A PAINTING OF A lighthouse hangs in Garry J. Scheuring's office, but since learning the history behind it, Midlantic Corp.'s chairman and chief executive has decided the picture must go.

It depicts Long Island Sound's Execution Rock, where 17th century Dutch colonists left prisoners chained so they would drown when the tide came in.

That's not the kind of image a bank CEO wants to be associated with -particularly at Midlantic, which itself came perilously close to drowning in a tide of bad loans.

In 1990 and 1991, the Edison, N.J.-based company lost $738 million, and some analysts expected it to sink to Davy Jones' locker.

But under Mr. Scheuring, who arrived from Chicago's Continental Bank Corp. in 1990, Midlantic has shed affiliates, jettisoned $100 million in overhead expenses, cut the payroll by 2,000, sold off problem assets, restructured the remaining lines of business, and set out to right the bank's consumer banking operations.

The results have been dramatic. Profits last year were $127 million, 24 times what they were in 1992. During the period, return on average assets increased from 0.04% to 1.24%. Return on equity was up to 17.5% from 0.92%.

And problem assets, which stood at $1.9 billion when Mr. Scheuring came aboard, were $398 million at yearend 1993.

That's still high for a $13.7 billion-asset bank, but Mr. Scheuring noted that a second bulk sale of problem assets was to be completed in June, and further improvements will come during the year.

The shedding of overhead is also reflected in the improving efficiency ratio, or noninterest expense per dollar of revenue. The number has plunged from 82% in 1991 to 62% in the first quarter of 1994.

Comparing Midlantic today with when he arrived, Mr. Scheuring said "They are really two different stories. One is pretty well finished. And the other is well along."

"Garry Scheuring has done a great job," said Lawrence W. Cohn, an analyst with Paine-Webber Inc. in New York. "He's got it cleaned up and earning a reasonable level of profitability."

He adds, "They still have work to do on the expense base. [But] for the most part, the problems are behind them."

Mr. Cohn, among others, considers Midlantic an "irresistible" target for a New York or Pennsylvania bank seeking to expand in New Jersey and southeastern Pennsylvania.

He said that Midlantic is "a tremendously strong middle-market lender" and is building a good retail business.

Mr. Scheuring deflects the question. "I'm convinced the industry will continue to consolidate," he said. "But our measure will be how well we do in our basic business.

"Our strategy and goal is to build this business back to what we think the franchise really can do," he said. "Our core strategy is to be good at this business in our own markets, to be a top-notch marketing organization, to be good salesmen, to cross-sell our customer base, and to grow it.

"If we do that well," he added, "the stock price will reflect that and the [acquisition] rumors will go away."

Mr. Scheuring agrees that work remains to be done in reducing the efficiency ratio. He said "we want to get it to 60%," but declined to offer a target date for achieving that goal. But he added "we want to be close" by the end of 1994.

A major part of Midlantic's strategy is a refocusing on consumer banking, an area executives said had been neglected. It was also an area where Mr. Scheuring had little experience.

"Where I came from, we sold the retail bank," he said. "But one of my frustrations here was, who's in charge of business for the consumer?

"We didn't have anyone totally accountable and responsible," he added.

Management was reorganized around lines of business. Mr. Scheuring recruited Alan M. Silberstein from Chemical Banking Corp. to head consumer banking.

Midlantic - unlike some other banks that went through similar restructurings - also decided that there would be no major paring down of the branch network.

"My view is you better be into something else first before you close your branch," said Mr. Scheuring. "The branches are where we come face-to-face with people. It's where we sell mutual funds. It's where we'll offer other products.

"The branch will be an important part of the sale for a long time," he said.

Still, executives realized changes were needed in the bank's 326 offices. One of the first was adding a relationship banking product offering customers incentives to consolidate accounts at Midlantic.

The bankers also reevaluated the role of technology. "The basic change in the management of our systems process over the past few years was to have the businesses more critically involved," said Mr. Scheuring.

While Mr. Scheuring headed the steering committee for the reengineering effort, the working team was headed by Jeffrey S. Griffie, Midlantic's executive vice president responsible for information technology.

Tandon Capital Associates Inc., the New York consulting firm that has become a darling of bank stock analysts through its reengineering work with a number of big banks, was brought in to assist with the restructuring, called Focus 1992.

"In some sense for us, the decision to work with Midlantic was our belief in Garry," said Chandrika Tandon, the consulting group's chairwoman. "He led [Midlantic] through an incredible transition."

It didn't come easy, bank executives admit. "This was a very painful process," said Mr. Griffie. "Without using someone on the outside, we wouldn't have made the progress we have made."

The bank went through an aggressive cost-cutting program, carving out $100 million of annual overhead expenses. In 1991 and 1992, it sold affiliate banks in upstate New York and Pennsylvania, its Florida-based trust business, and the mortgage company.

