Bank One Corporation
Bank One Corporation
Sales: $25.98 billion (1999)
Stock Exchanges: New York Chicago
Ticker Symbol: ONE
NAIC: 551111 Offices of Bank Holding Companies; 52211 Commercial Banking (pt); 52221 Credit Card Issuing (pt); 52232 Financial Transactions Processing; 52239 Other Activities Related to Credit Intermediation (pt)
Chicago-based Bank One Corporation formed in 1998 through the merger of Bane One Corporation, headquartered in Columbus, Ohio, and First Chicago NBD Corp. The fourth largest bank in the United States in the late 1990s, Bank One is also the number two issuer of credit cards. The company offers such services as commercial and corporate banking, loan and leasing, insurance, and investment and brokerage services. With branches primarily located in the Midwest and Southwest, Bank One has more than 1,800 branches spread across 14 states.
History of Bane One Corporation
While the corporation was created in 1968 as First Bane Group of Ohio, Inc., a holding company of The City National Bank & Trust Company of Columbus, the organization’s origins may be traced to the Great Depression and the McCoy family. John H. McCoy began his career in banking when he left the eighth grade to work in a bank in Marietta, Ohio. By 1930, he was successful in the field and began serving on the Ohio state bank advisory board, soon thereafter becoming the Ohio representative to President Herbert Hoover’s Reconstruction Finance Corp. (RFC). In 1935, the RFC appointed McCoy president of Columbus’ City National Bank & Trust (CNB).
CNB, formed from the consolidation of two small Columbus banks, had an infamous anniversary: October 29, 1929, Black Friday. The bank had struggled through the Depression, surviving only with the help of the RFC, and when John H. McCoy took control, the two banks were still operating semi-autonomously. During this time, two families dominated banking in the state capitol: the Huntingtons, with their namesake Huntington National Bank, and the Wolfes, who owned Ohio National Bank and several major media outlets. While the Huntingtons controlled the lucrative trust business, Ohio National, by far the biggest bank in town, had the majority of the commercial lending.
Moreover, during this time Ohio state regulations prohibited banks from expanding across county lines, limiting growth possibilities and creating interdependence among banks in most of Ohio’s 88 predominantly rural counties. When large transactions were required, smaller banks established affiliations with bigger banks like Huntington National in Columbus or Fifth Third in Cincinnati, which in turn established ties to money center banks in New York or Chicago. These cooperative banking relationships in Ohio formed a “pyramid” in which small banks were, out of necessity, dependent on larger ones. As a result, there was little competition among local banks, and none at all among banks in different counties.
John H. McCoy made a fortuitous decision when he opted to focus CNB’s operations on retail banking, a field virtually untapped by his primary Columbus competitors. John H. was an impressive figure and established an enduring corporate culture at CNB. He is said to have worked so hard that he fainted several times at CNB, and, despite enduring four heart attacks between 1943 and his death in 1958, the patriarch never quit the bank. He established strictures against drinking coffee in the office and alcohol at lunch, and he earned the nickname “five percent McCoy” due to his insistence on charging customers five percent interest on loans, when most bankers were charging much less. John H. maintained that the valuable added services CNB offered its customers were worth these higher rates. McCoy’s progeny carried on that legacy: net interest margins still ranked among the highest in the business in 1992. Moreover, CNB’s corporate culture came to reflect John H.’s often paradoxical principles: autonomy, control, individuality, and uniformity; over the years, CNB entered many new ventures, as long as the stakes were low and the potential fallout from failure was limited.
In 1937, John G. McCoy finished his studies at Stanford and joined his father at the bank. One of the keys to CNB’s local success during this time was its transformation of branch banks from smaller replicas of cold, imposing bank buildings to friendlier neighborhood centers. During World War II, John G. served in the Navy and a younger McCoy, Chuck, ran the bank when a heart attack briefly put John H. out of commission. John G. returned to find that Columbus in general, and his father’s bank, in particular, were enjoying a boom in retail. Moreover, Chuck had introduced several innovations at the branches, including carpeting, modern lighting, community rooms with kitchens for local meetings, and continuous counters to replace the traditional teller cages. In the postwar period, CNB built the first drive-in branch bank; a few other banks were providing window service, but CNB built a specially designed, freestanding, drive-in bank.
When John H. McCoy suffered a fifth heart attack and died in November 1958, CNB was still ranked third among the banks in Columbus. John G., an operations specialist, was quickly named president, and one year later he was asked to take over as chairperson. The 46-year-old countered the board’s offer with demands of his own, including the creation of a research fund consisting of three percent of the bank’s profits. The board agreed, and John G. went to work. The research fund provided financial support for the technological innovations CNB would pioneer in the years to come, including a computer center for check-reading and other data processing functions.
