Anthony Labozzetta likes a challenge. In early 2010 he left his job as an executive vice president at TD Bank — even then an established and growing organization with more than 2,000 branches across Canada and the U.S. — and took over as CEO of Sussex Bank, a struggling local institution in northwestern New Jersey that was burdened with a high level of nonperforming assets. The turnaround he helped launch — in June, the since-renamed SB One Bank announced a merger with Enterprise Bank, its second in just over a year — offers some good lessons for many business owners and executives.
“I didn’t think that Sussex Bank was imploding, but before I joined I knew there were significant problems with nonperforming assets and other issues,” recalled Labozzetta. “But I also realized that conditions like this are often a byproduct of something else, like the corporate culture, the set of behaviors that’s accepted by all of the employees.”
Sussex Bank didn’t have a strong company-wide culture. “It showed up in a number of ways: a lack of clear lines of communications and a lack of accountability and transparency,” Labozzetta said. “People were in silos, and they looked at issues from a narrow, departmental view, instead of one that considered the whole enterprise. They didn’t know what ’great’ looked like.”
It can be tempting to discount observations like that; after all, it’s natural for the new guy or gal to point out how their predecessor screwed up. But Labozzetta said — and the Sussex board that hired him agreed — that these issues had consequences: “People who should have known better didn’t understand cash flow and other concepts and they were approving loans without doing enough investigation of the collateral that was supposed to secure them. Then when bad things happened (like loans that went bad), the problems weren’t addressed. They just festered and got worse.”
Labozzetta said he had ideas about fixing the bank, but realized that pulling it off would require a kind of hybrid approach from the board. “I wanted to take full responsibility for running the bank,” he said. “The board had to feel comfortable enough not to try to micromanage the bank’s day-to-day operations. But at the same time, I recognized that I needed, and still welcome, the expert advice that board members can offer. Their willingness to act interactively as a sounding board and as a strategic partner was a key part of the bank’s turnaround.”
One of the first issues Labozzetta tackled were the nonperforming assets, primarily real estate-related loans that had gone bad. “The NPAs were daunting,” he recalled. “But we had to deal with reality. One option would have involved a fire sale of the bad assets, but that would have been bad for our capital. Instead we developed strategic approaches aimed at working out the loans.”
A workout — which typically involves restructuring loan terms or making other arrangements, like getting the borrower to agree to sell off other assets to pay off the loan — can be more complicated than simply calling the loan, dumping it or selling it at a deep discount, but may generate more revenue for the lender while potentially preserving the relationship with the original borrower.
Labozzetta, however, didn’t simply implement a new way to handle bad loans. Instead, he built a new way of attacking problems: put out the legacy fires but continue to build the business. “Before you can do anything else as a CEO, you’ve got to be willing to lead,” he said. “You present your plans and see how people react. Some people can’t change or won’t change, and they may have to leave.”
He started by cleaning house, bringing in some new people and outside experts. He then set up a committee of about four or five people to focus on the nonperforming assets.
“I chaired it and isolated the committee, so other people could focus on expanding the bank’s activity while we worried about cleaning things up,” according to Labozzetta, who added it wasn’t a quick fix. “We created a plan around each issue and then executed on it while monitoring the progress and adjusting as needed. We set realistic quarterly goals that were tied to overall annual goals, and after paying more than $27 million to resolve the legacy bad loans, we had brought the issues at our bank to peer level by year four.”
So it wasn’t a cheap fix or a quick one, but remember the way Labozzetta isolated the NPA fixers from the rest of the crew? That paid off because during those four years, “we were bringing on new people and reinvesting in existing ones, and building new regional offices. Even as we addressed the past problems we were planning for the future.”
Labozzetta approached the expansion in the same way he handled the bad loans: using a measured, analytical approach. “As its name implied, Sussex Bank is headquartered in Sussex County, and at the time that I joined it was expanding north and west into New York State and Pennsylvania,” he recalled. “The problem was that Sussex County, at the northwest tip of New Jersey, doesn’t have the population density that much of the rest of the state does to begin with, and expanding north and west would bring us into similarly rural areas. Now rural can be great for a brank franchise, especially if it’s in the [commercial real estate] space, but it wouldn’t deliver the kind of fast growth we needed.”
In reorienting the bank, he turned it from a quiet hometown institution to a high-performance one. “Instead of expanding north and west, we went south and east, into the New York [Metropolitan Statistical Area],” he said. One of the first steps in that direction was the April 2017 agreement to buy Community Bank of Bergen County in a $45.4 million, all-stock transaction that closed in January. Besides propelling Sussex Bank into the billion-dollar-plus asset class, the M&A gave the institution a bigger presence in the North Jersey market, beefing up its existing Oradell branch with three more full-service branches in Bergen County.
The transaction also gave the bank a new identity: SB One, which was announced in April. “The Sussex Bank name was well-respected in Sussex County, but if you’re expanding into Bergen and Hudson and other North Jersey counties, along with the New York City and Long Island markets, you want a name that makes a connection with customers, and Sussex Bank just didn’t do that. SB One retained some of the historic identity, but also positioned us for expansion into new markets.”
By combining organic growth with M&As like the Bergen Bank buy and the recently announced Enterprise Bank agreement, the bank is fulfilling Labozzetta’s goal of “expanding, competing and winning in new markets. Instead of fleeing from competition, we confronted competitors and beat them. Whatever market we’re in, new and existing, we want to win and we can.”
The market seems to agree with him. In January 2010, about the time Labozzetta came aboard, the bank’s stock was trading at under $5 per share. On Aug. 1, it was just under $29 per share.
Like Archimedes using a lever to move the Earth, a talented CEO can drive a turnaround at an underperforming bank, according to Donald Musso, a former banker who’s president and CEO of FinPro Capital Advisors Inc., a full-service management consulting firm that provides advisory services to the financial institutions industry.
“In general, a great CEO is the driver that can make a bank outperform competitors,” said Musso, who noted that he had not studied SB One, and was speaking conceptually. “Give me a great CEO in a bad market and that bank will likely be a winner.”
FinPro works with many newly appointed CEOs and those who are about to be appointed. “They’re talented people, but you may have a CFO who knows the numbers but doesn’t yet know the broader market, or a commercial lender who knows his or her customers but doesn’t know how to handle the back office and motivate people,” detailed Musso. “We’ll inventory their skills and work out a plan to bring them up to speed as a CEO. It can take a year or even three years, but they develop as we move along.”
Compared to their predecessors, today’s CEOs face more challenges, he added. “You’re looking a significant regulatory, compliance, shareholder and competitive issues,” he said. “It’s not easy. There’s a shortage of good CEOs, because a lot of them don’t have the right training.”
But as the case of SB One shows, when supported the right CEO, buttressed by a good team, can make a big difference.