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Memorandum t o the Board From: January 26, 1940. C. E. Cagle Subject: Bank of America N . T . & S.A. The p r i n c i p a l matters which have been c r i t i c i z e d i n t h i s case are: I. II. III. IV. Dividends and Earnings Capital Structure C l a s s i f i e d or C r i t i c i z e d Assets Banking Premises and F u r n i t u r e and F i x t u r e s , i n c l u d i n g a p p l i c a b l e p o r t i o n o f investment i n Merchants N a t i o n a l R e a l t y Corporation s t o c k , c a r r i e d i n the investments account V. Other Real E s t a t e , i n c l u d i n g amount of sales contracts w i t h C a p i t a l Company and C a l i f o r n i a Lands, c a r r i e d i n l o a n s , a p p l i c a b l e p o r t i o n of investment i n stock of Merchants N a t i o n a l R e a l t y Corporation, c a r r i e d i n i n vestments, and a p o r t i o n of b u i l d i n g s c a r r i e d as banking premises but no longer used as such VI. Purchasing or Making I l l e g a l R e a l E s t a t e Loans i n V i o l a t i o n o f S e c t i o n 24 F e d e r a l Reserve Act VII. Large L i n e t o Transamerica Corporation and A f f i l i a t e d Organizations A. I l l e g a l Excess L i n e t o Transamerica Corporat i o n and A f f i l i a t e d Organizations 1. Guaranteed Loans 2. C a p i t a l Company - D i r e c t Real E s t a t e Loans and Advances 3. C a l i f o r n i a Lands - R e a l E s t a t e Loans and Advances 4* Western F u r n i t u r e Exchange 5. S e l f - I n s u r a n c e Fund B. Option t o Purchase N a t i o n a l C i t y Bank Stock C. Investment i n and Loans Secured by Transamerica Corporation Stock and Bank 1 s Own Stock To: The Board VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. - 2 - A. 0 . Stewart L i n e (and P a c i f i c Coast Mortgage Co.) Geiman C r e d i t s " S e r v i c e Charges" on Dormant Accounts Bonds and S e c u r i t i e s , Write-ups D i v i d e n d s Declared not s e t up i n Records Records o f A p p r o v a l o f T r a n s a c t i o n s by D i r e c t o r s and Committees Thereof Employees* P r o f i t S h a r i n g P l a n Growth and Expansion Manager/lent and P o l i c i e s Each o f these m a t t e r s i s discussed i n t h e a t t a c h e d memorandum, i n dicating: 1. The c r i t i c i s m s made by t h e examinors, 2. The p o s i t i o n t a k e n o r r e q u e s t s o r r e q u i r e m e n t s made by t h e C o m p t r o l l e r o f t h e Currency, 3. The p o s i t i o n t a k e n b y t h e management o f t h e bank, and i n some i n s t a n c e s t h e n a t u r e and e x t e n t o f c o r r e c t i o n s made, and 4. A d d i t i o n a l comments and e x p l a n a t i o n s . W i t h r e s p e c t t o t h e c r i t i c i s m s o f most o f these m a t t e r s , corrections have been made, i n v a r y i n g degrees, and sdme have been removed e n t i r e l y . How- e v e r , f u r t h e r c o r r e c t i o n s seem necessary w i t h r e s p e c t t o t h e f o l l o w i n g m a t t e r s , most ox^ which (as i n d i c a t e d * ) were i n c l u d e d i n t h e Order t o Show To: The Board - 3 - Cause i s s u e d by t h e C o m p t r o l l e r under date o f January 11, 1940. A. Dividends * U n t i l adequate c a p i t a l s t r u c t u r e i s p r o v i d e d and asset c o n d i t i o n s a r e c o r r e c t e d , should be e l i m i nated o r c u r t a i l e d s h a r p l y . An adequate program o f c o r r e c t i o n s w i l l leave b u t v e r y l i t t l e f o r d i v i dends f o r a t l e a s t f i v e y e a r s , b u t t h i s m a t t e r should be covered s p e c i f i c a l l y . B. Capital Structure * Should be i n c r e a s e d i m m e d i a t e l y a t l e a s t $30,000,000 and f u r t h e r s t r e n g t h e n e d by a l l o r a substantial p o r t i