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HAND-BOOK
FOR
Bank Officers
BY
Geo. M. Coffin,
AUTHOR OF
"Hand-Book for National-Bank Shareholders."
WASHINGTON, I). C,
H. L. McQuKEN, Publisher.
189T.
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Kntered according to a(5l of Congress, in the year iSgi, by
Geo. M. Coffin,
In the office of the Librarian of Congress, at Washington, D. C.
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PREFACE
>' TN preparing this (the third) edition of this work, some important
^ 1 additions have been made, the chief of which are the two new
5 chapters on the powers and duties of the President and Cashier,
respectively.
Though treating specially of the law and practice governing National
^ banks, the volume, as it now stands, will be found valuable and useful
~ to the officers of any commercial bank, for the reason that the National
^ banking system embodies the very best features of commercial banking,
as is conclusively shown by the wonderful success, growth and strength
attained by it in a period of about twenty-five years.
Perhaps the best proof of the merit of the work is the fact that it has
J reached a third edition in sixteen month's time, a result largely owing
to the commendation kindly expressed by some of the most prominent
and successful bankers in all sections of the country.
January, iSgi.
38642*?
CONXKNXS.
PART ONE.
Lawful-Money Reserve.
CHAPTER I.
Page.
Legal requirements i
Required on deposits only 3
Ivist of reserve cities 3
Classification of banks with regard to percentage of reserve
required 4
Various forms of lawful money available for reserve 5
Deposits, and sundry items which are allowed to offset deposits 7
Reciprocal accounts with reserve agents 8
Examples showing how reserve should be computed in ordi-
nary cases 9
Exceptional cases 12
Rules for finding exact excess with reserve agents and for ap-
plying it to reduction of liability on deposits 12
Examples showing how reserve should be computed in excep-
tional cases 15*"
CHAPTER II.
Explanation of rules applying in exceptional cases 17
Explanation of case of 25 per cent, reserve bank 17
Explanation of case of 15 per cent, reserve bank 19
Simple method of keeping the 5 per cent, redemption fund
account 20
How to compute average reserve 22
Form of application for Comptroller's approval of reserve agent 22
PART TWO.
CHAPTER I.
ORGANIZATION OF NATIONAL BANKS.
Minimum capital stock required 24
Increase and reduction of capital stock 24
Minimum bond deposit requirements 25
vi CONTENTS.
CHAPTER II. P^ee-
QUALIFICATIONS, DUTIES, AND LIABILITIES OF DIREC-
TORS.
General information as to duties 27
How directors should be chosen 30
Scope of powers conferred upon directors — Specific duties . . 31
Decisions as to liabilities — What would constitute violation of
law " knowingly " committed or permitted 33
CHAPTER III.
BOOKS, ACCOUNTS, AND RECORDS.
Form for daily statement of resources and liabilities 41
CHAPTER IV.
GENERAL BANKING POWERS CONFERRED BY SECTION
5136, PARAGRAPH 7.
Court decisions construing these 42
Power to borrow money — Power to issue time certificates of
deposit 45
Bills payable defined 48
Post-notes defined 49
Right to deal in stocks and bonds denied by the courts ... 50
* Purchasing commercial paper 54
CHAPTER V.
TRANSACTIONS IN REAL ESTATE.
Restrictions imposed by law 57
Securities based on real estate values 59
Supreme Court decisions 61
CHAPTER VI.
RESTRICTIONS AS TO LOANS IMPOSED BY SECTION 5200.
Examples illustrating excessive loans and such as are not
excessive 64
Deposits with banks and bankers regarded as loans 68
Exceptions as to discounts, and examples illustrating these . 69
Overdrafts are loans 72
CHAPTER VII.
RESTRICTIONS WITH REGARD TO A BANK'S ACQUIRING
AND HOLDING ITS OWN STOCK.
Penalty for holding beyond time limit 73
CONTENTS. Vll
CHAPTER VIII.
EARNINGS, SURPLUS AND DIVIDENDS. Page.
Legal requirements regarding net profits and surplus — Bad
debts defined 76
Legal requirements with regard to reports of dividends and
earnings — How to make these up 78
Capitalization of surplus 80
CHAPTER IX.
REPORTS OF CONDITION REQUIRED BY SECTION 521 1.
Information with regard to same, filling out schedules ... 82
Verification and Attestation 86
How to proceed in absence of three directors or of both presi-
dent and cashier 87
Penalty for delay in forwarding reports 87
CHAPTER X.
MATTERS OF MANAGEMENT AND POLICY.
Overdrafts 89
Renewing paper by noting payment of interest on same . . . 91
Renewal of discounted commercial paper 91
Borrowing money on certificates of deposit 92
CHAPTER XI.
DIGEST OF NATIONAL-BANK CASES 93
CHAPTER XII.
THE PRESIDENT.
His powers and duties 95
The vice-president — powers and duties 97
CHAPTER XIII.
THE CASHIER.
His powers and duties 98
CHAPTER XIV.
GENERAL REMARKS, IN CONCLUSION, REGARDING THE
NATIONAL-BANK SYSTEM 105
Notes.
Additional Reserve Cities.
On page 3 of this volume it is stated that there
are nineteen reserve cities, and on page 4 a list of
these cities is given. To this list should now be
added the names of three more which have recentl}-
become reserve cities — making a total of twenty-two
(22) reserve cities at present (December, 1890).
The following is a list of the three cities referred
to and the dates upon which they were approved
by the Comptroller:
Minneapolis, Minn., approved July 5, 1890.
St. Paul, " " July 8, 1890.
Brooklyn, N. Y. " July 14, 1890.
Lawful Money.
To the list of various forms of lawful monej^ on
page 6 should now be added U. S. Treasury Notes
issued under act July 14, 1890, which are also avail-
able for lawful money reserve.
I-Iand=Book
FOR
BANK OFFICBRS.
PART ONE
CHAPTER I.
I.AWFUL-MONEY RESERVE.
Legal Requirements.
The "reserve" of a bank is that proportion of its
"deposits" or liabilities payable on demand, which
it is reqnired, by law, "at all times" to "have on
hand in lawful mone}^ of the United States."
The law bearing on the subject is to be found
in sections 5191, 5192, and 5195, United States
Revised Statutes, chapter 4, National-bank Act ; in
sections 2 and 3 of the act of June 20, 1874 ; and
in sections i and 2 of the act of March 3, 1887.
All of these will be found in the "National-bank
2 HAND-BOOK FOR BANK OFFICERS.
Act," edition of 1888, compiled under direction of
the Comptroller of the Currency.
The cash resources which the law requires a
bank to lay aside at all times in this way constitute
the sheet-anchor of safety in stormy financial
weather, and as a matter of policy alone, apart from
other considerations, too great stress can not be
laid upon the importance of a faithful and uniform
compliance with the law in this particular, in spirit
as well as in letter.
Striking proof that this view of the subject is
held and practiced by bank managers as a body is
found in the fact that although the law requires
National banks located outside of reserve cities
(over 2,800 in number) to maintain a reserve of 15
per cent, only, their reports show that these banks
habitually carry a reserve equal to an average on
the whole of over 28 per cent. (See page 195,
Comptroller's Report for 1888.)
That the framers of the law evidently realized
the importance of this feature also, is apparent from
the fact that the law prescribes for habitual viola-
tions of the statute, in this particular, the summary
and severe penalty applying in only a few other
places, viz., the appointment of a receiver to wind
up the bank's affairs. (See section 5 191.)
LAWFUI.-MONEY RESERVE. 3
Required on Deposits only.
Attention is here called to the fact that previous
to the passage of the act of June 20, 1874, the law
required National banks to maintain a reserve on
their "circulation" outstanding as well as on their
"deposits," but this requirement was repealed b}^
the act named, and since then a reserve has been
required on "deposits" only. The act of 1874 also
provided that each bank should keep on deposit
with the Treasurer of the United States an amount
of lawful money equal to 5 per cent, of its "circu-
lation," for the redemption of which at the United
States Treasury this act provides, but the bank
was at the same time permitted to count this " 5
per cent, redemption fund" as a part of its reserve
on "deposits."
List of Reserve Cities.
There are at present nineteen "reserve cities,"
as per list given below, sixteen of which were des-
ignated in section 5 191, while three others, viz.:
Kansas Cit}^, Mo., St. Joseph, Mo., and Omaha,
Nebr., have been recently added under the opera-
tion of the act of March 3, 1887.
Chicago and St. Louis, which had been "reserve
cities" previously, became "central reserve cities"
under the provisions of the act of March 3, 1887.
See note on page facing first page.
4 HAND-BOOK FOR BANK OFFICERS.
Central Reserve Cities:
New York City, N. Y.
Chicago, 111. St. Louis, Mo.
Reserve Cities :
Albany, N. Y. Milwaukee, Wis.
Baltimore, Md. New Orleans, La.
Boston, Mass. Washington, D. C.
Cincinnati, Ohio. Omaha, Nebr.
Cleveland, Ohio. Philadelphia, Pa.
Detroit, Mich. Pittsburgh, Pa.
Kansas City, Mo. San Francisco, Cal.
Louisville, Ky. St. Joseph, Mo.
Classification of Banks with regard to Percentage
of Reserve required.
It will be found, from the portions of the law
quoted, that in the matter of reserve requirements
the National banks are divided into three distinct
classes, according to location, viz.:
1. Those located in the three "central reserve cities,"
which are required to maintain a reserve equal to 25 per cent,
of their "deposits," and to keep the entire amount on hand
in bank.
2. Those located in the sixteen other "reserve cities,"
which must also maintain a reserve of 25 per cent, on " de-
posits," but are required to keep only one- half oi same on
hand /;/ bank, while they may keep the remainder on deposit
with any National bank, or banks, located in any of the
'* central reserv^e cities."
3. Those located outside of the nineteen "reserve cities,"
which are required to maintain a reserve of only 15 per cent,
on "deposits," and to keep on hand in bank only two-fifths
See note on page facing first page.
r
tAWFUIv-MONEY RESERVE. 5
of this, while the remainder may be kept on deposit with any
National bank, or banks, located in an}^ of the nineteen "re-
serve cities."
Of course, if any bank of the second or third class
does not avail itself of the privilege of keeping a
portion of its reserve with "reserve agents," it
must keep the entire required amount on hand in
bajik.
It will be observed that while section 5192 in-
cluded banks located in Richmond and Charleston
among those privileged to act as "reserve agents"
for the 15 per cent, banks, section 5 191 did not im-
pose upon them the necessity for keeping a reserve
eqtial to 25 per cent, of their "deposits," as was re-
quired of banks located in the other cities named in
section 5192, and for this reason the privilege of
acting as "reserve agents" has never been accorded
by the Comptroller's of6.ce to National banks in
those two cities.
Various forms of Lawful Money available for Reserve.
As the law prescribes that the reserve of a bank
must be in "lawful mone}^ of the United States,"
the term "lawful money" is defined as follows:
Previous to the resumption of specie payments,
on the ist of January, 1879, "lawful money" vir-
tually meant United vStates "legal-tender" notes,
6 HAND-BOOK FOR BANK OFFICERS.
gold and silver coin being, until then, at a premium,
and not in general circulation, but since then the
term has embraced various forms of currency,
which it is important for every bank to know, in
order that it may intelligently carry out the re-
quirements of the law in the matter of reserve.
The following list of the various forms of "lawful
money" available for reserve purposes existing at
present is, therefore, given:
1 . Gold coin of the United States.
2. "Standard" silver dollars of the United States.
3. Fractional silver coin of the United States.
4. Certificates for gold coin deposited with the Treas-
urer of the United States.
5. Certificates for silver dollars deposited with the
Treasurer of the United States.
6. United States "legal-tender" notes.
7. Certificates for "legal-tender" notes deposited with
the Treasurer of the United States.
8. Gold clearing-house certificates.
In order that reserve may readily be computed
at any time, and that the information required for
reports of condition (which are always called for
past dates) may be fully and accurately stated, it
is absolutely necessary that a daily and exact re-
cord of the amount of each kind of the various kinds
of currency should be kept for this purpose. That
this may be done, it will of course be necessary to
See note on page facing first page.
I^AWFUL-MONEY RESERVE. 7
assort the cash on hand at close of business each
day, and in doing this, National-bank currency
should be separated from other forms of paper cur-
rency, and in case a bank has any notes of its own
issue on hand, these should in turn be separated
from those issued by other banks.
Deposits, and Sundry Items which are allowed to
Offset Deposits.
The term ''deposits," used in those portions of
the law which bear on the subject of reserve, em-
braces not only all classes of what are known as
'' individual deposits " held b\^ a bank, but deposits
made by the United States Government and by its
disbursing officers also.
Balances due to other National banks and to State
and private banks and bankers, being, as a rule,
payable on demand, have always been regarded as
"deposits" also, and any bank holding these has
been required to maintain a reserve upon such bal-
ances, balances due from other banks and bankers
being allowed to "offset" the balances due to them;
but when in au}^ case the amount due from banks
and bankers exceeds the amount due lo them, such
excess can not be applied in reduction of liability on
other "deposits," and amounts due from and to
banks and bankers are then excluded from both
8 HAND-BOOK FOR BANK OFFICERS.
sides of the calculation necessary for determining
"deposits" and reserve required thereon.
The other items of a bank's "resources" which,
under the various rulings of the Comptroller's
office, are admitted to offset or reduce its liability
on "deposits" are as follows:
1. " Exchanges for clearing-house," viz.: checks on other
banks in same place, which are members of a clearing-house.
2. " Checks on other banks in same place."
3. "Bills of other National banks" held by the bank.
Bills of the bank's own issue are, of course, not admitted to
offset its liabilities on ' ' deposits. ' '
Reciprocal Accounts with Reserve Agents.
It is the custom with some banks to keep recip-
rocal ^.o.down'i.^ with their "reserve agents," and in
such cases the question arises as to how these items
should be treated.
As the law provides that a portion of a bank's
"reserve may consist of balances due to" it " from
associations approved by the Comptroller of the
Currency," such items should, as a rule, be treated
as follows in computing reserve:
1. If the balance oi any such "reciprocal account" is an
amount ^mq^ from the "reserve agent" bank, ?m<i\i balance
may be treated as available for reserve.
2. But, if such balance represents an amount due to the
"reserve agent," then it should be regarded as " due ^'t? other
National banks, ' ' and so treated.
LAWFUL- MONEY RESERVE. 9
-*■
Examples showing how Reserve should be com-
puted in Ordinary Cases.
To clearly illustrate how the reserve of a bank
should be computed in any ordinary case, two ex-
amples are given here; the first (Form A) of a
bank which should have 25 per cent, on hand; the
second (Form B) of a bank which should have 15
per cent, on hand. Each of these examples is
computed on a form identical in every respect with
the printed blanks now used in the Comptroller's
office for this purpose.
The great advantage of this form consists in the
fact that down to the point of finding the amount
of "deposits" upon which reserve is to be main-
tained, the process is the same iox all banks regard-
less of location. Beyond this point it is only neces-
sary to apply the proper proportion required by
each case (viz., 25 per cent, or 15 per cent.), and
the proper distributioii of the reserve in bank and
i7t hands of agents required in such case.
