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p June 1, 1950 Board of Governors Messrs. Millard arid Vest Proposed certification by Comptroller of the Currency with a view to removal of national bank directors. STklCTLY CuhFIDKwTI*L In accordance with the instructions of the Board at the meeting on May 19 » representatives of the Board1s staff met with staff representatives of the Comptroller of the Currency and the FDIC to discuss further the proposed certification by the Comptroller to the Board with a view to the removal of the directors of the Continental Natioxial Bank and Trust Company, Salt Lake City, Utah, unaer section 30 of the Banking Act of 1933» Mr. Slade, Vice President of the federal deserve Bank of San Francisco, attended the meeting. Mr. Jennings and Mr. Anderson represented the Comptroller's Office, and Mr. Shearer and Mr. Aycock represented the FDIC. fte pointed out that action by the Board in a case of this kind would be reviewable by the courts; that the failure of the bank to increase its capital, being negative in character and a matter for stockholders1 action, would hardly be a proper basis for a section 30 proceeding} that the overexpansion of loans in relation to capital is a relative matter and is actually tied in with the amount of the bank's capital; that despite the substandard quality of many of the bank's loans, tne losses of the bank have not been abnormal and the total amount of paper classified doubtful and loss in the most recent examination report is relatively small; that the most recent examination report contains some statements of the examiner indicating some little improvement and other soiuewhat complimentary language on his part; that even if the proceeding were successful, there would seem to be nothing to prevent the stockholders from electing other directors to carry out the policies deoired. Mr. blade also stated his views, which in general were in accord with those of the Board's representatives. The matter was thoroughly discussed. The Comptroller's representatives took the position that the bamc was one of the worst, if not the worst, national bank in the United States from the standpoint of ratio of capital to risk assets and that something snould be done to correct the situation. They felt that a section 30 proceeding for tne removal of directors offered the only practicable solution and thot this was much preferable to a proceeding by the FDIC to terminate the bank's insurance, for the latter would necessarily force tne bank to liquidate as a national bank. They argued that the question whetner the bank was engaged in unsafe or unsound banking practices was a matter of expert opinion and that if the Board, after hearing and on the basis of the certification by the Comptroller, found that it was so engaged, the courts prooably would not overrule the Board. Even if the Board should lose the case, they felt that the supervisory authorities would then be in a good position to go to Congress and ask for appropriate amendatory legislation. -2The FDIC representatives felt that the situation was definitely a bad one and that something should be done about it. They did not commit themselves definitely, nowever, on whether or not the Board would have a good case in undertaking to remove the directors of th£ bank because of its failure to increase its capital or because of its persistoint liberal loan policy in relation to capital. They said that tney ho.d brought a number of proceedings against banks for the termination of insurance in which factors of this kind were alleged, but in all of these cases there had also been other factors which gave other legal grounds for action. None of these proceedings had been considered by the courts, when asked whether the FDIC would proceed against this batik for tne termination of insurance in the event the Board did not act in the matter, the PfeXC representatives indicated that they had not fully considered the matter and that they were not prepared to give a definite answer to the question at this time. They referred to the fact, however, that Mr. Harl had advised Deputy Comptroller Kobertson that, if tne section 30 proceeding did not go tnrough, to let him know and he would then consider termination proceedings by the FDIC. The Continental National Bank and Trust Company is one of a group of nine baiiKs in which the Cosgriffs have substantial ownership or control. Throe are national bariKs, one a btate member bank, ana of the others four are nonmember insured and one nonmember uninsured. Nearly all of these banks have low capital ratios and some of them are in approximately the same situation in this respect as the Continental National. For this reason the Board's representatives suggested several times the desirability