Originally published in American Banker on July 7, 1982.
In a move that has occurred only twice before in the 50-year history of the Federal Deposit Insurance Corp., the deposit insurance agency Monday formed the Deposit Insurance National Bank, this time to assume the deposits of the failed $460 million-deposit Penn Square Bank NA here.
The new institution opened at 9 a.m. Tuesday to begin paying off insured depositors and will remain open until that is accomplished.
Penn Square, which had about 80% of its own portfolio in energy loans and which had sold more than $2 billion in participations to several large banks, was declared insolvent at 7:05 p.m. Monday by Comptroller of the Currency C.T. Conover, who named the FDIC receiver.
It thus becomes the largest payout in the history of the FDIC and the fourth largest U.S. commercial bank failure in history. It was the 16th commercial bank failure this year.
At a 7:30 a.m. press conference on Tuesday called by the FDIC to reassure depositors, William M. Isaac, chairman of the FDIC, said that because of the "large volume of known and unknown potential claims against the bank," the regulators did not attempt to arrange a merger with a stronger institution, which is usually the preferred measure when a bank fails.
These potential claims, he said, include letters of credit, loan participations held by correspondent banks, and other commitments.
Rapid Growth Cited
In a prepared statement, Mr. Conover said "the bank began to experience serious problems after rapid growth resulted in deteriorating asset quality. The bank was the originator and servicer of a significant number of loans for energy-related purposes.
Losses centered on these energy-related loans and together with funding difficulties resulted in the bank's insolvency."
The bank grew from approximately $30 million in assets at the end of 1975 to the $525 million level when the bank closed for the last time.
Mr. Isaac said there were about $270 million in insured deposits and anouther $190 million in uninsured deposits. The number of deposit accounts is about 28,000.
Under the liquidation arrangement, which will be carried out by the FDIC, customers with deposits in excess of the $100,000 insurance limit will have their deposits up to this limit transferred to Deposit Insurance National Bank, with the excess representing a claim against the Penn Square receivership.
These deposits will be given a "receiver certificate," equivalent to the insured portion of their deposits. These claims will be afforded general creditor status, sharing with the FDIC and other general creditors on a pro rata basis the proceeds from the liquidation of Penn Square's assets by the FDIC.
The FDIC said, "it is not possible to forecast the ultimate recovery on the receiver certificate." The agency said, however, that federal bank regulators will permit institutions under their jurisdiction "to carry any of the receiver certificates at not more than 80% of face value." That percentage, they added, could be changed from time to time based upon periodic reviews of the value of the assets in receivership.
Mr. Isaac said liquidations are a fairly lengthy process, usually taking 10 years, but claims on uninsured deposits "will be paid out periodically."
By statute, the new bank created by the FDIC must complete its task in 18 months, although the FDIC official expressed the hope this will be accomplished in perhaps 90 days. He said the bank will remain open as long as necessary and even 24 hours a day if the demand for payment is there.
No bank was asked to bid for Penn Square Bank. When asked if the bank's investors were prepared to consider a capital infusion, as American Banker had learned last week, Mr. Isaac said, "we didn't approach anyone, and no one approached us."
Mr. Isaac said the three-day holiday weekend was spent "dealing with the possibility of a merger." But by Monday evening, he said, it became clear that it would not be "appropriate to ask another bank."
The regulator said he had been informed last Wednesday morning by the Comptroller of the Currency that the bank might fail, and FDIC examiners were dispatched to Oklahoma City shortly thereafter.
What started out as a small FDIC task force gradually grew to a team of 60 examiners.
The national bank examiners have been reviewing Penn Square Bank for almost three months in what presumably started out as "a routine examination."
According to Mr. Isaac, loan chargeoffs of between $40 million to $50 million were ordered by the examiners, wiping out the bank's capital of approximately $40 million.
He said that the decision to shut the bank down was "a tame judgment" and that "several reviews were made."
The bank's funding difficulties, he said, accelerated Friday and Saturday as a result of press reports that the FDIC was on the scene and that the bank's failure might be forthcoming. However, American Banker has learned that these liquidity problems may have begun much earlier when Continental Illinois National Bank & Trust Co. of Chicago and possibly Seattle-First National Bank, Chase Manhattan Bank NA, and
Northern Trust Co. of Chicago stopped funding on existing lines of credit to Penn Square customers. This reportedly prompted several large commercial customers to move their balances elsewhere, perhaps even to the larger correspondents themselves.
Chairman Sought to Assure Depositors
As late as Friday, when long lines of depositors began appearing at Penn Square Bank, Bill P. Jennings, Penn Square chairman, went on local radio to assure the public that Penn Square would be open for business as usual Saturday and Tuesday.
He told a business reporter for the Daily Oklahoman late Friday night that the bank will be open "with its deposits fully insured by the FDIC just like all other banks. We are open for business despite the rumors that have been rampant. It's not all that tough here."
Mr. Jennings said the number of people that withdrew funds Friday was not "excessively large. Friday is always a heavy day, and on a Friday before a holiday, we expect to have activity.
"We expect," he continued, "an active Saturday, just as any Saturday is active at Penn Square Bank. FDIC examiners are not on the scene and are not expected here Saturday. A routine examination by national bank examiners is continuing."
Then he said, "I'm sure the banking system is concerned about Penn Square because we serve such a large segment of industry. We have problem loans like everyone else. We are an integral part of the oil business, and oil is integral to Oklahoma."
On Sunday, it became evident that the usually ebullient Mr. Jennings was not so optimistic. Reached on Sunday at noon, he said "I can't talk now," when asked if the bank would open for business on Tuesday.
Lower Rebates
At present, the FDIC's insurance fund amounts to $12.25 billion; with the Penn Square failure and the closings of a number of large savings banks earlier this year, it is likely that banks will receive lower rebates of their insurance premiums from the agency than they have in the past.
In Washington, Rep. Fernand J. St Germain, the Rhode Island Democrat who is chairman of the House Banking, Finance and Urban Affairs Committee, said he has asked his staff to begin a review of the Penn Square situation. That staff review will involve staffers on both the full banking committee and those on the subcommittee on financial institutions supervision, regulation and insurance. Mr. St Germain is also chairman of the subcommittee.
He said, "any decision on whether to launch a formal investigation will depend on the facts and significance of the banking issues developed in the preliminary review."
In the aftermath of the Penn Square bankruptcy, bankers and other observers here were raising questions about the credit criteria used by the upstream banks.
Other concerns are being expressed about the effect of the failure on the 30 or so country banks that may hold $125 million or more in downstream participations.
And there are fears that the Penn Square's demise, which arose out of ill-conceived loans to inexperienced oil and gas operators, may now topple other customers who may not be able to get credit to fund their own activities.
Other Similar Takeovers
The two previous occasions when the FDIC formed a bank to pay off depositors of a failed bank involved Sharpstown State Bank of Houston and Des Plaines Bank of Illinois.
Sharpstown failed in January 1971, and Des Plaines failed last March.
Running the Deposit Insurance National Bank of Oklahoma City will be Michael Newton, a career FDIC employee, and James T. Hudson, who is in charge of receivership at the FDIC.
