Fortunes can reverse quickly in banking — sometimes in a favorable direction, as they did for Sun Bancorp Inc. in Vineland, N.J.
The $3.5 billion-asset company was grappling with a regulatory order and coping with deteriorating credit in its slow-growth southern New Jersey market when it secured a $100 million investment last week, half of it from billionaire Wilbur Ross' private-equity group. Now with beefed-up capital and a respected partner, Sun is eager to start scooping up banks in New Jersey.
But the company has work to do before it can go on a shopping spree.
"Judging by the fact that they're not profitable and haven't been profitable for really the last four quarters, it would seem to me that getting offensive with the capital is probably not the first order of the day," said Jason O'Donnell, an analyst at Boenning & Scattergood Inc.
Ross, who is to join Sun's board and control 24.9% of the company once the deal closes, contends that Sun is a diamond in the rough.
"We believe that there is a fundamentally strong institution that is temporarily burdened by commercial real estate loan losses," Ross said in an interview by e-mail last week.
But he acknowledged that Sun has not turned the corner. The company faces more loan losses, he said, and will have to eat its vegetables before deploying the capital.
"Its challenge will be to put the loan losses behind it as soon as possible," he said. "It probably will be the end of this year or early next year before it starts making acquisitions, with or without FDIC assistance."
The infusion would put to bed any concern about the banking company's capital position.
"It looks like the raise is sufficient … to put them in a position where, once credit quality does stabilize and profitability does return, they can get offensive from a whole-bank standpoint," O'Donnell said.
Sun has struggled more than its peers with credit deterioration, O'Donnell said. As of March 31, it had a nonperforming assets ratio of 2.54%, compared with the state average of 1.71%.
Also, the demographics of its region, southern New Jersey and some parts of the state's midsection, are not as attractive as in nearby markets, he said.
"Household income and growth in that area is not anywhere near where it is in northern New Jersey, or southeastern Pennsylvania," O'Donnell said. "And so it lacks some of the wealth [and] lacks some of the growth prospects that we see elsewhere in New Jersey."
The subsidiary Sun National Bank has not turned a profit since the first quarter of 2009. The dilutive effect of the investment — which would more than double the company's shares outstanding — will put Sun under more pressure from shareholders, said Jeff Marsico, an executive vice president at Kafafian Group in Parsippany, N.J.
"They have to do something to increase their earnings power," he said, and keep these owners happy.
An immediate obstacle to making acquisitions would seem to be the regulatory order under which Sun still operates.
The company entered into an agreement with the Office of the Comptroller of the Currency in April to boost its bank unit's total risk-based capital ratio to 11.5%, from 10.99%, and to develop a plan for maintaining adequate loan-loss reserves.
The investment would boost capital ratios above the required levels, the company said.
Also, the fact that Sun's stock is trading at such a low multiple — it closed at $5.32 a share Tuesday while its tangible book value is $9.18 a share — would make it difficult to issue shares to a selling bank in a merger transaction, Marsico said.
"If somebody's going to join with Sun, I think they're going to want Sun to have beaten back some other demons before they link up with them," he said.
For his part, Ross has no illusions about Sun's financial condition — he said anticipated loan losses were factored into the price. "This is why our share price is well below the tangible book value per share," he said in the e-mail. The investors are purchasing $100 million of common and preferred stock at $4 a share, just 43.5% of tangible book value.
Ross said he was encouraged that the Brown family, which founded the bank, had preserved its stake with a $30 million cash investment. (The remaining $20 million came from other investors.)
He said the bank's new management team, led by Thomas Geisel, formerly the president of KeyCorp's Northeast region, has increased core deposits by 16% and the net interest margin by 90 basis points since taking over in early 2008.
Ross has had a variety of experiences investing in community banks. He was part of a team of investors that bought the failed BankUnited in Coral Gables, Fla., in 2009.
More recently, he spearheaded a $200 million investment in the small but ambitious First Michigan Bancorp Inc. in Troy. This capital allowed the $100 million-asset company to buy the $900 million-asset CF Bancorp of Port Huron, Mich., out of receivership.
Ross said his firm, W.L. Ross & Co., also intends to invest in a bank in the Pacific Northwest.
Despite Sun's slow-growth market, Ross said New Jersey is a great home for regional banks. The Garden State has the highest median family income in the nation and is home to many small and midsize businesses, he said.
Going forward, he said, Sun will continue to operate as a regional institution and "will have a modest de novo branching program but will redeploy the excess capital just raised into acquisitions of similar institutions."
Ross said he thinks New Jersey's banking market is ripe for consolidation. The next 18 banks below Sun in asset size have an aggregate $13.3 billion in deposits, he said, and 110 community banks in the state are smaller than Sun — with less than $2 billion of assets.
"Acquisition targets are plentiful," he said.
Rick Weiss, an analyst at Janney Montgomery Scott, agreed. There has been hardly any M&A activity in New Jersey since the start of the downturn, he said, and potential sellers have been holding out.
"There's probably more pent-up demand on the part of the sellers," he said. "And I think the Ross investment also gives the stamp of approval to Sun's management team."