In exceptional cases, which are defined and illus-
trated on pages 12 to 20, all that is needed is
to extend the ordinary computation a little further
b}' a very short and simple calculation. Concise
rules for this calculation are given on page 12.
With a copy of this general printed form, and the
few rules referred to, the computation of reserve in
the case of any bank, under any circumstances, be-
comes an easy and simple matter.
lO
HAND-BOOK FOR BANK OFFICERS.
Form A. ^Calculation of the Lawful-Money Reserve of National
Banks Located in Reserve Cities and Central Reserve Cities.
Items on Which Reserve is to be Computed.
LIABILITIES.
Due to National Banks* 1235,866
Due to State banks and bankers 25,559
1261,425
LESS
Due from other National banks 125,335
Due from State banks and bankers .... 100,000
*Should the aggregate "Due
from " exceed the aggregate " Due
to" banks, both items must be
omitted from the calculation
225,335
Dividends unpaid
Individual deposits ....
United States deposits . . .
Deposits of U. S. dis. ofl&cers
136,090
3,867
2,857,628
705,000
Gross amount 13,602,585
DEDUCTIONS ALLOWED.
Exchanges for clearing-house
Checks on other banks in the same place . .
National-bank notes
5107,950
513
17,340
Twenty-five per cent, of this total amount Jl®"
125,803
,476,782
is the entire reserve required, which is 869,195
Deduct 5 % redemption fund with Treasurer U. S. . 2,250
Net reserve to be held |866,945
Items Composing Net Reserve and Distribution of Same.
One-half of the net reserve
is* 1433,472
*If reciprocal accounts are
kept with reserve agents, only
the net amount due from such
agents is available for reserve.
Balances with approved re-
serve agents amount to 440,067
Excess with reserve agents
6,595
One-half of net reserve is |433,473
Items in bank's pos-
session to make up
the same, viz. :
Fractional silver 129,885
Silver dollars . .
Silver Treas. cert.
Gold coin ....
Gold Treas. cert.
Legal-ten'r notes
U. 8. cert, of de-
posit for legal-
tenders . . .
Gold C. H. cert's
1,090
22,060
300,050
50,000
12,000
20,000
Excess in items held by the
bank
435,085
$1,612
LAWFUL-MON:eY RESERVE.
II
Form B. — Calculation of the Lawful- Money Reserve of National Banks
Not Located in Reserve Cities or Central Reserve Cities.
Items on Which Reserve is to be Computed.
WABIWTIES.
Due to National banks* 182,946
Due to State banks and bankers 16,735
l99,68i
I^ESS
Due from other National banks 1:25,043
Due from State banks and bankers .... 5,695
* should the aggregate "Due
from " exceed the aggregate " Due
to" banks, both items must be
omitted from the calculatiou.
30,738
168,943
Dividends unpaid 621
Individual deposits 728,423
United States deposits . . . 55,ooo
Deposits of U. S. dis. officers . 36,098
Gross amount
DEDUCTIONS ALIvOWED.
Exchanges for clearing-house
Checks on other banks in the same place ...
National-bank notes ,
1889,085
fe,S94
1,650
Fifteen per cent, of this amountg@°
5.544
3-541
is the entire reser\'e reqtiired, which is I'i32,53i
Deduct 5 %■ redemption fund with Treasurer U. S. . 1,125
Net reserve to be held 1131,406
Items Composing Net Reserve and Distribution of Same.
Three-fifths of the net re-
serve is* 178,844
*If reciprocal accounts are
kept with reserve agents, only
the Hi't amount due from such
agents is available for reserve.
Balances with approved re-
serve agents amount to 50,796
Two-fifths of net reserve is ^2,562
Items in bank which
may lawfully make
up the same, viz. :
Fractional silver ^2,094
Silver dollars . . 4,450
Silver Treas. cert. 8,575
Gold coin . . . 51,896
Gold Treas. Cert. 3,000
Legal-ten'r notes 15,025
U. S. cert, of de-
posit for legal-
tenders
Gold C. H. cert's . . .
Deficiency with reserve
agents 128,048
RECAPITULATION
Excess in the entire reserve held
85,040
Excess in the two-fifths
reserve held $32,478
14,430
12 HAND-BOOK FOR BANK OFFICERS.
Exceptional Cases.
It sometimes happens that, while the "aggre-
gate" reserve of a bank located outside of a "cen-
tral reserve city" is more than sufficient, it has not
a sufficient amount on hand in bank; in other
words, it has more than is. necessary in the hands
of " reserve agents." In such a case, while the law
does not permit such excess with " agents " to offset
a deficiency in the reserve needed in bank^ such
"excess" may be regarded as "due from other
banks," and, as such, applied in the same way to
reduce liability on " deposits," with the result some-
times of so reducing the amount of reserve needed
in bank as to show that the "lawful money" on
hand is sufficient.
In order to find and apply the exact excess in the
hands of "reserve agents" use the following:
Rules for finding Exact Excess with Reserve Agents
and for applying it to Reduction of Liability on
"Deposits."
From the amount actually in hands of " reserve
agents," deduct the amount which by the ordinary
method of computation it seems should be there;
the remainder will be the "apparent excess."
I. In the case of a " reserv^e city" bank, add one-seventh
of the "apparent excess" to such "apparent excess" and
LAWFUL-MONEY RESERVE. 1 3
their sum will be the ' ' exact excess ' ' which may be applied
to reduction of liability on "deposits."
II. In the case of a 15 per cent, bank, add yiine-ninety-firsts
of the ' ' apparent excess ' ' to such ' ' apparent excess, ' ' and
their sum will be the ' ' exact excess. ' '
Having ascertained the "exact excess" in this
way proceed to apply it to reduction of liability on
"deposits" and to the consequent decrease of re-
serve apparently required to be in bank as follo\vs:
I. Where the "exact excess" equals or exceeds
the balance due to other banks and bankers, as
shown by ordinary method of computation, the
amotmt by which the reserve apparently required
in bank may be decreased wall be —
{a) In the case of a "reserve city" bank, one-eiglitli of the
balance due to other banks and bankers.
{U) In the case of a 15 per cent, bank, 6 per cent, of the
batance due to other banks and bankers.
Note. — The reason for this is, that in such a case the treatment of
the "excess" with "agents" as an amount <hxii. frotn banks and bank-
ers causes the amount A.\x^ from to offset the amount due to other,
banks and bankers and so eliminates the balance due to them from the
computation, and therefore renders it unnecessar}' to provide for a re-
serve on such balance.
II. Where the "exact excess" is less than the
balance due to other banks and bankers, the amount
by which the reserve apparently required /// bank
may be decreased will be —
(a) In the case of a "reserve city " bank, one-seventli (|)
of the ' ' apparent excess. ' '
14 HAND-BOOK FOR BANK OFFICERS.
{b) In the case of a 15 per cent, bank, six-ninety-firsts (^)
of the '' appa7'-ent excess.''
As ^ of any amount is a little less than one-fifteenth
(-(fo) of such amount, it will involve less labor to find y\ of
the ' ' apparent excess ' ' and this portion will be nearly
enough correct, unless the ' ' excess " is a large amount.
Note. — The reason for this is that in such a case the treatment of
the " excess" with "agents" as an amount due /"row other banks has
the effect of reducing the liability on the balance due to other banks,
and therefore renders it unnecessary to provide for a "reserve " on the
amount of such "excess."
To illustrate tlie application of these rules for
"exceptional" cases, two examples are given: the
first (Form A) illustrating the case of a 25 per
cent, bank ; the second (Form B) illustrating the
case of a 15 per cent, bank, each of which has an
amount with " agents" in excess of legal require-
ments.
Note. — In all computations for ascertaining reserve it should be dis-
tinctly understood that any excess in the hands of agents can not be
counted as reserve for the reason that the law (Sees. 5192 and 5195)
fixes a limit to the amount in the hands of agents which may so be
counted, and au}'^ amount over and above the designated limit or pro-
portion has not the legal status of reserve and can not so be regarded.
LAWFUL-MONEY RESERVE.
15
Form A. — Calculation of the Lawful-Money Reserve of National
Banks Located in Reserve Cities and Central Reserve Cities.
Items on Which Reserve is to be Computed.
LIABIUTIES.
Due to National Banks* |i59,387
Due to State banks and bankers 6,041
1165,428
LESS
Due from other National banks ..... 89,072
Due from State banks and bankers .... 20,861
* Should the aggregate "Due
from " exceed the aggregate " Due
to" banks, both items must be
omitted from the calculation
109,933
Dividends unpaid
Individual deposits ....
United States deposits . . .
Deposits of U. S. dis. officers
155,495
5,488
618,978
110,000
Gross amount 1789,961
DEDUCTIONS ALLOWED.
Exchanges for clearing-house
Checks on other banks in the same place . .
National-bank notes
80,696
1,020
8,326
Twenty-five per cent, of this total amount fi®" . .
is the entire reserve required, which is
Deduct 5 % redemption fund with Treasurer U. S. .
90,042
1699,919
174,979
4,500
Net reserve to be held 1170,479
Items Composing the Net Reserve and Distribution of Same.
One-half of the net reserve
is* 185,239
*If reciprocal accounts are
kept with reserve agents, only
the lief amount due from such
agents is available for reserve.
Balances with approved re-
serve agents amount to 144,936
One-half of net reserve is ^85,240
Items in bank's possession
to makeup the same, viz.:
Fractional silver f4,209
Silver dollars . . 2,006
vSilver Treas. cert. 4,500
Gold coin .... 41,695
Gold Treas. cert. 12,050
Legal-ten 'r notes 14,280
78,740
"Apparent excess" with
reserve agents .... $59,697
To find "exact excess" add
one-seventh of this = 8,528
Apparent deficiencj' of re-
serve in bank $6,500
As "exact excess" exceeds
balance due banks ($55,495),
take one-eighth of such bal-
ance 6,937
"Exact excess" with re-
serve agents is ... . $68,225
RECAl'ITULATION.
JSxcess in the entire reserve held
Showing actual excess of
reserve in bank of . .
• 1437-
1437
i6
HAND-BOOK FOR BANK OFFICERS.
Form B. — Calculation of the Lawful- Money Reserve of National Banks
Not Located in Reserve Cities or Central Reserve Cities.
Items on Which Reserve is to be Computed.
WABIIvITIES.
Due to National banks* 139,873
Due to State banks and bankers 4,261
LESS
Due from other National banks . .
Due from State banks and bankers
^7,382
2,543
* Should the aggregate "Due
from ' ' exceed the aggregate ' ' Due
to" banks, both itenas must be
omitted from the calculation. ■
144,134
9.925
134,209
Dividends unpaid 410
Individual deposits 241,444
United States deposits . . . 110,000
Deposits of U. S. dis. officers . ...
Gross amount 1386,063
DEDUCTIONS AI<I,OWED.
Exchanges for clearing-bouse
Checks on other banks in the same place . . . . $2,263
National-bank notes 5,33o
7,593
Fifteen per cent, of this amountg^^ 1378,470
is the entire reserve required, which is $56,770
Deduct 5 % redemption fund, with Treasurer U. S. . 2,250
Net reserve to be held
154,520
Items Composing the Net Reserve and Distribution of Same.
|2i,8o8
Three-fifths of the net re-
serve is* 132,712
*If reciprocal accounts are
kept with reserve agents, only
the }iel amount due from such
agents is available for reserve.
Balances with approved re-
serve agents amount to 61,832
' ' Apparent excess ' ' with
reserve agents .... $29,120
To find "exact excess"
add Ti'j of this = , . . 2,880
Two-fifths of net reserve is
Items in bank which may
up the
Showing actual
Exact excess with reserve
agents is $32,000
RECAPITUIvATION
Excess in entire reserve held . .
lawfully make
same, viz.:
Fractional silver $2,012
Silver dollars . . 540
Silver Treas. cert. 3, 165
Gold coin . . . 3,946
Gold Treas. Cert. 2,780
Legal-ten'r notes 8,000
»
Apparent deficiency of re-
serve in bank ....
As "exact excess " is less
than balance due banks
($34,209), take vfi of
" apparent excess " . .
20,443
$1,365
1,920
excess of $555
$555-
LAWFUIv-MONEY RESKRVE. 1 7
CHAPTER II.
LAWFUIv-xAIONEY RESERVE.
Explanation of Rules applying in Exceptional Cases.
As some readers will naturally wish to know
the reasons for applying the rules for " exceptional "
cases given in the preceding chapter, the following
explanation in each of the two cases therein illus-
trated is given here.
Explanation of Case of 25 Per Cent. Reserve Bank.
It is evident, at a glance, that when the '' apparent
excess" of $59,697 is considered as "due from
other banks," and is applied to reduction of liability
on "deposits," it will have the effect of making a
proportionate reduction in the amount of reserve
required. The reserve allowed with "agents"
being one-half of one-fourth, or one-eigJitJi of the
amount of "net deposits," the reduction here will
be in the proportion of one dollar of reserve to every
eiglit dollars applied in reduction of "deposits."
This being the established ratio, we know that
the "additional excess" with "agents" must be
onc-cigJitJi of the "exact excess" to be applied in
reduction. We also know that this " exact excess"
1 8 HAND-BOOK FOR BANK OFFICERS.
will consist of the "apparent excess" ($59,697),
increased by the "additional excess," and knowing
so much, we can readily ascertain the amount of
"additional excess."
To simplify the illustration, let us assume that
X represents the unknown "additional excess,"
and, from what has just been stated, we obtain the
following equation :
Eight times X is equal to $59,697 increased by
X; or, taking the amount X from each side of the
equation, seven times X is equal to $59,697, and
dividing each side by seven we find that X, or the
"additional" amount, is equal to $8,528; and that
$68,225 (eight times X) is the exact amount that
can be applied to reduction of liability on " de-
posits."
As this "exact excess" ($68,225) exceeds the bal-
ance due to banks and bankers ($55,495) it will
have the effect of eliminating the latter item from
the computation, and of converting the " apparent
deficiency of reserve in bank " ($6,500) into an
actual excess of $437 instead. (See Rule I, clause
(^), page 13.)
As the " apparent excess " in this example was
of itself greater than the balance due to banks,
LAWFUL-MONEY RESERVE. I9
it was not necessary to carry out the computa-
tion to find " exact excess," but this has been done
simply to show how it should be done when cir-
cumstances require.
Explanation of Case of 15 Per Cent. Reserve Bank.
In the case of this 15 per cent, reserve bank, the
excess with reserve agents can be applied in the
same way to reduction of liability on "deposits," the
prop07'tion^ of course, being changed.
With such a bank the law allows a portion of
its reserve equal to 9 per cent, of net deposits to
be kept with "agents;" therefore, the proportion
that "reserve with agents" should bear to "de-
posits" is as 9 to 100.
Applying the same line of reasoning as in the
case of the 25 per cent, bank, we find that the
" apparent excess " is $29,120, and assuming that X
represents the whole "excess" that can be applied,
we know that 9 per cent, of X, or yf of X, will
be the "additional" excess which can be released
from its function as reserve and applied to reduction
of liability, and also that the "exact excess" will
be the "apparent excess" increased by this "addi-
tional excess."
