We're thinking two steps ahead in the attempt to identify
tomorrow's best investment opportunity today. Sun Bancorp (
) is a unique opportunity to invest alongside Wilbur Ross, one of
the great value creators of our generation. The bank is finally
focused on achieving profitability, which will unlock near-term
shareholder value. For long-term investors, SNBC is an exceptional
chance to participate in a massive wave of consolidation about to
hit the banking sector.
With over 50 branches in New Jersey, SNBC is a full-service
commercial bank with approximately $3 billion in assets. After
surviving the credit/financial crisis, SNBC has labored through a
multi-year turnaround. In addition to raising capital, the bank
divested problem loans to solidify the balance sheet. SNBC also
reduced expenses by closing underperforming branches.
Despite these initiatives, the bank's progress to date has been
uninspiring. In addition to credit costs, non-interest expenses
remain elevated, hindering the bank's ability to turn a profit. On
an annual basis, SNBC was last profitable in 2008.
However, all is not lost. At the end of November, investors
finally received some positive news. The Board dismissed
President/CEO/Board member Thomas Geisel and has retained an
executive search firm to identify a successor. SNBC's Chairman of
the Board, Sidney Brown, will stand-in on an interim basis.
Step 1: Right the Ship
, Mr. Brown was quite direct in the bank's go-forward strategy and
what will be expected from new leadership. Indicating a new sense
of urgency, SNBC expects to return to profitability in 2014 by
right-sizing expenses with current revenue. A key component of this
target will be the reduction of professional fees, which totaled
$4.9 million in 4Q13 and $18.2 million in 2013. Beginning in 2Q14,
the bank expects consulting expenses to range between $1 million
and $1.5 million on a go-forward basis.
The focus on near-term profitability is significant because it
will enable SNBC to begin to recapture its substantial deferred tax
asset. At December 31, 2012, the bank had a valuation allowance of
$113.4 million against its deferred tax asset. The release of the
valuation allowance would have a positive impact on earnings,
capital and, ultimately, the equity valuation.
Notably, turnaround connoisseur Wilbur Ross, best known for his
deep value investment approach, is a major shareholder and Board
member. Ross's involvement gives us confidence in the validity of
SNBC's revised turnaround plan.
Step 2: Growth
The banking community is in the midst of a challenging
situation. Although banks operate in a low net interest margin
environment, there are limited organic growth opportunities
Further, rising compliance costs are encouraging banks to
increase assets, thereby spreading the expense over a larger base.
As banks look to expand, the most logical approach is to acquire
Once SNBC has its own house in order, there is a considerable
opportunity to consolidate the New Jersey market. In fact, the
Garden State is one of the most over-banked regions in the
Upon announcing a 25% equity stake in SNBC, Mr. Ross hinted at
such a scenario.
The next 18 banks in size after this one, together, have
around $5 billion in deposits, and there's another 100-some-odd
banks that, in total, have $40 billion in deposits," Mr. Ross
said. "That's just way too many banks for one state to have.
The New York Times
The ambition to expand is multi-fold. In addition to the obvious
benefits of scale, the market simply prefers the larger banks. Over
the last four years, the stock performance of large cap financial
institutions has double small cap returns. As such, smaller banks,
on average, are valued at about 90% of book value versus 150% for
the national players.
For long-term investors, SNBC is an exceptional chance to
participate in a massive wave of consolidation about to hit the
banking sector. The company's footprint is at the center of what
should be one of the country's most active regions.
With the backing of Mr. Ross's private equity firm (over $7
billion in AUM), we believe SNBC is ultimately the acquisition
vehicle to roll-up a number of financial institutions in New Jersey
I am long SNBC. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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