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I n accordance w i t h your tela£>hone request o f today, I am sanding to you a t your home the memorandum which we discussed. I t i s sent to you i n the greatest confidence, to be used by you i n such a way t h a t you w i l l f u l l y protect the Board and me. I t i s understood yon w i l l not lu<t i t out of your possession, w i l l not l e t i t becone a pert of your o f f i c e f i l e s j t h a t you w i l l e i t n e r destroy i t or r e t u r n I t to me when i t nas served your purpose. June 1, 1950 Board of Governors Messrs• M i l l a r d and Vest Proposed c e r t i f i c a t i o n by Comptroller of the Currency with a view to removal of n a t i o n a l bank d i r e c t o r s . STRICTLY CONFIDEiM'TIiiL I n accordance w i t h t h e i n s t r u c t i o n s o f t h e Board a t t h e meeti n g on May 19> r e p r e s e n t a t i v e s o f t h e Board 1 s s t a f f met w i t h s t a f f r e p r e s e n t a t i v e s o f t h e Comptroller o f t h e Currency and t h e FDIC t o discuss f u r t h e r the proposed c e r t i f i c a t i o n by t h e Comptroller t o the Board w i t h a view t o t n e removal o f t h e d i r e c t o r s o f t h e C o n t i n e n t a l N a t i o n a l Bank and T r u s t Company, S a l t Lake C i t y , Utah, under s e c t i o n 30 o f t h e Banking Act o f 1933* Mr. Slade, Vice President, o f t h e f e d e r a l ueserve Bank o f San F r a n c i s c o , attended t h e meeting. Mr. Jennings and Mr. Anderson r e p resented the C o m p t r o l l e r ^ O f f i c e , and Mr. shearer and Mr. Aycock r e p r e sented t h e FDIC. We p o i n t e d out t h a t a c t i o n by t h e Board i n a case o f t h i s k i n d would be reviewable by t h e c o u r t s ; t h a t the f a i l u r e o f t h e bank t o i n crease i t s c a p i t a l , b e i n g negative i n c h a r a c t e r and a matter f o r s t o c k h o l d e r s 1 a c t i o n , would h a r d l y be a proper basis f o r a s e c t i o n 30 proceedi n g ; t h a t the overexpansion o f loans i n r e l a t i o n t o c a p i t a l i s a r e l a t i v e m a t t e r and i s a c t u a l l y t i e d i n w i t h t h e amount o f t h e b a n k S c a p i t a l ; t h a t d e s p i t e t h e substandard q u a l i t y o f many o f t h e bank f s l o a n s , t h e losses o f t h e bank have n o t been abnormal and t h e t o t a l amount o f paper c l a s s i f i e d d o u b t f u l and l o s s i n t h e most recent examination r e p o r t i s r e l a t i v e l y s m a l l ; t h a t t h e most recent examination r e p o r t contains some statements o f t h e examiner i n d i c a t i n g some l i t t l e improvement and o t h e r somewhat c o m p l i mentary language on h i s p a r t ; t h a t even i f t h e proceeding were s u c c e s s f u l , t h e r e would seem t o be n o t h i n g t o prevent t h e stockholders from e l e c t i n g o t h e r d i r e c t o r s t o c a r r y out t h e p o l i c i e s d e s i r e d . Mr. Slade a l s o s t a t e d h i s v i e w s , which i n g e n e r a l were i n accord w i t h those o f the Board 1 s r e p resentatives. The m a t t e r was t h o r o u g h l y discussed. The C o m p t r o l l e r s r e p r e s e n t a t i v e s t o o k t h e p o s i t i o n t h a t t h e bank was one o f t h e w o r s t , i f n o t t h e w o r s t , n a t i o n a l bank i n t h e U n i t e d S t a t e s from t h e standpoint o f r a t i o o f c a p i t a l t o r i s k assets and t h a t something should be done t o c o r r e c t t h e s i t u a t i o n . They f e l t t h a t a s e c t i o n 30 proceeding f o r t h e removal o f d i r e c t o r s o f f e r e d t h e o n l y p r a c t i c a b l e s o l u t i o n and t h a t t h i s was much p r e f e r a b l e t o a proceeding by t h e FDIC t o t e r m i n a t e t h e b a n k S insurance, f o r t h e l a t t e r would n e c e s s a r i l y f o r c e t h e bank t o l i q u i d a t e as a n a t i o n a l bank. They argued t h a t t h e question whether the bank was engaged i n unsafe o r u n sound banking p r a c t i c e s was a m a t t e r o f expert o p i n i o n and t h a t i f t h e Board, a f t e r h e a r i n g and on t h e b a s i s o f t h e c e r t i f i c a t i o n by t h e C o m p t r o l l e r , found t h a t i t was so engaged, t h e c o u r t s probably would n o t o v e r r u l e t h e Board. Even i f t h e Board should