20 HAND-BOOK FOR BANK OFFICERS.
We have, therefore, from this the following equa-
tion : X equals $29,1 20, increased by g per cent, of X;
and, deducting 9 per cent, of X from each side of
the equation, we have X less xo of X, or tVo of X
equals $29,120; and from this, yio of X, or i per
cent, of X, equals $320; and 9 per cent, of X equals
$2,880, which is the " additional " excess to be added
to $29,120 to make $32,000, the "exact excess"
which can be applied to reduction of liability.
As the ratio of " reserve in bank" to "deposits"
is 6 per cent., when the "deposits" are reduced by
$32,ooo,'$i,920 less "reserve "will be needed /;^ bank.
But, $1,920 is just -gr of $29,120, the "apparent ex-
cess," so that the amount by which the reserve ap-
parently required in bank may be decreased will be
g-T of the "apparent excess" with agents. (See
Rule II, clause [b)., page 14.)
Simple Method of keeping the 5 Per Cent Redemp-
tion Fund Account.
As it appears to be the custom with many banks
to credit their circulation account with all of their
notes, both " fit" and "unfit," which have been re-
deemed and returned by the United States Treas-
urer, and to charge this account with all amounts
remitted to the Treasurer to reimburse their 5 per
cent, fund, it is suggested that all such redemption
LAWFUL-MONEY RESERVE;. 21
transactions should be entered in the 5 per cent,
fund account on the books of the bank, and not in
the circulation account, which should show a fixed
balance, representing the circulation issued to the
bank on its bonds, and should not be altered at any
time, except to be increased by the amount of cir-
culation issued to it on deposit of additional bonds,
or to be decreased by the deposit of lawful money
with the United States Treasurer for the purpose
of reducing circulation and withdrawing bonds.
To illustrate how entries should be made in the
5 per cent, fund account, let us assume that the
Treasurer has on deposit for the bank a fund of
$2,250, and that he redeems for the bank $1,000 of
its notes, of which $500 are "fit" and $500 are
"unfit." Upon receipt of the $500 "fit" notes the
bank should debit "Cash" and credit its 5 per
cent, fund account, and make a similar entry when
it receives the $500 incomplete currenc}^ from the
Comptroller's office in replacement of the " unfit "
redeemed by the Treasurer and destroyed. These
entries woul4 reduce the 5 per cent, fund account
to $1,250 debit balance, and it would be restored to
its proper amount, $2,250, when the bank remits
$1,000 to reimburse its account with the Treasurer,
22 HAND-BOOK FOR BANK OFFICERS.
for then the account would be debited with $i,ooo,
and " Cash" credited with the same amount.
This method of treatment would be very simple ;
the account would always exhibit the exact balance
in hands of the Treasurer, and, in fact, would be
practically the counterpart of the account as kept
on the books of the Treasurer.
How to Compute Average Reserve.
In each report of condition a bank is required to
state its average reserve on deposits for the pre-
ceding 30 days. To obtain this, take the percent-
age of reserve for each business day during the 30
days preceding date of report and add these per-
centages together. Divide the aggregate so ob-
tained by the number of business days and the
result will represent the average ratio desired. (See
note, page 14, as to excess with reserve agents in
computing reserve.)
Form of Application for Comptroller's Approval of
Reserve Agent.
To THE Comptroller of the Currency,
Washington, D. C.
Sir: Application is hereb}^ made for your approval of the
National Bank as an association with which
a portion of the lawful money reserve of this bank may be
kept in accordance with law.
Respectfully yours,
(To be signed by Cashier or other officer of bank making application.)
Note. — National banks in reserve cities may select 2My National
bank or banks in any of the "central" reserv'e cities only. Those lo-
cated outside of reserve cities may select any National bank or banks
in any reser^-e city or cities ' ' central ' ' or other. All selections are sub-
ject to approval of the Comptroller.
ORGANIZATION OP NATIONAI^ BANKS. 2$
PART TWO.
CHAPTER I.
ORGANIZATION OF NATIONAL BANKS.
The law relating to the organization of National
banks is to be found in sections 5133, 5134, 5135,
and 5136 United States Revised Statutes, National-
bank Act.
It has not been deemed necessary to introduce
into this little work all the details of information
and printed forms pertaining to the organization of
a National bank for the reason that a pamphlet
containing all such information and forms, entitled
" Instructions in regard to the Organization, Ex-
tension, and Management of National Banks,"
compiled in the year 1884, under direction of the
Comptroller of the Currency, can be obtained free,
upon application to his office, by any person desir-
ing a copy, together with any further information
on the subject which may not appear to be em-
braced in the pamphlet.
24 HAND-BOOK FOR BANK OFFICERS.
Minimum Capital Stock Required.
It may be well to state here that the minimiim
capital stock required of each National bank (see
section 5 1 38) is based upon the population of the place
in which it is located, at date of its organization, as
follows :
1 . $50,000 for a bank organized in a place having
6,000 inhabitants, or less.
2. $100,000 for a bank organized in a city having
over 6,000, but not more than 50,000 inhabitants.
3. $200,000 for a bank organized in a city having
over 50,000 inhabitants.
Increase and Reduction of Capital Steele.
This pamphlet also contains the information and
forms necessary to enable a bank to increase or re-
duce its capital stock as provided by sections 5142
and 5143, respectively.
Since the pamphlet was prepared, section 5142
has been amended by "Act approved May i, 1886,
(see page 75, National-bank Act, edition of 1888),
section i of which provides that a National bank
may "increase its capital stock in. accordance with
*
existing laws, to any sum approved b}^ the said
Comptroller, notwithstanding the limit fixed in its
original articles of association and determined by
said Comptroller."
ORGANIZATION OP NATIONAIy BANKS. 25
Prior to the passage of tliis act, in 1886, the banks
had been limited in any proposed increase of capi-
tal to the maximnm of increase which was named
and provided for in their articles of association at
time of organization.
«
Extension of Charter.
The pamphlet also gives the forms and infor-
mation necessary for procuring an extension of
corporate existence beyond the limit fixed in the
original charter granted at time of a bank's organ-
ization. The law on this subject is to be found
in the act of July 12, 1882 (pages 68-73, National-
bank Act, 1888), entitled "An act to enable Na-
tional banking associations to extend their cor-
porate existence, and for other purposes."
Minimum Bond Deposit Requirements.
Section 8 of the act just mentioned amended the
law with regard to the amount of bonds to be depos-
ited by banks already organized, or to be afterward
organized, having a capital of $150,000, or less^ to
the effect that such banks should not be required
to deposit United States bonds to any amount in
excess of one-fourth of their capital stock.
The minimiiin bond deposit required of banks
having capital in excess of $150,000 is uniforml}^
$50,000. (See section 4, act of June 20, 1874.)
26 HAND-BOOK FOR BANK OFFICERS.
CHAPTER II.
QUAI.IFICATIONS, DUTIES, AND IvIABII^ITIES OF
DIRECTORS.
Sec. 5146. Every director must, during his whole term of
service, be a citizen of the United States, and at least three-
fourths of the directors must have resided in the State, Ter-
ritory, or District in which the association is located for at
least one year immediately preceding their election, and must
be residents therein during their continuance in office. Every
director must owni, in his own right, at least ten shares of
the capital stock of the association of which he is a director.
Any director who ceases to be the owner of ten shares of the
stock, or who becomes in any other manner disqualified, shall
thereby vacate his place.
Sec. 5147. Each director, when appointed or elected, shall
take an oath that he will, so far as the duty devolves on him,
diligently and honestly administer the affairs of such asso-
ciation, and will not knowingly violate, or willingly permit
to be violated, any of the provisions of this Title, and that
he is the owner in good faith, and in his own right, of the
number of shares of stock required by this Title, subscribed
by him, or standing in his name on the books of the associa-
tion, and that the same is not hypothecated or in any way
pledged as security for any loan or debt. Such oath, sub-
scribed by the director making it, and certified by the officer
before whom it is taken, shall be immediately transmitted to
the Comptroller of the Currency, and shall be filed and pre-
served in his office.
DUTIES OF DIRECTORS. 27
Sec. 5239. If the directors of any National banking asso-
ciation shall knowingly violate, or knowinglj' permit any of
the officers, agents, or serv^ants of the association to violate
any of the provisions of this Title, all the rights, privileges,
and franchises of the association shall be thereby forfeited.
Such violation shall, however, be determined and adjudged
by a proper circuit, district, or territorial court of the United
States, in a suit brought for that purpose by the Comptroller
of the Currency, in his own name, before the association shall
be declared dissolved. And in cases of such violation, every
director who participated in or assented to the same shall be
held liable in his personal and individual capacity for all
damages which the association, its shareholders, or any other
person shall have sustained in consequence of such violation.
General Information as to Duties.
The oath, which every director of a National bank
is required to take before he is qualified to act in
that capacity requires him, among other things, to
swear or affirm " that he will, so far as the duty de-
volves on him, diligently and honestly administer
the affairs of such association, and will not know-
ingly violate, or willingly permit to be violated,
any of the provisions of this 'Title" (/. e.^ the Na-
tional-bank Act).
As a director receives no compensation for his
services, the extent to \vhich the duty of adminis-
tering the affairs of the bank devolves on him is a
matter which his own conscience must decide, for
the law imposes a penalty on him only for such
28 HAND-BOOK FOR BANK OFFICEIRS.
violations of the law as he "knowingly" commits,
or "knowingly" permits any of the employes to
commit.
This being the case, it would not be a difficult
matter for a director to avoid incurring any legal
liability by habitually absenting himself from meet-
ings of the board and from the bank, and generally
keeping himself out of the way of information with
regard to the bank's affairs, and the only incentive
such a director would have to restrain him from
pursuing this course would be his interest in $i,ooo
of stock in the bank, which every director is com-
pelled by law to own in his own right.
Such instances as this are, no doubt, extremely
rare, yet, at the same time, it is certain that in a
measure the same bad results are attained through
indifference and carelessness on the part of directors,
arising from a wrong conception of their duty to
the stockholders, whose interests they are pre-
sumed to represent, and also from their ignorance
of che law governing the bank whose affairs they
are chosen to administer.
Directors do not, perhaps, always realize to what
extent the stockholders are compelled to rely upon
tnem for seeing that the capital they invest is used
DUTIES OF DIRECTORS. 29
profitably and honestly, but, as a matter of fact,
outside of sucli information as the officers may be
disposed to furnish them, the only reliable data as
to the bank's affairs accessible to stockholders are
those furnished by the sworn reports of condition,
which are published in the newspapers five times a
year.
When this responsibility to stockholders is fully
realized, it would seem that a prudent and consci-
entious man of business would hesitate to act as
director, unless he intended to inform himself as to
his duties, and, having done this, to "diligently
and honestly administer the aff"airs of the bank."
Such a director will inquire how he may most
readily, and without too much research, acquire
such reliable information as will enable him to dis-
charge his duties intelligentl}^ ; and partl}^ with a
view to furnishing in concise form and plain terms
some of the information needed this little work has
been prepared, embracing only such subjects as
most commonly present themselves to bank officers
in the regular current of business.
The construction of law and rules of practice
here given are those which at present seem to ob-
tain in the Comptroller of the Currency's office as
30 HAND-BOOK FOR BANK OFFICERS.
the outcome of information and experience accumu-
lated during a quarter of a century, from intimate
and constant of&cial intercourse with the banks,
supplemented by careful examination of all legal
decisions bearing on their operations. In this con-
nection it is suggested that in all cases of doubt as
to a proper construction of law, or as to correct and
sound practice, directors or other bank officers
should promptly apply for information to the
Comptroller's office, as in doing so they obtain the
benefit of a large experience gained in dealing with
the affairs of over 3,300 banks.
How Directors should be Chosen.
The law relating to this subject is contained in
sections 5145, 5148, and 5149, and is so explicit as to
leave but little room for misunderstanding. Great
care should be taken, however, to see that all the
details therein prescribed are carried out with pre-
cision, as the failure to do this in any one particular
might, under certain circumstances, permit the
raising of some question as to the validity of acts
performed by the directors capable of being decided
by the courts adversely to the interests of such
directors, or of the stockholders whom they repre-
sent.
DUTIES OP DIRECTORS. 3 1
Scope of Powers conferred upon Directors; Specific
Duties.
Paragraphs 6 and 7, section 5136 (see page 9,
National-bank Act, edition 1888), contain a sum-
mary of the general powers conferred by statute
upon the directors of a National bank, and prescribe
how some of these powers may be delegated by
them to the officers whom they appoint.
Section 5145 (see page 13, National-bank Act,
1888), in prescribing that "the affairs of each
association shall be managed by not less than five
directors," clearly contemplates that its affairs
should receive the constant and personal super-
vision of the board as a whole, or where this is not
practicable, that it should be accomplished through
committees selected from their number chareed
with special duties in this respect.
The scrutiny of all loans and discounts made is a
matter which should always receive the particular
attention of the board as a whole, or of its com-
mittee selected specially for this purpose, but per-
haps the most important duty devolving on direc-
tors is that of making a thorough and searching
examination of the assets, books, and accounts of
the bank, without previous notice, at reasonable
intervals between the dates of the Government
32 HAND-BOOK FOR BANK OFFICERS.
examiner's visits. These examinations should be
made by such of the directors as are most familiar
with figures and expert at accounts, otherwise they
will not always disclose the actual condition of the
bank's affairs.
Every bank officer and clerk who is faithfully
discharging his duties will gladly welcome such a
verification of the trust confided to his care, and,
through fear of discovery by this means, the would-
be dishonest official or employe may be restrained
from acts ruinous to himself and detrimental to
the interests intrusted to his keeping.
As directors are empowered by section 5136, par.
5, to ''require bonds of" the officers whom they
appoint "and fix the penalty thereof" a sufficient
bond should be required of every officer or employe
intrusted with the keeping of valuables or of the
books in which account of such is kept. Such a
course certainl}^ is prudent as affording to stock-
holders and depositors some measure of protection
against official negligence or dishonesty.
In this connection it is suggested that, as the
necessary bonds may now be procured from com-
panies specially organized for the purpose of fur-
nishing such, at very low rates, the premium on
DUTIES OF DIRECTORS. 33
these bonds might be paid, and in some instances
is paid, by the bank, instead of by the officers
bonded.
There is fully as much reason and warrant for
paying for such suret}^ or guarantee of official
integrity as there is for the paj^ment of premium for
insurance of the bank building and other property
against the risk of destruction by fire, and surel}^
there is no question as to the duty of directors in
this latter case.
Another important matter demanding their at-
tention is of course the provision of a suitable, con-
venient, and secure office in which the business of
the bank may be carried on entirely separate and
apart from any other business.
It is also necessary that a fire-proof and burglar-
proof safe should be provided for the safe keeping
of its cash, bills receivable, securities and other
valuables, and also of its books and records. Where-
ever the safe will not accommodate the latter, a
suitable fire-proof and burglar-proof vault for them
should be provided in addition to the safe.
