CHAPTER 3
Penn Square Bank, N.A.
Name of Institution:Penn Square Bank, N.A.
Headquarters Location:Oklahoma City, Oklahoma
Date of Resolution:July 5, 1982
Resolution Method:Deposit Payoff/Deposit Insurance National Bank
Introduction
The failure of Penn Square Bank, N.A. (Penn Square), Oklahoma City, Oklahoma, still ranks as one of the Federal Deposit Insurance Corporation’s (FDIC’s) most publicized, most difficult, and most colorful bank resolutions. Penn Square failed July 5, 1982, with $470.4 million in deposits and $516.8 million in asts. By aggressively making large and speculative loans, especially to the oil and gas industries, the bank had grown from $62 million in asts in 1977 to $520 million in asts by mid-1982.1 Penn Square then sold majority interests in tho loans to other banks (in the form of loan participations), but
retained the responsibility for rvicing the entire loan amount.2 At its failure, Penn Square was rvicing approximately $2 billion in loans.
Of the $470.4 million in deposits, only about $207.5 million were insured. The bulk of uninsured deposits were funds of other banks. After extensive discussions with the Office of the Comptroller of the Currency (OCC) and the Federal Rerve Bank (Federal Rerve), the FDIC made the decision to pay off the insured deposits of Penn Square. A payoff was deemed to be necessary to resolve the failing institution at the least cost to the deposit insurance fund. As a result, Penn Square became the largest bank failure in the FDIC’s history in which uninsured depositors suffered loss.
1. Irvine H. Sprague, Bailout (New York: Basic Books, 1986), 11
2.
2. “A loan participation is a sharing or lling of ownership interests in a loan between two or more financial institutions. Normally, a lead bank originates the loan and lls ownership interests to one or more participating banks at the time the loan is clod. The lead bank (originating bank) normally retains a partial interest in the loan, holds all loan documentation in its own name, rvices the loan, and deals directly with the customer for the benefit of all participants. Properly structured, loan partici
pations allow lling banks to accommodate large loan requests which would otherwi exceed lending limits, diversify risk, and improve liquidity or obtain additional lendable funds.” FDIC, Division of Supervision, Manual of Examination Policies (1995), 27.
528MANAGING THE CRISIS
Background
Penn Square, formed in 1960, operated as a small, one-office retail bank with a pa-
rate drive-up facility in an Oklahoma City shopping mall. In 1975, Bill Jennings, a
former president of Penn Square, created a holding company to purcha the bank
with $2.5 million borrowed from another Oklahoma City bank and little equity. The
following year, Penn Square formed a loan department for oil and gas loans. From the
beginning, the bank failed to document loans properly. In addition, it bad repayment
on collateral value rather than on the ability of the borrower to repay, and collateral
documentation deficiencies were common.
Moreover, although the OCC t lending limits on the amount of credit that could be extended to any one customer, when one of Penn Square’s oil and gas customers
wanted to borrow more than that limit, Penn Square would make the loan and ll a
participation to another bank. In 1978, Penn Square began lling oil and gas participa-
tions to Continental Illinois National Bank and T rust Company (Continental),
Chicago, Illinois. In 1979, when the Shah of Iran was forced out of his country and fears
of oil shortages created panic buying and a surge in oil and gasoline prices, Penn Square
began lling participations in oil and gas loans to other large banks in the country,
primarily Seattle First National Bank (Seafirst), Seattle, Washington; Northern T rust
Company (Northern), Chicago, Illinois; Cha Manhattan Bank (Cha), New York,
New York; and Michigan National Bank (Michigan National), Lansing, Michigan.
As early as May 1977, the OCC examination of Penn Square noted concentrations of credit to oil and gas companies.3 Subquent OCC examinations in April 1980 and
March 1981 found low capital, excessive low-quality loans, inadequate liquidity, inexpe-
rienced staff, increasing problem loans, and management problems. Penn Square offi-
cials signed an OCC agreement in June 1980 pledging improved lending practices and
the maintenance of 7.5 percent capital, but no changes in lending practices were notice-
able. Penn Square’s external auditors became concerned with the level of loan rerves
and gave the bank qualified opinions in December 1977 and March 1981.4,5
In 1981, the Southwest saw a huge increa in commercial loans, particularly in the oil and agricultural industries. In April 1981, oil prices peaked at $36.95 a barrel and
不苟言笑的意思then began to fall. Recessions in oil-consuming nations, conrvation efforts, and the
3. “Generally a concentration is a significantly large volume of economically related asts that an in
stitution has
成交方式advanced or committed to one person, entity or affiliated group. The asts may in the aggregate prent a sub-
stantial risk to the safety and soundness of the institution.” FDIC, Division of Supervision, Manual of Examination
Policies (1995), 46.
