Sun in N.J. Adding New Loans While Dealing with Old Problems

Sun Bancorp is looking to expand its loan book, even as bad loans from its past continue to create red ink in its bottom line.

Though a head-scratcher to some outsiders, the move makes perfect sense to Thomas X. Geisel, the company's president and chief executive, who says the strategy will pay off over the long run. "You can sit back and nurse old injuries, or you can figure out how to rehabilitate yourself and figure out how to move forward," he says.

The Vineland, N.J., company is "prudently and aggressively" working through an existing $100 million problem loan portfolio that primarily consists of real estate assets, Geisel says.

Sun also wants to book loans elsewhere, hiring 50 former MetLife employees for the $3.1 billion-asset company's residential lending division. Sun also hired three commercial lenders from Susquehanna Bancshares, including James Higgins, to open a loan office in Plymouth Meeting, Pa., near Philadelphia.

"As time goes on, what you'll see is leverage from the reduction in the troubled loan portfolio and an increase on the revenue side" from expansion efforts, Geisel says. "If you just focused on the loan portfolio, you'd never get to see that leverage."

Sun (SNBC) is trying to expand revenue without straining its balance sheet, says Matthew Kelley, an analyst at Sterne Agee Group. "It's a delicate balance of trying to stay engaged in the marketplace and working through the credit challenges that are not going away," Kelley says.

Due to a spike in troubled-debt restructurings, Sun lost $28.1 million in the first quarter, after losing $1.5 million a quarter earlier.

The hires should help reduce Sun's reliance on net interest income. When Geisel joined Sun in January 2008, the company derived 87% of its revenue from net interest income. That has dropped to 80%, and Geisel says he wants the figure to drop to 75% in 18 months. Expanding Sun's originate-to-sell mortgage business, asset-lending and brokerage services should speed the transition, he says.

It helps to have deep-pocketed financial backers, including WL Ross & Co., a private equity firm that owns 24.8% of the company. Other investors include New York private equity funds Siguler Guff & Co. and Anchorage Capital Group. Those supporters must decide in the next 12 to 18 months on whether to make another investment in Sun, Kelley says.

"They have an important decision to make whether to put in additional capital, to expedite the cleanup, to resolve once and for all the legacy bad credits," Kelley says. "This company really needs to clear the decks of all those problems that they've been working on for close to four years. It's taking longer than anyone anticipated."

Efforts to reach Wilbur L. Ross Jr., the chairman and chief executive of WL Ross and a Sun director, were unsuccessful.

Some investors are cautious about Sun's outlook. During the company's April 25 conference call, Rick Weiss, an analyst at Janney Montgomery Scott, expressed concerns that Sun's nonperforming assets were creeping back up. Nonperforming assets rose 5.4% in the first quarter from a quarter earlier, to $118.8 million.

"Is this something that you're likely to see just hiccups along the way?" Weiss asked. "I realize the year-over-year trend is good, but from the fourth quarter it didn't seem to be a good trend at all."

Sun decided in the first quarter to classify more assets as nonperforming, Barbara Fouss, the company's chief credit policy officer, said on the conference call. She said that included loans where Sun had concerns about the underlying collateral.

"We certainly … expanded the spectrum of what we would take to NPA than what we had done in the past," Fouss said. "We really wanted to be proactive on where our impairments were."

Geisel says he wants to expand the company's geographic reach by adding branches in central and northern New Jersey. The company has clients across New Jersey, but only has branches in two-thirds of the state's 21 counties.

"We don't need a physical location in every county, but we do want a continuous band of strength across the state," Geisel says. "We want to fill in some of the gaps, from a branch perspective."

WL Ross has invested in Sun and other community banks, including BankUnited (BKU) in Florida and Talmer Bancorp in Michigan, because of a bullish stance on those companies' ability to buy neighboring banks.

"I think there will be mergers forced simply because the very little banks can't afford it," Ross said in an Oct. 2 interview. "A lot of them are kind of throwing their hands up, saying, 'This is a losing game — I'm not going to be making any earnings anymore.'"

Geisel says he doesn't expect to become a consolidator any time soon, partly because the company is still focused on cleaning up its loan portfolio. Geisel also says that buyers and sellers remain far apart on price. "Buyers are still looking for a good deal and sellers are still a little unrealistic as to what price they can get," he says.