Since Keycorp and Society Corp. announced their intention to merge a few months ago, banking experts have been musing over other pairings of like-sized bank holding companies.

One combination that intrigues East Coast industry watchers involves Midlantic Corp. and UJB Financial Corp., two recovering New Jersey banking companies that are attractive acquisition targets.

With branch networks covering nearly identical territory and a similar mix of consumer and middle-market business banking, a Midlantic-UJB merger could yield considerable expense savings and deliver strong earnings.

What's more, it would create a $27 billion-asset regional player that could eventually be sold for a much higher premium than either bank could fetch separately.

To some analysts, it's a merger of equals made in heaven.

"I think it makes an incredible amount of sense," said Frank R. DeSantis, an analyst at Donaldson, Lufkin & Jenrette Securities Corp.

"There's a logic to it," said Lawrence Cohn, an analyst at PaineWebber Inc. "There's a tremendous amount of overhead that could be eliminated."

Mr. DeSantis estimates that Midlantic, based in Edison, N.J., and UJB, headquartered a 40-minute drive away in Princeton, could achieve a 20% reduction in combined expenses if they merged.

Profits Seen Doubling

The combined entity would have profits of $445 million - more than double what each bank earns now - and a return on assets of 1.45% by 1995.

Returns on assets at UJB, New Jersey's second-largest bank company with $13.6 billion in assets, and Midlantic, the state's No. 3 bank with $13.5 billion in assets, were 0.53% and 1.08% for the first nine months of 1993, respectively.

It is not clear whether the chairmen of the banks have ever spoken about merging or would consider combining forces. And which executive would run the merged entity is an open question.

Garry J. Scheuring, 54, chairman and chief executive of Midlantic, and T. Joseph Semrod, 56, UJB's chairman and chief executive, are both several years away from retirement. Both have strong senior management teams and a few potential successors to the CEO's office.

No Word of Talks

In any case, analysts say they are not aware of any talks between Mr. Scheuring and Mr. Semrod.

But sources say Mr. Scheuring would be open to a merger of equals or sale to a larger company once Midlantic has fully repaired its credit quality problems. A bank spokesman said Mr. Scheuring would not comment on merger plans.

In an interview several months ago, Mr. Scheuring, a former Continental Bank Corp. vice chairman who was recruited to Midlantic in 1991, said in-market combinations make sense.

"We have 2,700 banking locations in New Jersey and that's an expensive infrastructure," he said. "That doesn't get resolved by some out-of-state bank coming in and purchasing branches."

Independent Stance

Mr. Semrod, on the other hand, is said to be committed to keeping UJB independent. He recently announced a consolidation and restructuring program that seemed to indicate his belief that the bank can make it on its own, at least for the time being.

Mr. Semrod also declined to comment on mergers, said a UJB spokeswoman.

But both chairmen have been under pressure to sell, especially Mr. Semrod. UJB has been the subject of acquisition rumors on and off since 1990. The company, which was devastated by bad assets, fought a proxy battle that year against a shareholder group that wanted lo install a new board of directors that would sell the bank.

Mr. Semrod won the battle and has made strides in turning the bank around. Over the last year nonperforming loans have been whittled down to 3.14% of total loans at Sept. 30 from 4.34%. Profits grew 51% to $54.6 million in the first nine months of this year from the same period last year.

Right Behind First Fidelity

The bank, with 259 branches in central New Jersey and eastern Pennsylvania, has the second-largest share of deposits in New Jersey (First Fidelity Bancorp. is No. 1) and is the No. 2 lender to middle-market companies and consumers in the state.

With such an attractive franchise and with credit problems on the mend, UJB continues to be dogged by takeover rumors.

While Midlantic has not been the subject of takeover rumors as intense as those about UJB, it is clearly viewed as an attractive acquisition candidate. Its consumer business is booming at its 330 branches, and credit quality problems have subsided. Nonperforming loans were 5.5% at Sept. 30, compared with 9.2% a year earlier.

Once nonperformers fall below 5%, which analysis expect by yearend, Midlantic can expect suitors to start lining up. Profits were $111 million in the first nine months of this year, compared to a loss of $4 million during the same period a year ago.

Defensive Strategy

Mr. DeSantis believes that a defensive merger of UJB and Midlantic would allow both banks to realize their full earnings potential and ease the pressure to sell. But he and other analysts say there's no telling whether a merger would work. Mergers of equals can be difficult to carry off.

Mr. Cohn at PaineWebber says that a UJB-Midlantic merger would require a huge investment in back-office operations to handle a doubling of accounts. And a merger would also bring enormous staff cuts.

It's not certain that banking regulators would allow the two banks to merge, given that they've both had enormous credit quality problems. Midlantic is operating under agreements with the Federal Reserve Bank of New York and the Comptroller's office.

And the stock market frowns on mergers of equals because there's usually not immediate benefits for shareholders. Keycorp's shares have fallen 10% since its merger with Society was announced. Investors are dubious about whether an out-of-market merger of equals can succeed.

That's not as much of an issue for UJB and Midlantic, since they're such close neighbors. Marriage Made in Heaven? Pro forma 1995 estimatea for UJB-Midlantic merger UJB Midlantic CombinedNet interest income $674 $560 $1,234Noninterest income 190 220 410Noninterest expense* 545 450 846Loan loss provision 60 40 100Pretax 259 290 698Net income 166 186 445Return on assets 1.10% 1.25% 1.45% (*) combined expenses are 85% of the sum Source: Donaldson, Lufkin & Jenrette

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