The Federal Deposit Insurance Corp. tried at least three times in the last two months to stop the failed United American Bank of Knoxville from engaging in "unsafe or unsound" practices, court documents unsealed yesterday disclosed.
The questionable practices included making "poor quality" loans to insiders and issuing misleading financial statements to the public, the documents said.
United American was closed Monday morning by Tennessee banking officials, who cited "large and unusual loan losses" at the $760 million institution. The bank was the centerpiece of a group of five banks owned by the flamboyant Tennessee politician and businessman, Jake Butcher, who was the driving force behind last year's World's Fair in Knoxville.
United American was purchased by First Tennessee National Corp. late Monday night and reopened as First Tennessee-Knoxville yesterday morning. First Tennessee Chairman Ronald Terry said his Memphis-based company, the largest bank company in the state, will end up paying about $52 to $54 million after First Tennesee absorbs United American's bad loans and investments.
Sources said First Tennessee will have to write off well more than $50 million, and perhaps as much as $86 million, in bad loans and will have to absorb a $20 million loss on the bank's investments--such as municipal bonds and Treasury securities.
Butcher and other investors in United American will lose their entire $52 million stake in the failed institution, Terry said. But the nearly 135,000 depositors, whose accounts totaled about $600 million, will not lose a cent. Their accounts--as well as the failed bank's good and bad loans and investments--have been assumed by First Tennessee.
Court documents unsealed yesterday revealed that federal investigators have not only been auditing since last November the five banks owned by Jake Butcher, but also the two dozen banks controlled by his brother, C.H. Butcher Jr.
According to the court documents, the Federal Deposit Insurance Corp. issued three cease-and-desist orders between Dec. 19 and Feb. 4 that sought to stop the bank from engaging in "unsafe or unsound" banking practices.
The FDIC charged on Dec. 19 that United American bought back $16 million in loans, many of them bad, that it had sold outright last October to Knoxville's Southern Industrial Banking Corp.
Butcher's brother is chairman of Southern Industrial, his father, C.H. Butcher Sr., is a director, and businessman Edward C. Browder is a director of both the failed bank and Southern Industrial.
The federal agency, which insures bank deposits up to $100,000, alleged that the bank should not have bought back the loans.
In January, the agency issued another order that said the bank was in a severe cash squeeze for several reasons, including making loans without adequate collateral and documentation, making loans to borrowers who did not have the ability to repay them, making "poor quality" loans to directors and other insiders and not taking proper steps to collect loans.
Early this month, the agency issued another directive, charging that the bank had made false statements to the public about its financial health, including underestimating its 1982 losses. The bank said it had a $2.3 million loss; the FDIC said it should have been reported as much higher. The FDIC said depositors and investors relied on those statements.
The bank had gone to court last week to try to overturn the FDIC orders, alleging that the agency began to audit the five banks owned by Butcher--as well as the banks owned by his brother--with a "preconceived notion" that the banks were in bad financial shape and inadequately managed.
At the bank's request, all documents in the case, including the FDIC orders, were sealed by a judge. The case was dismissed and the documents revealed to the public after United American failed.
Despite a loan portfolio that is riddled with losers, United American was the subject of a spirited and expensive bidding battle among several major Southern banking companies, including First Tennessee and Citizens and Southern of Atlanta.
The FDIC and First Tennessee negotiated until 4 a.m. Monday "until time ran out," according to First Tennessee's Terry. First Tennessee and the FDIC had hoped that a purchase could be worked out in time to keep United American open Monday.
Although that attempt failed, Terry said, First Tennessee kept its final offer on the table so that the FDIC could assure depositors Monday that their funds were safe. If the FDIC could not find a purchaser, depositors with more than $100,000 in the bank faced the loss of some of their funds--as happened with the failure last July of the Penn Square National Bank of Oklahoma.
Under a new emergency bank merger law passed last fall, the FDIC was permitted to solicit bids from big out-of-state banks and asked for bids from 32 banks--some of them as far away as New York City, including the prestigious Morgan Guaranty Trust Co. Eight banks submitted bids by the 5 p.m. Monday deadline.
At 6 p.m., Terry said, the FDIC said that an out-of-state bank, Citizens and Southern, had submitted the best bid, but because First Tennessee's bid was within 15 percent of the Atlanta bank's offer, the FDIC asked the Memphis bank (and possibly other banks) to submit another bid by 7:15 p.m. The law says that a merger with an in-state bank is preferable to an out-of-state merger.
At 10 p.m. First Tennessee's bid was accepted. Under the agreement, First Tennessee will assume responsibility for the first $86.5 million in loan losses on United American's portfolio as well as $20 million on its investments. To offset some of those losses, the $52 million of the failed bank's capital was transferred to First Tennessee. Losses above $86.5 million will be assumed by the FDIC.
The federal agency loaned First Tennessee $36 million for 10 years to replace the capital that will be eaten up by the bad loans First Tennessee assumed.
It was the fourth largest bank failure in the nation's history. But because big banks were not involved in the failure and a purchaser was found, it will have fewer repercussions than the failure of the far smaller Penn Square Bank.