April 26 — They call it Continental Illinois' Oklahoma City loan production office. Its real name is Penn Square Bank NA, the principal subsidiary of Penn Square Corp. But judging from the pace at which the $400 million-asset institution sells oil and gas loans to its friends in Chicago, the distinction may be more nominal than real.
What was just six years ago a sleepy, $30 million-asset suburban retail bank is today a mammoth loan brokerage operation that is originating and participating out energy loans at a rate that gives some veteran energy lenders and correspondent bankers the shivers.
Here in oil and gas country, energy-related credits have for years constituted a large portion — as much as 30% or more — of the portfolios of most large banks. In contrast, 80% of Penn Square's portfolio is made up of these loans.
Lately, however, declining oil and gas prices, the surge in idle rigs, and the well-publicized cash flow squeeze of some large independent oil and gas producers have given rise to concern among some bankers and analysts that the bank may have bet too heavily on the energy business.
Having sold more than $2 billion in participations — almost seven times the $300 million in loans the bank now has on its own books — Penn Square may well have originated more loans relative to its own portfolio than any other bank in the nation. The volume of participations relative to loans varies considerably from bank to bank, but it is certainly unusual for outstanding participations to exceed net loans.
Energy lending and correspondent banking are so tightly knit at the bank that the five-man correspondent department is actually melded into the oil and gas division.
Of the $2 billion in participations, most have been sold upstream to four banks: Continental Illinois (which Penn Square says holds close to half of the total), Chase Manhattan, Seafirst, and Northern Trust. About $125 million (6%-7% of the total) have been sold to some 30 or so smaller correspondents, mainly loan-hungry Oklahoma country banks.
This volume of energy deals is particularly awesome when one considers that the energy loan portfolios of Manufacturers Hanover Trust and Chase Manhattan Bank at yearend 1981 were approximately $4 billion and $3.5 billion, respectively.
Object of Some Sharp Criticism
In recent months, the bank's huge volume of participations, rapid growth, highly aggressive lending practices, some acknowledged snafus in loan documentation, and a dramatic rise in chargeoffs in 1981 have made it the object of some sharp criticism in Oklahoma banking circles.
The bank's flamboyant 58-year-old chairman and largest stockholder, Bill P. Jennings, and a large coterie of admirers in the energy business attribute this criticism to jealousy over Penn Square's phenomenal growth and profitability. "When you've grown as fast as we have," says the feisty, white-haired banker, "people tend to shoot at you."
To be sure, merchant banking has so far paid off handsomely for Penn Square. In 1980, the bank earned $4.2 million on average assets of $358 million, a return of almost 2.1%, far above the average for its peer group. Return on average equity was a phenomenal 33%. These results reflect primarily an abundance of fee income as well as relatively low noninterest expenses.
But traditional lenders question whether the bank can sustain these results over the longer term, particularly if energy prices continue to deteriorate. Indeed, 1981 was a year of reckoning in which the operational and administrative strains of originating billions in loans took their toll. Acknowledges one director, "The bank has had to run to keep up."