l o s e t h e case, t h e y f e l t t h a t t h e supervisory aut h o r i t i e s would t h e n be i n a good p o s i t i o n t o go t o Congress and ask f o r a p p r o p r i a t e amendatory l e g i s l a t i o n * -2The FDIC r e p r e s e n t a t i v e s f e l t t h a t t h e s i t u a t i o n was d e f i n i t e l y a bad one and t h a t something should be done about i t . They d i d n o t commit themselves d e f i n i t e l y , however, on whether or n o t t h e Board would have a good case i n u n d e r t a k i n g t o remove t h e d i r e c t o r s o f the bank because o f i t s f a i l u r e t o increase i t s c a p i t a l or because o f i t s p e r s i s t a n t l i b e r a l l o a n p o l i c y i n r e l a t i o n t o c a p i t a l . They s a i d t h a t they had brought a number o f proceedings a g a i n s t banks f o r t h e t e r m i n a t i o n o f insurance i n which f a c t o r s o f t h i s k i n d were a l l e g e d , but i n a l l o f these cases t h e r e had a l s o been o t h e r f a c t o r s which gave o t h e r l e g a l grounds f o r a c t i o n . None o f these proceedings had been considered by the c o u r t s . Mien asked whether t h e FDIC would proceed against t h i s bank f o r t h e t e r m i n a t i o n o f insurance i n t h e event t h e Board d i d not act i n t h e m a t t e r , t h e FDIC r e p r e s e n t a t i v e s i n d i c a t e d t h a t t h e y had not f u l l y considered the m a t t e r and t h a t t h e y were not prepared t o g i v e a d e f i n i t e answer t o t h e question a t t h i s t i m e . They r e f e r r e d t o t h e f a c t , however, t h a t Mr. H a r l had advised Deputy Comptroller Robertson t h a t , i f t h e s e c t i o n 30 proceeding d i d n o t go t h r o u g h , t o l e t him know and he would then consider t e r m i n a t i o n proceedings by t h e FDIC. The C o n t i n e n t a l N a t i o n a l Bank and T r u s t Company i s one o f a group o f n i n e banks i n which t h e C o s g r i f f s have s u b s t a n t i a l ownership o r c o n t r o l . Three are n a t i o n a l banks, one a S t a t e member bank, and o f t h e o t h e r s f o u r are nonmember i n s u r e d and one nonmember uninsured. Nearly a l l o f these banks have low c a p i t a l r a t i o s and some o f them are i n approximately the same s i t u a t i o n i n t h i s respect as t h e C o n t i n e n t a l N a t i o n a l . For t h i s reason t h e Board's r e p r e s e n t a t i v e s suggested s e v e r a l times the d e s i r a b i l i t y o f making a simultaneous examination o f a l l o f these banks i n order t o get as f u l l and complete i n f o r m a t i o n as p o s s i b l e w i t h respect t o a l l m a t t e r s , and p a r t i c u l a r l y w i t h respect t o such matters as t h e p o s s i b l e s w i t c h i n g o f loans among t h e i n s t i t u t i o n s , b e f o r e a n y t h i n g else i s done. Y e also suggested t h e d e s i r a b i l i t y o f « s i t t i n g down w i t h Mr. C o s g r i f f and t r y i n g t o work out some arrangement under which the bank might o b t a i n more c a p i t a l , as f o r example by t h e s a l e o f i t s b u i l d i n g and t h e use o f t h e proceeds t o increase t h e c a p i t a l o f t h e bank. Mr. Slade p a r t i c u l a r l y had i n d i c a t e d t h a t such a conference w i t h Mr. C o s g r i f f might p o s s i b l y be p r o d u c t i v e o f some good r e s u l t s and would do no harm p a r t i c u l a r l y i f r e p r e s e n t a t i v e s o f a l l t h r e e agencies participated. Mr. Jennings o f the C o m p t r o l l e r ' s O f f i c e , s a i d t h a t , s u b j e c t t o checking w i t h t h e C o m p t r o l l e r , he f e l t t h a t t h e y would be agreeable t o a simultaneous examination but would n o t be agreeable t o p e r m i t t i n g such an examination t o delay the c e r t i f i c a t i o n by t h e Comptroller t o t h e Board. He a l s o i n d i c a t e d t h a t he thought t h e y would i n v i t e Mr. C o s g r i f f t o come t o Yfoshington t o discuss t h e m a t t e r b e f o r e making t h e c e r t i f i c a t i o n , b u t t h a t t h e y would n o t be w i l l i n g t o have any r e p r e s e n t a t i v e o f t h e Comptroller go t o S a l t Lake C i t y or t o San Francisco t o discuss t h e m a t t e r w i t h Mr. C o s g r i f f . -3I t i s our view t h