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This volume is one of a series of reports prepared by the Committee on Branch, Group, and Chain Banking
for the information of the Federal Reserve Board and the
Federal Reserve System*

These reports were not approved

or adopted by the Federal Reserve Board as an expression
of its views.

All citations of these reports should re-

flect this limitation*





Material prepared for the information of the
Federal Reserve System by the
Federal Reserve Committee on
Branch, Group, and Chain Banking

\i. S. F&^evi\ 1Ue>e.vve-

Members of the Committee
E. A. Goldenweiser, Director, Division of Research and Statistics,
Federal Reserve 3oardv Chairman
Ira Clerk, Deputy Governor, Federal Reserve Bajik of San Francisco
M. J. Fleming, Deputy Governor, Federal Reserve Bank of Cleveland
L, R. Rounds, Deputy Governor, Federal Reserve Bank of Hew York
E. L* Smead, Chief, Division of Bank Operations, Federal Reserve

J. H. Riddle, Executive Secretary and Director of Research

The Committee was appointed February 26, 1930* ^7 the
Federal Reserve Board


• • .to assemble and digest information on
branch banking as practiced in the United States,
group and chain banking systems as developed in
the United States and elsewhere, the unit banking
system of the country, and the effect of ownership
of bank stocks by investment trusts and holding


To the Federal Reserve Board:
The Committee on Branch, Group, and Chain Banking transmits herewith a study of 225 "banks which suspended during the years

The material is largely derived from a review of ex-

aminers1 reports, which cover in some cases a considerable period
of years prior to the respective suspension.


E. A* Goldenweiser

Chapter I

Chapter II

Chapter III

Purpose, Materials, and Methods
Selection of Sample Banks for the 1921-1930 Study
Selection of Sample Banks for the I93I Study
Nature of Data Compiled
Methods of Analysis
References to Case Histories


Assets and Liabilities of Suspended and Active Banks,
Quality of Assets
Loans to Officers, Directors, Relatives, and Their
Interests ;?'^'31
Borrowings ' ^ - > '
Further Comparisons of Suspended and Active Banks
Comparison of Banks Suspending in 1930 with the
33 Active Banks
Composition of Loans and Investments of Banks
Suspending in 1931 and of Member Banks Outside of Central Reserve Cities
Consolidated Balance Sheets of Banks Suspending
in 1931 and of Operating Banks
Deposit Trends of Suspended and Active Banks


pan and Collection Policies
' ''' *j
Lax Lending Methods
Slack Collection Methods
Loans to Officers, Directors, Relatives, and Their
Capital Loons, Loans on Inflated Real Estate Values,
and Excessive Loans to Tenants
Capital Loans
Loans dn Inflated Farm Land
Loans on Inflated City Real Estate
Excessive Loans to Tenants
Placed Paper, Non-resident Loans, Loans to Accommodate Other Banks, and Split Loans
Placed Paper
Non-resident Loans
Loans to Accommodate Other Banks
Split Loans
Loans to Officers for Speculation in Securities
Criticized Demand Loans
Loans Collateralled by Bank's Own Stock or Stock
of Affiliates



Ho .


CONTENTS (Cont'd)
Profits Over Safety, Loans to Capture Business,
and Loans As Service to Community
Profits Over Safety
Loans to Capture Business
Service to Community
Miscellaneous Lending Errors
Loans to a Get-Rich-Quick Promoter
Loans Secured " y Life Insurance
Automobile Paper
Chapter IV

Chapter V


Investment Policies
Quality of Securities and Depreciation
Bond Quality Index
Securities Depreciation
Faulty Investment Practices
Bonds Bought for Yield
Bond Trading
Convertible Bonds
Unlisted Bonds
Heal Estate Bonds
Irrigation Bonds
Bonds Chiefly Responsible for the Depreciation in
the Investment Portfolios of the 105 Banks
Method of Selecting Bonds Contributing Greatest


Other Operating Policies
Overextended Condition and Continuous Borrowing
- Miscellaneous Criticisms
Payment of Dividends Not Currently Earned
Excessive Investment in Banking House
Too High Salaries
Too High Interest Rate on Deposits
Mismanagement of Municipal Deposits
Mark-up of Book Value of Assets
Payment of Unsecured Produce Drafts for Worthless Drawer
Cotton Speculation
Customer's Check "Kiting"




CONTENTS (Cont'd)
Chapter VI

Criticisms of Bank Personnel
Illegal Acts
Inactive Directors
Weak Management
Exploitation of Bank by Management
Outside Activities of Bank Officers
Involved Affairs of Owners
Illness and Death of Officers
Difficulty in Removing Officers


Chapter VII

Economic. Climatic, and Competitive Factors


Chapter VIII

Assets and



Liabilities of Suspended Banks
of Loon and Collection Policies
of Investment Policies
of Bank Personnel



An analysis of the examination reports of 120 member banks which
suspended in the years 1921-1930 and 105 member banks which suspended in 1931
has been undertaken in order to secure a definite picture of the operations,
problems, and policies of these institutions prior to closing. The general
purpose of the study is to throw more light on the causes of bank suspensions.
There have been many previous discussions of bank failures and their causes,
but nearly all of them treat the subject from the standpoint of the outside
observer. In the present study, the materials used relate to the internal
operations of banks and to the criticisms by examiners as these banks progressed towards insolvency.

In this way, more of the personal element in bank-

ing and a more intimate view of the detailed operations are shown.
The original study covered 120 banks suspending during 1921-1930,
but later a list of 105 member banks suspending in 193^ w a s selected by the
Committee for further study in order to determine whether the factors of banking weakness had changed either in emphasis or scope in that year. General
business conditions had changed in 1931 a^d securities had depreciated heavily.
Many bank failures occurred in that year in the five Federal reserve districts
which were not represented in the first study. Furthermore, it was observed
that the proportion of large banks among the 1931 suspensions was greater than
among those failing in previous years.

- 2-

Selection of Sample Banks for the 1921-19"50 Study
The basic materials for the 1921-1930 study were case histories of
120 suspended member hanks (119 national and 1 State member) and comparative
histories of 33 active member hanks in towns that had had hank failure3. The
failed hanks were selected from 7 Federal reserve districts, and the active
hanks from 5 Federal reserve districts. The distribution of these hanks, bydistricts, was as follows:

Table 1 - Distribution by Federal Reserve Districts
6f Banks Selected for the 1921-I93O Study


Number ofl Number of


6 - Atlanta
7 - Chicago
S - St. Louis
9 - Minneapolis
10 - Kansas City
11 - Dallas
12 - San Francisco







. 120



The method of choosing the suspended banks for the study was designed to make the sample thoroughly representative.

In h Federal reserve

districts, the Federal Reserve Committee on Branch, Group, and Chain Banking
arbitrarily chose the banks for the study. These districts were Atlanta,
St. Louis, Kansas City, and Dallas. Lists were prepared of the failed member
banks in these districts, arranged in chronological order according to date
of failure. This chronological list was then divided into 20 parts, and 1
bank chosen from each part. For example, if there ware SO failed member

- 3-

banks in the district, every fourth bank was chosen. In a few cases, it was
found that the resulting sample list of failed hanks gave one State in the
district an overepresentation and some other State an inadequate representation.

Where this was the case, some of the failures in the States having too

many hanks in the sample list were replaced by banks drawn at random from the
States which were poorly represented.

It was later found that in a few cases

historical records had been destroyed, and it was necessary to substitute
other banks whose records were available.
In the Chicago, Minneapolis, and San Francisco districts, the Federal
reserve bank officials chose respectively 9, 11, and 9 failed member banks as
typical examples, and the histories of these banks were added to those selected by the Committee. In the Chicago district, the.Committee selected an
additional 11 banks, bringing the total number of failed banks in the sample
list for that district up to 20.
Active banks, or banks still in operation when the data were cont*
piled, were chosen by the Federal reserve bank officials in 5 of the above 7

In the choice they used their own discretion. The only rules

laid down for the choice of these banks were that they should be banks located
in communities where bank failures had occurred, that they should embrace
banks of various sizes, and that they should be in good condition.
These lists include banks from large cities, suburbs, and small
towns. The failed banks include institutions from mixed farming, wheat raising, live stock, cotton, tobacco, and rice growing communities. Some of then:
were from communities which had been visited by floods, drought, and storms.
Some were from oil boom towns, and others from mining communities. Several

- k -

banks are included which were adversely affected by the Florida land "boom.
The list of banks is well distributed according to the year of failure as
well as according to the size of community. The list of active banks also
includes institutions from a variety of economic areas, largely rural, and
to be sure that these surviving banks were not favored by less strenuous
circumstances, they were all chosen from towns which had had bank failures.
The towns or communities from which the active banks were selected
averaged slightly larger than the communities from which the failed banks
were selected. The median failed bank was in a community with a population
range from 1,000 to 2,500 people, whereas the median active bank was in the
next larger population group with a range from 2,500 to 5,000 people.

Table 2 - Classification of Selected Active Banks
and Banks Suspending during 1921-1930
by Size of Community
Under 500
500 - I.OOO
1,000 - 2,500
2,500 - 5,000
5,000 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 and over











120 .



The banks selected were also well distributed according to size,
as measured by deposits in 1920, or the earliest date thereafter for which
figures were available*

The selected active banks were slightly

- 5-

larger than the selected failed "banks. The median failed "bank was in the
deposit group $250,000~$500,000, and the median active bank was in the next
higher group with deposits from $500,000 to $750,000,
Table 3 - Classification of Selected Active Banks
and Banks Suspending during 1921-1930
by Size of Deposits
$10,000 - 50,000
50,000 - 100,000
100,000 - 150,000
150,000 - 250,000
250,000 - 500,000
500,000 - 750,000
750,000 - 1,000,000
1,000,000 - 2,000,000
2,000,000 - 5,000,000
5,000,000 - 10,000,000
10,000,000 - 50,000,000
50,000,000 and over















Selection of Sample Banks for the 1911 Study
The 105 banks selected for the 1931 study included 101 national
banks and \ State banks, members of the Federal reserve system. All failed
national banks with deposits of five million dollars or more were included.
The remainder of the banks were apportioned among the twelve Federal reserve
districts to give proper representation to each district and were selected
in much the same manner as those in the I92I-I930 group. As a result of
this method of selection, the distribution of the banks used in the sample
list was as follows:

- 6-

Table k - Distribution of Selected Banks Suspending
in 1931 ^y federal Reserve Districts
District . .

Number of
suspended "banks

1 - Boston
2 - New York
3. ~ Philadelphia
4 - Cleveland
5 - Richmond
6 - Atlanta
7 - Chicago
S - St. Louis
9 - Minneapolis
10 - Kansas City
11 - Dallas
12 - San Francisco





The sample group of 1931 hank suspensions includes institutions from
all types of communities. Using as a basis the descriptive material provided
in the case of each hank, the following classification of the hanks according
to type of community was prepared to indicate the representative character
of the cases. The chief reason for subdividing the farming region into northeastern and other sections was to determine whether or not the causes of "bank
failure in the five northeastern districts, which were not included in the
earlier study, were radically different from the causes of failure in the seven
districts represented in the earlier study.
Table 5 - Classification of Selected Banks Suspending in 1931
^y Type of Community
Type of community
Failed banks in cities of over 100,000 population
I&ILsd banks in other industrial and suburban cities
Failed banks in mining communities
Failed banks in northeastern farming region(l)
Failed banks in other farming regions


reserve districts 1 to 5 inclusive..

Number of

- 7 The f a i l e d banks used i n the 1931 study a r e d i s t r i b u t e d according
to t h e s i z e of community i n Table 6 .
Table 6 - C l a s s i f i c a t i o n of Selected Banks Suspending i n 1931
by Size of Conraxnity


Under 500
500 - 1,000
1,000 - 2,500
2,500 - 5,000
5,000 - 10,000
10,000 - 50,000
50,000 - 100,000
100,000 and over

of over
0 •

i n d u s t r i a l Mining
' commusuburban


1 l6


















These banks were a l s o well d i s t r i b u t e d according to the s i z e of,
bank, as measured by d e p o s i t s i n t h e l a s t h a l f of 1330*

This i s shown i n

Table 7*
Table 7 - C l a s s i f i c a t i o n of S e l e c t e d Banks Suspending i n 1931
by Size of Deposits


Under $50,000
50,000 - 100,000
100,000 - 150,000
150,000 - 250,000
250,000 - 500,000
500,000 - 750,000
75o,ooc - 1,000,000
1,000,000 - 2,000,000
2,000,000 - 5,000,000
5,000,000 - 10,000,000
10,000,000 - 50,000,000
50,000,000 and over


j of over
1 100,000


Other 1
i n d u s t r i a l Mining


1' 8














Other i
farming •Total




o •



















|__ _ 55



-sNo new data on active banks were compiled for 1931» but the records
of active "banks used in the earlier study and covering the years from 1921 to
193° > inclusive, are also used for comparisons with the 1931 suspensions.


mast "be recalled, however, that these active "banks were selected from only five
Federal reserve districts and represent largely raral sections*
Comparisons are also made between the failed banks and all operating
member banks outside of central reserve cities*

The central reserve city banks

were excluded in order that the figures might not be unduly weighted by a few
large city institutions which differ widely in the character of their business
from the failed institutions.
The figures for the operating banks outside of central reserve cities
were taken from the abstracts of member bank condition reports as of December
31 each year from 1919 to 193^» inclusive.
be made with qualifications.

Here again, the comparisons mist

In the first place, the ratios between balance

sheet items of the operating banks are based on aggregates which are influenced
heavily by the larger banks, whereas most of the ratios of the failed banks
are medians, in the construction of which large and small banks have equal

Furthermore, the consolidated balance sheet of operating banks con-

tains the figures of many banks which later failed*

Nature of Data Compiled
Three types of information regarding these selected banks were compiled*

The first consisted of excerpts from examiners1 criticisms over a

period of years prior to suspension.
banks only.

This was collected for the suspended

The second type of information consisted of statistical material

taken from balance sheets, examiners1 reports, and earning and dividend reports.

- 9 -

These data were compiled for both suspended and active banks•

The third type

of data was collected only for the 105 "banks suspending in 1931list of bonds and securities of each failed bank for three datesi

This was a
at the time

of the last examination, one year before the last examination, and two years
before the last examination.
In the appendix will be found the first six case histories, inserted to show the nature of the data collected from examiners' comments*
These case histories give certain descriptive data about each bank and its
community, certain balance sheet items, examiners1 classifications of criticized
assetsi and the above-mentioned excerpts from confidential comments by examiners*

This statistical and critical material was taken from each examina-

tion report from 1920 to the time of closing, except in a few cases where the
compilation begins as of a somewhat later date.
The examiners' criticisms and other data have been disguised to
prevent the recognition of the identity of the various banks in the sample
list, since the identification would be of no advantage in this study*


the process of disguising the material, the populations of the various towns
and cities have been rounded off to even hundreds or thousands, and the names
of States, towns, banks, corporations* examiners, and other persons have been
either deleted or changed to key letters where it was desirable to indicate
the repeated reference to the same party*
In spite of the effort to make the sample list of banks representative, certain deficiencies in the material used must be recognized*

The col-

lected excerpts from examiners1 comments were perhaps too condensed in some

In other cases, comments would have been more illuminating if they

„ 10 ~

had been extended further back.

The comments in the case histories are neces-

sarily in the language of the examiners and much illustrative material is inadequate because of the absence of elaboration by the examiner.

There is

also evidence that certain special types of criticism have been more fully
developed in some districts than in others.

Examples of this were the cita-

tions of poor farming methods in one Federal reserve district and the frequent
mention 4n some districts of the lack of credit data in the subject banks,
whereas this was rarely mentioned in other districts.

Methods of Analysis
Two general types of analysis were used in the study.

The first

was a statistical approach to the subject by means of balance sheet ratios.
Using the detailed statistical information collected, the liistory of each bank
that failed and the history of each active bank were shown in the form of
several ratios for each examination.

It was necessary to resolve the figures

for the large number of individual banks into 3eries showing the typical condition of active and suspended banks.

To do this, the several ratios of each

class of bank for given periods were assembled and median ratios were found.
Tables showing these median ratios appear in appropriate places in the text, an"
a number of illustrative charts are presented comparing the course of these
median ratios for

- 11 -

suspended "banks and active "banks,
The second method of analysis was to tabulate the frequency of the
various criticisms made "by examiners.

If a "bank was criticized for slack col-

lection methods several times on different examinations, this criticism was
tabulated only once.

On the other hand, criticisms by examiners were tabulated

even if they were of minor importance and played only an unimportant part in
the failure of the bank.

In a summary of this sort, it must be recognized that

there is some chance of difference of interpretation of an examiner's comments.
An effort has been made to avoid personal bias, but the fact mast be conceded
that no two persons would read these case histories and arrive at exactly the
same number of frequencies for the various tabulated criticisms.
The examiners1 comments
trative material.
of judgment.

and other data

provide a wealth of illus-

Here again the choice of examples has been largely a matter

An effort was made to use only typical cases as illustrations,

but it was frequently necessary to make a choice on the basis of the thoroughness with which the examiner expressed his ideas.
For the 105 banks suspending in 1931 an analysis is also made of
their bond holdings.

References to Case Histories
In the following chapters frequent quotations are made from examiners1 conments to illustrate various points.
by reference to the case histories by number.
1930 group are numbered from 1 to 120.
entirely in the appendix.)

The quotations are accompanied

The suspended banks of the 1921-

(The first six of these cases are given

The active banks are numbered from 121 to 153^

suspended banks of the 193 1 group are numbered from 154 to 25S#


- 12 -

The word suspended i s used throughout t h i s volume to designate the
"banks selected for the study which closed during 1921-1931, although the data
presented r e l a t e to t h e i r condition prior to suspension.

The word active i s

used to designate the 33 selected banks which wore s t i l l in operation a t the
time the data were compiled.



Success or failure of a "bank depends in large measure on the
quality of its assets.

In fact quality is a much more important factor

than either the form or distribution of assets.

Bad assets lead to fail-

ure either through impairment of capital as a result of losses, or through
a shortage of cash as a result of a frozen condition.

Every bank mast be

prepared to go through periods of declining deposits.

Withdrawals may be

the result of reduced business activity generally, the flow of funds auay
from a region or coninunity for economic reasons, or the loss of confidence
on the part of depositors.

When deposits begin to decline, a bank may be

forced to dispose of some of its assets or use them as a basis for borrowing.

So long as the assets are high-grade and liquid these withdrawals can

be met.

If the process continues until the bank has left only an inferior

grade of assets, however, and cannot realize on them as rapidly as deposits
are withdrawn, then it must close its doors.
The quality of a bank's assets in turn reflects the quality of
its management*

Many of the defects in management leading to failure are

revealed in the studies of balance sheet items and trends in this chapter.

ftuality of Assets
The quality of assets of a bank may be judged by comparing its
fixed and criticized assets with its ca-pital and surplus.

In this way,

the fixed and criticized assets are measured against the stockholders1

- 13-

- Inequity in the "bank. In mailing this comparison the method worked out by
the Federal Reserve Bank of Minneapolis has been adopted. For the sake of
"brevity in expression the percentage ratio between a hank1 s fixed and questionable assets and its capital and surplus is referred to in this discussion as the "ratio of non-liquidity*"
The items included in the total fixed and questionable assets
are the following:
1* Losses,
2. Doubtful assets.
• Slow loans.
• Slow assets in the investment account, including
foreclosures, claims, judgments, defaulted bonds,
and depreciation on bonds.
5. "Other real estate" reported as "slow."
0. Expenses in excess of earnings.
7. Banking house and furniture and fixtures.
From this gross total of criticized and fixed assets are deducted
the following items, which are construed as offsets to questionable assets:
1. Undivided profits.
2. Reserves for losses and depreciation.
3# Estimated true value of "other real estate" in excess
of its book value and prior liens.
U. Other concealed assets, including appreciation on bonds.
The total of fixed and criticized assets includes everything
which a bank examiner classifies as losses, doubtful, slow, or otherwise
undesirable. It also includes the banking house and furniture and fixtures,
since these assets are permanent and usually cannot be disposed of until
the bank goes into liquidation. Furthermore, an occasional bank has too
large an investment in its banking house and weakens its earning power and
liquidity as a result. From the total of fixed and criticized assets all

- 15 -

reserves for losses and depreciation and all concealed assets, such as
appreciation on "bonds, are deducted.

The undivided profits account is also

deducted from the t o t a l of fixed and c r i t i c i z e d assets, since undivided
profits are in the nature of unsegregated reserves.
The inclusion of "slow" assets in the total of fixed and criticized
assets requires some explanation.

If all slow assets were fully collectible

within a reasonable length of time there would he little justification for
considering them fixed or frozen, hut slow assets are nearly always a composite of collectible assets, partly-collectible assets, and assets of
doubtful value which the examiner hesitates to criticize more severely on
account of lack of information,

A line that has been carried continuously

for an extended period in its entirety is considered a slow loan by many
examiners, unless the borrower can sell the security and liquidate the entire line without stopping or hampering his operations.

Some years ago the

Comptroller of the Currency made the statement that "any loan is slow upon
which it will subsequently be necessary to take real estate in order to prevent loss.11

However, the comptroller commented that he would not make a

hard and fast rule as to what assets should be considered slow or doubtful*
The net total of criticized and fixed assets minus undivided profits,
reserves, and concealed assets is divided by the capital and surplus of the
bank to compute the percentage known as the ratio of non-liquidity.


ratio furnishes a quick way of summarizing the condition of the bank and makes
direct comparison possible between the condition of banks of various sizes.
Chart 1 and Table 8 show the comparative histories of the active
banks and suspended banks used in this study, as measured in terms of ratios
of non-liquidity.

As in other charts and tables used in this study, the

typical or median experiences of the two classes of banks are shown.

- 16 -



PER 1100







120 BanKs
Suspending W21-W3C> /


1 L—•















105 BanKs

suspending in 1'9 3 1 ^









. 3 3 Active BanKs


1 2 1922 1923 1924- 1925 1926 1927 1928 1929 1930


Fixed and questionable assets per $100 of capital and surplus
for the typical or median bank In (1) the 120 selected member
banks suspending during 1921-1930, (2) the 105 selected member
banks suspending in 1931, and (3) the 33 active banks selected
from towns where failures had occurred.

- 17 Hie typical active bank never allowed its fixed and questionable
assets to rise above 68 per cent of capital and surplus, and during good years,
such as 1920 and 1929, the active banks' ratios v?ere less than 50 per cent.
To state the policy of active banks in another way, they always kept their
total of criticized and fixed assets well below their stockholders1 investment in the bank.
Banks which later suspended followed a very different course. In
1920 their ratios of non-liquidity were not materially worse than the ratios
of the active banks. This was partly due to the favorable agricultural
situation. From 1920 on, however, the amount of fixed and questionable assets
of suspended banks rose steadily until the typical banks showed ratios much
above 100 per cent. This means that the banks which later failed had criticized and fixed assets much larger than their capital and surplus for an extended period before they closed. In some cases the undesirable assets
amounted to ten times capital and surplus.

Table 8 - Fixed and Questionable Assets per $100 of
Capital and Surplus
Suspended "banks
105 "banks 33 selected
suspending j suspending active "banks CO
in 1921-1930
in 1931
(median) j
120 "banks [


$ 30
1920-1st half
$ 23
$ 11
1920-2nd half
1921-lst half
1921-2nd half
1922-lst half
1922-2nd half
1923-1st half
1923-2nd half
681924-lst half
1924-2nd half
1925-1st half
1925-2nd half
1926-lst half
1926-2nd half
1927-1st half
192?-2nd half
1928-lst half
1928-2nd half
1929-lst half
1929-2nd half
1930-1st half
1930-2nd half
38 ,
1931-lst half
236 •
(1) Banks still in operation when these data wcie comoiled#
They were selected from communities which had had failures.

- IS -

An analysis of the ratios of non-liquidity of suspended "banks
divided into groups according to the year of failure shows that a similar
development occurred among banks failing in every year from 1921 to 1930,

The ratios of typical tanks in all groups were small in 1920,

but deteriorated rapidly as the oanks approached failure.

Banks which closed

in 1927 had the worst ratios according to median experience.

Table 9 - Fixed and Questionable Assets per $100 of Capital and Surplus
Banks in



half $ 10
half .

1922 1923 1924 11925 11926 1 1927 1
1928 11929 j 1930 11931

$ 42 $ 51 $ 28 $ 12 $ 51 $ 23 $ 51 $ 9 $ 17 $ 23
99 155
59 • 71
218 106 137 108 139 227
273 154 156 130 266 107 162 139
292 200 145 176 303 1 125 155 172 107 i
252 177 155 141 141 189 114 142
280 230 196 151 ! 229 163 112 108
297 204 , 189 322 141
85 110
207 225 238 146
85 133
352 230 331 153 113 125
206 271 150 107 132
218 321 209 121 ( 120
430 224 j 129 1 154
447 240 151 174 114
292 211 167
j 299
248 176 129
j 343 260 223
257 243 1 157
199 153
296 176

1 208



j 236

An analysis of the ratios of non-liquidity of the banks which
failed in 1931 by economic areas shows that banks in the large cities and in
the mining comnrunities made a more favorable showing than banks in the other

A part of this better comparative showing was no doubt caused by the

- 19 -

fact that a larger portion of their weak assets was in the form of "bonds.
The examiners in setting up criticized assets merely include the depreciation
on "bonds and recently have omitted entirely the depreciation on the higher
grades of bonds, wherpas they include the total took value of other weak
assets in the criticizable total. This explains in some measure why the
fixed and questionable assets of "banks in the two farming groups, where "bond
investments were small, reached higher levels. Banks in suburban and smaller
industrial cities which were adversely affected by the collapse of the city
real estate boom, found their ratios of non-liquidity rising materially as
city real estate loans began to be added to the criticized assets beginning
in 1926.

Table 10 - IPixed and Questionable Assets per $100 of Capital and Surplus
in Selected Banks Suspending in 1931
Median or typical bank in
Cities \
Mining i Northof over
commu?- I eastern ; farming
(55 hanks)
(8 hanks)
(16 "banks) (16 hanks)
(10 hanks)



$ 11


$ 35

$ 42







• •








- 20 -

Loans to Officers. Directors. Relatives. and Their Interests
A study of the histories of representative active banks and "banks
which closed shows a y/ide difference in the amounts loaned to officersr
directors, and related interests.

This is illustrated in Chart 2 which gives

for "both active banks and suspended banks the loans to officers, directors,
and their interests per $100 of capital and surplus.

The figures are given

in Table 11 #

Table 11 - Loans to Officers, Directors, and Their Interests
per $100 of Capital and Surplus



Suspended "banks
120 hanks j 105 hanks j
in 1921-1930
in 1931

half I

$ 26

$ 30






33 selected
active hanks

$ 19

22 -



- 21 -


PER #iO0
105 BanKs
Suspending in 1931






120 BanKs
Suspending in 1921-1930





1920 1921

1922 1923 1924 1925 1926 1927

1926 1929

1930 1931

Loans to o f f i c e r s , d i r e c t o r s , and t h e i r i n t e r e s t s per $100
of c a p i t a l and surplus for the typical' or median bank in
( I ) the 120 s e l e c t e d member banks suspending during 19211930, (2) the 105 s e l e c t e d member banks suspending in 1931,
and (3) the 33 a c t i v e banks s e l e c t e d from towns where f a i l ures had occurred.

- 22 -

For active "banks the general trend of these loans was
downward, especially after 1927,

For the tanks suspending in

1931, however, the trend was upward, and just -prior to failure the
loans to officers, directors, etc., amounted to nearly 40 per cent
of capital and surplus.
It is evident that the typical active "bank reduced loans
to the management when circumstances were favorable, whereas in
many of the "banks which later suspended the management increased
their "borrowings as the years passed, in spite of the fact that
the condition of these "banks was growing worse*
The median histories of the suspended "banks grouped
according to the year of failure were very similar to the composite
for all the suspended banks as shown in the above table*

Loans to

officers, directors, and their interests were larger relative to
capital, and surplus than in the active banks,and these loans were
net reduced as a rule during the years covered by the study.
A closer analysis of the 1931 bank failures shows that
suspended banks in each of the economic regions habitually loaned
larger amounts to their officers, directors, and related interests
than the typical active bank.

The heaviest lenders to these interests

were the banks in large cities and in other industrial and suburban

- 23 -

Table 12 - Loans to Officers, Directors, and Their Interests per $100 of
Capital and Surplus in Selected Basics Suspending in I93I
Median or typical bank in
of over ; industrial
eastern 1
popularegion i (55 hanks)
(g hanks)
(10 hanks) !
(l6 banks)
(16 hanks)











































- 2H~

Striking differences appear in the history of "borrowings
by suspended and active banks. Ihe rr~tio used to measure this
factor wa3 the amount of borrowed money and borrowed bonds per
$100 of capital and surplus. The median bank of the 33 active
banks borrowed nothing at the beginning of 1920, but did borrow
small amounts in the latter part of 1920 and in the first half
of 1921. After that year, a fev/ of these active banks borrowed
from time to time, but the typical or median bank was out of
debt continuously from 1922 to 1930.
In contrast, the typical suspended bank of the 19211930 group was never out of debt according to median experience
during the whole period from 1920 to the date of failure.
Borrowings by the typical suspended bonk reached a high level
of 1U9 per cent of capital and surplus in the second half of


Borrowings " y the median suspended bank of the 1931
group reached a peak of 38 P^r


^ °£ capital and surplus in

In the succeeding six years the median "bank was out of

debt almost continuously. Beginning in 1929» however, these
banks borrowed heavily, the ratio for the median bank rising
to 36 P e r cent of capital and surplus in the first half of
1931. Chart 3 and Table 13 show the borrowings of the typical
bank in each of the three groups.


26 -


PER ${00


PER #100











1926 192"7 1925

1929 1930 1951

Borrowed money and "borrowed bonds per $100 of capital and
surplus for the typical or median bank in (1) the 120 s e lected member banks suspending during 1921-1930, (2) the
105 selected member banks suspending in 1931 f and (3) the
33 active banks selected from towns where f a i l u r e s had occurred*.

- 27 -

Table 13 - Borrowed Money and Borrowed Bonds per $100 of Capital
and Surplus
Suspended hanks
120 tanks 1
105 hanks
33 selected
suspending in active hanks
suspending in




half |
half 1



































- 28 ~

A study of me&ia-n ratios of the suspended banks
grouped " y year of failure shows that the typical banks which
failed from ig2l to 1927, inclusive, were never out of debt
from 1920 to the date of failure. Banks which failed in
1928, I929, and 1930 were out of debt only occasionally,
and banks which failed in 1931 ^ere

out of debt about one-

half of the time. Banks which failed in the earlier years
borrowed more heavily than banks which failed in the later

- 29 -

Table ik - Borrowed Money and Borrowed Bonds per $100 of Capital
and Surplus

1920-lst half
1920-2M half
1921-lst half
1921-2nd half
1922-lst half
1922-2nd half
1923-lst half
1923-2nd half
1924-lst half
192H-2M half
1925-lst half
1925-2nd half
1926-lst half
1926-2nd half
1927-lst half
1927-2nd half
192S-lst half
192S-2nd half
1929-lst half
1929-2M half
1930-lst half
1930-2nd l a f
1931-lst half

Banks suspending in
1921 l£22j 1923 1924 1925 1926 1^27 19281 1929119301 1931
$ 81 $102 $ kS $63 $74 $ 95 $15U] $ 59
0 $20 $26
121 219 4 5 13U 129] 254 146 62 $ 15 73
1S1 195 i4o I5U 159 151: 156] 163 55; 70
13k 230 200 l64 171 18<3 205 7U 1181 31
2&'9 207 185 l4S 2l4! 136' 9U 111 35 1 38
7S 1S2 99 137 132 50 77 19

172 160

93 88
53 116 l44
62 i4o







66 149
87 106
82 122




1 g




16 0
37 12
20 13
0 0
0 0
33 20
27 16
59 1 0
is I 2 7
44 s
^ 33




- 30 -

A closer analysis of the 'borrowing record of
the "banks which failed in 1531 shows that banks in
mining communities borrowed less in proportion to
capital and surplus than any other group of banks.
Banks in all of the other groups borrowed much more
freely, and in many cases continuously.

- 31 -

Table 15 - Borrowed Money and Borrowed Bonds per $100 of Capital and
Surplus in Selected Banks Suspending in 1931



Cities *
of over
(l6 hanks)

$u 3






Median or typical hank in
(S banks)
(10 banks)
(16 banks)










(55 banks)













- 32 -

Farther Corn-parisons of Sas-oended and Active Banks
Comparison of Banks Suspending in 19*50 with the 22 Active
Banks. - On account of the special interest in recent failures, a
more detailed comparison was made between the histories of the 25
representative banks which failed in 1930 and the 33 active banks
used in this study.

This affords a comparison over a period of

nearly eleven years.
The comparisons are made as of five different dates,
the first half of 1920, 1925, 192S, 1929, and 1930.

The balance

sheet items taken from each examination report for each bank were
reduced to percentages of total loans and investments for that
bank on the date of the examination.

Median ratios were computed

for each balance sheet item on each date, providing- a single ratio
for each item for the suspended banks and another for the active
banks in each of the five years used in the study.

Table 16 shows

the ratios for the typical suspended bank and the typical active

- 33 -

Table l6 - Balance Sheet Items per $100 of loans and Investments
of 25 Representative Member Banks Which Failed in 1930,
and of 33 Active Member BanksU)


33 selected active banks
1920 I I925 1928 1 I929 1 1930 1920 I I925 J 1928 1929 I 1930

25 hanks which failed in 1930

$75 •! $88.3 $88.2
Bonds and, s e c u r i t i e s
24.; 11.7 11.8
loans and investments
100.0 100.0 100.0
Banking house and f u r n i ture and f i x t u r e s
Other real e s t a t e
Cash and due from banks
Capital funds
.Time deposits
Total deposits
94.3 105, 102.1
Sorrowed money


$84,2 $8^.1 $78.7- $67.1 $61.4 $59.7 $56.5
I5.8 14.9 2 i . 3 32.9 38.6 40.'3 U3.5
100.0 100.0 100.0 100.0 100.0 100 ;o 100.0











•* 1 Data from examination reports in f i r s t half of each year.


24.8 1914.8 13.
38.5 37.
IO9.8 106.




This comparison again shows that the suspended banks had larger
loans and investments relative to deposits than the active hanks, and also
& larger proportion of loans relative to loans and investments than
the active hanks. This latter difference developed after 1920, however, .
and suggests that the condition of the two groups of banks in 1920 did not
vary greatly.
Certain other differences in the assets of the two groups may
also be noted. Banking house and furniture and fixtures were consistently lagor
in all five years

in the suspended banks than in the active banks. Other

real estate was larger relative to loans and investments in the suspended
banks than in the active banks. Furthermore, the ratio of other real
estate to loans and investments increased steadily in the suspended banks,
whereas it was reduced to zero in 1929 and 1930 i11 the median active banks*
This indicates either that the suspended banks did not follow as aggressive
a policy in disposing of or charging off other real estate as did the active
banks, or that they acquired larger amounts of other real estate in order to
reduce losses on bad loans.
Cash and balances due from banks were smaller relative to loans
and investments in every year in the suspended banks than in the active


Deposits of the suspended "banks were less than total loans and
investments in 1920, 1929, and 1930, indicating that in those years the suspended hanks were using funds other than deposits for the purpose of acquiring or maintaining earning assets. Borrowed money was being utilized " y the
suspended "banks in 1920, 1928, 1929, and 193O according to median experience,
whereas the median active hank was entirely out of deht during all of the
five years.
Composition of Loans and Investments of Banks Suspending; in 1911
and of Member Banks Outside of Central Reserve Cities. - Changes mado in
192S in the condition reports of member banks make it possible to compare in
detail the loans and investments of the 105 banks which failed in 1931 with
those of all operating banks outside of central reserve cities. Table 17
gives a classification of the loans and investments of the two groups as
of December 31, 1928*

This is on an average about two and one-half years

prior to the date of failure of the 105 banks• This table throws light on
the hitherto unknown amount of open-market loans in the portfolios of active
and suspended banks and the amount of miscellaneous assets among their

- 36 -

Table 17 - Loans and Investments on December 31, 1928, of 105 Member Banks
Failing in 1931 and of All Member Banks Outside
of Central Reserve Cities

Classification of
loans and investments

Loans to Customers
To banks
On s e c u r i t i e s
On farm land
On other r e a l e s t a t e
All other

105 banks failing in 1931

All member banks
outside of

Per cent
(000 omitted) of total

central reserve c i t i e s
Per cent
(000 omitted) of t o t a l

$ 1,92S

Open-marknt Loans
Commercial paper
Brokers' loans (in New York
and outside)



6.7 •
















Miscellaneous items included
in s e c u r i t i e s account




U. S. s e c u r i t i e s (including
c i r c u l a t i o n bonds)
Other s e c u r i t i e s





3.0U3.95H .







Loans to customers comprised a slightly larger percentage of total
loans and investments in the suspended banks than in all member banks outside central reserve cities, but the increase was in loans on securities which
theoretically might have been very liquid. Open-market loans were smaller,
relative to total loans and investments, in the suspended banks than in the
more comprehensive group* Likewise investments were smaller in the suspended
banks, composing 28.1 per cent of total loans and investments, as compared
with 31 »5 P e r cent in the case of the operating member banks. Combining the
totals of security investments and open-market loans to arrive at a grand
total of investments as contrasted with loans to customers, it is found
that on December 31, 192S, these items composed 3^.1 per cent of loans
and investments of the suspended banks as compared with 3S#8 per cent in
the case of all member banks outside of central reserve cities. The similarity of these proportions reflects the fact that the 1931 failures, in addition to one class of banks with small bond accounts which closed on account
of loan-and other difficulties, included also another class of banks with
large bond accounts where bond depreciation was an important element in the


Consolidated Balance Sheets of Banks Suspending in 19^1 and of
Operating Banks« - Consolidated balance sheets of the 105 failed hanks have
been made from their condition reports of December 31, 192S, and December
31, 193°t for comparison with the abstracts of condition reports of all
member banks outside of central reserve cities on the same dates• In this
comparison loans to customers and open-market loans are shown separately.
The various balance shoot items have been reduced to percentages of loans
and investments and are presented in Table 18.

- 39 -

Table IS - Balance Sheet Items per $100 of Loans and Investments
of 105 Member Banks Failing in 1931 and All^Member Banks
Outside of Central Reserve Cities^1)

T t1./am

X v K^lll

Loans to customers
Open-market l o a n s
Investments( 2 )
Cash and due from banks,
Capital fund?
Due to banks
Demand d e p o s i t s .
Time d e p o s i t s
United S t a t e s d e p o s i t s
Total d e p o s i t s
Borrowed money

• 1 1 n






• ! - • " •

•..•••1 —



-All member banks o u t s i d e
l o g banks f a i l i n g in 1931 . ,Qf' Central r e s e r v e c i t i e s
. Dedember 31» 1 December 31» December 31» December 31>
:• i q 2 g

$ 69.^

$ 65.5.;
"" 26.3

$ 60.9








. 16.0


$ 63.I









i - - - - -





- •'

(1) Total loans and investments declined 5-3 per cent in the 105 suspended banks
during the two years, and 5*4 per cent in the member banks outside of the
central reserve cities.
including miscellaneous assets reported in thfe investment account.


Deposit Trends of Suspended and Active Banks
The deposit trends of active and suspended banks have been compiled in order to determine whether withdrawals from suspended banks over a
period of years prior to failure were heavier than from active banks, For
each bank the deposits shown in the first examination report each year were
reduced to a percentage of deposits in 1920, or the earliest succeeding date
for which data were available. The median percentage was then selected for
oach year for each of three groups of banks; namely, (l) 33 active banks,
(2) 25 banks suspending in 1930, and (3) 105 banks suspending in 1931 •
Table 19 gives the figures for the median or typical bank in each group*

- 1«L-

Table 19 - Deposit Trends of Representative Suspended
and Active Banks

, (index numbers: median experience)
Year banks closed banks closed active
in 1QTL
in 1Q"50


9 s,-'






The use of medians tends to Iiide the extreme fluctuations either
on the rise or on the fall of deposits of individual hanks. Since only one
date for each year was taken for each of the banks, it is probable that
neither the highest nor the lowest deposit figure for any bank is included
in the series*

The figures, therefore, show only the general trends of do-

posits * Furthermore, in the case of closed banks the deposits on the date
of closing were not used, and consequently the figures do not reflect the
shrinkage of deposits during the final few days of the bank's existence.
In both the active and suspended bank lists there were a number
of banks which enjoyed remarkable increases in deposits during the period
covered by the survey*

One active bank had deposits in 1929 more than

nine times as large as in 1920. One of the banks which closed in 1930 had
deposits in 1926 and I929 more than three and one^half times as large as in
1920, and one bank which closed in 1931 had deposits in 1930 eighteen times
as large as in 1920.


Even among the "banks which suffered extreme losses of doposits,
it was generally found that this could not " e classed as the principal
cause of the failure, although it may have "been the more immediate cause.
The tanks which sufferod heavy withdrawals and then failed were uniformly
banks whose assets were undesirable and frozen and which could not, therefore, he converted into cash to meet deposit withdrawals. Generally, this
frozen condition was of long standing, and loss of confidence led to the
final heavy withdrawals.
The 1930 hank failure with the greatest deposit decline suffered
a loss of more than one-half of its deposits during the years 192O-I926.
In 192S its deposits reached a low level of 36 per cent of 1920, but in
1929 they increased to U5 per cent of the 1920 figure. At the time of failure, however, they had declined again to 33 P er

c e n t o f ttie

1920 amount. This

bank's loss of deposits was caused partly by crop failures and low commodity
prices, but undoubtedly lack of confidence in the bank on the part of the
community was also responsible for part of the shrinkage. The bank was overextended in 1920, with borrowings nearly twice as large as its capital and
surplus. The management had made excessive loans based on speculative farm
deals and was in such poor condition in 1920, that it had been placed on the

- »Acomptroller^ list for special frequent examinations. Looking back on the
1920 situation, the examiner wrote in 1923: "If this hank should ever again
give the amount of trouble as to excessive loans that it has in the pastj
the charter should he revoked.?r

In succeeding years, there were several in-

stances mere the president of the hank endeavored to avoid the results of
his mismanagement "by such means as charging illegal loans against profit and
loss, paying illegal dividends, and selling bonds to the bank at prices above
the market quotations. This man died in 1925, and thereafter the management
of the bank passed through several hands. In 1928 and 1929

good crops and

the establishment of a new industrial plant in the community caused an increase in the deposits of the institution, but the weight of the frozen
assets of the bank was so great that the shrinkage in deposits of 1930 and
1931 could not be met.
The bank failure of 1931 with the greatest deposit shrinkage lost
half of its deposits in 1921 and another portion in 1922, so that its deposits in the latter year were only 28 per cent of the 1920 level. From that
time on, the deposits of this bank remained at about the 1922 level until
shortly before the time of failure, when they decreased to lk per cent of
the 1920 level. This bank was in an oil-boom town. The management which
rats in charge in 1920 consisted of a group of unscrupulous directors who
misused the bank in a variety of ways. The most important misuse of the bank
ra.s in the matter of loans to oil-field operators. The examiner had the following to say about these loans in 1920:
^-22-20 " . . . The town of
is in the midst of a
big development and it is the opinion of your examiner that
this bank is too liberal in the making of loans to operators
who at present may be all right, but may meet with such reverses as to affect their financial standing at any time."

-i»5In June, 1920, the management was acquired by another group of unscrupulous
promoters, who immediately "began using the bank's funds for their own private interests. The hank was resold in November, 1920, at which time as
assessment of 150 per cent was voted and a reorganization of tho bank occurred. The purchaser of the controlling interest in the bank was a capitalistt.who knew nothing about the banking business. In 1922 the examiner had
the following to say about this man and the condition of the bank:
1-27-22 "Mr.
, the dominating figuro in the bank,
makes a statement worth J/4 million but is one of these
characters if he regards a man's credit good, matters of law
are not considered very essential. He is safe and conservative but this trait should be curbed. Just now in view of
the fact that the restoration of the bank from tho exploiting
of former management, depends on keeping him connected, diplomacy is suggested in presenting his idiosyncrasies to him.
Prom sources thought reliable, it is learned he made tho statement 'if it took $100,000 to put the bank on its feet, he would
spend that much.1 No liquidation in farm paper, largely Creek
negro freedmen, is expected before fall.. The interest is, as
it has always been in small fields, problematical; it is contingent on excitement, i.e., development. All lines, except
those shown, are apparently margined or satisfactory financial
statements on hand. This is just a 'nursing case' and it will,
take time, patience and diplomacy to work it out. By comparison with last report, it would indicate progress has been made;11
For several years the owner of the bank contributed heavily and out
of proportion to his stock ownership to keep the bank open and to take out
losses which developed in assets which were in the bank when he purchased it.
However, the lack of experience of the bank management soon began to be reflected in new loans of an undesirable character and in certain illegal
transactions, the latter probably unwittingly committed.