of making a simultaneous examination of all of these banks in order to get as full and complete information as possible with respect to all matters, and particularly with respect to such matters as the possible switching of loans among the institutions, before anything else is done. r»e also suggested the desirability of sitting down with Mr. Co&griff and trying to work out some arrangement under which the bank might obtain more capital, as for example by the sale of its building and the use of the proceeds to increase the capital of the bank. Mr. Slade particularly had indicated that such a conference with Mi*. Cosgriff might possibly be productive oi some good results and would do no harm particularly if representatives of all three agencies participated. Mr. Jennings of the Comptroller's uffice, said that, subject to checking with the Comptroller, he felt that they would be agreeable to a simultaneous examination but would not be agreeable to permitting such an examination to delay the certification by the Comptroller to the Board. He also indicated that he thought they would invite Ur. Cosgriff to come to Washington to discuss the laatter before inducing the certification, but that they would not be willing to have any representative of the Comptroller go to Salt Lake City or to San Francisco to discuss the matter with Mr. Cosgriff. It is our view that it would be desiraule for the Board to authorise us to advise the Comptroller's representatives substinitially as follows: In view of the fact that practically all of the Cosgriff banks are in a relatively weak capital position and the unsound practices, if any, probaoly would apply to all, the Board feels that a simultaneous examination is desirable and would be glad to arrange with the Federal Reserve Bank to participate in such an examination so far as the £>tate member bank is concerned; that, since the purpose of the exarrdnation would be to develop what information there might be"that would h^ve a bearing upon a determination as to whether there should be a section yj proceeding, any further steps toward such a proceeding should be deferred until the results of t.uch an examination could be considered} that at some appropriate time, probably after such an examination, one representative each from the Comptroller's Office, the FD1C and the Federal Reserve bank should sit down with Mr. Cosgriff and discuss the matter fully with him, with the hope to obtaining some additional capital or change in loaning policies; and that such a conference would h^ve raore chance of being productive if neld in San Francisco or bait LaKe City. This would contemplate that v*e would not voluntarily say to the Comptroller whether or not the Board would proceed with a section 30 proceeding if the Comptroller made the certification, but if pressed, that the Board's representatives would say that the Board hoped that the Comptroller would not make the certification at this time and, if he insists on doing so, the Board's present foeling is that it would not be advisable for it to undertake such a proceeding. c 0 p Y July 7, 1950. Files Proposed certification by the comptroller of the currency with a view to removal of directors of the Continental National iicUiK it Trust Company, Salt Juake v^ity, Utah. ueo. S. Sloan CC^FlDEtitlAL Assistant Chief National onnk Examiner Jennings called the writer oy telepnone tnis morning to state that iAr. waiter GoigAttm President and (*»ith his filij) controlling stockholder of tne Continental National Bank and Trust Company of Salt .Lake City, had conferred in Washington with tne Office of the Comptroller oi' the Currency on Friday and Monday (presumably June 30 and July 3)« As a result of this conference Mr. Cosgriff tentatively agreed to reduce tne total of the loans of the subject bank froui &cl,00G,00G, as shown by the report of examination as of February * 8 , 1950, to approximately $17f000,000. Such reduction was GO oe accomplished within 6 to 9 wntln and was to be a bona fide reduction made in loans of borderline or distinctly risk character. Capital of the OUIIK xas also to be increased $<.i>C,GOO through the injection of new funds. The agreement was to ce confirmed by Mr. Cosgriff aftor his return to Salt Lake City and consultation with his associates. If confirmed, as confidently expected, iir. Jennings said the Comptroller's Office did not intend to proceed furtner .vith its proposal to cite the directors of the bank under Section 30. Mr. Jennings said that consideration had been given to tne fact that the bank had #4,250,000 in M U Title 1 loans ahlch *ere furtner insured bj private coverage to provide total coverage of 40 per cent and, tnerefore, appeared to represent little, if any, risk. *iiso, tno actual value of the banking