By the late 1950s, the increasingly profitable CNB was gaining on local competitors Huntington and Ohio National, and John G. brought on an innovative advertiser, John Fisher, to promote new retail products like checking accounts. Over the course of his 30-year career at CNB, John Fisher combined marketing and computing intuition to revolutionize CNB and the banking industry as a whole. Moreover, Fisher, a former disc jockey, cultivated a unique image for the bank when he hired comedienne Phyllis Diller as CNB’s spokesperson in 1962. Board members worried that Diller would not convey the dignified image typically cultivated by banking institutions, and they voiced their concerns to John G. at subsequent board meetings. As Fisher told Institutional Investor in 1991, the CEO defended his visionary marketing director to the board by saying, “Gentlemen, it’s very simple: You can have either dignity or dividends. I vote for dividends.”
While Fisher’s outlandish campaign gave CNB a higher profile among competitors as well as customers, his unconventional ideas were not limited to advertising. At his and McCoy’s instigation, CNB became the first bank outside of California to market Bankamericard (which later became Visa) in 1966, beginning a very profitable credit card processing sideline. Handling all the data processing duties associated with the credit card, CNB helped to make Bankamericard the first nationally accepted credit card. This innovation not only poured revenue and credibility into CNB but helped transform Americans’ buying and spending habits, ushering in the “age of plastic.” In 1968, CNB helped issue more than one million credit cards through 50 banks. Two years later, on Columbus Day, Fisher activated the country’s first automated teller machine (ATM). Fisher also led unprecedented, and ultimately failed, efforts into videotex-based home banking, with which customers could view their accounts and pay their bills using their television screens.
During this time, John G. devised a plan to sidestep state banking regulations prohibiting interstate mergers and acquire other Ohio banks in the process. He decided to develop a holding company—a corporate body that, technically, was not a bank and thus could lawfully expand across county and state lines. The holding company, formed in October 1967, was called First Bane; its unusual spelling was the result of Ohio laws forbidding holding companies from calling themselves “banks.” John G. first approached the directors of Farmers Savings & Trust, a county-seat bank in Mansfield, Ohio. The directors of Farmers Savings, nearing retirement and looking to sell the company, agreed to the merger proposition, becoming CNB’s first acquisition through a stock swap.
Strict guidelines for acquisition soon developed. Proposed acquisitions were required to have assets amounting to no more than one-third of those of the buyer, a policy that ensured manageable deals and allowed the buyer to survive a bad acquisition. In addition, acquisitions were forbidden from diluting earnings, even during the first year of the merger. First Bane usually avoided such turnaround situations by focusing on acquiring banks that were strongest in its own retail and small business markets, which would generate economies of scale in areas such as processing. Under First Bane’s merger policy, salaries, hiring and firing, staff allocation, and even the pricing of products and services remained the responsibility of the affiliate bank, which maintained its own president, board of directors, and business plan.
First Bane soon proved especially proficient at consolidating management information systems. Each new affiliate was required to submit detailed monthly reports, which were then compiled on First Bane’s powerful computer system for comparative purposes. The surveys induced competition among the branches and provided an incentive to match the best. Virtually all new affiliates met the challenge and improved their return on assets and profitability after merging with First Bane.
We will deliver exceptional results through exceptional people. We are a highly respected, world-class financial services company committed to being the best in all we do: superior performance, quality service, a great place to work.
From 1968 to 1978, First Bane acquired at least 15 Ohio banks, raising its profits to over $25 million annually, and formed First Bane Group Financial Services Corporation to offer personal property leasing and mortgage servicing. The company’s growth was also fueled by the liberalization of Ohio banking laws during this time, which were amended to allow statewide branching and mergers between banks located in any county. The holding company’s name was changed to Bane One in 1979, and by 1980 the corporation was one of only seven banking organizations amon the 100 largest in the United States to have recorded ten consecutive years of increases in both earnings and dividends. In 1981, Time magazine called Bane One “perhaps the most advanced financial institution in the United States.”