In 192U the examiner

described the situation as follows:
7-15-2^ "The entire capital stock of this bank is now
owned by the board of directors, and 215 scares are owned by
_. Correspondence on file in your office will give all of

- U6-

the details of the situation here* It is, essentially, that
lias voluntarily taken on the responsibility
of beeping this "bank open. It has already cost him an enomous
sum and the "bank lacks a lot of "being clear now. His determination and resqurces are such that it is "believed he will
accomplish his purpose if given reasonable time in which to
do it* He has voluntarily saved the Department the loss of
a hank and it is helieved he will comply with his promise to
remove $7*000.00 of the losses within the next ninety days.
The other directors are of little financial worth. The directors have had persistent heavy overdrafts which Mr.
promised to have discontinued. Mr. _ _ , Vice President, is
active manager of the hank. It appears that he has practically exhausted his resources in kseping it open. While
giving all due credit to him for his efforts in the collection of the old paper, the condition of their tenant paper is
not such as to warrant ono in "believing he is a good chattel
mortgage hanker."
Examiners' comments showed that the president made further contributions in 1925, 1926, 1927, and 1928, hut at the same time he continued
to make improvident loans. In January, 1928, the examiner commented as
1-12-28 ,f. • . The total of doubtful assets, at this
examination, shows a decrease since the previous examination;
which is, however, very largely accounted for hy the amounts
classed as worthless. President
, the Tank's managing
officer, has seemingly no conception of the principles of
credit extension. His new loans consist largely of advances
to former "bankrupts and negro tenant fanners, in every instance inadequately secured. He is himself a gross, unprepossessing figure, and the only reason for tolerating his
presence around a hank is the fact that he will, when urged,
continue his contrihutions to remove losses. Unless his
policies can he changed, his contrihutions will continue to
he semi-annual affairs."
In the last half of 1929

the hank was placed on the special exami-

nation list, and apparently this action had a very salutary effect. The
loans of the hank were reduced to less than one-half of the deposits, the
criticized paper was reduced to one-half of capital, surplus, and undivided
Profits, and in December, 1929, there were no violations of law. At that

-U7time it can be said that the bank was in good condition as to its assets,
were it not for the weak management.
In the summer of 1930 the management of the "bank again wont "beyond
the bounds of good business. Loans practically doubled, a large amount of
borrowings appeared in the report and the total of criticized assets increased. The examiner1 s comments at that time follow:
6-9-30 "President
and his family have again gone on
a regular 'rampage1 by the excess credit route* The line of credit used by Mr.
and his family amounting to over
$30*000.00. The son who operates the
is wholly irresponsible. Has no assets, ability, or anything else. Admitted
that he had lost money gambling. He, through the approval of
his mother, has been giving 'purported bills of exchange for
everything that he might take a notion to purchase in the
operation of his business* He only has about a $U,000.00
stock on hand at this time, consisting almost entirely of
flour and stock feed. If it were not for his father, who
will have to liquidate this account, it would represent a
large loss. President
claims he is worth $425,000*00.
I think that is at least $275,000.00 high. I told Proaident
( that if he was worth one-half of what he claimed ho was
worth I could see no reason for his flagrant violation of
Section 5200. That he could have easily borrowed from one
of his correspondents. He spoke as though it would take him
sixty days to get his account out* He claims his account is
largely represented by paying up back incomo taxes that the
government has dug up . . ."
Thereafter the condition of the bank became rapidly worse. The
condition of the president's personal affairs and the general condition of
the bank is shown by the following quotation from the last examination of
the bank made in April, 1931:
t~15~31 M . . • President
*s current obligations
are being classed doubtful this examination, with a thorough
•understanding that unless liquidated, a more adverse classification may be anticipated at next examination. It is believed President
can still liquidate his obligations to
subject bank, but it will be necessary to apply the pressure
to bring the necessary results. Classification of
obligations arrived at after due consideration and the experience of three examinations. Mrs.
nas invited to


-Usattend th£ directors1 meeting, incidentally, took the meeting
" y storm, gave a complete history of the bank for years, stated
the sacrifices her husband had made, and the pitch of her voice
was convincing enough that it was not necessary for her to place
a pistol on the desk to hold attention or attendance, which it
is said she has resorted to in past. Recommend notice of impairment be issued for $15,950.26, and the bank retained on the
special list. . ."
The bank closed in July, 1931, after suffering a withdrawal of
$1>+I000 of deposits since the April examination.
A study of these cases leads to the conclusion that the deposit
trends of active and suspended banks have been very similar, aside from the
final runst

This applies to the usual experience and not necessarily to

extreme cases.


Loans or lending policies were criticized by examiners in 210 of
the 225 suspended banks, or 93 pe r


of the cases. These criticisms, which

are listed in Table 20* ranged from general statements regarding weak or injudicious loans to specific illustrations of special kinds of mistakes.
Table 20 - Criticisms of Loan and Collection Policies

Type of criticism


1921-1930 J
1 Total
suspensions suspensions

Lax lending methods
Slack collection methods /
Unwise loans to directors and officers ' v '
Lack of credit data I
Capital loans 3
"Placed paper" /
Excessive loans to tenants f
Loans subject to prior liens f
Loans to accommodate other "banks /
Loans based on inflated land values
Excessive loans on city real estate 3
Evasion of loan limit "by splitting lines with
other hanks /
Unwise loans to relatives and friends ~^
Attempts to capture "business "by loans /
Bnphasis on profits over safety /
Hon-resident loans /
Loans collateralled "by hank's own stock '
Automobile paper '
Belief in "service to community by loans"
Loans for security speculation '
Concentration of credit on "one crop" or industry /
Loans to "straw men" to- permit speculation by /






























Note: Other criticisms occurring only once were: bonuses received for loans;
loans to purchase stock in subject bank; loans made up to 100 per cent of appraised value; lack of eligible paper; concentration of demand collateral
loans; demand paper carried too long; loans to non-customers; loans collateralled by local manufacturers non-liquid stock; financing pure bred live
stock; unwarranted liability on cattle and cotton deals; loans to "get-richquick" promoter; and loans secured by life insurance.


- 50-

The commonest criticism was "lax lending methods,» which refers to
lending methods generally rat l e r than to one or two specific types of loans*
Slack collection methods ranked second. Unwise loans to directors and officers and their interests ranked third, lack of credit data fourth, and capital
loans fifth.

In many cases, of course, two or nx>re of the criticisms listed

applied to the same "bank.
A variety of criticisms of speculative loans on securities appeared
in the 1931 study, including such items as loans to "straw men" to permit
speculation " y "bank officers, loans collateralled by the bank's own stock,
and various other loans for security speculation. These criticisms occurred
almost entirely in the city hanks. In "both studies banks in rural areas made
loans of a speculative nature on farm real estate*

Lax Lending Methods
One hundred and fifty-two of the suspended banks were subject to
this general criticism. This large total is important because general laxity
was recorded only where the examiner made a general criticism of the lending
methods of the bank. A bank was not recorded as having lax lending methods
if the examiner criticized only some specific kind of loan.
Frequently these comments occurred only in 1920, or in the first
year of a bank's troubles. Later examination reports described only the
struggle of those banks to survive. Probably this is the reason why poor
lending policies are so often overlooked as a cause of failure.
A common type of criticism is illustrated in case 10U where the
examiner wrote in 1927:


"President A appears to lend money in most any amount and
under most any conditions to most anyone who a p p l i e s , without
due consideration to the time when payment can be expected or
the source from which funds for liquidation are to con©."
Sometimes the criticism inferred that wilful negligence had been a
factor, as well as merely inexperienced or lax lending methods*

An illustrar-

tion i s found in case 7 0 where the examiner wrote in 1920:
"All violations are promptly adjusted each time during the
examination and then "bank apparently feels free to operate as i t
d e s i r e s u n t i l an examiner comes six months l a t e r . Bank has been
repeatedly c r i t i c i s e d for excess loans, reserve shortage, etc*
Advised officers and directors that adjustment of c r i t i c i s e d
items during examination did not satisfy r e t i r e m e n t s of the law.
The President pleaded ignorance on many points, hut when excess
loans have been repeatedly granted and reserve continually short
i t i s hard to believe that the matters are due e n t i r e l y to ignorance . "
Correspondence in the Federal reserve bank f i l e s shows that t h i s
bank was a heavy borrower in 191S and 1919* and during those years had a large
amount of statutory bad debts and a chronic deficiency in reserves*

As early

as 1915* the bank showed loans in excess of deposits and borrowings up to 60
per cent of capital*

The bank borrowed heavily from 1915 u n t i l i t closed in

In case 101 the examiner wrote in 1925*
"The outstanding undesirable feature of bank's assets i s the
accumulation of slow and undesirable a g r i c u l t u r a l paper, largely
due to the former policy of permitting borrowers to carry over
a l l or a portion of the lines from one year to the next wnen
complete liquidation should have been insisted upon. Many of
these l i n e s became so heavy in time that l i e n s on r e a l e s t a t e
were r e s o r t e d to for additional protection, and some of these
are now largely dependent on this real estate for f i n a l l i q u i d s
t i o n , This condition i s a l l the more singular as t h i s section
of the country has as a rule enjoyed good crop harvests nearly
every year u n t i l the present one."
This bank should have collected i t s loans during the good crop

The effect of f a i l i n g to do so became clearly evident during the


succeeding years when crops were poor. In 1926 the same examiner had the
following to say:
"Condition of this bank at present is rather unsatisfactory, though not considered alarming. Criticised assets are
somewhat larger than at last examination. This condition is
largely due to the very literal credit policy while operating
under a State charter during which time they accumulated a
large volume of slow and non-liquid paper. In addition to
this, the "bank has not heretofore insisted upon seasonal liquidation of farm credits, even during good crop seasons, but
permitted borrowers to carry over a large portion of their
lines from year to year. A great many of these lines in time
assumed unwarranted proportions and became more or less frozen. The crop disaster of the past season which caused a 75
per cent shortage in the normal value of the crops has brought
this condition out more clearly than possibly it could have
been done by any other means, and directors should now be
awake to the importance of immediately adopting a vigorous
collection policy."
By 1927 the weakness of this bank's policies had become still more
evident, and the examiner wrote:
"Extension of credit in the cot ton-growing section of the
Plains has been abused beyond all measure and nowhere more
flagrantly than here. The banks are not alone in this abuse,
but must share their full responsibility. Where a merchant by
investing a few hundred dollars in fixtures and a month or two
rent on a location may establish a line of credit of several
thousand dollars with a wholesale house, besides obtaining a
credit line at his local bank on the plea of working capitalit is time to call a halt. Farm credits are in the main based
on equities equally absurd. A high percentage of failures
naturally results, which is bad for any community. The community will not suffer in the least by thus curtailing credit.
On the contrary, it will eventually be far better off. It has
been suffering the past two years from Jboo. much credit."
In case 66 economic conditions and poor loans were jointly responsible for the troubles into which this bank was plunged. The hard winter of
1919-1920 caused difficulties for ranchmen throughout the northern half of the
United States and forced banks to extend their lines of credit more than they
would ordinarily have done. However, correspondence in the Federal reserve

- 53 -

"bank files indicates that this particular "bank was a continuous borrower
since 19lU, and had teen In a weak condition since 1918. In January, 1920,
the examiner wrote:
"This hank, although on the special list for a lor£ time,
still continues to violate the law and appears careless in
matter of extending credit. I would recomxend the most drastic
measures possible to compel them to comply with the law. Crop
failures in this locality make it necessary to carry over coivsiderable paper, some of which has narrow margin of security."
In April, 1920, the same examiner wrote:
"Because of a long hard winter and the high price of feed,
it has "been necessax^y to strain credits in order to assist some
of their customers to carry live stock through the winter in
order to avoid serious losses, and some of the excess loans may
have been excusable on these grounds, but this is not true in
all cases, and the violations are due largely to the carelessness of the* officers and their weakness in not being able to
decline the loans*n
This bank struggled along for two more years before the drop in prices of
agricultural products and crop failures in the dry land farming area, coupled
with the "free and lenient policy" which had been followed in making loans
during earlier years, forced the suspension of payments shortly before the
close of 1922.
In some cases it is difficult to determine whether the examiners'
comments were intended as criticisms of lending policies or whether the
troubles were attributed to economic forces. There was much more justifies
tion for a banked making loans against inflated values in the farming country
in 1919 and 1920 than there was for similar mistakes in such localized booms
as that in Florida or those in the various oil fields. An illustration of a
banker* s unreasonable attitude towards an oil boom was given in case 79 where
the examiner wrote in 1923:



It must " e remembered that this condition dates back some
three years when a probable oil boom was apparent, but failed
to materialize. The officers failed to foresee the future, and
went ahead and made large loans to farmers, business men, and
parties here to invest in 'XX1 real estate and loans of a speculative nature. It v/ill be noted that the paper classified as
worthless in this report is in the majority loans to bankrupt
concerns, oil operators, and to parties who invested in lots of
the 'XX1 townsite addition. These lots are practically worthless as town property, and the only value would be in acreage

Slack Collection Methods
Weak or negligent methods in handling collections of loans constituted one of the most serious criticisms found in the study of suspended
banks. Examiners criticized 133 of the 225 banks for this defect in management.
In case 69 the bad effect of allowing customers to run the bank's
collection policy was discussed in a mamorandum appearing in .the Federal reserve bank's files and dated in early 1921. The statement in reference to
this matter was as follows:


"With reference to the paper of this institution, will say
that I do not believe that the care has been exercised that
should have been. There are too many tenant farmers owing the
bank, and credit has been too liberally extended to this class.
Several tenant farmers have notes in the institution running from
$2,000 to $3>000, where the limit should not have been to exceed
over $800 to $1,000. The reason for this can be attributed to
the fact that the cashier has lived in this section all of his
life, and does not seem to have had the nerve necessary to stand
up under the demands of his customers. The result is that in
place of reducing their indebtedness, it has been constantly increased from year to year, and the statutory limitation has prevented their getting more money than they actually owe at the
present time* There is no question in my mind but what there
has been a loss of confidence in the management of the institution. There has also been a tendency to pay off other indebtedness they owed in preference to paying the obligations which
they owed the bank. The farmers have been kind of watching one
another and have discussed amoxgst themselves that the indebtedness which they owe the bank could wait, as it seemed to be a
very easy matter to obtain such extensions as they might desire.
I even believe that this has been advocated by the directors of
the bank, and, although J have no positive proof, I believe the
directors themselves have not taken the paying of their notes
seriously and being in that position could not very well ask
other note makers to do any better than what they themselves
In case 120 borrowers had been allowed to form the habit of not
even paying the interest on their notes at the time of renewal.

In 1922 the

examiner wrote:
"Management has been far from aggressive, the borrowers
have been educated to add interest to their loans whenever renewed if unable or not convenient to pay the interest, and it
will be difficult for the officers to reverse such a practice
or policy."
Case 111 illustrates the disastrous effects of not pushing collections when conditions are opportune.

Crops were good in 1928, but collections

were allowed to lag and the crop failure of 1929 caused serious troubles for
the bank.

The examiner wrote:

- 56-

"He (the cashier) is regarded as "being a very weak credit
man and unless a more rigid collecting policy is pureed during
the marketing season the aggregate losses will be rather heavy.
Better than an average cotton crop was marketed here last searson, and if proper efforts had been put forth many lines could
have "been liquidated in full, a portion of which were carried
over and with this year's crop being cut short approximately
50$, it leaves the bank with an accumulation of slow and doubtful paper, and in few instances are the borrowers in a position
to strengthen ban!;!s position."
In case HG so little emphasis was placed on the proper collection
policy that the bank allowed insufficient clerical nelp for this purpose.
This was first criticized by the examiner in 1922 as follows:
"It is evident that a great deal of delinquency in attention to maturing paper can be attributed to insufficient help.
At present the bank is short one employee, since the resignation of Mr* B, active vice president, and the work has accumulated in the past two months•"
Two years later slack collections were still in evidence, as seen
from the following comments of the examiner:
"Bank is apparently in standard condition with the exception of overdue paper, which is a continuing result of a
long established habit, and the local borrowers more or less
suit their own convenience in arranging for their maturing
Later in 192U the faulty organization of the bank for handling
collections was further described as follows:
"Ho improvement is shown in condition of overdue paper.
It is largely left to President D to attend to maturing paper.
Ke is a practicing lawyer, and is usually busy in his law office, hence the bank's business is neglected,"
Many specific cases could be cited to illustrate the character of
slackness in collection policies.
of this matter.

Case 52 furnishes a well written discussion

In 1929 the examiner criticized the directors for not paying

their own debts to the bank in the following words:

- 57 -

"If the d i r e c t o r s really wish to get t h i s "bank in sound
condition, they cannot show t h e i r desire in any b e t t o r way
than arranging to pay tack what they owe the "bank. And if
each officer and each director pays the "bank what he owes i t ,
examiner believes that the officers and directors w i l l see
that other debtors pay t h e i r obligations to the bank.11
Later in 1929 the same examiner c r i t i c i z e d in d e t a i l the f a i l u r e
to c o l l e c t a number of the loans.

His description of the bank's weak policy


T, the Chancery Clerk, is a very popular man and owes
bank $11,140S. and endorses quite a number of notes, of which
notes aggregating $13,H0S. are listed as subject to criticism. The greater portion of these loans have been in the
bank a great many years and apparently no effort is being
made to collect same. His statement is not especially attractive and bank has no data as to the extent of his indirect liability. Ho reason is apparent why he should not be
required to pay or adequately secure his indebtedness, nor
why notes which he has endorsed should not also receive diligent attention. But apparently nothing is done. He is popular, a county official, and a friend of the bank and thus the
matter drifts on, and really management does not know whether
or not the loans can be collected, as no effort has been made
to collect same. Other instances: In 19?.4, 0» had loans that
were regarded as hazardous, and bank got as security a mortgage on five small dwelling houses in this town. Five years
have past and loan still remains in the bank. Hone of the
houses have been sold and debt reduced. Can these houses be
sold, if so, they should be and debt reduced. If they cannot be sold, bank: should be charging off the loan. Messrs*
D have had full loans in the bank for many years. One of the
Messrs* D has been associated in business with Pres. C for
rainy years. Examiners have repeatedly criticised these lines,
but they remain? in the bank and apparently no effort is being
made to collect same, and if any effort is being made, it is
meeting with very little success.
"At last examination, P owed this bank direct loans of
$11,000., loan made by Q, for his accommodation $9S0.00; he
also had an overdraft of $S55.» mailing an excess line. These
various items still remain in the bank and the line is still
in excess. Mr. E is a lawyer who has a good practice, was
formerly a director in the bank, and was a law partner of
Judge A, who prior to his death was a director and a valuable
nan on the board. Mr. H is said to be a man of some property
interests, lives well, rather extravagantly for a man heavily
in debt. But bank has made no effort to collect or secure

- 5S ~
loan nor even collect the overdraft, Mr, H is said to have
recently sold some "brick company stock for a substantial sum.
Examiner asked officers why Mr. E had not used some of the
money in paying his indebtedness to bank. The reply was that
Mr. B's wife was going to keep that money to send the children
to college, and bank apparently is standing by doing nothing.
However, a few days prior to examination, a committee was appointed to see Mr. R and try to get him to pay something, but
court has been in session and Mi*. H was busy and has not yet
been seen. These instances are thus mentioned so that it may
be seen why this \ank has gotten into this condition and why
it has been retained on list for special examination for so
many years,"
In many cases collections were made difficult by adverse farming
conditions, but even under these circumstances, it was frequently stated by
examiners that the banks under criticism had not made as strong an effort to
collect as they might have done. In some cases adverse comparison was made
with the collection records of other banks in the same locality*

For example,

in case 102 the examiner wrote in 1921:
"The condition of the bank's note case is very unsatisfactory. Its condition is serious when it is considered that the
normal liquidation for tne year is completed, except for the sale
of a few straggling bales of cotton and some small cattle sales
that will be made in spite of the stagnation. The farmers generally have their feed. However, a fair grain crop has been produced, and the crop of 1922 will be even cheaper than that of 1921.
Notwithstanding all these facts, pro and con, the fact remains
that the bank is in a seriously extended condition, and also the
fact cannot be denied that a better condition could have been produced by a more conservative policy. Other "banks in the same section are in a much better condition. For instance, the state bank
at this place has retired all borrowed money and has Ho# reserve."
A year later the sarre condition was shown to have continued and the
examiner wrote:
"Ho improvement is shown in this bank since last examination. In fact, when it is remembered that the liquidating period
of the year has come and gone the bank is thought to be in worse
condition than at last examination. It is to be admitted that
this section is in trouble and has been for a number of years.
Three crop failures followed successively and last spring the A
Hiver, in the bottom land of which stream a considerable portion
of the adjacent farm lands lie, overflowed its low banks twice,

- 59 so that these waters and the excessive rains made it necessary to
plant three crops. The crop was therefore late and poor* Other
localities, however, in practically the same condition have succeeded in making better progress, and the state bank in this
place lias collected well, so that they now have 50^ cash reserve.»
In some hanks a new management assumed control and later took an inordinately long time to collect the poor loans inherited from the preceding

Their att'.tude might be characterized somewhat as follows:

"Don't blame us for the slow improvement; we are not responsible for the mistakes of the previous management•"

Case k is a typical example.

In 1921 the

examiner wrote:
"The condition of this bank is very unsatisfactory. Former
President A seems to have unloaded considerable amount of slow
and doubtful paper before leaving. The paper does not bear his
endorsement and in nearly every instance is that of tenant farmers
secured by live stock and future crops, the former inadequate and
the latter undeterminable. The directors of this bank are to
blame for allowing this paper to come into the bank. All paperclassed in this report as doubtful and remaining in the bank after this year's crop is harvested, should be promptly charged off."
Three years later the criticized paper still remained in the bank
and many of the lines had increased under the new management.

The examiner

stated the condition as follows:
"Note the tremendous amount of slow and doubtful paper.
There is some apprehension on my part as to whether the directors and officers have the force or the will to rise to the
occasion necessary to save the bank. I am in doubt as to whether
or not they really appreciate the fact that the bank is in an almost serious position. For it appears they have become accustomed to its condition, and justify their personal position, each
one of them, by the often repeated statement. 'You know we are
not responsible - the fault is with our predecessors.' Apparently no positive efforts have been made - certainly not in a forceful and intelligent manner, to reconstruct the bank, in a handling
of the many slow and doubtful items of assets. Reference back
three, four or five years ago, to certain lines now standing,
shows that such lines are now carried at an increase of from 200

to 5005b."

~ 60 ~

By the winter of 1925 some of these notes had been brought to
suit in an effort to collect, but even then the directors of the bank were
apparently half-hearted in their attention to these natters. Developmsnts
in this bank continued to be adverse, and in 1926 the examiner wrote the
following description of the situation:
"The condition of the bank is not at all satisfactory.
Many of the loans are tied up with court litigation and have
been in this same condition for a long time. The bank continues to make additional advances to tenant farmers who appear to be hopelessly involved. Aggressive action of the
directors would in many cases help to clear out some frozen
paper, but the directors are of the easy going type and appear
willing to wait and hope that loans will be paid voluntarily.
Directors state that the bank was in very bad shape when they
took charge and are prone to compliment themselves on the good
work they have done in clearing up the situation. Most of
this clearing up was done by charging off rather than by collection. If the loans classed doubtful are not paid or
properly secured this fall, they should bo eliminated from the
assets of the bank."
Finally, in 1927, the examiner began to list some of these stale
loans as losses, and even then the directors protested because the loans
were inherited from a former management. The examiner described the situartion as follows:
"Loans listed as lossed in this report have been carried
for a number of years, without any progress in the way of reductions. In most cases they are loans to tenant farmers who
have not been able to make any money except to pay advances for
crops. Directors claim that these loans are old workout propositions handed down by a former management, and therefore feel
that they should have tine to work them out."

Loans to Officers, Directors, Relatives, and Their Interests
The chief abuses of loans to officers, directors, and their interests were unwarranted capital loans to weak credit risks and failure to

- 61 -

enforce collections against these favored parties. Faulty lending policies
in this regard were very general among the suspended "banks. Among the 225
cases studied there were unwise loans to directors, officers, and their interests in 110 cases, and unwise loans to relatives of "bank officials in lk
cases, making a total of 12U cases where this fault occurred in a sufficiently pronounced form to be mentioned " y the examiners.
Three cases will illustrate these lending practices. In case 109
a national hank examiner and a Federal reserve hank examiner made a joint
examination in 1922. The Federal reserve hank examiner made the following
"If there was ever an institution organised by 'the stockholders, for the stockholders,1 this is the ONE. This condition
largely is responsible for their present deplorable strait. The
officers of this bank have wilfully indulged themselves in this
practice, and have about reached a point where they cannot liquidate in the 'pinch1 to save this institution from going on the
The national bank examiner wrote:
"The officers and directors are borrowing 3 ^ of the bank's
capital and surplus and the first thing I demanded after classifying the loans was that they eliminate their lines, or materially reduce them, at once. This they claimed they could not do
without a little time, and even then they did.not think they could
raise an amount that would be called a material reduction. There
is a condition existing in this bank that is found in very few.
In making up the schedule of liabilities for borrowed money, I
suspected the shareholders were riding the bank and called for
their stock register. I found that fourteen of their shareholders
were borrowing $217,630.00, direct, and their affiliated interests
$19,129.00, making a total of $236,819.00
Based on these
figures the fourteen shareholders referred to above are using the
entire working capital, and approximately all local deposits.
They have been using the bank for a select few and have not served
the public as a bank should."
In 1923 the hopelessly frozen condition of these favored loans became evident and the examiner wrote;


& 2 -

"In. regard to the B, Casnier D, and Mrs. C lines your examiner i s beginning to get somewhat uneasy, as p r a c t i c a l l y no red u c t i o n h a s "been effected in each case since I have been v i s i t ing the bank, over a period of about two years. As shown in
t h i s r e p o r t , the directors are s t i l l borrowing unduly, considering the bank's over-extended condition. I again suggested to
them that they borrow funds elsewhere and liquidate t h e i r indebtedness here, but a l l , with the exception of H, claimed they
had t r i e d to do t h i s but had failed."
Case 27 affords a more complete i l l u s t r a t i o n of the e v i l s of unwise
credit extensions to officers, directors, and t h e i r i n t e r e s t s .

In 1922 there

was evidence of too generous treatment of the directors and t h e i r i n t e r e s t s
and the examiner wrote:
"Directors and t h e i r interests borrowed 125 per cent of
t h e i r c a p i t a l and surplus.. Considering the over-loaned cond i t i o n of the bank these lines are subject to c r i t i c i s m . "
In 1923 the examiner wrote:
"The d i r e c t o r s are interested in the majority of local ind u s t r i a l plants in an o f f i c i a l capacity and as a result these
companies have extended lines*"
By the summer of 1926 many of these loans had increased and the
examiner wrote as follows:.
"Bank i s carrying an excessive amount of bad assets on
which no i n t e r e s t i s being paid and many accommodation loans
to cover up excess loans to local industrial concerns in which
the o f f i c e r s and directors have a financial i n t e r e s t . The
p r e s i d e n t ' s loans have been renewed without the payment of interest."
A year l a t e r a f u l l realization of the bad effects of t h i s abuse
of c r e d i t was reached and the examiner stated that:
"The board i s weak in a b i l i t y and does not d i r e c t . Management r e s t s largely with the president whose a b i l i t y i s seriously
questioned. Under h i s management t h i s i n s t i t u t i o n has become
water-logged with undesirable frozen a s s e t s . Almost one-third
of the loans are to directors and t h e i r interests and comparative


reports will show this amount to be increasing. These loans have
"been in the bank for years with no reduction until they nave become of a very frozen and, in a substantial part, doubtful nature.
Very few losses are admitted and comparatively small charge-offs
are being made while earnings are only nominal. Apparently in
an attempt to deceive and evade the excess feature, numerous accommodation loans are being carried, including directors - largely
for the accommodation of corporations in which directors are interested. Many of these are being renewed without any payment of
interest. Borrowings are steady. Reserves are small or deficient.
The result of the policy which permits the board and its interests
to borrow 195 per cent of-the capital and surplus, a very large
percentage of which is frozen or doubtful. Officers and members
of board have no conception of a capital lo^n, nor is there any
one of them apparently qualified to pass on an application for a
line of credit."
In case 71 among a great variety of malpractices appeared the matter of unwarranted loans to relatives of the bank cashier. In 1926 the examiner wrote:
"It appears that the bank in the past was used to a large
extent in financing the 'X family* in their various banking
operations. Said banking operations proved unsuccessful, and
now this bank is endeavoring to collect on the various lines
obtained through aforesaid operations."

These loans remained in the bank with some increases until they

equaled the entire capital and surplus of the bank, and in 1929 the examiner
summarized the situation as follows:
"Loans to officers, directors, relatives, and affiliated

$ 7,1+31.00

"The above loans are those made to the various officers,
directors, their relatives and .iffiliated concerns of the chain
of which this hank is a unit. The purpose of this compilation
is to reveal how grossly the officers of this chain have violated their public trust hy misusing depositors' monies and the


extent to which this bank has been exploited for the furtherance of their personal interests. The classification of each
loan is indicated thereafter to reveal the sub-standard quality of same, and the recapitulation reveals that the entire
capital and unimpaired surplus has been withdrawn by these individuals in the form of loans, thereby forcing the customers
to capitalize this bank with their deposits. If these loans
are good and collectible, as represented, the payment of same
will eliminate capital impairment and is a duty and obligation,
both moral and legal, that these individuals owe to the shareholders and depositors of this bank."

Capital Loans, Loans on Inflated Real Estate Values»
and Excessive Loans to Tenants
Errors in policy regarding loans on real estate and loans to
farmers were common in the group of closed banks used in this survey. Frequently loans were made without specific security which proved to be undesirably large, and in an effort to secure the loans junior mortgages were
taken. This habit was not the subject of general comment by the examiners,
but in studying the histories of banks that closed, it was found that the
practice was present in exaggerated form in a large number of cases. Many
faulty loans on real estate bore evidence that they were made to give a
special benefit or profit to officers, directors, or interests close to the
management and thus were merely a phase of exploitation of banks by their
Capital Loans. - Banks frequently make loans which cannot be repaid at maturity in the ordinary course of business transactions, and sometimes several renewals are necessary.

It is not the intention here to make

a general condemnation of such loans. However, the examiners' comments show
that in the group of suspended banks studied capital loans were excessive.
In case 62 the examiner made pertinent comments as to the shortcomings of capital loans. In January* 1920, he wrote:



It is hard in the final analysis to criticize individual
loans, "but the cumulative character of the large lines and
their seeming fixity of amount and continuity of the accommodations do produce a situation of non-liquidity whicn is not
satisfactory to your examiner#.. ..Examiner lists large lines
and classified interests in order to emphasize the tendency
to make what approach, if they are not in fact, capital or partial capital loans, which are necessarily of a non-liquid or,
at least, of a not easily liquidating character. Individually
considered the various lines possess merit and may be rated
good, hut taken collectively produce a condition of non-liquidity# This situation is not regarded as satisfactory and is considered to he one which is likely to cause trouble to both borrowers and bank in the event of a recession of deposits requiring liquidation of loans."
These comments were further elaborated in August, 1920, as follows:
"The habit of loaning to corporations all that they should
borrow, and then to the individual for company's benefit is as
unsafe as it is unlawful. It will be noted that practically
all excess loans are otherwise criticised."
In case 6S the exaininer described typical capital loans.

In 1922

he wrote:
"Acting as manager for the
Stock and Farming Company in the sale and management of large land holdings, he has
taken into the bank many top-heavy lines to contract holders,
whose equities in their respective lands are consistently small."
In 1923 the succeeding examiner described the capital loans of this bank as

"A large proportion of the bank*s loans are to tenant
farmers, and to individuals who are buying their farms on contracts. Generally, the terms of these contracts are favorable
to the holder, but the conditions of recent years nave not permitted them to improve their position to any degree, and when
consideration is given to the fact that in some cases credits
are extended using the equities in tnese contracts as a basis,
the situation cannot be said to be satisfactory."
In case 63 the bad effect of capital loans on a bank was well described by an examiner in 1922:

• 66 *

"They have extended unwarranted credit to so great a degree that only through the success of the farmers for several
seasons can they hope to "bring this tattered ship of distorted
finance to a harbor of safety. In my opinion, the damage has
not been done this year, hut in tue past, and they now find
themselves confronted with the day of reckoning - loaded up with
paper which no one can adjust without serious loss. They mast,
therefore, face the issue " y charging out the difference "between
what their actual securities are worth and the face of the loan*
The customers realize their position, and many are quitting with
frequent cases of bankruptcy. The serious question here is
whether continual nursing of their unwarranted loans will serve
any purpose. They have already reached a limit where the farmer
cannot pay his interest, let alone make a payment on principal."
In case 33 capital loans were made to finance land speculation outside of the community for non-resident borrowers* The serious effects of this
unwise policy were described in 1922 as follows:
"The bank's paper is not of the best sort, a large part of
it being trading paper growing out of land deals and smaller
transactions. Many of these loans have been made to aid land
speculation. The bank has been finding it difficult or impossible to effect reduction of its paper, and it will likely be
some months before any material reduction can be brought about."
The seriousness of the situation had become more evident in 1923,
and the examiner wrote:
"A real menace lies in the large amount of loans that are
dependent on the security of lands that are either non-productive or are subject to heavy prior liens. This has come about
' y a policy formerly pursued of loaning money too freely to
outsiders and in furtherance of land speculations. This tendency has been corrected,"
By 1925 the examiner found the bank in an alarming condition and
commented as follows:
"The directors are leaving the management to the president
who fails to comprehend the bank's perilous situation. The
loans generally are of a poor class, many were made to aid^land
speculations and in place of improving are growing constantly
worse as the land equities in which they are invested are being


wiped out. In examiner*s opinion, resources classified as doubtful are likely soon to develop entirely bad,"
Loans on Inflated Farm Land, - Loans based on farm land values,
made at the height of the farm real estate boom during the war by bankers
who did not recognize the temporary nature of high land prices, frequently
caused serious trouble.

In case 25 the examiner wrote in 1921:


It appears that practically all paper of this bank classed
as doubtful and loss, grew out of land speculation, cattle feeding, and the general slump in all farm products."
By January, 192U, the hopelessly frozen character of these real estate loans,
based on inflated prices, had become evident, and the examiner wrote:
"The aggregate of slow and questionable assets of this bank
is unreasonably high, a large per cent of which is dependent on
real estate security, and of this a considerable amount can be
liquidated only from the sale of the security which is largely
farm lands and for which there is practically no market. During
the boom period, land in this locality, in some instances, sold
as high as $500 per acre and at the present time it would not
sell for one half that amount.."
In August, 192U, the nature of the frozen real estate loans was further described in the following words:
"Under the management of the president, loans were made in
this bank during the high tide of prosperity without regard for
the financial standing of the tenant farmers, and those with
heavy encumbrances on their land. As a natural result, the
bank is now loaded with a large amount of slow and doubtful
assets that are dependent, in a large measure, on the successful sale of real estate."
In case 21 unsound real estate loans were augmented by loans to finance the raising of pure bred live stock. In 1923 the examiner wrote:
"This section ran rampant on the subject of high-grade
cattle and hogs which, coupled with high land speculation,

- 6S -

aided and abetted by the present officers of the bank who had
no conception of what the future might hold, and instead of
calling" in loans as they matured chose the policy of borrow-^
ing from an outside source, which is an incident there to»
loaded the bank with a most unwieldy mass of frozen assets.11
Loans on Inflated City Heal Estate. - City bankers made just as
glaring errors in loans on urban property as country bankers made in their
loans on farms during the various real estate booms. Comment has already
been made on the generally slack lending policy which created a mass of undesirable loans in an oil boom town. Two other examples are given here of
faulty loans on city real estate*

In case ,f20 the president was interested

in city real estate and undoubtedly his judgment was colored by his personal
interests. The effects of his policies began to appear in 1921 when the
examiner wrote as follows:
"Primary cause of present non-liquid condition was loaning by President to investors in local city real estate and
the placing of large loans, which could not " e handled by
this bank, of sheep and cattlemen with city correspondents."
In 1922 the following comment was made:
"This bank is carrying an enormous amount of paper which
is dependent upon the sale of real estate for liquidation,
largely city property. This condition reflects the management
of President who lias personally invested heavily in city real
By January, 1923, the situation load become worse, as indicated by the follow^ing sentence:
"Many of the bank's loans are so frozen and so dependent
on sale of real estate that the bank can almost be classed as
a real estate holding company."
The ultimate effect of this policy was described in 1926 as follows:


"It might " e able to pay its depositors in full over a
long period of time, but with the large amount of other real
estate now owned, unsalable at almost any price, immovable for
the past three to five years, and with but little prospects of
moving any material part of it within a reasonable future period,
if the present management continues to grant credit as freely
and liberally as they have the past five years, the bank is inevitably headed for the rocks."
In case 9 a ' ank in an entirely different part of the country with
a satisfactory record of growth and sound banking lost its sense of values in
the Florida boom and was plunged into serious difficulties. Between July,
1925, and January, 1926, the deposits of this bank increased more than one
million dollars from $1,936,000 to $2,966,000* Its loans also increased from
$l,lUg,000 to $l,93l»000. The increase in deposits and loans and the causes
were described by the examiner as follows:
"Deposits since the last examination show healthy increase,
but it might be proper to say that a substantial portion should
be attributed to an augmented loan account. 3. is supported by
a rich truck farming section, also some citrus fruit growing.
For a long time, the expansion and development of the little
city could be justly stated to be the result of a natural growth.
However, here recently, like most other places considerable real
estate activities have taken place, with resultant greatly enhanced property values. The President considers himself a very
conservative banker. However, in this your examiner does not
fully agree. I believe he wants to be conservative and, no doubt,
is more so than the other local state bankers. The examiner fe^ls,
has made criticism, also told President and Cashier that they are
too liberal in credit extensions, and once a loan develops weak
and slow they are not disposed to push it for collection with the
proper vigor they should."
With the collapse of the Florida boom, land values declined sharply
and the bank found itself possessed of a large volume of frozen loans to real
estate operators, as well as a large loan to a tourist hotel, which is discussed later under real estate bonds.
A number of the banks used in the 193I study were plunged into difficulties either by being operated by real estate promoters or by being car

~ 70 -

ried away " y the enthusiasm of city real estate booms in their communities.
When these booms collapsed, the hanks found that they had made undesirable
loans based on inflated land values. Many of these loans were thoroughly
frozen; some of them were converted into real estate, which, in turn, was
frozen; and in a few cases, the real estate loan mistakes were directly responsible for the suspension of the bank.
The worst case of unsound real estate loans among the 1931 suspensions was bank 171* This bank was operated by real estate promoters who
placed the greater part of their loanable funds in loans to real estate
dealers, home purchasers, churches, hotels, building contractors, and building and loan associations. To avoid excessive loans to certain parties, this
bank even followed the unethical practice of making loans to "straw men," or,
in other words, loans to men of no financial worth who were merely acting as
agents for other interests so that the names of these interests would not appear on the bank!s books.
Bank 171 was a suburban bank converted from a State bank to a national bank in September, 192*1. At the time of its first examination after conversion it was reported to he a heavy lender on real estate security.
these loans violated the National Bank. Act*

The examiner1 s comments follow:

"Like all suburban communities, the real estate field is
an active factor in the business life. This feature is reflected to a substantial degree in the loans to building and
loan associations, mortgage loans, and loans to real estate
dealers, builders, and the building trade. Two of the directors are active in this line. This class of loans is for
legitimate purposes and the security is on a conservative
basis. As a State bank, the management was in the habit of
taking real estate mortgages as 'side collateral1 or 'additional security,» without regard to the requirements of the
law* The directors were instructed that mortgage loans must
comply with the law, and it was put squarely up to them
whether they intended to meet the requirements of the law in
this respect. They disclaimed any intention to deliberately

Many of

•- 7 1 -

violate the law, "but at the same time, cited instances where
they felt the necessity of taking such additional security in
order to accommodate the business of the community."
Late in 1925 the examiner made further comments on the character
of the real estate loans and criticized the concentration of loans in the
real estate field.

His statement follows:


• • . A s will "be noted from the report, a large part of the
hank's loans are tied up in SOIQB manner with real estate, A
number of the bank's directors are active in this line. The
credit files of the bank are very complete, and there is every
indication that care is used in granting lines of credit. The
President was informed, however, that the loans of the bank
should be more diversified, as the percentage of loans allied
with real estate transactions was too large. Bank has a number
of loans to building and loan associations and these were gone
over with the President and he stated, as far as the officers
could determine, they were doing a safe business in assisting
home-buyers, and that to their knowledge, no funds were being
loaned to real estate enterprises on a large scale. The President and some of the directors are interested in the
Corp. and the
Corp. These companies furnish regular
statements and show progress. The loans to these companies appear safely secured. His attention was directed to the number
of loans secured by stock of these companies, and as some of the
loans are of long standing, he was advised that regular and marterial reductions should be obtained from all borrowers where
loans are renewed and all demand notes should be changed to
time. The bank has a number of loans secured by real estate
liens. The bank's equity appears to be adequate, and the President advises that a number of these loans are only temporary.
Bank also has a number of small loans secured by entered judgments, and the majority of the loans are $500.00 or under. It
is possible that some of these don't conform to Section 24,
Federal Reserve Act, but in case of very s:mll borrowers who
borrow for personal rather than business reasons, payments in
full or reductions are more easily obtainable, as long as a
judgment is on record. The officers were advised, however, that
adequate information should be on file. The bank is rapidly reducing the unlawful real estate loans, and only two small ones
remain, which are having attention."
In February, 1926, the examiner stated that 62^- per cent of the
"bank's loans were real estate loans, some of them to building and loan associations which were violating the law.

The comment follows:

- 72 -

"Approximately 6 2 ^ of the bank's loans are tied up with
real estate (secured and unsecured) $US7,000 to Building and
Loan Associations, which associations the President assures
are carefully managed, although his attention was called to
the fact that some of taem had been borrowing in excess of the
state limit (25$ of withdrawal value of shares). The loans to
real estate dealers and builders are to parties known to the
directors, and wnere unsecured are supported by financial
In October, 1926, the bank was still heavily involved in real estate
loans, as shown by the following quotation:
". • . Over one-half of the bank's loans are tied up with real
estate• These lines are to building and loan associations,
real estate dealers, builders, and loans secured by real estate mortgages. The President again assured the associations
borrowing were doing a safe building and loan business, and
that the builders and real estate borrowers were all people
known to the Directors and considered capable in their line*11
In May, 1927, the subsidence of the real estate boom had begun to
affect the real estate loans adversely, as shown by the following statement
of the examiner:
"This is a neighborhood bank located in (the examiner
names a suburban section of a large city). They also conduct
an office over a mile away. Mr, A, the President, is an attorney, and interested in a number of concerns, many of which deal
in, or finance real estate. He, therefore, thinks, to a large
extent, in terms of real estate values, although it is believed
he is conservative and capable, and does not let the bank take
unwise risks. As at previous examinations, a large percentage
of the loans are tied up with real estate. Eeal estate business is very quiet, and has been for some time. The statement
files of the bank are very complete, which indicates a proper
investigation of all lines. Most loans allied with real estate
are more or less slow, and the management was urged to insist
on reductions and obtain security on loans that appeared to be
slow in liquidation."
In November, 1927, the bank found that its concentration in loans
with real estate security was a detriment since it curtailed the amount of
Paper eligible for rediscount at the Federal reserve bank.

In this examina-

tion the matter of taking notes from "straw men" was also mentioned.

