Originally published in American Banker on July 8, 1982

Bankers here were by no means shocked by the collapse Monday of the $460 million-deposit Penn Square Bank NA. But they were a bit surprised that things were so bad that an outright liquidation was required.

There had been rumblings for months, even years, about doubtful management and lending practices at the institution which was declared insolvent because of losses on its energy-related loans and funding difficulties. However, prior to its demise, veteran lenders here had been reluctant to talk openly about Penn Square, fearing they would be accused of bad-mouthing a competitor, spreading rumors, or just sour grapes.

They are now becoming more talkative, and the specifics of these practices are beginning to emerge. The facts make the rumors pale in comparison, according to many local banking sources.

The upstream correspondent banks that bought more than $2 billion in oil and gas participations were not much more careful than Penn Square itself in the way they looked at these credits, these sources say.

They contend there was a "good-old-boy" camaraderie between Penn Square and its correspondents and that often loans were sold based on little more than good faith.

One sources says the upstream correspondent banks, two of which have already announced losses for the second quarter, "would have been all right if they had just followed their own rules."

In contrast, small banks apparently exercised more caution in their dealings with Penn Square than the money-center banks, sources say..

Many of the 30 or so Oklahoma country banks which held $125 million or more in downstream Penn Square participations are said to have been especially tough in demanding payment on past-due loans. Just three weeks ago, for example, one small bank is said to have told Penn Square to pay up or buy out a $500,000 participation. Penn Square bought out.

Comptroller Criticized
Many bankers also criticize the Office of the Comptroller of the Currency for not having stopped those practices long ago.

Ed Miller, president of the Founders Bank here, only a mile or so from the Penn Square shopping center where the failed bank had its offices, says, "The Comptroller should have used his cease-and-desist powers a year ago." He says if Penn Square had been under the state banking commissioner, which works closely with the Federal Deposit Insurance Corp., the situation would not have gone this far.

Bankers here are also angry that the failure of Penn Square has been linked to a weakening of the energy industry. They believe that if Penn Square had followed sound banking practices, it would have survived despite softening oil and gas prices.

The failure, the 16th commercial bank closing this year, is the fourth largest in the history of the Federal Deposit Insurance Corp.

In general, the lending staff at Penn Square, which numbered fewer than 20, is said to have been young, inexperienced, untrained, and unquestioning of the bank's lending practices, according to sources. Few of these officers are said to have had more than five years of lending experience.

Bill G. Patterson, the bank's 35-year-old senior vice president for oil and gas lending who was suspended from his job last week, joined the bank in 1977 from the First National Bank of Oklahoma City, where he was a lower-level officer.

Many say that any official investigation of Penn Square's activities is likely to focus heavily on Mr. Patterson, as well as Bill P. Jennings, chairman.

Moreover, until the Comptroller of the Currency ordered Penn Square to implement basic systems, procedures, and policies following its examination a year ago, there were essentially none in place.

In addition, informed sources are citing questionable practices that are now coming to light, including:

  • Granting loan requests without loan agreements, collateral, or guarantees where called for. Often loans were extended without current financial statements or audits. Legal and technical shortcomings with regard to loan documentation, such as missing signatures, were more the rule than the exception.
  • Arriving at a loan value and then computing an oil or gas reserve estimate that justified the loan rather than computing the reserve estimate first. The bank's petroleum engineers did not participate in the lending decision, did not sit in on the loan committee, and typically never found out how much money was actually lent.

In addition, they say Chase Manhattan's Penn Square participations did not pass through the New York bank's respected oil and gas department but instead were purchased by a unit of its financial services industry group which supervised correspondent banking. That group, headed by Wayne Hansen, a senior vice president, was also responsible for the department involved in the Drysdale situation a little more than a month ago.Sources also say the bank's directors, most of whom are involved in Oklahoma's oil and gas activity, accepted unquestioningly Mr. Jenning's assurances that loan losses would not be extraordinarily severe. One director voiced the belief right up to the end that loan chargeoffs would be no more than $5 million. In fact, they were closer to $50 million, and the bank's capital of approximately $40 million was wiped out.

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