Anthony R. Davis of Dean Witter Reynolds Inc. upgraded UJB Financial Corp. last week to "accumulate" from "neutral," calling the company one of the best performers in the brokerage firm's 31 - bank universe.

Princeton, N.J.-based UJB's net interest margin bucked the industrywide trend and increased 11 basis points to 4.70%, aided by a large chunk of interest-free deposits and surging loan growth.

But the big story, Mr. Davis said, is the company's success in cutting costs. UJB announced last year that it would save $40 million by 1996.

UJB will probably exceed its target, and drop its efficiency ratio below 59%, Mr. Davis predicted. Operating expenses have fallen 4%, or $25 million, since the announcement, and should continue to fall through the end of next year, he said.

UJB earnings soared 49% in the third quarter, and should top 30% for all of next year, he said. twice the rate for his 31 banks. In fact, earnings have outperformed Wall Street estimates for three consecutive quarters.

Mr. Davis raised his 1995 earnings estimate to $3.20 a share, up from $3.10. Wall Street consensus is $3.07 a share.

Because UJB is performing so well, Mr. Davis added, it would make an attractive takeover candidate.

"With a $1.4 billion market cap and 12 of the 25 largest U.S. banks headquartered within 200 miles of New Jersey, UJB remains a take-out target," he said. "Assuming UJB trades at 70% of the S&P 500, we think the stock has 12-month price potential of $32.

"In a merger, UJB's take-out potential is probably around $40," he said. "Investors searching for consolidation plays and strong EPS momentum should establish positions in UJB," which was trading at $26.50, when Davis issued his report

UJB has also been effective in cutting nonperforming assets from its portfolio, he said. In the third quarter alone, they fell by $15 million, or 4%.

The company has worked hard to obtain title to its foreclosed properties, and now holds 83% of them. By the end of the year, almost half could be sol.d, reducing nonperformers by 20%, he said.

As a result, he added, credit-related expense should drop from $95 million this year to $70 million next year, which would add 30 cents to per-share earnings.

By contrast, Mr. Davis continued, credit-related expenses should increase modestly at other banks for the first time since 1991.

But like the rest of the industry, UJB demonstrated only meager fee income growth. But even here, UJB showed positive signs, Mr. Davis said.

Driven by adjustable rate mortgages, UJB's mortgage originations should top $500 million this year, up 9% from last year, Mr. Davis said.

UJB continues to show the positive effects of its reorganization, Mr. Davis said. Employees are down from 6,130 a few months ago to 5,900 today, a 2% reduction in salary expense.

And the company now has only two subsidiaries, one in New Jersey and one in Pennsylvania. Last year it had nine.

Branch automation and data processing efforts are also beginning to pay dividends, he said.

The net interest margin will shrink from its current level, he said, but should hold steady at 4.50% through next year.

"While core deposit rates will rise, 25% of deposits are in interest-free demand balances and the margin drag from NPAs will continue to dwindle," he said.

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