•- 7 3 -

"Approximately &0f> of the loans are connected with real estate ( B / L Associations, realtors, "builders and loans secured "by
mortgages). Concentration of loans in this type of "business has
existed for some time. The matter was discussed with the President and Cashier, and they agreed it would be necessary to diversify its business more. This was brought to their attention when
they found it necessary to rediscount, as the amount of eligible
paper was comparatively small. The necessity of reducing the slow
and doubtful items was brought to the attention of the management.
The other real estate owned and carried in Suspense Account shows
an increase. They were urged to make every effort to get these
unprofitable items out of the bank. It might be added that the
real estate business is, and has been very dull
The matter of taking 'straw makers' on notes in connection with real estate loans was also discussed. This is an old practice with real
estate borrowers. The management has promised in the future to
obtain detailed information in connection with all mortgage loans
(particularly those submitted by real estate dealers and builders)
and 'straw1 makers will be refused."
In May, 192S, the examiner's comment contains furtner details of
the loans to "straw men*"

The quotation follows:

"Concentration in loans allied with real estate continues.
There are a number of loans to building and loan associations,
but officers state they are doing a safe business. A large percentage of loans are secured by mortgages. There are still some
real estate loans in this bank on which the makers are only
'straw men.' The President is looking into them, will furnish
the name of the real borrower, and they will be eliminated if
found to be unlawful; as an example of this practice there are
two mortgage loans to Z totaling $22,500. This man is a watchman in the bank. The officers were again advised that a detailed
record of all real estate loans should be in the bank, and if
'straw men' were used, the name of the actual borrower should always be known. The amount of slow and doubtful loans and the
Suspense items continue to increase in total, (exceeding the Surplus and Profits of the bank). Many of the loans are very slow
and will require time to work down. The Suspense account represents real estate acquired through sales to protect old debts.
There are enough real estate people associated with this bank
to make a market so that the bank can dispose of these properties."
In November, 192S, the examiner commented at some length on the evil
effects of concentrating in loans on real estate.

Such loans were criticized

as being slow and frequently leading to the acquisition of other real estate,
in which case the bank incurs expenses for taxation and other items.



quotation follows:

• • . There are a number of men on the Board of Directors who are
in the real estate "business and the bank has always handled a nun*ber of loans dealing with real estate transactions. As a result
the bank has continually been criticised for concentration in loans
allied with real estate. A large amount is loaned to various building and loan associations, but the management assure they are well
known to them and that they are engaged in a safe and legitimate
building and loan business. There are other loans to persons engaged in the real estate business and builders. Over one million
dollars of the loans are secured by mortgages or judgments, mostly
the former. A number of thesfc loans have been to builders, and
while the equity is there to secure the bank, it is believed it
would be a rather slow job liquidating some of them, if payment were
required and demanded. The amount of slov; and doubtful loans and
the Other Heal Estate account continue to materially increase*
(Slow and Doubtful loans: Suspense a/c; Total of these two accounts
classed as Slow, Doubtful and Loss is about 70c/b of the capital, surplus and profits of the bank), A number of the loans so listed are
believed to be very slow and will require time to completely liquidate. The losses estimated will be charged off. Regarding the
'Other Real Estate Account,' this has been increased over 100$ since
the last examination, and represents real estate acquired through
sales and which the bank has purchased to protect themselves from
possible loss on old debts. Their judgment is questioned in acquiring some of the items in this list audit is believed they would
have been as well, if not better off, to have taken the small initial loss, instead of acquiring a large amount of real estate, some
of which is not paying any income, and then take a long time to sell
it, in the meantime, having to pay taxes and other expenses. The
large line is also one for consideration and action. While the M
Corporation has no liability to the bank on these mortgages, nevertheless, the original parties giving the mortgages now have no responsibility and the M Corp, has taken over the properties to protect their liens, and of course have to pay interest on mortgages
to the bank. It is their intention to take these mortgages out of
the bank. This entire situation was discussed with the President
and Cashier, and their attention directed to the largo amount of
slow assets the bank had and which required some action on the part
of the management. The bank has been borrowing since the last examination and will continue to do so unless the real estate concentration is reduced. There are some real estate dealers in the bank
who borrow constantly and by calling some of their loans and reducing the number of loans to building and loan associations, the bank
should be able to go out of debt. They were also requested to see
in the future that all information in connection with real estate
loans including the committee report in detail shall be placed in
the files so that an examiner can readily obtain the details of
each loan, as many of them are very much involved, due to the practice among real estate people of using 'Straw men. ,u


In May, 1929, the examiner described an unsuccessful effort "by the
directors to dispose of other real estate.
". . . Since last examination a Real Estate Committee composed of
Directors has "been named, hut no progress lias "been made toward
selling any properties. Exchange of properties was arranged in
one case, hut only time will tell whether this action was wise*
The management was requested in the future to discourage exchanges and only jake sales, of their real estate. The Board
has a number of members in the real estate "business, and the
fact that they have been unable to do anything with the properties owned "by the bank confirms the report that real estate in
E at this time is not moving at all. In fact it is very difficult to sell any real estate in the outlying sections. There
have been a number of foreclosures in tne City and a number of
Building and Loan Associations have had to take over their
properties. This bank loans to a number of Associations and
some of their statements show that they have taken over real
estate. The management, however, say that they are acquainted
with these Associations and feel they are capably managed and
in safe condition. This is a neighborhood bank in the (examiner
names suburban section of a large city). There is very little
demand for commercial loans and a very large percentage of the
loans are allied with real estate, including loans on mortgages. Some of their mortgage loans do not conform to law and
they have been requested to collect them. There are also a
number of loans secured by assigned mortgages. The management
was requested to look these over as some of them should be collected."
In the same examination the examiner described the general condition of the
bank in the following words:
"• . • The Cashier was requested to see that full reports in
connection with all real estate loans be compiled and put in
the bank along with the mortgages. Many of the real estate
transactions are so involved that it is difficult to find out
just who the party is that is being accommodated. The following facts stand out at this examination: Deposits have declined; bank has been regular borrower; large amount of slow
and doubtful items, including real estate owned and bond depreciation; unlawful real estate loans and concentration in
loans connected with the financing of real estate."
In November, 1929, the progressive deterioration in the real estate situation and in the assets of the subject bank was described by the
examiner as follows:

- 75-

"This is a neighborhood bank located in (.examiner names
suburban section of a large city), " f i e the bank has loans
to a number of customers in that section, the larger part of
their business has been to real estate developers, loans on
real estate security, borrowers financing mortgages and building and loan associations* The real estate situation in E is
not good and* it is hard to sell any real estate and only then
at a much lower figure than cost. The building and loan situation is even worse. Many properties have been taken over;
stockholders have been withdrawing their funds and it is a
very difficult matter to tell which are good associations and
which are not. A sort of mortgage moratorium has been declared
and it is my understanding that a-number of trust companies and
others holding mortgages have agreed not to call any that are
due at this time but will carry them along if interest is paid.
With this background and the fact that this bank has a large
amount of real estate on hand; loans to building associations;
mortgage loans and other loans allied with real estate; it is
easier to appreciate the problem they have. This bank has a
number of real estate men connected with the Board and they
do think and always have thought in terms of real estate. The
concentration has been repeatedly criticised, and it is only
of late that the active management has agreed with the examiner
that some plan for breaking up this concentration will have to
" e adopted and followed* There is a large amount of slow and
doubtful assets in the bank, showing an increase over the last
examination. Most of them will require time to work out. The
estimated losses should be charged off and the value of the
doubtful items obtained. In connection with other real estate
owned, these properties should be re-appraised and it is believed it will be found the bank value is high. The management was advised that the excess loan must be brought within
the lawful limit and they were further advised of the liability
of the directors,"
In May, 1930, the undesirable concentration of real estate loans
was described by the examiner in the following terms:
"The real estate situation in E has been very bad and shows
very little improvement. Real estate is worth what it will
bring, which is considerably less than prices obtainable a few
years ago and present day appraisements are at best an expert
guess. This bank has over 62$ of its loans tied up with real
estate financing ($1,126M secured by mortgages; $UlOM to building and loan associations; $l6UM to real estate dealers and
$212M to builders, churches, hotels and loans secured by judgments and mortgage finance company stock). Regarding the mortgage loans, it is believed the bank is protected by sufficient

- 77 -

equities, "but these loans are not readily collectible and in
order to get them out of this hank, practically all of thein
will have to he refinanced elsewhere. The bank is after the
building and loan associations and requiring reductions. Since
last examination over $100M has been collected from the various
associations borrowing. Loans to real estate dealers and builders are all more or less slow."
At the time of this examination, the bank had real estate loans of $1,912,000,
out of total loans of $3,055*000.
The last examination of this bank was made in December, 1930, at
which time the examiner placed the responsibility for the bank's deplorable
condition squarely on the shoulders of the directors.

His comment follows:


• , . A t this writing, no bank or trust company can be found
that is willing to attempt to liquidate the bank. Tne directors of this bank are responsible for its condition and many
of the loans are either to themselves; concerns in which they
have an interest; loans to acquaintances and financing of real
estate which they have recommended."
In case 169 the judgment of the bank officials was warped by speculative optimism

regarding the future of real estate values following tne

opening of a new bridge.
volume of frozen loans.

The boom collapsed and left the bank with a large
In July, 19291 the examiner described this situation

and expressed the view that the bank would be able to work out of its difficulties,
" . . . This bank, like others in the outlying
districts, is suffering from the slump that followed the
real estate boom of 1925. There was then widespread optimism as to the results to come from the building of the
Bridge, and land development operations, and extended building held full sway. There was a somewhat general participation in these movements which were furtner encouraged by the program of roadbuilding and boulevarding
hereabouts. With the collapse of the boom and its high
prices, and the entanglement of so many individuals therein,
the re-action left little market for real estate, even at
normal or sub-normal prices. Foreclosures have now had


their run, and, for the first time since the "boom, there seems
to be an awakening in real estate. Rental property is filling
up instead of standing idle. As a result of the combination
Company and
, and the increased manufacturing activities which will have
for their center,
the population of the city, itself, should increase, forthwith,
ahout 1^,000. The
Manufacturing Company will employ
at)out 600 in its factory ahout a mile and a half from this "bank.
In the liquidation of its loans witn various real estate features, the hank does not depend upon 'boom1 prices, but rather
upon a return to normal activity. Tnere has been nothing to
do, but wait until the stagnation passed. Had the bank pressed
for payment, it would have been acquiring real estate, instead '
of simply allowing its customers to keep up their interest meanwhile. The new President lias decided trading ability, and is
adroit in the handling of situations, so that with a betterment which is evidently at hand along real estate lines, should
be able, before long, to work out of bank, a number of loans
which it has carried during the dull period."
By August, 1930i these hopes ttad largely vanished, as snown by the
following quotation:
"Condition much the same as prevailed at last examination. A large portion of the loans are dependent upon real
estate and the officers and directors, individually or
through companies formed for the purpose, are speculating
with the bank's funds. While some of them have made a pretense of depositing collateral, it is little more than a
sham because they deposit shares of stock of the companies
in whose name title is taken to the real estate. The whole
trouble arises from a visionary boom in real estate values
anticipated when the
Kiver Bridge was built and
everybody who could muster up sufficient credit bought real
estate with the expectation of reselling at a handsome profit. Failure to realize their hopes left the bank with a lot
of slow loans and questionable security*11
In case 219 the bank was in the habit of making loans on real estate up to 100 per cent of the appraised value of the property, as shown by
the examiner *s comment in November, 1928.
"Policy of loaning up to one hundred per cent of appraised value of real estate subject to criticism."

- 79 -

In case 15U tne bank made mistakes in granting loans for construction.

In May, 193° > the examiner criticized "illegal loans upon real estate,

principally construction loans, at greater than 50 per cent of the market
value of the properties."

In April, 1921!, an excessive loan for the cons trac-

tion of a large reservoir was described as follows:

. . • Many estimated losses remain together with a large
amount of doubtful paper in which losses will probably develop. By far, the most important matter is the
excess loan, whose outcome is dependent on the completion of a
large reservoir construction contract for the
While this loan is enormously excessive and varies up and
down as the advances to the contractors are made and repaid,
there seems to be notning to do but carry the loan to completion of the contract. This loan was in the bank wnen converted to the
System. No one can tell whether loss
or profit will result. The bank is in the contracting business to the extent of this loan."
In May, 1925, the reservoir loan was believed to contain a large
loss, as shown by the following comment:
". . • First: The
contract. No one knows how this
will come out. This bank has ceased to make advances and the
contract is to be financed to completion by
. I believe that a heavy loss will be sustained. The estimate of
$300,000 is wholly arbitrary."
Excessive Loans to Tenants. - Among the suspended banks there were
many cases where bankers failed to realize that a tenant's ability to repay
a loan depends almost entirely on his earning powei.

Loans were made based

on the tenant's chattels, and when it was found that these loans could not
be repaid at maturity they were renewed, frequently for larger amounts, until
they became thoroughly frozen and developed into losseswill indicate the nature of the mistakes made.
in 192I:

A few illustrations

In case S6 trie exaniner w o t e

- GO -

"Paper reflects poor judgment in the granting of credit.
Loans are largely slow and non-liquid with some losses probable
on insufficiently secured tenant farmr loans."
This case continued to become more aggravated during succeeding
years, and in February, 1926, the examiner wrote:
"Lacks executive ability and forcefulness. Lacks officers who know how to run a bank and keep it solvent. Lacks
men of vision and moral courage. The bank's assets are negligently and recklessly handled. Funds are loaned to 'honest
fellows1 who happen to apply, apparently without reference to
The next examiner wrote in July, 1926:
"Evidently unsecured credit was formerly advanced without inquiry as to borrower's financial responsibility, with
the result that the bank now finds itself burdened witn a
mass of slow and doubtful assets."
The bank by this time had been placed in a vulnerable position, and
in succeeding years crop failures occurred /nich caused the bank's final suspension in 1927.
In March, 1926, further complications in connection with the reservoir loan developed, as shown by the following quotation:
"• . . First: The
contract. No one knows how this will
come out. This bank has ceased to make advances and the contract is to be financed to completion by
. It has not yet
been determined whether the
dam has slipped during the
past winter. If it has not slipped the contract will probably
be completed leaving a claim of approximately $1,^00,000 against
the City of
. No one knows when or how this claim will
be settled and in my judgment a loss of at least $300,000 should
be estimated on the unsecured portion of the debt held. In view
of the prospective litigation such figures have not been set up
in the report."
At various times in the later history of this bank its claim against the city
on account of this reservoir was nentioned but the quotations were too indefinite to be of value in this study.

- 81 -

In December, 1923, a further misuse of loanable funds by tnis bank
in credit extensions for the construction of apartment houses was described
in the following terms:
"• . . The '
Lino1 so called is an outgrowth of unwise financing of construction mortgage loans for
his interests. In addition to direct loans to
his company, the
; Company other loans were made collateraledty mortgages understood to have been legal for a national bank. Proceeds were used to finance the construction
of apartment houses and loans were to be temporary only, until
savings bank mortgages could be obtained.
was the
operator who arranged the financing. Difficulty lias been encountered in placing mortgages and this bank has been forced
to continue its advances in order that properties might be
completed and placed in a position where sales may be possible,
or mortgages placed so tnat such advances may be liquidated.
Loans clearly above the value limit for real estate loans
have resulted and in addition, in my opinion, loans in excess of the legal limit to one borrower have also been made.
Total advances on these mortgage loans "nave been very large,
but participations out have reduced the totals to figures
which would be legal if such participations are bona fide.
In some instances, the money advanced for participations
has come from outside this bank and there is no criticism
on the basis of excessive loans. In two instances, however,
loans have been made by the bank for the purpose of allowing the borrowers to participate in the real estate loans
and in exactly the same amount as tneir borrowings and on
the same date. This was done to avoid having excessive loans
to the mortgage loan signers and the participants are considered to be accommodation signers only. As shown in the
schedule of excessive loans, I do not consider that the illegal feature has been avoided. President
with this classification and argues that the loans are entirely within the law in this report."
In case 105 the examiner gave the bank some good advice which,
if followed, might have forestalled later troubles.

In 1923 he advised:

- 22 -

"A discontinuance of the policy of lending money in material amounts to tenant farmers and others financially irresponsible, on the probability that they will make a cotton
crop or in some other manner produce a basis of credit by
the maturity of the paper."
Case IIS was a bank located in the rice growing section, which
was not sufficiently conservative in its loans to tenants growing rice.
Fne examiner described the lending policy of this bank in February, 1921,
as follows:
"Serious condition of bank is result of incompetent
management and excessive rains and floods coming just at the
time when rice crop was ready to harvest, ruining a large
part of the crop, and preventing threshing. This happened
last November and the rice has been in the fields until this
writing, threshing having just commenced. Former management
made loans in large amounts to tonant farmers, depending, in
most cases, on rice for payment. Ihis has been a profitable
crop for past three years, and last season the growers thought
they would make a tremendous profit, and put in nil the land
they could get under lease, borrowing all the bank would let
them have to do so. Hice is expensive to put in, and bank
loaned to limit on nothing but prospects."
In case 10U the examiner in 1928 looked backward over the history
of the bank and commented on the errors in loans to tenants and their effects.
His description of the failure to use sound judgment in tenant loans was as
"It was found that a large number of lines under $500
were apparently worthless. Many were begun in 1922 and 1923
with an original loan of, say, $25 to a tenant farmer on on
unsecured basis, and being unpaid was increased by interest
and a new loan granted from time to time. In this way, paper
has accuraulated°which is certainly worthless under the management of the officers who have directed the affairs of the bank,
and presumably will not be collected by the receiver."

- S3 -

Placed Paper, Non-resident Loans« Loans to Accommodate
Other Banks, and Split Loans
The types of loans enumerated in the title of this section are all
somewhat similar and shade into each other in such a way that separate treatment of each class is difficult.

There is nothing specifically wrong with

any of the types of loans mentioned above when they are handled properly
and the same principles are followed as in making other good loans*


banking troubles centering around these classes of loans arise from the making of such loans either without sufficient credit information or to further
the selfish purposes of the bank management.

Errors in these loans were

.Among the 225 failed banks used in this study, errors from placed

paper were mentioned in 27 cases, loans to accommodate other banks were criticized in 22 cases, split loans between banks were criticized in 15 cases,
and non-resident loans were criticized in 10 cases.
Placed Paper. - Placed paper consists of bills receivable of one
bank which are purchased by another bank.

In its best foim placed paper

consists of high-grade notes which one bank sells to another bank as a liquid
investment for the second bank.

As will be seen from the following illustrar-

tions, this purpose in placed paper is frequently distorted into the sale of
undesirable notes from one bank to affiliated banks to evade the criticism
of examiners,

(in some parts of the country the bank selling its paper to

another bank classes such paper as "sold out" paper.)
Case UU is an excellent illustration of a bank, well run as to its
local business, but mulcted by the management of the chain of banks to which
it belonged through the sale to this bank of undesirable notes.

A letter

accompanying this case history and written by the Federal reserve agent of
its district outlines the development of this case very clearly, as follows:

- SU-

"In my opinion, Bank 44 is ono case in which a bank with
good management failed. It is my understanding that all the
losses occurred in loans placed in the bank by A, Company.
These loans were accepted by the active management because of
the implicit confidence which the management load in the integrity, ability, and financial strength of A. The X# Company of
Y was the central bank of the A. Company's chain of banks. The
Y bank and A. Company placed enough paper in Bank 44 to render
it insolvent. I am advised that the loans and other assets
that were taken on the judgment of the local management were of
an unusually liquid type. The question naturally arises ?Can
the management of a bank be good that would pennit such a large
volume of loans to be acquired from one source without making
an independent investigation?' The files of the office of the
Comptroller of the Currency will show copies of the letters
from the Comptroller's office to the bank in which the Comptroller instructed reduction of the A. Company line, and in
which he finally advised the directors that they would be personally responsible for loss if the line was not reduced to a
reasonable amount* In making loans to other than A. Company,
the bank made close credit investigations and used it3 independent judgnent' in accepting the loans. The management was
bad to the extent that it failed to use these some safeguards
in loans made to or through A. Company and the X. Company of
Case 71 is another illustration of a bank which was a member of a
chain banking system and where the owners of the chain placed undesirable
notes of one bank in another bank, at times approaching criminal violation
of law in so doing.

In this bank the purchase of notes from other banks

in the chain was habitually practiced from the beginning of tho case history in 1920.

In the first examination of the history the examiner wrote:

"LARGE LINES: Some improvement in large lines, as a
guarantee has been obtained from the
Eaim Mortgago Company, and credit statements are on file supporting paper
taken from the
Bank of
• The lines are still
carried in too large amounts and in poor shape."
This paper was known to bo undesirable but it remained in the bank, and in
December, 1921, the examiner made the following comment:
"The bank allowed a large amount of paper to be taten in
from closely affiliated banks, and now is having great difficulty in removing any of it. Therein lies the worst feature
of the bank's present condition."

~ 85-

At the close of I923 paper of this type was still being held.

The examiner

did not specifically criticize this paper as slow, doubtful, or loss but
merely questioned the advisability of carrying paper of this sort as a
secondary reserve.

His comments follow:

"LARGE LINES: The bank line listed and discussed at some
length has been criticised as it is practically all paper taken
from other banks which directors of this bank are interested in.
Presumably, the paper is at least fair, but statements do not
accompany all unsecured loans, and the security on the collateralled loans is frequently held by the sending bank so that an
accurate check is impossible. Your examiner questions the advisability of talcing such a large proportion of this paper which
emanates from the surrounding territory and is no more liquid
than its own paper. As long as the bank has surplus funds, it
should be carrying a fair proportion of liquid assets in the
form of prime commercial paper, Treasury Certificates or Liberty Bonds, and the management was so advised."
Examiners continued to criticize this misuse of the practice of
buying placed paper during subsequent years, but they began to experience
difficulties in identifying such paper because the managers of the chain
apparently disguised such notes by having them made out on the note form
of the purchasing bank.

In 1928 the examiner wrote:

"There is believed to exist in many of the banks operated
by the Y and Z system exchanged notes of various banks and,
while there may be some existing here, they cannot be identified, as the loans carried are all on this bank's form of note."
By the summer of 1929 the condition of this bank had become very precarious
with estimated losses larger than the combined capital and surplus of the
bank, and large amounts of slow and doubtful assets.

At that time the ex-

aminer wrote:
"PLACED PAPER: Other banks of this chain are carrying
paper of very inferior quality for this bank, which reciprocates by carrying the same class of paper for them. This
highly objectionable and unsound practice, together with the
preceding criticism (loans to relatives), is primarily the
cause of the deplorable condition of this bank."


CO -*

Finally, a short while before the "bank closed, the examiner summarized the wrecking of this profitable "bank by the bank management in the
following words:
"Exploitation by officers and directors for their own interests and that of their relatives and affiliated interests
is the chief reason for the deplorable condition of this bank.
This bank, organized under a state charter with a $10,000.00
capital, has increased its capital to $25,000.00 and surplus
to $25,000.00 from earnings; has paid its shareholders $60,500.00
in cash dividends; has capitalized the
Investment Company,
a shareholders' concern, with a $U5,000,00 capital, and, in addition to that wonderful record, it has charged out over
$95»000.00 of losses that have been placed in this bank by the
dominant interests of their affiliated concerns and their own
borrowings, and $20,000.00 of losses on this type of paper still
remain in the bank. This record borders on the criminal, and
yet Mr. Y. feels no sense of guilt, but is trying desperately to
saddle this hopelessly insolvent bank on to local farmers by reselling his stock to them through Cashier X."
Examples also occurred among the cases studied showing the dangers
of placing paper from the standpoint of the bank selling the notes.


case 65 some of these pitfalls were described in 1921 as follows:
"In addition, Mr. Z., president, secured by mortgage
$20,000.00 of placed .mper, held by the
Cattle Loan
Company and the
Bank of
, without recourse
on the bank. This paper was causing serious embarrassment,
the holders threatening immediate acti m if the same was
not fully -protected
The bank has outstanding still,
in addition to the naper held by the
Bank of
above, mentioned, a'cout $60,000.00 of other placed
pa-oer. Approximately $50,000.00 of this paoer is held by
the X banks in .
_ , and Mr. X., father of the cashier,
assured me that he would see that this -?a-oer was taken care
of in such a way as not to embarrass the bank."
A second example of the hazards of placed paper, or "sold out"
paper, as it is called in this instance, was found in case 90.

In 1923

the examiner wrote:
"This is an exchange of paper between the subject bank
and its correspondent bank at
. At the tine of this examination, its correspondent bank is carrying approximately

~ 87 -

$67,300 of the so-called «sold out1 paper, and this hank, in
turn, is carrying approximately $^3,000 of paper for its correspondent hank. Should the correspondent hank undertake to
hold this hank liahle on the
ranch company line (amount
$33,000 'sold out* and $2,500 carried in subject hank) the line
may present a serious problem to this bank, as the line is not
fully covered by security,»
The following footnote inserted by the Federal reserve bank described later developments in the "sold out11 paper of this bank,
"Later correspondence on file in the office of the Chief
National Bank Examiner disclosed the fact that the bank carrying the 'sold out1 paper charged matured notes in the amount of
$2S,000 and did not credit renewals, and returned one draft of
the subject bank, claiming that the subject bank f s account was
overdrawn, which, of course, caused the subject bank considerable embarrassment. One of the contributing, if not the principal, factors resulting in the suspension of the subject bank
was its 'sold out* paper,"
Non-resident Loans, - In some localities the demand for loans was
apparently insufficient to use the lending capacity of banks up to the desired amount, and these banks went outside of their community to secure loans.
Where these loans were made without proper regard for conservative loan
limits or on the recommendation of brokers interested only in selling the
loan, difficulties arose.

In case 3 2 tk*s type of loan was criticized by

the examiner in 1922, as follows;
"The officers are capable men but were too optimistic
through the period of inflation and the bank is loaded with
paper of a very slow nature. Some improvement in the way of
reducing and securing has been made, but the general condition of loans is unsatisfactory, and there is much work to
do which, if neglected, will result in heavy losses. Apparently, they sought outside paper of a capital and promotion
nature. One reason for the bank having to borrow is the
large amount of non-resident and non-customer paper on hand, •
This paper is menacing to an extent, and will apparently be
slow in liquidating."
Loans to. Accommodate Other Banks, - In this class of loan also it
is only the abuse of such loans that is held up for criticism.

It is sound

- ss ~
banking practice for correspondent banks to males loans with adequate security
to other hanks having relations with them, hut it is quite another thing for
one hank to make loans to an affiliated hank to prevent it from closing, and
without adequate security.

It is this class of loan with which the follow-

ing illustrations are concerned*

In case 29 the growth of the practice of

supporting a weak affiliated hank "by accommodation loans was described as
"The president for the past several years had devoted
the larger part of his time to the affairs of the bank, and
has gradually increased deposits. However, together with
this increase in business of the bank he has also increased
his outside holdings to where his operations have become
extensive and his indebtedness heavy. It is believed that
a large amount of the paper listed as slow in this report
found its way into thex bank through these operations. Particular attention is called to approximately $100,000 in
loans taken for the accommodation of a neighboring bank in
which the president of this bank is interested and which
bank is believed to be in financial difficulties. This
hank has been instructed that accommodation loans of this
character should be curtailed materially and that in examiner's opinion this particular item of criticism should
be watched carefully and followed up."
A year later this practice was described as follows:
"The president is borrowing heavily through his affiliated concerns and a large part of the slow paper undoubtedly
came through the neighboring state bank in which he is heavily interested. The president is making efforts to reduce
this indebtedness."
In 1927 the examiner stated that the directors of the bank were fully aware
of the president's practice in this matter:
"For the past several examinations, criticism has been
directed toward the line of credit, direct and indirect, extended to a state bank in a neighboring town in which the president is heavily interested. This state bank is known to be in
a very bad condition and it is the president's intention to
work out this bad condition by placing a large amount of that
bank*s paper in this bank. The directors of this bank are
fully aware of the reason that this accommodation line is being

- S9-

extended. It is the opinion of the examiner that it would
be the "best policy for the "bank to build up a good secondaryreserve in "bonds, instead of taking a chance on a proposition
of this kind."
Another similar case was 67•

In 1921 this hank even violated the

law to extend assistance to two affiliated "banks.

The examiner apparently-

opposed this practice for he made the following statement:
'EXCESSIVE LOANS: As shown on Page 5, unusual methods
have "been resorted to in order to loan "bank's funds to two
State institutions controlled " y Directors, Apparently, "both
hanks have been in seriously extended condition since the
early part of January of this year, and probably longer.
Judging by infonnation obtained from Directors, your Examiner is convinced that it was clearly understood that the
lav; was being violated, Directors1 defense being that it was
merely a matter of keeping the banks from closing."
The next examiner visiting the bank later in 1921 condoned this practice in
the following statement:
"EXCESS LOANS: To affiliated banks for purpose of temporary accommodation to forestall possible closing. On account of closing of several state banks in this vicinity,
these banks were in an extended condition and help was necessary to keep them going. If they had closed, the effect on
other banks in county would perhaps have worked a great
hardship. Therefore, accommodations appear warranted, but
should be reduced at once."
Whatever the merits of supporting the weak affiliated institutions,
it appears that it was dangerous to allow these weak banks to lean on the
stronger institutions.

This matter was discussed by the next examiner in

1922 as follows:
"As shown by this report, the bank is in an exceedingly
unsatisfactory condition, the cause of which is in a great
measure due to the financing of banks and other interests
controlled by the X~Y combination, who control and dominate
this bank. EXCESS LOAHS: The excess loans to banks were
brought about by advancing money to their banks that were
struggling under financial difficulties, and it was claimed
that this procedure was taton to avoid their closing. The
funds were advanced with the understanding that it was to

- 90 -

be only temporarily, but it has now become more or less
permanent with no immediate prospects for reduction to the
legal limit. It is claimed that these banks have loans with
the War Finance Corporation which have been approved and as
soon as the returns are received these loans Y/ill be reduced,
but not sufficient funds will be available for a reduction
to within the limitations of Sec. 5200. X and Y hold the
control of the State Banks that are excessive borrowers, and
it is shown beyond a doubt that they have abused their control by accepting the loans, which, in your examiner's opinion, have greatly endangered this bank. It would appear from
their financial statements that they are men with sufficient
financial responsibility to finance their enterprises from
other sources than this bank."
Split Loans. - Two or more country banks sometimes split a loan to
a borrower, and split loans frequently mean loans beyond sound limits.


case 98 the examiner wrote in 1922:
"The former management took on entirely too many large
cattlemen and floated the loans in Y and Z, and left this
bank, in some cases, with the unsecured end*11
In 1923 the examiner described this split loan policy as follows:
"Wherever a bank has maintained a policy of lending
their limit loan to a borrower and then lending him as much
as he wanted through a loan company attached to the b-mk,
or lending him money for some eastern bank, the lending bank
has always had a difficult proposition and probable losses
to face. That is the situation here."
In case 89 the bank management apparently made split loans with
other banks as an outlet for unused lending power.

The character and pur-

poses of the split loans were described as follows in 1922:
"The President dictates the policies of the bank and,
as heretofore stated, is interested in two other country
banks and is apparently using the funds of this bank to
further his interests in the other two institutions. The
loans the subject bank is carrying for the two banks are
not first class, since it is evident that frequently the
borrowers also owe one, and, in some instances, both of the
other banks the legal loan limit; those banks, in many instances, holding the first mortgages on such borrowers'


property and this bank having no security at all, or security
that is very unsatisfactory. The unsecured lines of credit
under discussion are based on property statements, the net
worth of which, it would seem, is represented "by highly inflated real estate values placed on the holdings of the borrowers. Then, too, in the instances where this bank holds
second mortgages as security the equity could only be protected by advances whi&h would be prohibitive. The officers1
and directors1 attention was called to the fact that in many
instances heavy lines of credit had been extended to families,
the credit extended being so heavy that it required the legal
loan limit of the two affiliated banks and the subject bank to
carry the borrower at a time when the subject bank was overextended and compelled to rediscount in order to carry such

Loans to Officers for Speculation in Securities
At several banks the examiner criticized the practice of making
large loans to the officers and directors of the bank to permit them to
speculate in securities.

In case 15^ the bank management was criticized

very severely for this practice.

The examiner*s comment in 193^ regarding

the poor quality of the management and their unsound practices follows:
"With respect to the safety of the management, it is evident that a radical change in policy at least is required. I
believe the violations of law in most instances to be willful
and persistent, and the danger in the heavy loans in this and
affiliated banks to the managing officers and certain of the
directors for stock speculation, and the use of accommodation
notes are obvious. The moral effect alone on the entire personnel is bad. As before stated, the management's position
with respect to the excessive loans appears to be that the law
has been successfully evaded. Director
is generally reputed to be a plunger, and while he does not in my judgment
dominate, I believe his influence is bad. If these unlawful
and unsound practices continue, the results to this bank and
the other banks in the group may be grave, indeed. President
and Director
t have shown a disposition so far to
support these banks with their personal resources, but there
is", of course, a limit to their ability in this respect, and
I believe they are now greatly extended. The other directors,
with the possible exception of Directors
men of limited means.11
A particular phase of the overextension of credit to the management of bank I5U was its practice of making loans to "straw men."


~ 32 -

men" are persons of no financial responsibility who are allowed to sign
notes and borrow funds from the hank, the proceeds of such loans going to
hank officers or directors, or other favored interests. The reason for this
indirect method of extending credit is either to allow the individual to
receive more credit than he is legally or financially entitled to, or to
make it unnecessary for his name to appear on the bank!s record as a borrower*

A description of this practice is given in the following comment

written in 1930:
"The use of accommodation notes or straw names for the purpose of dealing in stocks still continues. A loan of $129i250»
went through the books March 29f 1930 in the name of
(brother of President
employed in the real estate loan
department of the bank) secured by 25OO shares of Paramount.
This loan was reduced by sundry payments in April, and the
balance paid May 2nd. A similar loan of $221,915* in %he name
(a bank employee) went through the books also on March
29th, secured by 500 Col. Gas, 500 Con. Gas, 500 Nat'l Pr. &
Lij., 1600 Anarada, and 5^0 Paramount. The balance of this loan
was paid May 3rd. There was held in cash as a credit at the
date of the examination $137,5^6.50 arising from the sale of
Westinghouse stock on sundry loans shown in detail on Page 11.
This cash was not credited to the loans, but VBS held, no
doubt, for the purpose of buying other stocks when the opportunity was considered favorable. The
note shown in the
slow and doubtful schedules is an instance of stock specula^tion in an endeavor to recover a loss.
has been bankrupt for months. His note is still carried in the assets,
and there are frequent changes in the collateral securing the
In bank 156 the examiner's comment in I93O shows that this bank
also was following the practice of lending money to "straw men" for undesirable purposes. The quotation follows:
"The excessive loan and large line to
Bros. (Director
) is particularly subject to criticism. There is. no
financial statement on file.
. is in the leather business,
real estate, theatres, controls the
, Trust Co. and is interested in various other enterprises. Ee is a plunger and is
known to be a heavy borrower. How much he is worth cannot be

- 93 -

ascertained. Directors were advised that the excessive loan to
Bros., should be reduced to the legal limit immediately
and that the straw notes and accommodation loans should be
eliminated from the "bank at once. They were further advised
that credit infonnation regarding
should he obtained or
the line placed on a secured basis or liquidated. "

Criticized Demand Loans
Bank 172 was in the habit of carrying demand loans as a largo part
of its earning assets.

These demand loans were collateralled by stocks and

bonds but were ineligible for rediscount at the Federal reserve bank and in
spite of their demand classification, they proved difficult to collect.


early as 1923 this practice was criticized by the examiner as follows:
"It was suggested that large amount of demand paper could
be changed to time notes. At present time, bank has very little paper eligible for rediscount."
Two years later the same practice continued as shown by the following quotation:
"The bank continues to carry a large proportion of demand
paper, 6l$ of total loans being in this form. The apparently
large amount of past due paper is caused by the failure to collect interest on demand loans, which are billed quarterly."
In 192S it began to be apparent that the demand loans were frozen,
as shown by the following comment:
"The general character of the loans is slow and of capital nature. Past due paper is excessive both as to amount and
number. The greater proportion of bank's loans are demand, a
number of which have been carried without reduction over an extended period. It was recommended that a plan of amortization
be arranged for these loans in order to prevent their developing into frozen assets. There is no doubt but that this bank
has an unusually large amount of slow paper and action should
be taken to curtail accumulating any additional."
In the spring of 1929 a further description of these demand loans
was given, as follows:


"loans consist mostly of advances to local merchants, real
estate dealers and oil and gas operators. In many instances
the "borrowers worth is chiefly in real estate, and the loans
are of a capital nature, having been carried a long time with
little or no reductions. Credit information is wholly inade- '
quate, and several important loans were not supported by financial statements. Attention is directed to the large amount
of demand loans carried, J&$ of the total loans "being in this
f oim#"
At the last examination of the "bank made in April, 1931f the examiner1 s comments showed that the demand loans were still in the "bank's
assets, although other circumstances were directly responsible for the closing of the "bank,
"The institution is in an extremely non-liquid condition.
A large portion of the unsecured loans are "based upon real estate equities, and the collateral loans include a number of
purely speculative loans to individuals with little financial
responsibility. Many of the latter loans are under-collateraled
at present market prices. Due to a combination of circumstances,
which included sudden death of a director, a defalcation, and
friction among the hoard members, the "bank experienced a slow
run, and during the period from March 1, to date of closing the
examination, deposit liabilities declined $H90,000,00 in spite
of efforts of the management to regain the confidence of its
customers. Immediately after closing the examination, efforts
were made to sell the assets to two other local hanks. Having
"been unsuccessful in closing a deal, the hank was closed on
May k by the State Banking Department, and a temporary receiver
was appointed,"

Loans Collateralled b£ Bank*s Own Stock
or_ Stock of Affiliates
Several cases were found where banks either had made illegal loans
secured by their own stock, or had made loans to individuals and others to
assist in the purchase of the stock of affiliated banks or companies.


practices were subjected to severe criticism.
In case 155 loans were made to borrowers who purchased stock of
the bank at the same time.

Although there is no evidence in the examiner's

- S5 -

comments that the stock was actually pledged to secure the loanst the practice was criticized in 1930 a s follows:

. . . In further reference to loans originally made to borrowers who purchased stock of the bank at the same time, it should
" e stated that at the present time the total loan to these borb
rowers is $550,32^.65 which is $76,027*21 greater than on May 31,
1930, and $29,687.65 greater than when originally reported in
February, 193°• These loans were apparently all introduced by
. Checkings with reputable
credit men regarding
this man are not favorable, although no actual dishonesty charges
were made. He has been instrumental in introducing other borrowers since the preceding examination and some of their loans
are criticized herein. Many of these have come from the Tr. Co.
recently consolidated with the
, Bank.,r
In case l66 the bank had been endeavoring to sell 600 shares of
its stock to responsible outside parties who were believed to be able to
bring enough business to the bank to place it on a satisfactory earning
basis. Apparently this deal was not completed, and in 1930 it was found
that the bank had sold some of its stock to a penniless corporation which
borrowed the money from the bank with v t i h to make the purchase and pledged
the bank!s stock as collateral. The transaction was described as follows:
". . . The bank has a loan to
Inc., secured by 139 shares
of this bank's stock. This corporation has no paid in capital
and this stock is the only asset. This loan should never have
been granted, and taking the bankfs stock as collateral was
known to all of them to be unlawful,"
In case 219

t h e tanlc w a s

criticized in 1925 and again in 1928 and

1930 for having loans collateralled by stocks of affiliated banks.

In I92S

loans of this nature were made with 67O shares of stock of affiliated banks
as collateral, and by the spring of 1930 ttle number of shares of affiliated
bank stock held as collateral had been increased to 2,185.

In 1931 the

parent "bank located in the downtown section of the city was taken over by another barikf but as no provision was made for the absorption of affiliated
"baiikegthe oubject bank suspfcndod business* There is no record of what happened


to the loans secured " y stocks of affiliated "banks.
In case 15^ the "bank at two different times used its own funds to
support the price of its stock. In May, 1930f this practice was described
as follows:

• . • The settlement sheets in the bond department show numerous
transactions in the bank's own stock. Most of these items are
cleared the same day. It is admitted by President that support
has been given to the market for the bankys stock, but he denied
that there has been any speculation by officers or directors in
the stock. He claims that there has been a considerable bona
fide distribution of stock, which is still going on, that none
of those on the inside have disposed of any of their personal
holdings or profited by stock dealings."
This same bank, case l^kt

purchased the bonds of an affiliated

corporation to provide funds for that corporation to buy a group of banks.
This practice was described in May, 193°> a s follows:
". . . The illegality of the bankfs investment in the securities
of the
Trust has been repeatedly criticized by the Examiners
and by your office. There has been some reduction in the amount
of bonds originally purchased, but on account of lack of marketability, the bonds havo moved slowly, and no definite plan or
promise for their elimination from the bank's assets has been
submitted. The funds supplied to the Trust by the bank's purchase of the bonds havo been used for tho most part in purchasing the controlling interest in tho group of banks above named.
These banks were takBn over before the market crash last fall,
and at prices above book values and including large allowances
for good will. The price paid for the
Bank stock was especially high, and the condition of the bank requires a further
investment or contribution for its support. A detailed statement of the Trust, as submitted by the management, is shown in
the bond and stocks account. The item shown on this statement,
'Demand Loans Secured $127,S6S.75« is a note signed by President
and director
, secured by stocl^s and bonds valued
at about $150,000. President
, stated that the
stock shown in this statement was taken out by him personally
May 23th, in accordance with previous agreement. He further
stated that the stock was acquired by and came into the Trust
in connection with the purchase of the
Trust Co. An exchange of
National stock for
t Trust stock was offered
to the shareholders of the latter, and the
Trust was
caught with this stock which was not accepted by
shareholders when market values declined last November."


this practice was again mentioned in March, 1931, in the following

. . . The "bank's large investment in the
Trust debentures
has long been criticized as illegal and has been very undesirable also, representing as it does, inter-bank financing of a
nature which might prove disastrous in times of depression
such as now exist."

Profits Over Safety, Loans to Capture Business,
and Loans as Service to Community
These three general practices were not frequently mentioned by
the examiners, but where they occurred they usually led to difficulties.
Profits Over Safety. - The most important of the throe practices
was the emphasis on profits over safety.

In case 67 the examiner wrote in

"The present condition of this bank appears attributable
mainly to partial crop failures and general market declines,
and to a considerable extent to unwise business judgment on
the part of officers and directors thru a too generous policy
of extending credit generally, apparently always considering
profits and increasing of the business, rather than keeping
prepared for emergencies."
This bank suffered at the same time from the difficulties of declining commodity
Prices and from unwise loans to the owners of the bank.
In case 97 the emphasis on high earnings caused troubles beginning
in 1926.

In this case the examiner wrote in 1926:

"Management appears capable but in their zeal to show
a high earning power have over-stepped the bounds of conservatism in some instances and accumulated a rather large
proportion of criticized assets."
At the following examination the examiner wrote:
"The cautiousness that should have been employed has been
lacking to a certain extent in the desire to get new business.
The bank has not been able to command as select a class of
business as its volume entitles it to."


This "bank was also ambitious to build its balance sheet up to
large totals with the following results, as described by the examiner in
"Good, liquid bank credits in this town are limited in
volume, and it is most difficult to operate properly at this
point. This difficulty is accentuated in the subject bank by
the desire which appears to animate Vice President B. to have
a big bank. The business of the subject bank is 'forced,1
meaning by that that the deposits do not represent accumulated
savings of the community or reserves carried by depositors
against contingencies or against current requirements. An unusually large percentage of their deposits are 'float.1 Mr.
B. -should know that one cainnot skate continually on thin ice
with safety. He should know that he cannot do a *big business on the basis that his bank now has, n i
In some instances a desire to make money was supplemented by an
easy-going, amiable disposition on the part of lending officers, which
promptly led to difficulties.

This is well illustrated in case 6, where

the examiner wrote in 1921:
"The management of this bank is left entirely with the
Cashier, Mr. A. He is apparently an easy going sort of
fellow, anxious to make money, and in his eagerness to make
money it appears that he loses sight of the principal to a
great extent and can see only the interest or discount received. "
In this case

the liberal lending policy was in evidence at the earliest date

given in the case history, which was June, 1920,

At this tame the bank had

deposits of $356,000, loans of $^79»000» ^ l d ™a<s "borrowing $S7 f 000.


the period from June, 1920, to April, 1921, this bank*s loans continued at
approximately the same level but its deposits were reduced more than onefourth, and its borrowings increased 5° P e r cent, illustrating the frozen
character of its credit extension*
In one instance the cashier of the bank resorted to forgeries to
cover up losses sustained through unwarranted credit risks.

The cause of the

- 99 bank ! s

difficulties was described "by the examiner in 1922 as follows:

"The Cashier is resourceful "but inclined to take too
many risks, or rather they could hardly he called a risk,
more an attempt to finance too great a volume of business
on his limited resources. He explained that the extended
condition at this time is due to a change in county administration and the treasurer seeking other hank depositories.
The records reveal this "bank was greatly extended last
Later examinations describe the gradual recognition of the undesirable character of many loans in the bank.