a t i t would be d e s i r a b l e f o r the Board t o a u t h o r i z e us t o advise t h e C o m p t r o l l e r ' s r e p r e s e n t a t i v e s s u b s t a n t i a l l y as f o l l o w s : I n view o f t h e f a c t t h a t p r a c t i c a l l y a l l o f the C o s g r i f f banks are i n a r e l a t i v e l y weak c a p i t a l p o s i t i o n and t h e unsound p r a c t i c e s , i f any, probably would a p p l y t o a l l , t h e Board f e e l s t h a t a simultaneous examination i s d e s i r a b l e and would be g l a d t o arrange w i t h t h e Federal Reserve Bank t o p a r t i c i p a t e i n such an examination so f a r as t h e S t a t e member bank i s concerned; t h a t since t h e purpose o f t h e examination would be t o develop what i n f o r m a t i o n t h e r e might be t h a t would have a b e a r i n g upon a d e t e r m i n a t i o n as t o whether t h e r e should be a s e c t i o n 30 proceeding, any f u r t h e r steps toward such a proceeding should be def e r r e d u n t i l t h e r e s u l t s o f such an examination c o u l d be considered; t h a t a t some a p p r o p r i a t e t i m e , probably a f t e r such an examination, one r e p r e s e n t a t i v e each from t h e C o m p t r o l l e r ' s O f f i c e , t h e FDIC and t h e Federa l Reserve Bank should s i t down w i t h Mr. C o s g r i f f and discuss t h e matter f u l l y w i t h him, w i t h t h e hope t o o b t a i n i n g some a d d i t i o n a l c a p i t a l o r change i n l o a n i n g p o l i c i e s ; and t h a t such a conference would have more chance o f being p r o d u c t i v e i f h e l d i n San Francisco o r S a l t Lake C i t y * T h i s would contemplate t h a t we would n o t v o l u n t a r i l y say t o t h e Compt r o l l e r whether o r n o t t h e Board would proceed w i t h a s e c t i o n 30 p r o ceeding i f t h e Comptroller made t h e c e r t i f i c a t i o n , but i f pressed, t h a t t h e Board 1 s r e p r e s e n t a t i v e s would say t h a t t h e Board hoped t h a t the Comptroller would n o t make t h e c e r t i f i c a t i o n a t t h i s t i m e and, i f he i n s i s t s on doing so, t h e Board's present f e e l i n g i s t h a t i t would n o t be advisable f o r i t t o undertake such a proceeding* July 7, 1950. Files Proposed c e r t i f i c a t i o n by t h e Comptroller o f t h e Currency w i t h a view t o removal o f directors of the Continental National Bank & Tmist Company, S a l t Lake C i t y , Utah, Geo. S. Sloan CONFIDENTIAL A s s i s t a n t Chief N a t i o n a l Bank Examiner Jennings c a l l e d t h e w r i t e r by telephone t h i s morning t o s t a t e t h a t Mr. Walter C o s g r i f f , P r e s i d e n t and ( w i t h h i s f a m i l y ) c o n t r o l l i n g s t o c k h o l d e r o f t h e C o n t i n e n t a l N a t i o n a l Bank and T r u s t Company o f S a l t Lake C i t y , had c o n f e r r e d i n Washington w i t h t h e O f f i c e o f t h e Comptroller o f t h e Currency on F r i d a y and Monday (presumably June 30 and J u l y 3)* As a r e s u l t o f t h i s conference Mr. C o s g r i f f t e n t a t i v e l y agreed t o reduce the t o t a l o f t h e loans o f t h e s u b j e c t bank from $21,000,000, as shown by t h e r e p o r t o f examination as o f February 28, 1950, t o approximately #17,000,000. Such r e d u c t i o n was t o be accomplished w i t h i n 6 t o 9 months and was t o be a bona f i d e r e d u c t i o n made i n loans o f b o r d e r l i n e o r d i s t i n c t l y r i s k c h a r a c t e r . C a p i t a l o f the bank was a l s o t o be increased $250,000 through t h e i n j e c t i o n o f new funds. The agreement was t o be confirmed by Mr. C o s g r i f f a f t e r h i s r e t u r n t o S a l t Lake C i t y and c o n s u l t a t i o n w i t h h i s associates. I f confirmed, as c o n f i d e n t l y expected, Mr. Jennings s a i d t h e C o m p t r o l l e r ^ O f f i c e d i d not i n t e n d t o proceed f u r t h e r w i t h i t s proposal t o c i t e t h e d i r e c t o r s o f t h e bank under S e c t i o n 30* Mr. Jennings s a i d t h a t c o n s i d e r a t i o n had been given t o t h e f a c t t h a t t h e bank had #4,250,000 i n NHA T i t l e 1 loans which were f u r t h e r i n s u r e d by p r i v a t e coverage t o p r o v i d e t o t a l coverage o f 40 per cent and, t h e r e f o r e , appeared t o represent l i t t l e , i f any, r i s k . A l s o , t h e a c t u a l v a l u e o f t h e banking house, which appears t o exceed c a r r y i n g v a l u e by #800,000, was n o t e d . I f t h e proposed a c t i o n i s t a k e n , t h e r i s k asset r a t i o o f t h e bank w i l l be about 13 per c e n t . ( I t was 8 . 