The decision by Sun Bancorp Inc.'s board to part ways with chief executive Thomas A. Bracken had Wall Street debating both the progress of the company's turnaround effort and its future as an independent company.
Late Monday, the $3.3 billion-asset Sun said that its fourth-quarter earnings per share of 21 cents had missed estimates by 3 cents and that full-year earnings per share of 81 cents fell 4 cents short. The Vineland, N.J., company simultaneously announced that the board had asked for Mr. Bracken's resignation.
Sidney R. Brown, the company's vice chairman, treasurer, and secretary, said in a conference call with analysts Tuesday that the board had "lost patience" with Mr. Bracken, who was hired in 2001 to turn around the struggling company.
Though he said that Sun "is a far better company and a much stronger competitor in New Jersey today" than it had been then, the board "didn't want to wait another year and have another earnings miss."
In the conference call, analysts asked Mr. Brown how long the board might wait before considering a sale.
But Mr. Brown, whose family owns more than 20% of the company's stock and holds four board seats, refused to discuss a sale, saying instead that he would be working closely with executives to accelerate an improvement in earnings by increasing revenue and eliminating waste.
"This bank is not going to be stuck in neutral over the next three to six months," he said.
Analysts suggested that Sun could fetch a 33% premium over its current share price in a sale, but Mr. Brown said that any gap between the stock price and a potential takeout price would not be "maximized" until earnings improve.
"The earnings potential of the bank has not been realized," he said.
Sun has appointed A. Bruce Dansbury, an executive vice president and chief credit officer, as chief operating officer until a CEO is named.
Mr. Brown said the board would consider internal and external candidates and conduct a nationwide search for a successor to Mr. Bracken. The company hopes to hire someone within 120 days, he said.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said that Mr. Bracken was probably not the best fit for Sun. "He wanted to grow the bank through acquisition, which is what they did in the first part of his tenure, only to realize it was not the right strategy," he said. "This bank needs to shrink dramatically to get to respectable profitability."
Mr. Cassidy, who has an "underperform" rating on the company, said its 75 branches should be reduced by one-third to reach peak profitability.
Bret Ginesky of BankAtlantic Bancorp Inc.'s Ryan Beck & Co. said the board's apparently active involvement in overseeing the bank makes the CEO's departure less of a blow.
"The board is definitely getting more involved and taking action," said Mr. Ginesky, who maintained his "market perform" rating on Sun.
Mr. Brown said the company is aiming for a return on assets of at least 1%, a return on equity of 12% to 14%, and an efficiency ratio between 62% and 65%.
Sun had a return on assets of 0.53% last year, down from 0.63% the previous year, and a return on equity of 5.28%, down from 6.76%. Its efficiency ratio was 75.23% for the year, slightly worse than the 73.11% in 2005.
Mr. Ginesky said that setting those targets would help in measuring Sun's progress this year. "I think, if they don't get here in a year or so, they're probably going to be selling the bank," he said.
As part of a cost-cutting initiative, the company cut five of its 80 branches in last year's second half, selling three and consolidating two others, but analysts said that Sun needs to shed more. As of June 30, Sun's branches averaged $34.3 million in deposits, well below the average at other New Jersey banks, and had a median branch size of $27.8 million.
"That's the white elephant that's in the room - these small branches," said David W. Darst, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp. "They have to take a harder look at the branch footprint."
Sun's shares closed at $19.19 Tuesday, up 1.21% from Monday's close. Since Dec. 29, its shares are down 10%.
Mr. Cassidy said he thinks that the stock is overvalued because some investors anticipate a sale - but should not.
"With Bracken's departure, if there are any investors who think they're for sale, they're kidding themselves," Mr. Cassidy said. "The board is in charge. The board has four members of the Brown family on it. They're not going to sell."
Joseph Fenech, an analyst at Sandler O'Neill & Partners LP, maintained his "hold" rating. He said he does not think the stock is overvalued, based on metrics like tangible book value and core deposit premium. "If costs were more in line with peer levels, you'd see higher earnings here."
Sun said after the market closed Monday that fourth-quarter earnings slipped 3%, to $4.5 million, or 21 cents a share, from the same period a year earlier. The results included a pretax charge of $1.1 million, or 3 cents a share, related to the two branch consolidations and severance expenses.
"Excluding the $1.1 million severance and branch consolidation charges in the fourth quarter of 2006, our net income increased 12.3% over the fourth quarter of 2005," Mr. Dansbury said. "This reflects good underlying momentum that we have been working to build for three quarters now."
Sun also said that it had appointed banking consultant Anat M. Bird to its board, filling a seat vacated when Howard Schoor resigned in December. Ms. Bird is the chief executive officer of SCB Forums, which organizes conferences for bank executives, and is an occasional contributor to American Banker. Sun hired her in June to improve its sales culture, a project she finished in the third quarter.