The directors were not

active in correcting the situation and finally it was discovered that the
cashier had substituted forged notes for items which had been classified
as losses.
Loans to Capture Business. - Closely allied to the emphasis on
profits over safety was the attempt to capture business by making loans as
a matter of policy*

In case 6k the examiner wrote in 1921:

"Former Vice President W. used as poor judgment in making loans as it has been my privilege to observe, and Mr* X.
who came into the bank a year ago, while a good collector and
having a thorough knowledge of the bankTs customers has not
had suitable training for an active manager; in addition to
which he has only mediocre assistance
* the bank is enjoying more confidence than heretofore. Like
others here, it has suffered from an over-anxiety for business, little attention being given to class or quality, but
this is past history."
Case 112 was another instance of a bank very eager for business
and having an incompetent lending officer.

In 1922 the examiner wrote:

"Management has been too eager for business, with result
that many loans are frozen and heavy losses are likely to be
The next examiner wrote in 1923*
"Past and present management are anxious for business.
Many loans made as a matter of policy."

• - -loo -

Later in 1923 the same examiner wrote:
"Former President A. deceased. President D. is following
closely in footsteps of predecessors and conducting largely a
one-man "bank so far as he can handle matters. He appears very
easy in extending credit or maiding too many loans as a matter
of policy, and also very reluctant and timid in enforcing collection on criticised lines, apparently "being afraid he might
lose a customer directly or indirectly,,f
This hank was victimized " y its borrowing customers, as indicated
by the examiner1 s comments in 1927:
"He (the president) is one of the most pleasing men I
have had the pleasure to come in contact with, hut is inclined to let people impose on him, and some of his financing
is subject to criticism. He tries to help people and concerns who do not even do business with the hank, and anyone
can take up his time whenever they desire."
Later in 1927 a more drastic description of the weakness of the
lending policy was made as follows:
"President D, continues to dominate and apparently directors cannot control him. Bank is overloaned, and President D.
continues to mate loans that will prove very slow and also continues to try and finance everyone in the community. Regardless of advice he receives from examiners and experienced bankers, ho does not change his policies. I am afraid that if he
does not change his tvays he will find bank in a serious condition one of these days."
Service to Community, - Bank 69 was a case where loans were made
on the theory that the community was entitled to credit, rather than on the
basis of the financial standing and responsibility of the borrower*


difficulties arising out of that policy were set forth by the examiner in
1921, as follows:
"The directors of the institution are all farmers, each
being actively engaged in farming operations. They have gone
upon the idea that the fanners in their vicinity are entitled
to the credit which they have received, rather than upon the
strict business standpoint as against their financial standing. In fact, I feel that the directors have been very lax
in their efforts to ascertain the true standing of the note

- 101 -

makers of their institution. I do not "believe that they
fully realize their duties and responsibilities of the
position which they hold*1*

Miscellaneous Lending Errors
In the case histories of suspended banks a number of errors in
loans were described which cannot be classified.

Several of these are illus-

trated by quotations below, but it should not be considered that the errors
found in the case histories complete the catalog of bad lending practices.
In spite of the wide geographical distribution of the case histories, it
should not be assumed that they typify every weak lending practice in all
classes of communities and under all conditions.
Loans to a _Get~Rich-Quick Promoter. - The following quotation from
case 10 illustrates the difficulties into which a bank: was projected when it
came under the influence of a certain type of promoter.

The examiner describes

the promoter as a man of striking personality, fluent speech, and empty

The following is a quotation from the examiner's comments in 1926:

"The date of this examination was advanced in order to
determine more definitely the connection with the bank of one
Blank of X, and, as far as possible, clean the bank of any
paper bearing the taint of his wildcat operations. Some
$6,000 of such paper was disclosed in my last report of-examination, at which time I had only a slight suspicion of
the character and credit standing of this party. Tor full
information regarding this subject fsee file furnished by
Chief Examiner.1 The J. line listed in schedule of excessive
loans has the taint and earmarks of a Blank promotion. President K misrepresented this line to me in my last examination,
and at that time I had no occasion to question the information he gave me. This examination disclosed that the total
line of the J ! s aggregated more than $60,000, $1*5,000 of this
amount was made up of purported acceptances of lumber drafts
represented to be* legitimate sales. Upon discovery of the
misrepresentation, I demanded payment of the entire line.
2?his was partly accomplished by removal of lumber drafts and
requiring President K. to furnish additional security for the
remainder of line, $15,000. To raise this amount of money,

- 102 ~

Mr. K. called on the Y Bank of X, one of Blank's "banks for
assistance. They sent Mr. L, its Vice President, to work
out plans of refinancing for him. A company was formed
made up of local people and directors of the hank who made
a note for $H5,000, taking as security such lumber as the
drafts represented and a blanket mortgage from the J!s on
all of their unpledged holdings. This note is to he handled
by the X Bank for the new company without recourse on this
bank. This will retire a like amount of borrowed money now
being carried for the bank by X. I learned during the course
of this examination that Blark was instrumental in K. acquiring control here. Last October K. bought out the C. interests,
consisting of 151 shares, for which he paid $1^5.00 per share.
Blank made the loan through the X Bank which now holds the
stock as collateral; in addition, K. holds 19 shares clear.
Not believing this a safe combination, I had K. execute an
option and proxy to Director M. for the 151 shares of stock
now held by the X Bank. This agreement or proxy is for a
period of twelve months. I believe that this action will
curb all future operations of Blank with this bank. I was
unable to remove from the bank at this examination the N.
and 0. note of $1,500; the P. Company note of $3,000 and the
note of Blank and P $1,000 all of which were taken into the
bank upon the recommendation of Blank. If collectible, I
believe that the Directors will see that they are paid at
maturity. Q, a brother-in-law of K, and formerly connected
with this bank as assistant cashier, bought out the Z Bank
here in recent months using the same plans of high financing
as was used by K. I am of the opinion that his bank is carrying same dangerous lines that are found here. Blank came
here some time in last October; he is reported to be a man
of striking personality, and to have a strong line of hot air.
It seems that he promised the people many things, among these
being a hotel to cost not less than $150,000, he to supply
$100,000' if they would raise $50,000. He pointed out to them
the many natural resources which were there for the taking,
etc., etc. As a result, he got the little community of 5°°
or 600 people very much worked up and excited, with the result that they began trading in real estate among themselves
believing in values which had nothing to back them up. This
condition has generally inflated credits; the bank has taken
on its share and the result is I find it badly extended."
Loans Secured by< Life Insurance,. - In case 1 the bank management
followed the practice of lending freely, and then securing r^eak lines by
life insurance policies. While this practice cannot be said to have closed
the bank, since the primary reason for its failure was a large defalcation
" y the cashier, it was a very expensive practice for the bank.

Loans with

~ 103 -

life insurance security were first mentioned by the examiner in 1921 when
he wrote:
"The Cashier says he 'feels so safe1 if he can secure
loans with life insurance; that life insurance is a Jhobby!
with him. The only way, apparently, to collect a good many
of these loans is to M i l off the borrowers."
The drain on the bank's earnings, as a result of these loans, became very
apparent in 1923 when the examiner described the situation as follows:
"While still loaded with many frozen loans, it appears
that everything possible is being done to prevent a loss
and these loans will be worked out as rapidly as possible.
Many of these loans are secured by life insurance policies
costing them approximately 3M per annum which of course
materially cuts down their earnings."
In I92U further deterioration in this class of loan was indicated
and the examiner wrote:
"Their condition is far from being satisfactory - their
trouble appears to be the result of relying too greatly upon
moral worth and extending credit without security beyond the
limit and ability of mater to pay - when determined as doubtful bank officers attempt to secure by taking out life insurance, carrying the premiums in most cases, the conclusion of
which produces a dangerous, slow workout condition, but which
is beyond the ability of the Directors to solve immediately."
By the beginning of 1925 it appeared that many of these loans
secured by life insurance policies were in reality losses, but the examiner merely classified them as doubtful assets.

His statement follows:

"The classification of loans is the result of a canvass
of the notes, with the directors shown as being present. The
lines classified as doubtful are in reality losses, as the
directors admit the present insolvency of the makers, who are
without present financial worth to either pay or secure and
the ultimate liquidation of which is dependent upon the life
insurance policies taken out to secure or an inheritance from
some near relation most of whom are at present enjoying excellent health."

At the same time the examiner stated that actions by the manage-

~ 11- 04

.ment "bordering on criminal intent had been indicated.

His statement follows:

"The Cashier is doing all he can to eliminate items of
criticism, some of his methods, however, are questioned, for
instance, in the amount of estimated losses at last examination were a lot of small notes aggregating $3,000. endorsed
by E, both makers and endorser of which were admitted insolvent, after charging off the various small notes (2 name
paper) one note for the aggregate $3,000. was executed by
the endorser E, secured "by life insurance with no cash value,
reinstating the amount charged off. In spite of such practices and the large amount of questionable, doubtful paper
the directors withdrew $5,000. from surplus fund in order
to provide and declare a dividend."
Automobile Paper. - In 1921 many banks experienced difficulties in
collecting notes purchased from automobile dealers arising from the sale of

The methods of financing had not been standardized and many notes

were taken for too large a portion of the purchase price of the car and without regard to the ability of the purchaser to pay.

Two examples of this

class of loan were mentioned in the list of 120 suspended banks used in this

In case 63 the examiner wrote at the close of 1921:

"The Loans and Discounts are of an exceptionally slow and
stagnant character, largely due to the purchase of considerable
Machinery and Automobile sales paper."
In case 57 the examiner comments on the special undesirability
of automobile paper in a coal mining town where a strike is possible•
comments in 1921 were as follows:
"Also buys much automobile paper from directors B and A,
both dealers. Bank makes additional 2$ to kfo on these notes;
aside from fact that some arc overdue there is no serious
criticism. Your examiner has roquosted board to reduce amount
of automobile paper carried and have also requested them not
to make or buy any of this paper maturing later than April 1,
1922, when it is feared there will be a strike of coal miners.
Should this strike occur in April and this bank would be holding a large amount of small monthly payment notes of miners,
or even business people whose business depends to a large degree on mine pay rolls, the bank would be left holding some undesirable paper. Directors claim automobile season is over and
amount will be reduced materially every two weeks from now on
through the winter."




Only one "baric of the 1921-1930 group of suspensions selected for
this study was criticized "by examiners because of its investments.
most of the "banks in that group had negligible amounts of bonds.

In fact
In the

case of the one bank criticized the bond issue was the outgrowth of a poor
loan and could not "be construed as part of the true investment holdings of
the "bank.
Among the 105 banks selected from the 1931 suspensions, however,
a number had large "bond accounts, and serious troubles arose from their
efforts to make their investments yield too high a return.

This resulted

in bond speculation, trading out of high-grade issues into low grade issues
during periods of rising "bond prices, and the purchase of undesirable "bonds
for the sake of a high return.

Nearly one-third of these "banks were criti-

cized by examiners more or less severely for their investments, and a number of others held bonds of poor quality.
Bond depreciation was the primary cause of failure in b of the
105 banks selected from the 1931 suspensions, and an important contributing
cause of failure in k other cases.

These 10 banks, where bond difficulties

- 105 -

- io6 -

were either a primary cause or a major contributing cause of failure,
varied widely in size, ranging in loans and investments from $U00,000
to $3,000,000 at the time of their last examinations.

Five out of

the six banks whose failures were caused primarily by bond troubles
had more investments than loans.

In the k banks where securities

difficulties were an important contributing cause of failure, but
not the primary cause, investments were about one-half as large
as loans.
A study of the causes of bank failures in one district
in 1932 shows that bond depreciation was a much larger factor as
a cause of failure in that year than in 1931- .
While the failure record of 1931 did not indicate the
seriousness of the effects of the major decline in bond prices, a
study of the investment accounts of the suspended banks showed
that serious depreciation had occurred in .the holdings of nearly
all grades of bonds.
To isolate and analyze the weaknesses in the investment
portfolios a list of the bonds for each of the 105 banks used in
this study was secured for three different dates:

at the last

examination before failure, one year earlier, and two years

By studying the character of the bond lists of these

banks in 1929, 1930, and 1931, together with examiners1 criticisms,

- 107 -

it was possible to determine the quality of bonds that these banks were
buying during the period of prosperity.
The chapter is divided into three parts as follows:

(l) qual-

ity of securities and depreciation; (2) faulty investment practices; and
(3) bonds chiefly responsible for 1931 depreciation.

Quality of Securities and Det>reciation
Bond Quality Index. - The first step in the study of the bond
accounts was to develop an index which would measure the quality of the
bonds in which these banks invested.

The method used was originated by

the Federal Reserve Bank of New York, and consists of grading the bonds
of a bank according to their rating.

Bonds of the two highest ratings

are graded 100 per cent; bonds of the third rating, 90 per cent; bonds
of the fourth rating, SO per cent; bonds of the fifth rating, 50 per

bonds of the sixth rating, 10 per cent; and all other bonds and

securities receive a grade of zero.

The ratings used are those assigned

by important rating services, such as Moody's, Pitch, Standard Statistics,
or Bond and Quotation Service.

For the soke of uniformity the various

rating nomenclatures used by these services were converted into a uniform

classification developed by the New York Federal Reserve Bank

and ranging from la, which is the highest

- 108 ~

rating, to IVc, which is the lowest rating.

The following table will illus-

trate the manner in which the classification has been made uniform.

Table « & - Bond Rating Symbols
New York
Federal Reserve
Bank ratirq

Bond and
Statistics j

& Fitch


























In addition to the rated "bonds there are subclassifications in
the New York schedule for defaulted securities, stocks, and "bonds either
not rated or not listed.

United States "bonds to secure circulation and

the miscellaneous items, which are commonly included under the general
heading of "bonds and securities in a "bank "balance sheet and which include foreclosures, claims, judgnents, etc., are omitted from the calculation of the "bond quality index.

Bonds which a "bank had "borrowed or

had purchased under resale agreement were included in the "bond quality
index if they were included in the examiners1 lists.

It was impossible

to identify such "bonds, hut they were not an important item.

Since these

bonds are usually of the highest grade, their inclusion probably raised
the bond quality indexes of a few hanks.

- 109 -

In making the three annual "bond quality indexes for each "bank,
the "bonds were rerated each year.

This was important 'because there was a

general tendency for "bonds to deteriorate during these years.

A tank which

had a high "bond quality index in 1929 and neither "bought nor sold a "bond
in the next two years would usually have had a lower "bond quality index in
1931 than in 1929.

A typical case, 158, is given in Table Sf in order to illustrate
the method of computing the bond quality index.

This illustration shows the

1929 "bond holdings of a hank with a medium sized portfolio and a distribution
of securities among most of the rating classes.
Table -8?-- Security Analysis of Bank 158


la - U.S.
la - Other
I la
Seal e s t a t e
Not r a t e d
Not l i s t e d

Book value


claims, j u d g ments, e t c .



Per centj
of total)

Mar]jB t



2jfO,175 00
366,772 5q






6s,740.00! -i9.O6S.5O




D e s i r a - Index of
b i l i t y quality
weights (2 x 5)










[$1,222,894.35 S-91,006.01

Do not i n c l u d e U. S. Governments pledged t o secure c i r c u l a t i o n , F e d e r a l
r e s e r v e bank s t o c k , or s e c u r i t i e s of company owning bank b u i l d i n g .

- 110 -

In the first column of the illustration is given the "book value
of the securities owned " y the "bank classified " y ratings.

The hank had

only $2H,719 of United States bonds excluding circulation "bonds.


principal holdings consisted of bonds of the Ila and lib ratings.

In the

second column are given percentages showing what part of the total security
holdings were represented " y securities of the various ratings.


sures, claims, judgments, etc., are not included in total securities for
this imrpose.
The third and fourth columns, which are not used in computing
the "bond quality index, show the market value of the various grades of
securities held and the appreciation or depreciation in the "bond list when
hook value is compared with market value, A fev/ bonds in the "bank's list
were given a market value of either par or "book value because no current
quotations could " e found " y the examiner.

In those bonds there was probably

some depreciation which does not show in the table.

The total depreciation

in the bond account is, therefore, somewhat understated.

It will be noted

that this bank had a depreciation of $91,006 at the time of this examination.
Column five lists the desirability weights, or percentages assigned
to the various grades of securities.

In column six the figures of columns

two and five are combined by multiplication.

In other words, the figures

in column two are weighted according to the desirability or quality of
the various grades of bonds.

The total of the figures in column six con-

stitutes the index of quality of the bond accounts.

In this particular

- Ill -

bank, the quality index is 56.5 per cent of a perfect score.

If all of

the "bonds had "been of la or lb grade, the index of quality would have been
100 per cent.
The banks that failed in 1931 and were covered by this study fell
far short of a satisfactory record in the matter of bond investments.


IS of the 105 banks had bond quality indexes over 90 per cent at the last
examination before suspension, and only 30 had bond quality indexes over
80 per cent.

Their records at earlier dates were not much better.


26 had bond quality indexes over 90 per cent one year prior to their last
examination, and only 27 had bond quality indexes over 90 per cent two years
prior to their last examination.
bond quality indexes of $0 per
or worse.

On the other hand, 35 of these banks had




lower at the time of their'last ex-

This would indicate that their average bond holdings rated lib
One year before their last examination 27 of the banks used in

this study had bond quality indexes of 50 per cent or lower, and two years
before their last examination 17 had bond quality indexes of this very unsatisfactory character.
Unsatisfactory as the above figures show the bond buying habits
of these banks to have been, they do not give an adequate picture of the
holdings of those banks which were heavy bond buyers.

In the list of 105

tank failures were a group of ^9 banks whose bond holdings were small or

Banks with very small bond holdings frequently hold nothing

tut United States Government bonds or high-grade municipal bonds, which
are held for special purposes such as collateral for borrowed money or
collateral for public deposits.

Some of these banks hold nothing but

- 112 -

United States Government bonds simply "because they do not pretend to loiow
anything about other bonds and wisely prefer to place the small amount of
their investment funds in Government securities whose soundness is beyond

Other banks hold United States Government bonds to improve the

appearance of their balance sheets.
For purposes of more intensive study the banks used in this survey were divided into two grovips—those having marketable securities (at
market prices and excluding circulation bonds and miscellaneous items)
amounting to less than 15 per cent of their deposits in I929, and those
having marketable securities amounting to 15 per cent or more of their
deposits in I929.

The dividing point between large securities portfolios

and small ones was arbitrarily fixed at 15 per cent of deposits, without
undertaking to take a position on the proper quantity of marketable bonds
for a bank to own.
In Table 23 is shown the distribution of the banks in the first
group (those with small bond accounts) according to the quality indexes of
their bonds.

The quality index distribution is given for three dates:


last examination before suspension, one year earlier, and two years earlier.
It will be noted that 12 of these banks with small bond accounts had bond
quality indexes ranging from 95»1 to 100 per cent. Most of these banks
had few bonds other than United States Government securities.

Two of

tiie banks had no securities at the last examination before suspension.
The remainder of the banks in this group had bond quality indexes ranging
all the way from 95 to zero, showing that there was a great disparity among
these banks in the grades of bonds held*

Table jgfi- Bond Quality Indexes of Banks Having Less Than 15 Per Cent
of Deposits in Marketable Securities in 1929
Number of tanks
Last examina- 1
tion before
One year

Bond qualityindex

Ho securities















i ' °






1 *

Two years

Tor the hanks having larger hond accounts, that i s , marketable
"bonds amounting to 15 per cent or more of deposits in 1929, the record
of bond "buying p r a c t i c e s is even less satisfactory than in the group of
fcanks with small hond accounts, as i l l u s t r a t e d in Table *$.

Only 3 out

56 banks in t h i s group had bond quality indexes above 90 per cent at

the l a s t examination before suspension, and only 10 had bond quality in~
dsxes above 90 per cent two years e a r l i e r .

The remainder of the banks


owned "bonds whose average quality ranged from zero to 90 per cent, and
in a large proportion of these "bants the quality indexes were "below
50 per cent.

Tahle 1(3-- Bond Quality Indexes of Banks Having 15 Per Cent or More
of Deposits in-Marketable Securities in I929

Bond quality

Number of "banks
Last examina- 1
tion "before
One year






Two years






5 1
















(^One "bond list not furnished to the Committee.

A study of the relative qualities of the "bond accounts of "banks
i& various economic subdivisions of the country indicates that the "bond
accounts of "banks in the farming communities were of hetter grade than

~ 115-

those of banks in the cities and mining communities.

One explanation of

this fact is that the bond accounts of banks in the farming communities
were usually a smaller percentage of deposits than in the case of the
city banks, and consequently, it was probably true that government bonds
constituted a larger percentage of the total bond holdings of rural banks
than of city banks*

It is customary for most banks to have a "backlog" of

United States Government bonds and then, if circumstances permit, to invest other available funds in general market securities. A second factor
accounting for part of the better bond quality indexes of banks in the
farming country is that those banks are large recipients of public deposits of minor government subdivisions.

The government officials re-

quire collateral or surety bonds for these deposits and generally designate high-grade municipal and other securities for this purpose. Unfor*
tunately, it is impossible to isolate pledged securities for special analysis,

A third reason which appears to have accounted for some of the un-

favorable comparison between the bond habits of city bodies and country banks
is the fact that the city banks were more exposed to speculative influences,
and this speculative sentiment pervaded their bond policies.
Using the bond quality indexes two years prior to failure as
the best test of the bond buying habits of the banks with the larger bond
accounts, it was found that 7 out of 28 banks in farming communities had
bond quality indexes above 90 per cent, whereas only 1 bank out of 11 in
the large cities had a bond quality index above 90 per cent, and only

- 116 2 out of 10 banks in the smaller industrial and suburban c i t i e s had bond
quality indexes of this grade.

No tanks in the mining comiminities had

indexes above 90 per cent.
Securities Depreciation. - With the available material t h i s study
attempts to show the total amount of depreciation in the securities accounts
of the hanks which failed and the classes of hanks s\xffering most heavily
from s e c u r i t i e s depreciation.

Two methods have teen used to measure the

depreciation in the securities accounts of the sample hanks.

The f i r s t v/as

to compare the amount of depreciation with loans and investments and with
capital funds.

The second method was to compare securities depreciation

with the hook value of the securities owned.
The s e c u r i t i e s whose depreciation was compared with loans and investments and with capital funds were the t o t a l bonds and securities of each
bank, excluding circulation bonds.

Circulation bonds usually s e l l at a

premium, and t h e i r price fluctuations are subject to influences quite different from those affecting other s e c u r i t i e s .

Table 3# ~ Securities Depreciation per $100 of Loans and Investments
(Securities do not include circulation bonds)



Number of franks
Two years before Last
last examination


0.1 - 1
1.1 - 2
2.1 - "

3.1 - 4
4.1 - 5
5.1 - 6
6.1 - 7
7.1 - 8
8.1 - 9
9.1 - 10
10.1 - 15
15.1 - 20
20.1 - 25
25.1 - 30
30.1 - 35












- 117 Depreciation on securities, as shown in Table 25, was not large
relative to loans and investments, even at the last examination of the sample

All but 9 of the banks had depreciation in their securities accounts

of less than 10 per cent of loans and investments at their last examination.
Of the S banks with depreciation of more than 10 per cent of loans and investments only h had depreciation of over 15 per cent of loans and investments, and only 2 had depreciation of more than 25 per cent of loans and in»vestments.

Two years before their last examinations none of the sample

banks had depreciation in their securities accounts of more than 10 per
cent of loans and investments#
Securities depreciation is compared with capital funds in Table

Capital funds include the capital stock, surplus, undivided profits,

and sundry reserves of the failed banks.

Table 26 - Securities Depreciation per $100 of Capital Funds
(Securities do not include circulation bonds)

Number of "banks
1 Two years before Last examination
I last examination








0.1 - 10
10.1 * 20
20.1 - 30
30.1 - 1 0
U0.1 - 50
50.1 - 60
60.1 - 70



70.1 - so
80.1 - 90

90.1 - 100




150.1 - 160
160.1 - 170

170.1 - iso









- US -

The second method of measuring securities depreciation was to compare the depreciation with the value at which the securities were carried
on the hooks of each hank.

The investments used in this comparison are

those used in constructing the bond quality indexes. United States Government "bonds held by these banks as collateral for national bank notes and
miscellaneous items, such as foreclosures, claims, judgnents, tax certificates, etc., were omitted from this tabulation.

The miscellaneous items

excluded from the total investments were usually a very small part of the
total investment account, but there were a few exceptions.

In k of the 105

failed banks used in the I93I study, all or the greater part of the bonds
and securities (excluding circulation bonds) consisted of these miscellaneous
At the time of their last examination before suspension the 105
banks owned securities (excluding circulation bonds and $^30,000 of miscellaneous items) with a book value of $69,753*972.

The market value, however,

was only $59,779,938, resulting in a depreciation of $9»97l^C31** or 1U.3
per cent.

One year earlier the book value of the securities of these banks

was slightly higher and the depreciation amounted to only 7.3 per cent.
Two years earlier the book value of the securities of these banks was about
$2,000,000 higher than in I93I and the depreciation was only 3.S per cent.
The figures for the three dates are given in Table |S.

(The figures on de-

preciation do not include depreciation on securities where no market price
"is quoted.

Such securities are usually carried at book value in the ex-

aminer's tabulation of market value.

The bonds with no market are usually

& very small part of a bank's investments.)

- U9-

Table IjE. - Investment Accounts of 105 Failed Member Banks
A - At the Last Examination Prior to Failure
(excluding circulation bonds and miscellaneous



Banks having marketable investments
amounting to 15 per cent or more of
deposits in 1929
Book value 1 Marist value Depreciation as per cent
of book value

12 failed banks in c i t i e s
over 100,000 population $42,116.99S.99;$36,520,936.72 $5,596,062.27
10 failed banks in other
industrial and suburban
5,572,119-35 4,289,917-65 1,288,201.70
6 failed banks i n mining
4, 554,190.^7 3,900,003.51;
6 failed banks i n north1,540,928.66J
eastern farming region
22 failed banks in other
farming regions


$59,963,9^9.67 $50,880,073.95! $9,083,875-72



Banks having marketable investments
amounting to less than 15 per cent of
deposits in 1929
4 failed banks in c i t i e s
^over 100,000 population $ 6,379,713.97 $ 5,933,710.73U
o f a i l e d banks in other
industrial and suburban
1,562,664.41 1,398,498.96|
2 failed banks i n mining
failed banks i n north- |
eastern farming region
33 failed banks in other
farming regions










$ 9,790,022.39 $ 8,899,864.02; $ 890,158.37
Total—all banks



$69,753,972.06j $59,779,937.97 $9,97^034.09


- 120 -

21 .
Table f£ - Investment Accounts of 105 Failed Member Banks
B - One Year Prior to Last Examination


(excluding circulation Banks having marketable investments
bonds and miscellaneous items)
amounting to 15 per cent or more of
de-posits in 1929
Boole value

12 failed banks in cities'
over 100,000 population
10 failed banks in other
industrial and suburban
0 failed banks in mining
communit ies
6 failed banks in northeastern farming region
22 failed banks in other
farming regions

Market value


as per cent
of book value

$44, 124,432.7^ $41,071,352.91 $3,053,079.83

















$61,230,933.^ $56,662,215.02 $4,568,718.42


Banks having marketable investments
amounting to less than 15 per cent of
deposits in 1929
4 failed banks in c i t i e s
over 100,000 population
o_ failed banks in other
industrial and suburban
2 failed banks in mining
4 failed banks in northeastern farming region
33 f a i l e d banks in other
farming regions

$ 5,35^,028.50 $ 5,164,479.50, $ 189,549.00:
















$ 8,671,632.41 $ S,l69,3S3.S3 $ 502,268.58
Total—all banks



$69,902,565.25 $64,831,573.85 $5,070,987.00


- 121 -

Table %-

Investment Accounts of 105 Failed Member Banks
C - Two Years Prior to Last Examination

(excluding circulation "bonds and miscellaneous items)

Banks having marketable investments
amounting to 15 per cent or more of
deposits in 1929


Book value

12 failed banks in cities
over 100,000 population
10 failed banks in other
industrial and suburban
0 failed banks in mining
6 failed banks in northeastern farming region
22 failed banks in other
farming regions

Market value

as per cent
of book value

$42,853,377-29 $4l,53S,629.54 $1,314,747.75

















$61,728,906.27 $59,195,324.34 $2,533,581.93


Banks having marketable investments
amounting to less than 15 per cent of
de-posits in 1929
4 failed banks in c i t i e s
^over 100,000 population $ 6,215,303.0^ $ 6,122,245.82 $
0 failed banks in other
industrial and suburban
1,5^3,239.01 1,488,507.47
2 failed banks in mining
* failed banks in northeastern farming region
33 failed banks i n other
farming regions










$ 9,359,680.55 1 9,682,353-19 |$ 177,327.36
Total—an banks



j $71,538,586.82 |$6s,877,677.53 $2,710,909.29


- 122 -

The percentage depreciation in all three years was greater in
"banks with large security holdings than in "banks with small holdings.
Banks having marketable investments amounting to 15 per cent or more of
deposits in I929 had depreciation in their securities accounts at the
last examination "before suspension of 15.1 per cent, whereas "banks having
marketable investments amounting to less than 15 per cent of deposits in
1929 had depreciation of only 9»1 per cent*
Banks in various economic groups experienced marked differences
in the per cent of depreciation in their investment holdings. Among the
banks with larger investment holdings, "banks in the large cities made the
best record, with a depreciation of only 13-3 P e r cent at the time of their
last examination*

Banks in the mining communities ranted second, with a

depreciation of lU.H per cent.

Banks in the southern and western agri-

cultural sections ranked third, with a depreciation of 15»9 Ver


Banks in the smaller suburban and industrial communities were fourth, with
a depreciation of 23.1 per cent.

Banks in the northeastern agricultural

section made the poorest showing, with a depreciation of 30.4 per cent.
-Among the banks with small investment accounts, the record was
quite similar, with banks in the large cities having the best record and
banks in the northeastern agricultural section having the worst record.

Faulty Investment Practices
This section describes and illustrates the more important mistakes in investment management contributing to the poor quality of the


bond lists found in the 105 "banks*

To describe the investment mistakes

a combination of examiners1 comments and illustrations from the "bond
lists of representative banks has been used.
Bonds Bought for Yield* - A common mistake made by these
banks in handling their bond accounts was to place the factor of
yield above the factor of safety of principal in selecting issues.
This ' weakness was not mentioned by the examiners in their criticisms
very frequently, but a study of the bond lists of these failed banks
shows that the criticism would have been merited in many instances.
The examiners did not begin to criticize the purchase of securities
on the basis of yield until the last year or so prior to suspension.
The following is a typical criticism on this point, and is taken from
the April, 1931, examination report of bank 157.
". . . the real malady lies in the bond list where yields
have been primarily considered and secondary reserve is
a forgotten quality. Depreciation in the class of bonds
held has increased staggeringly between examinations.
The bank seems to be a mark for bond salesmen with the
usual result to the bank."

- 12U ~

As a result of "buying for yield rather than for safety,
this hank: had a "bond quality index in 1929 of 60.2 per cent.


the time of the last examination before failure it had declined to
31 • 2 per cent.

It is very evident that yield was an important fac-

tor in the selection of the bonds of this hank, since the average
yield on the entire list at hook value was 6.9S per cent.

It was

also very evident that safety was a secondary consideration, for
the average rating of these "bonds wa3 only slightly abovo lib.
This was also indicated by the bond quality index of 60.2 per cent.
Almost the entire list consisted of weak foreign and public utility

There was only $1,000 of United States bond3 in the entire

list which totaled more than $125,000.

- 125 -

In periods of depression low grade "bonds decline in price much
more than enough to offset any additional income which may have been
received during the period of ownership of the bond.

The record of what

happened to the price of those bonds which this bank held from 1929 until
the time of its failure will serve to illustrate this.

In thi3 bank's

portfolio a group of $46,380 of bonds was held through the two year period
prior to last examination.

The income from these bonds during the two year

period was $5,695, but the depreciation, comparing market value in 1931 vith
book value in 1929, was $30,515.
Bond Trading. - Bond trading in the language of bankers generally
refers to the practice of selling bonds at a profit in a rising bond market
and reinvesting the proceeds in bonds which are selling at a discount.

In a

period of falling bond prices these banks generally sell those bonds with the
smallest depreciation in order to avoid taking losses.
involves two mistakes in policy:

Usually this practice

(l) Selling high-grade issues and reinvest-

ing in securities of lower grade; (2) retaining poor bonds with large depreciations hoping to sell these securities later at more favorable prices.
During times of rising bond trices the faults of bond trading
are masked by the large immediate profits secured by the sale of bonds
which are quoted at higher prices than the value at which they are carried
on the banks' books.
from bond trading.

In case 158 the examiner commented on the profit

Nevertheless, his comments in January, 1929, showed

that he was aware of the risk of this practice.

Eis uneasiness was well-

founded, because within the next year
•become very apparent.

the evils of "bond trading had

His comment follows:

"The hank continues to profit considerably hy its policy
of actively trading in "bonds, many of which are of a
speculative character. Profits on sales of securities,
since the preceding examination, increased the profit
and loss account "by over $30,000. It is Relieved that a
responsible officer in one of the large
trust com**
parties is advising President
in this connection.
While the profits from this or any other legitimate
source are "badly needed, management has been advised
that the corresponding risk mast not "be overlooked."
In bank 157 • tto examiner commented on the losses arisiig from "bond
trading in the summer of 1929 as follows:
"Bond depreciation at present aggregates $12,te>S.75
although depreciation of $5,55°i and losses on "bonds
sold $1,321.58, have "been charged off since last examination. This position in the "bond account has resulted from the fact that in the past the hank has
actively traded in "bonds, taking profits hut allowing
losses to remain in the "bond account."
One illustration from the hank hond portfolios will serve to
show the dangers and mistakes of hond trading.
157 is used.

For this purpose


In June, 1929, this hank held $125,6^5 of bonds at hook

The market value of these bonds was $11^,702, showing a depre-

ciation at that time of $10,9^3, or 9 per cent.
teen months

During the next fou3>

bonds were sold from this list with a book value of $53,632.

The bonds which were sold were those with the smallest depreciation,
indicating that the bank was selling its better securities and retaining
its poorer securities in the hope that the price of the latter would
recover in time so that the bank would not find it necessary to write off
& heavy depreciation.

This proved to be a forlorn hope, because during


tho period from June, 1929, to August, 1930, the tank mote off $8,6l0, or
12 per cent of the hook value of the bonds which thoy retained, and yet
the depreciation on the "book value of those "bonds in August, I93O, was
$11»565, which was $3,852 larger than the depreciation on the Bame bonds
at t h e i r higher hook value in June, 1929.

It i s thus seen that i t was an

expensive policy to retain these low grade bonds in the hank's p o r t f o l i o .
During the same period (from June, 1929, to August, 1930)
hank purchased "bonds with a hook value of $50,236.


The "bonds which they

hought were of a lower average grade than the bonds which they Bold, as
shown by the following tabulation.
Table 4g"~ Bonds Sold and Purcliased "by Bank 157
Between June, 1929, and August, I93O



$ 1^,487.50







During the- period from August, I93O, to November 1933-, tha same
bond practices were followed by this "bank with similar r e s u l t s .
this period

bonds t o t a l i n g $75,254 at book value were held in the p o r t -

folio continuously.

In August, 1930, the depreciation on these bonds was

$8,604, or 11 per cent of book value.


Between August, I93O, and November,

9 3 l , the bank wrote off $6,469, or 9 per cent of the book value of those


However, the amount written off did not equal the decline in the

market value, and in November, 1931, the depreciation on the same bond3
as compared with their lower hook value was $35,61+5, or 52 per cont.
In this period

the hank continued the policy of selling its

better bonds; for example, it sold during the year $38,385 of bonds at
1930 "book value, with a depreciation of only k per cent, as compared with
an 11 per cent depreciation on the bonds which they retained.

As in the

preceding year, the quality of the bonds purchased was lower than the
quality of the bonds sold.

This is shown by the following table,

Table -**£-- Bonds Sold and Purchased by Bank I57
Between August, 193^1 s^cL November, 1931


$ 9,1+50.00





Convertible Bonds, - Several banks lost heavily through investing
*heir funds in convertible bonds. A convertible bond is a bond which can
be traded for stock of the same company under certain conditions.

As the

price of the stock advances, the bond can be profitably converted into
shares of stock, while if the price of the stock declines, the holder of
the bond can retain the bond, and in that way, hold a lien on the assets
°f the company issuing the bond, which ranks ahead of the stockholders1

The weakness of convertible bonds is that usually the holder

sacrifices something in the way of safety in exchange for tho possibility
of profit from a rise in the price of the stock.

Convertible "bonds are

often "junior liens" and are not much "better than tho stock into which
they can be converted as regards safety of the principal.

Some "banks

attempted to combine speculation in stocks with investment of the funds
under their management, with disastrous results.

In bank 155, $711,331

was invested in convertible bonds in September, 192% out of a total bond
account of $l»593t573 at took value. At that time

the convertible bond

section of this list appeared to be much more desirable than the other
investments, for the convertible bonds had an appreciation of $136,000,
whereas the remainder of the bonds had a depreciation of nearly $3U,000*
It should be mentioned that the convertible bonds were carried on the
bank!s books at a price above par, and in some cases, the carrying prices
were higher than the call price for the bonds.
By October, 1930., the relativo desirability of convertible bonds
and other securities had been completely reversed*

The bank had purchased

a few more convertible bonds, so that its convertible bond list at book
value totaled $71+7,526, out of a total bond account of $1,973,813.


market value of the convertible bonds had decreased much more sharply than
the market value of the other securities owned by this bank, so that there
^as a depreciation in the convertible list of $119,701, or 16 per cent, of
book value, whereas the remainder of tho bond account showed a depreciati o n of only $87,893, or 7 per cent.
By August,1931, the plight of the convertible bond section of
^kis bank's holdings had become much worse*

Some of them had been sold,


and the book value of those held in August, 1931, was $627,2UH.

The depre-

ciation on these bonds was $250,861, or kO per cent. Many of the other
bonds' laid by this bank had been sold by this time, so that the total
bond account at book value was only $1,268,975, Many of the better grade
bonds had been sold.

The depreciation on the remaining bonds, other than

convertibles, was $217,789, or 3U per cent.
The list of convertible bonds held by this brink contained many
low grade issues, but even in the highest grade convertible issues it made
some very bad mistakes.

Tor example, in 1929 this bank owned $75,000 of

one bond issue, the call price on which is 105» and yet the bonds were

on the books at 137«3. At that time the bank probably thought

that it had a very satisfactory investment, because there was a "paper
profit" of 60 per cent on those bonds due to the exceptionally high price
(218) at which they were selling in the market.

This particular issue was

given the highest rating by the various investment services, but that rating
referred to the safety and marketability of the bond at par.

No rating ser-

vice attempts to rate the desirability of holding a bond above its par or
call price.
One-third of these holdings of this convertible bond was sold before the next examination in October, 1930. On the latter date the record
shows that the book value of the remaining portion of this issue had. been
marked up to I76.9.

While this mark-up TOS contrary to good banking prac-

tice and was wholly unjustified when the call price is considered, the

- 131 -

action of the "bank may have seemed reasonable at the time because the market value of the bond reached a high point of 227 In 1929.

The market price

had declined to 152, however, by October, 1930, and while this value would
have shown an appreciation on the bank's holdings at the 1929 book value,
there was actually a loss of Ik per cent on the higher book value at which
the bank was carrying these bonds in 1930Between October, 1930,

axi L


August, 19311 the bank made no change

in the book value of its holdings of this bond.

In 4ngustf 1931» the bond

had declined in price to .129, so that there existed a depreciation of 2J
per cent on the book value, whereas the depreciation would have been only
6 per cent on the 1929 book value, which was presumably the purchase price
of the bonds.
The bank's method of handling its investment in low grade convertible bonds was equally faulty, A bond with a rating of Ilia, may be
used as an illustration*
these bonds.

In 1929 this bank owned $20,000, par value, of

The call price was 10UJ.

The book value was llli, indicating

that these bonds had been purchased at a price well above their call price.
However, the market price had declined to 95 by June, 1929, showing a
"paper loss"

of more than $3,000 at that time. By October, 1930, the

market price of the bonds had declined to Sk9
bank's records remained unchanged.

whereas the book value on the.

The depreciation, therefore, was $9,500.

By August, 1931, the market value of these bonds had declined to 51J, but
the bank's book value remained unchanged and there was a depreciation of
The bank owned also in another convertible issue $75,000, par
value, which was being carried in June, 1929, at a book value of 122,

- 132-

The call price of these bonds v/as 102|. However, the market price at that
time was 214 and there was an appreciation of market price over the "bank's
"book price of $63,900. Between June, 1929, and October, 1930, the "bank
bought an additional $25,000, par value, of these bonds.

The purchase was

evidently made at a high price "because the book value increased from 122 to

Subsequent to the purchase of these additional bonds the market de-

clined to 95 at the time of the 1930 examination, and there was a depreciation of $44,000 in this issue. Between October, 1930, and August, 1931,
there was no change in the bank!s holdings of these bonds.

The book value

was reduced one point, to 138, by a charge against profit and loss.


market value of the bonds declined, however, to 87, leaving a depreciation
of $51,000 in the bank's holdings of this issue.
Unlisted Bonds. - The majority of the banks used in this study
bought bonds which were not listed on any exchange, and some of which had no
market except the doubtful one of resale to the issuing house.

The banks

also bought large numbers of bonds for which the rating services published
no rating.

For these issues the bank was compelled to depend on its own

information or the recommendations of banks, bond houses, and bond salesmen.
There were 592 of these unlisted issues and most of them were of
medium or low grades according to the best information available.
109 issues out of the 592 had defaulted by the close of 1931.

In fact,

Table S S

gives the distribution of these issues according to ratings assigned by
the Committee's staff.

- 133 -


85- ~ Distribution by Ratings of Securities Found
in Failed Bank Portfolios for Which No Eatings
Were Given by the Usual Services

Our rating





Not rated "because of
insufficient data


Case 159 furnishes an illustration of a bank whose holdings of
unlisted "bonds resulted in disaster.

As early as 1923 the examiner criticized

the "bank for "buying "bonds with a limited market in an effort to secure a high

His comment follows:

"....It will ho noted that many of tho issues in the Bond Account
are not listed and the examiner could not find quotations in appraising their market values. The yield on the list is a little
over 7% which accounts in a large measure tor the handsome earnings
which the hank enjoys. Examiner recommends greater caution in
making purchases and that seasoned bonds and bonds having a \7ide or
ready market be acquired. President and Cashier keep m close touch
with bond market."
In the summer of 1926 the quality of the bond account was again
criticized in the following words:
The desirability of improving the quality of the bond account
as'weU as S J requiJement^ith rfspect to credit data were discussed with Mr. _
who agreed to make some effort to comply rath
sup-ffestions. However it cannot be expected that the habits and
Jraltices empfoyJd by him for forty years will undergo much change
at this late date.11

-13UIn December, 1929, the bond portfolio was criticized moderately,
shown by the following words:
"• . • Bonds and Securities need more attention as the report
pages will show. Agreed to charge off only $15,000 depreciation in Bonds & Securities."
In June, 1930, the point of view of the bank management with regard to the purchase of second grade bonds is described and criticized in
the following words:

. . • The chief cause of complaint is the bond list which is
decidedly second grade. Bonds purchased with view to yield.
The list yields 7$- Management figures that it is better
business to charge off $25,000 a year and make that much extra
in trading profits and yield than to purchase conservative
bonds. Cashier purchases bonds for this brrnk as well as the X
which list shows a large depreciation."
In February, 1931, the bank's bond buying habits were described
as "reckless."

The situation was stated as follows:

" . . . This bank through the reckless purchases of bonds now
finds itself facing a serious situation, The list is composed
of speculative bonds of the worst kind. Many are in default
and others on the way. List was analyzed by Standard Statistics Inc. Their appraisal showed a depreciation of over
$^00,000 and it was their opinion that it was a gamble as to
whether the bank could work out of this predicament. The
affiliated bank at
is in the srane condition."
The bank closed in March, 193*i at which time the full Import
of the faulty bond buying practices of the management had become apparent.
Hie situation was described as follows:
" . . . Bank was closed by resolution of the Board at 9:30 P.M.
March 11, 1931. Insolvency was due almost entirely to bond
losses. Safety of principal has been absolutely disregarded
for interest yield. Affairs of the bank have been dominated
entirely by Cashier who is 73 years old..
It would seem that
the directors are chargeable with gross neglect of duty.
Failure of the bank was due to incompetent management. This
bonk had been in operation sixty-six years and apparently
had enjoyed the confidence of the community. Until the
Cashier fceccme the managing officer some seven or eight years
ago it was probably worthy of such confidence but since he
has been in charge he gradually traded the high grade investments into low grade speculative issues."

