American Banker
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    This year marks American Banker's 175th anniversary. To commemorate the milestone, we've dug into our archives to bring readers highlights from our coverage of pivotal moments in U.S. banking history. In addition to this series, look for our special 175th anniversary edition this fall.

    Family Trees of the Megabanks


    Penn Square Failure Hits Banks Hard

    By Phillip Zweig

    JULY 7, OKLAHOMA CITY — 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."

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