Continental Cuts Payout, Sets Aside Big Reserve
Pressured by federal regulators and a slumping real estate loan portfolio, Continental Bank Corp. announced dramatic steps on Friday to slash costs and improve its balance sheet.
Observers had been expecting a retrenchment, but a 40% dividend cut and a $175 million "special provision" exceeded most estimates. The special provision will result in a $125 million loss in the third quarter.
Further Surprises Coming?
"You have to wonder how bad Continental's asset quality problems will get," said Adam Klauber, a banking analyst with Duff & Phelps Inc., Chicago. "Anytime you see a surprise provision of that magnitude, it's a signal there's larger deterioration brewing in the portfolio."
Coming amid an examination by the Office of the Comptroller of the Currency, the action raises major questions about Continental's $2.7 billion commercial real estate portfolio, which heretofore was exhibiting an extraordinarily low default ratio of roughly 4%.
A $150 million component of the special provision was designated for loan loss reserves, Continental said, and sources close to the company said problem loans to real estate developers were almost solely responsible for an expected substantial increase in nonperforming assets during the third quarter.
Profit Shown in Half
During the first six months of 1991, Continental earned $59 million, compared with breakeven results during the first half of 1990.
Though the company's common stock jumped this month on takeover speculation, analysts repeated on Friday their skepticism as to whether Continental is saleable, given its exclusive focus on the sagging corporate banking market and deteriorating asset quality.
Continental declined to disclose how much nonperforming assets would rise from the June 30 level of $770 million, or 5.36% of gross loans. Anthony Polini, a banking analyst with A.G. Edwards Inc., estimated Continental's problem assets could reach $950 million at Sept. 30.
In reaction to the announcement, both Standard & Poor's Corp. and Moody's Investors Service placed $1.4 billion of Continental debt securities under review for possible downgrade. Moody's said its inquiry would "focus on the deterioration in the company's loan portfolio and its ability to produce sufficient core earnings.
Continental's common stock dropped substantially in the three days leading up to Friday's announcement. Closing Monday of last week at $15 a share, the issue by Thursday's close had dropped 12.5%, to $13.125.
Analyst said the market in part took its cue from an investment group including CBS chairman Laurence A. Tisch, which on Tuesday completed a 12-day sale of 1.6 million Continental shares at prices ranging from $14 to $15.375.
Continental common on Friday fell 87.5 cents to close at $12.375, or at 52% of its $23.90 book value per share.
As part of the Friday announcement, Continental said it had cut its quarterly common dividend to 15 cents per share from 25 cents, a move the company said would conserve roughly $20 million annually.
Continental said $25 million of the special provision was for "restructuring operations and leases."
In a continuation of retrenchment efforts spanning at least two years, Continental resigned its position as a primary dealer of U.S. government securities, laid off 250 workers and closed its Singapore office. About $17 million of annual cost savings will flow from the layoffs, Continental said.
The company said the $150 million special loan-loss provision would be in addition to its normal provision and would build loss reserves to about $475 million - a 45% increase since June 30.
Ratio May Sink to 5.3%
Continental said its Tier 1 capital ratio would decline from 7.1% at June 30 to between 5.3% and 5.5% at Sept. 30. Standard & Poor's analyst Charles Rauch said he "would prefer" to see Continental raise additional equity.
But a company spokesman said Continental would stand by prepared remarks stating: "These ratios amply exceed regulatory requirements and compare favorably with Continental's competitors."
The OCC has not yet finished its audit of Continental.