The corporation’s assets passed the $5 billion mark in 1982, as barriers to interstate branching continued to deteriorate. Federal and state banking regulations changed dramatically in September 1985, enabling Bane One to enter its first agreement with a banking organization outside of Ohio. Purdue National Corporation in Lafayette, Indiana, became the first out-of-state bank to affiliate itself with Bane One. After a relative lull in acquisitions from 1983 to 1986, Bane One’s merger activity picked up. In 1987, for example, the company purchased the $4.4 billion American Fletcher of Indianapolis, and the next year it acquired $4.3 billion Marine Corp. of Milwaukee. Bane One took advantage of nationwide reciprocal banking soon after it was legitimized in Ohio in 1988. By the end of the following year, the corporation had added affiliates in Kentucky, Michigan, and Wisconsin. Nevertheless, the corporation focused on regional operations until the early 1990s, when it began to extend its presence west and south as virtually every barrier to interstate banking was removed.
John B. McCoy, son of John G., also entered the banking business. Like his father, John B. graduated from Stanford. After three years in the U.S. Air Force, he took a position at Citicorp in New York, where he stayed for less than a year before returning home to Columbus in 1970. The younger McCoy worked his way through six different sections of the bank—including the credit card division, which he built into one of the nation’s largest—and, in 1984, he was named CEO of the corporation. John B.’s efforts to keep Bane One focused on consumer banking allowed the corporation to avoid the real estate loans, Third World debt, and leveraged buyout problems that troubled many banks during the 1980s. The bank lent more to consumers than to businesses and rarely offered loans at all to large companies. From 1984 to 1990, John B. engineered 54 acquisitions, thereby tripling Bane One’s assets to $27 billion. These acquisitions helped Bane One to thrive during an early 1990s recession.
Bane One continued to refine the branch banking experience in the 1980s by decreasing its number of tellers, adding new drive-in lanes and ATMs, giving the platform officers separate offices, adding travel agencies and a discount securities broker, and leasing space to insurance agents and real estate brokers. The corporation also introduced such innovative concepts as Sunday hours in Ohio, “weekly specials,” and credit card tie-ins with groups such as the American Association of Retired Persons and airline frequent flyer programs.
However, by the beginning of the 1990s, Bane One’s five-state Midwestern market, in which the population had remained stagnant for years, was becoming saturated. In order to maintain the corporation’s customary 15 percent annual profit growth, John B. decided on a course of expansion. Focusing on Texas, the nation’s third largest bank state with $175 billion in deposits in 1990, McCoy found a retail void in the banking market that could be filled by his bank’s successful formula. First, he agreed to the government-assisted purchase of 20 failed Texas banks, known as MCorp, for $500 million, which brought Bane One’s assets to approximately $36 billion. Just two days after taking control of those former MCorp banks, he bought Dallas-based Bright Bane Savings Association and its 48 branches for $45 million from the Resolution Trust Corporation, making Bane One the country’s 16th largest bank, with $37 billion in assets. MCorp was Bane One’s first turnaround situation, and ob-servers wondered whether the corporation was up to the challenge, especially given the competitive banking environment in Texas. Led by John B., the corporation achieved that and more, acquiring banks in Colorado, Arizona, California, Utah, West Virginia, Kentucky, and Oklahoma in 1992 and 1993.
For fiscal 1993, Bane One earned a return on assets of 1.53 percent, marking the first time in history that an American banking institution with over $50 billion in assets crossed the 1.5 percent mark. The company sustained its annual earnings per share increase, becoming one of only 14 nationally traded U.S. companies to do so in 25 years. American Banker named John B. McCoy “Banker of the Year” for 1993.
- First Chicago (the First) opens for business.
- The First opens the First Trust and Savings Bank to serve non-commercial customers.
- First Trust merges with Union Trust Company to form the First Union Trust and Savings Bank.
- John H. McCoy becomes president of City National Bank & Trust (CNB) of Columbus, Ohio.
- CNB becomes the first bank outside of California to market Bankamericard (later Visa).
- First Bane Group of Ohio, Inc., a holding company of CNB, is formed.
- First Chicago Corporation is established.
- First Bane Group is renamed Bane One, and its affiliated banks adopt the name Bank One.
- Bane One expands beyond state boundaries through an agreement with Purdue National Corporation in Indiana.
- Bane One enters Texas through the acquisition of MCorp and its family of failed banks.
- First Chicago and NBD Bancorp, Inc. merge to form First Chicago NBD Corp.
- Bane One acquires First USA Inc., a fast-growing credit card company.
- Bank One Corporation is formed through the merger of Bane One and First Chicago NBD.
- Bank One launches an Internet-only bank called WingspanBank.com.
In the mid-1990s, the inadequacy and inefficiency of Bane One’s decentralized management strategy rose to the surface, and the company reorganized operations, which by 1994 included a network of 57 banks, along five core business lines: commercial banking, retail banking, specialty finance, investments, and credit cards. Bane One also sought to streamline operations and cut costs, and thus the company eliminated about 4,300 jobs and sold or closed about 100 bank branches. The bank planned to devote time and energy to restructuring and strengthening the company. Plans to develop national, profitable businesses and to enhance marketing efforts were put in place.
