The chairman of First Chicago Corp., which had extraordinary loan losses of $279 million in the third quarter, said yesterday the massive write-offs were a one-time event and there are no lingering, unreported problems in the big bank company's loan portfolio.
Barry Sullivan said the bank company, with $38 billion in assets, is taking steps to ensure that it comes to grips earlier with problem loans at the bank. First National Bank of Chicago, the holding company's principal subsidiary, is Chicago's biggest bank.
First Chicago's announcement late last month of a sudden deterioration in a number of its loans stunned financial markets. As a result of the big charge-offs, First Chicago reported a third-quarter loss of $71 million.
Roughly two-thirds of the $279 million in loan losses were caused by 10 credits, Sullivan said.
The loss was especially upsetting to the markets because it came only months after the other multinational Chicago bank, Continental Illinois, essentially failed. Continental was kept from failure by the biggest federal rescue in business history.
The Continental problems were caused by an inadequate credit screening and reporting procedure that permitted the bank to book billions of dollars of bad energy loans.
Sullivan said the loans that caused the massive write-offs already had been identified as problem credits by First Chicago officials. But he said they were caught by surprise by a sudden and large deterioration in the value of those loans during the third quarter, which ended Sept. 30. In many cases, First Chicago already had written off a portion of those loans, he said.
Sullivan said that in most cases, the unexpected write-offs occurred not because of any change in the ability, or inability, of the borrower to make payments but because of a sudden decline in the value of the collateral that backed up the loans.
When a borrower is behind on principal and interest payments, banks regularly reduce the value of the loan on the books to the amount that they expect to realize from the sale of the collateral.
For example, Sullivan said, a $50 million shipping loan that was behind on both principal and interest payments might be written down to $35 million on the bank's books, if the loan was secured by a vessel worth $35 million. But if the appraised value of the vessel fell to $20 million, the loan's value would have to be similarly cut.
The 10 problem credits were pinpointed during an examination by the Comptroller of the Currency in September. After that probe, Sullivan said, the bank took a conservative view of its entire portfolio and wrote off about $100 million more than the federal regulators suggested.
Officials at the comptroller's office agree that First Chicago ultimately took a harsher view of its portfolio than they did, although banking sources close to the situation at First Chicago said initially the bank was skeptical of the examiners' evaluations of collateral values.
Sullivan said that the screening process First Chicago uses to evaluate new loans is solid and he is satisfied with the bank's procedures for working out loans that go bad.
But he said the bank is in process of improving its watch procedures so that it can more closely track the deterioration of a loan and work out earlier with the borrower a plan to keep a problem credit from becoming a bad credit.
Often, to keep a troubled borrower from going bankrupt, banks stretch out repayment terms and, in tougher cases, reduce the interest rate on a loan. The bank also can seek more collateral to back a troubled loan.
Sullivan, a top official at Chase Manhattan Bank, was named to head First Chicago in 1980. The big bank company then was troubled by problem loans left over from the recession of 1975-76 and management strife. In the last four years the bank has reduced its problem credits, strengthened its capital base and improved its profitability.
Sullivan said in yesterday's interview that First Chicago would return to normal profitability in the current quarter and that the bank will continue to follow its plan to become the Midwest's premier bank.