Sun Bancorp Inc.'s efficiency drive is starting to show up in its bottom line, and the Vineland, N.J., company aims to maintain the momentum with more aggressive cost cutting.
Sidney R. Brown, the $3.3 billion-asset Sun's vice chairman and acting president and chief executive, said it would shrink its 72-branch network by up to 27%.
Excluding a few new branches that are still ramping up, Sun has 15 to 20 underperforming ones with less than $20 million of deposits, Mr. Brown said last week in a conference call.
Over the next two months the board plans to discuss whether those branches need better locations or staff overhauls. Sun should be ready to announce, by the end of next quarter, how many could be consolidated, sold, or closed, he said.
Sun has been in turnaround mode for several years. In the past year it has eliminated five branches and 100 jobs.
But analysts have said repeatedly said that Sun's cuts have not gone deep enough. (Its continued earnings struggles cost chief executive Thomas A. Bracken his job in January.)
Sun's branches have deposits of $37.5 million on average, up from $33.8 million a year ago. Mr. Brown said that the next round of branch pruning should "take us north of $40 million in deposits per branch, which is going to begin to put us closer in line with our peer group."
Sun's first-quarter earnings rose 12% from a year earlier, to $4.7 million, and earnings per share rose 10%, to 22 cents.
The company said the results included a pretax charge of $874,000, or 2 cents a share, because of two one-time items: $2.3 million of severance-related expenses offset by a net gain of $1.4 million from the sale of three branches.
Excluding the charge, earnings were in line with the average estimate of analysts surveyed by Thomson Financial.
The analysts were pleased with the overall results, but some remained skeptical about Sun's ability to sustain earnings growth.
"We think the jury is still out as to whether Sun's existing franchise is capable of generating meaningfully higher returns," Joseph Fenech of Sandler O'Neill & Partners LP wrote in research note issued Monday. "Sun has never performed at a high level and is attempting to take that next step against the backdrop of an extremely challenging operating environment."
The efficiency ratio, long a sore spot with analysts, was 71.1% for the quarter, up slightly from 70.8% in the fourth quarter but down from 77.2% in last year's first quarter, excluding all unusual items.
Mr. Brown said he expects the ratio to be down to the high or mid 60s by yearend.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said in an interview Monday that Sun had "a nice start" this year. "The company has been making strides in focusing in on what has been its No. 1 problem, which is bloated expenses," Mr. Cassidy said.
But he said the CEO search will sidetrack that project.
Mr. Brown said Sun had hired a headhunting firm in late January to begin the CEO search. But he stressed that Sun would continue to move forward "very aggressively" even if it takes three months to name a new chief executive.
Analysts forecast that Sun will earn 99 cents a share this year and $1.11 next year. At Tuesday's closing price of $18.84, the stock was trading at 19 times the projected 2007 earnings and 17 times the projected 2008 earnings, said Mr. Cassidy, who rates the stock "underperform."
"Here's a company that's been mismanaged and not generated any sustainable growth, and it is trading similar to Northern Trust in Chicago, which has a great, long-term track record," Mr. Cassidy said.
Matthew Kelley of Sterne, Agee & Leach Inc., the only analyst with a "buy" rating on the stock, said Sun is "incredibly cheap" at a 6% deposit premium.
"Sun put up a big quarter," Mr. Kelley said in an interview Monday. "It's one of the only companies to beat our numbers so far in the Northeast universe, and it was beat on solid asset growth, but more importantly, significant expense reductions."
