Labozzetta's star continues to rise in an industry where he has been active for decades. He is currently serving a three-year term on the New Jersey Bankers Association, where he was also selected to join the group's executive committee.
John McWeeney Jr., the association's president and CEO who has known Labozzetta for about a decade, praised the veteran executive for being "a dynamic banker" who has earned the respect of his peers. "His experience working at a smaller bank — and a larger one like TD — gives him insights into our needs as an industry, which is helpful for our members," he said.
Labozzetta's reputation was cemented when he was at Interchange, Fenech said, pointing out that TD kept him for years after buying his bank. He also noted that Interchange's loan book held up "better than most" during the crisis. TD "respected his work," Fenech said. "I doubt they would have kept him on otherwise."
Labozzetta's reputation at Interchange also made an impact on Lawrence Seidman, a bank investor from New Jersey with a storied history in shareholder activism. Seidman began buying Sussex stock in late 2014 at about $10 each; those shares have appreciated by more than 60%.
"He's an excellent banker and he's doing a great job," said Seidman, who is not looking for the company to find an exit strategy to maximize value for investors. "His management has been beneficial to shareholders."
The key to Labozzetta's management style, evidenced by his post-crisis efforts, is his ability to make adjustments when necessary to survive and thrive in a climate of change.
The "formula isn't a static one," said Mark Hontz, Sussex's vice chairman. "If a strategy isn't building the right relationship with the customer, the shareholder or employees then it will surely be adapted or changed as time goes on."
A willingness to change could help Sussex as regulators scrutinize the banking industry's reliance on commercial real estate lending. CRE loans amount to more than 400% of Sussex's capital, which is well over the level that typically catches the eye of examiners.
The company is looking to diversify by adding more Small Business Administration and commercial-and-industrial loans. However, Labozzetta is confident in the strength of Sussex's CRE book, noting that management has kept loan-to-value ratios low and the borrowers are familiar customers.
A commitment to change also should help Sussex stay ahead of shifts in customer behavior. While the hub-and-spoke model seems to be working now, Labozzetta readily admits that Sussex might have to find new ways to reach customers in three to five years. So the bank is always looking for ways to improve.
For instance, Sussex taps an employee to serve as the customer advocate during strategic planning sessions. That individual is "basically the attorney for the client," charged with voicing how customers might react to changes such as new fees, Labozzetta said.
Advocacy had led to meaningful change at Sussex, including a decision to adopt a private bank feel where clients sit at a desk to discuss their needs or complete transactions rather than standing at a counter.
In another instance, Labozzetta stepped in to the advocacy role during an annual credit summit, pushing for quicker turnarounds for loan applications. He successfully pressed his team to shorten some of the response times to 24 hours.
"You can't be someone who doesn't like change. We have to adapt," Labozzetta said. "The worst thing you can do is nothing."