Decisions as to Liabilities; What would constitute
Violations of Law "Knowingly" Committed or
Permitted.
With regard to what constitutes violation of law
''knowingly" committed or permitted by a director,
34 HAND-BOOK FOR BANK OFFICERS.
resort must be had to the many legal decisions on
this point, two of the most recent of which by Fed-
eral courts are those in the cases of " Movius vs.
Lee (30 Fed. Rep., 298)," and "Witters vs. Sowles
(31 Fed. Rep., i)."
For general and reliable treatment of this sub-
ject, reference may be had to the work of "Morse
on Banks and Banking," third edition, by Parsons,
chapter IX, where these two and other leading
decisions are referred to.
In general terms it would seem that if a d'irector
has no official knowledge of a violation of the bank-
ing law he is not to be held personally liable for
any loss or damage resulting therefrom, but if, at
a board meeting or elsewhere, he officially assents
to any transaction which on its face constitutes a
violation of law, he may be held liable personally
for any resulting loss or damage; and ignorance
of the law under such circumstances could not be
set up as a defense, for it is to be assumed that a
person acting in such a capacity should have such
a correct knowledge of the law under which he acts
as is readily obtainable by a practical man of affairs.
BOOKS, ACCOUNTS, AND RECORDS. 35
CHAPTER III.
BOOKS, ACCOUNTS, AND RECORDS.
One of the essentials of successful banking is
that the records of all transactions should be kept
in a clear, simple, and systematic manner.
The number and character of books for keeping
these will vary with the volume and special fea-
tures of the business done b}^ each bank, but cer-
tain of them are necessary in every case, and of
these a slight sketch is here given.
A book should first be provided in which the
minutes of all meetings of stockholders and meet-
ings of directors should be promptl}- recorded, giv-
ing tersely but clearly an account of all business
transacted at such meetings.
All certificates of stock should be bound in book
form, with a stub to each certificate, upon which
stub the name of shareholder, the number of shares
issued to him, and the date when issued, should be '
carefull}' noted before the certificate is detached.
This book should also be used in cases of all trans-
fers of stock, a new certificate being issued in the
36 HAND-BOOK FOR BANK OFFICERS.
case of every transfer, made out in the name of the
new shareholder in place of the original certificate,
which should be taken up and cancelled.
All transactions shown by this stock-certificate
book should be posted to the stock ledger^ which
should contain a separate account for each share-
holder, so kept as to readily show at any time the
name and address of every shareholder, and the
number of shares standing in the name of each.
Certificates of deposit^ like stock certificates,
should always be issued from a book with a stub to
each for noting the necessary data. The practice
of noting partial payments on these certificates is
apt to cause confusion in accounts. The simpler
and better wa}^ in such cases is to take up and
cancel the certificate first issued and issue a new
one for the reduced amount. The custom which
some ofi&cers have of signing these certificates in
blank before they are needed is not a safe one and
should as a rule be avoided.
Cashier's checks and all checks and d^^afts on other
banks and bankers should also always be issued
from a book having a stub upon which the neces-
sary data regarding each check or draft drawn
should be noted before it is detached.
BOOKS, ACCOUNTS, AND RECORDS. 37
All deposits subject to check should be posted
daily to a ledger, showing the account with each
depositor, and to this ledger all checks drawn against
deposits should, of course, be posted daily also, in
order that the balance of any depositor's account
may be readil 3^ ascertained.
This ledger, generally known as the "individual
ledger," should be balanced at least once a month,
and at the same time all depositors' pass-books
should be balanced and compared with the ledger,
and all differences looked up and reconciled.
It is the custom with some banks to send to each
depositor, at intervals, a statement exhibiting the
balance of his account, as shown by the books of
the bank, with the request that he verify this bal-
ance by his pass-book and return the statement to
the bank, and this method serves to develop errors
and sometimes false entries on the books of the
bank.
In the same way all current accounts with other
banks and bankers should be verified and recon-
ciled at least once a month.
Appropriate books should be provided for record-
ing all loans and discounts, or "bills receivable,"
showing names of makers and indorsers, acceptors,
386427
38 HAND-BOOK FOR BANK OFFICERS.
or guarantors, with memoranda of all collateral se-
curity lodged with same, and the dates on which
the paper is made as well as those upon which it
will mature.
All stocks, securities, judgments, claims, other
real estate and mortgages owned, and other assets,
should be so recorded as to show readily a detailed
account of these in order that the information
needed for reports of condition and by the bank
examiner may be obtained at any date without
difficulty.
As soon as paper becomes overdue a separate
record of such should be made, and when any over-
due paper passes into the class of " bad debts as de-
fined by section 5204," such items should again be
separated from other overdue paper. Such treat-
ment of all overdue paper and " bad debts " is nec-
essary in order that these items may be held under
special observation and that the information re-
quired by reports of condition may readily be fur-
nished.
A general cash-book should contain a daily record
of aggregate transactions in the various general ac-
cou7its^ viz., deposits, loans and discounts, interest,
exchange, current expenses, etc., and the resulting
BOOKS, ACCOUNTS, AND RECORDS. 39
balance of cash on hand, showing in detail the va-
rious items of which this balance is composed.
The placing in ''cash itcms^'' of such items as past
due paper, dishonored checks, or drafts, expense
items, etc., except temporarily, should be avoided,
as the term when representing such assets is mis-
leading. Items of this character should be trans-
ferred to appropriate accounts, and "cash items "
should include only such as represent readily con-
vertible value.
All items entered on the general cash-book should
be posted daily to appropriate accounts on 'Oci^ gen-
eral ledger^ the daily balances of which should be
exhibited on a statement or balance book for the
purpose of showing in condensed form the resources
and liabilities of the bank and the condition of its
lawful-money reserve from day to day.
A form for such a daily statement is offered by
way of suggestion on page 41.
A careful review of all the assets should be made
frequently, and their book value, as far as practi-
cable, adjusted to actual values, so that the books
and reports of the bank may, as nearly as possible,
represent the true condition of its affairs.
During recent years great improvements have
been made in the methods of bank book-keeping
40 HAND-BOOK I^OR BANK OFFICERS.
with the result of simplifying these and saving
time and labor. Information as to these may
readily be obtained from leading banking periodi-
cals, and also from the examiners and from banks
in the larger cities where these methods have been
generally adopted.
In conclusion, it is suggested that it is all-im-
portant that the accounts and books of a bank
should be posted up to date, as far as this may be
possible, and that frequent trial balances and veri-
fications are very necessary for the purpose of
developing and rectifying errors which, in spite of
all precautions will inevitably occur.
BOOKS, ACCOUNTS AND RE;C0RDS.
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42 HAND-BOOK. FOR BANK OFFICERS.
CHAPTER IV.
GENERAL BANKING POWERS CONFERRED BY
SECTION 5136, PAR. 7.
To exercise by its board of directors, or duly authorized
officers or agents, subject to law, all such incidental powers
as shall be necessary to carry on the business of banking;
by discounting and negotiating promissory notes, drafts, bills
of exchange, and other evidences of debt; by receiving de-
posits; by buying and selling exchange, coin and bullion; by
loaning money on personal security; and by obtaining, issu-
ing, and circulating notes according to the provisions of this
Title.
Court Decisions Construing These.
As it is very important to know what powers are
granted to a National. bank under its charter, the
following extracts from two decisions are quoted, as
throwing some light on this subject, and as show-
ing what a bank may safely and prudently do with-
out exceeding the powers clearly granted by its
charter.
From the decision of the Supreme Court of Penn-
sylvania, in Fowler z^s. Scully, in 1873 (Thomp-
son's National Bank Cases, p. 856), we quote, as
follows, on this point:
GENERAL BANKING POWERS. 43
In view of the rule of interpretation of such charters given
to us by the Federal courts, and the maxim expressio luiius
est excliisio alterius, the argument might close with the terms
of the power to loan money on personal security; for agree-
ably to this rule and maxim no other securitj^ than personal
can be taken for money lent. This is the law of the bank's
capacity and of its control. It accords also with the nature
of banking as a business, which is precisely described in the
language of the law itself ; the disco2inting and negotiating
of promissory notes, drafts, bills, and other evidences of debt
(meaning, of course, debts ejusdem ge7ieris, such as checks,
certificates of deposit, etc.); the buying and selling of bills
of exchange, bullion, and lending of money on personal se-
curity. The reasons are manifest. The business of a bank
is commercial, not that of dealing in real estate, brokerage,
etc. It, therefore, does not buy and sell real estate, ground-
rents, mortgages, stocks, produce, etc.
And, further, from United State.s Supreme Court
decision (First National Bank of Charlotte vs. Na-
tional Exchange Bank of Baltimore, Thompson's
National Bank Cases, p. 128), as follows :
Authority is thus given to transact such a banking busi-
'ness as is specified, and all incidental powers necessary to
carry it on are granted. These powers are such as are re-
quired to meet all the legitimate demands of the authorized
business, and to enable a bank to conduct its affairs within
the general scope of its charter safely and prudently. This
neces.sarily implies the right of a bank to incur liabilities in
the regular course of its business, as well as to become the
creditor of others. Its own obligations must be met, and
44 HAND-BOOK FOR BANK OFFICERS.
debts due to it collected or secured. The power to adopt
reasonable and appropriate measures for these purposes is an
incident to the power to incur the liability or become the
creditor. Obligations may be assumed that result unfortu-
nately, lyoans or discounts may be made that can not be
met at maturity. Compromises to avoid or reduce losses are
oftentimes the necessary results of this condition of things.
These compromises come within the general scope of the
powers committed to the board of directors and the officers
and agents of the bank, and are submitted to their judgment
and discretion, except to the extent that they are restrained'
by the charter or by-laws. Banks may do, in this behalf,
whatever natural persons could do under like circumstances.
To some extent it has been thought expedient in the Na-
tional banking act to limit this power. Thus, as to real es-
tate, it is provided (Revised Statutes, sec. 5137; 13 Stat., 107,
sec. 28) that it may be accepted in good faith as security for,
or in payment of, debts previously contracted; but, if ac-
cepted in payment, it must not be retained more than five
years. So, while a bank is expressly prohibited (sec. 5201;
13 Stat., no, .sec. 35) from loaning money upon or purchas-
ing its own stock, special authority is given for the accept-
ance of its shares as security for, and in payment of, debts
previously contracted in good faith; but all shares purchased
under this power must be again .sold or disposed of at private
or public sale within six months from the time they are ac-
quired.
Qtiotation.s from this decision will also be found
in paragraph on dealing in stocks and bonds (p.
50).
GENERAL BANKING POWERS. 45
Power to Borrow Money; Power to issue Time Cer-
tificates of Deposit.
As the question whether a National bank has
the power to borrow money involves the question
as to its right to issue time certificates of deposit,
the following extracts from third edition of " Morse
on Banks and Banking," by Parsons, to which we
are indebted for quotations made on other topics in
this work, are given as a summary of judicial
decisions bearing on this subject.
Business Pozvers. Par. 51, sec. 5. As invoh^ed in the
power to receive deposits, a bank may issue certificates of
deposit, which in Massachusetts and Pennsylvania are not
regarded as negotiable paper; but in other States they are
considered promissory notes (which seems clear upon any
defini-ion of a note to be found in the authorities), negotiable
under the same limitations as notes
They are used to save carrying money; but as they do not
pass by delivery, but only by indorsement, they are not in-
tended to circulate as money in the sense of a banking law,
such as the National or New York law; and, therefore, the
prohibition in those acts of issuing notes to ciradate as money,
other than those provided for or named in said acts, does not
interfere with the power of a bank to issue certificates of
deposit.
They may be payable on demand or on time, if the circum-
stances justify the bank in borrowing on time (see par. 63),
unless there is a restriction in the organic law or by statute.
If a bank can not issue its negotiable promissory note on
time, neither can it issue a negotiable certificate of deposit of
46 HAND-BOOK FOR BANK OFFICERS.
this description. If the note would be void, so, likewise, is
the certificate. If, however, the bank is empowered to issue
promissory notes, subject only to the restriction that it shall
issue none which are designed to pass into circulation as cur-
rency, but only such as become necessary in the ordinary"
course and conduct of its affairs, and are strictly business
paper, then it may issue certificates of deposit, whether pay-
able on demand or otherwise, subject only to the same restric-
tion. By reason of the ease with which such instruments
may be used for circulation, the courts have often been rigid
in scrutinizing them, and applying the strict letter of the law
to them; but they have never, that we have found, substan-
tially modified or departed from the general principles above
laid down.
Business Powers. Par. 63, sec. 9. So far as it is involved in
receiving deposits, borrowing is a part of banking, but bor-
rowing strido scnsu, taking a loan for a defiiiite time, instead
of one payable on demand, as ordinary deposits are, is not a
part of the business of banking, nor a necessary incident
thereof as s. contimcoiis practice ; but (like every other corpora-
tion in the United States) a bank has an inherent right to
borrow money whenever it is reasonably necessary in the
proper conduct of its business, unless specially restricted.
The privilege is the child of necessity, and is limited by the
same necessity or intrinsic propriety which gives it birth.
The borrowing must be incidental to the legitimate banking
business of the association, otherwise the act is tiltra vires;
as if the money is obtained for speculation. Aside from the
theory of law, as no one but the bank can well judge whether
a loan is reasonably necessary or not, the practical fact is
that a bank can borrow money whenever it wishes to, and, if
the money is used in its proper business, no fault will be found,
and even if wrongly applied, it will not affect the validity
of the loan as between the parties ordinarily. * * *
GENERAL BANKING POWERS. 47
The right to borrow money is also clearl}' im-
plied in section 5202, which fixes the limit for such
borrowing as follows:
No association shall at any time be indebted, or in any way
liable, to an amount exceeding the amount of its capital stock
at such time actually paid in and remaining undiminished by
losses or otherwise, except on account of demands of the na-
ture following:
First. Notes of circulation.
Second. Moneys deposited with or collected by the asso-
ciation.
Third. Bills of exchange or drafts drawn against money
actually on deposit to the credit of the association, or due
thereto.
Fourth. Liabilities to the stockholders of the association
for dividends and reserve profits.
From these it will appear that a bank has un-
doubted right to borrow money whenever it be-
comes necessary to do so in the regular course of
business, but that it should not make a practice of
doing so continuously. Whenever it becomes nec-
essary for a bank to borrow money habituall}^ in
order that it may be able to suppl}^ its regular cus-
tomers with accommodations, it is evident either
that its resources are locked up in inconvertible
forms, or that its capital is insufficient.
In the former case, ever}' effort should be made
to convert its assets into available funds, and in
48 HAND-BOOK FOR BANK OFFICERS.
the latter it should seek to increase its capital
stock to the extent of its regular needs, for it is
neither safe nor prudent to allow its customers to
depend for accommodation upon funds procured
frequently from a distance, which may at any time
be withdrawn by the lenders; and, further, if a
bank can make a profit by regularly lending money
for the use of which it has to pay interest, it would
seem that it has the ability to make the invest-
ment of additional capital stock profitable to those
by whom it may be contributed.