The payroll was cut by 2,000 people, not counting those in the spun-off businesses.

"I don't want to make reengineering into something that it is not," said Mr. Scheuring. "It is to me a very well-thought-out management process about looking at what you do and seeing what it is you don't do.

"There's no magic to it. It isn't rocket science. The key to it is you attack the entire company with the same process and you do it with the intensity and conviction that gets the job done," he said.

Part of the key, managers say, was demonstrating that everyone would be affected.

A number the cuts were largely symbolic. A wide staircase outside Mr. Scheuring's office that led to what once was the executive dining room has been blocked off. There is no receptionist to greet visitors to the executive floor.

"Going through that process -- having everybody in the company included -really, I think, establishes a culture of expense management that we've done a lot to preserve," said Mr. Scheuring. "People are accountable for what they spend and what they ask for."

Information technology was no exception.

"When we went through our Focus project, we submitted everything to them, including technology," said Mr. Scheuring. "And we did a fair amount of downsizing there."

According to Mr. Griffie, Midlantic's operations budget reached a peak of $36.5 million in 1991. This year, it is about $30.5 million. He notes that comparisons are difficult, however, because the bank's asset size before the restructuring was $23 billion.

"As we worked on [Focus 1992] for about nine months to a year, what we saw was a change in culture," said Mr. Griffie. "The change we saw in technology is we refocused on the things that were most important to us as a company."

Midlantic, like many other regional banks, opened a 24-hour-a-day telephone center to cut costs and free branch personnel from handling routine customer requests.

According to Mr. Griffie, the West Paterson, N.J., facility takes about 5 million to 6 million calls annually.

He said the bank is continuing to add new services at the center. Two months ago, for example, representatives began to take consumer loan applications over the phone.

According to Mr. Griffie, that service, along with a new credit scoring system, will help achieve the bank's goal of further boosting consumer loans. In 1993, outstanding consumer loans jumped $800 million to $2.4 billion.

But Mr. Scheuring said the loan portfolio is still "a little bit short of what an average bank our size should have."

In addition, Mr. Griffie said, Midlantic is in the midst of a three-phase program to provide better technology to branch personnel. The first stage, involving teller functions, has been completed.

"Step two is going to be a new release of platform automation, which is going to enhance the performance of our customer service representatives to sell products," he said. Platform employees, for example, will have printers to handle loan documents. This step is to be finished by summer's end.

The third part involves further enhancing teller functions. "They will have complete end-of-day settlement," he noted.

Branches will also get new hardware. "The platform is definitely going to 486 client-server-based technology."

Tellers, however, may continue to use so-called "dumb" terminals linked to a mainframe computer.

The bank has just under 2,000 PCs today among its 5,090 employees.

Midlantic tends to avoid developing its own software applications. "We're not the Thomas Edisons of technology," Mr. Scheuring said.

"We are what you would describe as a package shop for the major number crunching," said Mr. Griffie. "We have centralized that which is done on our host" computer.

According to Mr. Scheuring, "We would rather do that than go out on our own. We're not of a size where there is going to be a technical or customer advantage for us to try to reinvent something."

Midlantic employs 58 computer programmers, a small number for a bank its size, said Mr. Griffie.

Unlike many of his counterparts, Mr. Griffie has been outspoken about the staying power of mainframe computers, which others see being eclipsed by client-server technology, in which networks of PCs share data processing tasks.

"I still haven't seen a client-server technology and software than can process two million accounts on a nightly basis," he said. "I believe there is a place for mainframe computers."

That's not to say he's bearish about client-server, which he views as an essential technology. "The challenge that we have is the disaggregation of the information. How do you move the information that is on the host computer? How do you move it out to your branches? How do move it out to your phone center?"

He notes that one of Midlantic's technical advantages is its telecommunications network, built when the bank was in an acquisition mode in the 1980s.

The bank's infrastructure, he noted, can handle any acquisitions Midlantic might make.

And the bank is healthy enough now that that might happen. "We've made some bids," said Mr. Scheuring. "But we're not going to pay more than we think is a fair price."

But, he said, "We'll have an opportunity to be an acquirer. We've shown some interest in acquiring small opportunities that come along. We're interested in some of the [Resolution Trust Corp.] properties in our markets that are up for sale. We're not looking to extend our geographical area.

"Every area of the company now has standards of customer service that we are measuring in an effort to improve our service and quicken our response time," said Mr. Scheuring. "We've enhanced the product lines where they were short, particularly in the consumer area. That's done." At a Glance Midlantic Corp. Headquarters: Edison, N.J. Assets: $13.7 billion Employees: 5,090 Return on average assets: 1Q '94 1.34% 1993 1.24% 1992: 0.04% 1991: -2.49% Efficiency ratio: 1Q '94 62.0% 1993: 66.8% 1992: 76.0% 1991: 82.0%

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