2 per c e n t . ) I n view o f t h e p o s s i b i l i t y t h a t a l l o r p a r t o f t h e proposed r e d u c t i o n i n loans might be e f f e c t e d through t r a n s f e r t o o t h e r banks o f t h e C o s g r i f f c h a i n , he f e l t t h a t t h e proposed simultaneous examination o f a l l banks i n t h e group should be c a r r i e d out but s a i d t h a t , i n t h e circumstances, t h e C o m p t r o l l e r would n o t wish t o enter t h e n a t i o n a l banks i n v o l v e d b e f o r e September. The w r i t e r suggested t h a t i t might be p r e f e r a b l e t o d e f e r simultaneous a c t i o n u n t i l t h e s i x t o n i n e months p e r i o d allowed f o r e f f e c t i n g t h e r e d u c t i o n i n loans had elapsed. Mr. Jennings agreed but s a i d t h e m a t t e r should be determined a f t e r c o n f i r m a t i o n o f t h e t e n t a t i v e agreement had been r e c e i v e d from Mr. C o s g r i f f . We are t o be advised when t h e agreement has been confirmed and Mr. Jennings suggested t h a t advices t o t h e Federal Reserve Bank o f San Francisco be d e f e r r e d u n t i l t h a t t i m e . GSS:es July 31, 1950. Mr. H. F. Slade, Vice P r e s i d e n t , Federal Reserve Bank o f San F r a n c i s c o , San Francisco 20, C a l i f o r n i a . Dear Mr. Slade: Your l e t t e r o f J u l y 28 addressed t o Mr. M i l l a r d was r e c e i v e d t h i s morning. He i s not expected t o r e t u r n u n t i l august 7. You are c o r r e c t i n your understanding t h a t Mr. C o s g r i f f reached an agreement w i t h t h e C o m p t r o l l e r s O f f i c e w i t h regard t o t h e p r o v i s i o n o f a d d i t i o n a l c a p i t a l and o t h e r a c t i o n t o be taken and we were advised i n f o r m a l l y t h a t t h e Comptroller would n o t proceed, f o r t h e present a t l e a s t , w i t h h i s proposal t o issue a c i t a t i o n under S e c t i o n 30* fthen r e p o r t e d , however, the agreement was t e n t a t i v e and was t o have been confirmed by l e t t e r a f t e r Mr. C o s g r i f f had t a l k e d w i t h h i s a s s o c i a t e s . At t h a t time i t was agreed t h a t t h e c a p i t a l o f t h e S a l t Lake bank would be increased $250,000 through t h e i n j e c t i o n o f new funds and t o t a l loans o f t h e bank would be reduced about $4,000,000 w i t h i n 6 t o 9 months. The r e d u c t i o n was t o be made i n loans o f border l i n e o r d i s t i n c t l y r i s k c h a r a c t e r . Chief N a t i o n a l Bank Examiner Folger advised us today t h a t t h e l e t t e r o f c o n f i r m a t i o n had n o t been received but he understood t h a t Mr. C o s g r i f f was s t i l l i n t h e East and had not r e t u r n e d t o S a l t Lake C i t y since h i s d i s c u s s i o n a t t h e C o m p t r o l l e r ' s O f f i c e . You would have heard from us e a r l i e r had we n o t thought i t best t o await c o n f i r m a t i o n and g i v e you t h e exact terms o f t h e agreement as soon as they could be a s c e r t a i n e d . Everyone seems t o f e e l t h a t simultaneous examination o f t h e banks i n t h e chain would be most d e s i r a b l e b u t , i n view o f t h e agreement w i t h t h e C o m p t r o l l e r , we have suggested t h a t such a c t i o n might be taken a f t e r t h e time f o r compliance w i t h t h e terms o f t h e agreement had e x p i r e d . This would permit d e t e r m i n a t i o n o f t h e e x t e n t o f compliance and whether i t had o r had n o t been accomplished through t r a n s f e r o f assets t o o t h e r banks i n the c h a i n . Vance S a i l o r o f t h e FDIC a p p a r e n t l y f e e l s t h a t simultaneous examinations should be made t h i s f a l l . At present t h e whole m a t t e r seems t o be up i n t h e a i r . I t i s good t o note t h a t you do not have examination o f t h e Boise bank scheduled f o r t h e near f u t u r e and we w i l l g i v e you d e f i n i t e advices as soon as p o s s i b l e . I f your time f o r