PhillyDeals: Can billionaire investor repeat steel triumph with banks?

Originally published July 9, 2010

Wilbur Ross bought control of the old Lukens Steel plants in Coatesville and Conshohocken, and dozens more steel mills, for the equivalent of $3 a share, in the slump of the early 2000s.

Ross folded the mills into one big steel company, with fewer jobs and retiree benefits, and sold it all for $42 a share to a European-Indian investment group for a $3 billion profit in 2004. That group is now ArcelorMittal, the world's biggest steelmaker.

Now Ross is buying beaten-down U.S. bank stocks.

He plowed $50 million into ailing Sun Bancorp, of Vineland, on Thursday.

The move came 10 weeks after federal bank regulators ordered the $3 billion-asset bank, the second-biggest bank still based in New Jersey, to raise more capital to cover losses from bad loans to Shore-area hotels and a country club, among other borrowers. The family of the bank's chairman, Vineland trucking and real estate mogul Bernard Brown, agreed to invest another $50 million.

Ross paid $4 a share, sparking a rally in Sun shares, which had been trading near an all-time low after losing money in each of the last four quarters.

The move follows Ross' earlier investments in troubled bank assets in the Midwest and Florida and a British bank start-up over the last year.

Is Ross trying to repeat his $3 billion-plus steel payday by building one big bank out of troubled smaller lenders, at today's bargain prices, to sell at a profit when business improves?

"We have no plans to roll up different regions," Ross told me. Rather, he says, he believes that winning customer market share is "the best strategy for value maximization."

He wouldn't elaborate on how he may plan to win customers from multistate rivals such as TD Bank and PNC, and local lenders like 1st Colonial National Bank of Collingswood.

Sun employs around 700 at its network of branches across central and South Jersey. The bank has entered, then withdrawn from, Philadelphia and Wilmington in recent years.

After layoffs earlier this year, "we are looking to grow," chief executive Thomas X. Geisel told me. He said Ross was recruited by Sun's investment bankers, Keefe Bruyette & Woods Inc. and Lazard Freres & Co. L.L.C. "Wilbur Ross has the same vision we had," Geisel added.

Geisel acknowledges the bank has trimmed its retail and real estate-loan staff, but adds that "we're hiring into our small-business group."

Asked why Sun's loans have declined slightly in every quarter since 2008, Geisel noted that business property, used as collateral for loans, has lost value, and "businesses aren't requiring as much capital to expand in this type of market."

Ross' investment helped rescue Brown and his four children, all Sun directors, who own a third of the bank's stock.

The Browns lost a corresponding share of Sun's annual dividend, which totaled $7 million last year, when the federal Office of the Comptroller of the Currency ordered Sun to stop paying dividends until it raised more capital.

The government "found unsafe and unsound banking practices" at Sun, according to its April report. Besides ordering the bank to find new investors and stop its dividend, it told Sun to form a "compliance committee" of people not related to each other to report on improved lending and risk practices, insider loans, and other bank policies and assets.

Sun's net loans totaled $2.6 billion on March 31, including $92 million to bank directors and other insiders and their companies, according to Federal Deposit Insurance Corp. data.

Following the government's "harsh" report, the Ross investment is "a stamp of approval" for Geisel and a model for future bank deals by private equity investors, Janney Capital Markets bank analyst Rick Weiss told clients in a report.

Following the 2008 banking industry collapse, regulators were initially reluctant to let buyout investors such as Ross invest in troubled banks, fearing that, if opportunist dealmakers scored big profits, citizens would complain they were benefiting from taxpayer bailouts. Sun initially accepted government TARP money but later gave it back.

Weiss noted the $100 million invested in Sun was more than the government required. Weiss expects the extra millions "will support growth, including potential acquisitions."

Brown's sons hold top jobs in the family trucking business, $900 million NTI Industries (formerly National Freight) of Cherry Hill, which was founded by Brown's father, Israel Brown, in 1932, and grew large as a federal government contractor after World War II.

Who's going to run the newly beefed-up bank - Ross or the Browns? "The board of the Bank holding company will consist of Brown representatives, at least some of the present outside directors, and [Wilbur L. Ross & Co.] representation," Ross said in an e-mail response.

Through his bank, Bernard Brown declined to comment.