4. On December 19, 1977, Arthur Young and Company wrote: “Due to the lack of evidential data relating to当心中毒
certain real estate and commercial loans, we were unable to satisfy ourlves as to the adequacy of the rerve for
loan loss.” See Phillip L. Zweig, Belly Up (New York: Crown, 1985), 61.
5. On March 13, 1981, Arthur Young and Company wrote, “We were unable to satisfy ourlves as to the
adequacy of the rerve for possible loan loss at December 31 [1980] due to the lack of supporting documentation
of collateral on loans.” Zweig, Belly Up, 174.
CASE STUDIES: PENN S QUARE BANK, N.A.529 sale of oil by some Organization of Petroleum Exporting Countries (OPEC) members in
excess of their quotas all combined to reduce oil prices in world markets.6 The demand for
oil rigs reached its peak in the Southwest.7 As oil prices continued to decline during
1982, profits for the oil industry in the Southwest slowed.
The Federal Rerve maintained tight monetary policies, and interest rates remained
high; therefore, Penn Square paid higher interest rates on deposits, particularly on large certificates of deposit (CDs).
In early 1982, in respon to the decline in oil prices, Penn Square’s participant
banks began pressing Penn Square to clean up the loan participations. Penn Square had
sold loan participations to 53 different participant banks; Continental alone held $1
billion of tho participations. Although Cha, Seafirst, and Northern stopped buying participations, Penn Square’s new external audit firm prented the bank with a clean
audit opinion in March 1982.8 Interest rates remained high; the Federal Rerve
discount rate was 12 percent in January 1982.
In May 1982, rumors of problems at Penn Square began circulating, which caud a
deposit runoff that forced the bank to rely increasingly on brokered funds.9 Brokered
funds at the bank, which in January had been about $20 million, reached $150 million
by May 1982.
As a result of its April 1982 examination, the OCC requested Penn Square to rai
capital by $7 million. The OCC also demanded that Penn Square charge off $10
million in loans. By June 28, 1982, it was apparent that Penn Square would fail. All that
was left to decide was how to handle the failure.
The Resolution
On July 1, 1982, at a joint meeting in Dallas, the OCC and the Federal Rerve argued
that Penn Square should be sold through a purcha and assumption (P&A) transaction
or given open bank assistance (OBA), while the FDIC argued for a payoff. The FDIC,
the Federal Rerve, and the OCC then began meeting in Washington to discuss resolution possibilities.
Neither the Federal Rerve nor the OCC wanted to e Penn Square paid off. In
the two decades before the 1980s, most failing banks were resolved through P&As that
6. Jack L. Hervey, “The 1973 Oil Crisis: One Generation and Counting,” Chicago Fed Letter, no. 86 (October
1994), 1.
7.Energy Information Administration, Annual Energy Review 1988; Gerald H. Anderson, “The Decline in U.S.
Agricultural Exports,” Economic Commentary (Feb. 15, 1987), 1.
8. Zweig, Belly Up, 304.
9. Brokered deposits are large deposits placed by deposit brokers on behalf of their customers. Becau of their
size, brokered deposits typically earn higher interest rates, from which the broker deducts a fee before passing the
interest to the customers.
爱就在身边530MANAGING THE CRISIS
Table II.3-1
The Last Twelve Bank Payoffs Before Penn Square
($ in Thousands)
Bank Name and Location Total Deposits Date
Watkins Banking Company, Faunsdale, Alabama$1,66007/24/78
Village Bank, Pueblo West, Colorado5,05901/26/79
Bank of Enville, Enville, Tenne3,46806/16/79
正中水镇
The Farmers State Bank, Protection, Kansas5,03809/21/79
Bank of Lake Helen, Lake Helen, Florida4,22901/11/80
First National Bank of Carrington, Carrington, North Dakota11,46102/12/80
The Citizens State Bank, Viola, Kansas1,87206/04/80
The Des Plaines Bank, Des Plaines, Illinois46,26903/14/81
Southwestern Bank, Tucson, Arizona4,74909/25/81
The Bank of Woodson, Woodson, Texas3,16803/01/82
Carroll County Bank, Huntingdon, Tenne8,23604/30/82
Citizens Bank, Tillar, Arkansas6,72306/23/82
Source: FDIC, Historical Statistics on Banking: A Statistical History of the United States Banking Industry, 1934–
1992 (Washington, D.C.: Federal Deposit Insurance Corporation, 1993), 615-618.
