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THE FINANCIAL PERFORMANCE OF
CONTINENTAL ILLINOIS NATIONAL BANK:
A CHRONOLOGY AND PEER GROUP COMPARISON

September 17, 1984
STAFF REPORT
TO
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE




COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

This report is the result of staff findings to date and does not
necessarily reflect the views of the Members of the Subcommittee.

CONTENTS

Page
Executive Summary

i

Section




Statistical data on bank failures,
Continental's performance ratios
compared to its peers, and
Continental's consolidated statement
of income and financial position for
the period 1970 through the first
quarter 1984
Analysis of the Financial Condition of
Continental Illinois Corporation as
compared with Other Multinational
Banks from 1976 to 1983

14

Financial History of Continental
Illinois Corporation from 1970-1984

23

li

EXECUTIVE SUMMARY
This report presents information on the financial history of Continental Illinois
tNationai Bank and Trust Company of Chicago, discusses significant events which affected
the Bank, and compares the performance of the Bank over time to other multinational
banks and other Chicago regional banks. The report is divided into three sections. In the
first section, we present (1) a chart which provides information on the increasing number
of problem and failed banks, (2) a series of charts which highlight ratios related to
Continental's performance in comparison with its peers, and (3) the consolidated statements of income and financial position of Continental for the period from 1970 through
the first quarter of 1984. The second section presents a comparative financial analysis of
the Bank in relation to its peers. The third section discusses the economic environment
surrounding the Bank; changes in the Bank's organization and management; and the Bank's
financial performance throughout the period from 1970 to date. The "section also discusses
significant events which contributed to the Bank's failure and subsequent rescue.
Continental Illinois Corporation, which commenced operations on April 1, 1969, is
dependent primarily upon the financial condition of Continental Bank, accounting for
approximately 95 percent of the holding company's consolidated assets. Through a
network of subsidiaries, branches, and representative offices, the Bank provides a broad
range of banking and related business services worldwide. At its peak in 1981 the Bank was
sixth among other multinational banks and the largest domestic commercial and industrial
lender, employing more than 12,000 employees.
The financial condition of the Corporation through 1981 was achieved primarily as a
result of annual growth in assets and loans significantly in excess of its peers. However,
by year-end 1982, the Corporation's ability to function as a viable entity was in extreme
jeopardy. During 1982 and 1983, the Bank's financial condition deteriorated severly. The
Bank's allowance for loan losses, net charge-offs, and nonperforming loans increased
dramatically. Among the factors that lead to this situation were the failure of Penn
Square Bank, the bankruptcy or depressed condition of Continental's once blue-chip
customers, and Continental's dependency on short-term rate-sensitive funds.
Significant asset quality problems in the Bank's oil and gas lending department were
highlighted by the Penn Square failure in July 1982. At year-end 1982, the provision for
loan losses amounted to $492 million, which included a $220 million provision related to
Penn Square. But, problems were not limited to just oil and gas lending alone. During
1983 and 1984, the Bank experienced significant credit quality and documentation
deficiencies in all aspects of its loan operations. As a result, more and more loans were
labeled as nonperforming. By June 30, 1984, nonperforming loans amounted to $2.7 billion.
After Penn Square failed, Continental's large uninsured depositors
became
increasingly concerned about the Bank's inordinately large amount of poor quality loans
and its viability in general. By early 1984, cash flow problems had become critical. In
May 1984, rumors of a possible failure or takeover circulated in the foreign money
markets upon which the Bank had become so dependent. Soon after, major providers of
overnight and term funds abandoned the Bank. Continental turned first to borrowing from
the Federal Reserve and then from a consortium of other large banks, but it was unable
to achieve stability. Consequently, on May 17, 1984, the Federal Deposit Insurance
Corporation arranged an interim emergency' assistance program and guaranteed all
depositors of the Bank.




1




SECTION 1

Statistical Data on Problem and Failed Banks

Continental's Performance Ratios
in Comparison to its Peers

Continental's Consolidated Statements
of Income and Financial Position
for the Period 1970 Through
the First Quarter of 1984

SCHEDULE OF PROBLEM AND FAILED BANKS AND INSURED DEPOSITS
FROM 1974 TO 1984
Failed Banks
Number
Insured
Insured
Deposits
(millions)

Year

Number of
Problem Banks

1974

183

4

$1,575.8

1975

349

13

339.6

1976

379

16

864.9

1977

368

6

205.2

1978

342

7

854.2

1979

287

10

110.7

1980

217

10

216.3

1981

223

10

3,826.0

1982

369

42

9,904.5

1983

642

48

5,541.4

198*

745 §/

55 a/

$J Information as of September, 198*
k' Not available at time of printing




3

b/

Performance Measures for Continental Illinois Corporation
As Compared to Other Multinational Banks From 1976 to 1983 U
1976

1977

1978

1979

1980

1981

1982

1983

14.00
10.65

14.14
10.94

13.69
12.33

14.37
13.68

14.82
13.54

14.88
12.75

4.56
11.53

5.95
11.15

.58
.46

.55
.45

.54
.50

.55
.52

.54
.52

.54
.51

.18
.49

.26
.52

.62
.77

.45
.56

.32
.46

.29
.38

.28
.46

.29
.41

1.28
.55

1.37
.64

1.27
1.04

1.13
.99

1.01
1.00

.91
1.03

.90
1.01

.89
1.03

1.15
1.08

1.24
1.21

3.1
3.0

2.2
2.2

1.4
1.5

1.3
1.2

1.1
1.0

1.4
1.3

4.6
2.1

4.5
2.3

4.88
4.90

4.54
4.69

4.51
4.57

4.36
4.39

4.17
4.45

4.22
4.63

4.81
4.86

5.17
5.39

4.88
5.67

4.54
5.34

4.51
5.17

4.36
4.98

4.17
4.93

4.22
5.04

5.27
5.70

5.64
6.26

7.13
7.77

6.90
7.43

6.70
7.11

6.05
6.80

5.77
6.88

5.40
6.76

5.26
6.98

6.03
7.62

Return on Equity
Continental
Peer Group
Return on Assets
Continental
Peer Group
Asset Quality
Net Charge-of is to
Total Loans
Continental
Peer Group
Allowance for Possible
Loan Losses to Total
Loans
Continental
Peer Group
Non Performing Assets
to Total Assets
Continental
Peers
Capital Adequacy
Equity Capital
to Total Assets
Continental
Peer Group
Equity Capital +
Subordinated Notes and
Debentures to Total
Assets
Continental
Peer Group
Equity Capital
to Total Loans
Continental
Peer Group




4

Performance Measures for Continental Illinois Corporation
As Compared to Other Multinational Banks From 1976 to 1983 1/
1976

1977

1978

1979

1980

1981

1982

1983

58.35
56.19

56.88
56.27

58.93
57.00

62.92
56.7*

62.77
57.15

67.40
60.3*

75.79
61.53

71.72
62.25

Continental

-37.88

-38.18

-37.09

-45.70

-46.32

-51.85

-58.16

-52.61

Peer Group

-16.75

-17.75

-21.48

-22.30

-25.07

-31.55

-31.51

-30.88

N/A
N/A

14.44
14.83

24.73
15.83

23.03
15.36

17.32
12.78

19.84
14.59

2.70
9.26

-7.15
5.99

N/A
N/A

17.41
14.75

20.38
14.19

15.23
16.09

17.60
11.85

11.60
8.48

-8.67
7.56

-1.87
4.59

N/A
N/A

11.80
15.63

17.25
27.16

16.68
24.77

15.39
14.92

12.69
9.73

-69.41
4.19

39.07
10.79

Liquidity
Total Loans to
Total Assets
Continental
Peer Group
Liquid Assets Volatile Liabilities
to Total Assets

Growth
Growth in Loans
Continental
Peer Group
Growth in Assets
Continental
Peer Group
Growth in Earnings
Continental
Peer Group

I ' More complete information on the composition of the ratios is contained in Section 2.




5

CONSOLIDATED STATEMENT OF INCOME
Continental Illinois Corporation and Subsidiary
Year ended 12/31 (S in thousands)
Interest k fees on loans
Lease financing income
Interest on deposits with banks
lnt.dc dividends on investment
securities:
Taxable income
Income exempt from Fed.inc. raxes
Trading account interest
lnt.on Fed.iunds sold <Jc securities purchased under agreemts to resell
Total interest income
interest on deposits
lnx.on Fed.xunds purch'd Jc secur.
sold under agreemts to repurchase
Interest on other borrowings
Interest on long-term debt
Total interest eipensp
Net interest income
Provision for credit losses
Net interest income after provision
for credit lanes
Trust income
Secur. trading profits <x commissions
Foreign exchange profits (losses)
All other income
Total other operating income
Net int^c other operating income
Salaries and wages
Pension, profit sharing, other

employee benefits
Net occupancy expense
Eqpt rentals,deprec<x maintenance
Other expense
Total other operating expense

Income before inc. taxes <Sc securities
gains or losses
Applicable income taxes (credits)
Incbeiore security gains or losses
Secur.gains or (losses) less
applicable income taxes
1
Extraordinary item, net of tax
Net income
Per common share:
Income before extraordinary item
Extraordinary item
Net income
Cash dividends declared
Average common shares outstanding
(in thousands)




1983

1982

1981

1980

303,734
20,979

3,453,274
95,907
214,107

4,683,350
125,073
499,437

4,796,322
90,327
747,149

3,448,973
65,338
658,355

23,323
10,702
9,359

105,316
49,759
29,iS2

129,365
59,667
34,308

148,910
64,194
34,032

133,215
70,951
29,307

90,149
960.74*

29^499
3.977.0*4

47.876
5.379.276

S3,281
5.964.213

65.374
4,472.513

572,309

2,191,239

3,100,409

3,316,677

2,397,443

124,932
79,046
35.219
311.306

512,868
301,163
[41,632
3.146.902

1,036,749
400,266
131.232
4.683.676

1,405,811
354,953
5.158,434

1,048,795
230,384
65,097
3.742.219

149,240
140.000

830,142
395.000

890,600
492.000

805,781
120.000

730,294
96,000

5,31S
7,224
72.483
100.8>2
110.122

433.142
62,369
19,648
10,587
309.523
402.129
837.271

398.600
60,428
39,8S2
(1,428)
221,382
320.764
719.364

685.781
53,600
27,888
31,155

209J64
322.407
1.008.188

634.294
44,309
6,122
32,284
160,422
243163?
37?1931

80,702

309,639

293,575

265,614

227,758

21,230
20,134
12,475
83.357
217.91S

74,750
37,410
44,913
204,462
721.179

61,071
72,726
41,095
204.727
673.194

74,377
65,747
36,357
180,759
623.354

61,473
53,314
36,301
173,374
553,220

(107,796)
—
(107,796)

116,092
16,174
99,918

46,170
(38,206)
84,376

384,334
124,019
260,315

319,711
95,568
224,143

575
136,628
29.407

1,245
7,156
108.319

(6,489)

(5,692)

—

..

1984(3/31)

5
5
$
$

2.46
0.17
2.63
2.00
40,045

SO.993

254,623

77.8X7

$
S
$
5

1.95

—

1.95
2.00
39,777

$
$

5

6.44

—

6.44

1.90
39,537

Gain on sale of charge card operations.
Due to the availability of information, certain line items have been rounded or
reasonably approximated. Also, inadequate information has prevented certain
line items from being stated individually. In some cases, totals were used to
maintain consistency (or comparative purposes.

