With an efficiency ratio of 78.32%, Sun Bancorp Inc. in Vineland, N.J., has a lot of room for improvement — and a long way to go before impressing analysts.
Its recently announced initiatives to boost profitability are a good start, according to analysts, but they are waiting to see the results. Some expect the $3.2 billion-asset company to sell itself next year if the plan fails.
Sun said last week that it would close or sell five of its 80 branches this year, renegotiate vendor contracts, and increase fee income. Last month the company said it would cut 8% of its work force.
Thomas A. Bracken, Sun’s president and chief executive officer, said he expects those changes to increase next year’s revenue by about $7 million and get the efficiency ratio under 70%.
His company also intends to come up with even more ways to improve its bottom line.
Analysts applauded the strategy but expressed cautious optimism.
“What they announced — on paper, it’s very good,” said Gerard Cassidy, of Royal Bank of Canada’s RBC Capital Markets, who kept his “underperform” rating on Sun’s stock. “Executing that is not going to be easy.”
Expenses have long been a problem for Sun and have led to an “extremely high” efficiency ratio, Mr. Cassidy said. “Good banks are in the low 50s. Very good banks are in the 40s.”
Sun’s second-quarter earnings fell about 21% from a year earlier, to $3.8 million, but Mr. Bracken said the results included a one-time charge of $400,000 to cover severance expenses.
The job cuts will save the company about $3.5 million a year, Mr. Bracken said.
He cited Sun’s strong loan growth as evidence of improvement, and he promised more to come. Loans jumped 18% in the second quarter, to $2.3 billion.
Last month Sun hired the consultant Anat Bird to develop the staff’s selling skills, and Mr. Bracken credited her with helping the company identify ways to increase annual fee income by $1.4 million.
“She gave us a few pointers on day one,” he said. “We are enhancing customer convenience and charging for that convenience. For example, we are being more diligent and aggressive with issuing debit cards, which generate interchange fees.”
Sun also is looking to hire a senior retail banking executive.
Late last month Bret Ginesky, an analyst at BankAtlantic Bancorp’s Ryan Beck & Co. Inc., upgraded Sun’s stock to “outperform,” from “market perform,” after the company announced the staff cuts.
He said he is confident Sun can improve, partly because “they have a lot of room to work with,” but he also said the company is an attractive takeover candidate.
Another analyst, who asked not to be named, said he thinks Sun may consider selling itself next year — but only if profitability fails to improve.
However, Mr. Cassidy said he does not think it will sell.
“The reason we still believe it’s an ‘underperform’ is valuation,” he said. “Though the company has made a step in the right direction on improving profitability, the stock still trades well in excess of its peer group — assuming Sun Bancorp is not for sale, and we don’t believe it’s for sale.”
On July 24, Sun’s stock closed at $16.25 a share, about 20 times its full-year earnings estimate. The average multiple for Middle Atlantic banking companies with $2 billion to $10 billion of assets is 15.7, according to Richard Weiss of Janney Montgomery Scott LLC, who has a “neutral” rating on Sun.
Mr. Bracken announced the initiatives Monday and by late Friday the stock was up nearly 10% for the week.
Mr. Weiss said he is taking a “wait-and-see approach” on the stock, but he likes what he is hearing from Sun, including the decision to eliminate five branches.
“There are not enough assets to support all those branches,” he said.
Joseph Fenech, an analyst at Sandler O’Neill & Partners LP, who has a “hold” rating on the stock, agreed that “for banks of that size, they have a much higher number of branches than what you would typically see.”
Mr. Ginesky said up to $70 million of core deposits could run off, depending on which branches are sold. Mr. Bracken would not say which branches would be eliminated.
Deposits rose 1.8% from a year earlier but fell 0.7% from a quarter earlier, to $2.6 billion as of June 30.
Mr. Fenech said a runoff of core deposits is a common trend in banking and a particular challenge in New Jersey, where competition is intense.
