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T H E CANANDAIGUA NATIONAL B A N K AND T R U S T C O M P A N Y GEORGE W.HAMLIN CA3SJANI)AIGUA, N . Y \ July 7 1938 PRESIDENT Mr. M . S. Eccles, Chairman Board of Governors of the Federal Reserve System Washington, D. C. Dear Mr. Eccles: I have received and read with much interest your letter of June 27th and also the copy of your recent letter to Senator Vandenberg which you enclosed. The latter contains the best answer to the questions discussed that I have yet seen, and suggests the solution of many of the problems which have so depressed and discouraged bankers generally and the small town bankers in particular. I have delayed acknowledging your letter until I could have the new scheme for the valuation of a bank's security list, which you mention in your letter, applied to our particular list over a period of years. For the purpose of obtaining the eighteen months averages, we used market values as of the last day of each month, as we had these figures available since 1934. A daily average would, of course, give a somewhat different result, but I doubt whether there would be a wide variation from our figures. I received the valuation figures this morning and am enclosing a copy, as I think you may be interested to see how, as applied to our bank, the operation of the new rule compares with that of the old. Some of the results are most surprising and, while favorable to us at this time, at other times appear to be quite the reverse. As the only reason for valuing a security list at all is to determine whether the bank can pay its obligations in full at a given time, I cannot see how it can legally be deprived of the benefit of any appreciation that may exist in Groups I, III or IV to offset any depreciation in Group II or III or IY> as the appreciation is an actual cash asset that can be realized by sale in a few days time. As we have something like ^530,000.00 in our Surplus, Undivided Profit and Reserve Accounts, we are well protected at this time against the operation of either rule, but I cannot even vaguely imagine how this new method of figuring values will affect our bond problems in the future. T H E CANANDAIGUA NATIONAL B A N K AND T R U S T C O M P A N Y C A ^ a s t d a i g i j a , N.Y. G E O R G E W. H A M L I N PRESIDENT Mr. M . S. Eccles . ' ,Tll1lr n J Q 9 * 2 I very infrequently get to Washington, ordinarily not more than once a year. When I have occasion to come again, I should very much like to have a short conference with you, if you are free to give me one at the time, and get your advice on some of the small tovm banking problems, in which banks like ours are vitally interested. I will take the liberty of writing you to ask for an appointment before making my next trip to the. Capitol. GWH/mhs President. July 12, 1938 Mr. George to. Hamlin, President The Canandaigua National Bank and Trust Company Canandaigua, Mew York Dear Mr. Hamlin: This will acknowledge your letter of July 7 respecting the recent changes in examination procedure with special reference to the treatment of bond depreciation* ftith your letter you enclosed a table of figures showing the depreciation or appreciation which would be reflected through an examination report under the new method as compared with the old method, as you ay, this shows some surprising results and was very interesting to me. The only time, of course, that the old method would be more advantageous to a bank would be during a period of high current prices with relatively low prices obtaining during the preceding eighteen months. Your letter suggests, therefore, that there might be times when the new procedure would work to your disadvantage as against the old rule. I do not think this necessarily follows, as the treatment of such depreciation is not for the purpose of showing loss and consequently of requiring charge-off as depreciation is charged off only respecting defaulted bonds and all stocks. There might be a time, as you suggest, when appreciation in Group II would offset depreciation in Groups III and IV so that a charge-off would be required even though the entire portfolio might show a net appreciation. In such a situation it is obvious that the tendency would be for banks to sell some of the Group II securities which showed a profit, using the profit to offset the loss in the other groups. Thus the operation of the new rule, to my mind, serves to induce selling of the more speculative type of securities when they are high and to prevent such selling during periods of low prices, such a result seems to be desirable. One statement you made in your letter indicates to me that you do not appreciate fully the general principles underlying the recent revision. You say: "as the only reason for valuing a security list at all is to d^^^ineietfi^tjfe^^lhe bank can pay its obligations in fu^l at a given time, I cannotoT^ee how it can legally be deprived of the benefit of any appreciaphilosophy behind the new rules is that a bank should not be ^examined for the purpose of seeing whether it can liquidate on the basx^wof ^in^rkieEf quotations obtaining on the date of the examination. On nr peAieoe^j Mr* George V<. Hamlin - 2 the contrary, the examination should be for the purpose of disclosing the general condition of the bank and the policies and practices of its management. The valuation of securities should be based on the same general principles as the valuation of loans or