巧克力城堡pasd all deposits to the acquiring institution. Past experience suggested that depositors
with uninsured funds and others (for example, general creditors) with uninsured
liabilities were reasonably certain of being paid. From 1980 until Penn Square failed on
July 5, 1982, the FDIC had paid off (protected only insured deposits) only 8 of 38 failed
banks. (See table II.3-1.)
仙人掌的描写
Before Penn Square’s failure, the FDIC had taken action on veral large institutions by fully protecting all depositors in P&A transactions or by providing OBA to keep the
institutions open. For example, the FDIC protected all depositors, including the unin-
sured, when the Franklin National Bank, New York, New York, was declared insolvent
by the OCC and clod on October 8, 1974. With $1.4 billion in asts, Franklin
National Bank was the largest bank failure in American history at that time. On April
28, 1980, the FDIC, the Federal Rerve, and the OCC jointly announced a $500
million OBA package to assure the viability and continued strength of the $8 billion
First Pennsylvania Bank, N.A. (First Penn), in Philadelphia.10 From November 1981
through October 1982, FDIC provided assistance to accomplish the mergers (and
prevent the failures) of 11 mutual savings banks that had total asts of $14.7 billion and
CASE STUDIES: PENN S QUARE BANK, N.A.531 total deposits of $12.1 billion. The largest of tho banks was the New York Bank for Sav-
ings, New York City; it had total asts of $3.4 billion and total deposits of $2.8 billion.11 Some government officials were concerned that a payoff of only the insured deposits
at Penn Square would have rious adver effects on the stability of the banking system.
Penn Square had about $470.4 million in deposits, of which only about $207.5 million合卺酒
were insured in 24,538 accounts. Among the depositors were 29 commercial banks, 44
savings and loan associations, and 221 credit unions.12
During the interagency meetings, the Federal Rerve, the OCC, and the FDIC discusd the various resolution alternatives. Although they discusd OBA, the FDIC
would have had to determine Penn Square “esntial” to its community; but with 36
other banks in Oklahoma City, the FDIC could not make that determination.13
Arranging a P&A transaction for the failed bank would have been difficult under
any circumstance becau Oklahoma laws did not permit bank branching, and few com-
panies would have been able to bid on the institution. In the ca of Penn Square, a
clod bank P&A transaction might have resulted in the FDIC’s assumption of a large
volume of contingent liabilities; the total amount was unknown but was believed to
exceed the $2.1 billion in loan participations sold. Becau of the heavy volume of participations and questions about the accuracy of information furnished to loan purchars, the FDIC anticipated a substantial volume of lawsuits. If the suits were successful, the cost to the FDIC of a P&A transaction ultimately would have been substantially higher than the cost of a payoff.
The FDIC’s concerns over contingent liabilities were bad on what is known as
“the First Empire decision.”14 When the United States National Bank, San Diego, Cali-
fornia, failed in 1973, the FDIC had attempted to structure a P&A transaction so that
certain contingent liabilities involving standby letters of credit, which had been issued to guarantee obligations of companies related to the bank’s controlling stockholder, would
not be assumed by either the FDIC in its corporate capacity or by the assuming bank. Instead, the FDIC left tho contingent claims in the receivership. The practical effect
was that the depositors and general creditors were paid in full through the P&A transac-
tion, and the contingent claimants were left with less than full recovery. First Empire
Bank, New York, New York, the beneficiary of the standby letters of credit, sued the
FDIC over that issue and won. The Ninth Circuit Court held that arranging for the
10. For further informaiton, e Chapter 2, First Pennsylvania Bank, N.A.
11. FDIC, Historical Statistics on Banking: A Statistical History of the United States Banking Industry, 1934-1992 (Washington, D.C.: Federal Deposit Insurance Corporation, 1993), 619.
12. Sprague, Bailout, 133.
13. In ction 13(c) of the Federal Deposit Insurance Act (FDI Act) of 1950, Congress granted the FDIC authority
to provide assistance to an open bank, “when in the opinion of the Board of Directors the continued operation of
such bank is esntial to provide adequate banking rvice in the community.” FDIC, Federal Deposit Insurance Corporation: The First Fifty Years (Washington, D.C.: Federal Deposit Insurance Corporation, 1984), 94.
14.First Empire Bank v. FDIC, 572 F. 2d 1361 (9th Cir. 1978), cert. denied, 439 U.S. 919 (1978).