This bank was in the northeastern faming area.
were as follows:

June,1929 - k2.k;

Its bond quality indexes

June, 1930 - 3U.9; March, 1931 - 17.S.

In case 189, the weak practice of "buying unlisted "bonds was
further aggravated "by the fact that these "bonds were purchased from an
investment house operated by one of the bank's directors.

This un-

doubtedly gave the bank a false feeling of security and led to very
serious exploitation of the bank by this director and his firm.
early as 1921

As ^

the examiner began to criticize the bond holdings of this

bank on the ground that they were unlisted and that it was impossible to
secure satisfactory market prices by itoich to appraise the present worth
of the bond account.

The examiner's criticism follows:

"This bank is conservatively managed by an attentive
board and a capable cashier, A largo portion of the
bonds and securities are unlisted and it is almost
impossible to appraise the entire list on a basis of
what each item would bring on the open market* This
matter was discussed with Director A, whose brokerage
f inn sold the bank most of their securities, While
admitting that outside quotations could not bo obtained in many cases, Mr, A claims the securities are
good and stands on his past rocord of securities
In 1923 the examiner's comment shows that the director continuod
to dominate the bond buying policy of the bank.

"Director A is a member of the firm of A J 'Cu±u^
Brokers, who handle a groat many unlisted securities,
No ready market oxists for those securities and it is
thought that the bank is investing too great a portion
of its funds in thoso securities. Information concerning such bonds is meager and valuos are listed at
carrying value, Diroctor A claims thoso bonds as good
and the other diroctors rely on his opinion ontiroly,"

In 1926 it was reported that tho bankfs bonds woro minglod with
the securities of other custoniors of tho director's invostmont finn.


oxaniinor's statement follows:
"....The bonds and socuritios of this bank aro fcopt
in a box at tho ( ^ Co., _ ^ , under tho control
of Director A and another off icor of tho bank* Somo
of those securities are hold in box rented by A and
Son, who has entire control. Thoso socuritios aro
mixed with other socuritios bolonging to customors
of A and son and upon a verification of tho banks
securities some of tho securities aro prosontod from
the latter named box as tho banks assots."
In April ,1927, the examiner again criticized the bond list of
this bank in the following words:
"The bond list of this bank has improved considerably during
the past five years, but there are still a number of unlisted
items held and your examiner is compelled to t ate quotations
from A and Sons, which concern is represented on the Board of
thid bank by A* While there is no reason to believe any of
the items held are bad, your examiner considers this class of
investments undesirable. Otherwise, the bank is in excellent
condition and well managed."
In October, 1927, a more detailed criticism of the bond account of
this bank was made, giving the examiner1 s reasons for suspecting the quality
of the bonds held.

"This bank's bonds, particularly industrials, have been
subject to criticism for years because of being unlisted,
of narrow markst and in some instancos weak. Since last
examination the bank has made twenty-four (2^) purchases
of bonds and has sold 29 issues held at that tine. Where
issues are not listed your examiner obtained so-called market prices from A and Son, which fira through Director A
attends to this bank's investments in bonds. While tho list
as reported shows an appreciation of $17,535-70 it is significant that none of this appreciation is in tho industrials although prices on unlisted issues wero obtained
from A and Son. The bank may have a paper profit now, but
it may also have some grief in the future. It is difficult for your examiner to definitely state that specific
issues aro not readily marketable, as his time and

facilitios do not permit of on investigation as to tho
ready sale prico of oach "bond, howovcr, ho is of the
opinion that if the industrial issues in this report wore
offered on tho opon market indepondont of A and Son,
they would "bring much less than values shown even if
purchasers could to found for all. Your oxaminor has
discussed this natter with Mr* A sovoral timos over a
period of sovoral yoars and has como to tho conclusion
that furthor effort to havo hin corroct this condition
would ho usoless as far as your examiner is concerned.
Local assets, and local managemont of this bank are
good hut tho menace lies in A in whom tho directors,
who are not at all familiar with investment securities,
have unlimited faith and who continuos to place undesirable bonds with tho bank,"
In April, 192S, the examiner1 s comment showed that the faulty
practices in handling the bank!s bonds continued and that the bank was
,not willing to follow suggestions for improvement.
".....Bonds, Securities, etc.: Prices on all bonds except
those marked # were obtained from quotation records available to your Examiner or from investment bankers other
than the fiia from which they were purchased. Inasmuch
as quotation sheets and brokers quote a market price on
these items your Examiner assumes that they are readily
marketable at the amounts listed. Prices on items marked
# could undoubtedly have been obtained from the fira from
which they were purchased, but inquiry outside resulted in
the information that there was ! No market available.1
These items would seem to be in the class of one house
bonds. Subsequent to last examination and under instructions of your office your Examiner advised the bank of
specific issues of bonds which in his opinion did not confoim
to the requirement of marketability. This criticism was
based on infonnation and opinions obtained in
_, and is
contained in Examiner's letter to bank under date of January 23, 192S, a copy of which was forwarded to your office.
The management did not agree with the classification of
your Examiner.11
This condition apparently continued without much change for
more than two years longer, for the examiner wrote in October, I93O:

" IO3 •*

"Your examiner has not been successful in past efforts
to have this hank improve the class of securities held,
The only result of written and verbal criticisms has
been an exchange of letters which has accomplished
nothing* Director A is a member of the firm of A and
Sons, Investment Bankers, of _.,,.» and can naturally
out-talk your examiner in defending objectionable bonds.
In view of the number of defaulted issues and the size of
the aggregate depreciation it is respectfully requested
that this bank be required to charge off the amount
listed as loss. These bonds could not be priced during
examination, consequently, your examiner was unable to
advise the bank as to the amount of depreciation,"
In the summer of 1931 the bank's officers and directors finally
decided to attempt an improvement in the bank's affairs, as shown by the
following quotation:

"Heavy depreciation in Bond Account and numerous defaulted issues due to character of securities* Slow and
Boubtful I»oans. Total of Doubtful and loss classifications exceeds Surplus & Profits* Statutory Bad Debts
and Other Overdue Paper* Officers not adequately bonded*
Lack of financial statements* Credit information too
general* Bank expecting to pay regular semi-annual dividend of $3*850.00. Officers and directors are now cooperating to improve this bank's condition although President X contends a continuation of dividends is essential
to maintain confidence of the community* No objection
is expressed to charging off losses as required and reducing Surplus when necessary, although this charge off
was deferred until an actual appraisal of the bond account
could be completed. The required charge off at this time
was calculated to mate due allowance for a voluntary
$15,000.00 charge off on May 27, prior to date of examinati o n * However, that charge off was accomplished by means
of writing up Banking House $10,200.00 and $2,500.00
voluntary contribution by directors. President X agreed
to charge off, (and promptly advise your office that this
had been done), such amounts as would be required as a result of this examination. To further improve this bank's
condition, officers have voluntarily accepted a reduction
in salaries and directors have waived their fees. Moody's
limited service has also been employed in an effort to
improve the bond account. Average net earnings before
losses and dividends* for past two years, show but
$6 175.00 semi-annually and consequently any material

improvement in bankfs condition is dependent on improvement in the bond account which includes many weak
issues. Based on "bond depreciation, capital shows an
inpaiinent of $U,69U.33 which should he made good and
Mr. X agreed to come to . .. , for a conference in the
Chief Examiner's office when requested and this conference will he held in the near future."
The "bond quality indexes of this hank were as follows:
1929 - 59.S; April, 1930 - 1*9*5; June,1931 - ^3.6.


This hank was in the

Northeastern farming region.
Real Estate Bonds. - Several hanks were criticized hy examiners
for holding undesirable real estate bonds.

However, there were no com-

ments extensive enough to be quoted in this section.
Bank 216 was criticized for its sale to customers of a large
volume of undesirable real estate bonds which later defaulted.


examiner stated that a moral obligation to protect the purchaser of
these bonds from loss rested on the bank, but the history of the bank
does not show whether the moral obligation resulted in any repurchases
of real estate bonds,fey-th-isbank.

Nevertheless, it was obvious from

the comments that the reputation of the bank for integrity was at

In March, 193O, the examiner made the following statement:
"In considering this situation the fact ^hould be
carefully weighed that this bank has sold out
approximately $6,500,000 of real estate bonds on
which a very real moral liability exists and at the
time of this examination there was past due principal and interest affecting one and one-rhalf million
dollars of these bonds."
In September, 1930, this matter of moral obligation was again

mentioned by the examiner in the following words:

"In considering the situation it is necessary to take
into consideration that the hank has sold some
$5,600,000 real estate honds to customers on which
there is $166,000 in default in interest and principal, affecting "bond issues totaling $2,155,000. TOiile
there is claimed to " e no liability on the part of the
hank, either written or verbal, there is unquestionably
a strong moral contingent liability which it will be
difficult to avoid."
Irrigation Bonds. - In case 25Hf the bank suffered serious
losses from the purchase of a large amount of irrigation bonds.


bonds were a popular form of investment several years agof since they
generally bore a high rate of interest and were exempt from taxation
and were apparently well protected by the ability to tax the land holders
benefited by the irrigation project.

However, in many such projects,

it later developed that the tax burden necessary to pay the irrigation
bonds was greater than the benefited communities could bear.

Land was

abandoned in many irrigation districts and the irrigation bonds defaulted.

This general experience affected the prices of all irrigation

The experience of this bank with irrigation bonds was first
mentioned in April, 192S, when the examiner commented as follows:

"....The bond account of the bank is very unsatisfactory.
Most of the depreciation is occasioned by irrigation
bonds. At a mooting held with the directors April 19,
1928, they agreed that in the event the Bond House from
which they purchased the irrigation bonds, did not replace them by good saleable bonds, they would make up
the depreciation, and a proper minute entiy was made of
such decision*"
Further detail was given in September, 192S, as follows:
".•..The bank's bond account shows a goodly depreciation,
occasioned principally by Irrigation Bonds, the most un-

- 1U1 ~

desirable of them "being the X bonds• These
bonds have not as yet defaulted but are badly
off on the market and not readily saleable.
As per agreement during examination made April
9, 1922, the Directors have paid in $6,375*00
to take care of depreciation in 3onds and an
account in this figure is now carried on the
In March, 1929, the irrigation bond troubles were again
briefly mentioned as follows:
". • . The Bond Account is very unsatisfactory. $13M of the $19M in depreciation is
occasioned by Irrigation Bonds. The market
is not only off, but badly slipping daily,
and it is believed that eventually a heavy
loss will be taken in these bonds."
In June, I929, the inexcusable concentration of the investment funds of the bank in irrigation bonds and the subsequent
difficulties of the bank were described as follows:

" . . . The entire capital of the bank was
on its organization invested in undesirable •


- lte -

irrigation Bonds, the market for which is
slipping "badly. The directors voluntarily
contributed $6,375.00 a year ago to a charge
off on these "bonds. At this examination
$10,972.13 was written off and further loss,
it is believed, is hound to develop. There
is no real market for the bonds and to dispose of the entire amount of these bonds at
the market values given would be impossible.
The values given represent the price here
and there where a sale has been made. All
of these bonds no doubt could be disposed
of in a very short time, but the price
would be about one-half of what is quoted
here. It is necessary to shop around and
find a buyer interested in this class of
investments in order to obtain fair values.
A large investment house is cooperating
with the bank hopeful of retiring all
issues of the Irrigation Bonds with as
little loss as possible."

- ii*3 -

The further history of the difficulties with irrigation "bonds in this tank was not given in the case history bocause irregularities were found in the management of the bank,
and the examiner's entire attention during the last two years
of the "bank's existence was centered on an attempt to effect
a reorganization or sale of the bank to other interests.

Bonds Chiefly Responsible for the Depreciation in
the Investment Portfolios of the 105 Banks
Further light on investment mistakes of banks failing in 1931 is obtained by a study of individual bonds contributing most to the securities depreciation of these banks.
It should not be claimed that exactly the same list of bonds
have been the principal cause of securities trouble in all



1931 "bank failures.

However, the list points to certain faulty

practices in "bond buying which were undoubtedly quite general.
Among those practices were the purchase of convertible bonds
at high premiums, the purchase of low grade issues, and the
purchase of unseasoned issues.
Method of Selecting Bonds Contributing greatest Depreciation* - A simple method was used to find the bonds contributing most to the bond depreciation of the sample banks.
Only general market securities were considered.

United States

securities, stocks, claims, judgments, and other irregular items
appearing in the securities records of these banks were excluded.
A tabulation was made for each bank of the individual bonds with
the largest dollar amount of depreciation whose combined depreciation amounted^to one-half of the total depreciation in the

- lk$ -

"bank's general security account. The next step was to select
the "bond issue showing the greatest dollar amount of depreciation, and the second issue in point of depreciation, and the
third and so on, until a total of depreciation had "been "built
up approximately equal to one-half of the grand total depreciation in the bank's "bond holdings.
The same procedure was followed for each of the
hanks which had substantial bond accounts (the banks with
investments of 15 per cent or more of deposits in 1929).


- ike -

The grand total depreciation of the bonds selected in this
way was $3,66*1,727 •
Based on the above described tabulation, a list
was made of the fifty issues contributing most to the depreciation in the bond accounts of the banks used in this

Each of these securities was an important problem

in only a small number of banks, but their combined depreciation in 1931 was $2,208,3^0.
The two bonds contributing the greatest amount to
the depreciation in the banks1 bond portfolios were convertible

The mistake made by banks was buying these bonds at



prices substantially above par and the depreciation experienced was due largely to the wijjing out of the premium on
the bonds in the market*

Of the first fifty bonds in point

of depreciation only five had ratings of the first three
grades in 1929.

The remainder of the issues were of the

fourth grade or lower.

In periods of declining bond prices

the issues of lower grade declined faster than the higher
grade issues, with the exception of convertibles.


- lUS ~

Table 31 - Ratings of Fifty Issues Contributing
the Greatest Depreciation to the
Portfolios of the 105 Banks

No. of issues






















- lUg -

In some of the fifty bonds the per cent of depreciation to book value was small, but the large holdings created
a heavy dollar amount of depreciation.

In other bonds the large

dollar total of depreciation was caused by a serious percentage
depreciation on rather small holdings.

The per cent of depre-

ciation of the various issues was affected considerably by the
dates of the reports, because the bond market was declining
throughout 1931 •
Every one of the fifty issues showed a depreciation
of ovex

10 per cent from book value at the time of the last

examination of the sample banks prior to suspension.

All but

one issue had a depreciation of more than 20 per cent.


depreciation ranged up to 100 per cent for the various issues,
and for the combined list of fifty bonds it was 1 5 per cent.

- 150 -

The depreciation recorded would have "been larger if the
last examinations of these tanks had all been at or near the time
of their failure instead of some months earlier.

Fne last ex-

aminations of fifty-four "banks, or more than half of the list,
*wero in the five months, March to July, 1931> "before the most

serious stages of depreciation in the general "bond market began,
and for l6 other "banks the last examinations were prior to the
beginning of 1931 •
Of the first fifty bonds in point of depreciation the
great majority were issued in the post-war period.
issues were brought out before 19K3-



Only four

these four were

railway issues and one was a joint stock land bank issue.


one issues, or k2 per cent of the first fifty, were brought out in
192S or later.

In other words, the bonds causing the greatest amount

of depreciation were unseasoned issues, largely the product of boom
conditions in the bond market.


- 151 ~

Table 32 ~ Years of Origin of the Fifty Issues
Contributing the Greatest Depreciation
to J;ne Portfolios of the 105 Banks

Year of issue

Ko» of issues















3efore 192^





1 1 ft LM

Table J ^ ~ Classification of the Fifty Bond Issues Contributing the
Greatest Depreciation to the Portfolios of the 105 Banks

Type of issue

Public U t i l i t i e s
Telephone & Telegraph
Light, Heat & Power
Street railwayBridge
Woolen Mills
Joint Stock Land Banks
Federal Land Banks
Investment Trusts

Book value

136,000.00 $ 122,562.50 $ 65,512.50





1,157,000.00 1,820,021+. 75
5)+, 000.00
1,670,000.00 2,318,311.00



292,922.1+5 210,261+. 95
90,693.50 j 56.U93.50
1,216,500.00 1,155,713.^5 727,3S1.U5





Par value

Per cent of
total depreDepreciation ciation in
f i f t y issues


2l+, 250.00







33-0 .


'^+.311.750.00 $U.917.800.1+5 [$2,208,339.70 !




- 153 -

The first fifty issues from the standpoint of depreciation
were widely diversified as to type.

Thirty-seven and six-tenths per cent

were public utilities, 33,0 per cent were industrials, l4.5 per cent were
railroads, 8.k

per cent were financial issues, and 6.5 Per cent were for-

eign No municipals were found among the first fifty bonds, due
partly to the wide diversification of investments of this class which did
not allow sufficient concentration of funds in any one issue for it to enter the group of leaders in depreciation*

Moreover, many municipals have

no market price and examiners were consequently unable to figure their

The distribution of the first fifty issues by type of issue

is found in Table $31


In addition to the examiners1 consents regarding their loans and
investments most of the suspended banks covered in this survey were subjected
to criticisms regarding other policies and practices. The frequency with

wnich these criticisms occurred is shown in Table k$*

Table k§.~ Criticisms of Other Operating Policies

Type of criticism

Overextended condition
Continuous borrowing
Failure to keep up legal reserves
Payment of dividends not currently earned
Excessive investment in banking house
Too high salaries
Too high interest rate on deposits
Large public deposits
Write-up value of building, furniture and fixtures, bonds, or other assets to cover losses
or earnings deficit
Bank understaffed
Bank too small for profit
Poor records
Unwarranted endorsement of notes
Criticized asset removed by loan to director
Surety bond difficulties
Investing public deposits in local loans
Failure to depreciate bank building and &miture
and fixtures
Reliance on permanence of large single deposit
Inefficient clerical force
Lack of proper supervision
Small net worth of stockholders
Bank undercapitalized
Bank overcapitalized
Miscellaneous criticisms occurring once each


, (105)



















- 15U -








^ ) The statistical analysis showed U2 cases of continuous borrowing in this
group, or nearly twice as many as the examiners criticized.



- 155 -

Overextended Condition and Continuous Borrowing
Of the 225 suspended banks included in the study, 106 were criticized by examiners for -overextended condition, and 76 were classed as continuous borrowers,

There is no accepted definition of overextended condi-

tion, but from examiners1 comments it can be inferred that they considered
a bank overextended when it had a combination of the following characteristics:

a large volume ?f loans relative to deposits, a very small volume

of secondary reserves relative to deposits, a large amount of loans of a
poor quality, and continuous or heavy borrowings from other banks.


not called an overextended condition, a similar situation occurs when a
bank becomes burdened with a large volume of depreciated securities.
In the case of most examiners, there was apparently no attempt
made to establish a connection between the causes of overextended condition

and the criticism of the status QUO.

Overextended condition might

develop as a result of bad management in overt ending or slack collections
or it might result from deposit withdrawals and economic reverses. However,
in every case of overextended condition there was a large total of criticized assets, suggesting the fact that the frozen character of the assets
was freauently the underlying reason for the overextended position.
The four conditions listed in the first paragraph of this section
occurred in nearly all of the cases where the banks were criticized for
overextended condition.

For example, in case 33 the bank was criticized

- 156 -

repeatedly in terms such as the following quotation from tne May, 1925,
"Bank continues to operate in an over-extended condition,
has been a habitual borrower in large amounts, with an unsatis factory reserve record."
At the time this was written, the bank had loans of $6^5,000, which were in
excess of its deposits of $6l8,OOQ,

The bank was borrowing $132,000.


criticized assets amounted to $309,000, as compared with capital and surplus
of only $50,000.

It had only $15,000 of bonds and securities, none of which

were marketable.
In case 21 it is evident that in the mind of the examiner overextended condition was more closely connected with the relation'of loans to
deposits than it was with any of the other factors mentioned above.


decreased between December, 19271 and June, 1928, and although loans also decreased by a small amount, the bank was stated to have become overextended,
inasmuch as it had been compelled to increase its borrowings in order to meet
deposit withdrawals.
In case 26 the bank was criticized every year from 1921 to 1926,
when it failed, for being in an extended condition.

Throughout this period

its loans exceeded its deposits, it had practically no investments, it was
borrowing heavily, and it owned an unwieldy volume of criticized assets.
Illustrations from two case histories will serve to describe extreme cases of borrowing.

Case 119 was a bank with a record of continuous

borrowings during all of the war period.

This bank was obviously overextend-

ed and paid insufficient attention to reserves during the years when its deposits were increasing*

When its deposits declined, in 1920 and 1921, it had

- 157-

no means of meeting withdrawals except to increase its "borrowings heavily.
In June, 1920, it was borrowing more than its total deposits and four times
as much as its capital and surplus. The following table gives the statistics
of its loans, deposits, and borrowings at various examination dates from 1916
to 1921.

Table -W - Loans, Deposits, and Borrowings in Case 119
(in thousands of dollars)


Loans Deposits Borrowings






$ 6


Case 109 shows a very similar condition.
had deposits of $§63,000 and loans of $75^tOOO«

In February, 1920, it

Its investment holdings were

negligible, amounting to $29,000. To support the volume of loans in excess
of deposits, this bank was borrowing $116,000*

During succeeding months,

its deposits declined and its loans increased, so that it was compelled to
increase its borrowings to $U4S,000 in September, 1921. At that time the
examiner wrote:
"This bank is in a very serious condition, as is shown on
face of report, I called the directors1 attention to this fact.
However, they do not appear to be alarmed over the situation.
Of their total loans, 67c> are pledged to secure bills payable;
of their total individual deposits, $100,000 represents state
funds subject to call at any time. In the event a call should
"be made for these funds, they have no exchange to meet the same
with, at present, and taking in consideration their liabilities
for money borrowed it is doubtful with your examiner if they
could find a bank that would be disposed to make further advances to them."

- lgS -

In many cases the failure to keep up legal reserves was a symptom of other difficulties rather than an original cause of trouble.


was sometimes due to heavy withdrawals or an overextended condition, "but
in some cases it v/as due to weak or careless management.

Miscellaneous Criticisms
Payment of Dividends Not Currently Earned. ~ Only 29 cases were
found among the 22f> suspended banks where the examiners had criticized
the management for the payment of dividends in excess of net earnings.
The criticisms, however, do not cover all the cases. . A survey of the net
earnings and dividend payments indicates that a large proportion of the
suspended banks paid dividends for a year or more after their net income
had decreased to a point where dividend payments could not be made out of
current earnings.

In fact, if the losses set up by the examiner had actually

been written off out of current earnings before dividends were paid, very
few of the banks under survey would have been able to pay dividends as long

-159 -

as they did without dipping into their undivided profits or surplus,
Excessive Investment in Banking House. ~ In 29 "banks, according
to the examiners, the investment in the banking house constituted such a
large portion of assets as to curtail the earning power of the "bank.


9 was such an instance where the examiner wrote in 1922 as follows:
"Handsome bank building is being pushed to completion
and is expected to be occupied on or by October 1. ;7hen
completed will cost some $250,000. In this connection,
management states they have a prospective buyer of present
banking house and adjoining property for $75,000 which,
when sold, will be credited on new building, thereby reducing it to about $1751000, Our examiner has stated to
President and Cashier that, in reality, they should have
more capital and surplus, since the new building would be
carried in excess of present capital, and surplus; further,
that present deposits justified additional capital and this
matter should be given consideration."
Later in the same year the bank building was completed and still appeared
in the examinees opinion to be too large for the size of the bank.
"Since last examination, the bank has completed its
new home and now has one of the most modern and wellequipped banking rooms in the fetate. The investment, at
present, is somewhat out of proportion to capital and
surplus account. In tnis connection, following previous
suggestion of the examiner, President A # advised me taat
plans are under way whereby capital will be increased
$50,000 and surplus $25*000 on the first of the year.
This, it will be seen, brings the investment more in
line, particularly after giving effect to the sale of
the old home now carried, the proposed sale of which has
been outlined by the bank to your office."
Early in 1925 the unwieldy

investment in the banking house began to be

noticeable in the earnings account, and the examiner wrote as follows:
"The bank is making just enough money to pay their
dividend and take care of the small losses that appear.
This is partly due to the heavy investment in building
and fixture s,"

- i6o -

Too High Salaries. - In 19 cases examiners reported that salary
payments were too large, sometimes because a single official's salary was
out of proportion to the earnings of the bank and some tines because of a
surplus of help.

In case kj

the examiner wrote in 1930:

"Vice President D dominates the bank. He is aggressive and is a good collector, and has made some progress
in collecting slow and doubtful loans. He is a man of extravagant ideas. It was upon his suggestion that bank
added Director G to its force of active officers, and also
brought Asst. Cashier F in the bank. It seems as though a
bank this size should be able to get along with less than
nine active officers and employees."
Too High Interest Hate on Deposits. - High interest rates on
deposits generally arose either from excessive competition between banks
in a whole area or from the desire to attract deposits from outside of the local banking district. The difficulty of maintaining a low enougn interest rate
for sound operation under strongly competitive conditions was described
in 192U by an examiner in case 71:

"The bank is having trouble in renewing some of its
good loans at 10$, many borrowers insisting upon S^ money,
at the same time the bank is paying 5# on time deposits.
A letter from your Department insisting, if possible, upon
a reduction to kcfi would probably have the desired effect.
I have been trying to get the banks to reduce to k%, but
it is inrpossible to expect one national bank to reduce to
Uj6 and allow the others to pay % and 6#, when they are
located in the immediate vicinity. I realize that some
banks are in a better position to pay ^6 than others to
pay U£, but if we are going to have any success in getting
the interest rate reduced, it will be necessary for all of
the banks to make the desired reduction."

High interest rates on deposits necessitated a search for
investments yielding high rates of intorost.

In 1925 the oxaminor

described the results of this practico as follows:
"This "bank is owned "by the Y-Z interests of
t "but the policy and management of tho bank is loft
largely in tho hands of the cashier, X, who has been able
to build up an unusually largo banking business for a village of this size and lias established himself a reputation
as a banker of more than average ability, but this has been
largely accomplished by the paying of a large interest rate
on time deposits. This has necessitated a higher loaning
rate and, as this particular community could not absorb
deposits obtained through this high rate, tho bank was
forced to go outside of its territory for loans, even enter: ing other states, with the result that the bank is carrying a considerable amount of slow and doubtful assets and
there is no doubt that the bank will suffer heavy losses
through this policy* It was necessary to got a high ii>torost rate on loans, which became the first attraction
when loaning money, rather than the security of the priivcipal. This apparently has been a policy of tjie Y-Z banks
. They state thoy have reduced their interest rate to 5/° on time deposits, but their loons havo
the appearance of 10/& loans.11
In case 6S the exasperated examiner exclaimed in 192**:
"How can a baiik, with the volume of business of this
one, with a capital of 25M, with 15M invested in bank building, with 24M invested in O.R.E., with loans of the typo
carried by this one, paying interest over a long (and probably indefinite) period on borrowed money amounting to about
100M, and paying (usually) 6 per cent interest on more than
two-thirds of its deposits, hope to rehabilitate itself
through its ordinary and usual operations? That's the main
question to be solved here. The answer assuredly is not
found in the 'Romances' of banking."
Case SS shows evidence of outside funds being attracted by
the high interest rate on deposits and the effects of those volatile
funds on banking problems.

In 1922 the examiner described the bank's

'^te^esiiLj-nte3?ee4 practice as follows:

- 162-

"Money is exceedingly tight locally. Before the
war, I was advised, the "bank paid 6$ on time certificates. Now they pay from Gi to 8$, with an estimated
average of a trifle over 1% They are irregular in
their amounts paid on savings* The two competing state
"banks are also hard up, so the cashier of the subject
hank advises, and the "banks practically "bid for deposits. With the decrease in deposits, the bank is
not making expenses, and no margin can he figured for
possible losses."
A year later a new management had taken over the b a n ^ s affairs, but was finding the outside funds a special cause for worry*


examiner*s comments were:
"One item in the bank's affairs, that of the high
interest rate paid on time deposits, (and of this time
certificate money, approximately $90,000 belongs to
certificate holders who live out of the state), made a
new man taking over the management afraid of its withdrawal with a lo\7ering of the rate. That was a big item
in making the purchaser take ample precautions as to his
safety. This item was slowly being corrected, the certificates as renewed being cut \$ or 1#* all thru the
past summer.,!
Mismanagement of Municipal Deposits. — In several banks included in this study, weaknesses developed through the faulty management of deposits of municipalities, counties, and other Government

The difficulties arose from the investment of such funds in

loans not subject to liquidation upon demand or at short notice.
lic deposits are subject to wide fluctuations.


They are built up rapidly

at tax payment dates and are then drawn down steadily to minimum balances
before the next tax payment date.

It has been a common practice for banks


to furnish security for such deposits by the pledge of a surety bond,
either supplied "by a bonding company or entered into jointly by substantial stockholders of the bank*

After furnishing such security,

the bank was then free to use the funds in any way that its management wished.

There were no cases where difficulties arose when the

management invested these public deposits in readily marketable, highgrade bonds or open-market loans of suitable maturities.

The diffi-

culties arose entirely out of the investment of these funds in slow
loans where there was a danger of inability to collect the loans
when the Government officials demanded their funds.
In case 109


found, a good example of the unwieldy propor-

tion of public and State funds sometimes included in the deposits of
a bank.

This bank had deposits of $232,000 in April, 1922, of which

only $90,000 was local deposits, the remainder being public and State

At that time this bank had loans of $707,000 and was borrow-

ing from other banks $423,000.
Case 37 illustrates the trouble arising from the mismanagement of public funds.

In 192^ the examiner wrote:

"While the general condition of the bank's assots
seems to have "been improved, this bank for three years
has been paying lj£ per cent for public funds, ranging
from $100,000 to $350,000. It has tried to invest these
funds profitably in sundry bonds, and has finally invested
$350,000 in local loans. It has contracted to accept these
funds for two more years beginning in 1925 at 3^ per cent,
and the management has adopted the policy of extending local loans on the strength of these temporary deposits in
anticipation of increased deposits during the next two
years. Duo to this short-sighted policy, the public funds
are a constant monaco,. and it is believed the bank will
experience difficulty in borrowing from its correspondents
to cover the large fluctuations of public funds which occur in the fall of the year. If at the ond of the twoyear period the bank should lose the public deposit and
has been during that period unable to increase its local
deposits or reduce its loans, it will face a serious situation."
At succeeding examinations the large volume of public funds
bearing a high rate of interest was criticized, but the practice of
the bank management was not changed.

In the spring of 1926 the usual

increase in public deposits from the proceeds of tax payments occurred
and the examiner criticized the bank's practice as follows:
"The bank has eliminated its borrowed money by the
influx of public funds and it is forecast that they will
again be heavy borrowers when withdrawals are made of
these funds, since the bank has always been in a highly
unliquid state, and these funds have boon for years a
decided element of danger to the bank, with the directors apparently unwilling to force their customers to
liquidate their loans in anticipation of these withdrawals •"
In the fall of 1926 the examiner's predictions came true, for he

"The situation at this bank has been most disheartening for a long period and since the last examination
withdrawals of public funds have seriously embarrassed
the bank, and its lean credit has been strained to the
limit. On the date of examination, the bank was practically out of funds to meet cash letters."

In case 77» the examiner exposes the dangor of this practice of handling public funds from the standpoint of the government
subdivision owning the funds. In this case it was a county whoso
funds wero placed on deposit with the bonk, and the risk involved
was well described in the following paragraph from the 1926 report:
"If this institution is forcod to suspend, which
seems inevitable, it will practically bankrupt this
county. The condition of the other two national banks
is such, as your office well knows, that thoy could not
stand a run. The First National Bank of 'Z,! an affiliated institution, could not hope to keep open. In fact,
the First National Bank of 'XX* would probably bo the
only bank that could withstand the storm. Furthermore,
it lias always been the practice of the County Treasurer
to deposit large sums of money in the subjoct bank during
the months of December and January without security. The
county balance at this time is covered. However, during
December and January it will run $100,000 in excess of
the security held.11
This practice with its risk to the county continued to be followed
up to the time of failure, for in April, 1927• the examiner wrote:
"The cash position of the bank is stronger than was
anticipated at this season of the year, and is largely
accounted for by the County Treasurer's largo balance.
He has approximately $138,000 on deposit in the bank,
with only $63,000 in collateral and surety bonds. It is
impossible for the bank to properly collateralize this
deposit, and, on the other hand, it is stated that the
County Treasurer is unable to find security for county
funds if depositedolsewhere. Should this account be withdrawn down to the amount of the supporting collateral, it
would undoubtedly have a seriously crippling effect on
this bank."
Tiie successful handling of public deposits with surety bond
security was sometimes threatened by the refusal of the bonding company to renew its bonds. No cases occurred in the bank histories
studied where the bonding companies' refusals


final, but the

threat of such action was mentioned in two cases, and the serious

- 166 -

nature of this threat can be seen from the tone of the following quotations*
In case 66 the examiner wrote in 1921:
"The situation was further complicated " y the action
of the bonding companies in refusing to renew bonds securing $^5,000 of county and city deposits, which bonds expired the latter part of December and the first part of
January. Your examiner, together with the county and city
treasurer, was in constant commanication with the agents
of those companies both during the examination and after .
returning to
, and I am now advised that the companies
have agreed to renew for another year,"
In case 115 the bank had been relying on its public funds to
meet the local demand for loans.

In the summer of I92H there was some

doubt in the examiner1 s mind as to the future attitude of the bonding
company, for he wrote:
"An unsatisfactory element is tho fact that it has
$175,000 in public funds on deposit, and six other large
deposit accounts aggregating $125,000. There appears to
be no reason though why any material withdrawals should
be made on any of these accounts. Ho trouble has yet
been experienced in obtaining renewals of depository bonds,
but attitude of bonding companies in this locality has not
been favorable."
The condition became precarious in succeeding months, and the examiner
wrote in December, 192^, as follows:
"A matter of grave concern is tho fact that of
$52^,000 deposits, $1^6,000 is public funds and $102,000
is eight individual accounts. $100,000 of public funds
are secured by depository bonds, and it is impossible to
determine when all or a part of these bonds may be cancelled. About 90 days ago, one company served a cancellation notice of a $25,000 bond. A conference was
arranged. Cancellation notice was rescinded."

- 167-

Mark-up of Book Value of Assets, - Ten banks facing losses or deficits
in earnings followed the practice of increasing the took value of their banking
house, furniture and fixtures, bonds, or other assets. This bookkeeping transaction added a like amount to the undivided profits of* the bank against which
losses or excess expenses could be charged.

In case 37

the transaction in 1925

was described as follows:
"Bank has appreciated its banking house $10,000 since last
examination so as not to show an operating deficit.'1
In case 86 the furniture and fixtures account was increased to cover
an earnings deficit, as described in the following quotation from a 1923 report:
"The furniture and fixtures have recently been replaced on
the books by an increase in the building and fixture account to
cover a deficit in the earnings due to a large amount of notes
taken for interest on limit loans when the interest could not be
paid in the past year. The amount at which the building and fixtures are carried is not excessive, and the building is thought
to be readily marketable at the present book value,"
In some cases such book entries were not illegal, since the true
value of the assets involved was sufficient to justify the increase in the book

However, this was not always the case.

In case 2. the examiner ques-

tioned the validity of such an entry in 1925, as shown in the following quotas
"Board increased value of bank building and lots $10,000,
new president J. contributed $6,29U3 1 on January 26, 1925,
and balance of losses were then charged off as classified in
report of January 12, 1925. Examiner does not exactly approve
appreciating building $10,000, but property includes two lots
and officers said they thought they could sell the adjoining
lot for $7,500 to $S,000, which would leave banking house and
lot on books at a reasonably fair value."
Early in 1926 the examiner reported that the lot adjoining the bank
building had been sold for a sufficient amount to reduce the book value of the
tanking house to a fair amount.

- 168 -

Lawsuits, - In several cases lawsuits with the outcome adverse to the
bank were the direct causes of "bank suspensions.

Case 55 was a small bank very

well run according to the examiner's classification of assets. The bank lost a
lawsuit in 192S, and was forced to suspend, but was later restored to solvency
without the formality of going through receivership.

The history of the lawsuit

is given in the following quotation:
"Herein is the history of the suit that caused this bank to
close its doors, together with information incident to reopening
for business.

The suit through which judgment was obtained was filed August
21, 1926 in the circuit court, and after many delays came to trial
on October 1, 1928* It grew out of the sale of stock in 1920 and
1921 in what was called the X Company, a company incorporated under
the laws of the State of D by some five or six promoters, of whom
A then president of this bank was president* The purchasers alleged
in their complaint and testified at the trial that A when soliciting
these purchasers verbally agreed that when $25,000 worth of the stock
was sold and paid for a meeting of the stockholders would be called
and one of their number sent to B to investigate the project, return
and report to another meeting of stockholders, at which time, if the
report was favorable, a representative would be sent to B to expend
the funds so raised to install and operate the plant for the manufacture of rubber products from cactus.
"Money derived from the sale of this stock was deposited from
time to time between June 1920 and July 1921 in the aggregate sum of
$18,000, and beginning in November 1920 was checked out by the secretary and treasurer of the rubber company to various persons and companies until there remained in July 1921 a balance of only $65.70.
The testimony of the defense by all directors except one who was unable, due to sickness, to attend the trial, and all of the active officers of the bank was that they had no knowledge of what was told
these purchasers of this stock or of any agreement of any kind that
these funds were deposited as a trust fund. The active officers testified the deposits were made by the office girl of the secretary
and treasurer of the company in the regular manner as any other deposits, and subject to check by the secretary and treasurer of the
company. The office girl of C., who was secretary and treasurer of
the company who opened the account, made all of the deposits, testified she knew nothing of any agreement with the bank. A. who since
has severed his connections with the bank, testified that he made no
such agreement with the purchasers of .the rubber company stock. The
^ank was unquestionably the victim of circumstances through this
suit over which they themselves or your office could have no possible
control, and it was due to this and this only that they were forced
to close their doors for the short time."

- 169 -

Payment of Unsecured Produce Drafts for Y/orthless Drawer, - In
case 99 an inexperienced c a s h i e r paid d r a f t s amounting to a l a r g e sum for
a w o r t h l e s s concern without f i r s t securing c o l l a t e r a l t o insure reimbursement #

The d e t a i l s of t h i s t r a n s a c t i o n are given i n the following q u o t a t i o n

from t h e 1929 examination report of t h i s bank:
"On A p r i l 29 , 1929 • I was i n s t r u c t e d by Chief Examiner
to proceed to X, as the Y National Bank there had suspended
lousiness. After a r r i v i n g there i t was d i s c l o s e d t h a t they
had g o t t e n i n t o trouble through an incapable c a s h i e r , and
the c a s h i n g of some $211,032.95 produce d r a f t s of one Z Company, which had been returned to them unpaid, and on which
the "bank had no recourse for t h e i r money*,...The d r a f t s t h a t
were p a i d were a l l -unsecured, drawn by the Z Company on v a r i ous concerns in v a r i o u s p l a c e s , mostly on D Company and the
E Company. The only evidence of s e c u r i t y was noted on some
of t h e d r a f t s by a c e r t a i n car number n o t a t i o n , "but "being
v o i d of any b i l l of lading or other evidence of s e c u r i t y ,
e x c e p t a s above s t a t e d simply a car number, and t h i s was
o n l y on a few of them. When asked about the cashing of
t h e s e d r a f t s , e t c . , Mr. A. only answered: ! I j u s t had conf i d e n c e i n these people and t h a t so many were p a i d I f e l t
t h a t t h e s e would he a l s o * 1 The records show t h a t the hank
f i r s t s t a r t e d cashing these drafts in November, 1928, and
s i n c e t h a t time the hank had cashed some $1,653,8^0.20 of
t h e s e i t e m s , a l l having been paid except t h i s amount of
Cotton Speculation. - In case 105 the bank became involved i n
c o t t o n s p e c u l a t i o n to a serious e x t e n t .

Much of the blame for t h i s trouble

should be a t t r i b u t e d to the dishonesty r a t h e r than the ignorance of the bank

The bank followed objectionable p r a c t i c e s i n connection with

c o t t o n f i n a n c i n g for s e v e r a l y e a r s .

I t gradually became evident t h a t the

bank o f f i c i a l s were themselves speculating i n c o t t o n , as shown by the
following q u o t a t i o n from a I92U r e p o r t :

"Tho condition of this "bank is deplorable, inexcusable and dangerous on account of the speculation in cotton by President A. Notwithstanding tho provisos mado by
him and other directors on April H, ISZk, as contained in
their letter addressed to tho Comptroller, tho some condition was found at this examination, and, while their weekly report to tho Department showed all bills of exchange
paid, they were not in fact paid, and their statement was
untrue. Furthermore, Mr. A, has been buying cotton since
previous examination (which he promised ho would not do),
and carrying the checks ho gave in payment therofor as
"Cash Items11 until the cotton was shipped and returns received* Mr. A t also wilfully borrowod additional fundB
from the bank since previous examination, knowing at the time
he had an excess loan in tho bonk* Tho notes representing these loans* .being signed r D Farm1 and »E Farm,1 his
name not appearing thereon, but upon close questioning ho
admitted that he signed the notes; that he owned the
farms, and the notes were his direct liability. The examiner called a meeting of the Board and all who wore
available were present and all matters again gone over
with them and their personal responsibility again explained to them and promises made that these matters would
not be permitted in future, in which this examiner places
no confidence, but fully believes that Mr. A. will do 'as
he pleases1 as long as he is connected with the bank in
any way. (The directors are mere figureheads.) Mr. A.
states that he expects to comply with his promise to retire from the bank within the time agreed upon with this
examiner and contained in the directors1 letter of April
U, 1924, (which statement is also not believed by tho
examiner)• Should he continue in charge, it is merely
a matter of time until he will wreck the institution and
bankrupt himself and associates. Therefore, the only
solution this examiner can see to protect the depositors
is to file suit for forfeiture of the bankls charter or
continue special examinations until the public become
aware of something wrong and start a run on the bank,
thereby forcing the closing of its doors."
In 1925 the examiner further described the irregular practices as follows:

"So far as could be determined, the * numerous irregularities revealed by the October examination in tho A.
Brothers1 cotton account had been adjusted. That is, the
account showed to be settled. Reference is made to the
promise made to examiner by A. at that time to discontinue
buying cotton* While the records indicate that he effected the liquidation of the account as then shown, it
appears that he practically engaged one F.f a would-be

- 171 r

farmer and cotton man, to buy cotton as it came in , and
I found the line in the "bank as is shown as excessive. Between examinations, the account has run much higher and in
excessive amounts. At the time of previous examination, I
took occasion to explain to all of the directors and Mr. A.
the methods followed by conservative "banks in handling cotton accounts which contemplate financing its purchase and
sale, and only " y requiring rapid sales is speculation
avoided. It has always "been A ! s policy to have the hank pay
for cotton, ship it to cotton factors in Y.t and draw against
it, which practise lessened the burden oh this bank in carrying it, but allowed him to speculate and throw the entire
hazard on this bank. The factor never advances but a portion
of the value and holds the actual cotton to secure him, while
this bank is in the position of a second lien holder. As P.
began to buy cotton, it was shipped to B. Cotton Company in
Y.i (which firm was holding the cotton belonging to A. Bros.)
in the name of A, Bros* This was determined in trying to check
the security represented to be held by the bank to secure F.
line, which I could not satisfactorily do; nor could I ascertain even by inquiry from B. Cotton Company, for all the cotton
they held was held for account of A. Brothers.11
Finally, the ownership of the bank was changed and an improvement
in the matter of handling cotton accounts was recorded.

However, the

cashier of the bank continued to manipulate the cotton accounts and finally
brought about a situation where the bank failed and the cashier took his
own life.
Customer's Check "Kiting." - In case 3S the examiner found in
1926 that a check "kiting11 operation had been in progress which promised to
be a serious matter for the bank.

Eis comment was as follows:

"An examination of this bank was made at this time in
view of the fact that a local concern had been kiting cnecks
between this institution and two other banks. The ultimate
loss to this bank at this time is not determinable, but examiner is of the opinion that it will not be to exceed
Two months later the loss from check "kiting" had been definitely
determined and it proved to be too large for successful handling by the bank

- 172»

management, a s shown "by the examiner's d e s c r i p t i o n of the s i t u a t i o n *
bank: c l o s e d s h o r t l y a f t e r t h i s examination.)

