The management team at Sun Bancorp in Mount Laurel, N.J., is hopeful that 2016 will deliver as much success — or more — as the year that just ended.
The $2.3 billion-asset company earned $8.8 million during the first three quarters of 2015, and industry experts believe that the momentum will continue when fourth-quarter results are reported later this month. If so, Sun will make good on a January pledge by Thomas O'Brien, its president and chief executive, to turn a profit in each quarter of 2015.
Hundreds of community banks deliver long stretches of profits with clocklike regularity, but doing so is a recent phenomenon at Sun, which last reported an annual profit in 2008. The company lost more than $350 million during the intervening six years.
O'Brien, who joined Sun in mid-2014, has positioned the company to achieve even bigger things this year. If Sun remains in the black and continues its recent trend of sterling asset quality, it is poised to recover a deferred-tax asset in the neighborhood of $130 million. For those reasons, O'Brien makes American Banker's list of community bankers to watch in 2016.
"If we do this right, we'll have an embarrassment of riches," O'Brien said on a recent conference call. "We'll be able to look at [stock] buybacks. We'll certainly be able to look at a cash dividend and we'll still be able to grow the balance sheet. It's an unusually large de facto capital raise."
O'Brien is no stranger to turnarounds.
State Bancorp in Jericho, N.Y., hired O'Brien as president and chief operating officer in November 2006, less than a year after the $1.5 billion-asset company reported a $35 million annual loss and was ordered to pay a $44 million jury verdict tied to a mortgage fraud scheme perpetrated by a commercial borrower.
State promoted O'Brien to CEO in 2007. From that perch, he presided over its revival and eventual $222 million sale to in January 2012 to Valley National Bancorp in Wayne, N.J.
State was an otherwise solid bank temporarily sidetracked by a client's malfeasance; Sun, by contrast, seemed shipwrecked when O'Brien joined the company as a consultant in April 2014. In addition to a mountain of losses, Sun had more than $37 million of nonaccrual loans on its books, and its efficiency ratio had climbed above 100%.
O'Brien "is a veteran banker who has experience fixing troubled institutions, but I think he was surprised at the magnitude of issues facing Sun," Mark Fitzgibbon, Sandler O'Neill's director of research, said in an interview. "He's accomplished a herculean task turning around a company most people had given up on."
From O'Brien's perspective, Sun was operating too many businesses out of too many branches. His prescription was simple, but radical. To tackle asset quality, he sold $71 million of problem commercial loans. To refocus operations, he got out of residential mortgages, health care and asset-based lending. Finally, to rationalize the branch structure, he sold or closed more than 30 branches.
O'Brien's restructuring did the trick. Sun's noninterest expenses are down nearly 25% year-over-year, though the changes involved the elimination of more than 240 jobs, or nearly 40% of the company's workforce.
Some kind of shock treatment was required, O'Brien said.
"We were compelled to address expenses aggressively, since it was fundamentally impossible for the company to ever be profitable carrying a $130 million expense load," he said. "There hadn't been a profit since 2008. All the constituencies were tired. I felt we had to do this and do it now."
Ted Peters said Sun was one of the first investments he made after becoming chairman and chief executive of the Bluestone Financial Institutions Fund a year ago. Peters said he remains enthusiastic about O'Brien and the investment.
O'Brien has "done an excellent job of restructuring the bank and following through on his plan," Peters, the retired chairman and CEO of Bryn Mawr Bank in Bryn Mawr, Pa., said in an interview. "He announced a plan and he executed. We like that."
Wilbur Ross, whose firm WL Ross & Co. owns a 23% stake in Sun, has also been pleased with the company's progress under O'Brien, whom he described as a "cold-eyed pragmatist."
"The key is he is very good at implementation," Ross said in an interview. "He's used a one-step-at-a-time approach that was much needed. … I'm very, very impressed with what Tom has done so far."
O'Brien's blueprint is straightforward. He wants Sun to focus on commercial-and-industrial and commercial real estate lending in northern and central New Jersey, as well as the New York metropolitan area.
Most of the heavy lifting has already been accomplished. Through Sept. 30, commercial loans, including real estate, accounted for about 70% of Sun's $1.5 billion loan portfolio. Asset quality, which was at crisis levels when O'Brien arrived, is largely under control. Nonaccrual loans totaled $3.1 million at the end of the third quarter, or just 0.2% of total loans.
O'Brien is "trying to focus on a few things and do them really well," Peters said. "That was always my strategy [at Bryn Mawr], to be pre-eminent in the space we occupied."
Sun's biggest problem these days is keeping loans on its books. It originated $113 million in loans in the third quarter, but clients paid off $164 million. New Jersey is home to several banks that, like Sun, are awash in liquidity, so competition will likely remain fierce, Fitzgibbon said.
"It's a difficult operating environment," Fitzgibbon said. "There's a lot of capital chasing the same pool of loans."
A number of second-step conversions have flooded New Jersey banks with capital. The $4.3 billion-asset Kearny Financial in Fairfield raised $671 million in May. A year earlier, the $20.3 billion-asset Investors Bancorp in Short Hills raised $2.2 billion, while the $1.2 billion-asset Clifton Bancorp in Clifton raised $163.2 million.
Investors has made particularly good use of its capital, boosting its balance sheet by more than 16% since its May 2014 conversion, to $20.3 billion. Industry observers have similar hopes for Sun, though recovering the deferred-tax asset is crucial to improving Sun's long-term value.
The DTA "will increase tangible book value per share by 65% from current levels," Peters said. "If that happens, I think the value of the stock will go up [significantly]."
Fitzgibbon called the prospect transformative.
"A lot of investors will start to pay attention to the company because of the book value," Fitzgibbon said. "It will start to look like an attractive merger partner."