6

1,798

.-

,,22,^,941
S
S
*

$.75

--

5.75
L.70

39,256

CONSOLIDATED STATEMENT OF INCOME
Continental Illinois Corporation and Subsidiaries
Year ended 12/31 ($ in thousands)

2,437,870
Interest 6c fees on loans
Lease financing income
39,190
Interest on deposits with banks
455,931
Int.dc dividends on investment
securities:
Taxable income
75,955
77,568
Income exempt from Fed.inctaxes
19,510
Trading account interest
Int.on Fed.funds sold 6c securities purchased under agreemts to resell
62.103
Total interest income
3.168.127
Interest on deposits
Int.on Fed.funds purch'd 6c secur,
sold under agreemts to repurchase
Interest on other borrowings
Interest on long-term debt
Total interest expense

1975

1976

1,022,987
29,772
224,991

918,572
24,918
217,617

1,017,596
22,050
152,619

67,970
75,789
12,265

71,628
70,903
11,060

69,116
63,607
10,326

77,397
46,107
13,169

39,000
2.034.208

12,000
1.443.341

8,000
1.312.156

7^00
1.335.938

1,739,743

1,049,519

696,809

661,192

668,449

806,611
47,920
2.594.274

444,161
33,665
1.527.345

253,530
27,398
23.712
1.001.449

182,784
23,603
12,089
879.668

189,919
14,077
28,309
900.754

573,853
70,000

506,863
62.500

441,892
53,500

432,488
75,000

435,184
75,000

503.853
37,434
15,730
12,583
141,983

444.363
34,521
11,255
15,267
105.713

357,488
33,618
17,299
7,152
66,953
125,022
482.510

360.184
31,845
17,282

7UJ583

611.119

388.392
34,082
10,954
15,005
79,395
1391436
527.828

199,501

166,358

145,600

131,937

119,386

51,187
41,401
27,549
144,894
464.532

44,456
33,838
20,889
118,401

32,048
25,509
18,888
S5j898
294.280

29,606
25,640
15,347
80.346

m%2

37,180
30,228
18,658
9i f 23l
322.897

270J325

247,051
52,925
194,126

227,177
58,453
168,724

204,931
60,727
144,204

188,230
57,468
130,762

195,161
76,164
118,997

ztiflno

Salaries and wages
Pension, profit sharing, other
employee benefits
Net occupancy expense
Eqpt rentals,deprec.<5c maintenance
Other expense
Total other operating expense
Income before inc. taxes 6c securities
gains or losses
Applicable income taxes (credits)
Incbef ore security gains or losses
Secur.gains or (losses) less
applicable income taxes
Extraordinary item, net of tax
Net income




1977

1,496,957
34,294
307,933

Net interest income
Provision for credit losses
Net interest income after provision
for credit losses
Trust income
Secur.trading profits <3c commissions
Foreign exchange profits (losses)
All other income
Total other operating income
Net int.<3c other operating income

Per common share:
Income before extraordinary item
Extraordinary item
Net income
Cash dividends declared
Average common shares outstanding
(in thousands)

1978

1979

166J756

1,681
..
M195a8p7

*
$
$

4.99

—

4.99
1.52
39,195

(907)

—

167.817
4.49

$

--

4.49
1.32

$
$

37,336

(2,958)

(1,081)

—

$
$

4.02

-•

4.02
1.26
35,537

—

127f804
$
$
$

3.63

*-

3.63
1.18

35,130

Due to the availability of information, certain line items have been rounded or
reasonably approximated. Also, inadequate information has prevented certain
line items from being stated individually. In some cases, totals were used to
maintain consistency for comparative purposes.

7

(6,107)

—

143,123

$

56,175
105.302
465.486

112.890

$

6.49

*
$

6.49
2.23

--

34,758

CONSQl-inATED STATEMENT OF INCOME
Continental Illinois Corporation and Subsidiaries
1973

1972

1971

1970

716,*90
S,000
133,5*8

356,67*
5,000
53,738

318,388
3,000
11,621

373,238

50,515
*8,326
1*,5*6

*5,295
*3,8*5
6,933

63,059
39,805
10,733

*1,837
3*,385
3*,236

15,000
986.923

9,000

520J53J

»,000
»50.606

*36,091

915,323

533,33*

2*3,052

208,939

193,962

355,517
57,*3l
9,135
1,337,»06

139,06*
32,*61
6,652
767,011

*3,019
16,51*
6.357
303 9*2

37,305
9,732

99,0*7

.236^6

293^009

297,3*8
32,900

219,91*
15,300

211,593
12,353

19*,580
15,262

133,032
l»,22i

26*.9*3
3i,*65
13,2*6

204,61*
31,*0*
9,381

199,2*0

179,313

173,361

2,303

*,299

6*, 000
103,711
373,659

59,000

33,000

26,000

30*1399

*6**l4

3a! 1«
a?!»»i

105,92*

39,613

77,57*

66,766

2*,099
21,009
10,7*9
61,*3*

20,*01
17,679
3,652
*3.125

iii!i65

l*»!»?3

17,669
15,9*0
6,336
38,323
156.392

15,936
13,276
6,*91
35,681
133,150

120,*17

150,39*
5*,*88
95,906

119,92*
33,619
36,305

107,*2*
29,29*
78,130

99,291
29,*93
69,798

93,739
29,39*
6*,3*5

265

576

78,395

70,37*

Year ended 12/31 ($ in thousands!

197*

Interest <3c fees on loans
1, 2*9,113
Lease financing income
19,000
Interest on deposits with banks
207, S11
int.<x dividends on investment
securities:
Taxable income
73,316
Income exempt from Fed.inctaxes
**,*38
Trading account interest
25,076
Int.on Fed.funds sold <3c securities purchased under agreemts to resell
16,000
Total interest income
1.635J25*
Interest on deposits
lnt.on Fed.funds purch'd Jc secur.
sold under agreemts to repurchase
Interest on other borrowings
Interest on long-term debt
Total interest expense
Net interest income
Provision for credit losses
Net interest income alter provision
for credit losses
Trust income
Secur. trading profits <x commissions
Foreign exchange profits (losses)
All other income
Total other operating income
Net int.A other operating income
Salaries and wages
Pension, profit sharing, other
employee benefits
Net occupancy expense
Eqpt rentals,deprec.<3c maintenance
Other expense
Total other operating expense




17,563

*d»3

h»!i&

7*,361

income before inc.taxes <3c securities
gains or losses
Applicable income taxes (credits)
Incbefore security gains or losses
Secur.gains or (losses) less
applicable income taxes
Extraordinary item, net of tax
Net income
Per common share:
Income before extraordinary item
Extraordinary item
Net income
Cash dividends declared
Average common shares outstanding
(in thousands)

2,395

(335)

(226)

85,»70

95,630

*5,556

(6,815!
mm

37,330

$

5.51

$

*.9* $

*.55

$

*.ii

$

3.38

$

5,51
1.10

$
$

*.9* $
.97 $

*.55
.92

$
$

*.il
.88

$
$

3.38
.32

3*,583

3*, 716

3*,*53

3*,26*

Due to the availability of information, certain line items have been rounded or
reasonably approximated. Also, inadequate information has prevented certain
line items from being stated individually. In some cases, totals were used to
maintain consistency for comparative purposes.

8

3*,58*

CONSOLIDATED STATEMENT OP CONDITION
Continental Illinois Corporation and Subsidiaries
1984

19S3

1982

2,039,281
3,415,990

2,569,866
3,586,524

2,199,386
1,880,853

2,513,080
5,082,703

4,361,504
4,294,045

646,739
761,664
1,814,334

676,774
561,589
1,762,394

444,224
853,460
2,064,744

499,817
169,164
2,169,303

417,207
128,065
2,505,924

129,329,847
1,045,485

20,187,123
10,203,246
1.038,400

22,053,107
10,817,214
1.172.478

22,131,015
10,044,482
1.123.729

18,528,132
8,381,566
720,003

30,375,332

31,428,769

34,042,799

33,299,226

27,629,701

267,333
29,706,615

269,720
382.565
30,776,484

322,551
381.083
33,339,165

423,000
289,169
32,587,057

262,663
246^413
27,120,625

325,599

337,045

342,241

298,715

276,479

870,015
1,870,572
41.450.809

859,318
967,377

690,442
1,084,909
42.899.424

1.087.488

4j.b9»l3»l

2,469,917
1.181.999
46.971.755

42.089.408

10,146,083
18,132,704
28,278 f 787

13,527,978
15,903,490
29,431,468

12,690,041
15,484,980
28,175,021

14,963,103
14,630,902
29,594,005

13,579,324
13,734,343
27,313,667

5,192,723
2,801,843
870,015
1,231,387
1,247,881
39,622,636

4,830,645
2,677,047
870,106
1,210,578
1*255,953
40,275,797

5,920,332
4,028,928
692,788
1,100,169
1,272.291
41,189,529

7,998,482
3,014,740
2,477,137
1,314,402
862,297
45,261,063

7,361,000
2,203,947
1,898,816
1,110,719
676.317
40,564,466

89,400
200,780
526,904
1,021,457

89,400
200,780
526,895
1,014,539

199,761
525,525
989,244

198,009
522,812
989,871

196,690
517,824
810,428

(10.256)
1,828,285
112
1.828.173

(9,975)
1,821,639
65
1.821.574

(4,433)
1,710,097
202
1.709.895

1,710,692

1,524,942

1.710.692

1,524.942

46.971.755

42.089.408

December 31 (S in thousands)

1981

1980

Assets

Cash and due from banks
Interest-bearing deposits
Fed.funds sold and securities
purch'd under agrmts to resell
Trading account assets
Investment securities
Loans:
Domestic

Foreign
Lease financing receivables
Total loans and lease
receivables
Less: Unearned income
Reserve for credit losses
Net loans and lease receivables
Properties and equipment
Customers' liability on
acceptances
Other assets
Total assets

401J384

1,898,071

Liabilities
Deposits:

Domestic offices
Foreign offices
Total deposits
Fed.funds purch'd <5c securities
sold under agreemts to repurchase
Other borrowings
Acceptances outstanding
Other liabilities
Long-term debt
Total liabilities
Stockholders' Equity
Preferred stock
Common stock
Capital surplus
Retained earnings
Accumulated translation
adjustment
Total
Less - Treasury stock at cost
Total Stockholders' Equity
Total Liabilities 4c
Stockholders' Equity




41.450.809

42.097.371

42.899.424

As of March 31, 1984.

Due to the availability of information, certain line items have been rounded or
reasonably approximated. Also, inadequate information has prevented certain
line items from being stated individually. In some cases, totals were used to
maintain consistency for comparative purposes.

9

December 31 ($ in thousands)
Assets
Cash and due from banks
Interest-bearing deposits
Fed.funds sold and securities
purch'd under agrmts to resell
Trading account assets
Investment securities

1979

1973

1976

1977

3,366,316
4,035 ,140

3,897, 143
3,926,679

2 , 8 7 9 , 378
3 , 9 3 2 , 661

308 ,174
1S9 ,101
2,226 ,340

361, 591
11*.,349
2,174, ,380

183, 324
299, 792
2 , 5 0 1 , 082

1975

1,523, ,849

1,761, 488

73,942,564
383, ,432
2,364,019

3 , 2 3 5 , 981
205, 925
2 , 2 8 1 , 344

s

Loans:
Domestic
Foreign
Lease financing receivables
Total loans and lease
receivables

16,366 ,150
6,315 ,562
609 ,668

12,796,075
5,650,035
2£L,816

10,333, ,300
3,980, M7
400, ,394

9 , 6 0 1 , ,343
3,357, ,468
324,,365

9 , 3 3 4 , 256
2,756, 076
274, 967

23,791 ,380

18,397, ,926

15,263, ,311

13,283, ,676

12,365, ,299

Less: Unearned income
Reserve for credit losses
Net loans and lease receivables

215,,374
212 r ISO
23,363, ,326

1*3,,305
191,r 237
18,563, ,384

121,,027
168,,164
14,974, ,620

107,,000
163,,271
13,013,405

97, ,000
161,,890
12,106,409

226,,342

195,,579

164,,966

120,,850

87,,596

1,092,,622
981, t 258

900,,405
925,,155
31.058.665

255,,893
603,.564
25,300,230

125,,515
511 t 265
21,»g»i ,899

176,,736
360,r 264
20,215,

12,517, ,200
11,490,,000
2*,007, .200

12,142, ,717
9.017, ,533
211160,250

10,089,,704
8,664 ,081
181753,735

8,708, ,640
7.108, ,487

I59ilt,l27

9,351, ,904
5 f 938, ,481
15,290,385

5,865, ,470
1,901, ,351
1,096,924
1,026, 740
529, 532
34,427,217

5,143, ,594
1,492,381
905 ,557
680 ,202
450 d?l
29,832, ,941

4,383 ,055
450,272
257 ,764
586,259
357,050
24,788 ,185

3,981, ,529
325 ,028
126 ,269
557 ,230
265 ,293
21,072.526

2,934 ,426
313 ,159
177 ,268
494 ,900
130 ,000
19,390 ,138

196, 095
510, 349
656,458

195 ,839
508 ,646
521 ,239

177 ,824
423 ,148
406 ,123

177 ,335
427 ,243
307 ,795

136
173 ,937
423 ,737
222 ,795

Properties and equipment
Customers' liability on
acceptances
Other assets
Total assets

-iW*jM

dm

Liabilities
Deposits:

Domestic offices
Foreign offices
Total deposits
Fed.funds purch'd <3c securities
sold under agreemts to repurcha
Other borrowings
Acceptances outstanding
Other liabilities
Long-term debt
Total liabilities
Stockholders1 Equity
Preferred stock
Common stock
Capital surplus
Retained earnings
Accumulated translation
adjustment
Total
Less - Treasury stock at cost
Total Stockholders4 Equity

1,362,902

1,225 ,724

1,012 ,095

912 ,373

325 ,605

1,362.902

1.225.724

1,012.095

912.373

825 4^605

Total Liabilities &
Stockholders4 Equity

3 5 , 7 9 0 . 119

31.053.665

25.800.280

21.984.899

20.215 £743




Due to the availability of information, certain line items have been rounded or
reasonably approximated. Also, inadequate information has prevented certain
line items from being stated individually. In some cases, totals were used to
maintain consistency for comparative purposes.