At the time of the l a s t examination, there was a potent i a l l o s s of approximately $50,000 as the r e s u l t of a checkk i t i n g scheme by a l o c a l concern. Since that time, d i r e c t o r s
of the bank have v o l u n t a r i l y removed $25f000 of t h i s amount,
and t h e r e i s p o s s i b i l i t y for recovery of the o t h e r $25iOOO
from s a l e of the a s s e t s of t h i s l o c a l i n d u s t r y . The d i r e c t o r s
of the bank were very much adverse to the levying of an a s s e s s ment a t t h i s time which would n e c e s s i t a t e an explanation of
the l o s s to the stockholders and would, i n t u r n , probably p r e v e n t an o r d e r l y l i q u i d a t i o n of the concern's a s s e t s . "




Examiners1 reports of the 225 suspended "banks selected for
this study contain many criticisms of the personnel of these hanks*
.Among the matters criticized, those mentioned most frequently are illegal acts, inactivity of directors, weak management, explftitation of
"bank "by management, and outside activities of officers.

The frequency

with which these and other criticisms occurred is shown in Table 36.

Table 36 - Criticisms of Bank Personnel by Ex'iminers
1931 1 Total
suspensions suspensions 1 X \J wtlX
(105) J

Type of criticism

Illegal acts
Inactivity of directors
Weak management
Exploitation of bank by management
Outside activities of officers
'Involved affairs of owners
Disregard for criticism
Overdrafts by officers, directors, and
Refusal to admit questionable character
of assets
Bank officer detrimental to bank
Natural death of officer or director
Managing officer ill
Land speculation by owners
President aged and infirm
Former management detrimental to bank
Suicide or disappearance of officer
Friction among officers and directors
Refusal to charge off losses as they occur
Refusal to pay assessment



• 11





; 31


















! x3

' 12









Note: Other criticisms occurring only once were: security speculation
by owners; director also director of competing bank; reinstatement of
objectionable officer; excessive drinking of cashier; purchase of
criticizable paper from brokers who are large shareholders; loss of
memory by officer; purchase of bank by promoters.


- 1 * -

Illegal Acts
One hundred and thirty-five out of the 225 suspended banks showed
some evidence of violation of banking law on the part of the officers or
employees of the banks.. In some cases the offenses were of the most serious nature, as in the case of the 2S defalcations, 5 conversions of funds,
S forgeries, and 27 false statements.

Table 37 gives a classification of

the illegal acts maintained by examiners and the frequency with which each

Table 37 - Evidences of Illegal Acts and Dishonesty
suspensions suspensions (225)

Type of criticism

Loans over legal limit
Disregard for law generally
Defalcation and embezzlement
False statements and entries
Unlawful real estate loans .
Loans without consent of directors
Check "kiting"
ForgeryEffort to sell bank stockholdings to dodge
Conversion of funds
Evasion of assessment
Illegal act unspecified
Cashier bribed to make loan
Overdrawing correspondent accounts
Replacing charged-off asset in bank












Note: Other criticisms occurring only once were: 2use of bank's funds to





support market for bank's stock; defalcation in affiliated bank; loan
on bank's own stock; certification of a customer's check on an overdrawn account; efforts to sell bank stock by promising large credit extensions; illegal interest paid on C/D'S; sale of worthless notes to
bank's customers on promise to repurchase after examiner left; bonds
held in safekeeping for customer pledged as collateral for bank loans;
general dishonesty; misapplication of voluntary contribution; violation of guaranty; directors reimbursed for reserve penalties charged to
them; failure to remit proceeds of collections made on rediscounts; rediscounted notes not shown on bank's books; crediting interest on "loss"
paper to earnings to pay a dividend.

~ 175 -

(The most frequent of the violations of law mentioned by
examiners was "loans over the legal limit" which was reported in
95 hanks.

In some cases these excessive loans were illegal in

amount at the time of their granting, and in other cases they were
increased to illegal size because the debtor could not pay hie note
at maturity and the bank was compelled to renew the note for its
original amount, plus interest>

In still other cases, loans became

excessive through the reduction in capital or surplus of the bank
after the loans were made. To avoid overemphasis on the frequency
with which excessive loans appeared in the examiners1 comments,
there were included in the tabulation only thoce banks where excessive loans were a chronic condition.

Inactive Directors
In 101 of the 225 closed banks selected for this survey, bank

- 176-

directors were criticized for paying too little attention to the affairs
of the hank.

In many instances the directors were merely appointed to

fulfill the legal requirements as to the number of men on the board of
directors by the self-serving managing officer owning the controlling
stock in the bank.

Such directors were usually controlled by the domi-

nating official's wishes, and were also frequently lacking in business
In other cases the directors considered that their positions
were merely honorary and placed full reliance on the ability and honesty
of the managing officers whom they elected.

Directors1 meetings were in-

frequent, and when they occurred they were mere formalities.
In case 15 is found a typical examiner^ comment describing the
board of directors of a "one-man bank,"

In 1929 the examiner wrote:

"For many years, and until two years ago, bank was
operated along the line of one-man policy* Vice President
P, active, dominated his board of directors, as well as all
employees of the bank* Until his own affairs became so badly* involved, he was generally considered an able executive,
and enjoyed the reputation of being able to work out bad
situations. He owes the bank at this time in excess of
$19,000, only partly secured. After exhaustive quizzing
and close analysis of his financial statement, the conclusion is reached that he is insolvent. It further developed
that he does not always confine himself to true statement
of facts. For this reason and the condition of his personal affairs, he is not believed fitted for the position that
he is now filling. The board of directors as a whole is
weak in banking experience. Having been dominated for so
long a time by Mr. P they hesitate now or are not qualified
to render the aggressive assistance that is necessary under
existing conditions. T, S and I are elderly men, representI
ing substantial financial worth with their principal interest in farming. V is a banker of tf, and an inactive di-


r e c t o r . He usually attends annual meetings. X, Cashier
of the hank and a director, exercises no authority boyond the supervision of the detail work of the bank.
Eis financial worth, if anyf i s small. Y i s a general
contractor. They have never had an expression from him
at board meetings, his financial condition i s close to
insolvency, and he owes the bank in excess of $15,000,
only p a r t l y secured. S, warehouseman, a young man, apparently making a success in his lino. As above stated,
he i s the only member of the board who shows any aggressiveness or concern over the bank's condition."
In case 80 was found a typical inactive board of directors
whose apathy and inattention to the bank's affairs led to forgeries
and other i r r e g u l a r i t i e s by the cashier.

In 1923 the examiner de-

scribed the board of directors as follows:
"No change in management or control since l a s t examination. Further investigations disclose the fact that
the Cashier dominates and directs the bank's p o l i c i e s .
This fact i s more apparent by reason that the minutes
of the meeting of Directors had not been written up and
were completed during examination. By completed, i t i s
meant wore written up. The record i s merely perfunctory
and does not disclose the fact that the directors toko
active i n t e r e s t . The Vice President and Cashier both
s t a t e that each day a meeting i s held at which time the
notes are discussed, though there i s no record of such
meetings. One director i s a boy, a former employee, and
now engaged in-auto sales business, and i s more or less
under influence of the Cashier. Another director is a
good business man, but moves along the line of least res i s t a n c e . That the directors are not vigorous i s d i s closed by the volume of overdue, unsecured and concentrated lines."
Case lU was a bank whose board of directors was composed of
successful business men whose primary interests were so pressing that
they neglected their duties as directors of the bank.

The bank, as a

r e s u l t , drifted along under incompetent officers u n t i l shortly before
insolvency when the examiner described

the situation as follows:

"The tank is not overly woll officered, nor do there
appear to be the efficient, trained and experienced officers at the head which an institution of this size should
employ and demand. One or mere of the executive officials
are handicapped and their efficiency retarded to a considerable extent on account of their own personal debts to the
bank requiring much of their energy and time to care for
personal needs and financing. There are some quite able
and successful business men upon the board of directors of
this bank. Some of those gonilemon, however, are getting
pretty well along in years, and are tired, wish to retire,
would prefer to resign on account of the continued criticism they have to face as to the bank, and their lack of
interest is plainly noted, although it may bo said to the
credit of Messrs. L f R, JJ, J, KK and A that they remain
loyal, and are believed to still have tho interest of
community and bank at heart, and who state they will go
to the limit and even sacrifice home and other comforts
and even necessities to the end that the bank may not
have to close."
Case 36 provides a good illustration of the drift toward insolvency of a bank with an incompetent president and an inactive board
of directors.

In 1921 tho examiner criticized the president in tho

following words:
"Policies appear to be dominated by the president
who is nearly seventy years old. His knowledge as to the
responsibility of borrowers appears to be rather limited.
Whother this is due to carelessness or old age, I am unable to state. Other members of the board are also subject to some criticism."
In 1922 the president was again criticized, and it was apparent from the wording of the report that the board of directors was not
"The president shows poor judgment in extending
credit and should not make loans without the approval of
a cor^xpetont discount committee. If the loans of the bank
cannot be handled in this manner, it will probably be necessary to request a change in management."
The same situation existed in 1923, as shown by the following quotation:

- JLOtf*'-


Management of this bank roots almost ontiroly with
the president, who is considered not a good jucigo of
credits, - evidenced " y the condition of loans. In the
past, the president has made practically all loans without consulting the discount committee, and at tne next
"board meeting would submit such loans for appx*oval. It was
agreed that future loans would all be submitted to the
discount committee before being made*11
By 1925 the condition had bocome menacing, and the examiner
described the management as follows*

(The bank closed early in 192b.)

"Condition here is very unsatisfactory. President
owns control of the stock and is not considered capable
of correcting the condition. Directors are mere figureheads. No monthly meetings are held, and bank is rapidly drifting into the danger zone. Since last examination,
additional excess loans have been made, which is conclusive evidence that no regard is paid to violation of law
by those directors. The president has an excess loan and
he is also mixed up in other deals in the bank which
causes examiner to believe that he has indulged in speculations in the past. This bank is also paying 5$ on time
deposits, which is entirely too high. As a matter of
fact, nothing is done right in this bank, and no letter
was taken, as directors will sign anything just to get
rid of the examiner. Their last letter was an absolute
. Snm.t, lim Dliuitui'j rermlt Dad PaiMim.*—% The case histories
afford numerous examples of banks which were exploited by managing officers and in which the exploitation can bo traced directly to the
domination of the banks1 affairs by one or more unscrupulous officers.
Case 26 was such an instance.

Early in 1921 the examiner reported the

domination of the bank's policies by the president, and described the
misuse of bank loans by the bank officials as follows:

"The president dictates the policies of this bank
and, as ho does not see fit to press collection of notes
classed as capital at last examination, there has been no
effort made to comply with instructions given at that
time. Several of the directors have promised to devote
more time to the bank's affairs and see that the loans

were given attention. They state they thought this was
being done, and had no idea the "bank was in this condition.
"Former vice president, who has "become rather heavily
involved, is owing considerable money to customers of this
hank. Present officers, with the exception of the president, are borrowing from this bank and elsewhere to speculate in real estate, and now find themselves owning quantities of land and cannot pay their debts* As soon as this is
known, the customers of the bank will undoubtedly have the
impression that the institution is being used for speculative purposes only, and, to a certain degree, this is true,
for many of the loans have been made for that purpose*
The large amount of paper carried past due can be attributed to neglect on the part of the officers."
The same combination of an inactive board of directors and a
self-serving group of officers was further described in the fall of
1921 in the following words:

"The policies of the institution are dictated by the
president who is the owner of 75 shares of stock. Other
directors, aside from the cashier and assistant cashier,
are farmers and do not profess to know much about the
banking business. It has been the custom to allow the
president to make loans and at the regular meeting following to approve loans without much investigation of the
basis on which the credit was extended. $26,000 was charged
off as loss at this examination, and the directors stated
they had no idea that such a condition existed*
"The bank has been paying dividends as high as 4o#
annually, which indicates that they are more interested
in that feature than giving the bank the attention it is
entitled to and which is so necessary at this time. The
last dividend was cut to 10#. All of the officers have
been speculating in land, and their net worth consists
entirely of real estate equities, while carrying charges
are more than their salary, to say nothing of additional
money which will have to be put into the land as per a
regular schedule of payments* The president owes about
$^2,000 to different banks and individuals. Cashier's
financial condition is becoming very much involved, and
he is owing other banks and individuals $22,000* If there
is no improvement in the cashier's affairs at the time of
the next examination, it is believed that the interests of
the bank can best be conserved by eliminating him from the

'tilTowards the close of 1923 tho affairs of the bank officors had
become moro badly involved, owing to the speculative transactions reported in preceding quotations.
"The president is attempting to handle the situartion alone, and thus far lias failed to materially improve it. The cashier is worso than useless and his
personal affairs are very much involved, duo to speculations in land. Assistant cashier is listless without
a constructive idea, and his porsonal affairs are overextended, due to purchases of heavily encumbered land."
In January, 1924, the examiner reported that the directors
continued to be under the domination of the president*

His description


"President lias for years dominated tho policies
of t h i s bonk. Cashier and assistant cashior, both dependent on their positions, have been serving as dir e c t o r s , and are not considerod capable assistants to
the president, • Other directors have f e l t that they
have had no voice in the management and think the
p r e s i d e n t ' s domination lias been absolute."
In January, 19251 the condition of the bank had become alarming with slow, doubtful, and loss classifications of assets totaling
$2b3,000, as compared with a capital and surplus of $38,000.


the president of the bank continued to be optimistic as to the future
of h i s i n s t i t u t i o n , as shown by the following quotation:
"The problems to be met in this bank are rendered
more d i f f i c u l t through the apparent i n a b i l i t y of the
president to comprehend the seriousness of the situation.
He thinks -isy estimate of losses too sevoro, his remarks
being 'of course, if this land has no value, then none
of the loons are good,' and t h i s expresses f a i r l y well
the bank's weakness."
Finally, just before the bank closed in 1926, the oxaminor
described the condition of the bank in the following words:

"Approximately 50# of total loans criticized*
$119,000 in real ostate loans taken as security for
debt, very largely junior liens and the prior encusi" in many instances are such as to question
the value of the bank's equity. During 1925, tho bank
operated practically without profit, and charged off
in excess of $2S,000. Assessment of $26,250 was paid.
Banc's surplus fund was originally $55,000, which, with
tho assessment paid, gives some indication of tho losses
which have already been charged off. Bank's record here
as to reserves is known to be one of the worst we have
had* Reports of examination and transactions with the
bank create the impression that the situation is absolutely hopeless. The only strength in rediscounts or
bills payable is in the paper taken."
Case 62 was one of the most flagrant examples of a bank with
a dummy board1 of directors and an unscrupulous bank president.


1920 a new director was elected to the board of this bank, and tho
unsatisfactory type of man selected was described in tho following
"A now member of the Board was elected to succeed
, who resigned, (never attended meetings).
Serving his own purposes, President X had Assistant
, an old-time employee entirely subservient
to his every wish, elected Director. Cashier
frankly admitted that they wore afraid to invite a good
man on the Board because they knew he would not stay*
There are at least a half dozen local and desirable men
holding sufficient stock to qualify that could be selected."
The whol^ bear* of directors was apparently under the domination of the president who hoodwinked them at his pleasure, as shown
by the following quotation from the same 1920 report:

"In response to inquiry as to why Directors had not
answered office letters, President X stated that he had
not been able to get them together, quite overlooking
the fact that Directors had met three times after letter
was received—t7/ice for regular meetings and once to
declare a dividend. The other Directors stated that they
had not been advised regarding the Examiner's report or
letters from your office. (Cashier
should bo excepted from this, as he is conversant with all matters
but a mere tool in the hands of the President.)»

- 183-

Later in I92O i t was discovered t h a t , while d i r e c t o r s ' meetings
had presumably been held in accordance with the by-laws, i t was common
p r a c t i c e to neglect n o t i f i c a t i o n of two of the d i r e c t o r s as to the time
of m e e t i n g s .
"Directors1 meetings have been held numerously during
the past four months - eleven in all. At only one of these a meeting requiring the approval of a bond for funds - were
, two employees of the bank, Cashier
and Note Teller, present. Your Examiner noted this absence,
and took the matter up with Mr. X and the two directors as to
the reason for so many absences. Mr. X stated the meetings
had usually been held about 5 P-M. &&& the boys had been too
busy to attend, though in the banking room at most of the
times. The two said that they had not beon notified, and
had been informed nothing important had come up, and there
was a quorum anyway."
The lack of sense of responsibility of the board of directors
was described in 1921 by the examiner as follows:
"It was quite clearly demonstrated during the examination of the assets that asido from what little data the
bank held on questioned items (most of which was in the
nature of memoranda made by the President) and from statements made by the President, there was littlo hope of getting much real information from the other members of the
Board, and they quite freely admitted that they did not
know and that they have depended largely, if not altogether, on the President for information, and have been
compelled to accept what he might choose to give them in
connection with matters."
By the beginning of 1922 the exploitation of the bank by the
president had gone to groat lengths, as shown in the following quotation:

"Notwithstanding the fact that this bank has been
subjected to most severe criticisms by your Department,
the Chief Examiner and Examiners for more than four years,
its condition has been constantly growing worse. During
this period of time, the administration of the bank's affairs has been completely dominated by former President X,

who has at all times unquestionably usod the "bonk in
m a n y ways to further his own personal interests (most
generally employing extraordinary methods in order to
conceal the facts), and who has made numerous loans "both in large and excessive sums - of fixod, speculati v e and questionable character, apparently without
any regard whatsoever as to ossential liquidity, law
and departmental requirements, and the natural consoquencos most certain to follow in connection with such
reckless and hazardous procedure As a result of the
many things in connection with the manipulations of
this management, the bank has finally been forced into
a most precarious condition, giving due credit, however,
to the fact that the somewhat recent general business
depression lias in no way benefited the situation."
Finally, the board of directors bocame aware of the serious
state of the bank's affairs and were mindful of their duties and
liabilities as directors of the institution.

Their awakening was

described in the following words:
"Other board members, after considering the bank's
precarious condition with your Examiner, apparently have
awakened to the fact that former President X has seriously mismanaged the bank's affairs, and nave now taken a
f i r m stand as to what the future business policies shall
b e . Directors appear to have lost all faith in X, and,
as a consequence, have adopted a resolution asking for Mr.
X ' s resignation. 11
In case S3, the bank was wrecked by the cashier's speculative
loans which probably would have been kept out of the bank if the directors had been active.

The attitude of the board of directors was

described as follows:
family owns control of the stock and the
Cashier is the active management and dominates the policy
of the bank. The directors do not give the bank the attention they should, but leave the management to the active
officers. The officers are capable but lenient with their
borrowers, due to competition."
A year later the cashier's unscrupulous acts were described
as follows:

- 185 -

"The bank is carrying a large amount of paper which
no "bank should carry or be allowed to carry. Along with
having numerous loans of large amounts that are slow and
will take three to five years to work out for local customers, it is also carrying at least $125,000 of paper
for non-customers and non-residents, which is of an extranaJy speculative nature and should " e removed from the
assets of the bank. These loans are taken in deals in
which the Cashier is largely personally interested."
In case 8k the domination of the bank by its president made it
possible for that official to involve the bank in a shortage of $177>000,
and other irregularities of at least $50*000,

la this case the relation-

ship between the board of directors and the officers of the bank was described as follows:
"This institution is completely dominated by the
President,. The directors, with the exception of the
President's son, are mere figureheads; they are clerks
with official titles and, consequently, would not object to any of the President's practices, even if they
were so inclined, for fear of losing their jobs. The
President's methods are fast placing this institution
in a very precarious condition, and were it not for
his own financial responsibility, the situation would
be alarming.,r

Weak Management
Seventy-one banks out of the 225 'banks studied were criticized
for weak management.

In a number of other instances the managing officers

T/ere inefficient in some one part of the bank's operation, but these Jl
banks had managing officers who displayed a general lack of ability.
In case 21 the Federal reserve bank credit department summarized
the weakness of the management in the following paragraph:

"The history of this bank reflects inferior, incapable and careless management, lacking vision and alertness, and as its condition inevitably became more involved
there were rumors of lack of integrity. Tendencies known
to weak institutions wore in evidence throughout most of
its history; namely, unwise and unsound granting of credits - these on entirely too liberal a basis under current
normal values and incomes - apparently lines increased
under inflated values; evasion of loan limit by placing
parts of lines with affiliated and other banks; lack of
definite information on credits and evasive and deceptive
attitude toward examiners; abuse of credit by officers and
directors; loans in excess of deposits, with lack of secondary reserve; invested assets being practically all
represented by local loans; overloaned and frozen condition, resulting in constant and heavy borrowings - oftentimes, with deficient reserves; lax collection policy,
permitting loans to run indefinitely when, with proper
action, many losses might have been avoided; inefficiency
reflected in bank's methods generally; board of directors
failing to do their duty in correcting wrong tendencies
even when so advised by Examining Department
This was a weak bank under normal conditions, further
weakened by inflations of the War period and that which
immediately followed it. With no strength to survive
falling values or reduced incomes, under other than favorable agricultural and business conditions, bank's
weakness was very apparent and lack of confidence ensued.
It had no strength to resist adverse conditions and
closing was only a natural consequence.u
In the excerpts from examiners' comments there were frequent
criticisms of the inefficiency of the bank officials, such as the following from case 100}

"After a very thorough examination of this institution, both examiners were of the opinion that the present
active officers can be charged to a great extent with the
present condition of the bank. The active head, Mr. C,
is absolutely inefficient, and admitted to his board, in
examiners' presence, that he was a poor credit man, and
was unable to make collections as he should. The large
lines carried through good years without any liquidations
are an evidence of that fact. If this institution can
be worked out, it will require a far more aggressive man
at the head of it."


- 187-

General incompetency of the bank management was
cited in case 6S. The president of that bank was an outspoken man who made a very good impression on the bank examiners -until 1923, when the first faint suspicion * of his
ability was voiced by the examiner in the following words:
"X is considered a compotent banker, has been
in this locality for a number of years and is
thoroughly conversant with conditions and tho
proper method of conducting a bank in an agricultural community. However, it must be said that
in the past and I believe, even yet, he is inclined to err on tho side of liberality in granting credits.H

- 1SS -

In November, 192H, the succeeding examiner stated that
the domination of Mr. X had proved prejudicial to the "best interests of the depositors.

He also wrote:

"His financial capacities are very limited, hut
his other capacities are good. For what he has done
and tried to do he is to he commended. BUT KIS BAKK
Case 120 was a one-man bank, dominated by its president,
who enjoyed in extraordinary degree the confidence of the public.
Based on an overly optimistic outlook for the future of city property , the president made a large amount of undesirable loans. His
position in his bank was described in 1922 as follows:

"President A is the dominating character. It is
evident that he has in the past been reluctant to share
any authority or responsibility with any other officers,
or even directors, and has not been disposed to consult
with the directors any more than absolutely necessary.
The last report of examination, likewise letters written
by the Comptroller addressed to the Board of Directors,
have not been submitted to the directors, and no mention
made in the minutes of board meetings. President A has
taken it upon himself to answer such communications.
Management has been far from aggressive, the borrowers
have been educated to add interest to their loans whenever renewed if unable or not convenient to pay the interest, and it will be difficult for the officers to re-


- ITS'verse such a practice or policy. President offered to
resign and turn the management over to some one else,
which is inadvisable. So far as public confidence in
the "bank is concerned ho is its strongest asset. If
the general public takes cognizance of the bank being
frequently examined, it would create an alarmr that
in the opinion of your Examiner would force the closing
of the bank. President A is also downhearted and mich
worried over the bank's condition, all of which affects
the welfare of the bank.11
At the beginning of 1923 it began to appoar that the salvortion of the bank rested in the infusion of new blood in the management,
as described in the following paragraph:
"Salvation and hope of this bank working out of
its present difficulties depends on obtaining sufficient outside directors (other than active officers)
who will and can curb the optimistic tendencies of
President A in his free granting of loans without adequate credit data, (as well as to himself, relatives,
friends. and other business associates.) Directors
B, C and D are meeting daily, authorizing all renewals before made, as well as other loans, and they advised President A he must co-operate with them if he
expected to retain his position and save the bank from
ruination* President A still holds the confidence of
the community, and it is inadvisable to remove him,
the bank cannot afford to employ additional competent
help, and it is very doubtful if any capable and experienced man would assume the worry and responsibility
that would naturally be thrust upon him in the management of the bank's affairs.11
In 1926 the examiner recapitulated the factors of weakness
in this bank's management in the following words:
"Your examiner was of the opinion that the greatest
danger at that time, after the new capital had been paid
in, was the optimistic management, their disregard for the
provisions or requirements of the Hational Bank Act, and
an apparent utter disregard for instructions of examiners
and your department. This, coupled with an exceptionally
weak board of directors, dominated and influenced by
President A left your examiner with a feeling of uneasiness as to the bank's future. President A in 1923 repeatedly admitted that he alone was responsible for the
bank's unsatisfactory condition, and that no one else


should bo censured. Your oxaminor believes Prosidont
A is chiefly responsible for the bank's unsatisfactory
condition today. Examiner is 01 the opinion that with
proper management, and had a policy of conservative
banking boon in effect tho past threo years, tho bank
would bo on a dividend paying basis today. Tho bonk
has attained its growth in spite of tho woak management simply because as a whole tho torritory tributary
has beon developed, tho town has grown."
Sometimes it was not an individual but a group which dominated
the bank in a manner adverse to its best interests.
family domination was apparent*

In caoo 6,

In 1922 tho examiner wroto:


AA, President, and the father of CJA and CSA
is somewhat tho hidden dominating force, inactivo,
but exerts his influence by reason of family rolartions, etc* CJA, Vice President and Cashior, activo
in the management, apparently of honest purpose, but
limited as to ability, carries tho full responsibility
of management and is burdened ontirely too much with
the detail operation of the bank. CSA, Assistant
Cashier and brother of CJA, acts in the capacity of
teller, my opinion is that he does not give his full
time to the bank, is wholly indifferent to uinnor in
which bank is run, and does not assume tno dutios or
responsibilities that ho should, his wife works in
the bank and I dare say does not earn her pay. F,
Assistant Casnier is only a fair clerk, and has the
greater amount of general bookkeeping to do, but is
thought could and would keep his work in good shapo
with proper instruction and supervision, two othor
clerks, a lady and a young man, are required to do
the individual bookkeeping, which could oasily bo
carried on with one witn assistance from some other
clork, in other words thoy have at least ono too
many clerks if not two. Of the directors, Gf C, and
D, are believed of average ability botn as business
men and as bank directors, that is to say for a sr^all
town, but their interest and supervision is considerably subordinated to tho A interost and control*"
The inefficiency of this family group was further described by tho
examiner in 1921* as follows:
"The bank is dominated by the A interest and
that principally the President, altho he is not active,

nevertheless this is true. The Vice President and
Assistant Cashier are "both sons of the President and
the Assistant Cashier's-wife io also an employee of
the "bank. The opinion of your examiner is that CJAt
Vice President and Casnier lias a desire to conduct
the hank as it should be, his methods are somowhat
crude and his policies lenient «tis true, hut he indicated a desire to do the right thing, hut ho io
restricted on every side in accomplishing anything
for the reason ho does not havo the support and cooperation of the working force or his father who is
President. At present the hank has no 'Head1 that
is to say, one with complete authority to see that
things are done as they should he. The Vice President and Cashier trios to do and look after everything with result practically nothing is really accomplished. Assistant Casnier A does not appear concerned about the welfare of the bank, is not interested
in complying with law and office instructions, ho
comes and goes at will, so does his wife, the indi-.
vidual bookkeeper does the same. Assistant Cashier
P is connected with several outside intorests besides numorous public affairs, all of which take some
of his time, this leaves only one lady who is giving
the bank full service and loyalty with it. Your examiner has endeavored to make himself very plain to
the Cashier in this connection and has enumerated all
of the above facts to him, further have advised him
that the writer and your office were very much dissatisfied with the small progress they have made in
adjusting matters of criticism. Eeplying the Cashier
admits the fact ho does not have the entire support
of tho organization and the justification of examiners
remarks, he further promises to take these matters up
in the inmediate future with his board of directors in
an effort to make such corrections in the working force
that will insure proper correction of matters now under
criticism, even if necessary for him to resign. Examiner has advised him that no person attempting to
conduct the baiik worJ d tolerate the services of the remaining force, unless it is the one lady previously
referred to. Whether or. not anything is done in this
respect remains to be seen. The opinion of your examiner
is that things will run along pretty much as they are
until the death of the President when no doubt there
will be changes brought about.»
In case 82, tho bank was run by heirs of the former bank

These heirs hod little banking experience, and furthermore

were involved in continual bickering over seniority in the bank and
patronage rights.

The situation in 1928 was described as follows:


-/*&--32J -

"Daring the administration of .
deceased, former
president of this "bank, his nephew was its cashier in charge
of the first teller's cage and _ _ ^ , recruited from a
bank, was its Vice President, working under the Presidents
close supervision. Upon the death of
four years ago,
, being the older of these two and the more assumptive, appoars to have declared himself the bank's manager
and, being devoid of either ability or financial worth, to
havo proceeded to over-extend both the bank and himself to
a dangerous degree, this, without regard for the admonitions of the Cashier, the directors of the bank, or your office. The Cashier, a thrifty lad, with access to the
fortune, but roticent about advancing on his own judgement,
deferred to the Vice President until last summer when the
advance of the boll weevil threatened the local cotton
crop and insolvency threatened the institution, the directors advanced tho Cashier to the management, an action
which tho Vice Presidont resented and which finally brought
the two to blows. Last December, directors
, Mrs.
called your examiner to Mrs*
's homein ^
and expressed themselves as disposed to eliminate the Vice
President and inquired if I would myself consider assuming
the management of this bank or would recommend someone who
might. Although their effort to find some suitable person
was without fruit, tho Vice President appears to have discovered it and to have summarily changed his course in an
almost desperate effort to appease his board and retain
his position. He now readily defers to the Cashier and
works 'like a trooper.1 Eis desk is now behind the fixtures and although his ability is extremely limited, he
is doing some good. His office force lacks coordination,
each clerk digging for himself so that the result is more
the running about and barking of a dog-town rather than
tho united industry of an ant hill but ho has two new men ,
who are fair clerks and the records are somewhat improved.
He has consolidated his personal borrowings, formerly scattered among the baik!s correspondentsf with the Cashier,
who holds his bank stock as collateral. The Cashier,
since the first of the year, appears to have assumed full
charge of tho bank's note case. He is slow and ordinarily
is conservative. He throws back, however, to the former
president's practice of overloaning a tenant farmer population , and all of the top-heavy new loans referred to in
the criticisms of this report are his own and are specially
set out in order to bring him to his senses. He made a good
record in his collections from this fall's cotton crop,
which saved his stockholders untold assessments. Now he
should stay on his base."

- 193-

Exploitation of Bank b£ Management
Managing officers or influential directors of a number of the
failed "banks included in this study used their positions to secure favors
from the hank and at times to finance speculative or fraudulent transactions
of their own.

In some cases the exploitations were not of a vital nature,

such as the abuse of the overdraft privilege; but most of the cases mentioned by examiners were much more serious.
In case 71 the cashier was stated to have loaded the bank with
a sizable amount of "other real estate," as well as a large amount of loans
based on second mortgages, where the indications were that these loans were
originally real estate deals of the cashier.

Other officers and directors

also misused the funds of the bank, as shown by the examiner's statement

in 1929:
"Exploitation by officers and directors for their relartives and a f f i l i a t e d interests is the chief reason for the
deplorable condition* Over $75,000.00 of placed paper emarnating from t h e i r concerns has been charged out in the past,
and every item appearing under their •large Line 1 should be
charged out."
In case k2 the self-serving attitude of the bank president is
well described in quotations from two examinations in 1929.

February 1929 - "The condition of this bank is far from
satisfactory. A new president was elected recently to succeed A who is now looking after his personal a f f a i r s . In
my opinion there is grave danger that A will s t i l l attempt
to dominate the bank. Former President A during his tenure
of office made large loans to his family and a f f i l i a t e d int e r e s t s . While your examiner is not alarmed at the present
time over these large lines, yet there is always a potential
danger in large concentrations of credit to a single i n t e r e s t . The A estate has valuable properties, but the management of i t s affairs by foimer President A is worthy of some
criticism* The personal habits of this man are not above
reproach, and the public generally seem to know that he is
addicted to the excessive uso of liquor. During Mr. A»s
management of the bank, he had no regard for the s p i r i t of

the law,
ings had

and readily admitted to your examiner that ho had
the provisions of section 5200 "by carrying accompaper for the "benefit of customers whose "borrowreached the legal limit."

J u l y , 1929 - "At the regular election of officers in January,
Director C was elected president, but duo to i l l health, ret i r e d on July 1, and Mr. A was re-elected. Prosidont A i s
the dominating element in tho bank. Ho and his family own
actual stock control. Mr. A»s ideas of hanking principles
are fundamentally unsound. Ho has regarded tho hank as being operated for the benefits of his own interests and tho
large line sot up i s concrete evidence of tho result of his
regime* Cashier D i s no banker. Ee was formerly County
School Superintendent. Cashier D is thoroughly in sympathy
with tho policies of President A and is unlikely to oppose
In case ^9, a family dominated the bank and used i t for their
own i n t e r e s t s , beyond the limitation of good judgment.

In 1922 tho ex-

aminer said:
"President A and his family oxercise control in management. Bank has lately become involved in bankruptcy proceedings of a member of the X C# Co., whereby i t i s disclosed
t h a t President A received a bonus on material used in the
road construction by the X C. Company, and the interest thus
created in the enterprise evidently influenced him in granting loans to the company of $1S,000, far in excess of the
legal limit."
The bad effect of t h i s lending policy was described in 1923 as follows:
"Bank s t i l l holds among i t s assets items resulting
from the bankruptcy of the X C. Company. President A's
connection with operations of the X C. Company have been
reported in previous exrminaticns. The tendencies of the
As to become involved in various enterprises wherein they
were to share in the profits in return for furnishing
operators funds from the bank, has boen apparently somewhat curtailed through their experience with tho X C. Co.,
but t h i s inclination will have to be kept in mind in examinations of the bank as long as tho As are in active
In case U6f the vice president drew a salary from the bank without rendering any service for i t .

The condition was described in 1923 as

"It was found during examination that Vice President
A was drawing a salary of $1S00 without rendering any service to the bank, other than attendance as director. Matter was talked over with the hoard and they readily agreed
that it was unjust to "balance of stockholders, hut they
were unable to help it on account of A controlling tho mar*
jority of stock. It is understood that he draws salaries
from other banks without rendering any service other than
as a member of the board."
Case 10S was a bank purchased and wrecked by promoters.


method of operation of theso men was described after the failure of tho
bank in 192H as follows:

"In the spring of 1922 the A family had so misused and
stolen the bank out that the writer called tho Chief Examiner
into conference. Mr. B, a director at that time, together
with President Cf guaranteed the solvency. Mr. B was worth
enough to do this. At that time the bank was broke. It
would hardly have paid 10 cents on the dollar. Mr. B was
an old cow-man. He was lost in the bank. He soon grew
tired of the banking business, after paying in some $46*000
to take out bad assets. He agreed to give the bank to his
cashier, Mr. D, who was planning with some friends to undermine Mr. B, anyway. However, Mr. D could not make a go of
it as it was still broke without the B and C guarantee. It
was assessed 100$. D could not pay it, nor could his associates, Mr. E , a broke promoter who had readily lined up with
D in a get-rich-scheme, and Mr. E who had formerly worked
with Mr. D at the Federal Reserve Bank, and had boon induced
to leave the Federal Bank and came to X with his small savings on a rosy picture of the future by Mr. D. None of these
men could pay the assessment. Mr. B could and was liable
but he would not as he was sick of banking. He felt his life
was in danger. He agreed to go to Y and borrow the necessary money, loan i t to 1)£ E and J to pay the assessment of
$15,000, take their note secured by all but 15 shares, the
other $10,000 in losses was to be provided for by the reduction of the capital from $35,000 to $25,000. D fell out
with his associates who accused him of misrepresenting to
them. Mr. G, a broke banker from Z, a friend of Mr. E, came
over and agreed to take the presidency. Accordingly, 0, E
and T made a note to Mr. B for $15,000, which was paid into
the bank. Instructions were left them as to how to proceed
with the reduction of the capital from $35*000 to $25,000.
They made only a pretense of reducing the capital. They
never called a formal meeting of the stockholders. They
never held a formal meeting of any kind, at least the minutes do not so record. Mr. F states that G, E and E, wha


owned over two-thirds, voted to reduce. Anyway, it was only a
book entry and the capital was reduced on the "bank's books to
$25,000. This gave what I considered at that time a solvent
hank, still somewhat burdened with slow paper. But a very
weak board of directors and a management that was weak but
honest. Mr. E is believed honest. He was active in charge.
G was figurehead. E a promoter, was dangerous, but outside
of being on the note had no say so to amount to anything* E
had figured that he could resell this stock to substantial
parties in the community, pay off B and have a $10,000 profit
to divide with E and G. He was a promoter and insurance salesman and did have some ability along this line. He was advised
that under no conditions could he place the notes representing
the sale of stock into the bank. He then wanted to scheme
out. Some way, G got in touch with a Mr. H and I. They examined the assets carefully. They agreed to buy the bank
stock held by G, E and E, paying them $3i26o cash and assuming
the note to B for $15t000« G, E and F, in their anxiety to
get from under the loan to Mr. B, turned the bank over to Mr.
I and H, who drew two drafts aggregating $3,260 on J, and paid
off G and E and E. However, they were afraid to call B in on
the trade for fear he would block it. Erom letters on file
exchanged between I and E, I cun sure it was a frame-up. These
drafts were returned unpaid from J, as they knew they would
be, and K and I placed their own worthless notes in the assets,
now as they were in the saddle. B soon found it out and of
course felt that he should have been consulted. He refused
to release G, E and E off his note but did agree for I and H
to go on now. But when his $15*000 note came due he came in
and demanded the money. I could not pay and B caused such a
racket and talked it over town as to how I and H had secured
control of the bank that a run started* It was never entirely
quieted and finally closed the bank."
In case 12, the management of the bank blamed their predecessors,
for the questionable loans in the bank.

There was some ground for this

blame, and yet the new owners soon placed the bank in a still more unsatisfactory condition.

Their attempt to blame the former management was de-

scribed by the examiner in 1922 as follows;

"The many other criticisms which when summed up clearly
indicate that the bank is suffering from the effects of maladministration to a considerable extent on the part of former
officers antedating the purchase of a controlling interest in
the bank by D and C. This applies of course more to the
criticised loans, and it must be said that the present management has succeeded in clearing up many unsatisfactory lines.
It is typical of the 'one man domination,' and subject to all
the evils incident thereto, as expressed in the number and

character of criticisms. In view of the difficulties which
have always surrounded the situation and the local conditions
which have prevailed during the last two years, it has boon
your Examiner's desire to give the "bank the benefit of every
reasonable doubt, but the progress made has been disappointing and the time seems to have arrived when roostablishmont
of asset values has become necessary, regardless of who or
what may or may not have been responsible for the bank's
present condition, Mr, 0 has stated to your Examiner that
he has achieved his purpose in life at thirty-four yoars of
age* namely to be worth a million dollars and the solution
of the problem in connection with the bank is believed to bo
in his ability to protect his large interest by making good
the losses, since to charge them off and exhaust the surplus
by so doing would no doubt imperil the bank's continuance,H
By the fall of 1923 ** became clearly evident that the now management was at least equally aa s a l to blame for the conditions of the bank
as the former owners, for the examiner wrote:
"To predict the outcome and future of this institution
is very difficult. Like all stories there are two sides, and
there is no exception to the rule in this bank. The officers
tell the story that they have for a long time had much trouble
among themselves, through former acts of mismanagement, unwise
and unwarranted loans and extensions of credit, dissenting
members of the Board leaving the directorate and now using
their influence to injure the name and standing of the bank.
The President, Mr, C, claims that he has neglected his own
personal affairs and business to work for the bank in its difficulties and troubles and relates long stories of self-sacrifice, spending and depositing of money, traveling clear to
England and making innumerable trips in the interest of the
bank and proudly declaring the things he has accomplished.
He is an interesting man, a good talker, shrewd, suave and
diplomatic, keen and sharp. He puts forth his side of the story
ahead of everything else. Ho loses sight of the fact that he
and his enterpriser* havo long 'ridden the bank,' self-served
to the limit, caused much criticism to be heaped upon the bank
on account of his actions, yet feels that he is and has been
the means of 'saving the bank' as he terms the work. It apparently had not often occurred to him that by his own actions
the bank load suffered fully as much as by the actions of

Outside Activities of Sank Officers
In several cases bank officers wore conducting business enterPrises or were holding public office aside from their official bank

- 198 ~


In such cases it was generally found that these outside ac-

tivities absorbed so much time and energy that the bank officers
slighted their primary work.

In case 65, the managing officer of

the bank was involved in local politics, liquor running, and oil

The difficulties in which this involved the bank were

described in 1921 ao follows:

"I have never regarded the X's as of high caliber and
now that a real crisis impends, X is telling the real truth
about his loans, and they reveal a woeful lack of credit
knowledge (friendship and good-fellow loans). X lias also
financed the running of whiskey to some extent (loss to result, or now present); also some of his old customers drifted
into the liquor traffic. In fact, quite a number of
persons were at one time engaged in what appeared to be a
prosperous,.'though hazardous and temporary business. X h$s
also interested himself in the oil game, which in this stato
is the worst kind of wild-cat ting. He tolls me ho has not
actually put money into a project, but has allowed his ncuno
to become publicly associated with interests connected with
it. Another thing: X is Mayor of
, being elected after a bitter campaign which apparently ended in a factional
town 'fight1. These various activities have tended to cause
comment-and finally open talk not only in
but in tho
immediate vicinity, and a serious drop in deposits ($U0,000) during the past thirty days is the answer. The bank
has never been a prosperous one, but the X ! s have 'milked it1
by the salary route; X's salary of $6,000.00 per year is
absolutely ridiculous, not only from the point of his ability
as a manager but also the bank's size and ability to pay
such a salary. As to loans to the X's: I found that a
considerable portion of the loans to
clerks) were given for differences or shortages in warrant
or similar accounts which their brother, X, has made them
responsible for. That portion was ordered off the books
at once. X is apparently thoroughly and completely disheartened with his problem, and this attitude (that of
quitting) is the really serious thing about the bank."


- 199-

In saveral cases the outside activities of "bank
officers were instrumental in "bringing :into the bank's assets a volume of undesirable loans. This matter has been
mentioned in several other parts of this survey.
will serve to illustrate the point.

Case 66

In 1921 the examiner


- 129"Control held by Y and X, vice president and cashier,
respectively. I t appears that in the past the management
of the honk has been largely left by the directors with
Messrs, X and Y, who are both active, and that Y probably
dominated and directed the policy of the bank. X and Y are
copartners, and for a number of years have been ongaged in
business outside of the bank, largely speculative, their
dealings being largely in lands and livestock. Considerable of the paper criticised in this report has come into
the bank through operations of this kind.11
Involved Affairs of Owners
Running through a H the comments regarding weak management and
the exploitation of banks by .their owners, were comments showing that the
owners gradually became involved in losses which depleted their capital
and made their bank loans highly unsatisfactory.

Case 69 is an example of

t h i s s o r t , where the examiner described the financial condition of the directors and president as follows:

"Too much confidence has been placed in the Cashier of
t h i s i n s t i t u t i o n , and the Directors have not fulfilled their
duties as prescribed by statute. In making up financial
statements, the Directors did not include l i a b i l i t i e s which
they should have included. Directors
the President have been reported to have speculated in grain,
and they are reported to have lost $5,000.00 each; none of
these men reported these losses as l i a b i l i t i e s on financial
statements to the Federal Reserve Bank. The indirect borrowings from the
Trust Company on a note of $12,000.00
for the bank was never reported, nor was i t divulged to the
examiner; other joint notes to the same concern in the amount
of $11,500.00 of Directors were not reported in their financ i a l statements. A loss of over $10,000.00 sustained by
loans to
a renter on the land owned by the bank, was
also never reported. The present payroll of the i n s t i t u t i o n
i s now $675.00 per month; t h i s , with current expenses, will
r e s u l t in daily loss, impairment of surplus and c a p i t a l . Both
Directors and Officers have executed notes personally and for
the bank to such an extent that their personal guarantee i s
of no value, with the possible exception of
The Officers: and Directors have also failed upon request
to honestly s t a t e the condition of their personal standing,
as well as the bank's, and have wilfully withheld necessary

Illness and Death of Officers
All banks have the problem of furnishing substitutes or roplacoment for bank officials who are incapacitated duo to illness or who die
or are forced to retire on account of age. The failed banks used in this
survey were no exception.

