EDISON. N.J. - When Garry J. Scheuring wanted to show appreciation to his top credit officer for swiftly disposing of problem realty assets, the normally low-key executive decided to have some fun.

Rather than throw a stodgy dinner, Mr. Scheuring, chairman and chief executive of Midlantic Corp., presented the credit officer with a Tonka toy dump truck, in honor of his aggressive disposition of bad assets.

The truck now sits like a trophy on a credenza at Midlantic's headquarters here.

Three tumultuous years into his tenure as head of New Jersey's second-largest banking company, Mr. Scheuring can afford to clown around a bit.

Midlantic, with $13.8 billion of assets and 330 branches throughout New Jersey, is in the midst of an impressive turnaround.

Earnings Up, Bad Assets Down

Profits more than doubled in the first half of this year to $64.4 million, compared with the same period last year. Problem assets are down 56% to $855 million from their peak of $1.935 billion when Mr. Scheuring took over.

On the expense side, Mr. Scheuring hired Chandrika Tandon, a former McKinsey & Co. consultant and cost-cutting guru, to help put together a program to reduce annual core operating expenses by $100 million.

As a result, payroll has been reduced by 2,000 positions since June 1992 to 5,300 full-time employees.

Meanwhile, core businesses like retail banking have been restarted and are performing well.

Seemed on the Brink

That's not bad for a banking company that seemed on the brink of extinction a few years ago.

Observers give most of the credit for the revival to Mr. Scheuring, 54, who left a vice chairmanship at Chicago's Continental Bank Corp. to move to New Jersey three years ago.

"It's a whole different company since he came on board," said Livia S. Asher, a banking analyst at Merrill Lynch & Co. "He's made very visible progress."

The taciturn Mr. Scheuring sidesteps the praise, saying that while Midlantic has come a long way, there's still plenty to be done.

"Our focus has been rebuilding our franchise to its full value," he said.

Mr. Scheuring's top priorities: asset quality and rebuilding core businesses.

Lingering Woes

Problem assets, though greatly diminished, are still a thorn in Midlantic's side. Nonaccrual loans represented 6.2% of total loans at the end of the second quarter, nearly three times the industry average of 2.42% for the 50 largest East Coast banks, according to Keefe, Bruyette & Woods Inc.

Because of its asset problems, Midlantic is operating under written agreements with the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency.

To accelerate the disposition of bad realty loans, Mr. Scheuring earlier opted for a bulk sale of nonaccrual real estate loans and foreclosed properties that had a book value of $244 million. At June 30, nearly 85% of the portfolio has been sold.

Workouts, Restructurings

Alfred Schiavetti Jr., the chief credit officer who owns the Tonka dump trunk, said the bank is close to completing the remainder of the bulk sale.

Midlantic could use more bulk sales to reduce nonperforming assets, he said, but added that it is more likely the bank will steadily reduce nonaccruals through workouts and loan restructurings.

A former senior credit officer in the real estate division of Chemical Banking Corp., Mr. Schiavetti, 54, was recruited by Midlantic just three months after Mr. Scheuring himself had arrived. Mr. Schiavetti quickly set out to bring a practical and aggressive workout policy to Midlantic.

"When I came, there was only one workout technique being used: lawsuits," he said. "We established a workout strategy and divided it into three groups: commercial loans, real estate loans, and foreclosures."

Coming to Terms

The bank offers to take concessions on principal in exchange for borrowers enhancing its collateral position. It also will rewrite a loan and change the payment terms. The result has been more loans returning to accrual status.

The strategy is not rocket science, Mr. Schiavetti concedes, but it has brought results. "It was just straightforward, commonsense things that we did," he said.

Mr. Schiavetti declined to forecast where nonperformers will stand at year's end, though he said they cannot continue to drop at the current pace $100 million per quarter. The supply, after all, isn't endless.

Pointing at his toy truck trophy, he quipped: "My ultimate goal is to have no more assets to dump."

An Attractive Number

Lawrence W. Cohn, an analyst at PaineWebber Inc., believes Midlantic can reduce problems assets to under 5% of its total loans by the end of the year.

Once the bank hits the 5% target, the analyst said, suitors will begin knocking on Mr. Scheuring's door.

Mr. Scheuring said he expects more consolidation among New Jersey banks. Moreover, he believes that in-market mergers, rather than acquisitions by out-of-state players, is a more effective way to reduce overlapping branch networks. But he's mum on Midlantic's game plan.

"We want to see the turn-around through and get it done right," he said.

Outpaced by Rivals

Midlantic certainly hasn't been the only New Jersey bank to suffer asset-quality problems, But some of its competitors have rebounded faster and are already taking advantage of consolidation.

First Fidelity Bancorp., with $32 billion in assets. has expanded in New Jersey through dozens of acquisitions following its aggressive rebuilding efforts. It has now moved into some of Midlantic's key markets.

Meanwhile, out-of-state banks like Bank of New York Co. and Corestates Financial Corp. have made inroads into Midlantic's turf by buying Garden State companies.

Mr. Scheuring said he will consider small fill-in purchases today, but still cannot afford to make acquisitions a primary strategy.

Focus on Growth

"I think we can benefit far more from continuing the programs we've begun," said Mr. Scheuring. "The primary focus of the bank now is building the business."

To that end, he has concentrated on recharging Midlantic's retail and corporate banking businesses, despite the fact that commercial loan demand remains weak.

Midlantic, like most companies, is stepping up efforts to cross-sell noncredit products such as cash management to local businesses. Fees from these services are up 20% from year-end 1992.

Midlantic also has made a big push in the area of trust and financial management services.

The bank has $6 billion in client assets under management, including $1.9 billion in its Compass Capital Group of 15 mutual funds. Midlantic is the investment adviser to the funds.

Trust Income Declines

But building such businesses takes time. Trust income totaled $20 million in the first six months of the year, down from $26 million during the same period last year.

Mr. Scheuring has had better success in retail banking. Consumer loans are up more than $400 million so far this year, and the successful launch of new deposit products has boosted fee income.

Time for Business Calls

Two years ago Mr. Scheuring spent most of his time in Edison tending to the bank's myriad problems.

Today, with many of those problems on the mend, he's spending nearly 80% of his time outside the office, visiting customers and branches.

"Two years ago the focus was on just keeping our customers, but now we're concentrating on getting new business," says Mr. Scheuring.

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