By 1997 Bane One was the tenth largest bank in the nation, with more than $90 billion in assets and more than 1,500 offices spread across 13 states, mostly in the Midwest and Southwest. The bank’s focus on strengthening operations culminated in its largest acquisition to date when the company bought First USA Inc., one of the fastest-growing credit card businesses in the nation, for an estimated $6.75 billion. The acquisition effectively created the third largest U.S. credit card company, with about 32 million cardholders, and boosted Bane One’s presence in the rapidly growing credit card industry. The company indicated interest in further growth through acquisitions and in working toward the building of a national presence.
History of First Chicago Corporation
In the summer of 1863, Edmund Aiken headed a group of ten investors who wanted to take advantage of the National Banking Act that President Abraham Lincoln had signed into law earlier that year. This act allowed national banks for the first time to exist along with state-chartered institutions. Aiken, a 51-year-old private banker, realized that the demands of financing war-related businesses, together with the industrial and commercial growth of Chicago and the development of Illinois, created a need for a national bank in the Midwest. Aiken’s group invested $100,000 to start First Chicago (the First). The bank opened its doors for business on July 1, 1863, the day the Battle of Gettysburg began.
The First was an immediate success. After only 18 months, the board of directors voted to increase its capital stock to $1 million, which was the limit in the bank’s Articles of Association. The First moved twice during its first five years, as increasing business forced it into larger quarters. Although the First was housed in a fireproof structure when the Chicago Fire struck in 1871, its building was seriously damaged. Fortunately, the bank’s safes and vaults withstood the flames and nothing of importance was lost. The job of collecting records and monies buried in the ashes fell to Lyman Gage, a young cashier who eventually became president of the bank and then secretary of the treasury in President William McKinley’s cabinet. Gage was one of a long line of employees who used his training and experience at the First to serve the federal government. Three months after the Great Fire, the First reoccupied its charred quarters and began helping Chicagoans rebuild their city. Out of the ruins, the First emerged as one of the most prominent and respected business leaders in the community.
As Chicago prospered, the First expanded and changed with its growing customer base. To motivate employees the First began awarding bonuses for “able and meritorious” effort; in 1881 the bank distributed $20,000 as incentives to employees. The bank began declaring quarterly dividends to customers at mid-year in 1882. That same year, it became the first bank to open a women’s banking department, to make ladies more comfortable when conducting business in the male-dominated bank. During the Panic of 1893, the First found an original solution for the currency shortage: it imported gold from its London correspondent bank, a practice that quickly spread to other banks. In 1899 the bank was the first American bank to establish a formal pension plan, a clear indication of its employee-oriented management style.
At the turn of the century, the industrial revolution created an unprecedented demand for credit. The First met this need through mergers. When it joined with the Union National Bank in 1900, the First’s assets climbed from $56 million to $76 million. It combined with the Metropolitan National Bank in 1902 and raised its assets to $100 million. In this way the First acquired the resources to serve both the needs of its regular customers, whose businesses were flourishing, and the needs of new customers, who were trying to capitalize on the opportuni-ties of the era.
In 1903 the First opened the First Trust and Savings Bank, a separate corporation to serve the non-commercial members of the community. During its first seven days of operation this bank tallied more than 1,000 savings accounts totaling in excess of $3 million. In two years the First Trust and Savings Bank had more than 10,000 depositors whose balances totaled nearly $18 million.
The First celebrated its 50th anniversary in 1913 by becoming a charter member of the Federal Reserve system. By 1915 the bank was one of the three most active banks in foreign exchange in the country.
During World War I, the First played a major role in helping the country finance the war effort. When local support for Liberty Bonds and government securities weakened, the First and the First Trust and Savings Bank purchased $10 million for their own accounts. This patriotic act, coupled with the First’s President James B. Forgan’s active promotion, helped inspire Americans to purchase another $12 million worth of government bonds and securities.
During the 1920s the bank grew steadily. A new addition to its headquarters, designed by Daniel Burnham, was completed in 1928 just as the number of depositors reached 20,000. When the Union Trust Company merged with the First Trust and Savings Bank in 1928 to become the First Union Trust and Savings Bank, the First looked optimistically toward the future. But as 1929 passed, this optimism turned into a painful pessimism. As the great crash neared, the First witnessed a stream of large customer withdrawals to cover speculative securities purchases.
