The aggressive drive for new business that proved costly to Chase Manhattan Bank in May has now tripped Chase and other major banks that tried to profit from loans to the once-lucrative oil and gas drilling industry.
Continental Illinois National, Seattle First, Chicago's Northern Trust and Chase, among others, apparently were blinded to the risks when they bought a total of $2 billion in loans from a small Oklahoma City bank that was closed Monday by the Comptroller of the Currency.
The loans, which were purchased by the banks over the last several years, looked good while the energy business was booming, but when oil prices turned down many of the small companies that had borrowed money originally through Penn Square National Bank could not pay.
Continental, the nation's sixth biggest bank and the largest commercial lender, had to write off so many loans it bought from Penn Square that it will report a loss estimated to be $60 million for the three months ended June 30. All told, Continental bought $1 billion worth of loans from Penn Square. Seattle First, which bought about $400 million, will also report a second-quarter loss.
Chase said that many of the $250 million in loans it bought from Penn Square are bad, but that its loan loss reserves are so large that it does not anticipate having to add to its bad credit reserve provision.
Chase's role is doubly embarrassing because it follows by less than two months its problems from the Drysdale Government Securities Inc. failure.
Chase had tried to become a significant middleman in the government securities market and permitted Drysdale--a tiny four-month-old firm--to run up obligations of $285 million. When Drysdale failed, Chase assumed its debts and said it would write off $117 million after taxes, more than it was expected to earn in the second quarter.
Banks and government officials asked how Chase, the nation's third biggest bank, could permit Drysdale--with but $20 million in assets--to accumulate a portfolio of government securities that was bigger than $6.5 billion.
The same questions are being asked about the big banks' involvement with Penn Square.
"It's unbelievable that Continental, one of the best-run banks in the country, got this deep in," said a top official at a competing bank. He said that Continental and Chase should have been warier of dealing with Penn Square.
The signs were there. Penn Square, only five years ago a consumer bank with $30 million in deposits, grew swiftly to a $450 million institution by the time it failed. Its lending officers were young and inexperienced, according to the head of lending in that area for a major bank. They made many of their loans to similarly young and inexperienced businessmen whose companies did not have the financial wherewithal to survive the decline in oil prices.
The bank's problems were no secret in Oklahoma.
Other major banks in Oklahoma City have criticized the lending practices of Penn Square for more than two years. In February, 1980, the Comptroller of the Currency, the agency that regulates national banks, put the bank on its private list of institutions that need "special supervisory attention."
Many depositors apparently smelled trouble, too. According to reports the bank filed with Federal Deposit Insurance Corp., the bank lost almost half of its checking accounts between Dec. 31 and March 31. At the end of last year checking deposits totalled $227.5 million. That had declined to $122 million by March 31. The bank had to replace much of these inexpensive funds with high-cost deposits.
Still the bank's total deposits fell $50 million in the first three months of the year.
A year ago, according to an official at a major New York bank that refused to work with Penn Square, a major Texas bank that had been doing big business with the Oklahoma bank got out.
But other banks, anxious to get into what appeared to be an ever-growing and ever-profitable lending business, stood in line to do business with Penn Square, said the banker.
Continental Illinois led the way. The giant Chicago bank long has been considered one of the best-managed financial institutions in the nation. In the last five years, however, it has grown faster than any other bank in the country in large part by making loans to energy firms, medium-sized companies and real estate firms. Despite a major international presence, Continental has avoided heavy involvement in many of the problem foreign loans--such as to Poland and Argentina. But in recent months the bank's name has popped up frequently as a major lender to domestic companies in trouble.
Continental is a major lender to ailing International Harvester, American Invsco Corp.--the troubled Chicago real estate developer--Nucorp Energy Inc., Turbo Resources Ltd., and Alfa of Mexico. It financed the McLean Gardens condominium conversion in Northwest Washington and foreclosed on that loan several months ago. It also has lent money to Braniff International Corp., the airline that filed for bankruptcy in May, Wickes Cos., the retailer that filed for bankruptcy last spring, and AM International Inc., which also filed for bankruptcy.
Despite its growing list of problem loans--of its $33.8 billion in loans last March 31, $844 million were listed as "non-performing assets"--the bank still was expected to report about a $60 million profit in the second quarter, according to banking analysts. Now those analysts expect Continental to report a $60 million loss. That figure could grow, or shrink, as the bank more carefully scrutinizes the Penn Square loans it owns.
Similarly, many bankers expect Chase Manhattan's sanguine attitude toward its Penn Square holding to evaporate as it looks closer at the loans. It was Chase's correspondent banking division--the part of the bank that deals with other banks--that bought the Penn Square energy loans, rather than the lending division of Chase that specializes in oil and gas loans.