entry a t Boise should near before you r e c e i v e f u r t h e r adv i c e from u s , please c a l l t h e matter t o our a t t e n t i o n . Very t r u l y y o u r s , Geo. S. Sloan Assistant D i r e c t o r , D i v i s i o n o f Examinations. August 16, 1950. CONFIDENTIAL On may 19, 1950, Mr. Vest r e p o r t e d t o t h e Board t h a t r e p r e s e n t a t i v e s o f t h e O f f i c e o f t h e Comptroller o f t h e Currency had advised the Board 1 s s t a f f t h a t the Comptroller was prepared t o make a c e r t i f i c a t i o n t o the Board as a basis f o r proceeding^ f o r t h e removal o f a l l o f the d i r e c t o r s o f t h e C o n t i n e n t a l N a t i o n a l Bank and T r u s t Company, S a l t Lake C i t y , Utah, under S e c t i o n 30 o f the Banking Act o f 1933• The Board had no p r e v i o u s knowledge o f the m a t t e r a l t h o u g h a warning pursua n t t o Section 30 had been sent t o the Board o f D i r e c t o r s o f the bank by the Comptroller on December 1 , 1949The l e t t e r o f warning s t a t e d t h a t D i s t r i c t Chief N a t i o n a l Bank Examiner Wright had been requested t o discuss w i t h Mr* C o s g r i f f the uns a t i s f a c t o r y c o n d i t i o n o f the bank from the s t a n d p o i n t o f i t s excessive l o a n volume and the heavy amount o f i t s c u r r e c t l o a n problems i n r e l a t i o n t o i t s inadequate c a p i t a l s t r u c t u r e , the v a r i o u s reasons why a d d i t i o n a l c a p i t a l was e s s e n t i a l and t o request t h a t a c t i o n be taken t o r a i s e the needed c a p i t a l . Mr. Wright had r e p o r t e d h i s meeting w i t h Mr. C o s g r i f f on October 25> 194-9, and t h a t Mr. C o s g r i f f s t a t e d , among other t h i n g s , he had no i n t e n t i o n o f complying w i t h the request t h a t (1) the c a p i t a l s t r u c t u r e o f t h e bank be strengthened through the sale o f new s t o c k , and (2) e f f o r t s be d i r e c t e d toward a more conservative l e n d i n g p o l i c y . The f o l l o w i n g data were submitted t o set f o r t h the b a n k ' s " s t e a d i l y worsening c a p i t a l p o s i t i o n due t o l o a n volume growth which has f a r o u t s t r i p p e d c a p i t a l s t r u c t u r e growth from r e t a i n e d e a r n i n g s " : Date o f Examination Deposits ( F i gures i n thou sands) Classified and S p e c i a l Adjusted Capital Mentioned Loans Loans Structure 5 - 5-44 11-14-44 6-12-45 12-23-45 6-28-4.6 12-17-46 6 - 9-47 3 - 1-43 8 - 1-49 #24,582 30,822 29,944 34,709 31,665 35,674 32,190 35,348 40,659 #3,694 5,100 4,523 5,952 8,179 11,729 15,528 17,334 21,978 #196 488 547 543 748 1,096 940 2,064 2,677 #1,301 1,342 1,388 1,447 1,717 1,739 1,936 1,884 1,924 Capital to Deposits 1-19 1-23 1-21 1-24 1-18 1-20 1-16 1-19 1-21 Ra t i o Capital to Risk Assets 1 - 5.93 1-7.14 1 - 6.59 1 - 7.88 1 - 7.86 1 - 9-60 1 - 9.81 1-10.16 1-12.04 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence To. Mr. M i l l a r d From. Date Geo. S. Sloan A g s 16,1950. u ut Subject: Walter E, C o s g r i f f and o t h e r d i r e c t o r s of the Continental National Bank and T r u s t Company, S a l t Lake C i t y Utah. CONFIDENTIAL On May 19, 1950, Mr. Vest r e p o r t e d t o t h e Board t h a t r e p r e s e n t a t i v e s o f t h e O f f i c e o f t h e Comptroller o f t h e Currency had advised t h e Board 1 s s t a f f t h a t the Comptroller was prepared t o make a c e r t i f i c a t i o n t o t h e Board as a b a s i s f o r proceedings f o r t h e removal o f a l l o f t h e d i r e c t o r s o f t h e C o n t i n e n t a l N a t i o n a l Bank and T r u s t Company, S a l t Lake C i t y , Utah, under S e c t i o n 30 o f t h e Banking Act o f 1933• The Board had no previous knowledge o f t h e m a t t e r although a warning pursuant t o S e c t i o n 30 had been sent t o t h e board o f d i r e c t o r s o f t h e bank by t h e Comptroller on December 1 , 1949The l e t t e r o f warning s t a t e d t h a t D i s t r i c t Chief N a t i o n a l Bank Examiner Wright had been requested t o discuss w i t h Mr. C o s g r i f f t h e u n s a t i s f a c t o r y c o n d i t i o n o f t h e bank from t h e standpoint o f i t s excessive l o a n volume and t h e heavy amount o f i t s c u r r e n t l o a n problems i n r e l a t i o n t o i t s inadequate c