In conclusion, this power of a bank to borrow
money is one that should be exercised only by the
board of directors, or by the managers of the bank
with the special sanction and approval of the board.
It is a power intended for use in cases of emergency
only, and should be carefully held in reserve for
such occasions.
Bills Payable Defined.
It is a question with a bank sometimes to deter-
mine what items, if any, of its liabilities should be
included under the head of " bills payable" on its
books, and in its reports of condition. Strictly
speaking, all deposits with a bank are loans to it,
and the marked distinction between a "deposit"
GENERAL BANKING POWERS. 49
with a bank and money loaned to, or borrowed by, it
seems to consist in the circumstance that a "depos-
it" usually voluntarily seeks the bank, while a loan
to it is money which the bank seeks to borrow for
a longer or shorter period. But money may be
borrowed by a bank either on the condition that it
is returnable to the lender on demand^ or at some
fixed future date. It would seem that this then
should be the dividing line between "deposits," or
amounts " due to other banks," and "bills payable,"
namely, that if the amount borrowed is payable to
the lender only at some fixed future date, it should
be entered as "bills payable," but if payable on
demand^ as "deposits" or "due to other banks or
bankers." In the latter case it is necessary that
reserve should be maintained on the amount bor-
rowed, as is required on all liabilities payable on
demand, but no reserve is required on "bills pay-
able." It matters not whether money is borrowed
by a bank on promissory note, certificate of deposit,
open account, or otherwise; if it is not returnable
on demand it should be classed as "bills payable."
Post-Notes Defined.
It has at times been questioned whether the re-
striction as to issuing "post-notes" contained in
50 HAND-BOOK FOR BANK OFFICERS.
section 5183 did not extend to the issuing of time
drafts, time certificates of deposit, and other obli-
gations of the bank conditioned for payment at
some future time, but a recent court decision (Rid-
dle vs. National Bank, Butler, Pa., 27 Fed. Rep.,
503) has declared that time certificates of deposit
are not to be regarded as "post-notes." This de-
cision, considered in connection with the well-settled
principle that a bank has the right to borrow money
when necessary, would make it appear that the
term " post-notes " used in the statutes was intended
only to prevent the issue of such notes to circulate
as money.
Right to Deal in Stocks and Bonds Denied by tiie
Courts.
With regard to the right of a bank to deal in
s/oc/js, the Supreme Court (First National Bank of
Charlotte z's. National Exchange Bank of Baltimore,
92 U. S., 122) expressed the following opinion:
Dealing in stocks is not expressly prohibited; but such a
prohibition is implied from the failure to grant the power.
In the honest exercise of the power to compromise a doubtful
debt owing to a bank, it can hardly be doubted that stocks
may be accepted in payment and satisfaction, with a view to
their subsequent sale or conversion into money, so as to
make good or reduce an anticipated loss. Such a transaction
would not amount to a dealing in stocks.
GENERAL BANKING POWERS. 5 1
In support of this decision we find in the National-
bank Act itself internal evidence to the same effect.
Section 5154, in providing for the conversion of
State banks to National banking associations,
makes an exception in the matter of the par value
of the shares of such State banks, and another ex-
ception with regard to their holding stock in other
banks as follows:
And any State bank which is a stockholder in any other
bank, by authority of State laws, may continue to hold its
stock, although either bank, or both, nia^' be organized under
and have accepted the provisions of this Title.
The only reasonable inference to be drawn from
this special provision of the law, in favor of State
banks converting to the National system, is that
it was not intended that National banking associa-
tions — originally organized as such — should have
the power to purchase and hold such stocks as
investments.
And so with regard to the right of a bank to deal
in bonds. We quote, as follows, from the decision of
a Maryland court (Weckler v. First National Bank,
42 Md., 581):
To the u.sual attributes of banking, consisting of the right
to issue notes for circulation, to discount commercial paper,
and to receive deposits, this law adds the special power to
52 HAND-BOOK FOR BANK OFFICERS.
buy and sell exchange, coin, and bullion; but we look in vain
for any grant of power to engage in the business charged in
this declaration. It is not embraced in the power to ' ' dis-
count and negotiate" promissory notes, drafts, bills of ex-
change, and other evidences of debt. The ordinary meaning
of the term ' ' to discount " is to take interest in advance, and
in banking it is a mode of loaning money. It is the advance
of money not due until some future period, less the interest
which would be due thereon when payable. The power to
' ' negotiate ' ' a bill or note is the power to indorse and deliver
it to another, so that the right of action thereon shall pass to
the indorsee or holder. No construction can be given to these
terms, as used in this statute, so broad as to comprehend the
authority to sell bonds for third parties on commission, or to
engage in business of that character. The appropriate place
for the grant of such a power would be in the clause confer-
ring authority to " buy and sell; " but we find that limited
to specific things, among which bonds are not mentioned,
and upon the maxim expressio rinius est exclusio alterius, and
in view of the rule of interpretation of corporate powers be-
fore stated, the carrying on of such a business is prohibited ■
to these associations. Nor can we perceive it is anywise nec-
essary to the purpose of their existence, or in any sense inci-
dental to the business they are empowered to conduct, that
they should become bond-brokers, or be allowed to traffic in
every species of obligation issued by the innumerable cor-
porations, private or municipal, of the country. The more
carefully thej^ confine themselves to the legitimate business
of banking, as defined in this law, the more effectually will
they subserve the purposes of their creation. By a strict ad-
herence to that they will best accommodate the commercial
community, as well as protect their shareholders. Such is
our construction of this statute, and it is supported by the
GENERAL BANKING POWERS. 53
best considered authorities and the decided preponderance of
judicial opinion in other States.
From these decisions it would appear that, while
it is lawful for a bank to acquire stocks or bonds in
good {aiih/or the purpose of securing debts previously
C07itracted^ the power to "traffic" in them — that is,
to buy them with a view of selling them at a profit —
or to hold them as investments, is not among the
incidental powers enumerated in section 5136, and
is, therefore, a power which it has no legal right to
exercise.
From the general tenor of the law, and the re-
strictions therein imposed, and the construction
placed upon the law by numerous court decisions,
it would appear that the framers of the law in-
tended to prevent the banks, as far as possible,
from getting their assets into any inconvertible
form, and for this reason the restrictions as to real
estate transactions are imposed.
If the investment of their resources in stocks or
bonds, except to save debts previously contracted^
would have the same effect of locking up their
funds as do investments in real estate, and experi-
ence proves that frequentl}'- it does, then it would
seem that such investments should be avoided by
54 HAND-BOOK FOR BANK OFFICERS.
all bank managers who desire to be on tbe safe side
of the law.
The accumulation of a large fund of surplus and
undivided profits in a bank which it is unable to
invest profitably in such loans and discounts as are
permitted by law, make it apparently necessary for
the bank to purchase stocks, bonds, and other se-
curities as investments for these "surplus funds"
as they are sometimes termed, in order that the
stockholders may realize dividends on these funds,
and this will account mainly for the large holdings
of some banks.
It would seem, however, that the same ends could
be attained if these surplus funds or accumulated
profits were distributed in dividends to the stock-
holders and invested by them in the same securi-"
ties, either as individuals, or by trustees acting for
them in groups or as a whole, and such a course
would certainly remove any question as to the le-
gality of such investments when made by the bank
in its corporate capacity.
Purchasing Commercial Paper.
It is the custom of some banks to purchase com-
mercial or business paper, either from brokers or
from the actual owners of such paper without re-
GENERAL BANKING POWERS. 55
course to such brokers or owners, or in other
words, without their guarantee or indorsement.
Whether or not the power to do this is granted by
law to a National bank, has never been decided by
the United States Supreme Court, and the decis-
ions rendered by various State courts have been
both favorable and adverse to this view. (See
"Morse on Banks and Banking," third edition,
by Parsons, pars. 72 and 73.)
The whole question appears to hinge upon the
proper definition of the word "negotiating" occur-
ring in par. 7, section 5136. On this point, as on
some others, the National-bank Act appears to con-
tain some internal evidence as to the intended
meaning of this term, for in section 5200 w^e find
that "the discount of commercial or business
paper actually owned by the person negotiating
the same" is excepted from the limit as to amount
which is applied to direct loans, or " money bor-
rowed." As used in this section it is clear beyond
question that the word "negotiating" means sim-
ply "offering for discount," and, as elsewhere sug-
gested in this work, the evident reason for the
exception of such discounted paper from the limit
applying to "money borrow^ed," was that it was
56 HAND-BOOK FOR BANK OPF'ICKRS.
of course presumed that the person actually own-
ing and negotiating such paper would indorse
it, or guarantee its payment by the maker. If
this view is incorrect we look in vain for any
valid reason for the exception made in its favor.
It seems not unreasonable to assume, therefore,
that the word " negotiating," as used in par. 7, sec-
tion 5136, and following so closely after the word
"discounting" in the same clause, has the same sig-
nificance as that implied in section 5200, and that it
was intended to confer upon a bank only the power
to "offer for discount" or to "rediscount" paper
which, under the power granted in the same para-
graph, it had already "discounted."
At all events, so long as this point is not defi-
nitely adjudicated by the Supreme Court, it would,
seem to be the safer course for such National banks
as claim the right to exercise this power to purchase
paper without indorsement or guarantee, that they
should consider money invested under such cir-
cumstances practically as "money borrowed" by
the makers of the paper or as direct loans to them;
and, therefore, should limit such purchases in each
and every case to an amount not exceeding one-
tenth part of their capital stock as prescribed by
section 5200.
TEANS ACTIONS IN REAI< ESTATE. 57
CHAPTER V.
TRANSACTIONS IN REAI. ESTATE.
Sec. 5157. A National banking association may purchase,
hold, and convey real estate for the following purposes, and
for no others:
First. Such as shall be necessar}^ for its immediate accom-
modation in the transaction of its business.
Second. Such as shall be mortgaged to it in good faith by
way of security for debts previously contracted.
Third. Such as shall be conveyed to it in satisfaction of
debts previously contracted in the course of its dealings.
Fourth. Such as it shall purchase at sales under j udgments,
decrees, or mortgages held by the association, or shall pur-
chase to secure debts due to it.
But no such association shall hold the possession of any
real estate under mortgage, or the title and possession of any
real estate purchased to secure any debts due to it, for a longer
period than five j-ears.
Restrictions Imposed by Law.
It will be clearly perceived from the language of
this section that the only purpose for which a
National bank may lawfully " purchase, hold, and
convey real estate" (other than its "banking house")
is b\^ way of securit}^ for "debts previousl}- con-
tracted." This is emphasized by the use of the
58 HAND-BOOK FOR BANK OFFICERS.
words "and for no others" in the first paragraph
of the section, and altogether the intent of the
statute is as explicitly expressed as plain language
.can do this, yet in case any doubt arises as to this
intent^ we have further the plain construction placed
upon it by the Supreme Court in the decision
already quoted on page 44 in the following lan-
guage :
Thus, as to real estate, it is provided (section 5137) that
it may be accepted in good faith as security for, or in paj^ment
of, debts previously contracted; but if accepted in payment, it
must not be retained more than five years.
This limit of five years was probably fixed by
the framers of the law as affording ample time for
disposing of such real estate.
It is presumed in some cases where a bank is'
either unable or unwilling to dispose of real estate
at the end of the five-year limit, that it conforms to
the legal requirement when it charges the value of
the real estate .off its books, but this is a mistaken
view of the law, which requires that the title to, or
mortgage on, real estate should be disposed of, and
makes no reference to the appearance of its value
among the assets of the bank.
In some cases the law on this particular point of
TRANSACTIONS IN REAL ESTATE. 59
holding possession is construed as referring to
the actual occupancy by the bank of the real estate
for which the bank holds title or mortgage. It is
scarcely necessary to state that the word "posses-
sion" refers to the holding of the written legal
instrument by the bank, and not to the actual occu-
pancy by the bank of the property over which the
title or mortgage gives it legal control.
4
Securities Based on Real Estate Values.
Besides titles and mortgages, however, there are
so many other forms under which an interest in
real estate may be acquired, to which the letter of
the law does not apply, and with regard to the hold-
ing of which the question of legality will arise, that
the language of the opinion of the United States
Supreme Court, in its decision in the case of Union
National Bank vs. Matthews (98 U. S., 658), is
quoted below as bearing directly on this question.
The court, with regard to section 5136, which
permits a bank to loan money "on personal secu-
rity," said: ■
Section 5136 does not, in terms, prohibit a- loan on real
estate, but the inii:)lication to that effect is clear. What is so
implied is as effectual as if it were expressed.
6o HAND-BOOK FOR BANK OFFICEIRS.
Passing on to the restrictions imposed by section
5137, it defined the object of these as follows:
The object of the restrictions (in section 5137) was obviously
threefold. It was to keep the capital of the banks flowing in
the daily channels of commerce, to deter them from embark-
ing in hazardous real estate speculations, and to prevent the
accumulation of large masses of such property in their hands
to be held, as it were "in mortmain." The intent, not the
letter of the statute, constitutes the law.
With this language in view, it would appear
that the holding of real estate in any form ex-
cept for the purposes clearly stated in section
5137 should be carefully avoided by all bank
managers who desire to conform to the "intent
of the statute."
For this reason, the holding, as investments^ of
any and all stocks, bonds, or other securities,
the value of which rests directly upon real estate,
except to save debts previously contracted^ should
be regarded by such managers as violations of
the spirit of the law, if not of its letter.
Some of the forms, other than deeds and mort-
gages, in which real estate values present them-
selves, are the following: land debenture bonds;
the stocks and bonds of land improvement compa-
nies, mortgage and trust companies, building and
loan associations; of companies whose capital is
TRANSACTIONS IN REAL ESTATE. 6 1
wholly invested in theatres, opera-honses, hotels,
elevators, cotton-presses, warehouses, and the
stocks or bonds of an}^ similar enterprises where
the capital is invested mainly, or entirely, in
real estate.
In connection with this subject of holding or
dealing in real estate securities, what is said else-
where with regard to dealing in stocks and bonds
generally (page 51) should also be taken into con-
sideration.
As such stocks, bonds, and other securities of
like nature, though depending largely or entirely
upon real estate for their value, are personal secu-
rity^ the holding of them as collaieral security for
loans appears to be warranted by law, which per-
mits "the loaning of money on personal security."
(Section 5136.)
Supreme Court Decisions.
With regard to making loans, secured by pledge
of notes or bonds secured by liens on real estate
(such as mortgages, deeds of trust, and the like)
as collateral security for such loans, the Supreme
Court, in the case of Union National Bank vs.
Mattheivs^ already referred to, decided that the
taking of such collateral security is not unlaw-
ful, inasmuch as the mortgage or its equiva-
62 HAND-BOOK FOR BANK OFFICERS.
lent in such cases does not run directly to
the bank, but to the borrower.