During the Depression that followed the 1929 stock market crash, the First’s sound financial base kept it from failing as 11,000 weaker banks did. Even in the depths of the Depression, the First never skipped an interest payment on savings deposits. Its strength allowed the First to merge with the Foreman State Banks in early 1931 and accept all of their deposit liabilities. Moreover, during a frenzy to acquire liquidity in early 1933, depositors were able to withdraw $50 million in just three days from the First without severely hampering the bank’s operations.
When President Franklin Roosevelt proclaimed a national bank holiday in 1933 to give banks a chance to stabilize, the First was one of the few banks able to open its doors without regulatory delays. Part of the reason for the First’s quick reopening was its status as a Federal Reserve member bank, which meant that it accrued advantages that non-member banks did not. Because the First Union Trust and Savings Bank was not a member, the First decided to absorb all of the savings bank’s business in order to retain its customers’ loyalty.
The establishment of the National Recovery Administration by Congress and the passage of the Banking Act of 1933 (better known as the Glass-Steagall Act), which created the Federal Deposit Insurance Corporation and separated commercial banking from investment banking, strengthened confidence in the First. When the Securities and Exchange Commission was established in 1934, fears of a second crash dissipated.
The First weathered the Depression and continued to grow as Roosevelt’s recovery policies took hold. In 1938, on its 75th birthday, the First’s assets reached the $1 billion mark, just as the American economy began to accelerate in anticipation of war. Remembering that capital costs skyrocketed during World War I, the First advised businessmen to avoid high prices by borrowing money for investment before any outbreak of fighting.
During World War II a quarter of the First’s staff served on active duty. Women were hired to fill wartime vacancies and to staff new positions as business increased rapidly. In the six years after the start of World War II, women helped the First double the value of its assets to $2 billion.
In 1944 President Roosevelt chose the First’s president, Edward Eagle Brown, to be the only American banker to serve at the United Nations Monetary and Finance Conference that met at Bretton Woods, New Hampshire, to sketch plans for the World Bank and the International Monetary Fund. Brown pioneered the development of highly specialized lending divisions to respond quickly and innovatively to corporate customers’ financial needs.
During the 1950s and 1960s the First enjoyed a period of sustained growth as it continued to build on its reputation as both a specialist and an innovator in business loans. As a result, the First’s assets more than doubled and the number of its loans quadrupled during this period. In 1959 the First opened a London office to improve its service to foreign correspondent banks and customers engaged in international trade. Three years later, the First started a Far East office in Tokyo. In 1980 the bank opened a representative office in Beijing, the first American bank to open such an office in China.
As the First approached the end of the 1960s, the bank prepared to expand, as fast as it could, throughout the Midwest and the world. When Homer Livingston passed leadership of the bank to Gaylord Freeman in 1969, an attitude of unre-strained optimism pervaded at the First.
That year the bank was reorganized as the major subsidiary of the new First Chicago Corporation to allow it to broaden the scope of its activities worldwide. This reorganization gave the First a way around restrictive banking laws. From the beginning of his tenure, Freeman followed an aggressive program to increase its assets through the acquisition of more loans. Freeman doubled First Chicago’s size in just five years. He accomplished this by recruiting top business-school graduates and quickly promoting them to positions of considerable lending authority. Unfortunately, this program produced one of the worst loan portfolios in the industry: in 1976 the bank’s percentage of non-performing loans reached a high of 11 percent—twice the national average.
A. Robert Abboud replaced Freeman in 1975 and immediately began dealing with First Chicago’s bad loans. Unlike Freeman, who was warm and supportive, Abboud’s methods were described as tyrannical and intimidating. Where Freeman favored a decentralized managerial style that bestowed maximum freedom on loan officers to make decisions, Abboud favored a centralized style to check and double-check every loan. In one 18-month period 118 officers left, reducing the bank’s executive ranks by 12 percent. Even after promoting 84 employees from within, Abboud was still 149 officers short of his budget, but he refused to hire recent business school graduates because he feared their lack of experience.
Abboud also drove away established clients with his highly conservative loan policy. His new controls doubled the time it took to approve loans and also left old customers uncertain as to whether their loans would be approved. Abboud raised interest rates on loans and required corporate customers to maintain compensating balances of 15 percent on an unexercised credit line when his competition required ten percent. Abboud justified his actions by pointing proudly to First Chicago’s balance sheet, which showed a 22-to-l ratio of assets to equity; only one other bank in the country had a better ratio. By 1980 Abboud had brought non-performing loans down six percent. First Chicago’s five percent rate was still double the national average, however.