a p i t a l s t r u c t u r e , the v a r i o u s reasons why a d d i t i o n a l c a p i t a l was e s s e n t i a l and t o request t h a t a c t i o n be taken t o r a i s e t h e needed c a p i t a l . Mr. Wright had r e p o r t e d h i s meeting w i t h M r . C o s g r i f f on October 25, 1949* and t h a t Mr. C o s g r i f f s t a t e d , among other t h i n g s , he had no i n t e n t i o n o f complyirfg w i t h t h e request t h a t (1) t h e c a p i t a l s t r u c t u r e o f t h e bank be strengthened through t h e sale o f new s t o c k , and (2) e f f o r t s be d i r e c t e d toward a more conservative l e n d i n g p o l i c y . The f o l l o w i n g data were submitted t o s e t f o r t h t h e bank's " s t e a d i l y worsening c a p i t a l p o s i t i o n due t o l o a n volume growth which has f a r o u t s t r i p p e d c a p i t a l s t r u c t u r e growth from r e t a i n e d e a r n i n g s " : Date o f Examination Deposits ( F i gures i n thou sands) Classified and S p e c i a l Adjusted Capital Mentioned Structure Loans Loans 5 - 5-44 11-1 4-44 6-12-4-5 12-28-45 6-28-46 12-17-46 6 - 9-47 3 - 1-48 8- 1-49 124,582 30,822 29,944 34,709 31,665 35,674 32,190 35,348 40,659 13,694 5,100 4,523 5,952 8,179 11,729 15,528 17,334 21,978 $196 488 547 543 748 1,096 940 2,064 2,677 11,301 1,342 1,388 1,447 1,717 1,739 1,936 1,884 1,924 Capital to Deposits 1-19 1-23 1-21 1-24 1-18 1-20 1-16 1-19 1-21 Ba t i o Capital to Risk Assets 1 - 5.93 1 - 7.14 1 - 6.59 1 - 7.88 1 - 7.86 1 - 9.60 1 - 9.81 1-10.16 1-12.04 To: Mr. M i l l a r d - 2 - August 16, 1950. The l e t t e r a l s o s t a t e d : "These two f a c t o r s , namely, (1) a heavy g e n e r a l l o a n volume, and (2) a d i s p r o p o r t i o n a t e volume o f weak l o a n s , i n r e l a t i o n t o y o u r b a n k ' s c a p i t a l s t r u c t u r e a r e t h e main b a s i s f o r our conclusions t h a t a d d i t i o n a l c a p i t a l i s e s s e n t i a l t o provide y o u r d e p o s i t o r s w i t h a reasonably p r o t e c t i v e margin o f c a p i t a l s t r u c t u r e and t h a t y o u r l o a n i n g p o l i c i e s should be made more c o n s e r v a t i v e . " S u b s i d i a r y f a c t o r s b e a r i n g on t h e c o n c l u s i o n s expressed i n t h e above paragraph a r e as f o l l o w s : 1* |5,551>800 o f y o u r b a n k ' s loans a r e t o i n d i v i d u a l s and i n t e r e s t s o u t s i d e t h e S t a t e o f U t a h . W h i l e many o f t h e s e l o a n s undoubtedly a r e j u s t i f i e d e x t e n s i o n s o f c r e d i t , we do c o n s i d e r t h a t you have gone f a r a f i e l d t o l o a n money, t h e r e b y i n c r e a s i n g y o u r l o a n s u p e r v i s i o n problems and t h e a t t e n d a n t degree o f r i s k i n a s u b s t a n t i a l p o r t i o n o f y o u r loan p o r t f o l i o . 2• |1,762,000 of your bank's loans are t o r e l a t i v e l y small f i n a n c e companies, a r e c a p i t a l i n n a t u r e , and would appear t o be c o l l e c t i b l e o n l y t h r o u g h t r a n s f e r t o o t h e r banks o r s u b s t a n t i a l l i q u i d a t i o n o f t h e f i n a n c e companies concerned. None o f t h e s e l o a n s appear i n t h e c l a s s i f i e d o r s p e c i a l mentioned l o a n schedules o f t h e r e p o r t . 3. Out o f a p p r o x i m a t e l y $3,000,000 o f l i v e s t o c k l o a n s , $847,000 c o n s t i t u t e p o t e n t i a l problems. 4. $951,000 o f y o u r b a n k ' s loans a r e n o t supported by c u r r e n t and s a t i s f a c t o r y c r e d i t i n f o r m a t i o n . 5. $1,310,850.12 o f y o u r banks l o a n s (5*96 p e r c e n t ) were i n a p a s t due s t a t u s a t t h e t i m e o f t h e August 1 , 194-9, exami n a t i o n . T h i s r e f l e c t s a d v e r s e l y on t h e e f f e c t i v e n e s s o f y o u r s u p e r v i s i o n and on t h e q u a l i t y o f t h e l o a n s i n v o l v e d . 6* Your b a n k ' s earnings a r e o n l y f a i r , and y o u r d i v i d e n d p o l i c i e s , b e g i n n i n g w i t h t h e year 1946, have been l i b e r a l . From January 1 , 1944, t o June 30, 1949, you have p a i d out $540,000 i n d i v i d e n d s and r e t a i n e d $693,300 o f e a r n i n g s . Considering y o u r b a n k ' s g r e a t need f o r a d d i t i o n a l c a p i t a l t h i s i s n o t a good r e c o r d . We a r e aware t h a t improved e a r n i n g s may be expected, i f s u b s t a n t i a l l o a n l o s s e s do n o t a c c r u e , but we do n o t c o n s i d e r t h a t f u t u r e r e t a i n e d earnings may be r e g a r d e d as t h e answer t o y o u r b a n k ' s b a d l y u n d e r c a p i t a l i z e d p o s i t i o n . To: Mr. M i l l a r d August 16, 1950. - 3 - 7. 