10

CONSOLIDATED STATEMENT OF CONDITION
Continental Illinois Corporation and Subsidiaries
December 31 ($ in thousands)

1974

1973

1972

1971

1970

Assets

Cash and due from banks
Interest-bearing deposits
Fed.funds sold and securities
purch'd under agrmts to resell
Trading account assets
Investment securities
Loans:
Domestic

1,905,849

1,556,970

1,779,892

1,340,999

1,803,907

(.2,151,719
356,048
1,774,445

2,237,921
339,825
2,069,506

1,593,554
181,290
1,802,936

902,863
181,992
1,707,646

918,870
413,528
1,519,447

c

Foreign
Lease financing receivables
Total loans and lease
receivables

10,047,666
2,607,592
102,819

8,216,269
1,777,829

5,946,998
1,173,004

4,016,679
879,614

3,476,186

12,758,077

9,994,098

7,120,002

4,896,293

3,476,186

Less: Unearned income
3
Reserve for credit losses
Net loans and lease receivables

157,378
12,600,699

142.950
9,851,148

129.530
6,990,472

. 125.639
4,770,654

123.782
3,352^04

58,672

49,293

46,173

40,627

32,759

271,245
522_,j70
19.640.747

84,930
537_^37
16.727.230

111,098
194.526
12.699.941

247,597
762J29
9.955.107

202,746
445j037
8.688.698

9,752,612
5,715.562
15,468,174

8,576,870
4,021.333
12,598,203

6,936,739
3.064.436
10,001,175

5,764,402
2.691.736
8,456,138

4,980,456
2.173,969
7,154,425

1,967,516
457,403
272,013
544,029
180.000
18.889.135

2,245,659
618,406
86,445
386,557
100.000
16.035.270

(.1,542,339
116,216
301,758
100.000
12.061.488

515,345
251,468
147,717

484,807
172,646
204,159
137,771

9.370.668

8.153.808

186
173,663
425,291
152,472

186
173,095
421,170
97,509

186
172,539
393,800
71,928

186
171,359
317,227
95,667

168,643
314,357
51,890

751,612

691,960

638,453

584,439

534,890

751.612

691.960

638.453

584.439

534.890

19.640.747

16.727.230

12.699.941

9.955.107

8.688.698

Properties and equipment
Customers* liability on
acceptances
Other assets
Total assets
Liabilities
Deposits:

Domestic offices
Foreign offices
Total deposits
Fed.funds pureed & securities
sold under agreemts to repurchase
Other borrowings
Acceptances outstanding
Other liabilities
Long-term debt
Total liabilities
Stockholders' Equity
Preferred stock
Common stock
Capital surplus
Retained earnings
Accumulated translation
adjustment
Total
Less - Treasury stock at cost
Total Stockholders1 Equity
Total Liabilities &
Stockholders' Equity




For Continental Illinois National Bank and Trust Company of Chicago and
Subsidiaries only.

Due to lack of information in years 1974 to 1970, the unearned income line item
was netted against the Loans (Domestic & Foreign) and Lease receivables line
items. Lack of available information prevented a further breakdown of Lease
receivables for the periods 1973 through 1970.
Due to the availability of information, certain'line items have been rounded or
reasonably approximated. Also, inadequate information has prevented certain
line items from being stated individually. In some cases, totals were used to
maintain consistency for comparative purposes.

11

ontinentai Illinois Corporation and Subsidiaries
(as percent of total assets)
December 31

19841

1983

1982

1981

1980

1979

1978

4.9
8.2

6.1
8.5

5.1
4.4

5.4
10.8

10.4
10.2

9,
11

12.5
12.6

1.6
1.8
4.4

1.6
1.3
4.2

1.0
2.0
4.8

1.1
.4
4.6

1.0
.3
6.0

48.0
24.2
2.5

51.4
25.2
2.7

47.1
21.4
2.4

44.0
19.9
1.7

45.7
19.0
1.7

41.2

170.8
2.5

1.5

42.2
15.4
1.6

73.3

74.7

79.4

70.9

65.6

66.5

60.8

59.2

.6
1.0
71.7

.6
.9
73.1

.8
.9
77.7

.9
.6
69.4

.6
.6
64.4

.8.

.8

.6

.7

Assets

Cash and due from banks
Interest-bearing deposits
Fed.funds sold and securities
purclVd under agrmts to resell
Trading account assets
Investment securities
Loans:
Domestic
Foreign
Lease financing receivables
Total loans and lease
receivables
Less: Unearned income
Reserve for credit losses
Net loans and lease receivables
Properties and equipment
Customers' liability on
acceptances
Other assets

1977

1.2
.4
7.0

1.82

.5
.7
58.0

1.0
2.4
100.0

Total assets

Liabilities
Deposits:

32.1
37.8

Domestic offices
Foreign offices
Total deposits
Fed.funds purch'd (5c securities
sold under agreemts to repurchase
Other borrowings
Acceptances outstanding
Other liabilities
Long-term debt
Total liabilities

29.6
36.1

~SO

31.9
31.1

32.3
32.6

~6370 T O

39.1
29.0

35.0
32.1

67.1

TO

39.1
33.6
-72J

13.8
9.4

17.0
1.7
1.0
2.3

~50

96.1

L4

Stockholders' Equity

Preferred stock
Common stock
Capital surplus
Retained earnings
Accumulated translation
adjustment
Total
Less - Treasury stock at cost
Total Stockholders' Equity

Total Liabilities &
Stockholders' Equity




.2
.5
1.3
2.5

.2
.5
1.3
2.4

.5
1.2
2.3

.4
l.l
2.1

.5
1.2
1.9

.5
1.4
1.8

.6
1.6
1.7

.7
1.7
1.6

4.4

4.3

4.0

3.6

3.6

3.8

3.9

3.9

4.4

4.3

4.0

3.6

3.6

3.8

3.9

3.9

100*0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

As of March 31, 1984.
Due to the availability of information, certain line items have been rounded or
reasonably approximated. Also, inadequate information has prevented certain
line items from being stated individually. In some cases, totals were used to
maintain consistency for comparative purposes.

12

CONSOLIDATED STATEMENT OF CONDITION
Continental Illinois Corporation and Subsidiaries
(as percent of total assets)
December 3 i
Assets
Cash and due from banks
Interest-bearing deposits
Fed.funds sold and securities
purch'd under agrmts to resell
Trading account assets
Investment securities
Loans:
Domestic
Foreign
Lease financing receivables
Total loans and lease
receivables
3
Less: Unearned income
Reserve for credit losses
Net loans and lease receivables
Properties and equipment
Customers* liability on
acceptances
Other assets
Tma! arsrts
Liabilities
Deposits:
Domestic offices
Foreign offices
Total deposits
Fed.funds purch'd <5c securities
sold under agreemts to repurchase
Other borrowings
Acceptances outstanding
Other liabilities
Long-term debt
Total liabilities
Stockholders1 Equity
Preferred stock
Common stock
Capital surplus
Retained earnings
Accumulated translation
adjustment
Total
Less - Treasury stock at cost
Total Stockholders1 Equity
Total Liabilities &
Stockholders' Equity




1976

1975

1974

1973

1972

1971

1970

6.9

8.7

9.7

9.3

14.0

13.5

20.8

1.7
10.8

16.0
1.0
11.3

11.0
1.8
9.0

13.4
2.0
12.4

12.5
1.4
14.2

9.1
1.8
17.2

10.6
4.8
17.5

43.7
15.3
1.5

46.2
13.6
1.4

51.2
13.3
.5

49.1
10.6

46.8
9.2

40.3
S.8

^40.0

•

.

•

.

60.4

61.2

65.0

59.7

56.1

49.2

40.0

.5
.7
59.2

.5
.8
59.9

-

.

.

.

.

.8
64.2

.9
58.9

1.0
55.0

1.3
47.9

1.4
38.6

.5

.4

.3

.3

.4

.4

.4

.6
2.3
100.0

.9
1.8
100.0

1.4
2.7
100.0

.5
3.2
100.0

.9
1.5
100.0

2.5
7.7
100.0

2.3
5.1
100.0

—

= =

57.9
27.0
84.9

57.3
25.0
82.3

5.2
2.5
1.5

5.6
2.0
2.3
1.6

r
4CJ7.9

—^HBS

39.6
32.3
71.9

46.3
29.4
75.6

49.7
29.1
78.8

51.3
24.0
75.3

54.6
24.1
78.7

18.1
1.5
.6
2.5
1.2
95.9

14.5
1.5
.9
2.4
.9
95.9

10.0
2.3
1.4
2.8
.9
96.2

13.4
3.7
.5
2.3
.6
95.9

k.

.
.8
1.9
1.4

.

4.1

-

.

-

.9
2.2
.8

.9
2.1
1.1

.

-

4.1

3.8

-

-

-

1.0
2.5
.6

-

4.1

-

.9
2.4
.8
95.0

.

-

-

94.1

93.8

.

1.7
3.2
1.0

1.4
3.1
.6

-

-

5.9

5.0

.
1.9
3.6
.6

.
6.2

4.1

4.1

3.8

4.1

.

.

.

5.0

5.9

6.2

100.0

100.0

100.0

100.0

100.0

100.0

100.0

.

For Continental Illinois National Bank and Trust Company of Chicago and
Subsidiaries only.

Due to lack of information in years 1974 to 1970, the unearned income line item
was netted against the Loans (Domestic 6: Foreign) and Lease receivables line
items. Lack of available information prevented a further breakdown of Lease
receivables for the periods 1973 through 1970.
Due to the availability of information, certain line items have been rounded or
reasonably approximated. Also, inadequate information has prevented certain
line items from being stated individually. In some cases, totals were used to
maintain consistency for comparative purposes.

13




SECTION 2

Analysis of the Financial Condition of
Continental Illinois Corporation
as Compared with Other LMultinational Banks
from 1976 to 1983

INTRODUCTION
In the last decade, the banking industry has been subjected to severe recessions,
inflation market shifts, increased interest rate volatility, development of new types of
assets and liabilities, and encroachment by other businesses. Furthermore, banking has
become less protected by regulation and has become more competitive at home and
abroad.
During this same period, the number of problem banks increased dramatically (from
183 at year end 197* to 7k5 as of September, 198*). As described by the Federal Deposit
Insurance Corporation (FDIC), a problem institution is one that has unsafe or unsound
conditions and a relatively high possibility of failure. In most instances an increase in
problem institutions is followed by an increase in failed institutions. Such was the case
for this period. The number of failed institutions, those institutions receiving financial
assistance from FDIC, increased dramatically from * at year end 197* to *2, *8, and 55 in
1982, 1983, and 198*, respectively.
But what causes an institution such as Continental Illinois National Bank to become
a problem or even a failed bank? The remaining sections of this report will attempt to
answer this question by reviewing the objectives and components of the federal regulatory
agencies1 surveillance system and analyzing the financial condition/performance of
Continental Illinois Corporation from 1976 to 1983. More specifically, these sections will
focus on how well Continental has performed in comparison with other multinational
banks and what factors led to its current situation.
OBJECTIVES AND COMPONENTS OF A SUREVEILLANCE SYSTEM
Each of the three bank regulators, the Office of the Comptroller of the Currency
(OCC), Federal Reserve System (FRS), and FDIC maintain a surveillance system. A
surveillance system is designed to identify financial institutions that have or are likely to
have financial conditions that warrant special supervisory action. Prior to 1975, the
regulators determined the financial condition of a financial institution solely through onsite examinations. However, in the mid to late 1970's, each regulator designed and
implemented a surveillance screening system.
The surveillance screening systems are not intended as substitutes for bank
examinations nor are they intended to replace the skills and judgements needed to monitor
banks or resolve their problems. The primary objective of the systems is to aid the
examination process by identifying changes in the financial condition of banks and bank
holding companies between examinations.
Detection of such changes enables the
regulators to focus on a select number of banks as opposed to focusing on the total
universe. In turn, the regulators can allocate examination resources efficiently by giving
the most attention to those banks that warrant the closest scrutiny. Essentially, the early
warning system is made up of three components: (1) a computer screening program to
identify financial institutions that fail certain ratios, (2) a detailed financial performance
analysis of the institution to its peers, and (3) a notification of corrective action and
follow up of problems identified from components (1) and (2).