After three years, Abboud realized that First Chicago was not prospering. Clients were not returning and new customers were repelled by First Chicago’s reputation for insensitivity to its customers’ needs. In 1975 Continental Illinois, First Chicago’s chief rival, was strikingly similar to First Chicago in size and makeup; they both depended heavily on commercial loans for volume and on money markets for funding. Five years later, Continental’s loan volume had grown to $23 billion, 50 percent larger than First Chicago’s, and its earnings grew 73 percent while First Chicago’s grew four percent. Abboud decided that First Chicago had to become a risk-taker to catch up.
Abboud chose to gamble in two speculative areas: fixed-rate loans and arbitrage in the Eurodollar market. By mid-1979, with interest rates on the verge of a historic climb, First Chicago found itself with $1 billion in fixed-rate loans that were being funded by short-term money whose cost was quickly rising above the yields of the loans. In 1978 Abboud more than doubled the bank’s Eurodollar commitment, to $6.7 billion, from $3.1 billion the year before. He was hoping for interest rates to fall, but, following the bank’s own forecast, they rose in late 1979 and early 1980. The Federal Reserve made the bank’s Eurodollar situation worse by tightening up regulations. Thus, First Chicago found itself funding its Eurodollar placements with higher-cost deposits. Although consumer banking doubled in five years under Abboud, his speculative decisions cost the bank dearly.
Barry F. Sullivan, an executive vice-president of Chase Manhattan Corporation, succeeded Abboud as chairman and chief executive of First Chicago in July 1980. He had the “people skills” the autocratic Abboud lacked, as well as the experience of putting a floundering bank back on its feet. Once in office, Sullivan zeroed in on building a new management team. He recruited 300 officers for product development and corporate accounts, expanded the corporate-planning staff from three to 44, and reshuffled the talent he already had.
At the same time, Sullivan created a new organizational structure for First Chicago based on strategic business units (SBUs). Sullivan partitioned operations into 145 SBUs in an attempt to decentralize and place responsibility for strategic planning and marketing on middle management. Sullivan’s philosophy and efforts got results: in the first nine months of 1983, earnings jumped 43 percent and return on assets, which were 0.23 percent in 1980, reached 0.53 percent, close to the 0.57 percent average return on assets at the ten largest money-center banks in the country. First Chicago caught the attention of Wall Street; at the end of 1983, three and a half years after Sullivan became chairman, First Chicago’s stock reached $24 a share, double its price when Sullivan took over.
Sullivan’s success can be attributed to more than just his managerial style. He instituted a more competitive pricing schedule for corporate loans and marketed it, and the bank’s new organization, aggressively. He eliminated a costly mismatch of maturities and rates in funding the bank’s loan portfolio. He abandoned the bank’s Brussels office and a Visa traveler’s check operation because of poor performance. He developed the industrial specializations that First Chicago had once been known for but that had been neglected by Abboud: energy and commercial real estate. Finally, he drew small- and medium-sized companies to First Chicago, a feat he accomplished by purchasing American National Bank and Trust Company, Chicago’s fifth largest bank and an expert in dealing with mid-size and smaller companies.
In October 1984, the comptroller of the currency examined First Chicago’s loan portfolio. Surprisingly, the comptroller judged that First Chicago had failed to acknowledge some bad loans. As a result, First Chicago was pressured to write off $279 million in its third quarter, six times the amount taken in the second quarter. In addition, the comptroller forced Sullivan to recategorize as nonperforming another $125 million in loans, bringing the total of nonperforming assets for the third quarter to $840 million.
First Chicago had to report a $71.8 million loss for the third quarter. Outsiders expected that these bad loans came from the bank’s foreign-debt portfolio, but most came from First Chicago’s domestic-lending group of energy and agriculture businesses. The oil glut had depressed energy prices far below the break-even point for local drillers, and the strong U.S. dollar had cut American farm exports. A few months later, First Chicago had to establish a $115 million reserve fund to cover losses stemming from a recent investment in a Brazilian bank. By the end of 1985, First Chicago had written off $131.1 million on its Brazilian fiasco.
Nonetheless, earnings increased in 1985 because Sullivan had made some astute decisions. His purchase of American National Corporation added record profits of $42 million to First Chicago’s bottom line. The promotion of First Chicago’s credit cards produced consumer loan profits that totaled $65 million. A third decision that paid off was First Chicago’s venture-capital stock portfolio, which added $121 million in pretax profits in 1985.
