The chairman of Continental Illinois National Bank conceded today that the bank's "reputation has been tarnished" by $1.3 billion worth of "problem loans" and acknowledged that the list of Continental Illinois' woes will grow rather than shrink in the coming months.
But Chairman Roger E. Anderson said the nation's sixth largest bank and its biggest business lender has "no intention of pulling in our horns," even though its bad loan rate is far worse than any of the other top 10 banks.
Anderson took the extraordinary step of inviting in a handful of reporters and opening up the bank's closets to display the skeletons of a dozen decimated corporations that are behind on the payments to Continental Illinois.
Most of Continental Illinois' troubles were well known, but Anderson decided to bring them all into the open in a usual exhibition of candor aimed at restoring the bank's stature in the financial community.
"Our reputation has been tarnished, but not forever," he said. "Our credibility has been questioned, but not destroyed," and Continental Illinois remains "financially sound and stable" with assets of $46 billion.
The Chicago bank reported a $61 million loss for the second quarter because of bad loans purchased from Penn Square National Bank of Oklahoma City, which was closed down July 5 by federal regulators.
The Penn Square losses culminated a series of problem loans that left Continental Illinois with 3.7 percent of its loans classified as "non performing"--bankers' jargon for debts on which either principal or interest is overdue.
None of the other 10 largest banks has such a high ratio of problem loans and Anderson admitted Continental's list likely will grow rather than shrink during the coming months as the recession and high interest rates take a further toll on its customers.
But, he stressed, "non-performing loans should not be considered as a proxy for" bad loans. Some non-performing loans do go sour, he said, but most are eventually repaid.
Furthermore, Anderson said, Continental's total loan portfolio should "be expected to reflect a higher percentage of non-performing credits than other major money center banks," because Continental has relatively fewer international loans and consumer loans than banks such as Chase Manhattan, Citibank and Morgan Guaranty.
Despite the well publicized troubles with countries like Poland, Argentina and Romania, international loans are less likely to become problems than loans to U.S. companies, he said.
Anderson admitted that because of Continental's well-publicized problem loans, many investors who normally buy the bank's large denomination cetificates of deposit are not doing so today. But Vice Chairman Donald Miller said Continental has had no problem replacing the lost funds.
Anderson, with the consent of more than a dozen of the bank's customers, put on the record for the first time the bank's position on nearly $1 billion of "problem loans," including ones to International Harvester, Nucorp Energy, Dome Petroleum, Braniff Airlines and the Gouletas family, which controls the condominium converter American Invsco.
Among the loans Continental Illinois discussed:
International Harvester. Continental has loaned $140 million to Harvester and its finance subsidiary and has committed to buy up to $50 million of loans made by the finance subsidiary. Of the $140 million in loans, $105 million are classified as non-performing.
Dome Petroleum, the big Canadian oil concern, has no direct debts, but the bank has loaned a total of $225 million to several of Dome's U.S. subsidiaries. He said every dollar of the loans to subsidiaries is being paid back on schedule.
McLean Gardens, the huge Washington condominium project, owes Continental Illinois $40 million and the entire loan is classed as non-performing.
American Invsco has whittled down its debt to the bank from $30 million six months ago to less than $5 million today, said James Harper, who heads Continental's real estate lending. Those loans are classified as non-performing. However, Harper said, the $75 million the bank has lent to other companies controlled by the Gouletas family and to family members Nicholas Gouletas, Evangeline Gouletas-Carey (wife of New York Gov. Hugh Carey) and Victor Goulet are being repaid on schedule.
Nucorp, the energy company that filed a bankruptcy reorganization petition last week, owes Continental $173 million, all of which is classified as non-performing.
Braniff, which filed for bankruptcy, in May borrowed $24 million from Continental. Anderson said the bank has written off $8 million of the Braniff loans and carries the remaining $16 million as "non-performing."
Anderson said he took the unusual step of detailing the bank's normally confidential relationships with its customers to quell rumors about the bank's situation.
He said Continental is still investigating the Penn Square fiasco to see how and why Continental bought $1.05 billion of oil and gas loans--about $220 million of which the bank either has charged off or thinks will become a problem--from the $500 million Oklahoma City institution.
But Anderson said the bank will bounce back. "We have a wide customer base, and although the economy is hurting many of them now, our earning power and potential are great."