house, which appears to exceed carrying value by £800,000, was noted. If tne proposed action is taKen, the risk asset ratio of the oank will be about 13 per cent. (It was 8.2 per cent.) In view of the possibility that all or part of tne proposed reduction in loans might be effected through transfer to other banks of the Cosgriff chain, he felt tnat the proposed simultaneous examination of all banks in the group should be carried out but t>aid that, in the circumstances, the Comptroller would not wish to enter the national banks involved before September. Tne uriter suggested tnat it iaight be preferable to defer simultaneous action until the six to nine months period allowed for effecting the reduction in loans had elapsed. 4lr. Jennings agreed but said the matter should be determined after confiraation oi tne tentative agreement had been received from lir. Cosgriff. he are to be advised when tne agreement has been coniirmed and Mr. Jennings suggested that advices to the Federal reserve £>ank of San Francisco be deferred until that time. c 0 p Y July 31, l'5O, Mr. H. F. Sl&de, Vice President, Federal Reserve sank of San Francisco, San Francisco ZQ, California, Dear Mr. Slade: Your letter of July 28 addressed to Mr. Millard was received this morning. He is not expected to return until August 7» You are correct in your understanding that &r. Cosgrlff reached an agreement with the Comptroller's Office with regard to the provision of additional capital and other action to be taken and we were advised informally that the Coajptrolier would not proceed, for the present at least, with his proposal to issue a citation under Section 30. >>hen reported, however, the ^agreement was tentative and was to have been confirmed by letter after Mr. Cosgriff had talked with his associates. *vt that t l — it was agreed that the capital of tne Salt Lake bank would be increased ^250,000 through the injection of new funds and total loans of the bank would be reduced about #4,000,000 within 6 to 9 months. The reduction was to be made in loans of border line or distinctly risk character. Chief National tianK Examiner Folger advised us today tnat the letter of confirmation had not been received but he understood that yir. Cosgriff was still in the East and had not returned to Salt Lake City since his discussion at the Comptroller's office. You would have heard from us earlier had M not thought it best to await confirmation and give you the exact terms of the agreement as soon as they could be ascertained. Everyone seems to feel that simultaneous examination oi the banks In the chain would be most desirable but, in view of the agreement with the Comptroller, we have suggested that such action odght be taken after the time for compliance with the t eras of the agreement had expired. This would permit determination of the extent oi compliance and whether it had or had not been accomplished through transfer of assets to other banks in the chain. Vance Sailor of the FDIC apparently feels that simultaneous examinations should be made this fall. At present the whole matter seeaia to bo up in the air. It is good to note that you do not hu.ve examination of tne boise Dank scheduled for the near future and we will give you definite advices ^s soon as possible, If your time for entry at Boise should near before you receive further advice from us, please caxi the matter to our attention. http://fraser.stlouisfed.org/ GSS;es Federal Reserve Bank of St. Louis Very truly yours, Cieo. S. Sloan Assistant Director, Division of Examinations. August 16, 1950. Walter S, Cosgriff and other directors of the Continental National Bank and Trust Company, Salt Lake City, Utah. Mr. Millard Geo. S. Sloan CONFIDENTIAL On May 19, 1950, Mr. Vest reported to the Board thfct representatives of the Office of the Comptroller of the Currency had advised the Board1s staff that the Comptroller was prepared to mske e certification to the Board as a basis for proceedings for the removal of all of the directors of the Continental National Bank and Trust Company, Selt Lake City, Ut&h, under Section 30 of the Banking Act of 1933. The Board had no previous knowledge of the matter although a warning pursuant to Section 30 hed been sent to the board of directors of the bank by the Comptroller on December 1, 1949. The letter of warning ststed that District Chief National P4ink Examiner Vright h«d been recuested to discuss with Mr. Cosgriff the unsatisfactory condition of the bank from the standpoint of its excessive loan volume and the heavy amount of its current loan problems in relation to its inadequate capit&l structure, the various reasons vhy additional capital wes essenti&l and to request that action be taken to raise the needed capital. Mr. Vright hed reported his meeting with