Once shunned by investors, Midlantic Corp. shares are trading at their highest price of the year.

The advance has pushed the stock 25% higher in the past two weeks. The streak continued Tuesday, as the stock rose 62.5 cents, to $21.25, or about 120% of book value.

The price was as low as $4.50 earlier this year amid investor concerns about Midlantic's bad real estate loans.

Takeover Talk

Moves to cover short positions before yearend were one factor driving the stock higher, analysts said.

But the company is also benefiting from takeover talk and a brighter outlook for earnings.

"Midlantic has a good franchise, and there's a reasonable possibility that it may opt not to remain independent," said Francis X. Suozzo, an analyst with S.G. Warburg & Co.

Analysts' lists of potential buyers include Chemical Banking Corp., which recently told analysts it wants to acquire another New Jersey bank; Bank of New York Co.; CoreStates Financial Corp.; and First Fidelity Bancorp.

Investors also believe in Midlantic's earning power. Fidelity Investments, one of the bank's biggest shareholders, believes that the company will report big gains in earnings in the next 12 months and that the stock price will continue to rise.

"This will be an exciting story in 1993," said Bruce Herring, a portfolio manager at Fidelity in Boston.

Midlantic is slowly recovering from its overhang of bad real estate loans and has shown a slight profit in each of the past two quarters.

Investors gained confidence earlier this month when Midlantic chairman Garry J. Scheuring and a consultant, Chandrika Tandon, gave a talk at a Goldman, Sachs & Co. investor conference.

Ms. Tandon, chairman of Tandon Capital Associates in New York, worked with Mr. Scheuring to cut an estimated $100 million, or 30%, in costs by changing the way the bank's various business lines operate.

Most of those savings were realized in the third quarter, when expenses before the costs of foreclosed properties were $120 million. A year ago, those expenses were $176.7 million.

But Midlantic is not every investor's choice for stock of the month.

Many thought the bank was a goner earlier this year and have remained chary of the high level of bad commercial real estate loans.

Last quarter, construction and commercial mortgages accounted for 36% of all loans, double the industry average. Nonperforming assets totaled $1.4 billion in the third quarter, or 9% of assets. That's down slightly from $1.8 billion a year before.

Even if the bank is on firmer footing, the share price may have gotten ahead of itself.

"Midlantic has had a steady decline in nonperformers, earnings are coming through, and they have more earnings power," said Mr. Suozzo. "The problem is the share price versus that earnings power."

Mr. Suozzo figures the bank can earn about $100 million a year, or $2.20 a share, once the level of bad loans drops to normal levels. With the share price around $21, the stock already trades at 10 times that earnings power. That's a full valuation, he said.

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