15

Although the regulators consider the present surveillance screening systems
extremely useful, they do have several limitations. The results of a computer screen are
only as good as the data and ratios used in the screen. A screen will not normally identify
those banks subjected to fraud, embezzlement, or other theft nor will it readily identify
understated amounts on the financial statements.
Also, screens are based on
predetermined ratios, thus they will not necessarily identify problems from an emerging
industry trend, such as problems caused by bad energy loans, unless such information has
been programmed into the computer. None of the systems are designed to predict bank
failures nor will they identify all unsound banks. The systems simply tell the regulator
that the financial condition of a financial institution has changed since the last bank
examination.
FINANCIAL RATIOS
As mentioned in the previous section, the screening of specif icTatios is basically the
technique or tool used by the regulators to monitor/analyze the financial condition of an
organization. The basic component of ratio analysis is a single ratio, constructed by
dividing one balance-sheet and/or income-expense item by another. The denominator of
such ratios may be conceived as a "base" or scale factor. For example, a profitability
ratio would relate a firm's profits to its asset or equity-capital base to provide a returnon-assets or return-on-equity measure of a firm's overall performance.
It is important to recognize that ratios by themselves do not tell us much about the
financial condition of the organization. To provide a meaningful basis for evaluating an
organization's financial condition, comparisons with other organizations and/or with its
own performance at other times are required. Also, ratio analysis focuses only on
symptoms not on causes of financial difficulty. The driving force behind an organization's
performance is its management: financial planning, policies, and internal controls
ultimately determine an organization's performance.
FINANCIAL ANALYSIS
In our analysis of Continental's financial condition from 1976 to 1983, we have
basically taken the approach used by the regulators and relied upon ratio analysis. We
have selected 13 financial ratios under 5 major categories that are used to measure an
institution's financial condition. For each ratio we have compared Continental's financial
condition with two peer groups. The first peer group includes 16 multinational banking
organizations, while the second peer group includes 4 of Chicago's largest banking
organizations. The ratios used in the analysis were determined from financial information
as filed by bank holding compnies with the Federal Reserve. The data obtained is based
on year-end financial data which has not been adjusted for prior year restatements. To
supplement the Federal Reserve data, we obtained comparative ratios from an outside
consulting firm and reviewed data from the Office of the Comptroller of the Currency,
including bank examination reports of Continental Bank from 1976 to date.




16

Listed below are the 5 major categories used to measure an institution's financial
condition. Included in these categories are the 13 selected financial ratios.
Profitability/Earnings
Ratio 1

Return on Equity

Ratio 2

Return on Assets

Asset Quality
Ratio 3

Net Charge-offs to Total Loans,
Net of Unearned Income

Ratio *

Allowance for Possible Loan Losses to Total Loans,
Net of Unearned Income

Ratio 5

Nonperforming Assets to Total Assets

Capital Adequacy
Ratio 6

Equity Capital + Allowance for Possible Loan Losses to
Total Assets + Allowance for Possible Loan Losses

Ratio 7

Equity Capital + Allowance for Possible Loan Losses +
Subordinated Notes and Debentures to Total Assets +
Allowance for Possible Loan Losses

Ratio 8

Equity Capital + Allowance for Possible Loan Losses to
Total Loans, Net of Unearned Income

Liquidity
Ratio 9

Total Loans, Net of Unearned Income to Total Assets

Ratio 10

Liquid Assets - Volatile Liabilities to Total Assets

Growth
Ratio 11

Growth in Loans

Ratio 12

Growth in Assets

Ratio 13

Growth in Earnings

The remainder of this section analyzes each performance category and provides
specific information about Continental's financial condition as it relates to other
multinational organizations. Additional information related to the components of the
above ratios and the multinational and regional peer group data discussed below may be
obtained from the Committee upon request.
17




PROFITABILITY
Profitability ratios are designed for the evaluation of an organization's operational
performance. The ratios yield an indicator of an organization's efficiency in using capital
committed by stockholders and lenders. The ratios analyzed are return on equity capital
and return on assets.
Return on equity capital
Return on equity capital (ratio 1) is the most important measure of profitability for
shareholders because it relates net income to the book value of their claims. An analysis
of the multinational and regional data reveals that Continental's return on equity capital
for the period 1976 to 1981 was high and very stable, averaging 14.31 percent, almost 2
percentage points above its multinational peer group. This high return on equity capital
is a result of continued improvement in net income due primarily to~a significant increase
in interest and fee income from an increasing volume of loans.
In 1982 and 1983, Continental's return was 4.56 and 5.95 percent, respectively. This
was 7 and 5 percentage points below the average of the multinational and 4 and 2
percentage points below the regional peer groups, respectively. In both analyses,
Continental ranked last and next to last. The extremely low return was due primarily to a
significant increase in the provision for loan loss expenses, a direct result of Penn Square's
failure and the bankruptcy and near bankruptcy of several of the Bank's large midwest and
manufacturing corporate borrowers.
Return on assets
Return on Assets (ratio 2), which measures the average profitability of the
institution's assets, is designed to indicate the effectiveness of management in employing
its available resources. An analysis of both the multinational and regional data reveals
that Continental's return on assets for the period 1976 to 1981 was high and very stable,
averaging .55 percent, approximately .06 percentage points above its multinational peer
group. This high return on assets is due primarily to the continued increase in the dollar
level of domestic and foreign earning assets. Also, the Bank channeled a large amount of
funds traditionally held in the form of short term money market investments into loans
offering higher yields but less liquidity.
In 1982 and 1983, Continental's return was .18 and .26 percent, respectively. This
was .31 and .26 percentage points below the average of its multinational and regional
peer groups, respectively. The low return was due primarily to an increase in loans
designated as nonperforming. Continental's loan loss reserve to total loans and net
charge-offs to total loans increased significantly from .89 and .29 percent in 1981 to 1.24
and 1.37 percent by the end of 1983, respectively. Also, Continental's net interest margin,
the total cost of all its funds contributing to earning assets subtracted from the yield of
all its assets, was as much as three-quarters of a percentage point below the average for
its multinational peers.
Our financial analysis coupled with a review of bank examination reports from 1977
to 1983 showed increased earning assets in the period leading up to 1981. These higher
levels of earning assets were the result of a substantially increased loan volume which
increased interest and fee income. Also, non-interest income was increased with the




18

expansion of the credit card operation in 1978. However, in mid-1982, poor asset quality,
as evidenced by an unprecendented volume of nonperforming loans, dominated
Continental's condition. Continental's earnings became severely depressed resulting in a
significantly reduced return on assets.
ASSET QUALITY
An analysis of asset quality is of particular importance to institutions which assume
both a credit and an interest rate risk on their assets. Asset quality is mainly concerned
with the level, distribution, and severity of nonperforming assets; the level and
distribution of non-accrual and reduced rated assets; the adequacy of valuation reserves;
and management's ability to administer and collect problem credits. The asset quality
ratios analyzed are: net charge-offs to total loans, allowances for possible loan losses to
total loans, and nonperforming assets to total assets. These asset quality ratios (3, 4, and
5) focus on indicating areas of concern in the loan portfolio, since assets of a financial
institution are represented primarily by loans.
During the period 1978 to 1981, the asset quality ratios of the multinational and
regional peer groups revealed the following. Continental's ratio of allowance for possible
loan losses to total loans was as much as .09 and ,25 percentage points below the average
for the peer groups. Continental's ratio of net charge-of fs to total loans was consistently
below its peers, averaging .29 percent as compared to the peer group's average of A3 and
A6 percent. Finally, the Bank's ratio of nonperforming assets averaged 1.30, just slightly
above the multinational peer group.
During 1982 and 1983, Continental experienced a severe deterioration in its asset
quality ratios as compared to the multinational peer group. The Bank's allowance for
possible loan losses to total loans increased significantly from .89 percent in 1981, to 1.15
and 1.2* percent in 1982 and 1983, respectively. The Bank's net charge-of fs to total loans
increased dramatically from a low of .29 percent in 1981 to 1.28 and 1.37 percent in 1982
and 1983, respectively (.73 percentage points above its peer group average of .55 and .6*
for those years). Finally, Continental's ratio of nonperforming assets to total assets also
increased dramatically from an average of 1.30 in 1979 to 1981, to 4.6 percent in 1982 and
1983 (2.* percentage points above the peer group average of 2.2 percent).
CAPITAL ADEQUACY
The primary function of bank capital is to demonstrate the ability to absorb
unanticipated losses. Capital ratios represent the primary technique of analyzing capital
adequacy. The capital ratios analyzed are: equity capital to total assets and equity
capital to total loans.
Equity capital to total assets
Equity capital to total assets (ratios 6 & 7) indicates the percentage decline in total
assets that could be covered with equity capital and, where applicable, subordinated notes
and debt. The ratios are inversely related to the size of the bank. This reflects the more




19

conservative stance of small banks and the ability of larger banks to reduce their need for
capital because it is believed they can reduce the adverse effects of the default risk and
market risk through the law of large numbers. An analysis of the multinational peer group
data reveals that Continental's equity capital to total assets ratios were relatively
constant for the period 1976 to 1983, averaging 4.6 and 4.7 percent, approximately .15 and
.69 percentage points below the peer average. On the other hand, an analysis of the
regional data ranked Continental last, at least .67 and .90 percentage points below the
peer averages.
Equity capital to total loans
Equity Capital to total loans (ratio 8) also indicates the percentage decline in assets
that could be covered with equity capital. However, this ratio uses total loans in the
denominator based on the belief that the majority of the risk in total assets is in the loan
portfolio.
An analysis of the multinational peer group data reveals a steady decline in
Continental's ratio from 7.13 percent in 1976 to 5.26 percent in 1982. During this period,
its rank fell from sixth to last within the peer group. Regional data also placed
Continental last during the period, averaging 2.43 percentage points below the peer
group average.
Our financial analysis and a review of the bank examination reports from 1976 to
1982 reveals that Continental's level of equity capital over the period did not keep pace in
relation to the extremely high volume of loan and asset growth. As a result, the below
average base that existed in 1976 continued to erode. Continental was able to assume the
additional risk and maintain a strained capital base, whereas others with the same capital
ratios could not, because of its continued increase in earnings performance. However, in
1982 and 1983, when the quality of Continental's assets was determined to be poor and the
earnings on those assets were depressed, the risk of insolvency significantly increased.
LIQUIDITY
An individual bank's liquidity is its ability to meet deposit withdrawals, maturing
liabilities, and credit demands and commitments over two time periods: (1) the short-run,
a period of less than 1 year and (2) the long-run, a period influenced from cycles in
economic and financial activity and the growth in deposits and loans. Liquidity ratios
provide the primary means of judging a bank's liquidity position. The two liquidity ratios
analyzed are loans to assets, and liquid assets minus volatile liabilities to total assets.
Loans to assets
Total loans net of unearned income
institution's liquidity. An analysis of the
Continental's loans continued to increase,
assets. During the period 1976 to 1983,




to total assets (ratio 9) is a measure of an
multinational and regional data reveals that
becoming far and away its major source of
the Bank's ratio rose significantly from an