In the Matthews case, the court was asked
to decide as to the legality of the following
transaction :
A National bank loaned a mercantile firm $15,000
on its promissory note. The firm assigned to the
bank, as collateral security for this loan, a note for
a like amount made by two persons in favor of the
firm, which note was secured by a deed of trust on
real estate, executed by one of the makers of the
collaters.1 note. The firm failed to repay their loan
at maturity, and the bank proceeded to realize upon
the real estate^ whereupon the maker of the deed
attempted to enjoin the bank from doing this,
"upon the ground that the loan was made upon
real security, which was forbidden b}^ the statute."
The court decided that the loan was not unlawful,
and the grounds upon which it reached its decision
on this point are given in the following passage
from its decision in the case of National Bank vs.
Whitney (103 U. S., 99), in which the court clearly
restated the Matthews case, and used the following
language :
In coming to this conclusion this court considered the
transaction in two aspects: first, as not being within the let-
TRANSACTIONS IN REAL ESTATE. 63
ter of the statute, because the deed of trust was not executed
to the bank. * * *
Viewed in the first aspect, the court held that, as a mort-
gage, the deed of trust was merely an incident to the note,
and a right to its benefit, whether it was delivered or not
with the note, passed with the transfer of the latter. If the
loan had been made upon the note alone, the benefit of the
deed as a mortgage would have inured to the bank by oper-
ation of law. Of course, that which the law would give
independently of a direct transfer by the mortgagee, the
statute did not intend to defeat, because such transfer was
made.
The decision appears to have been based upon
the view, first, that the collateral note, even though
secured by the deed of trust, ^2JS, personal security;
and, secondly, that the deed of trust (which it re-
garded as the equivalent of a mortgage) was not
executed directly io the bank.
In making loans on such collateral security,
however, the object of the restrictions contained in
section 5137, and the "intent of the statute," as
defined by the Supreme Court in the Matthews
decision, should always be held in mind; and the
decision of the court in this case is not to be con-
strued as warranting loans on such securit}^, which
do not in reality, as well as in appearance, fully
conform to the actual conditions of the case upon
which the decision was rendered.
64 HAND-BOOK FOR BANK OFFICERS.
CHAPTER VI.
RESTRICTIONS AS TO LOANS IMPOSED BY SEC-
TION 5200.
Sec. 5200. The total liabilities to any association, of any
person, or of any company, corporation, or firm for money
borrowed, including, in the liabilities of a company or firm,
the liabilities of the several members thereof, shall at no time
exceed one-tenth part of the amount of the capital stock of
such association actually paid in. But the discount of bills
of exchange drawn in good faith against actually existing
values, and the discount of commercial or business paper
actually owned b}^ the person negotiating the same, shall not
be considered as money borrowed.
Examples Illustrating Excessive Loans and Such as
are Not Excessive.
There is probably no section of the National-
bank Act that leaves more doubt as to its true and
exact application than this which prescribes a limit
to loans.
As far as the iJitent of the framers of this section
can be divined it appears to make a distinction be-
tween "loans" and "discounts." The restriction
is limited to "money borrow^ed" by an}?- "person,"
"company," "corporation," or "firm," including in
the liabilities of a company or firm for money bor-
RESTRICTIONS AS TO LOANS. 65
rowed, the liabilities of the several members thereof,
and ill order to determine whether a "loan" is ex-
cessive or not, it is important to know who gets the
benefit of the "money borrowed" from the bank.
The paper npon which loans are made varies so
mncli in form that nothing but the knowledge of
the actual facts connected with each transaction
can enable the officers of a bank to determine
whether or not they are violating this section of the
law.
The number of phases in which the question
presents itself to a bank is almost limitless, but a
few examples are given, by way of illustration,
which, it is hoped, will make the general meaning
more clear than it appears from the text.
I. Taking a bank with a capital of $100,000 act-
ually "paid in," and assuming that the firm or
company of John Smith & Co. wishes to "borrow
money" from the bank, up to the limit, it would not
be lawful to loan them more than $10,000 (one-
tenth of the "capital stock"); and the fact that
John Smith & Co. were able to give the strongest
and best indorsers for an amount greater than
$10,000, or to put up collateral securit}^ of ample
and undoubted market value, would not entitle them
66 HAND-BOOK FOR BANK OFFICERS.
lawfully to borrow one dollar more than $10,000, as
the law makes no exception in such cases, the limit
applying solely to the amount of the loan without
reference to its security.
2. If, before the firm applied for a loan, John
Smith or any one partner had borrowed $10,000
for his individual benefit^ then it would not be law-
ful to loan anything to the firm, for their limit for
"money borrowed" would have already been ex-
hausted by the loan to such member of the firm.
3. It is questionable whether it would be lawful
in such a case for the bank to loan any money on the
paper of any person, firm, or corporation, with John
Smith & Co., as indorsers of such paper, if it were
known that John Smith & Co. were directly tO get
the benefit of the money so borrowed, for this would
appear to be an evasion of the law ; but if any per-
son, firm, or corporation, whose paper was indorsed
by John Smith & Co., wanted to borrow money on
such paper for his or its individual benefit, the fact
that it was indorsed by John Smith & Co. would
not make a loan to such person, firm, or corpora-
tion unlawful.
4. In case John Smith & Co., as a firm, had bor-
rowed no money of the bank it would be lawful to
RESTRICTIONS AS TO LOANS. 67
loan to each member of the firm, upon his individual
credit and responsibility, an amount equal to the
limit, provided the money so borrowed by each
partner was for his individual benefit, and not for
the benefit of the firm.
5. Again, if John Smith & Co. had "borrowed
money" up to the limit, and any other person, firm,
or corporation should choose to borrow money of
the bank upon his or its own responsibility and
credit, it would be lawful for any such person,
firm, or corporation, to let John Smith & Co. have
the benefit of the money so borrowed. It is no
affair of the bank to know what disposal is made
by the borrower of the money borrowed.
6. It sometimes happens that several different
firms have one or more partners in common, and
the question will arise whether it is lawful to loan
each one of the firms an amount equal to the limit.
In such a case it would seem that if such firms are
doing business entirely upon the capital owned
solely by such common partner, or partners, they
should be regarded virtually as one firm, and the
total of loans to them should not exceed the limit;
but if each of the different firms really represents
separate and distinct capital invested in its business,
68 HAND-BOOK FOR BANK OFFICERS.
it appears that loans up to the limit may lawfully
be made to each firm.
Deposits with Banks and Bankers regarded as
Loans.
Amounts on deposit with State and private banks
and bankers in excess of one-tenth of the capital
stock, have always been held by the Comptroller's
of&ce to be violations of this section also, for the
following reasons :
In the decision of Bank vs. Lanier (ii Wallace,
369), which was on some other point of law, the
Supreme Court pronounced the following opinion
as to "deposits," viz.:
But a deposit is nothing but a loan of money. * * *
It is well known that country' banks keep on deposit in New
York with bankers and merchants a considerable amount of
money for their own convenience, for which they receive
more or less of interest. But whether interest be obtained
or not, these deposits are, equally with paper discounted over
the counter of the bank, loans of money, and the reason of
the rule is equally applicable to them. The banker is ac-
countable for the deposits he receives as a debtor, and the
individual borrower of money from the bank sustains no
other relation to it. In both cases money is borrowed, to be
returned in a greater or less period of time, according to the
contract of the parties.
In this view of the case, deposits are loans, and
as a State bank, a private bank, or a banker is
RESTRICTIONS AS TO LOANS. 69
either a person, a company, a corporation, or a firm,
any deposit with any such person, company, cor-
poration, or firm is regarded as a loan, or "money
borrowed," and is subject to the restriction as to
amount, which is prescribed by section 5200. It
ma}^ be that the courts would not hold that amounts
in excess of the limit sent to such banks or bankers
for collection are to be regarded as in violation of
law, but measures should be taken to reduce such
amounts within the limit as soon as it is ascer-
tained that the collections have been made b}^ the
bank or banker receiving the same.
Exceptions as to Discounts and Examples Illus-
trating These.
Coming, then, to the case of "discounts," which
are excepted from the restriction as to amount, two
exceptions are made, as follows :
" I. The discount of bills of exchange drawn in good faith
against actually existing values;" and,
"2. The discount of commercial or business paper actually
owned by the person negotiating the same."
Such paper as is clearly embraced in these two
classes, the law says, "shall not be considered as
money borrowed," and is, therefore, to be excepted
from the restriction as to amount.
70 HAND-BOOK FOR BANK OFFICERS.
As an illustration under the first exception, if
the firm of John Smith & Co., who had already
" borrowed money " to the extent of the limit, should
offer the same bank bills of exchange drawn against
shipments of cotton, wheat, corn, iron, or any other
merchandise which is readily convertible into
money, it would be lawful for the bank to discount
such paper to any limit which it considered safe.
Such bills or drafts are generally secured by the
attachment of bills of lading for the shipments
against which the bills are drawn, but if the bank
is satisfied of the actual existence of the values
and with the good faith of the parties to the trans-
action, the security of bills of lading, though
desirable, is not absolutely essential.
With regard to the scope of the second excep-
tion, it will be assumed, for the sake of example,
that the firm of John Smith & Co., who have
already "borrowed money" up to the legal limit,
offer to the same bank for discount paper which
they have taken from their customers either for
merchandise sold, money loaned, or other valuable
consideration. In such a case, if John Smith &
Co. are the bona fide owners of such paper, the
rkstrictions as to loans. 7t
bank may discount it for John Smith & Co. as
"commercial or business paper actually owned by
the person negotiating the same" to an}' limit
which, in the judgment of the directors of the bank,
it may be considered safe to do so.
Again, if the business paper of John Smith &
Co. were offered to the bank for discount by any
person, firm, company, or corporation actually
owning such paper, it would be lawful for the bank
to discount the same, although John Smith & Co.
had already "borrowed money" of the bank to the
legal limit.
It would seem that the intent of the framers of
this section was, using a homel}' phrase, to prevent
a bank from putting " all its eggs into one basket"
by making direct loans to any one person, firm, or
corporation, for even if the borrower were abun-
dantly good, or could lodge with the bank ample,
undoubted securit}^ for the " money borrowed," tlie
loan of a large amount to any one part}- able to offer
such security might operate to deprive others of
their due share of the benefits afforded b}' a bank,
which is established for the accommodation of the
public at large.
72 HAND-BOOK FOR BANK OFFICERS.
The exceptions noted were probably made be-
cause the transactions covered by them were not
only regarded as being generally better secured by
reason of the guarantee of both parties to such
transactions, but also because in this way the bene-
fits of the bank's resources would be better dis-
tributed to the public for whose accommodation it
is established.
Overdrafts are Loans.
Overdrafts are temporary direct loans to the
parties making them, or "money borrowed" in the
least desirable form, and, as such, should be so re-
garded and treated in computing the total liabilities
to the bank of any person, firm, company or cor-
poration for " money borrowed."
HOLDING ITS OWN STOCK. 73
CHAPTER VII.
RESTRICTIONS WITH REGARD TO A BANK'S AC-
QUIRING AND HOLDING ITS OWN STOCK.
' Sec. 5201. No association shall make any loan or discount
on the security of the shares of its own capital stock, nor be
the purchaser or holder of any such shares, unless such se-
curity or purchase shall be necessary to prevent loss upon a
debt previously contracted in good faith; and stock so pur-
chased or acquired shall, within six months from the time of
its purchase, be sold or disposed of at public or private sale;
or, in default thereof, a receiver may be appointed to close up
the business of the association, according to section 5234.
Penalty for Holding beyond Time Limit.
It will be observed that the law provides a pen-
alty which may be summarily applied by the
Comptroller to an}^ violation of the law in this re-
spect, and the reason for this it is not dif&cult to
find.
Whenever a bank uses any portion of its capital
to make a loan on its own shares, or to purchase
them, it reduces or impairs its capital stock by such
an amount, and, in addition, deprives its creditors
of the additional security afforded b}^ the contingent
74 HAND-BOOK FOR BANK OFFICERS.
liability attaching to the shares, if held by a solvent
shareholder.
Violations of the spirit of this section, if not of
the letter, not infrequently occur upon the organi-
zation of a bank, where shareholders are allowed to
give their notes for a portion or the whole of their
holdings, without being required to lodge their
stock with the bank as security, in direct violation
of the letter of the law.
Such evasions of law by officers, on the threshold
of a bank's career, do not augur well for its future
success, which must depend largely upon honest
and fair dealing with all parties having intercourse
with it.
The term of six months, during which a bank is
allowed to hold its own stock taken for debt, was
probably fixed because regarded as ample time in
which to arrange for its disposal.
EARNINGS, SURPLUS, AND DIVIDENDS. 75
CHAPTER VIII.
EARNINGS, SURPLUS, AND DIVIDENDS.
Sec. 5199. The directors of any association may, semi-
annually, declare a dividend of so much of the net profits of
the association as they shall judge expedient; but each asso-
ciation shall, before the declaration of a dividend, carry one-
tenth part of its net profits of the preceding half year to its
surplus fund until the same shall amount to twenty per
centum of its capital stock.
Sec. 5204. No association, or any member thereof, shall,
during the time it shall continue its banking operations,
withdraw, or permit to be withdrawn, either in the form of
dividends or otherwise, any portion of its capital. If losses
have at any time been sustained by anj^ such association,
equal to or exceeding its undivided profits then on hand, no
dividend .shall be made; and no dividend shall ever be made
b}' an}' association, while it continues its banking operations,
to an amount greater than its net profits then on hand, de-
ducting therefrom its lo.sses and bad debts. All debts due to
any a.ssociations, on which interest is past due and unpaid
for a period of six months, unless the same are well secured,
and in process of collection, shall be considered bad debts
within the meaning of this section. But nothing in this sec-
tion shall prevent the reduction of the capital stock of the
association under section fifty-one hundred and fort> -three.
Sec. 5212. In addition to, the reports required by the pre-
ceding section, each a.ssociation shall report to the Comp-
troller of the Currency, within ten days after declaring any
76 HAND-BOOK FOR BANK OFFICERS.
dividend, the amount of such dividend, and the amount of
net earnings in excess of such dividend. Such reports shall
be attested by the oath of the president or cashier of the
association.
Legal Requirements regarding Net Profits and Sur-
plus; "Bad Debts" Defined.
Section 5199 empowers the directors to declare a
dividend semi-annnally, if the "net profits" of the
bank will admit; and, as there appears to be no pro-
hibition in the law against their declaring dividends
oftener than this, or less frequently, they are per-
mitted to do so, provided they comply with all the
requirements of the law in respect to surplus, divi-
dends, and earnings. Before declaring a dividend
it is necessary, of course, to know whether the "net
profits "will admit of this, and section 5204 requires
that "net profits" must be arrived at by deducting
from gross earnings, or "undivided profits" from
all sources, the following items:
1. Expenses and taxes paid.
2. Losses which have been sustained from any cause.
3. The amount of "bad debts" as these are clearly defined
by section 5204. It will be observed here that these debts,
which are technically "bad," are not to be confused with
those which are known to be actually bad, for these latter
should be classed with ' ' losses tustained ; ' ' but, at the same
time, section 5204 requires that debts which are "bad"
technically should always be taken into account in comput-
EARNINGS, SURPI.US, AND DIVIDENDS. 77
ing net profits before declaring a dividend, whether they are
charged off the books of the bank or not.
