Bank of NY Shares Rated A Buy, but with Red Flag

In an unusual move, a securities analyst recommending Bank of New York has warned shareholders about the threat posed by loans to Midlantic Corp., a troubled superregional in New Jersey.

Bank of New York owns $50 million of Midlantic's preferred stock. Should it wind up worthless, the after-tax impact on Bank of New York's earnings would be 45 to 50 cents a share, according to Christoph Kotowski of Oppenheimer & Co.

He referred to Midlantic as "severely troubled" and pointed out that "regulators recently forbade it to pay any dividends without specific approval"

Dividend Effect Small

The impact of a payout omission would be only about 5 cents a share annually, Mr. Kotowski noted.

Bank of New York took the Midlantic preferred stock in partial payment for subsidiaries of Irving Bank Corp. it sold to the New Jersey bank in 1989.

Midlantic paid $291 million for the five banks in northern New York state. Bank of New York sold them after it acquired Irving in a lengthy and acrimonious takeover fight.

Client Raised Question

Mr. Kotowski said Friday he issued the report on the Midlantic preferred after being asked about the impact on Bank of New York by an institutional investor who is an Oppenheimer client.

The analyst recently initiated coverage of Bank of New York's stock with an aggressive buy recommendation. He reiterated that investment opinion, saying the potential loss was "a mild negative" for capital building efforts at Bank of New York.

A 50-cent loss, Mr. Kotowski said Friday, would for one quarter wipe out the earnings being retained by Bank of New York after the recent reduction in its dividend.

Details Confirmed

A spokesman for Bank of New York confirmed details about the preferred stock, but had no other comment on Mr. Kotowski's report. At Midlantic, a spokeswoman also said the company would not comment.

Bank of New York's shares, which have received favorable notice from several analysts recently, rose 12.5 cents, to $31.625. Mr. Kotowski expects the company to earn $1.50 this year, despite reserve building, and $3.75 to $4 next year. Midlantic stock, meanwhile, traded Friday at $5.125.

Midlantic is under aggressive new management, but nonperforming loans are likely to rise for the rest of this year, Fitch Investors Service said in a recent report.

Optimism on Midlantic

"Midlantic will probably meet the capital requirements imposed by the Comptroller of the Currency, and its liquidity position is healthy," Fitch noted.

"Prospectively, however, if nonperformers rise to $2 billion (from $1.2 billion on March 31), Midlantic will have difficulty surviving," the rating agency analysts said.

"Even if they peak below this, as Fitch is projecting, Midlantic will be hampered by high levels of nonperformers," the report said.

Midlantic: New Jersey's Weak Sister Figures as of March 31

Midlantic First Fidelity UJB Financial

Assets

Dollars in billions $22.6 $28.6 $12.7

Income

Dollars in millions -$22.9 $56.07 $1.6

Return on assets -0.43% 0.78% 0.04%

Nonperforming loans/loans 9.9% 5.45% 6.54%

Tier 1 capital/ risk-adjusted 6.05% 5.66% 8.04% assets Sources: Fitch Investors Service; Keefe, Bruyette & Woods Inc.

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