20

average of 58 percent for 1976 to 1978, to 62.8 percent for 1979 and 1980, and to 71.6
percent for 1981 to 1983, approximately 1.5, 5.85, and 10.3 percentage points above its
peers. In general, this ratio reveals the existence of a poor liquidity position which
dictates the need to further evaluate other liquidity ratios.
Liquid assets minus volatile liabilities to total assets
Liquid assets minus volatile liablilities to total assets (ratio 10) measures the net
liquidity of a bank's total asset portfolio after making deductions for volatile liabilities.
The numerator is reduced because a significant portion of the liquid assets are pledged
against Treasury and other public debt.
An analysis of both the multinational and regional data reveals that Continental's
ratio was extremely poor during 1976 to 1983, averaging -45.97 percent, or at least 21
percentage points below its peers. Not only did Continental rank last during the entire
period, but its ratio also increased significantly (from an average "of -37.7 percent for
1976 to 78 to -46 percent for 1979 to 1980 to -54.2 percent for 1981 to 1983).
Our analysis of the period from 1977 to 1983 revealed that Continental was
increasing its assets with heavy loan volume and had to finance them with more volatile,
more expensive money. Continental was not adjusting its maturities and asset and
liability composition in order to achieve a relative balance between interest sensitive
assets and liabilities. For example, to support its aggressive loan policy, Continental
maintained a high degree of rate sensitivity through the heavy use of overnight funds and
shortened CD and Eurodollar maturities. In addition, Continental began attracting
deposits of other commercial banks, particularly foreign banks, by in some cases paying
them more interest than domestic banks. At the same time, core deposits from
individuals, partnerships, and corporations remained constant during the period, lagging
behind the 8 percent growth rate reported by Continental's peer group.
GROWTH
Steady and controlled growth is a desirable characteristic for an institution. .The
examination of growth ratios reveals useful information about an institution's overall
performance. The three ratios analyzed are growth in loans, growth in assets, and growth
in earnings.
A high correlation exists among all three ratios, growth in loans, assets, and
earnings (ratios 11, 12, and 13). Assets which represent Continental's use of funds have
been primarily driven by a growth in loans whose interest income has stimulated a growth
in earnings.
An analysis of these ratios from 1977 to 1981 reveals a steady growth in earnings
averaging 14.8 percent. This consistent earnings growth, mandated by Continental's
management, was driven by a 16.4 percent steady growth average in assets which was
maintained by a significant growth in loans averaging 19.9 percent. During this period,
Continental outperformed its multinational peers in both asset and loan growth by 3.4 and
5.2 percentage points, resepectively. However, the growth in earnings considered strong
by management was as much as 3.6 percentage points below its peer group.




21

In 1982 and 1983, the strong and stable growth trends were eliminated. By mid to
late 1982 significant concern centered on the quality of Continental's assets. This caused
management to take an extremely cautious approach in acquiring additional loans. Also, a
number of loans were classified as nonperforming and were written off. As a result,
earnings from interest and fees on loans were serverly depressed.
Our analysis confirmed an increase in the growth of loans, assets, and earnings for
Continental during the period 1976 to 1981. As mentioned earlier, growth in loans was a
major reason for the growth in assets and earnings. An example of the growth in loans
was shown by Continental's loan portfolio increases in overseas loans, energy loans, and
loans to lesser-developed countries. Our analysis revealed that from 1976 to early 1982,
the Bank's loans grew from 60.* to about 79 percent of total assets. Particularly, growth
was shown in energy, specifically oil and gas loans.




22




SECTION 3

Financial History of
Continental Illinois Corporation
from 1970-198*

INTRODUCTION
In an attempt to protect the safety and soundness of the banking industry, the
Federal Deposit Insurance Corporation (FDIC), the Comptroller of the Currency (OCC),
and the Federal Reserve (FRS) on May 17, 1984, arranged an interim emergency financial
assistance program and guaranteed all depositors and creditors of Continental Illinois
National Bank and Trust Company (the Bank). At the time, the Bank had more than $40
billion in assets and had huge amounts of funds either loaned to or borrowed from many
U.S. banks. Regulators were concerned that if the Bank failed it could have had a domino
effect on the banking industry resulting in many other bank failures. The assistance
program was designed to alleviate the cash shortages facing the Bank so that it would
have time to recover in an orderly and permanent manner.
After an evaluation of various alternatives, the regulatory agencies on July 26,
1984, provided the Bank a permanent financial assistance program intended to restore it,
over time, to a profitable business entity. The major components of the plan, which is
subject to stockholders1 approval, include (1) installing a proven internationally recognized
management team, (2) moving $4.5 billion in problem loans to FDIC, (3) infusing $1 billion
in new capital from FDIC in exchange for preferred stock convertible to 80 percent of
the equity of Continental Illinois Corporation (the Corporation) which is the holding
company for the Bank, and (4) ensuring an ongoing line of credit from the regulators and
participating banks. *

But what caused the financial condition of the Bank to deteriorate? This section of
the report presents information on the Corporation's and Bank's organizational structure
and financial history along with a discussion of relevant events from 1970 to 1984 to help
understand how the problems developed.

CONTINENTAL ILLINOIS CORPORATION
Continental Illinois Corporation was incorporated in Delaware in November 1968 and
commenced operations on April 1, 1969, after it acquired all of the outstanding stock,
except for directors' qualifying shares, of Continental Illinois National Bank and Trust
Company of Chicago. The Corporation directly or through wholly-owned subsidiaries
engages in lease and debt financing, mortgage lending and banking, financing of energy
development and exploration, asset-based financing, reinsurance of credit life and credit
health insurance directly related to extensions of credit by the Bank, fiduciary and
investment services, and merchant banking overseas. The Corporation also owns two
banks in the suburbs of Chicago, Illinois, a small business investment company, and an
equity investment company.




24

Through a worldwide network of branches, representative offices, subsidiaries, and
affiliates staffed by more than 12,000 people, Continental provides commercial, personal,
trust, and money market services to individuals, businesses, and governmental entities.
Its business units are organized according to market areas.
SUBSIDIARY ACQUISITIONS
The Corporation's significant subsidiaries as of 198* were as follows:

Jurisdiction
of
incorporation

Name^

Percent of
voting
securities
owned

Continental Illinois National Bank <Sc Trust
Co. of Chicago

Illinois

100(2)

Continental Bank International

Illinois

100

Continental International Finance
Corporation

Illinois

100

Continental Illinois Bank (Canada)

Canada

100

Republic Realty Mortgage Corporation

Delaware

100

Continental Illinois Leasing Corporation

Delaware

100

Continental Illinois (Delaware) Limited

Delaware

100

Continental Illinois Equity Corporation

Delaware

100

Continental Illinois Service Corporation

Delaware

100

Continental Illinois Venture Corporation

Delaware

100

Continental Illinois International
Investment Corporation

Cayman Islands

100

Great Lakes Life Insurance Company

Arizona

100

Continental Illinois Overseas Finance
Corporation, N.V.

Netherlands
Antilles

100

Continental Illinois Trust Company of
Florida, N.A.3

Florida

100

Continental Illinois Trust Company
of Sarasota, N.A.3

Florida

100




25

Jurisdiction
of
incorporation

Name

Percent of
voting
securities
owned

Continental Illinois Energy Development
Corporation

Delaware

100

Continental Illinois Commercial Corp.

Delaware

100

Continental Bank of Buffalo Grove, N.A.3

Illinois

100

Continental Bank of Oakbrook Terrace^

Illinois

100

Continental Illinois Corporation
Financial Futures

Delaware

100

CONTINENTAL ILLINOIS NATIONAL BANK
The Bank, which became a subsidiary of the Corporation, has been in business for
more than 12* years. At the end of 1983, it was the largest bank in Chicago and was
seventh in size in order of both assets and deposits among approximately 15,000 national
and state banks in the United States. Operating a full service commercial banking and
trust business, the Bank serves individuals, businesses and government in the metropolitan
area of Chicago; other major metropolitan areas throughout the Nation; and overseas. It
receives deposits; makes and services secured and unsecured loans; distributes U.S.
government and municipal securities; and performs a wide variety of personal, corporate,
and pension trust and investment advisory services.
Over the past two decades the Bank changed from a conservative institution whose
principal functions were providing a safe place for people and businesses to keep their
money and lending to good credit risks, to an institution striving for constant growth at
home and abroad. During the 1960's, the Bank developed extensive international
operations; established groups to render specialized services to the Bank's oil, utility, and
finance company customers; established a unified Retail Banking Department to fully
serve the consumer and small businessperson; developed a separate Real Estate
Department to make commercial and home loans and to service the properties which the
Bank holds in a fiduciary capacity; and established a division to provide counseling to
companies wishing to relocate in the Chicago metropolitan area. The Bank has a large
network of correspondent banking relationships in the United States and throughout the
world and provides a wide variety of services for banks.




26

ORGANIZATION OF THE BANK
The organization of the Bank is built around markets it defines as groups of
customers who have common needs for the services offered. The activities of each of the
five customer-service units are summarized below.
General Banking Services
General Banking Services provides depository and financial services to corporations
and correspondent banks wherever located and to governments and their agencies outside
the United States. The responsibilities of the five units which comprise General Banking
Services are as follows:
U.S. Banking Services is divided into two areas, that generally provide commercial
deposit and loan facilities to corporations, banks, bank folding companies, other
financial institutions, and other entities not classified as multinational.* The
Metro-Midwest Groups, which are organized to provide specialized skills adapted to
specific industries, serve customers in the greater Chicago metropolitan area, other
parts of Illinois, as well as Indiana, Michigan and Wisconsin. The National Groups,
organized on a geographical basis, serve domestic commercial customers not
classified as multinational or served by Special Industries Services, including as
many as 2,600 domestic correspondent banks^ at one point.
Special Industries Services is organized to (1) supply specialized skills adapted to
specific industries and (2) to provide credit and loan facilities to customers
worldwide in the oil and gas, mining, construction and engineering, and shipping and
marine industries. The Service also provides nationwide credit and loan facilities to
public utilities, surface transportation, and equipment leasing industries.
International Banking Services is comprised of two Edge Act 6 Corporation
subsidiaries and specialized geographic groups. It is headquartered in Chicago and
has overseas branches, representative offices, and subsidiaries in 29 foreign
countries. It assists foreign correspondent banks, government entities, and
corporations not classified as multinational by providing them with international
financial services that include short- and medium-term loans, letters of credit,
acceptances, collections, remittances, deposit accounts, and foreign exchange
services.
Under the Edge Act, the Bank currently operates an Edge Act Corporation
subsidiary headquartered in Chicago named Continental Bank International, which
has branches in New York, Miami, Houston, and Los Angeles. The branches provide
international banking and financial services to corporations and correspondent banks
in their respective markets. Another Edge Act Corporation subsidiary, Continental
International Finance Corporation, also headquartered in Chicago, has investments
(ranging from 100 percent ownership to minority interests) in various foreign
financial institutions that serve to supplement the Bank's international services.




