Midlantic Announces Loss of $415 Million

Moving to clear the decks of problem real estate loans, Midlantic Corp. on Thursday said it added a whopping $403 million to its loan-loss reserves in the second quarter, resulting in a $415 million loss.

Garry Scheuring, Midlantic's newly installed chairman, said the aggressive housecleaning was aimed at acknowledging the extent of real estate problems at the $21.5 billion-asset company, based in Edison, N.J.

But Mr. Scheuring was not prepared to say that the company's string of losses, now standing at five straight quarters, have come to an end. He said that Midlantic would return to profitability within a year but declined to be more specific. Non-performing assets, which rose 15% in the quarter, to $1.88 billion, are believed to be close to peaking, he added.

Boost Capital-to-Assets Ratio

Midlantic also announced that it planned to sell a total of $6.3 billion in assets based outside of its core market of New Jersey and eastern Pennsylvania. The move will shrink the company by 30% and boost its capital-to-assets ratio.

Analysts said the size of the loss and the large provision were not completely unexpected. New CEOs of troubled banks, they said, often take drastic measures to recognize problems attributable to their predecessors.

"This is typical of what you get when you get a new CEO in," said Michael Plodwick, an analyst at C.J. Lawrence, Morgan Grenfell Inc. "Scheuring probably said, |If anything looks funny, catch it now.'"

Noncommittal on Reserves

Mr. Scheuring could not be pinned down on further additions to reserves this year. He conceded, however, that $30 million per quarter - a figure one analyst attributed to the bank - "could be a reasonable number."

He also would not rule out the possibility of a merger. "In the current state of the banking industry, any bank is wise to keep its options open," he said.

Among the assets put up for sale are Midlantic's four upstate New York banks, with combined assets of $2.5 billion; Midlantic Home Mortgage; Midlantic National Bank and Trust Co./Florida; and Midlantic Asia Limited in Hong Kong.

Midlantic is continuing to look for buyers for its United Penn Bank in Wilkes-Barre, Pa., with assets of $1.5 billion. It recently sold its York Bank and Trust unit to First Maryland Corp., a subsidiary of Allied Iris Banks PLC for $130 million.

Realizing $500 Million

Midlantic said it expects the sales to generate $500 million in cash. In addition to shrinking asset size, the sales will reduce the company payroll by 3,150 employees, to 7,300, and the number of branches by 140, to 344.

Analysts said Midlantic should have no trouble selling those assets but, in aggregate, is unlikely to earn anything on the sales.

That's still a positive because it redeploys needed capital at the company's main subsidiaries - Midlantic National Bank, Midlantic Bank North and Continental Bank.

Mr. Scheuring said layoffs would result from the restructuring, but he again declined to be specific. He indicated that some would come from the planned combination of Midlantic National Bank in Newark and Midlantic Bank North in West Paterson, N.J. Plans for that combination were announced as part of the restructuring.

Share Price Rises

Midlantic's stock reacted positively to the news, rising 50 cents a share, to $6, in late trading.

Nonetheless, analysts remained cautious in their outlook on the company. "This is a positive first move in getting the bank back on its feet, but it's going to be a long-term turn-around," said Dennis Laplant, an analyst at Fox Pitt Kelton.

Midlantic has more than 30% of its loans in real estate, one of the highest exposures of any large bank in the country. Nearly 10% of its loans are classified as nonperforming.

Analysts said that, while the New Jersey economy appears to be stabilizing, it is too soon to say so definitively. If it does get worse, analysts said, Midlantic would have to take additional big losses.

The restructuring, which had the approval of regulators, commits Midlantic to achieving Tier 1 capital of near 7%, a leverage ratio of 4.5%, and a tangible common equity ratio slightly in excess of 4%.

With the large provision this quarter, Tier 1 capital stands at 5.07%, and the leverage ratio is 3.3%.

In return for the company's commitments to increase capital ratios, regulators waived the special capital requirements in written agreements with the company.

Those agreements required Midlantic's banks to have Tier 1 ratios of 6% and leverage ratios of 5%. Midlantic had said in its first-quarter financial statements that it would have to take special measures to bring its Midlantic National Bank and Midlantic Bank North into compliance with those ratios by the Sept. 30 deadline.

Mr. Scheuring, who hired Merrill Lynch & Co. to help devise the plan, said he doesn't contemplate having to raise any outside equity. With the second-quarter provision, equity fell substantially, from $1.2 billion to $834 million, but assuming asset sales go as planned, that is an acceptable capital level for a $15.2 billion-asset bank.

The bank said nonperforming loans rose $242 million in the second quarter and chargeoffs were $176 million.

Reserves, which were at $549.7 million, or 61% of nonperforming loans, rose to $975.9 million, or 70% of nonperforming loans.

Table : Midlantic Corp. Edison, N.J. Dollar amounts in millions (except per share)Second Quarter 2Q '91 2Q '90Net income $(415.2) ($24.7)Per share (10.87) (0.67)

Net interest income (tax. equiv.) 169.3 222.5Spread NA NAROA NA NAROE NA NANoninterest income 56.4 127.4Noninterest expense 248.8 190.8Loss provision 403.2 185.9Net chargeoffs 176 NAFirst Half 1991 1990Net income $(438.1) $(23.3)Per share (11.50) (0.66)

Net interest income (tax. equiv) 349.6 463.9Spread NA NAROA (3.95)% (0.20)%ROE (70.77)% (3.10)%Noninterest income 121.5 192.1Noninterest expense 437.0 377.9Balance Sheet 6/30/91 6/30/90Assets $21,547 $24,351Deposits 18,965 20,317Loans 15,628 17,747Shareholder equity 834 1,456Loss reserve 976.0 NAReserve/loans ratio NA NANonperf. loans 1,393 NANonperf. loans/loans 8.9% NAPrimary capital ratio 3.8% NA

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