43% o f your bank's c a p i t a l s t r u c t u r e i s i n v e s t e d i n f i x e d a s s e t s . We recognize t h a t your banking house may be w o r t h w e l l i n excess o f i t s book v a l u e , but t h e percentage o f c a p i t a l p r e s e n t l y i n v e s t e d i n f i x e d assets i s h i g h , and t h e p o s s i b l e excess value i n t h e banking house can n o t soundly be regarded as an o f f s e t t o your bank's underc a p i t a l i z e d p o s i t i o n . The probable o r p o t e n t i a l excess value i n a banking house i s a sound c a p i t a l v a l u e only when i t has been r e a l i z e d upon. As you are w e l l aware, when r e a l i z a t i o n o f such a value becomes a n e c e s s i t y , t h e r e s u l t s are u s u a l l y d i s a p p o i n t i n g . 8. Over a l o n g p e r i o d o f time our examiners have c o n s i s t e n t l y regarded your b a n k ' s l o a n i n g p o l i c i e s w i t h grave r e s e r v a t i o n s . Commencing w i t h t h e year 1944, we f i n d no instance i n examination r e p o r t s where our examiners have regarded your l o a n i n g p o l i c i e s as measuring up t o acceptable standards • The f a c t t h a t your l o a n losses have been small i s , i n our o p i n i o n , t h e r e s u l t o f a c o n s t a n t l y expanding economy and not t h e outgrowth of sound l o a n i n g p o l i c i e s . We t h i n k f a r t o o many o f your loans a r e s t r i c t l y f a i r weather c r e d i t s which would n o t stand up s u c c e s s f u l l y under a moderate d e c l i n e i n economic c o n d i t i o n s . " Another important e x t r a c t from t h e l e t t e r is: " . • . T h e o n l y a l t e r n a t i v e t o r a i s i n g a d d i t i o n a l c a p i t a l which w i l l be acceptable t o us i s a v e r y s u b s t a n t i a l r e d u c t i o n i n l o a n volume coupled w i t h more c o n s e r v a t i v e l o a n p o l i c i e s . " The l e t t e r o f warning (copy i n Counsel's o f f i c e ) has been quoted a t l e n g t h as i t i s understood t h a t t h e c h a r a c t e r o f and basis f o r t h e Compt r o l l e r ' s complaint i s o f p a r t i c u l a r i n t e r e s t . The s p e c i f i c charge was: " S p e c i f i c a l l y we charge t h a t your l o a n i n g p r a c t i c e s and p o l i c i e s which p e r m i t t e d a t o t a l l o a n volume o f $21,978,181.18 (on August 1 , 1949) i n r e l a t i o n t o an a d j u s t e d c a p i t a l s t r u c t u r e o f $1,924,046.07 a r e unsafe and unsound. We charge t h a t t h e e x i s t e n c e o f l o a n problems i n t h e amount o f | 2 , 6 7 7 , 9 0 0 , as set f o r t h i n t h e C l a s s i f i e d Loan and Other Loans E s p e c i a l l y Mentioned schedules o f t h e examination r e p o r t dated August 1 , 1949, i s unsafe and unsound i n r e l a t i o n t o gross c a p i t a l accounts and reserves o f $2,027,479*15- We request t h a t t h i s f i r s t warning t o each o f you under S e c t i o n 30 o f t h e Banking Act o f 1933 be heeded and t h e unsafe and unsound p r a c t i c e s be c o r r e c t e d by means o f r a i s i n g a d d i t i o n a l c a p i t a l , reducing t h e volume o f l o a n s , and t h e adoption o f reasonably c o n s e r v a t i v e l o a n i n g p o l i c i e s . " To: Mr. M i l l a r d August 16, 1950. - 4 - I n subsequent correspondence w i t h t h e C o m p t r o l l e r , b e g i n n i n g w i t h a l e t t e r d a t e d December 6 , 1949> P r e s i d e n t C o s g r i f f t o o k e x c e p t i o n t o t h e charges made and s t a t e d t h a t t h e h o l d e r s o f t h e m a j o r i t y o f t h e s t o c k o f t h e bank ( h i m s e l f , h i s w i f e , mother and s i s t e r ) would n o t v o t e t o i n c r e a s e c a p i t a l under e x i s t i n g c o n d i t i o n s . He i n v i t e d t h e C o m p t r o l l e r t o proceed under S e c t i o n 30, and s t a t e d t h a t he was prepared t o defend h i m s e l f a t a h e a r i n