27

Multinational Banking Services provides the special expertise and worldwide
capabilities required by major corporate customers that have extensive worldwide
operations and are classified as multinational.
In addition to Chicago,
MultinationalBanking Services has personnel located in New York, London, Tokyo,
Brussels, Frankfurt, and other cities where multinational corporations are located.
Financial Services provides the other units of General Banking Services with
worldwide capability to serve clients by offering a comprehensive variety of trade
financing, global cash management, and investment banking functions, including
private placements, mergers and acquisitions, and corporate financial advisory
services.
Trust and Investment Services
Trust and Investment Services provides a variety of services to a large number of
individuals, associations, businesses, government entities, and institutions. Through it, the
Bank acts as trustee, executor, administrator, guardian, conservator, depository, transfer
agent, and registrar. In addition to the separate investment of trust assets, it maintains
collective funds for trust investment, including Continental Illinois Investment Trust for
employee benefit plans. It also offers custodian and investment counseling services, as
well as portfolio management, and financial planning and advisory services for both
domestic and international clients.
Real Estate Services
Real Estate Services makes a wide variety of residential, industrial, and commercial
real estate loans, including secured and unsecured credits, to the real estate industry.
The Bank's activities include extensions of credit to home builders and developers,
mortgage bankers, and real estate investment trusts, and the origination, sales, and
servicing of residential mortgages as well as other activities.
Bond and Treasury Services
Through Bond and Treasury Services, the Bank is a primary dealer in government and
federal agency securities as one of approximately 35 primary government bond dealers
authorized to deal directly with the Federal Reserve trading desk. It underwrites and
distributes state and local government and public housing securities, provides short-term
investment facilities to many corporations, supplies correspondent banks with services
ranging from periodic pricing of portfolios to complete portfolio management, serves the
primary banking needs of public bodies, funds the Corporation and its subsidiaries,
manages the Corporation's interest rate sensitivity program and capital account, and
controls the non-credit risk of the Corporation.
Personal Banking Services
The banking needs of individuals and households are the responsibility of Personal
Banking Services. It administers savings accounts, time deposits, checking accounts, and




28

a broad spectrum of consumer lending activities which includes personal loans, real estate
loans, and the MasterCard/Visa bank card programs until their sale in 1984. The Executive
Financial Center has been established in an effort to meet the complete banking,
borrowing, and short-term investment counseling needs of a select group of Bank
customers.
SUBSIDIARY ACQUISITIONS
The Bank has established a number of subsidiaries since 1970. Under the Edge Act,
it owns and operates Continental Bank International and Continental International Finance
Corporation.
Headquartered in New York, Continental Bank International is an
international banking organization, receiving deposits, making loans, and handling all
forms of international banking transactions. It maintains direct correspondent banking
relationships in most major countries, and its services are available to domestic and
foreign banks, corporations, and individuals. The Continental International Finance
Corporation, headquartered in Chicago, provides long-term equity and debt financing for
businesses operating abroad. The Bank also has equity interests (ranging from 100 percent
ownership to minority interests) in various foreign financial institutions located in various
countries worldwide.? These institutions supplement the Bank's international operations.
The statute limits Edge Act subsidiaries to serving foreign trade-related and other
international banking needs as opposed to U.S. banking needs.
CHRONOLOGY OF EVENTS AND FINANCIAL HISTORY
The purpose of this section is to recount the events that took place and financial
performance of the bank during the period from 1970 to the present. It is not intended to
explain why these events occurred. Early events and financial information is grouped into
two time periods —1970-7* and 1975-79. More recent events and financial information
related to the period from 1980 to 198* is presented on a year by year basis.

1970-197*
INDUSTRY ECONOMIC CONDITIONS
During the period 1970-7*, the U.S. economy was in the midst of the most prolonged
recession since 1933. Spending cutbacks by business, which reduced inventories and
shifted borrowings into the bond and commercial paper markets, caused a decline in the
volume of bank loans. In addition, the banking system was also affected by impending
industrywide problems throughout 197* resulting from the unusual failures of two large
banks and the relatively high level of uncollectible loans.




29

BUSINESS SERVICES
In spite of the economic conditions during this period, the Bank emerged in a
position of strength and stability by expanding in many areas. As of December 31, 197*,
the Corporation and its subsidiaries had approximately 9,880 officers and employees, an
increase of 1,600, or 19 percent, from 1970. All but 220 of the officers and employees
were employed by the Bank.
The commercial banking department, which provided commercial deposit and loan
facilities to individuals and corporations, was reorganized in 1973 around industry,
customer size, and geographic markets in order to develop new markets. Represented
among the approximately 33,000 accounts in the commercial banking department were 9*
of the 100 largest American corporations and 318 of the Fortune 500 list.
The international and overseas operations grew rapidly and placed greater emphasis
on regionalizing business development efforts and penetrating growth markets in each of
the countries where the Bank operated. By the end of 197*, the Bank's international
network included 122 facilities in 37 nations on six continents, making it the largest of
such networks operated by a U.S. financial institution.
Several other Bank operations grew rapidly during this period. The real estate
function expanded particularly as to lines-of-credit to home builders and developers,
mortgage bankers, real estate investment trusts, and interim construction lending; bond
operations enlarged its services to include underwriting and distributing state and local
government and public housing securities, providing short-term investment facilities to
many corporations and portfolio advisory services for correspondent banks, managing the
Bank's investment portfolios, and procuring a large share of the funds required by the
Bank; and Personal banking increased consumer credit services by implementing the
LMaster Charge International Charge Credit system.
SUBSIDIARY ACTIVITY
The early 1970s was a period of rapid growth in the Corporation's subsidiary
operations as evidenced by its activities. The Corporation
— participated in organizing a venture capital firm which operated under the name
of Continental Illinois Venture Corporation, in which the Corporation held 29
percent of the voting stock.
— acquired the business and properties of Republic Realty Mortgage Corporation in
June 1970 and continued to operate it as a mortgage banking firm doing business
in Illinois, Missouri, Wisconsin, and Georgia.
— acquired Group Counselors, Inc. by merger into Continental Illinois Realty
Advisors, Inc. in March 1971.




30

— entered into a joint venture with The Royal Trust Company in October 1971. The
Corporation and The Royal Trust Company then organized Builders Financial Co.
Limited and its wholly-owned subsidiaries, Builders Capital Limited and Western
Builders Capital Limited, to engage in construction and development lending and
other interim financing of Canadian real estate. The Corporation held 50
percent of the common stock and 49.9 percent of the preferred stock (voting) of
Builders Financial Co. Limited. The balance of the Builders Financial Co.
Limited stock was held by the Royal Trust Company.
— formed Continental Illinois Leasing Corporation to engage in lease and debt
financing in March 1972.
— formed Continental Illinois (Delaware) Limited in July 1972 to engage in
merchant banking overseas through subsidiaries chartered under the laws of Hong
Kong and the United Kingdom.
— formed Continental Illinois Leasing and Financial Ltd. in April 1974, a Canadian
corporation, to engage in medium-term lease and debt financing in Canada.
MANAGEMENT
On March 26, 1973, Roger E. Anderson and John H. Perkins were elected by the
Board of Directors to succeed Donald M. Graham and Tilden Cummings as Chairman of
the Board and President, respectively. No other major changes occurred.
FINANCES
The financial position of the Corporation continued to improve for the fifth
consecutive year since the bank holding company was formed. The increasing demand for
loans over the previous 5 years was satisfied largely through an increased reliance on time
deposits and interest-sensitive funds of all kinds. Total deposits had increased from $8.1
billion in 1972 to $15.5 billion in 197*. Particularly noticeable was the growth in overseas
branches and subsidiaries where time deposits increased $2.5 billion from 1972 to $5.7
billion in 197*.
Dividends on common stock continued to increase in accordance with the
Corporation^ policy to increase dividends as earnings increased. Dividends declared in
197* were $2.20 per share, as compared to $1.93 per share in 1973.
Earnings
Earnings for 197* increased 11 percent from 1973 to $95.9 million, with a 5-year
annual growth rate reaching 11.7 percent. The Bank's return on shareholders1 equity in
197* was 13.5 percent and had exceeded 12 percent annually for the fifth consecutive
year. These accomplishments for 197* were due in part to a 33 percent increase in net
interest income, resulting from a sharp decline in interest rates during the fourth quarter.
Total operating income increased dramatically in 197* to $1.7 billion, as compared
with $1.1 billion in 1973 and $*78 million in 1972. The 197* increase was due primarily to
interest fees on loans of $1.3 billion (representing 72 percent of total operating income)
which nearly doubled the $720 million recorded in 1973 and quadrupled the $369 million in
1972.
31



The growth in income was offset somewhat by the growth in expenses. Total
operating expenses also increased dramatically in 1974 to $1.6 billion, as compared with
$967 million in 1973 and $422 million in 1972. The 1974 increase was due primarily to
interest expenses of $1.3 billion (representing 83 percent of total operating expenses)
which nearly doubled the $767 million and quadrupled the $346 million in 1972. Other
expenses such as salaries, wages, and compensation increased from $110 million in 1973 to
$130 million in 1974.
Assets
Total assets grew at a record rate from $10.7 billion at the end of 1972 to $19.8
billion in 1974, with a 5-year annual growth rate of 20 percent. This growth in assets was
due largely to an increased demand for loans. At year-end 1973, loans were $9.9 billion,
an increase of 40.4 percent over 1972. By year-end 1974, loans increased another $2.8
billion to $12.7 billion, representing 64 percent of total assets. Domestic loans in 1974
rose to $10.1 billion, an increase of $1.9 billion from 1973, while overseas loans reached
$2.6 billion, an increase of $.8 billion.
Nonperf orming Loans and Losses
The loan loss reserve for 1974 was increased to $213 million, or 23 percent, from 1973
in recognition of possible future losses in a number of areas, including the real estate
field. This increase represented 1.2 percent of gross year-end loans.
1975-1979
INDUSTRY ECONOMIC CONDITIONS
The severe recession during the prior period which created financial difficulties for
a number of companies began to recede in early 1976. The improvement in the banking
industry occurred largely as a result of an increase in business borrowing, which was
fueled primarily by a sharp rise in inflation, but also by increases in corporate spending
for new plant and equipment and a continuing downturn in corporate liquidity.
As noted above, the economy during this period experienced a sharp rise in inflation.
The consumer price index increased 13.3 percent between the beginning and end of 1979, or
11.2 percent on the average during the year, as compared with a 9.1 percent increase on
the average for 1978. Also, world oil prices more than doubled in 1979 and were still
rising, outracing the rate of inflation and fueling still more inflation.
BUSINESS SERVICES
During this period, as in the prior period, the Corporation experienced continued
growth despite the economic conditions. General Banking Services, which includes
commercial, multinational, and international activities, experienced profitable gains in
volume and market position.
New business development and increased market
penetration, together with efforts at more effective comprehensive service for
multinational customers worldwide further enhanced the Corporation's position. Results




32

in all markets reflected an announcement made on July 7, 1976, by Continental's
Chairman, Roger E. Anderson, that the Bank would embark on a strategy to make it one
of the three biggest lenders to industrial and commercial companies by 1981.
Commercial Banking exhibited continued growth, especially in domestic commercial
and industrial loans. In addition to competing aggressively for large loans, the Bank
opened offices in the Midwest to enhance its position among small to mid-sized
companies. International Banking increased its services during the period by opening five
new branch and representative offices and three new bank subsidiaries.
Also, a
correspondent banking relationship was established with the Bank of China to conduct
business both with its Peking headquarters and its branches.
Real Estate Services' loan portfolio continued to grow, aided primarily by the
strength in the commercial construction market. Also, asset swap and repayment
programs further improved the Bank's position and accelerated the repayment of real
estate credits.
SUBSIDIARY ACTIVITY
The Corporation, through Continental Illinois Leasing and Financial Corporation,
formed Continental Illinois Capital (Canada) Ltd. in 1975, a Canadian subsidiary, to engage
in mortgage lending in Canada, acquired all outstanding common stock of Continental
Illinois Venture Corporation in 1976; formed Great Lakes Life Insurance Company in 1977
which acts as a reinsurance underwriter of credit, life, accident, and health insurance; and
formed Continental Illinois Equity Corporation in 1979 which makes equity type
investments in unaffiliated companies.

