First Chicago Corporation
First Chicago Corporation
Assets: $44.43 billion
Stock Index: Midwest New York Pacific London Tokyo
First Chicago Corporation is a multibank holding company whose principal subsidiary is the First National Bank of Chicago, the oldest and largest national bank still operating under its original name and charter. First Chicago (the First) takes great pride in its long history of dependable and innovative financial products, which it traces back to the Civil War. In 1969 the First was reorganized as a wholly owned subsidiary of First Chicago Corporation to allow it to broaden the scope of its activities worldwide.
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 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 opportunities 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 it 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 war-time 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 unrestrained optimism pervaded at the First.
That year the bank was reorganized as the major subsidiary of the new First Chicago Corporation. 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 nonperforming loans reached a high of 11%—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%. 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% on an unexercised credit line when his competition required 10%.
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 nonperforming loans down 6%. First Chicago’s 5% 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% larger than First Chicago’s, and its earnings grew 73% while First Chicago’s grew 4%. 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 and experience 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 3 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% and return on assets, which were 0.23% in 1980, reached 0.53%, close to the 0.57% 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 recatagorize 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. Most 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 First was founded in a tradition of service and trust that has survived to the present day. Under Sullivan’s stewardship, First Chicago has bounced back from serious domestic and foreign loan problems and the challenges of financial-product development and marketing in a volatile and changing world economy. The next decade will tell if Sullivan can complete First Chicago’s recovery and transform it into one of the premier banks in the U.S.
First Capital Corp. of Chicago; First Chicago Credit Corp.; First Chicago Financial Corp.; First Chicago Investment Corp.; First Chicago Leasing Corp.; First Chicago Léase Holding, Inc.; First Chicago Overseas Finance N.V. (Netherlands Antilles); First Chicago Properties, Inc.; First Chicago Realty Services Corp.; First Chicago Trust Company (Cayman) Ltd. (Cayman Islands); First Chicago Trust Company of Florida, N.A.; First Card Services, Inc.; First Chicago Trading Co.; First Chicago Trust Co. of New York; First Chicago Leasing (Japan) Co. Ltd.; First Chicago Investment Advisors, N.A.; The First National Bank of Chicago; First Chicago Building Corp.; First Chicago Futures, Inc.; First Chicago Neighborhood Development Corp.; FNBC Properties, Inc.; National Safe Deposit Corp.; Rosely Corp.; Senior Properties, Inc.; Triumph Properties, Inc.; ComTrac, Inc.; First Chicago National Processing Corp.; First Chicago Video Services, Inc.; Arrendadora e Inversionista Latina, S.A. de C. V.; First Chicago Australia Ltd.; First Chicago Hong Kong Ltd.; First Chicago International; First Chicago International Finance Corp.; First Chicago Investments (U.K.) Ltd.; First Chicago Kenya Ltd.; First Chicago Ltd. (U.K.); First Chicago Nominees (Ireland) Ltd.; First Chicago Nominees Ltd. (U.K.); First Chicago Panama, S.A.; First Chicago S.A. (Switzerland); First Chicago Services, Ltda. (Brazil); First Chicago (Singapore) Nominees Private Ltd.; The First National Bank of Chicago (C.I.) Ltd. (Channel Islands); First Chicago Australia Securities Ltd.; First Chicago Export Finance Ltd. (England); First Chicago Finleasing S.p.A. (Italy); First Chicago Hong Kong (Nominees) Ltd.; First Chicago Leasing Canada Ltd.; The First National Bank of Chicago (Canada); First Chicago Participacoes, Ltda. (Brazil); Banco Arfina, S.A. (Argentina); American National Corp.
Morris, Henry C. The History of the First National Bank of Chicago, Chicago, R.R. Donnelley & Sons Company, 1902; First Chicagoan: 125th Anniversary Issue. First Chicago Corporation, Chicago, March, 1988.