Continental Bank Corporation
Continental Bank Corporation
Incorporated: 1932 as the Continental Illinois National Bank and Trust Company of Chicago
Assets: $30.58 billion
Stock Index: New York Midwest Pacific Cincinnati London
Today’s Continental Bank, known as Continental Illinois until late 1988, is the product of countless mergers, but the bank can trace its roots to two main institutions: the Illinois Merchants Trust Company and the Continental National Bank and Trust Company.
The Illinois Merchants Trust Company’s earliest origins lie in the Merchants’ Savings, Loan and Trust Company, founded by a group of Chicago businessmen in 1857. Merchants’ survived the great Chicago fire of 1871 quite well; though all its records were burned, its valuables survived, and the bank lost only $55,000 in taking the word of its depositors about their accounts.
As Chicago became a major industrial center in the early 20th century, banks with larger lending capacities were needed to meet the increased demand for Crédit. In 1923 Merchants’ Loan and Trust (the word “Savings” was dropped in 1881) merged with the Illinois Trust and Savings Bank. In 1924 they were joined by the Corn Exchange National Bank to form Illinois Merchants Trust Company.
The Continental National Bank and Trust Company was the eventual product of a 1910 merger between the Commercial National Bank and the Continental National Bank. The Commercial had been organized in 1864, while the Continental was chartered in 1883.
In 1898 the Continental absorbed the International Bank and the Globe National Bank, bringing its deposits to $20 million. By 1905 Continental’s deposits had topped $50 million, giving it the strength not just to survive the panic of 1907 but to offer help to other banks.
In 1909 the Commercial, which had grown steadily on its own, merged with the Bankers National Bank, another prominent Chicago bank. That same year Continental took over the commercial business of the American Trust and Savings Bank.
But the thriving city of Chicago demanded ever-larger banks, and in 1910 the Continental and the Commercial decided to merge, becoming the Continental and Commercial National Bank. With a total capitalization of $33 million and deposits of $175 million, the bank was Chicago’s largest.
In 1918, the Hibernian Banking Association, established in 1861 as Chicago’s first savings bank under the name Merchants’ Association, was merged into Continental and Commercial.
In 1927 the Continental and Commercial Trust and Savings Bank, which had evolved from the American Trust and Savings Bank, merged with Continental and Commercial National; the resulting bank was the Continental National Bank and Trust Company.
In 1929 Illinois Merchants Trust merged with Continental National Bank and Trust Company to become the Continental Illinois Bank and Trust Company. This bank then became Continental Illinois National Bank and Trust Company of Chicago in 1932, when it was granted a national charter.
This new bank had total resources of more than $1 billion, but Continental’s size was of little comfort during the Great Depression, when it had to borrow $50 million from the federal government’s Reconstruction Finance Corporation in 1934. At the same time, Continental got a new chairman, Walter J. Cummings, the former head of the Federal Deposit Insurance Corporation.
During World War II and immediately after, Continental remained a cautious, low-profile bank. Its lending policies were unadventurous and it relied heavily on its large bond portfolio for revenue. Such conservatism was appropriate during depression and war, but the American economy boomed during the 1950s, and Continental’s financial performance sagged as the bank sat on its hands.
In 1959 Cummings retired and was replaced by David M. Kennedy. As The New York Times put it, Kennedy “transformed a hidebound, hyperconservative bank into one of the most dynamic and progressive forces in American banking.” Under Kennedy, Continental expanded its international activities significantly, opening a branch in London in 1962 and acquiring branches in Tokyo and Osaka from a Dutch bank. By 1967, Continental had a presence in much of Europe and Latin America. Because of Illinois laws prohibiting branch banking, Continental had never made retail banking an important part of its activities, concentrating instead on business lending. Kennedy pushed Continental into the retail business too. But most of all, Kennedy encouraged his loan officers to think more about growth and less about risk. However, his expansionist policies, as practiced by his successors, also set the stage for Continental’s downfall in the 1980s.
In 1969 Kennedy left Continental to become secretary of the treasury in President Richard Nixon’s first administration, and D. M. Graham took his place. Under Graham, Continental continued its pursuit of big corporate borrowers. It also reorganized in 1969, creating Conill Corporation, a one-bank holding company, as many large banks did at the time. In 1972 it adopted the name Continental Illinois Corporation. By the mid-1970s Continental was the nation’s eighth-largest bank and had acquired a reputation as one of the best-managed and most secure banks in the world.
In 1973 Roger Anderson became chairman. Anderson, a career Continental employee, was a zealous believer in the bank’s high-growth strategy. In 1976 he publicly declared that he intended to make Continental the nation’s premier commercial lender. Between 1977 and 1982, the bank more than doubled its loan portfolio, outperforming its rivals by a wide margin. By the late 1970s, it had achieved Anderson’s goal.
Its areas of highest growth, however, were energy and real estate, and when oil prices collapsed in the early 1980s and American industry reeled under the weight of recession and increased global competition, Continental found itself badly overextended. Its worst loans included $200 million to American Harvester, another $200 million to Dome Petroleum, $173 million to Nucorp Energy, $100 million to the Mexican Grupo Industrial Alfa, and $41 million to Wickes Corporation, all companies in serious trouble.