MANAGEMENT
Executive management remained unchanged, with the exception of George R. Baker,
who was placed in charge of the Commercial and International Banking Services
consolidated under General Banking Services.
FINANCES
Continental's financial position continued developing during this period at a rate
consistent with that of the previous 4 years. Stockholders' equity increased by $137
million or 11 percent to $1.* billion at December 31, 1979. The rate of return on
stockholders' equity has held steady over the period at 15 percent. In addition, the capital
base has provided a steadily rising dividend to stockholders. The 1979 dividend was
increased 11 percent to a new annual rate of $1.60 per share. This rate reflects a twofor-one common stock split which became effective in May, 1977.
Earnings
Income before security transactions increased 15 percent to a record $194.1 million,
for a 5-year compound growth rate of 14.2 percent, the same as in 1978. Net interest
income increased by $80 million, or 13.3 percent, to $677.3 million. Other operating
income increased by $41 million, or 24.5 percent, to $207.7 million, reflecting emphasis on




33

noninterest income. Against the $121 million gain from these two principal income
sources, other operating expenses were up $80.5 million, or 20.9 percent, to $464.5
million, reflecting business growth and the impact of inflation.
Assets
Loans and other earning assets averaged 20 percent above the 1978 level, and total
assets increased by $4.7 billion, or 15.2 percent, to $35.7 billion.
Nonperforming Loans and Losses
The 1979 provision for credit losses and net charge-offs, which are applicable to both
loans and lease financing receivables, were $70 and $49.1 million, respectively, as
compared to $62.5 and $41.4 million, espectively in 1978. In each of the prior two years
the provision had exceeded the charge-offs by approximately $21 million, thus slightly
increasing the reserve to $212.1 million at December 31, 1979. "Although the reserve
increased during the period, the reserve as a percent of total loans and leased receivables
decreased from 1.27 at year end 1976, to .91 at year end 1979.
1980
INDUSTRY ECONOMIC CONDITIONS
During 1980, the banking industry's attention was directed towards the continued
concern over accelerating inflation, volatile financial markets and uncertain economic
growth. The level of economic activity for 1980 was similar to the prior year. Unlike
1979, however, when the acceleration of prices was heavily concentrated in the energy
sector, no single factor accounted for 1980fs rise. The inflation rate remained high due to
a deterioration in the price situation. For example, labor costs increased due to an
acceleration of compensation per hour and a poor performance in productivity. Food
prices surged under the influence of rebounding farm prices and rising costs of marketing.
Conditions in the mortgage and housing markets deteriorated sharply. Also, inflation
produced serious problems for the nonbank thrift institution and other entities that
concentrate their holdings in longer-term instruments bearing fixed interest rates.
BUSINESS SERVICES
The Bank continued to work toward its goal of becoming one of the three top
institutions serving American and foreign-based multinational customers by further
developing its business services. General Banking Services, building on national presence
of 25 offices, opened new offices in the South and West. Four Edge Act subsidiaries based
in major cities were reorganized as branches of a single Edge corporation based in
Chicago. Selective expansion of the international network continued with the opening of
three new branches. In addition, a minority interest was purchased in a Nigerian firm, and




34

service to correspondent banks in Europe was enhanced through a newly formed European
Banking section headquartered in London.
In other areas, commercial finance activity was augmented by a new Commercial
Services unit that specialized in helping businesses, such as smaller oil and gas producers
that might not qualify for traditional bank financing, with loans secured by the value of
equipment or merchandise.
SUBSIDIARY ACTIVITY
In February 1980, the Corporation established Continental Illinois Energy
Development Corporation to make loans to energy development and exploration
companies and to service such loans; formed Continental Illinois of Florida, Inc., to
engage primarily in the marketing of trust and investment services provided by the Bank;
and funded Continental Illinois Overseas Finance Corporation N.V. in the Netherlands
Antilles.
MANAGEMENT
Donald C. Miller was permanently assigned as Vice Chairman of the Board of
Directors; Edwin J. Hlavka was designated as the Vice President and Auditor of the
Corporate Financial Services; and Edward S. Bottum was assigned as the Vice President of
Trust and Investment Services, replacing Charles R. Hall.
FINANCES
The Corporation's financial growth continued amid 1980fs high rate of inflation and
unprecedented interest rate swings. The Multinational Lending Department placed heavy
emphasis upon extending commitments to carefully identified targets and increasing these
commitments to the full lending limit. International Banking Services and the Financial
Institution Division stressed expansion of wholesale banking both nationally and
internationally.
Equity capital increased by 11.8 percent to 3.62 percent of total assets. Retained
earnings increased by $162 million, bringing the year-end total to $1.5 billion, thus
building the capital base for further growth.
Earnings
Earnings reflected continued, steady earnings on the part of major profit
contributors, General Banking Services and the Special Industries Group. The Oil and Gas
Division was the Special Industries Group's single largest source of profit for the year.
Net income was up $30.1 million, or 76 cents a share, to $225.9 million. The overall
return on assets declined by two-hundredths of 1 percent.




35

Assets
Loan volume averaged $4.2 billion and other earning assets $1.3 billion above the
1979 level, increasing net interest income on a taxable equivalent basis from this source
by $1*0 million, or 20.6 percent. Except for April and May, the Corporation recorded
increases in average total loans each month. Growth in loans was heavier in the second
half of the year and more pronounced in domestic loans, in contrast with the first half, in
which foreign loan growth predominated. Average total assets grew by about $6.3 billion.
The growth in assets was financed largely through higher balances of interest-bearing
liabilities.
Nonperforming loans and losses
Nonperforming credits were $444 million. Mortgage and real estate loans on a
renegotiated basis were up $21 million from the prior year. The reserve for credit losses
increased 13.9 percent from 1979. Relatively lower growth of loans'in 1980, coupled with
a higher net addition (provision for credit losses minus net credit losses) to the reserve,
maintained the percentage relationship of the reserve to total credits at the 1979 yearend level.
Net credit losses on consumer installment loans were the highest single loss
category in 1980. These losses were 45.9 percent of total net charge-offs in 1980 as
opposed to 6* percent in 1979. Net losses on commercial and industrial loans were up
$15.2 million in 1980 and represented 39.3 percent of total net losses, compared with 16.5
percent in 1979.
1981
INDUSTRY ECONOMIC CONDITIONS
The year 1981 was a year of extremes for banks in a number of key areas. There
were general domestic and worldwide economic weaknesses and wide fluctuations in
interest rate levels. Furthermore, the banking industry's capitalization base was eroding
causing concern to the bank regulators.
The overall level of economic activity during 1981 accelerated and the rate of price
increases slowed, but the burden of high interest rates placed some sectors of the
economy under heavy pressure. The housing industry was devastated, many auto dealers
closed because of declining sales and the extremely high cost of financing inventories, and
many other small firms in other lines went out of business. The thrift industry
experienced a severe squeeze on earnings and high interest rates impeded the formation
of business capital needed for improving productivity performance.
BUSINESS SERVICES
The Corporation's performance in 1981 was strong and compared well with the
previous strong year, 1980. The Bank moved up in the order of banks ranked by asset size,
taking over the sixth position from Chemical Bank. The Corporation's performance
stemmed from its concentrating in a number of areas, including significant non-interest




36

expense restrain and substantial expansion in the size of its loan portfolio. In 1981 the
Bank became the largest domestic corporate and industrial lender in the Nation.
One of the primary growth areas within the Bank was in the Oil and Gas Division of
the Special Industries Group. By mid-year, domestic oil and gas loans totaled $2.9 billion
and represented more than 10 percent of the Bank's total loan portfolio. The Bank had
developed a presence in most of the active areas in the industry by establishing regional
offices in Texas; Colorado; and Alberta, Canada. As with the oil and gas loans,
commercial real estate loans also made up about 10 percent of the Bankfs total loan
portfolio.
SUBSIDIARY ACTIVITY
New regional offices in Atlanta; Detroit; Minneapolis; and White Plains, New York,
further expanded the Corporation's U.S. network to 13 locations. Agreements were
reached to acquire two small Chicago banks.
The Corporation continued to enhance its position in the international financial
marketplace through selective foreign branch office expansion. Growth overseas was
principally related to the Multinational Banking Department and the Special Industries
Group. Branch offices were opened in Canada, Barcelona, and Puerto Rico, while satellite
facilities were closed in Dusseldorf, Edinburgh, Munich, Rotterdam, and Vienna.
FINANCES
As a concrete step toward further enhancing the attractiveness of stock as an
investment, long-range targets for two key performance measures were raised in 1981,
and new higher goals were set. The return on equity goal was raised from 15 percent to
18 percent, and return on total assets was raised to 0.65 percent, or 6 basis points^ above
the average return of the previous 5 years. The commercial and industrial loan portfolio
grew to $12.8 billion at year-end.
Stockholders equity averaged $1.6 billion in 1981, a 12.0 percent increase from 1980,
and was 3.6 percent of total assets at year-end. Stockholders received 28.8 percent of
1981 income before security transactions in the form of dividends, while in 1980 the
dividend payout ratio was 29.78 percent.
Earnings
Attention to resource allocation, expense control, funding, and liquidity
management made an important contribution to record earnings. Income before security
transactions of $260.3 million increased 16.1 percent from the $224.1 million recorded in
1980. Net income rose 12.7 percent from the previous year to $254.6 million. Return on
total assets increased 3 basis points over 1980. Net interest income was up 8.8 percent
over the 1980 level. The increase was made possible by a 17.7 percent increase in average
loans and a 27.3 percent increase in average leases.
Assets
Average total loans increased each month, except for February, with heavier growth
occurring in the second half of the year. The commercial and industrial loan portfolio




37

grew to $12.8 billion from about $9.8 billion in 1980 and real estate loans increased by 12
percent to a total of $3.9 billion. The Bank continued to be the leading lender to domestic
energy producers. Although only sixth in assets among American banks, it loaned more
money to domestic commercial and industrial companies than any other bank in the
Nation.
During the year, Continental moved toward higher yielding earning assets with
shorter maturities. This move was in line with the Bank's interest rate sensitivity
management policy which involved lengthening and shortening maturity schedules of
assets and liabilities in anticipation of interest rate cycles. Foreign operations accounted
for 40.7 percent of total assets at year-end and produced 29 percent of total net income
for the Corporation.
Average earning assets increased 12.8 percent, due primarily to growth in loans and
lease financing. The increase in average earning assets was financed primarily through
interest-bearing liabilities. These sources increased 13 percent in 1981 over the 1980
average, while interest-free funds increased 8.7 percent over the same period. The 15.2percent rate on average foreign time deposits tied the overall rate of average savings and
time deposits, and together these deposits increased 13.3 percent in 1981 over the 1980
average. The more expensive money-market liability, short-term borrowed funds, also
increased 11.8 percent over the same period.
Nonperforming Loans and Losses
As a result of high interest rate levels and an economic slowdown in 1981, the Bank
had nonperforming credits of $653 million; representing 1.9 percent of total loans and
lease receivables outstanding at year end, compared wiht $444 million, or 1.6 percent at
year end 1980. Before this rise, nonperforming credits had declined steadily from $705
million, or 5.7 percent of the total loan and lease portfolio reported at year end 1975.
Net credit losses increased 15.8 percent from 1980 to $71.1 million. Increased
domestic and industrial loans and overseas loan charge-offs contributed to the entire
increase amid sluggish economic conditions.
1982
INDUSTRY ECONOMIC CONDITIONS
Persistent weakness in business activity and employment, along with high interest
rates, exerted pressure on commercial banks. Profits edged down and returns on assets
and on equity reached lows last observed in the recovery from the 1973-75 recession.
Potential losses became worrisome as the financial difficulties of some major borrowing
countries impaired their ability to maintain payments on debt owed to U.S. banks. Most
commercial banks recorded substantial profits, but the proportion of banks with operating
losses rose to nearly 8 percent, about equal to the mid-1970's peak and more than double
the recent low in 1979.
BUSINESS SERVICES
The Corporation experienced serious difficulties because of an inordinately high
level of problem assets. Significant publicity of its relationship with the defunct Penn
Square Bank caused Continental's image in the financial community to fall precipitately.
This in turn, caused a significant change in its funding profile. Because domestic
38



investors were reluctant to purchase long-term instruments, the Euromarkets were
heavily used in order to maintain a relatively stable mix between long- and short-term
funding.
Problems were evident in all lending departments with oil and gas and real estate
accounting for a large portion of the problem loans. Between 1981 and 1982, outstanding
loans in the Oil and Gas Division increased from $2.8 billion to $5.2 billion, more than 15
percent of the Bank's total loan portfolio.
Under market pressure, the Bank removed its name in late July from the list of
banks where CDs were eligible for delivery to fill Chicago Board of Trade and Chicago
Mercantile Exchange futures contracts. In early September, Standard and Poor's reduced
the Bankfs credit rating for the second time.
SUBSIDIARY ACTIVITY
Growth through establishment or acquisition of subsidiaries slowed to almost a
standstill. The Corporation completed the acquisition of two smaller banks in Chicago
which it initiated in 1981 and established a subsidiary to deal in the financial futures
market.