Mr. Cosgriff on October 25, 1949, snd that Mr. Cosgriff stated, among other things, he had no intention of complying with the request the.t (1) the capital structure of the bank be strengthened through the sale of new stock, and (2) efforts be directed toward a more conservative lending policy. The following data were submitted to set forth the bank's "steadily worsening capital position due to loan volume growth which has far outstripped capital structure growth from retained earnings"; Date of Examination 5- 5-44 11-14-44 6-12-45 12-28-45 6-28-46 12-17-46 6- 9-47 3- 1-43 8- 1-49 Deposits (Figures in thousands) Ratio Classified Capital and Special Adjusted Capital Capital to to Mentioned Structure Deposits Risk Assets Loans Loans •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 1,383 1,447 1,717 1,739 1,936 1,884 1,924 1-19 1-23 1-21 1-24 1-18 1-20 1-16 1-19 1-21 LE 1- 5.93 1- 7.14 1- 6.59 1- 7.88 1- 7.36 1- 9.60 1- 9.81 1-10.16 1-12.04 To: Mr. Hillard - 2 - August 16, 1950, The letter also stated: "These tvo factors, nassely, (l) a heavy general loen volume, and (2) a disproportionate voluae of weak lotus, in relation to your bank's eapitel structure are the aein basis for our conclusions that additional capital is essential to provide your depositors with e reasonably protective margin of capital structure and that your loaning policies should be m&de aore conservative, "Subsidiary factors bearing on the conclusions expressed in the above paragraph are as follows* 1« $5,551,800 of your bank's loans ere to individuals &nd interests outside the Stete of Utah, Vhile many of these loans undoubtedly are justified extensions of credit, ve do consider th*t you have gone far afield to loen money, thereby increasing your loan supervision problems and the attendant degree of risk in a substantial portion of your lo&n portfolio, 2, $1,762,000 of your bank's loans are to relatively small finance companies, are capital in nature, r^.nd would appear to be collectible only through transfer to other banks or substantial liquidation of the finance companies concerned. Hone of these loans appear in the classified or special mentioned loan schedules of the report, 3. Out of approximately $3,000,000 of livestock loans, $84.7,000 constitute potential problems, 4* t951»OOO of your bank's loans sre not supported by current end satisfactory credit information. 5. 11,310,350*12 of your banks loans (5.96 per cent) were in a pest due status ftt the time of the August 1, 1949, examination. This reflects adversely on the effectiveness of your supervision and on the quality of the loans involved. 6, Tour bank's earnings are only fair, and your dividend policies, beginning with the year 1946, have bean liberal. From January 1, 19>U, to June 30, 1949, you have paid out *54O,OOO in dividends snd retained $693»300 of earnings. Considering your bank's great need for additional capital this is not a good record. Ve are aware that improved earnings Bay be expected, if substantial loan losses do not accrue, but we do not consider that future retained earnings may be regarded as the answer to your bank's? badly undercapitalised position. ' i I' i To: Mr. Millard - 3 - August 16, 1950. ?• 43$ of your bank's capital structure is invested in fixed assets* We recognize that your banking house may be vorth well in excess of its book value, but the percentage of capital presently invested in fixed assets is high, and the possible excess value in the banking house can not soundly be regarded as en offset to your bank's undercapitalized position. The probable or potential excess value in a banking house is • sound capit&l velue only vhen it has been realized upon. £s you are veil aware, when realization of such a value becomes a necessity, the results are usually disappointing. 8. Over s long period of time our examiners have consistently regarded your bank's loaning policies with greve reservations. Cceamenciag with the year 1944, v-e find no instance in exaaln&tion reports where our examiners heve regarded your loaning policies as aeesuring up to acceptable standards. The fact that your loan losses have been ssall is, in our opinion, the result of a constantly expanding econoay and not the outgrowth of sound loaning policies. Ve think far too many of your loans ere strictly fair weather credits which would not stand up successfully under a moderate decline in economic conditions.11 Another important extract from the letter is: ••..The only alternative to raising additional capital which will be acceptable to us is a very substantial reduction in loan volume coupled with sore conservative lonn policies." The letter of warning (copy in Counsel's office) hcs been quoted at length as it Is understood that the character of end basis for the Comptroller's