any other assets. You would not think of valuing or pricing your various loans on the basis of what they might bring if disposed of on the date of examination. On principle, no bond should be priced as of the date of the examination unless it is a bond on which loss is indicated such as a defaulted bond. In other words, unless there is something inherently wrong with a bond it is good until it goes sour, just as any loan is. However, in approaching this problem, too great a departure from tradition could not be expected and for that reason it was agreed that bonds of less than the top quality (Group I) should be priced, but on an eighteen months1 average ratner than on the market as at the date of examination. But here again the depreciation is not to be charged off but half of it is to be deducted in computing the net sound capital of the bank. The salient point in all this is that the soundness of a bank should not be determined by the market ticker on the date of examination but rather on the basis of what the various assets in the bank are worth over the long pull. ±his conception treats the oank as a going concern and not as a business to be liquidated on the date of examination. Yours sincerely, M. S. Eccles Chairman LC/fgr Group III Groun II Actual 50" of 13-30. A'wteciation Depreciation ;>ver« LV. jr. c« Appreciation Grou • I 1355 Group IV Total Aprjmcictlon Hew Method Old Method 52,905 81,307 62,824 250,760 225,924 217,238 174,405 166,644 147,018 26,032 4,015 d 49,734 11,156 16,115 16,354 57,010 65,074 78,116 104,758 £01,550 177,763 134,852 10,j,244 14£,522 137,350 134,465 131,338 d 5?,824 d 8^,305 d 66,513 24,050 18,824 16,1-53 15,435 15,745 Jan. Feb. alar. 103,926 130,?87 125,558 65,594 47,674 56,546 125,045 116,348 107,899 36,US 44,831 41,281 18,876 21,770 21,675 — Apr. May June 114,584 120,615 144,761 63,539 46,853 54,493 33,524 30,535 82,191 23,057 33,546 43,753 17,601 16,680 12,137 — July Aug. Sept. 158,127 160,238 159,321 59,737 53,718 47,355 75,006 67,568 60,355 56,566 58,491 74,467 14,734 16,354 20,135 — Oct. Nov. Dec. 165,045 187,170 180,657 44,261 43,864 35,559 56,415 52,934 47,097 86,064 88,026 107,531 26,783 58, 2 U 37,U1 — Jan. Feb. 162,313 152,198 80,226 23,607 57,374 60,248 41,583 36,606 32,652 106,365 U5,446 88,257 44,303 42,570 46,223 Apr* May June 68,873 75,151 72,588 80,418 85,299 U S , 235 29,947 £8,570 28,736 64,322 53,408 37,435 33,205 34,443 23,474 July Aug. Sept# 99,475 77,812 46,625 83,784 101,162 149,364 23,688 30,890 33,474 41,364 32,830 12,742 36,U4 31,353 £2,566 20,485 2,855 d 8,117 171,663 137,367 189,834 36,508 40,432 44,530 a d 5,857 12,636 17,623 18,166 15,073 10,443 Jan. Feb* Liar* 45,308 73,062 4,383 287,724 277,252 383,240 50,585 56,730 66,108 d 21,380 7,531 17,427 11,519 12,041 4,759 - Apr-% Ma„ June 63,343 98,753 105,728 322,762 289,870 280,317 73,840 80,672 87,433 12,832 6,165 4,008 7,901 7,193 13,028 — Ji Aug. Sept. Oct. Itov. Bee. - - - — - 174,405 163,644 136,572 136,556 220,255 200,076 1551,338 • - — / 180,371 13c,196 153,083 166,66*: 131,758 86,826 40,534 1956 Oct* Hov* Dec* d — - - - - 125,045 / 33,953 116,348 / 150,107 107,839 / 131,531 90,524 / 87,402 30,595 ^ U5,745 8*;, 191 / 125,356 75,006 / 169,788 67,568 / 151,423 60,355 / 205,963 56,415 / 233,631 52,934 / 267,544 47,097 / 289,781 - 41,583 283,380 56,606 / 272,240 32,652 / 154,465 - £3,947 28,570 £5,736 — - — - — - 2^,888 50,830 33,474 42,165 5-3,128 62,153 / / / / / — M 92,583 87,710 24,000 87,771 40,814 67,430 138,875 19:,089 205,132 1358 July 5 f 1938 d d d d - - m 7i,9S5 56,790 85,535 — 8o,752 86,837 91,501 258,413 _ 130,032 - 166,168 - T H E CAMiiNDAlOUA NATION/iL BAKK A N D THU3T COMPANY CANAKDAIOUA, HEW TGRK* 252,276 184,618 331,521 REPORT OF CONDITION OF THE CANANDAIGUA NATIONAL BANK AND tRUST COMPANY OF CANANDAIGUA IN THE STATE OF NEW YORK, AT THE CLOSE OF BUSINESS ON MARCH 7, 1938. (Published in response to call made by Comptroller of the Currency, under Section 5211, TJ. S. Revised Statutes) ASSETS Loans and discounts $ 802,506.92 Overdrafts 57.19 United States Government obligations, direct and fully guaranteed 1,416,279.00 Other bonds, stocks, and securities 2,405,285.90 Banking house, $38,096.54; Furniture and fixtures, $11,136.14.. 49,232.68 Real estate owned other than banking house 5,500.00 Reserve with Federal Reserve bank 510,458.65 Cash, balances with other banks, and cash items in process of collection 348,488.51 Cash items not in process of collection 866.87 Other assets 186.55 Total Assets $5,538,862.27 LIABILITIES Demand deposits of individuals, partnerships, and corporations $ 754,578.95 Time deposits of individuals, partnerships, and corporations. 3,606,056.42 State, county, and municipal deposits 252,995.70 United States Government and postal savings deposits 4,038.27 Deposits of other banks, including certified and cashier's checks outstanding 23,532.90 Deposits secured by pledge of loans and/or investments $ 168,808.31 Deposits not secured by pledge of loans and/or investments 4,472,393.93 Total Deposits $4,641,202.24 Other liabilities . Capital account: Class A preferred stock, 2,750 shares, par $40] per share, retirable at $40 per share [$360,000.00 Common stock, 2,500 shares, par $100 per share J Surplus 250,000.00 Undivided profits—net 235,091.74 Reserves for contingencies 42,553.34 Preferred stock retirement fund 10,000.00 Total Capital Account Total Liabilities 14.95 897,645.08 $5,538,862.27
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