Continental Bank: Still Jockeying For Position

When the Federal Deposit Insurance Corp. sold its last 14 million shares in Continental Bank Corp. a couple of months back, bank Chairman Thomas C. Theobald celebrated by handing out hot dogs to employees during a lunch-hour party on Chicago's LaSalle Street. Theobald and other executives also passed out baseball caps marking the final chapter of the then-near-bankrupt bank's infamous 1984 takeover by the feds. "There is nothing over our heads any more," read the slogan on the hats. "The FDIC is gone. June, 1991."

Nothing, that is, except for a host of questions about Theobald's lackluster strategy. By most performance measures, Continental's progress has been middling at best. And on Aug. 30, Continental announced a $150 million provision for loan losses and a $25 million restructuring charge. Its stock is trading around $11, down 30% from a 52-week high of $16.

No one can accuse the hard-driving former Citibank executive of sitting on his hands since he took over Continental in 1987. An architecture buff, he has done more rehabbing and reconfiguring than most bank chairmen do in a whole career. But as Norman Jaffe, a bank analyst with Fox-Pitt Kelton Inc. in New York, puts it: "They've had a very uneven strategy."

WEAK PERFORMANCE. Theobald offers no excuses: "I don't apologize to anyone for the restructuring we've done around here." Among other moves, he has jettisoned a retail network assembled just two years before he arrived; staffed up and then shrank an overseas capital-markets operation; got rid of a money-losing stock options operation; inaugurated a mergers-and-acquisitions unit; exited a commodity trading and clearing business; and most recently, resigned as a primary dealer in Treasury securities. Theobald's basic goal is to provide loans and sophisticated services such as investment banking and risk management to a narrow tier of 2,000 small and midsize companies.

Theobald's restructuring, though, doesn't seem to be paying off on the bottom line. Continental's core corporate business grew only 5% in the year's first half when onetime factors are eliminated, says Charles D. Rauch, an analyst with Standard & Poor's Securities Inc. The bank's average return on equity hasn't reached Theobald's goal of 15% since 1988 and is expected to be below 10% at least through 1992, according to Jaffe. Margins last year were only 12%, far below Theobald's target of 30%, and are expected to fall further in 1991.

Lately, Theobald has turned his attention to shoring up capital. He recently cut the dividend 40% and sold $145 million in subordinated debt. But total capital is only 8.6% of assets, well below the 10.37% rate for other large banks. And while Theobald gets kudos for slashing Continental's head count by 45% and boosting revenues per employee by 72%, such cost-cutting has done little to allay concerns about his focus on the corporate middle market, which is intensely competitive. Rivals First Chicago, Northern Trust, and NBD Bancorp are better established. Bert Ely, an Alexandria (Va.) banking consultant, says Continental's "strategy is just coming into place at a time when we have a severe overcapacity problem."

FINANCE WIZARDRY. Competitors have capitalized on confusion in the marketplace about the bank's goals as well as demoralization among employees following years of continual change. "It's tough for them to keep their morale up when they're going through that kind of restructuring," says Kevin F. Walsh, executive vice-president of NBD Illinois. "We try to take full advantage of any signs of weakness like that. We go for the throat."

Continental has invested heavily to offer such services as interest-rate swaps to clients, but that hasn't given the bank much of a competitive edge. Blockbuster Entertainment Corp. is an example. The video-rental company, based in Fort Lauderdale, Fla., fits Continental's customer profile: entrepreneurial, fast-growing, with multiple corporate finance needs. But despite Continental's efforts to outfit the company with the latest high-finance wizardry, Blockbuster has stuck to standard-issue notes offerings and revolving lines of credit. "They've been innovative," explains Steven R. Berrard, Blockbuster's chief financial officer. "We just haven't needed it."

Theobald, however, insists he is making headway in the corporate market with a new campaign of loan packages. "So damn many people have stepped back because the profit margins have grown too thin," he says. "Pricing of corporate credit has jumped significantly."

Tending to existing loans has also kept Theobald busy. While he has shed much of the mammoth portfolio of bad loans he inherited, plenty of sick credits remain. Some 18.7% of Continental's loans are considered risky, compared with a 14.9% average for 35 large banks studied by the Chicago Corp. brokerage firm. Highly leveraged transactions amount to nearly 8% of Continental's assets, more than double the average for its peer banks. There is also concern about $500 million in loans to residential developers, primarily in California. Continental says it is comfortable with these longtime customers, even though West Coast home prices are falling.

Some competitors see Theobald's restructuring as a strategy to clean up the bank in order to attract an acquirer. The most likely candidate, say rivals, would be a foreign bank looking for a Midwest toehold. But Theobald insists he wants Continental to remain independent. In fact, he says that he has expansion plans of his own, including buying up smaller competitors. In the view of analysts who follow Continental, however, the last thing the bank needs now is another flurry of corporate maneuvers.

— With assistance by Suzanne Woolley

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