The bank’s net income in 1986 climbed to $276 million, which represented the strongest financial results in First Chicago’s history to date. In the wake of these profits, Moody’s Investor Service gave the bank a vote of confidence by raising the rating of First Chicago’s securities. More significantly, the office of the comptroller of the currency acknowledged that First Chicago had met all of its requirements for reducing risk on loans well ahead of the targeted dates.
What the banking industry feared most, happened in 1987: Third World countries suspended interest payments on their loans. This situation compelled First Chicago to raise its reserves on troubled-country debtors (mostly Brazil) by $1 billion. At the end of the year, First Chicago reported a loss of $571 million, in dramatic contrast with its historic earnings of 1986.
In 1987 First Chicago acquired First United Financial Services Inc., a five-bank holding company with a solid base of business in the growing western and northwestern suburbs. The bank also purchased Beneficial National Bank USA, Wilmington, Delaware, and renamed it FCC National Bank. With this addition, First Chicago became the third largest issuer of bank credit cards in the United States. As profits rebounded in 1988, First Chicago took another giant step in developing its customer-banking base through the acquisition of Gary-Wheaton Corporation, a four-bank holding company.
The early 1990s were not kind to First Chicago, however, and the bank suffered from problem loans in commercial real estate as well as highly leveraged companies. Sullivan left the company at the end of 1991, and new Chairman and CEO Richard L. Thomas assumed the task of turning the around the ailing bank. Thomas began by cutting the dividend 40 percent—in 1991, when the company was still under Sullivan’s command, First Chicago paid out more dividends than it earned. First Chicago posted a $15.1 million loss during the fourth quarter of 1991 for problem loans and expense-cutting costs. In order to streamline operations, the bank downsized its staff by about 1,000 workers in 1991, and additional personnel cuts were expected.
The changes implemented at First Chicago met with success, and earnings for the first quarter of 1993 rose more than 51 percent compared to the same period in 1992. The bank was also able to take some control of its problem loans by selling off $1 billion of its nonperforming real estate loans to GE Capital in February 1993 for about $500 million. The company’s first-quarter results were also helped by gains in First Chicago’s venture-capital portfolio and its rapidly growing credit card operations.
In 1995 First Chicago made a big move when it merged with NBD Bancorp Inc., based in Detroit, Michigan, to form First Chicago NBD Corp., the seventh largest bank in the United States and a leader in the Midwest. Prior to the $5 billion merger, First Chicago had $72.4 billion in assets and was ranked tenth in the nation. The bank was also one of the nation’s largest issuers of credit cards and was the market leader among corporate banking operations in the Midwest. NBD Bancorp ranked 18th and had assets of $47.8 billion. Thomas retired in May 1996, leaving command of the new bank to NBD Bancorp’s chairman and CEO, Verne G. Istock. Istock planned to make First Chicago NBD an even more powerful presence in the Midwest and to generate revenue growth by stimulating the slightly ailing credit card business and increasing marketing. Istock also hoped to make some strategic acquisitions to fight competition, as well as takeover attempts, and intended to turn around corporate bank operations by decreasing capital and shedding unprofitable product lines.
The Merger of Bane One and First Chicago NBD: Late 1990s
In April 1998 Bane One and First Chicago NBD announced plans to merge their operations in an estimated $30 billion deal. The newly formed company took the name Bank One Corporation and consolidated its headquarters in Chicago. Bane One’s McCoy became president and CEO of Bank One, while First Chicago NBD’s Istock assumed the role of chairman. The new company formed a powerhouse in the Midwest, and the bank expected the merger to generate $930 million in savings and $1.2 billion in additional revenue over the following two years.
Bank One placed hopes of expansion on the relatively new area of online banking and online services. Growth through the Internet, the bank believed, would be less costly than acquiring companies, a practice the bank planned to put on hold while it integrated the operations of Bane One and First Chicago NBD. In October 1998 Bank One’s First USA division made an agreement with Microsoft to pay about $90 million for advertising on the MSN Network, Microsoft’s online service, for five years. A month later Bank One inked a deal with Excite Inc., an Internet media company, to develop an online financial services area for Excite’s home page. Clients would be able to access personalized banking information, and Bank One would have access to potential new customers. In early 1999 First USA made another online deal when it signed a five-year agreement with America Online Inc. to market its credit cards to America Online members. It was estimated that the deal could generate nearly $500 million in revenues for America Online.
Bank One took a significant leap of faith in the Internet in mid-1999 when it launched an exclusively online bank, known as WingspanBank.com. By creating a new brand separate from the Bank One image, the company hoped to lure new, Internetsavvy customers who traditionally shunned the conventional banking system. The new venture was expected to add as much as $150 million to Bank One’s annual operating expenses.