o n of the earnings. C. C l a s s i f i e d Assets * Determined l o s s e s should be e l i m i n a t e d and adequate r e s e r v e s f o r l a r g e amounts o f probable l o s s e s p r o v i d e d , i n c l u d i n g German C r e d i t s . D. Banking Premises * Losses should be charged o f f and adequate r e serves f o r p r o b a b l e losses p r o v i d e d now o r a t l e a s t w i t h i n f i v e years t h r o u g h i n c r e a s e d r a t e o f d e p r e c i a t i o n o r o t h e r charges; p a r c e l s not occupied should be t r a n s f e r r e d t o Other Real E s t a t e and t h e occupied p a r c e l s shown as bank premises on t h e books and statements o f t h e bank. E. Other Real E s t a t e * E s t i m a t e d l o s s e s should be charged o f f and adequate r e s e r v e s e s t a b l i s h e d f o r probable f u t u r e l o s s e s . The t o t a l amount o f r e a l e s t a t e should be p r o p e r l y r e f l e c t e d i n t h e books and statements ( i n t h e circumstances i t m i g h t be p r a c t i c a b l e t o r e q u i r e a f i v e - y e a r period f o r the e l i m i n a t i o n of the other r e a l estate sales contracts). F. Real E s t a t e Loans * More strenuous e f f o r t s should be made t o b r i n g a l l l o a n s a c q u i r e d through c o n s o l i d a t i o n s , e t c . , i n t o c o n f o r m i t y w i t h law and t h e s t a t u t e should be observed s t r i c t l y w i t h r e s p e c t t o new l o a n s . To: The Board - 4 - G. Large Lino to Transamerica Corporation * This l i n e should be reduced and kept s t r i c t l y w i t h i n the l i m i t s established by law; N a t i o n a l C i t y Bank stock acquired under "Option to Purchase11 N a t i o n a l C i t y Bank stock should be eliminated; "Guaranteed Loans" should bo e l i m i nated; r e a l e s t a t e sales contracts should no longer be regarded as a part of t h i s l i n e but t r a n s f e r r e d t o Other Real E s t a t e . H. Service Charges Against Dormant Accounts There should be a d e f i n i t e determination as t o the l e g a l status and any amounts charged i l l e g a l l y should be restored t o the deposit accounts and the balance should be covered by reserves. I. S i m p l i f i c a t i o n of Group Relationships There should be a c l a r i f i c a t i o n of the holding company a f f i l i a t e question and c e r t a i n a f f i l i a t e questions, including P a c i f i c Coast Mortgage Company, Western States Corporation, and Bankam e r i c a Company; the financing and corporate structure of the group should be s i m p l i f i e d . J. V i o l a t i o n s of Law There should be a c l e a r understanding as to the a p p l i c a b i l i t y of the s t a t u t e s w i t h respect t o various c r i t i c i z e d matters and proper adjustments made. K. Relations w i t h Other Supervisory Agencies There should be a c l a r i f i c a t i o n of the issues w i t h the various agencies, including the S . E . C . , reasonable adjustments made, and the cases closed. I n a d d i t i o n t o the items indicated above, the Comptroller of the Currency i n the Order t o Show Cause issued January 11, 1940, requested t h a t 1. The Self-Insurance Fund w i t h Transamerica Corporation (balance #2,182,000) be returned i n cash to the bank. 2. The A. 0 . Stewart l i n e be promptly c u r t a i l e d or s a t i s f a c t o r y c o l l a t e r a l pledged back of the l i n e . To: The Board - 5 - There are some questions as to the C o m p t r o l l e r s p o s i t i o n w i t h respect to these two matters and unless and u n t i l f u r t h e r f a c t s are developed supporting the Comptroller 9 s c r i t i c i s m i t i s not believed t h a t these matters need be given f u r t h e r consideration.
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