But Continental’s worst problem was the Oklahoma City-based Penn Square Bank. During the heady days of the late 1970s, when energy prices reached an all-time high, Penn Square loaned billions of dollars to oil and natural gas interests in Oklahoma. Many of these loans, however, were either unsecured or secured by dubious collateral. Continental, true to its ways, had been anxious to get as much of the Oklahoma energy market as it could, but had found that the oilmen there had grown imperious as well as prosperous and required a hard sell. Impressed by Penn Square’s connections in the area, Continental wound up purchasing more than $1 billion worth of loans from Penn Square.
In 1981 Continental discovered that its Penn Square investment was fundamentally unsound, but expressed no alarm over it. At a shareholder’s meeting in April, 1982, Anderson declared that Continental’s Crédit quality was “very high.” But that June plummeting energy prices toppled Penn Square’s house-of-cards financing scheme and that bank was declared insolvent. Despite shareholder concerns, Continental classified only 15% of its Penn Square loans as nonperforming. Chase Manhattan Bank, another bank caught up in Penn Square’s implosion, wrote off 35% of its loans by comparison. Continental suddenly had a $61 million loss for the second quarter of 1982. By the end of the year, nonperforming loans totaled nearly $2 billion.
Some financial observers and perturbed shareholders suspected a cover-up on the bank’s part, but author Mark Singer suggests that Continental officials may simply have disregarded all the danger signs. “Among bankers there is an inbred tendency to react to a fiscal humiliation as if one had spilled gravy on a tablecloth or neglected to send a hostess a thank-you note,” he writes in Funny Money, his account of the Penn Square fiasco.
In February, 1984 Richard Anderson was forced to retire and David Taylor succeeded him. In March, the bank sold its profitable Crédit card operations, to raise cash. But much of the money went to pay its dividend to shareholders, not to shore up its financial condition. That May Continental suffered a run of monumental proportions.
Seemingly started by a false rumor that Continental was about to declare bankruptcy, the run cost Continental $1 billion in deposits on May 9 and another $3.6 billion on May 11. On the 14th, Continental announced that a consortium of 16 banks, led by Morgan Guaranty, had pledged a $4.5 billion line of Crédit to Continental. The run kept going. On May 17, the Federal Deposit Insurance Corporation (FDIC) joined 28 banks in pledging another $7.5 billion in assistance, stabilizing, but not stopping, the run.
By mid-July Continental had lost more than $14 billion in deposits. Since no bank had come forward to rescue Continental by means of a merger, that month the FDIC stepped forward to arrange a bailout of Continental itself.
In a very complicated arrangement, that September the FDIC essentially bought 80% of Continental’s shares for $1 billion, and paid another $3.5 billion for some $5 billion worth of Continental’s shakiest loans. The FDIC also installed John Swearingen, a former chairman of the Standard Oil Company of Indiana, as chairman and CEO.
Under Swearingen, Continental immediately set about selling more assets and cutting costs. The bank’s lending operations gained the discipline that they formerly lacked, and loan-loss reserves were strengthened. In 1985 Continental posted a profit of more than $100 million for the year. But over the next several years, it still lacked a coherent strategy for returning to its former greatness. In 1986 the FDIC made its first public offering of part of its stake in Continental, reducing its holding from 80% to about 69%, but at a disappointing price.
In July, 1987 Thomas Theobald, the former head of Citicorp’s investment-banking division, took over as chairman and CEO of Continental. Under Theobald, Continental finally decided on a distinctive strategy: to concentrate on providing financial services to business customers. Continental sold its retail-banking business, trimmed its international operations, and focused on services like financial risk management for small and mid-sized companies.
So far, the strategy appears to be successful. In 1988, its first full year as a banker to businesses only, Continental reported record profits. In December of 1988 the bank changed its name, dropping the “Illinois” to officially become the Continental Bank Corporation, in an effort to position itself to business customers nationwide. That same month, the FDIC reduced its stake in the company to just over 40%.
Although the bank still faces stiff competition and several challenges—among them returning to full public ownership—Continental has put the 1980s firmly behind it and enters the 1990s with a strong position in a growing market niche.
Continental Bank International; Continental Bank S.A./N.V. (Belgium); Continental Brokerage Services, Inc.; Continental Illinois Venture Corporation; Continental International Finance Corporation; Continental Illinois Limited London; Continental Illinois Servicios LTD A (Brazil); Continental Illinois Finanziaria S.p.A. (Italy); Continental Illinois Leasing S.A. (Spain); First Options of Chicago, Inc.; Continental Futures and Options Corporation; LaSalle Holdings, Ltd. (Canada); CIC Trading, S.A.; Continental International Finance, S.A. (Luxembourg); Societe Anonyme Financi-ere D’administration et de Gestión (Belgium); First Options of Chicago, Ltd.; Continental Illinois Securities Limited (Hong Kong); Continental Consulting Company, Ltd. (London)Continental Illinois (Asia) Limited (Hong Kong); Securities Settlement Corporation.
Welton, Arthur D. The Making of a Modern Bank, Chicago, The Continental and Commercial Banks, 1923; Singer, Mark. Funny Money, New York, Alfred Knopf, 1985; McCollom, James P. The Continental Affair: The Rise and Fall of The Continental Illinois Bank, New York, Dodd, Mead, 1987.