MANAGEMENT
As a result of Penn Square problem loans, a group of the Bank's senior officers
conducted a comprehensive management review of its operation and recommended a
number of management changes. A new auditor and Executive Vice President for General
Banking Services were appointed, and a new credit risk evaluation division was created. A
special litigation committee was also appointed to assess the Bankfs officers1 and
directors1 responsibility for the Bank's actions in connection with derivative and class
action lawsuits.
In 1983, the Bank entered into a written agreement with OCC agreeing to address
certain problems noted in OCC's 1982 examination of the Bank. Under the agreement, the
Bank was required to continue implementation and maintenance of new and strengthened
plans, policies, and procedures designed to improve overall performance in accordance
with the Bank's revised corporate objectives and to report periodically on such matters to
OCC. These actions cover such areas as asset and liability management and the Bank's
credit approval, evaluation, and collection activities. By May 198* the Bank was
experiencing severe cash flow problems requiring assistance from the FDIC and a
consortium of United States banks.
FINANCES
The Bank began to lose its position as a top money center bank. Total assets of the
Corporation declined by 8.5 percent from $46.9 billion in 1981 to $42.9 billion in 1982.
Stock prices fell from $36.90 per share to as low as $15 per share. Sources of funds
declined in all major categories except other borrowing, foreign deposits, and long-term
debt, which increased from the previous year by $1 billion, $800 million, and $400 million,
respectively. The greatest decline in source of funds was in domestic demand and time
deposits which decreased by $634 million and $1.6 billion, respectively, from 1981.




39

Severe market resistance curtailed the issuance of domestic CDs and commercial
paper to such a degree that the Bank was able to rollover only about 60 percent of its
commercial paper. When sizeable amounts of term money were obtained, the Bank had to
pay substantial premiums. By September 1982, the Bank's primary incremental funding
sources were overnight Eurodollars and brokered Federal funds.
Total stockholders1 equity declined by $797,000 at year-end 1982, over year-end
1981. As a result of reduced 1982 earnings and maintenance of the $0.50 a share
quarterly dividend, stockholders received 94.3* percent of income before security
transactions as dividends in 1982 compared with 28.88 percent in 1981. Retained earnings
were down by $627,000 from 1981fs total.
Earnings
Net interest and other operating income was a record $1.2 billion before provision
for credit losses. But net income was the lowest in 5 years, primarily due to a sharply
increased provision for loan losses of $492 million, compared to $120 million the year
before. Both the earnings decline and the increased provision reflected a steep rise in
problem credits.
Income before security transactions totaled $84.3 million, down
substantially from $260.3 million in 1981. Net income for the year was $77.8 million,
down from $254.6 million a year earlier. Net interest income accounted for 73.5 percent
of total operating revenues before provisions for credit losses, compared with 71.4
percent a year earlier.
Assets

Average total loans increased from 1981 levels in 8 of the first 9 months of 1982 but
declined in 2 of the final 3 months for a 15.8 percent overall increase over 1981.
Commercial and industrial loans averaged $13.7 billion in 1982 and remained the largest
domestic loan category, increasing by 28 percent in 1982. Mortgage and real estate loans
rose 9.6 percent, compared with 12.9 percent growth in 1981, while loans to financial
institutions were up 11.6 percent in 1982. Average interest earning assets, reflecting
higher loan and lease receivable balances, were up 15.8 percent to $33 billion.
Nonperf orming Loans and Losses
At the close of 1982, nonperf orming loans totaled $1.9 billion or 5.6 percent of total
loans and leases receivables, up substantially from $653 million or 1.9 percent of 1981 loan
and lease receivables. The provision for loan losses totaled $492 million, which included a
$220 million increase in the provision for loan losses during the second quarter due to
problem credits as a result of Penn Square loans. Net credit losses were $393.2 million,
up substantially from $71.1 million in 1981. Net losses of $191 million on participations
purchased from the Penn Square Bank were a major factor in the increase.
1983
INDUSTRY AND ECONOMIC CONDITIONS
The economy in the aggregate proved strong but banks experienced fewer demands
for business loans, which in the past had been among the highest yielding assets in banks1




40

portfolios. Credit problems intensified in energy and energy related businesses as the
recession lingered in that area. Housing and consumer spending provided the main thrust
for the economy. Business spending for autos, trucks, and high technology goods
accelerated, but investment in structures and heavy machinery remained weak. Federal
government spending was stimulative, but part of this effect was offset by declines in
state and local government spending. Exports remained weak and the trade deficit
ballooned as imports responded to rising domestic demand.
BUSINESS SERVICES
The Corporation continued to experience losses especially in the oil and gas area
which accounted for a high percentage of problem loans. Between nonperforming loans
and loss provisions, the Bank was carrying close to $590 million pretax drag on earnings.
Although funding had reasosnably stabilized, resistance to the Bank was still apparent,
especially in the domestic markets. Reduced premiums oh term funds and asset
reductions allowed overnight funds to decrease by about $4.6 billion. A shift to offshore
funding began in mid-1982, and in mid-1983 over one-half of term funds were obtained in
the Euromarkets.
SUBSIDIARY ACTIVITY
Subsidiaries of the Corporation, excluding the Bank, represented 5 percent of total
consolidated assets at December 31, 1983, down slightly from 5.1 percent a year earlier.
For the year the subsidiaries contributed $33 million to net income, compared with $43
million for 1982. No new acquisitions were reported by the Corporation.
MANAGEMENT
The Board and management responded to serious credit problems uncovered in 1982
by conducting an in-depth management review of operations. As a result, management
made major changes in lending policies and restructured senior management to better
define lines of authority and responsibility and provide for orderly management
succession. The "corporate office"9 concept was dissolved, with most department heads
reporting to the Chairman. In August, the Board elected Executive Vice Presidents Taylor
and Bottum to the Board. Mr. Taylor became Vice Chairman and retained his position as
head of Bond and Treasury Services, with Mr. Bottum shifting duties to become the head
of General Banking Services.
In November, the Bank realigned the investment
responsibilities and restructured the credit review function.
A Credit Evaluation
Department was created to replace the old rating committee.
FINANCES
The Corporation turned its attention to overcoming the problem of large amounts of
nonperforming loans causing depressed earnings far below that experienced during the
past few years. During 1983, the Corporation continued to pay a premium for certain of
its liabilities. Funding sources were shifted substantially to offshore markets. Foreign
deposits accounted for 38 percent of the Bank's funds, followed by 16 percent from time
deposits, and 16 percent from purchased federal funds. Subsequent to year-end 1983, one
of the major rating agencies reduced the Corporation's rating on nonredeemable preferred
stock and further reduced its rating of the Corporation's long-term debt.




*1

Earnings
Earnings continued to be depressed because of heavy loan loss provisions, income
reductions due to nonperforming assets, and increased funding costs. In addition, interest
expense continued to be higher than normal due to funding premiums of 25 to 50 basis
points paid on a portion of the Bank's liabilities.
Net income was $108.3 million in 1983, $30 million
one-third of 1981 net income. The return on average
percent, compared with 0.17 percent in 1982 and 0.57
income on a taxable equivalent basis declined 8.* percent
from 1981.

greater than 1982 but only about
total assets for 1983 was 0.26
percent in 1981. Net interest
from 1982 but increased slightly

Assets
Earning assets averaged $36.1 billion in 1983 reflecting a decline of $4.1 billion or 9
percent from 1982. Of the total earning assets, $23.4 billion was domestic and the
balance, $12.7 billion, foreign. Domestic and foreign loans made up $30.8 billion of total
earning assets and of these loans $20.5 billion was domestic and $10.3 billion was foreign.
Nonperforming Loans and Losses
Loan quality continued to decline as more loans entered the nonperforming
category. Nonperforming loans totaled $1.9 billion, or 6.2 percent, of total loans and
lease receivables. This compared with 1.9 percent at year-end 1981. Nonperforming loans
included $456 million in participations purchased from Penn Square, down from $595
million at year-end 1982. Loans purchased from Penn Square in the amount of $135
million were written off during the year. The provision for credit losses was $382.5
million or 1.21 percent of total loans compared with 1.11 percent at the end of 1982. Net
loan losses for the year totaled $386.5 million compared with $393.2 million in 1982 and
$71.1 million in 1981.
1984
INDUSTRY ECONOMIC OUTLOOK
Continuing economic expansion set the stage for improved banking industry
performance in 1984. The cash flow of corporations was much improved over earlier
periods and business borrowing from banks was increasing because of low current
inventory levels. Corporations did some restocking, a process normally financed with
bank borrowings. Rising levels of industry capacity utilization and the expressed intention
of corporate executives to boost capital spending indicated an increasing demand for
funds.
Foreign loans increased in 1984, but banks shifted their emphasis from foreign to
domestic consumers. The rate of growth in consumer lending, in the form of personal
loans and mortgages, was expected to surpass all other lending categories in 1984,
according to Standard and Poorfs. Personal income was up, unemployment down,
consumer confidence high, and the demand for durables and housing brisk.




42

BUSINESS SERVICES
Beginning in May 1984, the Bank experienced a serious liquidity crisis resulting from
the loss of a major portion of its funding base domestically and abroad. Major providers
of overnight and term funds failed to renew their holdings and the Bank was forced to
prepay time deposits in the Eurodollar and domestic markets and to arrange for the
replacement of CD's in the domestic market. Because no other adequate funding sources
were available, the Bank resorted to Federal Reserve Bank borrowings which rose to an
average daily level of $2.6 billion.
SUBSIDIARY ACTIVITY
During March 1984, the Bank sold its charge card operations, and during July 1984
the Corporation sold Continental Illinois Limited, its London-based merchant bank. The
Corporation announced plans to sell its leasing company and real estate mortgage
company.
MANAGEMENT
In early 1984, Chairman Anderson was replaced by David Taylor. Edward S. Bottum
was made President. In August, Messrs. Taylor and Bottum were replaced by John E.
Swearingen (Chairman of the Board of Directors and Chief Executive Officer of the
Corporation) and William S. Ogden (Chairman of the Board of Directors and Chief
Executive Officer of the Bank).
FINANCES
The Corporation's financial position eroded rapidly in early 1984, resulting primarily
from a run-off of deposits and other funding sources starting in May 1984. Business was
sluggish because of sharply narrowed margins and the effects of a large amount of Latin
American loans classified as nonperforming. At June 30, 1984, interest bearing deposits
totaled $14.5 billion, down from $24.9 billion at December 31, 1983.
Earnings
Earnings were offset by lower net interest income, reflecting the impact of interest
earnings reversals from nonperforming credits and increases in the general level of
interest rates which raised the cost of funding and narrowed margins. Higher other
operating income during the quarter more than offset the declines in net interest income.
Net income was $29 million for the first quarter; however, it was dependent upon a
nonrecurring revenue item totaling $188 million from the sale of the Bank's credit card
operations. The Corporation would have experienced a pretax loss of $140 million without
the nonrecurring income. The second quarter net loss was $1.2 billion. Net interest
income on a taxable equivalent basis was $166 million for the first quarter of 1984, down
from $241.5 million in the prior year's quarter. The net interest margin was 1.83 percent,
compared with 2.63 percent during the same period last year.




43

Assets
Earning assets averaged $34.5 billion during the second quarter — $21.9 billion
domestic and $12.6 billion foreign — down from $36.6 billion a year earlier. A significant
portion of this decline was in reduced domestic loan volume including the sale of the
charge card portfolio. At period end, earning assets totaled $32.3 billion, including loan
balances of $29.6 billion.
Nonperforming Loans and Losses
Nonperforming loans and lease financing receivables amounted to $2.7 billion at
June 30, 1984 and represented 9.2 percent of the loan and lease portfolio. Loans and lease
financing receivables to borrowers in the oil and gas industry totaled approximately $4.7
billion of which $1.1 billion were nonperforming. The provision for credit losses was $705
million. Net credit losses totaled $748 million.




44

FOOTNOTES

1

Participants include 28 major American banks.

2

Certain subsidiaries of Continental Illinois National Bank and Trust Company
of Chicago and certain subsidiaries of Continental Illinois Corporation are omitted
because such subsidiaries, considered in the aggregate, would not constitute a
significant subsidiary.

3

Except for directors 1 qualifying shares.

*

A multinational business is one that serves customers in the U.S. and other
countries.

5

U.S. banks that provide service to other domestic banks.

6

A Federal statute which authorizes national banks to form subsidiary corporations
for development of overseas business.

7

These countries are Argentina, Australia, Austria, Belgium, Brazil, Canada, the
Cayman Islands, Colombia, Ecuador, France, Indonesia, Iran, Jamaica, Japan,
Lebanon, Luxembourg, Malaysia, Morocco, Pakistan, Peru, the Philippines,
Singapore, Spain, Switzerland, Taiwan, Thailand, and the United Kingdom.

8

100 basis points equals 1 percent.

9

The corporate office included the Chairman, Vice Chairman, and the President. The
concept provided for most department heads to report to the corporate office rather
than to specific individuals.




45