Having arrived at the "net profits " in this way,
it is necessary that every»bank whose "surplus
fund " is less than 20 per cent, of its capital stock
should, before declaring a dividend, carr}' at least
10 per cent, of these profits to this fitnd as required
by section 5199. The bank may, if it so desires,
carry to the fund an amount greater than the re-
quired 10 per cent, of its "net profits," but, once
this is done, the law makes no provision for with-
drawing the excess so. carried for the purpose of
declaring a dividend so long as the surplus is less
than the required 20 per cent. '^'Vhile the law is
entirel}^ silent as to the purposes for which the
surplus is created and may be used, the presump-
tion is that the object of its accumulation is to
provide a fund for meeting unexpected or unusual
losses without resorting to an assessment of tlie
stockholders, in case such losses exceed the "un-
divided profits" on hand at the time; and, in this
view of the subject, a bank whose surplus is 20
per cent, or less is allowed to use the whole or a
portion of it to make good such losses, but only
then after it has first exhausted all of its " undi-
78 HAND-BOOK FOR BANK OFFICERS.
vided profits" on hand. In such a case, a bank
having to use all of its undivided profits for
making losses good, has, of course, nothing
wherewith to declare a dividend, and must per-
force pass its dividend for such a period. As soon
thereafter, however, as its " net profits " will admit,
it may declare a dividend, but before doing this it
will be necessary to carry one-tenth of such profits
to the surplus fund, which has been reduced below
20 per cent., and to continue to do this at the end of
each dividend period until this fund again reaches
the required limit of 20 per cent.
Whenever the surplus of a bank exceeds 20 per
cent, of its capital, it is lawful for the directors to
use the excess for declaring a dividend or for
making losses good, and in this latter case it will
not be necessary to pass any dividend, provided
the excess over 20 per cent, in the surplus is suffi-
cient to provide for such losses.
Legal Requirements with regard to Reports of Div-
idends and Earnings; How to Make These Up.
As section 5212 prescribes that "each asso-
ciation shall report to the Comptroller of the
Currency within ten days after declaring any
dividend, the amount of such dividend, and the
EARNINGS, SURPLUS, AND DIVIDENDS. 79
amount of net earnings in excess of such dividend,"
and further, that " such reports shall be attested by
the oath of the president or cashier of the asso-
ciation," it is necessary that banks should make
reports to the Comptroller, not only at their regular
semi-annual dividend periods, but also of any quar-
terly or special dividends they may declare between
those periods; and, in order to comply with the
requirements of the law, reports of any such
special dividends should be made in the same
form as reports of earnings and dividends made
at the regular semi-annual periods,, so as to show
not only the net profits on hand at date of
previous report, but also the gross earnings from
all sources since, as well as deductions for all
expenses and taxes paid, losses incurred, and
"bad debts," as defined by section 5204. Other-
wise its "net earnings, in excess of such divi-
dend," can not be truly shown by the report.
In making such special dividend reports, it is
not necessar}'- that a bank should close the accounts
on its books, if it does not desire to do so, but it is
essential that all items showing profit and loss for
the period covered by the report should be fully
entered in the report.
8o HAND-BOOK FOR BANK OFFICERS.
Capitalization of Surplus.
While a bank having a surplus equal to, or less
than, the required 20 per cent, may not be permit-
ted by the Comptroller to capitalize such surplus
in case of any increase of its capital, any bank
having a surplus exceeding this limit is, of course,
permitted to convert the amount in excess of the
20 per cent, into capital if it so desires, for such
excess practically represents "undivided profits."
Where the surplus is equal to, or less than, 20
per cent., the original shareholders may, however,
utilize a portion of this surplus in the following
manner:
The capital being $50,000, the surplus $10,000,
and the proposed increase $50,000, the ratio of the
surplus ($10,000) to the increased capital ($100,000)
will be 10 per cent. If the new stock be placed at
no (its true value) a premium of $5,000 will be
realized on the increase when sold, which premium
should properly go to the original shareholders
(the owners of the surplus) who in place of the
premium so collected relinquish to the new share-
holders a corresponding interest in the surplus
fund.
The rate of premium in any given case may be
obtained by dividing the amount of surplus by the
amount representing the total capital stock after
the proposed increase is added.
REPORTS OF CONDITION. 8 1
CHAPTER IX.
REPORTS OF CONDITION REQUIRED BY SECTION
5211.
Sec. 52 1 1 . Every association shall make to the Comptroller
of the Currency not less than five reports during each year,
according to the form which maybe prescribed by him, veri-
fied by the oath or afiirmation of the president or cashier of
such association, and attested by the signature of at least
three of the directors. Each such report shall exhibit, in
detail and under appropriate heads, the resources and liabili-
ties of the associations at the close of business on any past
day by him specified; and shall be transmitted to the Comp-
troller within five days after the receipt of a request or requi-
sition therefor from him, and in the same form in which it is
made to the Comptroller shall be published in a newspaper
published in the place where such association is established,
or if there is no newspaper in the place, then in one pub-
lished nearest thereto in the same county, at the expense of
the association; and such proof of publication shall be fur-
nished as may be required by the Comptroller. The Comp-
troller shall also have power to call for special reports from
any particular association whenever in his judgment the
same are necessary in order to a full and complete knowledge
of its condition.
Sec. 5213. Every association which fails to make and
transmit any report required under either of the two preceding
sections shall be subject to a penalty of one hundred dollars
for each day after the periods, respectively, therein men-
82. HAND-BOOK FOR BANK OFFICERS.
tioned, that it delaj^s to make and transmit its report.
Whenever any association delays or refuses to pay the pen-
alty herein imposed, after it has been assessed by the Comp-
troller of the Currency, the amount thereof may be retained
by the Treasurer of the United States, upon the order of the
Comptroller of the Currency, out of the interest, as it may
become due to the association, on the bonds deposited with
him to secure circulation. All sums of money collected for
penalties under this section shall be paid into the Treasury
of the United States.
AN ACT
Defining the Verification of Returns of National Banks.
Be it enacted by the Senate and House of Representatives
of the United States of America in Congress assembled^
That the oath or affirmation required by section fifty-two
hundred and eleven of the Revised Statutes, verifying the
returns made by National banks to the Comptroller of the
Currency, when taken before a notary public properly au-
thorized and commissioned by the State in which such
notary resides and the bank is located, or any other officer
having an official seal, authorized in such State to admin-
ister oaths, shall be a sufficient verification as contemplated
b):- said section fifty-two hundred and eleven : Provided^
That the officer administering the oath is not an officer of
the bank.
Approved February 26, 1881.
Information with regard to Same; Filling Out Sched-
ules.
The examination of five reports of condition a
year from each of over 3,300 banks necessarily
involves a large amount of correspondence betw^een
REPORTS OF CONDITION. 83
the Comptroller's office and the banks. Much of
this correspondence relates to violations of law,
such as excessive loans, loans on, and investments
in, real estate, deficient reserve, etc., but a very large
proportion is made necessary by omissions on the
part of those who make up the reports to fully fill
out schedules on the back of the report, and a little
more care in this respect would relieve the banks
from the trouble and annoyance of replying to the
thousands of letters which are addressed to them
for the purpose of obtaining information which
should be given in the report when rendered.
The law requires the banks to make these re-
ports to the Comptroller " five times a year," "ac-
cording to the form which may be prescribed by
him," and, under this authority, he calls for cer-
tain information in the schedules on the back,
which it is important to have in order to know the
true condition of each bank, and whether its opera-
tions are conducted in conformity to law or not.
When it is remembered that, as a rule, the ex-
aminer visits each bank only once a year, it is
very important that these sworn statements of
condition should be full and complete in every re-
speqt. In very many cases violations of law and
84 HAND-BOOK FOR BANK OFFICERS.
incorrect practices, which occur through ignorance
or inexperience, are developed by these reports,
and timely warning and suggestion from the
Comptroller's office are all that is necessary to
prevent recurrence.
The items which are most frequently omitted
from the schedules are the following:
Bad debts, as defined by section 5204, Revised Statutes.
Other suspended and overdue paper.
lyiabihties of directors (individual and firm) as payers.
Under the first of these three the bank is re-
quired to state, not debts that are actually worth-
less, but all such as are technically "bad debts"
as clearly defined by section 5204. The amount of
"bad debts" on the books of a bank has a very
important bearing on its condition, for if this
exceeds the sum of its surplus fund and net un-
divided profits, it is an indication that its capital
may be impaired.
The schedule of "stocks, securities, judgments,
claims, etc.," should clearly show the different
items composing the total of these, and is in-
tended to embrace only such items as are owned
by the bank. Any such items held as collateral
for loans should not be entered here, but in the
REPORTS OF CONDITION. 85
appropriate place in schedule of "loans and dis-
counts." No real estate items should be entered
here, but in the schedule for " loans and discounts,"
if held as collaterals, and in schedule for "other
real estate and mortgages owned," if owned by
the bank. In this latter schedule, as also in the
schedules provided for listing "loans and dis-
counts, secured b}^ mortgages or other real estate
security," it is important to state Jiow and luJien
such investments or collaterals were acquired, in
order to show whether they were acquired in con-
formity to provisions of section 5137, and whether
they have been held longer than five years.
In a great many cases replies from the banks
show that no entries are to be made in the schedules
left blank, but as it is impossible to infer this from
the face of the report in the case of bad dchis^ over-
due paper ^ liabilities of directors^ and excessive loans ^
it is necessary to address a letter of inquir}' to the
bank in each case. For this reason a note in red
ink is printed conspicuousl}' on the back of the
report, requesting the bank to "fill all schedules,
writing in the word ' none ' wherever no amount is
to be entered."
86 HAND-BOOK FOR BANK OFFICERS.
Verification and Attestation.
After seeing that a report of condition has been
properly filled out, both with regard to the items of
" resources " and " liabilities " on its face and the
schedules on the back, it is necessary to see that it
is signed, sworn to, and attested as required by
law. It must be signed either by the president or
cashier, as no other officer is e77tpowered by section
^211 to do tJiis^ and attested by three directors, as
required by the same action. The officer signing
the report, if a director, should not sign in attesta-
tion of his own signature, as it is hardly to be sup-
posed that this was contemplated by the law; and
finally the officer signing should swear to it before
a notary public, or other officer having an of&cial
seal, and authorized to administer oaths, as required
by the act approved Februar}^ 26, 1881. As this
act provides that the officer administering the oath
should not be "an officer of the bank," the oath
should not be administered by a director acting in
that capacity, for the reason that in section 5497,
enacted prior to the act of Februai;y 26, 1881, a di-
rector is evidently regarded as an officer^ inasmuch
as the following language is used: " Every presi-
REPORTS OF CONDITION. 87
dent, cashier, teller, director, or other officer of any
bank or banking association."
How to Proceed in Absence of Three Directors, or of
both President and Cashier.
Should it ever happen that the signatures of three
attesting directors required by law can not be pro-
cured within five days after receipt of report blanks,
or should it be impossible to obtain the signature
of either the president or the cashier in time, through
the absence or disability of both these officers, all
that can be done is to make up a temporary report
signed by some other officer, attested by the signa-
tures of as many directors (not over three), as it is
possible to obtain, and promptly forward this to the
Comptroller within the five days allowed. In such
cases, a letter explaining the circumstances should
always accompany the report, and a complete re-
port, inade up in all respects as required by law,
should be forwarded to him at the earliest possible
day thereafter
Penalty for Delay in Forwarding Reports.
It will be observed that section 5213 prescri1)es a
penalty of $100 a day for each da3'''s delay beyond
the period named for forwarding reports of condition,
88 HAND-BOOK FOR BANK OFFICERS.
and for this reason particular care should be taken
to forward these reports to the Comptroller's office
"within five days after the receipt of a request or
requisition therefor from him;" that is, within five
days after the date upon which the "call" and re-
port blanks are received by the bank.
MATTERS OF MANAGEMENT AND POLICY. 89
CHAPTER X.
MATTERS OF MANAGEMENT AND POLICY.
Overdrafts.
The practice of allowing customer's accounts to
be overdrawn is one that pretty generally prevails
in the banking business without reference to local-
ity, and so long as a due regard to the security of
such overdrafts is had, the policy of allowing them
is not necessarily attended with danger. It is a
privilege, however, that may very readily be abused
by the customers of a bank, unless great care and
prudence is exercised by its officers, and undue
laxity on the part of one bank is very apt to induce
its competitor to pursue a similar course through
fear of losing business.
In certain portions of the countr}^ and at certain
periods of the year — notably in the South and
West — the rapid marketing of the great crops of
cotton, wheat, corn, etc., creates conditions under
which overdrafts are for a season practically un-
90 HAND-BOOK FOR BANK OF^FICERS.
avoidable, and under such circumstances it is only
necessary that the bank should look carefully to
securing itself for these temporary loans, by ware-
house or elevator receipts, or bills of lading, further
protected by fire or marine insurance, in order to
eliminate from the practice the chief elements of
danger. Whenever it is practicable to do so, demand
notes for the average amount of accommodation
granted in this manner should be taken, and, of
course, interest should always be charged for the
use of money loaned in this way.
In reporting overdrafts in statements of condition
to the Comptroller, the amount of same should not
be deducted from " deposits " so as to decrease liabili-
ties shown under this item in the report, but entered
as an item of "resources." In classifying them in
schedule on back of report, the " secured" should be
separated from the "unsecured," and in s;^ating
amounts "standing" for certain periods of time
named in the schedule, only overdrafts that have
been continuously standing at fixed amounts for
the periods named, without any change in the
accounts in which they appear should be stated as
"standing."
MATTERS OP MANAGEMENT AND POLICY. 9I
Renewing Paper by noting Payment of Interest on
Same.
With some banks it is the custom to renew paper
at maturity by simply noting or indorsing the pay-
ment of interest on it. The distance at which the
customers of a bank live from it in some localities,
the inconvenience the}^ would undergo in coming
personally to renew their notes at maturity, and
other circumstances, make this course necessary
in such cases, and sometimes desirable; but care
should always be taken by the bank to see that no
claim on any indorser or suret}^ on the paper is
forfeited by failure to give such indorser or surety
proper and full notice, by protest or ether means,
of its non-payment at maturity, and this precaution
should be always taken when paper becomes over-
due, whether interest is paid at maturit}- or not.
In extending paper by pa3nnent of interest, a full
memorandum should be noted on it, in ink, of the
amount of interest paid, the date on which it is
paid, and the period of time for which it is agreed
to extend it, so that these data may show the basis
of the new transaction.
Renewal of Discounted Commercial Paper.
It sometimes occurs that paper originally dis-
counted by a bank as "commercial or business
92 HAND-BOOK I^OR BANK OFFICERS.
paper " is, at maturity, renewed with the mutual
consent of all parties concerned. Unless the con-
ditions warranting the discount of such paper re-
main practically unchanged- at time of renewal, it
is a question whether it does not then become ac-
commodation paper, and as a consequence subject
to the restrictions^ applying to " money borrowed."
Borrowing Money on Certificates of Deposit.