g b e f o r e t h e Board o f Governors and would appeal t o t h e c o u r t s , i f necessary. The bank was examined February 2 8 , 1950, and t h e C o m p t r o l l e r proposed t o s t a t e i n h i s c e r t i f i c a t i o n t o t h e Board, which was never presented f o r f o r m a l c o n s i d e r a t i o n , t h a t t h e examination d i s c l o s e d no a p p r e c i a b l e change i n l o a n p o l i c i e s , t h a t t h e m a t t e r o f a d d i t i o n a l c a p i t a l had n o t been p r e s e n t e d t o t h e meeting o f shareholders h e l d on January 1 0 , 1950, and t h a t t h e d i r e c t o r s had f a i l e d t o d i s c o n t i n u e ( a f t e r warning) t h e unsafe and unsound p r a c t i c e s complained o f i n c o n d u c t i n g t h e business o f t h e bank. The r e p o r t o f examination as o f February 28, 1950, showed t h e following p r i n c i p a l items: T o t a l assets $50,188,700 Deposits 46,315,400 Borrowed money ( F . R. B k . ) 1,500,000 Cash and Government s e c u r i t i e s 25,831,800 Loans and d i s c o u n t s 20,954,000 Banking house, f u r n i t u r e and f i x t u r e s 831,100 Capital: Common $900,000 Surplus 900,000 Undivided p r o f i t s 307,100 2,107,100 A d j u s t e d c a p i t a l account amounted t o 4 p e r cent o f t o t a l a s s e t s and 8 . 2 per cent o f r i s k a s s e t s . Losses had been charged o f f d u r i n g t h e examination and c l a s s i f i e d a s s e t s were: Substandard Loans and d i s c o u n t s Overdrafts Suspense Totals $781,500 -0-01781,500 Doubtful $128,600 -0-01128,600 Loss $42,800 28 167 143.000 To: Mr. M i l l a r d - 5 - August 16, 1950. S i g n i f i c a n t l y , the examiner s t a t e d i n t h e CONFIDENTIAL s e c t i o n of the report t h a t : "While t h e r e has been no expressed change i n t h e l o a n i n g p o l i c i e s o f t h i s i n s t i t u t i o n examiner senses a tendency towards conservatism." A meeting o f r e p r e s e n t a t i v e s o f t h e Board 1 s s t a f f and V i c e P r e s i d e n t Slade o f t h e Federal Reserve Bank, San F r a n c i s c o , w i t h r e p r e s e n t a t i v e s o f t h e C o m p t r o l l e r and t h e FDIC was h e l d June 1 , 1950. The C o n t i n e n t a l N a t i o n a l Bank and T r u s t Company o f S a l t Lake i s one o f a group o f n i n e banks i n which t h e C o s g r i f f s have s u b s t a n t i a l ownership or c o n t r o l . There a r e t h r e e n a t i o n a l banks, one S t a t e member bank, f o u r nonmember i n s u r e d banks and one nonmember uninsured bank. I t was suggested t h a t a l l should be examined simultaneously t o determine t h e s i t u a t i o n o f t h e whole group. A f t e r d i s c u s s i o n the C o m p t r o l l e r s r e p r e s e n t a t i v e s agreed t o t h e suggestion t h a t simultaneous examinations should be made but d i d not wish t o delay S e c t i o n 30 proceedings. A l s o , they agreed t o i n v i t e Mr. C o s g r i f f t o Washington f o r a f u r t h e r d i s c u s s i o n o f t h e m a t t e r b e f o r e c e r t i f y i n g t h e case t o t h e Board. Mr. C o s g r i f f d i d come t o Washington about J u l y 1 and, a f t e r a d i s c u s s i o n a t t h e C o m p t r o l l e r ' s o f f i c e , t e n t a t i v e l y agreed t o increase t h e c a p i t a l o f t h e bank by |250,000 through t h e i n j e c t i o n o f new funds 000,000 w i t h i n and t o reduce t h e loans of t h e S a l t Lake bank by about s i x t o n i n e months. The r e d u c t i o n i n loans was t o be a bona f i d e reduct i o n made i n loans o f b o r d e r l i n e or d i s t i n c t l y r i s k c h a r a c t e r . T h i s agreement was t o be confirmed by l e t t e r a f t e r Mr. C o s g r i f f had consulted w i t h h i s associates and we were advised t h a t , i f the c o n f i r m a t i o n was r e c e i v e d , t h e Comptroller d i d n o t propose t o proceed f u r t h e r w i t h t h e m a t t e r o f c e r t i f i c a t i o n t o t h e Board under S e c t i o n 30. About two weeks ago we were advised t h a t t h e agreement had n o t been confirmed but i t was understood t h a t Mr. C o s g r i f f had not r e t u r n e d t o S a l t Lake C i t y . Simultaneous examination o f a l l banks i n t h e group i s s t i l l contemplated but t h e t i m e f o r such examinations has n o t been determined.