complaint ia of particuler interest. The specific charge vast •Specifically we charge that your loaning practices and policies which permitted a total loan volume of *21,973,181.18 (on August 1, 1949) in relation to en adjusted capital structure of £1,924,046.07 are unsafe end unsound. ¥e charge that the existence of loan problems in the amount of $2,677,900, as set forth in the Classified Loan and Oth^r Loans Especially Mentioned schedules of the examination report dated August 1, 1949, is unsafe and unsound in relation to gross capital accounts and reserves of |2,0?7,479»15» Ve request that this first warning to each of you under Section 30 of the Banking Act of 1933 be heeded and the unsafe and unsound practices be corrected by means of raising additional capital, reducing the volume of loans, and the adoption of reasonably conservative loaning policies." 4TE FDLE To* Mr. Millard August 16, 1950. - 4- In subsequent correspondence vith the Comptroller, beginning with & letter dated December 6, 1949, President Cosgriff took exception to the charges aad« and stated that the holders of the majority of the stock of the bank (himself, his vife, mother and sister) vould not vote to Increase capital under existing conditions. He invited the Comptroller to proceed under Section 30, and stated that he was prepared to defend hiaself at a hearing before the Board of Governors and vould appeal to the courts, if necessary. The bank was examined February ZB, 1950, and the Comptroller proposed to state in his certification to the Board, which was never presented for fon&fcl consideration, thst the examination disclosed no appreciable change in lo«n policies, that the matter of additional capital had not been presented to the meeting of shareholders held on January 10f 1950, and thst th© directors hnd failed to discontinue (after warning) the unsafe and unsound practices complained of in conducting the business of the bank. Tie report of examination &s of February 28, 1950, showed the following principal items: Total asset8 Deposits Borrowed money (F. R. Bk.) Cash and Government securities Loans and discounts Banking house, furniture and fixtures Capit< COBSBOQ $900,000 Surplus Undivided profits 900,000 307.100 #50,188,700 46,315,400 1,500,000 25,331,800 20,954,000 831,100 2,107,100 Adjusted capital account amounted to 4 per cent of total assets and 8»2 per cent of risk assets. Looses had been charged off during the examination and classified assets verei Loans and discounts Overdrafts Suspense Totals Substandard Doubtful $781,500 -0-0$781,500 $128,600 -&-0$123,600 Loss $42,800 28 167 ?42.300 OLE Toi Mr. Millard August 16, 1950. Significantly, the ex&ainer stated in the CONFIDENTIAL section of the report that* "Voile there has been no expressed change in the loaning policies of this institution examiner senses a tendency tow&rds conservatism.11 A meeting of representatives of the Board's staff and Vice President Sl&de of the federal Reserve Beak, San Francisco, with representatives of the Comptroller and the FDIC vas held June 1, 1950* The Continental Hstional Bank and Trust Company of Salt Lake is one of a group of nine banks in vhich the Cosgriffs have substantial ownership or control. There are three national banks, one State member bank, four noniaeaber insured banks and one nonmember uninsured bank* It visa suggested that all should be examined simultaneously to determine the situation of the whole group, After discussion the Comptroller's representatives agreed to the suggestion that simultaneous examinations should bs made but did not wish to delay Section 30 proceedings. Also, they agreed to invite Mr* Cosgriff to "Washington for a further discussion of the matter before certifying the case to the Board. Mr. Cosgriff did come to Washington about July 1 and, after a discussion at the Comptroller18 office, tentatively agreed to increase the capital of the bunk by $250,000 through the injection of new funds and to reduce the loans of the Salt Lake bank by about #4,000,000 vithin ' six to nine sonths. The reduction in loans was to b© a bona fide reduction mfede in loans of borderline or distinctly risk character. This agreement was to be confirmed by letter after Mr. Cosgriff had consulted with his associates and we were advised that, if the confinaction was received, the Comptroller did not propose to proceed further with th© siafcter of certification to the Board under Section 30. About two weeks ago we were advised that the agreement hud not been confirmed but it was understood that Mr. Cosgriff had not returned to Salt Leke City. Simultaneous examination of all banks in the group is still contemplated but the time for such examinations has not been determined. GSSie* L
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