By the very nature of the terms in which it is
couched a certificate of deposit evidences that a
deposit of money has been made with the bank
issuing the certificate prior to its issue, and it
would seem proper and good banking practice,
therefore, to confine the use of these certificates to
this legitimate function, and that they should not
be used in the stead of promissory notes for bor-
rowing money, especially in cases where the money
is not actually received by the bank until after the
certificate of deposit has been issued.
It may be well to note here that certificates of
deposit — which after a customary form bear interest
if the deposit remains for a certain stipulated period
of time— are in effect </^;;2^/2^ certificates, for by waiv-
ing the claim to interest the holder of such a certificate
may demand payment of the deposit at any time.
These should not be confounded with time cer-
tificates, under the terms of which the holder has
no right to demand payment except at the expira-
tion of the period of time named in the certificate.
DIGEST OF NATIONAI, BANK CASES. 93
CHAPTER XI.
DIGEST OF NATIONAL BANK CASES.
Commencing with the year 1875 each annual
report of the Comptroller of the Currency has con-
tained a digest of court decisions in cases concern-
ing National banks, and this digest, which has
carefully been revised and added to from time to
time, has now grown to be a very valuable feature
of these reports.
In it the salient points in each case are stated
as briefly and concisely as possible, conveniently
arranged for reference, under the following
general heads, taken from the index of contents
appearing on pages 8y and 88 of volume I,
Comptroller's report for 1889:
I. Constitutional law; 2. Powers and liabilities of National bank-
ing associations; 3. Ultra vires; 4. Stock; 5. Shareholders; 6. Offi-
cers; 7. Interest; 8. Insolvent associations; g. Receivers; 10. Taxation;
II. Jurisdiction; 12. Suits; 13. Evidence; 14. Crimes.
The decisions therein cited occupy twenty-five
pages of the report (89 to 113 inclusive) and fur-
nish a most reliable and convenient fund of iiifor-
94 HAND-BOOK FOR BANK OFFICERS.
matioii to the bank officer or attorney in many
questions presenting doubt or difficulty. A copy
of the Comptroller's report is sent eacli year to
every National bank, and one may be had free,
upon application, by any one in need of the infor-
mation it contains.
In addition to this digest just described, "A
Digest of Recent Decisions in Banking Law" is
also to be found in the 1888 report, on pages 127 to
138. This digest will be found to contain much
valuable and interesting matter of a general nature,
on the topics of "Banks and Banking," "Bank
Officers," and "Business."
To the banker or bank attorney who desires a
standard work, however, embracing the law and
usage relating to the banking business in all its
phases, the work of" Morse on Banks and Banking,"
third edition, by Parsons, can not be too highly
recommended. It is full and complete on ever}''
branch of the subject, and is recognized everywhere
as a standard authority.
THE PRESIDENT. 95
CHAPTER XII.
THE PRESIDENT.
His Powers and Duties.
Section 5150 prescribes that " one of the directors,
to be chosen by the board, shall be the president of
the board," and, although the law does not in terms
so prescribe, this director, in practice, is the presi-
dent of the bank also.
In the index of the National-bank Act, edition
of 1888, will be found reference to all portions of
this act which specifically define what the president
should do and should not do; and these statutory
requirements apply also in nearly every particular
to the cashier of a National bank.
Besides these statutory requirements, the by-laws
of National banks, prescribed by the directors, gen-
erally make the president "responsible for all such
sums of money and property of every kind as may
be intrusted to his care or placed in his hands by
the board of directors, or b}' the cashier, or other-
wise come into his hands as president," and pre-
scribe further that "all contracts, checks, drafts,
etc., and all receipts for circulating notes received
96 HAND-BOOK FOR BANK OFFICERS.
from tlie Comptroller of the Currency sliall be
signed by the president or cashier."
In this connection it may be noted that the
general form of by-laws for National banks usually
provides as to the "conveyance of real estate^^ as
follows :
All transfers and conveyances shall be made by the bank
and under the seal thereof, in accordance with the orders of
the board, and shall be signed by the president or cashier.
From this, it is clear that neither the president
nor the cashier is competent to transfer or convey
real estate^ which is the property of the bank, to
any other party unless specially authorized to do
so by order of the board of directors. .
It is customary for the president to sign the min-
utes of all business meetings (which should also be
attested by the cashier) and also (with the cashier)
to sign all certificates of stock issued.
Be3^ond the duties here enumerated, and such
others as may be specially delegated to him by the
board, the authorit}^ of the president does not gen-
erally exceed that of any other director, although,
as he usually receives a regular salary for his
services, he is expected to devote more of his time
to the supervision of the business of the bank.
THE PRESIDENT. 97
The Vice-President— Powers and Duties.
As to the powers and duties of the vice-preside7tt^
the articles of association usually prescribe that the
board of directors "shall have power to elect a vice-
president, who shall also be a member of the board
of directors, and who shall be authorized, in the ab-
sence or inability of the president from any cause,
to perform all acts and duties pertaining to the
office of president, except such as the president
only is authorized by law to perform."
The signing of circulating notes is the only act
that the vice-president is specially authorized by
law to perform, and he is not therefore legally
qualified to act in the place of the president in
performing any other act prescribed by statutes
for the president.
98 HAND-BOOK FOR BANK OFFICERS.
CHAPTER XIII.
THE CASHIER.
His Powers and Duties.
By long-established usage the cashier of a bank
is regarded by all concerned as its chief executive
officer, whose duty it is to see that the policy and
plans formulated by the directors — ^who are the
responsible managers — are properly carried into
execution.
As the success and welfare of every banking
institution necessarily depends in large measure
upon the ability, integrity, and skill of its cashier,
it is important that this officer should have a clear
comprehension of the responsibilities devolving on
him and the powers with which he is invested for
the proper discharge of his duties.
Much of what is contained in this chapter will
apply to the cashier of any commercial bank, but
the duties of the cashier of a National bank, which
are here specially considered, may properly be
divided into two classes, as follows:
THE CASHIER. 99
1 . Those which are distinctly defined by the National-bank
Act.
2. Those which are inherent in his office, whether pre-
scribed by law or delegated to him by the directors, who
appoint him ; being such as by well-established usage he is
expected to perform by virtue of his office.
As to the duties of the first class above named,
reference to all of these may be found in the index
of the National-bank Act, edition of 1888, on page
91. The duties which he is by law required to
perform consist, chiefly, of the verification of va-
rious reports and certificates under oath, and the
signing of circulating notes, and certain statutory
restrictions also prohibit his performing acts which
would be either dishonest or injurious to the in-
terests of all concerned.
In this connection it is to be noted that wherever
the statute specifically prescribes that an instru-
ment is to be signed by the cashier or the president,
no other officer of the bank is legally qualified to
sign in the place of either of these officers.
Particular attention is directed to the require-
ment with regard to the certification of checks.
Section 5208 makes it "unlawful for any officer,
clerk or agent of any National banking association
to certify any check drawn upon the association
lOO HAND-BOOK FOR BANK OFFICERS.
unless the person or company drawing the check
has on deposit with the association at the time such
check is certified an amount of money equal to the
amount specified in such check," and further pre-
scribes that while "any check so certified by duly
authorized of&cers shall be a good and valid obliga-
tion against the association," its certification by any
ofiicer, clerk, or agent would subject the association
to the penalty of being placed in the hands of a
receiver by the Comptroller.
Apparently to correct abuses in this respect, Sec-
tion 13, act July 12, 1882, was afterwards enacted,
which makes the officer, clerk, or agent wilfully over-
certifying a check personally liable, on conviction,
to severe penalties of fine and imprisonment. This
section is more explicit in its terms than Section
5208, and prescribes penalties for anj^ officer, clerk,
or agent who shall wilfully violate Section 5208,
" or who shall resort to any device, or receive any
fictitious obligation, direct or collateral, in order to
evade the provisions thereof, or who shall certify
checks before the amount thereof shall have been
regularly entered to the credit of the dealer upon
the books of the banking association."
The second class embraces a wide range of duties,
The cashier. ioi
the chief of wliicli perhaps are embodied in the fol-
lowing extracts from a general form for by-laws
usually adopted by the directors of associations at
time of organization, viz.:
Under the caption of "Officers" section 7 of this
form prescribes that " the cashier * * '^ shall
be responsible for all the moneys, funds, and val-
uables of the bank " ; and under the caption " Con-
tracts" section 21 prescribes that "all contracts,
checks, drafts, etc., and all receipts for circulating
notes received from the Comptroller of the Cur-
rency shall be signed by the (president or) cashier."
These practically commit to the cashier's safe
keeping and control all the negotiable personal
property of the bank and confer upon him certain
included powers necessary to the proper discharge
of the responsible functions of his office.
Such, for instance, are the giving of certificates
of deposit, cashier's checks and other vouchers for
money or valuables intrusted to the safe keeping
of the bank ; the certification of checks ; the signing
of checks and drafts for the purpose of transferring
the funds of the bank from one place to another,
or for paying its current expenses or other obliga-
tions ; the buying and selling of exchange, coin and
I02 HAND-BOOK FOR BANK OFFICERS.
bullion where this is a part of the bank's regular
business. The cashier also has the power to in-
dorse paper intrusted to the bank for collection,
and upon receipt of money in payment of contracts
to indorse and deliver paper and collateral security
representing the same ; but he has no inherent right
to indorse non-negotiable paper, or to compromise a
debt to the bank, or change the terms of an original
contract without express authorit}^ from the board of
directors. Of course he has no right in his official
capacity to indorse his own individual paper.
In cases of emergency he may, for the purpose
of meeting the obligations of the bank, rediscount
negotiable paper or pledge negotiable securities
in order to borrow money, and even execute a
promissory note for this purpose; but he is not
empowered to borrow money continuously and
habitually for the purpose of providing additional
capital in this way. As a rule, however, it is better
that all borrowings by the bank should be made
with the knowledge and under the express instruc-
tions of the board of directors.
It is within the power of the directors to limit
these powers of the cashier; but in case he exer-
cised them in spite of such restrictions his acts
THE CASHIER. 103
would bind the bank to outside parties who were
without notice of such limitations to powers ordi-
narily inherent in the cashier.
In this connection, the following extract from the
decision of the U. S. Supreme Court in Merchants'
Bank vs. State Bank (lo Wall., 649), defining in
general terms the authority of the cashier, will be
found valuable and interestinsf:
■^t)
The question we are now considering is the authority of
the cashier. It is his duty to receive all the funds which
come into the bank, and to enter them upon its books. The
authority to receive implies and carries with it authority to
give certificates of deposit and other proper vouchers. Where
the money is in the bank he has the same authority to certify
a check to be good, charge the amount to the drawer, appro-
priate it to the payment of the check, and make the proper
entry on the books of the bank. This he is authorized to do
virtute officii. The power is inherent in the office.
The cashier is the executive officer, through whom the
whole financial operations of the bank are conducted. He
receives and pays out its moneys, collects and paj'S its debts,
and receives and transfers its commercial securities. Tellers
and other subordinate officers maybe appointed, but they are
under his direction, and are, as it were, the arms by which
designated portions of his various functions are discharged.
A teller may be clothed with the power to certify checks, but
this in itself would not affect the right of the cashier to do
the same thing. The directors may limit his authority as
they deem proper, but this would not affect those to whom
the limitation was unknown.
I04 HAND-BOOK FOR BANK OFFICERS.
As chief executive officer, the cashier ordinarily
conducts the correspondence of the bank and super-
vises the subordinate officers and clerks in their
duties of receiving and paying money and keeping
the books and accounts. He also sees that proper
notices of meetings are sent to shareholders and
directors and that the necessar}^ minutes of such
meetings are properly recorded, to be afterwards
signed by the president and attested by himself.
It is customary, too, for the cashier (and the presi-
dent) to sign all certificates of stock issued by the
bank.
In conclusion, it may be said that while the
cashier has no pow.er to shape or direct the policy
of the bank's business, it is his duty to see that all
the details of such polic}^ — not inconsistent with
law — as the directors may adopt, are carried out
with the utmost faithfulness, diligence, and skill.
GENERAL REMARKS. 1 05
CHAPTER XIV.
.GENERAlv REMARKS, IN CONCEUSION, REGARD-
ING THE NATIONAL BANK SYSTEM.
In the preparation and compilation of this work
certain conclusions have forced themselves upon
the mind of the author, which he ventures to em-
body with the work, and to give for what they may
be worth.
By requiring the maintenance of a " lawful-
money " reserve upon deposits, imposing upon the
banks restrictions in the matters of real estate
transactions, and holding their own stock, and in
failing to grant them the power to deal in stocks
and bonds, it would appear that the framers of the
law, in the light of past experience, aimed to create
a banking S3\stem, the resources of which should,
in convertibility and activity resemble the blood
circulating through a healthy human bod}', and to
prevent the clogging of its arteries and veins with
impediments which tended to produce financial
torpor, disease, and death. How wisel}' these law-
makers builded is attested by the existence to-day
Io6 HAND-BOOK FOR BANK OFFICERS.
of over 3,300 banks iu active operation. The splen-
did success so far attained by National banks, as a
whole, is the best evidence of the integrity and
ability of those who have been charged with their
management, and should stimulate officers of newly
organized banks to emulate the fair dealing, pru-
dence, and conscientious desire to act within the
law, which, to a striking degree, characterize Na-
tional-bank officers as a class.
In effect, the law has operated, as was intended,
to make National banks distinctively banks of de-
posit and discount, and as such they have taken
root, grown up, and flourished wherever the en-
vironment has been favorable to such growth.
Whenever a National bank is organized or operated
for the purpose of speculating in real estate, dealing
in stocks and bonds, or for other illegal purposes,
the promoters will sooner or later be compelled to
yield unwilling compliance to the law, or to accept
the alternative of voluntary or involuntary liqui-
dation.
The great confidence reposed by the general
public in National banks is based mainly upon the
knowledge that they are held to a strict account-
ability to the law by means of intelligent and
GENERAL REMARKS. I07
tliorough governmental supervision, and whenever
a charter conferring this great advantage is ac-
cepted by the managers of a bank, they should also
in good faith accept whatever apparent disad-
vantages are imposed by the law under which the
charter is granted.
The circulation feature, which for a time when
bonds were low in price and interest rates were high,
was very profitable, and which must in time nec-
essarily disappear on redemption of the bonds upon
which this circulation is issued, has now become,
to a great extent, a mere incident of the system,
and where rates of interest are high — as in the
West and South — operates to prevent its natural
growth, because, under these circumstances, the en-
forced investment of capital in high-priced bonds
inflicts actual loss of profit on the margin invested.
Various plans for removing this obstacle to the
growth of the system have been proposed from time
to time, but so far no action in this direction has
been taken by Congress. It is more than jDrobable,
however, that a solution of the difficulty for the
present, at least, will be found in the course rec-
ommended by the Comptroller, viz., a reduction
in the minimum bond deposit limit fixed by the
law as it now stands.
UNIVERSITY OF CALIFORNIA AT LOS ANGELES
THE UNIVERSITY LIBRARY
This book is DUE on the last date stamped below
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