As part of the new company’s consolidation efforts, Bank One reduced its workforce by about five percent, or 4,500 jobs, in 1999. Bank One also sold the mortgage servicing portfolio and transaction processing services of First Chicago NBD. For the second quarter of 1999, Bank One reported net income of $992 million, an increase over the year-earlier net income of $895 million. First USA continued to contribute significantly to revenues, with $920 million in sales during the second quarter, but increased competition and slowing growth in the credit card industry led industry observers to view Bank One’s results with a hint of skepticism.
In the summer of 1999 Bank One announced that 1999 profits would not meet with Wall Street expectations. Problems with First USA and the slowing credit card industry were blamed. Indeed, First USA had grown at 20 percent a year in the mid- to late 1990s, but growth for the remainder of 1999 was projected to remain stagnant. First USA’s attempts to stave off competition and falling profits included stiffer penalties for submitting late payments and jumps in interest rates. Cardholders retaliated by canceling their First USA cards, and First USA’s attrition rate climbed as high as 17 percent in 1999. The credit card division was unable to sign up enough new members to balance out its losses.
Reaction to Bank One’s announcement included a 23 percent drop in its stock price. McCoy and Istock traded positions, and though McCoy remained CEO, he lost a large portion of his operating responsibilities. By the end of 1999 the climate at Bank One was so bleak, and the former Bane One and First Chicago NBD factions so opposed, that in December McCoy was in essence forced to resign from the company he had worked so hard to build. Istock took over as interim CEO and had the task of announcing that earnings for 2000 would also be less than favorable—First USA’s profits were projected to fall 30 to 35 percent. Istock also announced a restructuring strategy designed to raise profitability and said the company would take a $725 million charge against fourth-quarter 1999 earnings.
Problems continued to plague Bank One in early 2000 as it struggled to turn around its underperforming operations. Though Bank One blamed the majority of its problems on First USA, the company faced some challenges in other areas. For instance, Bank One used $80 million to cover losses in auto leases, and the company struggled to integrate the computer systems of First Chicago, NBD, and Bank One. For the first quarter of 2000, First USA’s net income was $70 million, down considerably from the year-earlier amount of $303 million. Bank One’s overall earnings for the first quarter reached $689 million, compared to $1.15 billion in 1999. Bank One remained confident, however, of its ability to return the ailing First USA division to profitability by 2001.
In March Bank One announced it would reduce its work-force again in order to cut costs. About six percent, or some 5,100 jobs, would be eliminated, mostly from the credit card, consumer lending, and staff services operations. Also that month Bank One gained a new CEO and chairman, Jamie Dimon, formerly a president with Citigroup Inc. Dimon quickly got started on his challenging task of turning around the floundering company. Bank One’s retail credit card business in Canada was sold to Royal Bank of Canada, and its retail credit card business in the United Kingdom was sold to Halifax Group plc. Both the Canadian and U.K. divisions had been launched in late 1998. The sales reflected Bank One’s attempt to refocus on strengthening domestic businesses. Bank One also sold its subprime real estate loan portfolio to Household International Inc. The division, which included 97 Bank One Financial Services branches in 29 states, was not considered to be a core operation. Another division that faced changes was WingspanBank.com. The online bank’s launch was accompanied by intensive marketing efforts and in its early stages gained 50,000 customers, but the bank soon lost steam—though analysts expected the bank to attract about 500,000 customers in its initial year, the bank only had about 107,000 accounts after its first six months. Bank One considered selling off the division but in July chose to integrate it into its retail division and planned to combine WingspanBank.com and Bank One into one Internet platform.
With the legacies of Bane One and First Chicago NBD providing strength and support, and a new CEO with an effective track record in the financial services sector, supporters of Bank One remained positive and hopeful. As Bank One looked forward, its future was unpredictable, but the company planned to put its problems behind and to live up to its promise of great savings and unprecedented revenue growth.
First USA Bank, National Association; Paymentech, Inc.; Bane One Loan Services Corporation; Bane One Insurance Company; First Chicago NBD Insurance Company; Bane One Management Corporation; Bane One Texas Corporation; Bank One, National Association; Bank One International Holdings Corporation; Bane One Capital Holdings Corporation; BOCP Holdings Corporation; Finance One Corporation; Bane One Financial Corporation; Bane One Capital Corporation; First Chicago Leasing Corporation; Bane One Capital Markets, Inc.
Bank of America Corporation; The Chase Manhattan Corporation; MBNA Corporation; Citigroup Inc.; Wells Fargo & Company.
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—April Dougal Gasbarre
—updated by Mariko Fujinaka