Continental Price Shows Symptoms of Weakness
Several securities analysts are warning that $12.75 a share may be too much to pay for Continental Bank Corp., even though the price is only about half of the bank's book value.
A syndicate coordinating the Federal Deposit Insurance Corp.'s sale of its stake in Continental priced the shares late last week at a 46.7% discount from book value, which was $23.90 on March 31.
Two signs of weakness give analysts cause for concern. Not only are regulators pressuring Continental to trim its dividend, but the company's reserve for loan losses has dwindled as a percentage of problem loans.
The potentially painful cures - a dividend cut or a profit-draining loss provision - could hurt Continental's stock.
"There definitely is downside risk on Continental because the company doesn't have a great deal of flexibility," said Adam Klauber, a banking analyst with Duff & Phelps, Chicago.
Continental's stock closed Friday at $13.125. That compares with a 52-week low of $7.375 and a high of $17.50.
The investment banking group led by Merrill Lynch & Co. plans to complete the sale of the FDIC's remaining 26.3% stake in Chicago-based Continental by June 6. Goldman Sachs, Lehman Brothers, and Dean Witter Reynolds are also part of the syndicate.
According to Oppenheimer & Co. estimates, the parent company's first-quarter payout to shareholders of 25 cents a share equaled 86.2% of operating earnings per share. During the past five quarters combined, Oppenheimer estimates, Continental paid $1.04 of dividends for every $1 of operating income.
Public Shareholders' Bonanza
Public shareholders were fortunate. In filings with the Securities and Exchange Commission, Continental reported that its lead unit, Continental Bank, skipped a dividend to its parent in first-quarter 1991.
Meanwhile, Continental's nonperforming assets rose by a relatively modest 6.8% during the first quarter. But the company's $768 million caseload at period end comprised 5% of gross loans and represented a 64% increase since March 31, 1990.
Continental also saw its ratio of loss reserves to problem loans slip to 43% from 57% during the 12 months ended march 31. By contrast, 153 publicly owned banking companies surveyed by Keefe, Bruyette & Woods Inc. in aggregate reported a 75.6% reserve ratio at March 31.
Continental's vulnerability, Mr. Klauber said, stems in part from its focus on commercial banking, which in the current recessionary environment is not a robust market. "The company's reserve level is low, and core earnings aren't strong enough to insulate if from further asset-quality problems," Mr. Klauber said.
In its SEC filing, Continental said it "continues to focus on the level of dividends," and on improving asset quality.
Livia Asher, a banking analyst with Merrill Lynch, said Continental's words of caution are "prospectus language" that should not cause great concern to investors.
"My view is that Continental can continue to pay the dividend," Ms. Asher said.
Christopher Kotowski, a banking analyst with Oppenheimer (which is not participating in the Continental syndication), is more pessimistic. He noted that Continental finished the first quarter with $1.8 billion of commercial mortgage and construction loans and $2.1 billion of HLT loans.
Said Mr. Kotowski: "There's always someone out there who clings to the hope that dividends won't be cut and who ends up disappointed."
PHOTO : Continental's Payout