There wore frequent cases whore managing offi-

cers became ill or grew aged and infirm and were unable to carry on the
bank's affairs in a satisfactory manner*

A few bank officials wero in-

volved in defalcations and ooxrrirttted suicide. One bank official lost his
memory and since his bank maintained no adequate credit records, the bank
suffered great embarrassment until its affairs could be untanglod.


officers disappeared! with a resulting loss of public confidence in their

The most serious results of these personnel difficulties occurred

in the smaller country banks where the management was vested in one or
two officials#

In such banks substitutions in the work of managing the

bank were difficult.

The operating officers had no understudies.


an official became incompetent on account of his age, it was sometimes
impossible for the bank to afford the services of a second officer to
take part of the duties of the first. All of these factors led to slipshod banking, especially in the matter of granting new loans and making

Difficulty in Removing Officers
Examiners repeatedly referred to the difficulty of removing bank
officers who were incompetent, unscrupulous, or dishonest.


these officers owned the controlling interest in their banks and dominated
their boards of directors.

In such circumstances the board of directors

did not wish to antagonize the owner of the bank by voting for his re-

moval as an officer, and, in fact, i t i B doubtful if ouch a method of removal would have served any good purpose as at the next directors ' oloction the owner of the majority stock would replace^the existing hoard of
directors by another group of men who would replace him in offico.


case 112, the examiner described the inability of an examiner to romovo
a bank employee in the following words:
"Directors were advised that examiner had no authority
to demand or request resignation of any employee, but that
i t was duty of examiner to make recommendations to directors
for good of bank, and i t was suggested that if presont management did not show a desiire or inclination to work with direct o r s that diitebtotfs should employ some one who would tako charge
of bank's loans arid who would t e responsible only to board hnd
not subject to interference by president or cashier, and i t
was further suggested that directors compel officers to comply
with resolutions passed that no new loans in excoss of $500
be made without f i r s t being authorized by finance committee
and that directors compel officers to furnish at board moetings information they desire concerning status of loans and
other a s s e t s , and that if present officers are not competent
in opinion of directors and the bank's welfare would bo improved by a change of management that they give serious cons i d e r a t i o n to same."
In some cases the board of directors and the examiner recognized
the weakness or detrimental influence of a bank officer, but allowed him
to continue in office rather than to risk the loss of public confidence
which might a r i s e from a change of management.

Case 70 was such an irw

In that bank the examiner reported in 1921 that the president

had been removed from active management, but was allowed to r e t a i n his

The examiner's statement follows:

"Your examiner does not question the integrity of the
president at t h i s time, but his judgment has been exceedingly
poor. He has permitted his customers to impose upon him, and
i s very optimistic even at the present time
At the meeting
with the board of directors, a resolution was passed prohibiting the president from making or renewing any loans whatsoever,
and the directors are to hold weekly meetings and make weekly
r e p o r t s of the progress made to the Chief Examiner and your
examiner. The matter of requesting the resignation of the

- 43? president was suggested to the board, but their disapproval
of t h i s course was unanimous. The president holds the confidence of the community and the directors f e l t that to
have i t known that Mr, X was no longer actively interested
in the bank's affairs would work to the detriment of the
bank. He i s , however, to be practically relieved of responsibility in the management of the affairs of the bank,"
I t l a t e r developed that i t was impossible to provent further
detrimental actions by the president of the bank, and in 1922 i t was found
nocessary to remove hipi from office in order to 30cure further loans from
the War finance Corporation and the Federal rosorve bank.

This action

was described in 1922 as follows:
"So acute had the situation become, i t appears to
your examiner that in. ldto December or early January further accommodations sought and obtained in some measure
through the War Finance Corporation was secured only after
Mr* X had consented, whether voluntarily or otherwise your
examiner does not undertake to determine, to ronounco his
powers and duties as active president; and since some date
in January or February Mr,
, who was elected as vice
president, has been in active control and management and
determining the policies of the bank. Under the terms of
the re&olution providing for his installation, there i s a
r e c i t a t i o n that his employment is to continue u n t i l the
War Finance loan is repaid. I t is further proper to state
t h a t Mr,
has the confidence and support of the Federa l Eeserve Bank, and that the Federal Reserve Bank will
continue i t s accommodations as long as he i s in charge,
Mr, X, the deposed president and his associates, somo of
them, a t l e a s t , have control of the stock. So far as I
have been able to discover, Mr, X has not interfered with
the management and conduct of the bank during Mr,
administration; and I can readily imagine that he has not
concerned himself particularly to help or do any real l i f t ing, so far as i t may be apparent, at least, in the bank's
present condition to get i t into easier and more comfortable circumstances,"
Later i t became necessary to levy a 100 per cent assessment,
The deposed president made i t a condition of voluntary payment of t h i s
assessment tfcat he be allowed to regain his position as president of the

This seemed to be the only possible way to avert the bank's closing,

and he was allowed to resume his position.

In case 105, the president engaged in cotton speculation as
previously described, arid the other stockholders were very anxious to
eliminate him from management.

They even offered him more for his stock

than it was worth, but he refused the offer and remained in control of
the "bank until 1926. The efforts to get rid of this man wore described
by the examiner in 1925 as follows:
"His resignation has been obtained repeatedly but he
continues to dominate the bank's affairs and will always do
so until he disposes of his stock* He claims ho has boon trying to do this, but the examiner is reliably informed that he
was offered more than the stock was actually worth and refused the of for. Ho is the hardest man to do anything with
that this examiner has eyer come in contact with, ho will
promise anything and never fulfills a promise."
In case 2, the examiner tried repeatedly to secure the resignation of the bank president who had engaged in chock kiting and other forms
of exploitation of the bank, but the president refused to sell his bank
stock or resign*

The examiner stated that the only possible chanco to

save the bank was to force a consolidation with the other bank in the

However, in this case the president of the bank finally sold his

stock to outside parties.

It was not stated just what caused the presi-

dent to take this action.

The examiner's description of tho situation


"At the same time President A was determined to
dominate the policies of the bank and would not consent to
anything else so long as ho held any stock or had anything
to do with it at all, but the public had lost all confidence in him and the bank on account of his management and
his extended condition personally* A banker had offered
to put $30,000.00 new money into the bank for its capital
if President A and his board would agree to take out
$25,000.00 of the worthless notes and the other real estate,
to elect new directors, and place it on a sound basis, but
he said he would not do that. Examiner could see this as
only possible chance to save the bank, or to force a consolidation with the other bank here, as a last resort."

In one case the examiner stated that the only way to induce the
president of the hank to retire on account of his age was to levy a heavy
assessment against the stockholders. Thisfcericwas case 36, and the examiner's statement written in I926 was as follows:
"The examiner believes that an assessment is highly desirable if for no other reason than to get the president out
of the bank and his stock placed in responsible hands.;|
Case 60 presents the unusual occurrenco of a group of depositors
forcing the board of directors to reinstate as president a formor cashier
who had been removed for incoiapetency. Tho reu^val of this man by the
directors in 1929 was described as follows:
"The directors of this bank continue to allow A to
dominate the policies of the bank. Ho is largely responsible for the excessive loans and bank's general unsatisfactory condition. C, former assistant cashier and bookkeeper, resigned recently. The directors obtained tho
service of D, a local boy, who for the past fow years has
held a position as bookkeeper in one of the largo X banks.
He was elected as cashier and director; A boing removed
as cashier and director, but retained as assistant cashier.
"The change has not improved tho situation. Mr. A
continues at tho same work and cashier D is the bookkeeper.
"Cashier D has not had the nocessary experience to
qualify as an executive. Mr. A spends considerable of his
time in looking after his farm and his insurance business
and the affairs of tho bank have suffered.
"President Bt who has been <mito activo in tho past
year is a man six'o^-fiv^ years of age, now failing in health
and is desirous of being relieved of tho responsibilities.
"A meeting of the board was hold during examination.
The directors were urged to make the necessary changes with
a view toward placing the bank in satisfactory condition."
The examiner was very much surprised at tho time of his next
examination to find Mr. A acting as presidont of the bank, and the reason
for his return to authority was described as follows:


- 206 -

"The examination of t h i s "bank was made in the r e g u l a r
course* Your examiner entered the hank the morning of March
26 f 193° a t 7*3° A.M., and found Cashier C in charge. A,
foiroer c a s h i e r , who resigned at the time of the l a s t examination was e l e c t e d president of the bank at the l a s t
r e g u l a r stockholders 1 meeting. His e l e c t i o n as p r e s i d e n t
was brought about through demands on the board of d i r e c t o r s by some of the large depositors that he return as an
a c t i v e o f f i c e r or they would withdraw t h e i r money.
"Cashier C inforaed your examiner t h a t the bank had
l o s t about $20,000.00 in deposits and the d i r e c t o r s were
f o r c e d to t a k e A bank into the bank.11


Among factors that eventuated in bank failures examiners' reports as a rule l a i d stress on those that were in large measure controllable by the management, and consequently they do not throw much light on
general economic conditions in their relation to the suspension of banks.
Some economic, climatic, and competitive factors are, however, included
in the examiners' analyses of banking situations.

The roost frequently

mentioned external factors were crop failures, lower commodity pricos,
bank f a i l u r e s in the vicinity, lower land values, and shut-downs of industry and s t r i k e s .
In case 39 the examiner criticized the banking structure of tho
community as being overdeveloped, as shown by the quotation from a 1926
"This bank i s operated in a small town in competition
with two other banks, and it is really a one-bank tovm.^
The banks are very b i t t e r and one would do almost anything
to hurt the other."
However, for several years before this criticism was made, the examiner
had been c r i t i c i z i n g the management of the subject bank for i t s weak lending policy.

As early as 1923 the following comment appeared:

"This community has been hard hit on Ian* values.
The slow paper i s only fair and there is but l i t t l e prospect for immediate improvement. The active president wh0
i s in charge has been away and is not considered J good
credit manf nor does he appear to have the * ° r c ^ ° f ? f d
proper security after he is advised of tne borrower
financial worth. Examiner attempted to impress upon direc
t o r s and officers the lack of atten ion given 0 loans
c r i t i c i z e d . Unless energetic e n o r t is o * " » w
the bank along these l i n e s , i t could ^ s i l y drift into £
unsafe condition. Too many loans are ^ w i t h o u t suffi
cient knowledge of the borrowers' a b i l i t y to pay.

- 207-

- 20S ~

By the close of 1927, the bank's d i f f i c u l t i e s from i t s weak
p o l i c i e s had become at-orles.

The examiner wrote:

"This bank i s simply a mess from s t a r t to f i n i s h . To
b e g i n w i t h t h e president knows nothing of banking, although
he i s a c t u a l l y t r y i n g h i s best to work things out.
new c a s h i e r i s lazy and h i s services w i l l have to be d i s pensed w i t h . There i s l i t t l e , if any, improvement in the
l o a n s , mainly because there i s not a r e a l c o l l e c t o r in the
bank, and i t i s a n t i c i p a t e d they will have many more l o s s e s .
The" d i r e c t o r s even now do not seem to r e a l i z e t h e i r respons i b i l i t y , although they have been told p l a i n l y what they
would have t o do, both by the examiner and the department.
Three of t h e d i r e c t o r s have many old past-due loans in the
bank r e s u l t i n g from endorsed paper, and s t i l l they make no
e f f o r t t o pay. The d e t a i l work of the bank i s in a deplorable condition.
The bank i s located in a very small
town i n which t h e r e i s another bank operating under a s t a t e
c h a r t e r . This s t a t e bank i s known to be in poor condition,
so t h e p i c t u r e p r e s e n t s a poor farming community with two
poor banking i n s t i t u t i o n s and neither i s in a p o s i t i o n to
t a k e over t h e o t h e r , and a very b i t t e r f e e l i n g e x i s t s . .
Close s u p e r v i s i o n i s needed here and, no doubt, eventually
t h i s bank w i l l have to close i t s doors.»
Early i n 1930 t h i s bank closed, and the examiner described the combinat i o n of f a c t o r s r e s p o n s i b l e for the f a i l u r e in the following words:

- 209 -

'The general condition of the bank reflects a materia l l y weaker condition than heretofore existed, due princip a l l y to procrastination on the part of the management in
not obtaining security and forcing liquidation where ess e n t i a l , continued poor crops, unfavorable prices, deflsut i o n in r e a l estate values, and the closing of the local
s t a t e bank January 25, which has resulted in the withdrawal
of $3S,000 in deposits since that time* After two conferences with the Board of Directors at which plans were
submitted to help effect a correction, a meeting was held
a t the chief examiner's office, after which directors
passed a resolution ordering this bank closed on February
2**, 1931."
Case 110 was a bank that was situated in a small town too
near a medium-sized c i t y .

In 1925 the examiner described the faulty

location as follows, but i t should be noted that he did not blame the
location alone for the bank l s difficulties, for he stated that the
bank had "been badly managed*

"This bank is located not very far from X., a city
of approximately Uo,000 people, and. unfortunately, a
l a r g e percentage of i t s business goes there. Competit i o n i s keen; the X banks have made a practise of han^
dling farm paper at S per cent, it being customary for
small country banks to charge 10 per cent. Local merchants and other enterprises are affected by the business that leaves here. This town cannot be considered
a desirable banking point. As previously stated, this
bank has been badly managed in the past.

- 210 -

The management was changed, but many poor assets remained in the bank,
as shown by the following quotation from tho 1927 report:
"This l i t t l e bank is situated too near X, on a paved
road to ever amount to much. It has been just hanging
on for the l a s t two or three years, chiefly because tho
C. National Bank, X. t believes in the ability and charact e r of the present management. The writer also thinks
well of Mr, A,, the active officer in charge. The
trouble i s chiefly old lines that were placed here under
a former mangement."
In January, 192S, the bank closed.

The examiner, who was present at

the time of f a i l u r e , described the difficulties of the bank as follows:

"This bank closed after the examination and before
f i n i s h i n g report•
For several years, this bank has
been very weak. Under a former management, the loons
became very extended* At one time the deposits of
t h i s bank reached $3^0,000,00. The stockholders of
t h i s bank have been fighting among themselves. They
are d i s s a t i s f i e d on account of not having any dividends
in years.
All the bank ! s profits each year have been
absorbed in taking care of old losses. President B. is
an excellent character.
He is about 81 years old and
unable to work. He came to this bank some 5 or 6 years
ago from the local state bank at the time the banks merged.
He i s too old to work. He held a contract between hinn
self and the old directors .that, while not legal, was
d i f f i c u l t to break on account of his good reputation and
advanced age.
This contract called for a salary of
$100.00 per month for l i f e .
Vice President A. has been
somewhat of a disappointment. He receives a salary of
$200.00 per month.
The bank was hardly aole to pay i t .
Cashier D. r e a l l y did the detail work on a salary of
$125.00 per month. The salaries of the officers caused
the stockholders to hold secret meetings and f a l l out.
As a r e s u l t , the C. National Bank, X., wmch J j *
lending t h e i the money to run on for years, withdrew i t s

- 211 -

Case 56 was another bank in a poor location, as shown
by the following quotation from a I92I report:
"This bank is located away from the business diut r i c t of XX and within 50 yards of the entrance to Y.f
which i s a separate municipal corporation, where are
located the stockyards. All or practically a l l of
the real estate is owned or controlled by the largo interests.
The other bank, which is also located in Y.(
was organized by the same interests that control the
yards in order to handle the banking business arising
out of the sale of live stock, and is so advantageously
located that the business of the yards flouc to i t naturally f
This bank, however, has in the past been
able to divert some of the business. During the past
eighteen months i t has, as many other brinks have, experienced a very large decline in deposits. The future
success of the bank depends upon its ability to regain
i t s deposits.
If that cannot be done, there should
be a radical cut in expenses."
Later the bank changed i t s location to a more central part of the
c i t y and, as a r e s u l t , secured over 1,000 new accounts and decreased
i t s rent m a t e r i a l l y .

Nevertheless, faulty policies burdened the

bank with undesirable assets, and in 192U the bank was forced to

The examiner, who was present at the time of failure, do-

scribed the causes of failure as follows:

212 -

"The bank's heavy losses are due principally *o i t r
extended the banl, of 2 and its customers, and the loans
i t ? ! tJr.
i ??* H a d n 0 t t h e s e l a r 6 e l o ^ e s developed,
* " " i n S t i t u t i o n c o ^ d * ™ been r e - '

Case 96 was a bank situated just acroos the State line from
a group of banks operating under a State guaranty act which used this
protective factor for destructive advertising.

The examiner blamed

the advertising of these competing banks for some of the difficulties
i a which t h i s bank became involved, but other factors were much moro
important, as shown by the following statement made at the time of
the bank's f a i l u r e in 1923:
'{(Phis community has been particularly hard hit in
the past few years, due to the rapid decline in the
c a t t l e market and the continued drouth. Ead this bank
been in a position to withstand the steady withdrawals
for j u s t sixty days more, and if the directors had been
a l i v e to the condition into which their bank wa3 getting
and resourceful enough to use their credit to aid the
bank a t . the time i t needed i t instead of now, the bank
would not be closed.
Unfortunately, this l i t t l e town is
near the
border line where Guaranty Fund banks make
a s p e c i a l t y of advertising the advantages of having one's
money safe, and as soon as doubt of the strength of this
bank got into the minds of the people they began to draw
out t h e i r money and put it in Guaranty Fund banks.
Cashier A., without any notice to the directors who are
strong men financially, let the X. P. & G. Company cancel
a bond securing the county funds and made no attempt to
replace i t with personal bond which could have been done
under the new Public Monies Law. The country treasurer
was n o t i f i e d on August 6th by the X. Company that i t s
l i a b i l i t y ceased 30 days from date. On September Uth,
although A had had 30 days in which to prepare a personal
Taond and get i t before the county commissioners, nothing
had been done, so the county treasurer, in order to prot e c t himself on h i s individual bond, presented a draft
of 4.6,000 for payment and, as the bank could not make
payment, i t f a i l e d to open on the morning of September 5th.


Farther light is thrown on the weak banking policy responsible for the f a i l u r e of this bank by the following quotation from
the 1922 report:

"These people have permitted their entire capital
and surplus to become tied up in six lines of credit,
which a r e not the best lines in the bank, by any means;
in f a c t , as i s usually the case, they are the weakest.
They have loaned the limit to the husband and then done
the same thing with the wife, claiming they both ran
separate o u t f i t s , a l l of which, in my opinion, ic simply
an evasion of the law. At any rate, i t is the poorest
kind of banking, and needs prompt attention."



In order to obtain a picture of typical conditions that
have led to bank failures during the years 1921 through 1931, an
intensive study has been made of 225 selected banks that have suspended during that period.

The material analyzed was drawn largely

from examiners1 reports of the condition of these banks for a period
of years prior to suspension. One hundred and twenty of the banks
analyzed suspended prior to 19311 a*1* 3 out of U of these wore lo~
.catedin towns of less than 5,000 population in Federal reserve districts predominantly agricultural. One hundred and five of the banks
analyzed suspended in 1931; of these, kj wore located in towns with
a population of 5,000 and over, and many were in the industrial districts of the Northeast.
Assets and Liabilities, of Suspended Banks. - Analysis of
the balance sheets of 225 *^*

suspending during the years 1921-

1931 indicated that the deterioration of assets which resulted in
the final closing of banks was in most instances the result of a
process developing over a period of years. According to bank

~ 2lU


- 215 -

examiners' classifications, the questionable aoocto of suspended
'."banks a considerable time before failure assumed relatively largo
proportions when compared with the capital and surplus of thcoo

In many cases these questionable assets were more than

200 per cent of the capital and surplus of the bank prior to

Large borrowings were characteristic for a con-

siderable period prior to suspension of the 225 banks.


were instances in which borrowings were several times tho amount
of capital and surplus.

In jS cases out of the 225, tho manage-

ment was criticized for continuous borrowing.

The 105 banks which

suspended in 1931 had for a considerable time before failure a higher proportion of loans end investments in loans to customers than
did a l l member banks outside of central reserve c i t i e s .

The sus-

pended banks had a somewhat lower proportion of open-market loans
and a somewhat lower proportion of investment securities. Among
225 suspended banks, the ratio of loans to officers, directors,
and their interests was higher as compared to capital and surplus
than was the case in a group of banks that did not suspend.


c a l l y , the suspended bank prior to failure was advancing to officers,


*- 216 ~

d i r e c t o r s , and their interests a figure equivalent to about
one-third of capital and surplus.
Criticisms £f Loan and Collection Policies, - Examiners'
reports constantly criticized officials of a majority of the 22$
suspended banks because of lax and careless lending policies,
which were often accompanied by slackness in collection efforts.
C r i t i c i z e d lending practices were often associated with real
e s t a t e mortgages and general loans to farmers.


loans were made to farmers without specific security, and in
an effort to secure the loans junior mortgages on farms were
subsequently taken.

Examiners' comments showed that other types

of c a p i t a l commitment were common. Loans were made which could
not be paid in the ordinary course of businoss at maturity, such
loans were constantly renewed, and were thus furnishing capital
to borrowers.

"Placed paper" and the evasion of loan limits by

s p l i t t i n g lines with other banks were often specifically c r i t i cized by examiners.


- 217 -

Criticisms of Investment policies. ~ Among the i : banks,
which failed during the years 1921-1930, portfolioo were heavily
weighted with local loans and included relatively few investment

.Among the 105 banks

which suspended in the year 1931,

however, a number had relatively large bond accounts.

In this

group of banks, difficulties with bond investments arose in part
• from purchases for yield rather than for safety. 3ond trading,
unlisted bonds, real estate bonds, and convertible bonds were
often the specific causes of troubles. Nearly one-third of the
105 banks wfere criticized by examiners, more or loan severely,
because of their investments, and a number of others held bonds
of poor quality.

In several cases where bond depreciation wa3 the

primary cause of failure, investments formed a larger proportion
of portfolio than loans. During the period covered by the study,
depreciation in bond accounts was not found to be serious for many
of the banks analyzed until the second examination of 1931.


the Northeastern part of the country especially, bond depreciation
was a much larger factor in bank difficulties in 1932 thnn it had
been in 1931 or previous years.


- 213 ~

Criticisms of Bank Personnel. - In 135 out of 225 GUG~
pended banks evidence of disregard of banking law or regulation
on the part of officers or employes was reported by the examiners.
In some cases, the offenses were of the most serious nature, ac
in the case of 2S defalcations, 5 conversions of funds, S forgorios,
and 27 f a l s e statements.
Exceeding the legal limitation on loans to one interest,
f a i l u r e to keep up legal reserves, payment of dividends not currentl y earned, and excessive investment in banking house were often a l luded to by bank examiners•

In 101 of the 225 suspended banks,

bank directors were criticized because of their lack of attention
to the affairs of the banks. Managing officers or influential
d i r e c t o r s of a number of the failed banks included in this study
used t h e i r positions to secure favors from the bank, and at times
to finance speculative or fraudulent transactions of their own.
Attention was often called to the payment of excessive salaries
to bank o f f i c i a l s .


- 219 ~

In 71 out of 225 "banks, examiners' criticisms frequently referred to weak management* Weak loan, investment,
and collection policies referred to in previous paragraphs
are additional indications of ineffective management•


- 220 -



- 221 -

Case Histories of Suspended Banks

- 222 -

Case 1
Bank Organized:
Bank Suspended:


Population of Town: 3000 (1910 Census)
3000 (1920 Census)
3000 (1930 Census)

Principal Crops or Industry Served " y Bank:
Tobacco, grain, cattle, hogs, and sheep.
Important Excerpts from Reports of Examination: (Amounts in thousands of dollars)
BorrowClassified Assets


& Profits




Slow Doubtful Losses

ljw26-20 Exam. S:









11-26-20 Exam* T:









3-1U-21 Exam. U:
6-13-21 Exam. P: "A very satisfactory response was made by the Board of Directors
to the examiner^ remarks. They are working hard; "but thru careless extension of
credit, they have gotten into such a condition that they cannot work out rapidly.
The Cashier says he ffeels so safe1 if he can secure loans with life insurance,
that life insurance is f a hobby1 with him. The only way, apparently to collect a
good many of these loans is to kill off the borrowers. It seems to me that if the
next examination could be made in four months, instead of three, it could be seen
better the progress made."
6-13-21 Exam. P:
6-20-22 Exam. V: n In your examinerfs opinion, while this bank is in far from a
satisfactory condition, still there seems to be no cause for alarm as a majority
of the paper, while slow and unsatisfactory has more than even chance of eventually working out. The Board was impressed with the necessity of requiring reductions wherever possible and it is believed that after the crops have been harvested this fall, there will be substantial reductions in a number of the criticised lines. At time of previous examination your examiner required the board to
make good on fines for deficiencies in reserve to the amount of $356.89. It was
discovered that this sum was at a later date charged to the expense account and
the directors refunded this sum. Since the last examination there has been additional fines of $172.jk making a total of $529.23 which the directors were requested to restore to the bank and which they promised to do, the Cashier stating
that each account would be charged with his share and the expense account credited.
It is thought tnat the next examination should be made in about four and one half
months and so continued until the bank is in a more satisfactory condition.M
6-20-22 Exam. V:

~ 223 Case 1 (Continued)



& Profits




Classified Assets
Slow Doubtful Losses

12-1-22 Exam, V: "The management and directors of this bank seem content to let
things drift along with the hope that conditions will get better without any effort
on their part* There is no question in your examiner's mind hut that the "bank
could have shown a much "better condition this time if there had been some good hard
work done by the management and board. It is true that their main crop (wheat) was
a failure this year, but this is a good cattle and hog country and the condition of
the other bank in town will show that this failure is not entirely responsible for
this bank's extended and overloaned condition as they claim, but is entirely due ta
lack of aggressiveness on the part of the board and management. The board requested that they be allowed to charge off $3>500. each six months on the losses
shown, but were advised that permission would have to be obtained from your office.
Their reason for wanting this concession is that they might declare a dividend
claiming that if a dividend was passed, it would wreck the bank, this is of course
only an idea, and in your examiner's opinion would not have such a serious resultf
It is respectfully recommended that your office require a bond from the directors
guaranteeing the bank against any losses in the paper classed slow and doubtful.
The schedule showing directors' liabilities in call of September 15f 1922, is apparently incorrect to the amount of the indirect liability charged to A and possibly one or two others. The bank keeps no record of the directors1 endorsements,
and when questioned as to how he obtained the amounts, the cashier stated that he
took the last report of examination and made his schedule from the amounts shown
there. A letter was left with the Cashier to be signed by all its directors and
forwarded to your office. In view of unsafe condition of the bank and seeming lack
of effort on the part of the management and board, it is respectfully recommended
that this bank be examined again in not more than sixty days."
12-1-22 Exam. V:
2-6-23 Exam. V: "The bank shows some improvement over last examination. Borrowed
money has been reduced some $k0U, Loans 20M (in addition 6M during examination) and
deposits have increased some $30M. Hegardless of these figures the management has
improved fully 50$ in that the directors are taking an active interest in the baik ,
have recently passed a resolution that everybody must pay at least 10$ on their
loans at each renewal and have so far lived up to this requirement. Your examiner
believes that at last the board and management have awakened to the face that they
must show some results, and it is believed the bank can be removed from the special
list or at least allowed to run U^ months before another examination."
2-6-23 Exam. V:
5-29-23 Exam. V: "Your examiner did not hold a board meeting inasmuch as all directors were not available, and furthermore the bank is seemingly having their attention. While still loaded with many frozen loans, it appears that everything
possible is being done to prevent a loss and these loans will be worked out as
rapidly as possible. Many of these loans are secured by life insurance policies
on which the bank is paying the premiums. This item is costing them approximately
3M per annum which of course materially cuts down their earnings. The attitude of
the management and directors has -undergone a great change in the past six months,
in that instead of being indifferent they are now on their toes and working hard
to bring the bank back to a sound, solvent condition. This is evidenced by the follow^

- 224 ~
Case 1 (Continued)



& Profits




Classified Assets
Slow Doubtful Losses

ing figures* Loans reduced since previous examination $5211. Borrowed money $96M
and deposits have increased 3*M» Your examiner is of the opinion that the bank
can safely be removed from the special list and respectfully recommends that this
be done*"
5-29-23 Exam. V:
1-25-24 Exam. P: "Bank will probably take a long time to work out of present condition, the Cashier and other directors now seem to realize necessity for making
every effort, "
1-25-24 Exam. P:
7-1-24 Exam. W: "As is shown by the face of the report and classification of this
bankfs assets, their condition is far from being satisfactory - their trouble appears to be the result of relying too greatly upon moral worth and extending
credit without security beyond the limit and ability of maker to pay - wnen de- v
termined as doubtful bank officers attempt to secure by taking out life insurance,
carrying the premiums in most cases, the conclusion of which produces a dangerous,
slow workout condition, but which is beyond the ability of the Directors to solve
immediately. A general curtailment of all lines is promised for purpose of reducing the bank's over-extension. The Cashier is intending to visit X next week
and has promised your examiner to have a conference with the Chief Hational Bank
Examiner, and to renew with him all promises and good intentions as snown in this
report. As shown in the letter to be forwarded after signatures of directors are
affixed, your office is to be furnished with a detailed report, weekly, (copy to
Chief National Bank Examiner), disclosing success in eliminating the numerous
criticisms, the collection and further securing of all doubtful assets and reduction of borrowed money. It is not believed that more frequent examinations at
this time would be of any special benefit and that the Directors are honest in
their promise to assume general direction and to give all aid possible towards
bettering the bank*s conditions."
7-1-24 Exam, tf: 100
1-31-25 Exam. W: "It was ascertained that about 1921 this bank sold to the T
National Bank a portion of their B/H's aggregating $69,000., said to have been
done without recourse or repurchase agreement, but when your examiner attempted
to reconcile the notes held as rediscounts and as collateral for money borrowed
from the Y National Bank of Z of this bank, an aggregate of $44,000. was included
in rediscounts which were not shown by the daily statement or general ledger of
this bank, but a portion of which was shown as a line due this bank by entries on
the liability ledger. It was also admitted by the Cashier that the notes aggregating $44,000* were endorsed with recourse on this bank, but as before stated,
both President and Cashier insisted that they were the residue of the original
sale of notes, aggregating $69,000.00* Your examiner then requested that a committee appointed by the Board visit the President of the Y National Bank, and
procure a waiver of all liability pertaining to the $44,000. which was secured
and reads as follows: f Z, Peby. 3, 1925#~ I hereby certify that the above list
of notes aggregating $44,756.07 is held by the Y National Bank without any endorsement or guarantee of the B National Bank of C«f (Signed) President. - The
books of the bank also show that they owe the War Finance Corporation $50,000.

- 225 Case 1 (Continued)


Cap, & Profits



Borrow-^ Classified Assets
SloW Doubtful Losses

"but have collected $7,250. of notes pledged as security for this debt which has
not been remitted or credited, only entries made were redaction of B/Rfs and increasing of cash and due from banks. Should amount collected have been remitted,
reserve deficiency would have been increased a like amount, The Cashier is hopeful of procuring consent to make substitutions rather than payment. The classification of loans is the result of a canvass of the notes, with the directors
shown as bein& present. The lines classified as doubtful are in reality losses,
as the directors admit the present insolvency of the makers, who are without
present financial worth to either pay or secure and the ultimate liquidation of
which is dependent upon the life insurance policies taken out to secure or an inrheritance from some near relation most of whom are at present enjoying excellent
health* The officers and directors, while admitting the losses as shown, beg
that they be given an opportunity to make a concerted effort to procure security
for the lines as shown and to charge off $4,000. on 6/30/25 and balance as requested by your office, begging, however, your utmost leniency. The situation
here is very grave, requiring extreme cooperation and guidance by the Board of
Directors. It is believed that a change of President at this time would be productive of great good to the bank. The President, being badly involved (line secured by life insurance 10M), although inactive, is dominated by the cashier, has
very little stiffness in his back bone, lacks knowledge of general banking affairs or conduct of same. Mr. D, who is a member of the Board in excellent financial condition, would, if desired, accept the Presidency and work out the
bank's problems to a favorable conclusion. He at the present time is on the
verge of disposing of a portion of his holding for $300,000* all of which he assured your examiner he would use in protecting the bank's interests should he be
chosen as President, Mr. D is a retired attorney, bears an exceptional reputation in his community, and is thoroughly acquainted with the financial worth of
the customers of the bank; this with his knowledge of law and personal financial
success, would indicate his especial adaptability for this situation. The Cashier
is doing all he can to eliminate items of criticism, some of his methods however,
are questioned, for instance, in the amount of estimated losses at last examination were a lot of small notes aggregating $3>000# endorsed by E, both makers and
endorser of which were admitted insolvent, after charging off the various small
notes (2 name pappr) one note for the aggregate $3,000. was executed by the endorser E, secured by life insurance with no cash value, reinstating the amount
charged off. In spite of such practices and the large amount of questionable,
doubtful paper the directors withdrew $5»000. from surplus fund in order to provide and declare a dividend. Under liquidation the losses would probably aggregate considerably more than estimated as doubtful and loss as the bank holds a
large aggregate of paper which to a large extent is moral, the enforced payment
of which would result in a loss, but which if given time will work out."
1-31-25 Exam. W:
8-27-25 Exam. W: "Practically four days were spent in endeavoring to strike a
balance on the Loans and Discounts. Impossible to verify. Duplications were
found in the note file, said to be errors in not taking out and returning notes
satisfied by renewals. Notes discounted and collateral pledged cannot be reconciled with lists furnished by holding bank against this bankfs records, nor can

- 226 Case 1 (Continued)



& Profits




Classified Assets
Slow Doubtful Losses

any "borrower's liability " e checked against this "bank's liability ledger. The
Cashier admits that 90$ of the accounts are incorrect. Both President and Cashier
I promise to immediately install a new liability ledger and see that it is kept
in balance. Each and every loan was separately canvassed - Messrs. D, F, G, H and
I being present and fully admitting the classification as shown throughout the
report, before Closing the examination; doubtful loans and losses were again gone
over and declared by them to be a correct showing. It is promised that the entire report will be reviewed at the next monthly meeting at which time all losses
will be charged to Profit and Loss, also that a full attendance of the board will
be required. Crop conditions locally are very bad, in fact might be termed a
failure and very small if any relief may be anticipated from the marketing of
farm products. Businessfconditionsat C are dependent upon the farmers1 production. They have no manufacturing industries to stimulate business. The lack of
farm production for past three or four years is reflected in this and other bank's
condition in this section. In checking the earning and dividend report for June
the 30th., it is found that the Cashier made a book entry of $3*000., debiting
'Unearned interest1 and crediting 'Undivided profits1 with like amount. This so
stated was for the purpose of carrying out the director's promise to charge out
losses of $H,000.00 and to provide funds to declare a dividend. In addition to
the above, he added interest to items shown and admitted as being doubtful and
losses in former report, crediting same to earnings. These entries were made for
the same purpose. Last December, the Cashier had E give him a note for $31000*00
which was credited to earnings, so called recoveries from losses charged off. U
is a discharged bankrupt, has no assets and apparently no moral worth. His line
in the bank as well as those of other members of his family is not collectible,
except when guaranteed by responsible parties. The loans and discounts are carried in such a way that it is impossible to provide a method through which a
satisfactory checking can be made. Some of the notes do not appear to be listed
or entered upon the bank's books. Duplications found, but claimed to be errors
in not removing the old note from the file. Demand notes (so-called) are kept
separate, always in the custody of Cashier, quite a portion of which are nothing
more than memoranda of amounts due. The Cashier is treasurer of the city,
credit balance at this time about $3,000.00, but he is carrying in his bonds and
other security accounts about $15$000.00 of warrants which are payable on demand
and are not interest bearing, in loans and discounts are so called demand notes,
of around $3»Q00. upon wnich interest is not and will not be collected, so stated.
This practice covers quite a period. Cashier stated that he had plenty of funds
in the other banks to pay these items, but was playing politics, in order to get
the benefit of the proceeds of issuance and sale of $100,000.00 in bonds, about
Sep. 1st. Liability Ledger cannot be depended upon, no effort has ever been made
to put it in balance, even the lines of the directors are not correct. Assistant
Cashier J; has an unsecured borrowing line of $10,700.00 and in addition to this
his account is overdrawn $1,000.00, habitually over an extended period; but the
directors and other officers claim that this overdraft was produced without their
knowledge or consent. J is said to own a home valued at around $5»000.00 mortgaged for $U,000, interest in his father's estate, which likewise is mortgaged
for its worth. Unless his brothers and sister will come to his aid or he can get

- 227 ~
Case 1 (Continued)



& Profits




Classified Assets
Slow Doubtful Losses

his friends to endorse for him the hank will probably lose this entire amount.
The directors admit that it is all doubtful, J has an invalid sister whose affairs
he is said to have charge of, her account is overdrawn $325»00 and in addition
owes the bank for borrowed money $2,710.00, It is not known if she has sufficient
assets to protect. It is thought both are borrowers in other banks, but amount
not known. In looking through the check files, debit slips were found closing out
small deposit balances, said to have been used by the officers in paying losses on
overdrafts and shortages in the cash. Just how much has been used in this way
cannot be learned as no record was kept and officers and employees claim ignorance
as to the aggregate, and insist that it would be impossible to even partially establish the amount or the number of account. Stating that only very small balances were used and for the purpose of ridding the ledger of amounts too small to
bother with, when transferring balances and opening up or installing a new system.
The new President, Mr, D insists tiiat he is going to renovate .the. bank,
put in new and modern system of bookkeeping and see that the books are properly
kept. While it is thought that he has the best of intentions, yet it is doubted
if the present Casnier will co-operate with him or assist in the betterment of
present conditions, as he has been in the bank thirty years and entirely satisfied with the way matters are and have been conducted. The directors are disposing of other real estate to Directors D and I, they having offered about
$3>000.00 more than can be obtained from any other source. This sale together
with the collection of City Warrants (which is promised) will restore the bank's
reserve, and materially restore their cash position."
g-27-25 Exam. W:
7-3-2b Exam. W: "Especial attention is called to Page 6 which gives detailed information as regards the affiliation of the directors, combining of their lines
both direct and indirect, and showing the full extent to which they are personally guaranteeing assets which would otherwise be classed as doubtful or loss. It
is to be hoped that these lines may be reduced, as the bank's growth is hampered
by reason that a large portion of the loans are frozen, and the reserve being
habitually deficient, the bank is unable to take on new accounts or extend the
business. As shown on page 11, under 'Recapitulations1 the bank has doubtful
assets aggregating $75»0M-5,22 which in all probability will become determined
losses. In addition to the foregoing losses of $5t9*+7*SU under liquidation
doubtful paper and losses would be increased, by reason that, should immediate
payment be required of some of the lines shown as slow, makers could not pay and
enforced liquidation would produce insolvency* However, at this examination the
directors shown as present, passed upon or classified all lines both separately
and collectively. A new liability ledger has been installed, but as yet has not
been balanced* Due to the methods practiced in the handling of the loans, it is
practically impossible to correctly aggregate or exhaustively determine the
amount of loans due to duplications, lack of records for notes held as collateral
for B/R's at various sources of borrowing, and those placed with the bank's attorney for collection. While reading the minutes it was ascertained that on June
30th, after an examination by a committee appointed from the board, it was ascer-

Case 1 (Continued)

Cap. & Profits




Classified Assets
Slow Doubtful Losses

tained that the bankfs loans and discounts were short $2,596.37 which was cared
for " y the Ass't. Cashier and Custodian of the notes executing his note in the
amount of $2,596*37 and same endorsed " y the Cashier I. After a long run was
made " y your examiner, and the list checked back the loans appeared to be over
only $1,976 but after taking off the liabilities of borrowers and comparing'same
with the amounts as shown from the liability ledger, an error of $3*500.00 was
found in the extension of credit extended to the Cashier. The liability ledger
showing only $9t950 wnile the notes and copies of notes found in the note case
produced a total of $13*^50.00. Mr. I when approached relative to the matter,
immediately stated that there was an errort insisting that he only owed the bank
$9*950.00 for direct personal extensions of credit. Upon producing evidence, or
items in question proving the correctness of your examiner's line sheet, Mr. I
stated that, there were two copies of note of $3*500.00 and there should be only
one. (Destroying one). It could not be ascertained from the copy destroyed if
such were the case, as it was not dated. However in checking the collateral
pledged for B/R's it was ascertained that his contention was correct. Correcting
this finding and one or two other minor errors in deductions of credits, resulted
in a shortage of $3»370.91* this in addition to the amount corrected of $2,596.37
on June 30th. as before stated. It was then required that a run be made of the
new liability ledger, this after being checked back produced a shortage substantially as was produced by your examiner from the notes. The directors were then
requested, with the assistance of the active officers, to take the bank's loans
and check them back with the liability ledger. The directors and attorney for
the bank wars requested to produce a full listing of all items lodged with him for

7-3-26 Exam! W:









9-29-26 Exam. 0: "Acting under instructions contained in Comptroller^ letter of
September IS, 1926, the writer went to C, September 29th, and made an examination of this bank. At conclusion of the examination it was found that a MOST
DAN&EROUS and UNSATISFACTORY CONDITION existed, and in order that the Board of
Directors might be rightfully advised of the situation a letter was prepared and
read to a quorum of the board who came at special request to a specially called
meeting. As a copy of the said letter is sent with and becomes a part of this report, it is believed unnecessary to further list the contents of the same on this
page as the CRITICISMS set forth fully include every item read to Board in the
letter. It is feared that the bank is in such an unsatisfactory condition that
little may be done at this date to save it. It was thought possible a consolidawith the other bank in town might be arranged but that does not appear among the
possibilities. At the meeting of the Board the matter of resignation of I, Cashier, and the Assistant Cashier, was discussed. I, who is a director, appeared at
the meeting. He was very much unconcerned. So great confidence have some of the
members in I they refused to at first even listen to such an act as his resigning
I stated ha had done nothing wrong, however, if the \?hole board desired, he would
arrange his affairs to possibly retire January 1, 1927 • The LETTER EROM THE
COMPTROLLER was then read to the Board and President D and Vice President & spoke
very strongly and I presented the resignation of both himself and his son, as

229 Case 1 (Continued)



& Profits




Classified Assets
Slow Doubtful Losses

cashier, director and assistant cashier to become effective immediately. The
Board accepted the resignations. Prior to the meeting and in the morning, Mr. I
agreed to furnish the bank a personal statement and also by ttmst deed convey to
the bank to secure his direct and indirect line all of his real property which
includes farms, his home, town and city property which the Board claims have a
net worth of some $225*000. It was pointed out to the Examiner that the public
upon learning of the resignations would become very curious and suspicious and
that an immediate run upon the bank would follow. Inasmuch as the examination
of the other bank in town was to be made by the writer the day following it was
agreed and understood that Mr. I would remain in the back room of the bank for a
few days, without any title or authority to touch a book or paper and that his
son, after being bonded for $12,000. would remain as teller for a few days* This
was believed by examiner to be good judgment as Mr, I is popular and has many
friends who persist in believing in. him. It was reported to the writer that matters were quiet in C after this and up to Thursday morning, October 7» 1926, when
President D, over long distance telephone, advised that he had found some shortages in savings bank pass books of the bank, which disclosed the fact that I was
short at least $100,000. in his accounts through a long period of years in manipulation of the said pass-books, which Mr. D claimed could not have been discovered
by the examiners had not Mr. I made the confession and disclosure to him. Mr. D
stated he believed the bank was therefore INSOLVENT and he was advised by the
writer to convene his Board of Directors, apprise them of the situation and if
they so determined that the shortages would put the bank in the ABSOLUTELY INSOL-'**
VENT CLASS, to close the doors and have a notice posted upon the doors atating
it.yras closed by the order of the Board of Directors. Such action was taken
Thursday noon, October 7t 1926, the bank was closed, and Examiner was instructed
to proceed to C at once and take charge of the bank, is now in charge, and states
he so notified your office. This report will show there were determined losses
aggregating $36,000. and with doubtful paper fully twice that sum and depreciation in bonds and overdrawn profit and loss account, hopes for the bank to long
remain open were indeed not bright. However, up to the time of the departure of
Examiner from C last Tuesday night (Oct. 5th) the directors and President D were
determined to do their utmost to preserve the interests of depositors. Later
disclosures of the shortage utterly overwhelmed them, and I's best friends now
appreciate the fact they SHOULD HAVE L0N& AGO GOTTEN RID OF HIM. In a late message received today from the examiner, he states the stealings have been going on
9-29-26 Exam. 0:






192*+ 1925 Total

Net Income (Gross Earning less Expenses)
Losses Charged Off
Assessments before Suspension
Bad Assets Purchased by Stockholders














- 230 Case 2

Bank Organized: 1907
Bank Suspended: 1930

Population of Town: 2000 (1910 Census)
3000 (1920 Census)
3000 (1930 Census)

Principal Crop or Industry Served by Bank:
General farming, fruit & vegetable canning, cattle raising & marketing, lumber.
Important Excerpts From Reports of Examination:
3-29-20 Exam, U:

Cap, & Profits


(.Amounts in thousands, of .dollars)
Classified Assets

Loans Deposits



Slow Doubtful Losses



10-7-20 Exam, U:
4-5-21 Exam, U: "In view of the continued violations of Section 5200 your Examiner recommends that the bank be placed on the list for frequent examination."
4-5-21 Exam. U:
g-22-21 Exam, U: No Remarks
S-22-21 Exam, U:







6-12-22 Exam, U: "Meeting of directors was called but none other than the active
officers were available. By reference to Page two, it may be seen that the management of the bank is left to the officers as they and one other director usually comprise the directors attending the meetings. The President is resourceful
and in good standing with other banks and can and doubtless will remove all paper
under criticism in this report. Under his management no losses have developed up
to the present."
6-12-22 Exam, U:
10-30-22 Exam, U: "While the President is using the bank for his own benefit to
too great an extent, he is a man of worth and ability and is working out some slow
and undesirable paper."
10-30-22 Exam. U:
U-13-23 Exam, U: "The large line of A should be -reduced because it shows too much
of the bank's assets being used for his personal benefit. The worth of A has
been gone into thoroughly and although his statement shows a net worth of over
200M several of the assets are subject to a scaling down which would leave his
worth at about 10014. The principal portion of this worth consists of land elsewhere, the purchase of wnich is the cause of his present extended condition. The
fact that he is operating this farming land on principles which maintain here and
at a distance which precludes close supervision, naturally makes for a condition
which practically eliminates profits. He is capable and will be able, doubtlessly to dispose of his holdings to advantage before he becomes involved. His
credit is good through this section and he has promised to move a large portion
of the line criticised."
4-13-23 Exam. U:

~ 231Case 2 (Continued)



& Profits




Classified Assets
Slow Doubtful Losses

10-^23 Exam. U: "Unless the health of President A fails it is believed that
there is little doubt but that he can work out of his present extended condition.
It is believed that a part of the large line is borrowed for his benefit but such
cannot be traced thro-ugh the records. In view of the continued violations of law
as evidenced by excessive and non-conforming real estate loans; the extended condition of the president, as evidenced by the large line, and the large amount of
doubtful paper it is believed that the next examination should be made in about
ninety days#"
10-4-23 Exam. U:
1-2-24 Exam. U: "The responsibility of the management of the bank has been assumed for so long by the president that officers and directors give it little attention except to approve his policies. He has been giving his time to his own
interests to the neglect of the bank and having been appointed receiver for the X
Co. has recently given half his time to it. He has promised to have all matters
criticised in good shape by the time of the next examination which should be made
in ninety days, because of the continued violations of law and large amount of
slow and doubtful assets."
1-2-24 Exam. U:
10-14-24 Exam. Q: "President A was absent on trip during examination, but Examiner saw him on his return the afternoon of October 15t 1924. At examination
July l6, 1924, he was found 'kiting* about $35iOOO.OO to $40,000.00 and quite a
lengthy session was held with him and the other directors before the matter was
adjusted. He ventured the remark to your Examiner October 15» 1924, that we had
accused him of 'kiting1 but that his reserve ran low at Y, and that he had some
money in other banks on which he gave checks to build up his reserve. This is
mentioned to indicate just what type of man he is and to s-uggest what we mast
meet at this end of the line. It would appear that directors closely watched
and prevented him from 'kiting' following the examination of July l6, 1924, and
that he soon cleared out the amount. However, one of the directors said that he
opened an account with his competing bank in the town, and 'kited' until banks
finally realized what he was doing and some of his checks went to protest. Mr.
B, Cashier, Z National Bank, C, informed Examiner that about $18,000.00 of his
checks in favor of the D Bank, E, were returned through his bank, and that the
E bank was alarmed for some days before A succeeded in arranging the amounts to
their satisfaction. It would appear that he cleared the 'kite' out of his own
bank under pressure of daily attention from his directors, but that when he succeeded in arranging the matters that he became antagonistic to frequent visits
and attention from the directors. Directors probably would have asked him to resign, but he has so much more stock than they that they did not feel like it.
They also felt that he would get enough support from his friends and relatives to
control the annual election in January and that he would be able to have it as he
wanted then. Some of the directors also think that he has become irritated on
account of their close supervision since the examination of July l6, 1924, and
that he will probably control the annual stockholders1 meeting next January and
elect an entirely new board to suit himself or such individuals as he can control.

- 232 Case 2 (Continued)


Cap. & Profits




Classified Assets
Slow Doubtful Losses

It would appear that as soon as directors cease their vigilance or daily watch
that he will operate HIS bank to suit himself • It is really more than could he
expected of a hoard of directors to have to watch transactions and his account
daily or so often, and if he could he driven out of the system it would he good
work well done. He has a small amount now which has the appearance of a 'kite1
as shown by question 5» Va&e 3 of this report, and this matter was called to the
attention of Directors F and G during examination. This has been done in spite
of his letter of July 15, 1924, but the checks were issued by his secretary and
he would probably contend that she had no instructions to do so. It would now
appear that some of the country banks know more about him than they did, and that
this information will be circulated until most of them will know of this matter
in the course of a few months* He admitted liabilities of more than 100M to your
Examiner at the examination of July 18, 1924, but they probably are much more.
He said that his assets would aggregate about 500M. However, it is doubtful if
they would liquidate 25$ of that amount, and when all the banks of this section
call him as they probably will do as this informatioh becomes circulated, it may
yet cause some embarrassment. In other words, this is a proposition which cannot well be solved so long as he is in active charge or control of the bank.
Also, as the information becomes circulated, further withdrawals of deposits may
result. It would appear that there have been some withdrawals since last examination, and one of the directors said there had been in their time deposits.
He had an offer to buy from two sources, but was said to have asked 150$ for his
stock which was not worth more than 73% Then he would expect to sell without
buyer making an examination which is scarcely probable. Examiner informed directors that losses impaired their capital, and advised them that if they desired to discuss the matter further he would see them at his office Saturday,
October IS, 1924, but they did not come. However, President A called over long
distance to discuss some matters. He was informed as to some of the items that
must be removed from the assets, and asked a little time. Examiner informed him
that it would be 15 to 30 days before letter from Washington, D. C. reached him
or his board, and that in the meantime they could prepare themselves to arrange
matters. President A has indicated his intention of giving his commission as
receiver of the X Company to the bank to reduce the loss to the bank, but that
has not yet been determined as to the amount. However, it soon should be ascertained, and he now should know about how much of the loss in that line he
will remove. They will not make a move to clear the matter until forced to do
so, and in opinion of examiner it is time for the bank to be relieved of the
losses as listed. The items listed otherwise undesirable in the report should
be removed from the assets as well as the losses listed as there may be some loss
in items listed otherwise undesirable but for lack of information desired by examiner that was about the only classification the items could be given. It is
recommended by Examiner that these items be required to be removed just the same
as the losses. There may be some contention from President A that Examiner has
been too hard in his classification, but examiner is ready to meet him or his
board in regard to any line or classification. A> State Bank Examiner, made H
Bank, I, and reports 'kite1 cleared about the middle of August, and that he had
some ten or twelve dollars left to his credit there. Your Examiner will again
make this bank in regular course unless it should be assigned to Chief National
Bank Examiner or some action taken in meantime.11
10-14-24 Exam. Q:

- 233 Case 2 (Continued)


Cap, & Profits




Classified Assets
Slow Doubtful Losses

1-12-25 Exam. Q: "Examiner was requested by telegram to begin an examination of
this "bank Monday morning January 12, 1925 with the understanding that Chief Examiner would join him for conference Tuesday morning January 13* 1925* The examination soon revealed that the hank was in a very serious condition, and examiner could see hut two ways in which to save it. It may he recalled that President A was 'kiting1 to the extent of $35,000*00 to $1+0,000.00 and that it was with
difficulty that your examiner succeeded in getting it stopped after spending
three days in the hank and a visit by Chief Examiner was necessary. The bank also
had some losses, and it would appear that the public gradually became aware of the
condition of the bank. Deposits had reduced some at the examination October 1924,
and more recently withdrawals had been very heavy until bank was in a very extended and serious condition. The certificates of deposit have a 30 day notice
clause in them, and on Friday Jan. 9i 1925 directors found it necessary to enforce the notice of 30 days to keep the bank open longer, and when examiner arrived at the bank a few certificates had been presented for payment at the expiration of the 30 days and more were presented during the examination. Some demand deposits, or checking accounts, had been closed with prospects of more being
closed and local people were withholding their deposits. At the same time President A was determined to dominate the policies of the bank and would not consent
to anything else so long as he held any stock or had anything to do with it at
all, but the public had lost all confidence in him and the bank on account of his
management and his extended condition personally. A banker had offered to pat
$30,000.00 new money into the bank for its capital if President A and his board
would agree to take out $25t000*00 of the worthless notes and the other real estate, to elect new directors, and place it on a sound basis, but he said he would
not do that. Examiner could see this as only possible chance to save the bank,
or to force a consolidation with the other bank here, as a last resort. Chief
Examiner arrived about 10:30 A. M* Tuesday, Jan* 13t 1925* and the matter was
discussed in detail* However, while examiners were at lunch, the unexpected happened* President A and J signed contract in duplicate by which the said A sold
all his stock to J and agreed to have at least 260 shades of the stock transferred to J. Then the annual meeting was held and the following gentlemen were
elected directors:

J •


Retired - estimated worth 200M
V*P. CC Ey.

Examiners met with new board, and discussed matters of criticism as listed onpage
12 of report, and especially as to the condition of the bank and the losses were
disclosed to them with request that directors inform us how the impairment in
capital would be made good. Directors at that time said perhaps by assessment of
the shareholders, and your examiner recommends that the usual impairment notice
be mailed to the directors in regular course* Everybody whom examiners met after
the matter had been closed had remarks of confidence in the new management, and
it would appear that confidence had been restored and the run ceased with pros

- 23^
Case 2 (Continued)



& Profits




Classified Assets
Slow Doubtful Losses

pects of an increasing line of deposits* J will " e president, and P will " e acb
tive vice-President severing all other business connections at once, and present
cashier and assistant cashier will remain with bank. While the new directors are
thought to be fairly good business men, thoy are not experienced in banking, but
have the confidence of the community and represent some worth and should bring
some good accounts to the bank. It is also the intention of President J to secure the services of a good bank man with ample experience to assist them in
familiarizing themselves with their new business venture and connection for two,
three or four months* The Cashier is familiar with the clerical work and records.
Please note attached clipping from local newspaper which went to press when the
annual meeting was in session and soon after would be distributed to subscribers
through the mails to different parts of the community as well as in the town of
1-12-25 Exam. Q:
8-3-25 Exam. Q: "On January 13, 1925* while Chief Examiner, Examiner and Assistant were at lunch, A sold his interest in this bank to J and associates and it
has been intention and efforts of new board and management to work assets and affairs into a more satisfactory condition. In the deal A took out note of Q for
$5#300, board increased value of bank building and lots $10,000, new president J
contributed $6,291«31 on January 26th, 1925t and balance of losses were then
charged off as classified in report of January 12th, 1925t Examiner does not exactly approve appreciating building $10,000 but property includes two lots and
officers said thought could sell the adjoining lot for $7»500 to $8,000 which
would leaving banking house and lot on books at a reasonably fair value. Since
last examination and elimination of A he filed a petition in bankruptcy on May
9, 1925» and his realty all now would appear to be mortgaged and while he lists
assets of about koOU and liabilities about 23SM it is not thought more than 10$
can be realized from the receiver and that it will be a long drawn out matter.
Some of the assets he lists have been found worthless, his realty is listed more
than it is worth and also found to be mortgaged. Ihe largest asset is a farm and
it has been found not worth anything near what he had claimed and contended it was
worth. In fact he filed a statement with some local banks during 1924 indicating
a net worth of about HOOM and some of them are considering prosecuting him now.
It would appear that line is almost a total loss. President J spoke to examiner
about July 20th to 23rd, 19251 about line but only saw him a few minutes and he
did not indicate it was quite so near a total loss. He then said as soon as loss
was determined he expected to personally remove it from the assets of the bank
and it is also recorded in a recent minute of board meeting that he expected to
remove it and that an assessment on shareholders would not be necessary. When
examination was made he was away on vacation for some two or three weeks and could
not make any arrangements with him in the matter. He may want to wait until bankruptcy case has been closed through courts, but it no doubt will be a long drawn
out matter and some litigation and assets of fixed nature and slow sale. While
President J made a bad deal and is taking a heavy loss in buying shares of A and
feels he should have time to arrange the losses, he is becoming advanced in years
and the sooner the matter has been arranged and losses removed the better for
bank and for him. When he returns, reviews his copy of the report and gets letter

- 235 -



Case 2 (Continued)
Borrow& Profits Loans Deposits

Classified Assets
Slow Doubtful Losses

from your office, examiner feels he will probably make arrangements to get money
to take out losses."
8-3-25 Exam. Q:
2-4-26 Exam. Q: "Very satisfactory progress has been made by new management
during the year since I/13/25 when cha:nge was made. There are yet two excessive
lines to workout, and this was discussed in detail. A new one occurred through
not knowing how to construe Section 5200 U. S. B. S. and will soon be corrected.
Lot adjoining building has been sold and reduced banking house and lot to a fair
value. Have some negotiations now to sell farm which would mean a great deal to
bank if can be consummated. One other piece of real estate has already been sdldt
under *new jianagement."
2-4-26 Exam. Q:
10-5-26 Exam. Q: "The present management took charge of the bank January 13, 1925
and has made reasonably satisfactory progress in working its affairs into a better
condition. The excessive lines of E and S were inherited from the old management
for which the present directors and officers are not responsible and are making
efforts to reduce to legal limit. It was stated that an effort would be made to
have T pay the $1,000.00 thought to be an accommodation note and it was hoped that
sale of timber to the extent of some $3,000 could be made to apply on the line of
H which would reduce it to legal limit. The excessive line of U was thought to
have been an oversight and correction at once was promised. A very short crop was
had in the community during 1925, but a good crop has been had during the present
year which should enable bank to collect some old loans and reduce others which
have been in the bank quite a while. Some small losses are being taken from time
to time on some of the old debts in the bank when the present management assumed
control 1/13/25; some were charged off June 30, 1926 and now have two that look
doubtful which may become losses. A great deal of work has been done and will be
necessary to collect or secure many of the slow loans before assets have been
placed in a more liquid condition* Community is supported by general farming including fruit and vegetable canning and raising and marketing cattle, and some
lumber business."
10-5-26 Exam. Q:
4-5-27 Exam. Q: "Not so much progress has been made since last examination in
working the affairs of the bank into a better condition, and more doubtful paper
with some losses will be found at this time. It is now hoped that the balance of
the loans and discounts will be found collectible even if slow. The two large
items now doubtful may be collected in time, but it will depend on favorable conditions to avoid losses. Two excessive lines inherited from former board and
management 1/13/25 are yet to be reduced to legal limit, and the one excessive
line at this examination will be reduced to legal limit in a very short time. A
large contract for construction of a water power project has just recently been
commenced and is located a few miles from town and will put some new money into
circulation in the community and town over a period of some months to stimulate
local business."
4-5-27 Exam. Q: •

- 236 Case 2 (Continued)


Cap. & Profits




Classified Assets
Slow Doubtful Losses

9-13-27 Exam. Q: "A little progress probably has been made between examinations
in working the affairs of this bank into better condition, but a great deal of work
is yet to be done* It is possible that may now have line of P in a better shape
with the collateral than before or at last examination and it may in time be liquidated but not yet enforceable for the full line* fOther Heal Estate1 yet to be
sold and may take some loss on that part of assets before it has been removed from
the assets of the bank, Fairly good general crops have been made this year in the
community, and soon should be reaching markets* Deposits are low at this time,
but then should increase some. It was agreed that your office would be advised
when the excessive lines have been reduced to legal limit,"
9-13-27 Exam. Q:
U-19-28 Exajn. Q : "President J who, with his family, held control of this bank#
died February 27 > 1928 and the officers of the bank do not know what disposition
of the holdings may be made. It was stated that some of the directors had made
the heirs an offer to buy the stock, but that no action had yet been taken. It is
the opinion of examiner that but little will be done to better the condition of
the bank until the matter has been disposed of as officers of the bank have been
expecting a son of former President J to assume the management of the bank. It
is thought that President J suffered much financial loss in the later years of his
life and that his estate may not now liquidate more than $50,000. It would be to
the interests of the bank for some good local business men to acquire the stock
and become interested in the affairs of the bank, but the disposition is as yet a
matter of uncertainty. The bank is in such condition now that it should prosper
under good management and ownership."
U-19-28 Exam. Q:
8-21-28 Exam. Q: "It was stated that have prospect to sell the lOther Real Estatel
but that probably would have to take a small loss on it. The examiner requested
that a committee make special efforts to sell the remaining pieces of 'Other Real
Estate1 to relieve the bank of that frozen and undesirable asset.
After the
death of President J February 27th, 1928, the directors made an offer to the heirs
to acquire his stock which it was intended to distribute with business men of the
town and community. However, there has been no action on the part of the heirs
of the deceased to dispose of their holdings. If the !0ther Real Estate1 can be
sold, it would mean much to the bank's affairs. Prospects for general farm crops
are not encouraging on account of late spring and much rain, but some crops will
be fair."
8-21-28 Exam. Q:
2-1^-29 Exam. Q: "There will probably be some loss in * Other Real Estate1 yet,
and an effort to dispose of it is to be made. While bank yet has a large amount
of frozen loans, it is working into better condition. Deposits have increased
satisfactorily between examinations. Fair crops were made during 1928, and some
tobacco has brought some new money into the community. The estate of J, deceased,
and sons and a brother still hold a controlling interest in the bank. The management appears to be fairly safe, but could be stronger. The directors and officers appear to be encouraged with progress made and with prospects and outlook
for tne future at this time."
2-1U-29 Exam. Q:

- 237 Case 2 (Continued)


Cap. & Profits




Classified Assets
Slow Doubtful Losses

3-19-30 Exam. Q: "Fair general farm crops were made during 1929 and a good tobacco crop was made and a good price realized, but that does not reflect in the
bank's line of deposits nor in its loans and discounts. It appears not to have
made any progress since last examination which unfortunately was February lUth,
1929 delay having been caused by examiner being held on other work and sub-dis-.
trict behind with examinations. Examiner does not think it necessary to place
bank on special listf but strongly recommends that a collect telegram be sent to
the directors upon receipt of this report to advise whether or not the excessive
lines have been reduced to legal limit and if not to advise when it will be done.
The directors should give close attention to bank^ affairs if Vice President V is
to be retained i i active management, and it is thought that a telegram instead of
a letter will have a good influence and get results where a letter may not. Of
course, a letter could then be written as to the other matters. If Vice President;V
is not going to keep his account in better condition it may be well for the directors to employ somebody else and let him resign. There are considerable doubtful loans and discounts and some little loss no doubt must be taken much of which
may be determined at next examination which should be made in about four or five
3-19-30 Exam. Q:
10-1-30 Exam. Q: "General farm crops will be short in this coxtainity, but it was
stated that a fair crop of tobacco has been had and is being cut at this time#
Bank still has large amount of frozen paper and assets which should have vigorous
attention to liquidate. "fice-President V'stated to examiner (confidentially) that
he.was planning to make a change about the first of the year. He stated that he
had not been able to obtain much help from directors as to the management and affairs of the bank. He promised to reduce to legal limit his excessive line and
the others at once. A conference with Directors W (who is one of the executors
of his father's estate which holds 237 shs.) K, and AA was had. Examiner suggested that since the Kfs held control of the bank that they should give enough
time to it to make it a success, employ some competent man that could and would,
or sell their holdings to somebody who could and would make it a success. Two
bankers are to some extent interested in buying control and either would make it
a success and the SB Co. would be glad to acquire control and place the necessaiy
management in charge. Director P stated that he would give consideration to the
suggestions to see what could be done. See earnings report 1925-1930."
10-1-30 Exam. Q:
Net Income (Gross Earnings less Expenses)
Losses Charged Off
Assessments before Suspension
Bad Assets Purchased by Stockholders

1925 1926
^ ^

1927 1928 1929
~ ^
"^— ~ "















- 23S ~
Case 3
Bank Organized:
Bank Suspended:


Population of Town:

3000 (1910 Census)
3000 (1920 Census)
3000 (193C Census)

Principal Crops or Industry Served by Bank:
Cotton and grain.
Important Excerpts from Reports of Examination:

(Amounts in thousands of dollars)

U-lU-20 Exam. S:

Cap. & Profits




Classified Assets


Slow Doubtful Losses





11-1^20 Exam. T:
4-7-21 Exam. T: "Transcripts of "bank accounts have been omitted as the "bank was
examined in January; this action deemed advisable on account of giving correspondents cause to become uneasy, some of lines classed as slow previously, have been
classed as doubtful, partly in order to assist management to reduce or collect.
Management advised considerable cotton was still in locality and not sold by grower. Management expects material reductions in lines when Federal Land Bank begins
business as contemplated in near future. It is recommended the bank be removed
from the special list for frequent examinations as the management has been changed
and special examinations will not help but be to the detriment of the bank, however, examinations should be left to the judgment of the Chief Examiner and it is
suggested that before making another examination, if one is to be made out of
order, the chairman be summoned to the office of the Chief Examiner prior and a
thorough canvass of the situation be made; while it appears the bank has been
saved from a receivership, resident Examiner has been materially assisted by the
efforts of the Chief Examiner. It has been one of the most stubborn and hardest
cases ever handled by resident examiner."
4-7-21 Exam. T:
ll-lU-21 Exam. P: "A comparison of this report with that made a year ago will
show a great improvement in those matters in which improvement could be expected
within that time. The slow and doubtful paper, with which the bank was saddled
by the former management will be gotten rid of very alowly. It seems as if most
of it should be collected in time. There appears to be a good deal of paper collectible this fall and the borrowings can probably be much reduced if not eliminated* Of the paper listed as doubtful, it would seem that the larger part is
collectible, tho it will probably have to be carried for some time to come. A
is very resentful at being superseded by the B's. C is, outwardly, satisfied and
desirous of helping* The B's said that they were continually opposed, and
thwarted by A, tho supported by D. They do not feel certain of C, suspecting
secret opposition. A told the Examiner that it was his intention to get rid of
the present Cashier. Examiner told him in plainest English that there must be no
change in the present management as the bank showed great improvement since the
removal of himself and C from activp management, such a promise is embodied in
directors1 letter which Examiner saw signed by all directors except D. Unless
it is signed by D also, an extension of charter is not recommended. It is believed that former management would soon reduce bank to condition that would

- 239 -


Case 3 (§ontinued)
Cap, & Profits Loans Deposits


Classified Assets
Slow Doubtful Losses

fojfce liquidation. Examiner was, recently, examining a bank in a town nearby.
While seated in the hotel lobby he overheard a conversation during which a man
remarking on a shortage that had just been discovered in a bank and on the fact
that the defaulter was known to be a gambler made the assertion that C, Oashie* of
a bank here, was another gambler (with whom he himself had played) and should be
watched. The speaker addressed his remarks to the Examiner of whose position he
was unaware, and to another man. This incident is told to show why Examiner is
insistent that the former management shall not be reinstated."
ll-lij-21 Exam. P:
U-24-22 Exam. V: "The bank has entirely gotten away from the influence of A and
under the present managementf it apparently seems will be able to work out, although they are at present in such shape that the least sign of weakness would
undoubtedly cause the public to start a run which would close the doors. The
present management has partially regained the confidence of the public, and seems
to be getting a firmer hold each day. In view of this fact your Examiner after
consulting with Chief Examiner, who also felt the proper course would be to do
nothing to destroy this confidence, gave as reasonable a classification to loans
criticised as could be consistently done. It is somewhat early yet to make any
predictions as to crop for the coming year, still the outlook appears promising
and unless some unlooked for event occurs to ruin the crops, a large part of the
loans to farmers will be liquidated this fall and the bank will then be in a position to rid itself of a goodly portion of the bad paper now held. Your Examiner
furthermore has been told that the Eeserve Bank has promised to stand back of the
bank to the last, it therefore seems that if not forced they will eventually woik
out. The present management is fully aware of the bank's condition and while
some, with the exception of E and B, were connected with the institution when it
was being loaded with bad paper by A, they all appeared to be willing to do everything possible to keep the bank open. Of course, it is impossible to get rid of
a great portion of the slow and doubtful paper without charging it off which
would mean the closing of the doors, therefore your Examiner in concurrence with
Chief Examiner thinks the proper course would be to give the present management
every encouragement and plenty of time to work from under and accordingly recommends that your office be as lenient as possible until the present management has
clearly demonstrated its inability to handle the situation."
lj-2*4-22 Exam. V:
10-2>22 Exam. V:

"The bank increased on August 9, 1922:
Furniture and Fixtures
Banking House
Other Real Estate


in order that they might charge off $10M of bad paper and increase their surplus
$1M. As to whether these values are inflated is of course, problematical. Management claims that there is still an ample margin in these three assets."
10-23-22 Exam. V:
H-30-23 Exam. V: "None of the present board of directors are responsible for the
excessive loans reported on Page six, these becoming excessive when the surplus

- 2U0 ~
Case 3 (Continued)


Cap. & Profits




Classified Assets
Slow Doubtful Losses

was wiped out by losses, on loans, made " y a former management. The lines reb
ported as excessive will probably work out, without loss, although in each instance some time will be required. The officers are only too anxious to have this
criticism removed and are doing all possible to have these lines reduced, but as
before stated, some time will be required. Two other lines which were excessive
due to the same reason as those shown, have been reduced below the limit. Your
examiner feels sure if your office will be lenient in this case, that these loans
will be reduced as soon as can consistently be done."
ij~30-23 Exam. V:
11-26-23 Exam, H: "The new management has made decided improvement in the general
condition of the bank and seems deeply interested in its future. Some old matters
will require considerable time to be worked out. Salaries are large :for the present business, though deposits show an increase of about $S5t000 in last two
11-26-23 Exam. H:
6-13-2U Exam. AA: "There are a number of items in the assets of this bank which
will be the source of considerable anxiety to those of its management until they
are realized upon. They are so involved as to make their liquidation a matter of
serious doubt. In various instances real estate is bought at tax sales hoping to
acquire an equity which will strengthen a claim held by the bank. For two years
the bank must patiently wait before it can know with any certainty just how they
stand as the state law gives the owner of any property, sold for taxes, the right
to redeem it within two years from sale. It is believed the situation here is
known to the Comptroller's office even better than to this examiner. It is undeiv
stood that the present management has improved the situation and it is believed
those in charge are doing everything possible to collect or better secure the old
debts which they inherited. A very few losses, however, would impair the capital
as they have no surplus. The loans made by those in charge now are small and held
to be without criticism. The present management unquestionably is to be commended
for the manner in which they have operated so far. A loss of $1,290 was recently
sustained by the bank on account of suit brought by X Bank, Y. $6,290 was really
the total paid but $5,000 was from bond of former employee. The overhead expenses
of operation appear to be large. There are six salaried employees. Altho the
individual salaries are small it is believed three good men could easily take care
of the bank!s business. The president and others of the management impress the
examiner as being conscientious and desirous of doing whatever is best for the
bank. They seem very grateful for the help and good advice received at the hands
of those in the Comptroller's office."
6-I3-2U Exam. AA:
1-23-25 Exam. W: "The board as a body does not appear to be giving the proper attention and careful consideration that this bank is apparently in need of* It is
believed that President B and his sons, who are the junior officers, are giving
the matters their closest attention, and are apparently making good headway. But
the bank still holds many loans that will be a great source of anxiety for several years to come. The officers admit the doubtful character of a large aggregate
of their Bills Receivables but are hopeful that by nursing and petting they can
eventually collect. A large portion classed as doubtful at this time, could not
be collected by suit. It is respectfully suggested that your office write a let

- 2in Case 3 (Continued)


& Profits




Classified Assets
Slow Doubtful Losses

ter to each member of this bank's board of directors urging them to get in harness
and assist in every way possible towards effecting a more favorable position."
1-23-25 Exam. W:
8-5-25 Exam. W: "Bank officers are unusually optimistic over the local crop outlook, estimated crop condition 90$ for this county. Acreage about 10$ increased.
Crop about two weeks early. Are expecting heavy curtailments on lihes classified
as doubtful and insufficiently secured, and hope to eliminate the greater portion
of criticised pa£er also dispose of their real estate. Quite a few inquiries for
farm landf are in evidence through options that have been taken. Directors are
now said to be fully cooperating and lending all assistance possible. Attendance
of meetings poor. Officers promise to do all within their power to correct and
eliminate all criticisms. Bankfs condition slightly improved by reason of collecting and further securing items reported as doubtful and slow in previous report.
Bank's condition however, is far from favorable and the most rigid attention will
be required in the working out of their problems - many of which will be long
drawn out, also quite a few of their D. P. C. loans will in all probability have
to be either refinanced or taken over for the bank's protection, further increasing their slow or frozen assets. Practically every loan made since the reorganization is well secured and none admitted as slow or doubtful."
8-5-25 Exam. W:
2-2-26 Exam, f: "Bank officers are discouraged and are contemplating merging, if
possible, with one or the other state banks here, provided they can furnish sufficient amount satisfactory assets for the acceptances of this bank's liabilities
to depositors. A close canvass was made of the batik's B/R's which as shown produce doubtful assets aggregating $U7,lUl#51+« This aggregate the President admits.
Under liquidation aggregate would be greater. Quite a large portion of the doubtful paper if collection were pressed would immediately become determined losses,
as the bank has been compelled to add interest to principal in order to keep the
paper current. The greater portion of the doubtful assets have carried beyond
six years. Should the merger not be effected, your examiner is apprehensive of
results due to lack of local confidence, street gossip, partially due to dissatisfied shareholders at not receiving dividend. Also their lack of knowledge
as to bank's true condition. Bank also has other real estate aggregating
$29t903.SO (including $6,000 not shown properly on bank's books) which if liquidation was enforced would probably result in a loss of around $3f000 but officers
are hopeful of working out in full if values enhance. Considering the past se£uson's crop production, largest ever experienced in this section and prices received, it is extremely discouraging to note that doubtful assets have increased
and no additional security has been gained, for the weak and doubtful lines."
2-2-26 Exam. W:











Net Income (Gross Earnings less Expenses)
Losses Charged Off
Assessments before Suspension
Bad Assets Purchased by Stockholders

( l ) T^-F-i/^-K





- 2^2 -

Case h
Bank Organized:
Bank Suspended:


Population of Town:

800 (1910 Census)
700 (1920 Census)
1100 (1930 Census)

Principal Crops or Industry Served by Bank:
Important Excerpts from Reports of Examination:

(Amounts in thousands of dollars)

1+-22-20 Exam. A:

Cap. & Profits




Classified Assets


Slow Doubtful Losses





7-22-20 Exam* A:
1-5-21 Exam* A: "The board blames Mr* A the former president for a number of thdr
slow loans* Mr. A recently resigned as president and director of the bank. President B, who succeeded Mr. A as president promises to exert every effort to effect
the collection of past due paper and correct all other matters criticised, and the
balance of the board with the exception of Director C (who never attends a meetii^
promise to lend their cooperation to this end. The farmers in this community have
disposed of very little of their products, and the management of the bank will be
compelled to insist upon liquidation in order to force their customers to market
their crops at the deflated price*"
1-5-21 Exam. A:
7-19-21 Exam. B: "The condition of this bank is very unsatisfactory. Former
President A seems to have unloaded considerable amount of slow and doubtful paper
before leaving. The paper does not bear his indorsement and in nearly every instance is that of tenant farmers secured by live stock and future crops, the
former inadequate and the latter undeterminable. The Directors of this bank are
to blame for allowing this paper to come into the bank* 411 paper classed in this
report as doubtful and remaining in the bank after this year's crop is harvested,
should be promptly charged off. Por your information and as a matter of record,
A f s balance is $20,981*23 and if he should withdraw his balance in the near future it might bo embarrassing for the bank in their present extended condition.
It is also my information that before A left he stated that if it wasn't for the
Cashier he would draw his entire balance. The bank's ability to pay in that event
remains to be determined."
7-19-21 Exam. B:
3-23-22 Exam. B: "A meeting was held with the Board and all criticised matters
taken up. Directors were urged to reduce their borrowings and in this way help
bring about a more satisfactory condition. Directors D and E are using the bank
unduly and largely through indirect borrowing in form of discounted paper. Their
statement does not warrant the lines extended. While the B line appears heavy it
is believed, basing my opinion on their statement, that they are safe and rather
conservative, however should be curtailed. By way of explanation of the analysis
of a financial statement in this section, you are respectfully advised that many
statements show large excess liquid assets, consisting mainly of bills receivable
and these many times are notes of tenants and will probably be paid if they live
Digitized long enough, consequently the statements are not as liquid as a first glance at

- 2^3 ~



C&se U (Continued)
& Profits Loans Deposits


Classified Assets
Slow Doubtful Losses

the statement would indicate. Those last remarks apply to this section generally i!
>23-22 Exam. B:
12-12-22 Exam. B: "At the completion of this examination directors D and E were
questioned in the presence of the other directors as to their worth. A statement
of the X Co. was presented and discussed. This statement of last spring shows the
concern operating at a loss and practically no liquid assets. These two gentlemen retired from the room and a lengthy discussion followed. The question of
talcing a mortgage on their property was "brought up but abandoned* because of probable bankruptcy proceedings resulting. They are now putting on a sale and the
outcome and success remain to be determined. The two of them being so badly
mixed up with the X Companyt it is difficult to ascertain the time condition of
their affairs. The large amount of criticised paper other than that mentioned
above is chargeable to former president A, who before his leaving converted all
of his holdings into cash through the bank and the directors allowed him to get
by with it. In view of the unsatisfactory condition of the bank it is recommended
that it be again examined in ninety days. The directors1 meeting closed at 11:30
P. M. having been in session from 7*30 P. M."
12-12-22 Exam. B:
3-5-23 Exam. B: "Very little if any improvement is noted in securing slow and
doubtful paper. At the close of this examination $5t300.*38 was classified as a
loss and charged off. There is $l6,6o6,.6o classified as doubtful and it is n y
opinion that the greater part will result in a loss. Your particular attention
is called to the direct and indirect loans of directors D and E as follows:
D direct and unsecured
Guarantor J note of $U,39^65 Y Co.
E direct and unsecured
Guarantor £ note of $U,39H.65 Y Co.
E and D
Sundry bills receivable (all overdue) aggregating $18,381.UU endorsed by them and carried at
Two notes of X Co. endorsed by them


The X Co. is a corporation, the stock of
which is practically owned by E and D and
is operated by them.
The X Co. has also discounted with the bank
their bills receivable to extent of - $2,733.16
in addition to the above.
Summing up the direct and indirect liabilities of the above they amount to $28,176.51« At a directors' meeting held last night the following plan was agreed
upon and the consummation of this agreement should be insisted upon. E agreed
to secure his obligations of $5f092.72 by real estate and such other collateral
as is acceptable to the board. E and D agreed to have renewed the notes of
$18,381.UU and carried at $10,070.12 and obtain additional security on these

- 2!+4~



Case U (Continaed)
& Profits Loans Deposits


Classified Assets
Slow Doubtful Losses

papers wherever possible. E and D agreed to secure the X Company's line at
$5,999.87 with a mortgage or deed oh the one story double brick building now occupied by them as the X Gongpany* E and D are so badly involved that the matter
is a delicate one because of probable bankruptcy proceedings and if such should
take place it would not be a surprise to them or the board or your examiner• At
the aforementioned meetings I told the board I was very much surprised at them
for so litfle progress having been made since my last examination and apparently
they had done very little towards getting results* Of the entire board the President would probably be the last to take the initiative and I endeavored to make
him understand his responsibility as President of the Bank and also advised him to
consult freely with the bank's attorney in the above mentioned matters* The lines
of the B's should not be overlooked as they should be reduced and it is to be remembered that both are directors* It is believed that further frequent examinations would prove detrimental and with that fact in mind I recommend that the
bgjhk be removed and examined the next time in regular order provided the notes are
secured as stated above and such other information as desired by your office is
promptly furnished*11
3-5-23 Exeun* B:
239 •
10-8-23 Exeun. B:









3-19-2^ Exam* B: "As stated at preceding examinations the present management is
not directly responsible for the bank's condition. A meeting was held with the
directors all being present except director C who resides elsewhere. $2,6lH*23
was set out as losses and ordered charged to profit and loss on the following day,
and they stated this would be done. Other losses will develop and should be
charged off as they are determined."
3-19-2U Exam. B:
&-19-2U Exam* C: "Note the tremendous amount of slow and doubtful paper* There
is some apprehension on my part as to whether the directors and officers have the
force or the will to rise to the occasion necessary to save the bank. I am in
doubt as to whether or not they really appreciate the fact that the bank is in an
almost serious position* ffor it appears they have become accustomed to its condition, and justify their personal position, each one of them, by the often repeated statement* 'You know we are not responsible - the fault is with our predecessors*' Apparently no positive efforts have been made - certainly not in a
forceful and intelligent manner, to reconstruct the bank, in a handling of the
many slow and doubtful items of assets* Reference back three, four or five years
ago, to certain lines now standing, shows that such lines are now carried at an
increase of from 200 to 500$» I had the board together, in a meeting, and brought
to their attention the many matters of exception which are set up in this report.
Some of the slow and doubtful paper can probably be salvaged by intensive work,
by intelligent consistent action of the board, as the crops are better than the
average in this section* If such an effort, continuous throughout the period
for the balance of this year is not made, and this opportunity for reconstruction
lost, losses will be definitely set, that will consume a large part of the capital. Note that the surplus, after the recent charge offs, has been practically
eliminated* Required a letter from the directors."
8-19-2U Exam* C:


Case k (Continued)
Cap. & Profits Loans Deposits


Classified Assets
Slow Doubtful Losses

8-13-25 Exam* D: ftAs will be seen from the report, the assets of the bank have
been classed as follows: Slow $8S,U51.02; Doubtful $25,5^7*10; Undesirable
$1,^37.22 and Losses $11,951.13, making an impairment of Capital of $7,H53.Ul.
Of tne total losses $4,072.86 were charged off during the examination, leaving
$H2H.86 in Undivided Profits (No Surplus) to take care of the remaining losses of
$7,878.28, or an impairment of $7,^53^1 as outlined. The condition of the bank
was thoroughly discussed with Directors W. B.,to.B., P and G. Director C could
not be reached. The Directors claim to be doing all they can to put the bank in
satisfactory condition, but the amount of past due paper and general condition of
the bank give tne impression tnat tney are either not doing what they should to
relieve the bank or else have not the ability and force to rise to the occasion,
and apparently do not realize that they are in a serious condition. Tney declined to take enougn of tne worthless paper out of the bank individually in order
to save the impairment of capital, feeling that it was not up to them any more so
than to the rest of tne stockholders, excusing the present condition on the grounds
that it is the fault of their predecessors. They asked that the following proposition be submitted to your office for approval: That they be permitted to carry
the balance of the paper classed as Losses in tneir loans and Discounts until
Spring of next year - the time tnat most of the bank!s earnings are made - and in
this way give them an opportunity to work it out, and consequently not only make
it necessary to make an assessment but also would not make it necessary for them
to show an impairment of Capital when tne next published Eeport of Condition is
called for. They state that they are doing all they can to work tne bank out,
that they have not paid a dividend for some time# tnat it is their intention to
take tneir losses just as fast as the earnings of the bank permit, and that they
feel sure that if they are permitted to carry tnis paper over into next year,
their earnings will be sufficient to cover, i i h l it might be possible for the
earnings of the bank next year to take care of the losses as requested, the Examiner is of the opinion that with the amount of statutory paper and other slow
and doubtful paper in the files of the bank, it will be about all the bank can do
for some time to take care of other losses that will arise from time to time.
While it is believed that it is the desire of your office to assist bank in every
way possible to work out of tight places, yet it is not thought advisable to let
this matter be carried as the Directors wish. It is therefore the recommendation
of tne Examiner (if such a recomjoendation is in order) that the Directors be advised that tneir request to carry the paper over into next year is not satisfactory, and that they then be given another opportunity to take the paper out of tne
bank individually or by voluntary contributions from the stocknolders, and if they
again refuse, tnat an assessment be made to take care of tne losses as outlined
in tne report. Inasmuch as the bank is due another regular examination before the
close of this year, it is not recommended that the bank be placed on tne Special
list unless it is the desire of your office that this be done."
8-13-25 Exam. D:
12-10-25 Exam. D: "The bank, in the opinion of the examiner, needs the closest
kind of attention to put it in a satisfactory condition. The Directors do not appear to be aggressive enougn to give tne bank the aid needed. Attention is directed to the large amount of statutory debts, most of whicn represent paper in
suit and much of which has been in court several years without decision. Directors claim tnis is tnrougn no fault of theirs, as they are represented by the
best attorneys available. All of which may be true, but they appear to rely too
much on the fact that the paper mentioned was in tne bank wnen they came into
charge, and that it is not their fault. This is granted, but this is no cure for

it, and unless they change their ways and actually set to work, it is the humble

~ 2^6 ~



Case U (Continued)
& Profits Loans Deposits


Classified Assets
Slow Doubtful Losses

opinion of the examiner that the "bank will eventually have to close* The "bank
should really he on the list for more frequent examinations. It is not recommended at this time, however, for the reason that the law suits in question will
not again come up "before April and an examination "before that time would be useless, except for the fact that we would he able to keep in closer touch with the
operations. It will be seen that after the losses were charged off, the capital
will show a small impairment."
12-10-25 Exam. D:
5-H-26 Exam* E: "The condition of the bank is not at all satisfactory* Many of
the loans are tied up with court litigation and have been in this same condition
for a long time* The bank continues to make additional advances to tenant farmers
who appear to be hopelessly involved. Aggressive action of the directors would in
many cases help to clear out some frozen paper but the directors are of the easy
going type and appear willing to wait and hope that loans will be paid voluntarily
Directors state that the bank was in very bad shape when they took charge and are
prone to compliment themselves on the good work they have done in clearing up the
situation. Most of this clearing up was done by charging off rather than by collection* If the loans classed doubtful are not paid or properly secured this fall
they should be eliminated from the assets of the bank. It is believed the directors will come to the bank's aid with a reasonable amount of money* It was loaraed
that there has been an application made to organize a state bank here. Directors
were of the opinion that a charter would not be granted* If a new bank is organized and is able to draw many deposits from the present one they would probably experience some difficulty meeting the withdrawal if heavy. Directors1 letter is respectfully submitted."
5-U-26 Exsun. E:
6-10-27 Exam. P: "It is believed that the directors are doing their best to place
the affairs of the bank in the condition it should be. There has been no reduction in the loans listed as slow and doubtful* but in most cases, the tenant farmers are making their crops with very little money advanced by the bank. Prospects
for a crop are good at this time* The faimers have a good stand of cotton, and
are feeding hogs. The loans and all matters of criticism were discussed with
three directors and the Cashier. Loans listed as losses were charged off during
examination, and directors promised to give other criticisms prompt attention.
Seductions on slow and doubtful loans can not be expected until the crop is harvested. It is believed that the directors are doing all in their power to work
out the lines, and it is recommended that no further action be taken until the
crops are harvested. It is believed that if this is done, and loans are reduced
in the fall the directors will take up the amount of losses that are determined
rather than have an assessment of stock."
6-10-27 Exam. P:
11-18-27 Exam. P: "Loans listed as losses in this report have been carried for a
number of years, without any progress in the way of reductions* In most cases
they are loans to tenant farmers who have not been able to make any money except
to pay advances for crops. Directors claim that these loans are old workout
propositions handed down by a former management, and therefore feel that they
should have time to work them out. Your Examiner endeavored to have the directors agree to take out the paper listed as loss and part of the paper listed as
doubtful, and thereby give the bank a clean slate. It is believed that, if these

- 2^7 -



Case 4 (Continued)
& Profits Loans Deposits


Classified Assets
Slow Doubtful Losses

loans could be cleaned out, the bank could make more than expenses and eventually
pay a dividend* For the past two years, the ^undivided profits have been used to
charge off losses* Inasmuch as no progress has "been made in reducing the loans
to tenant farmers, and some of the loans in hands of attorneys, your examiner "believes that the loans should he reduced to the actual value of the security* It is
recommended that a letter " e sent to the directors urging them to make arrangeb
ments to pay in somo new money and take up the paper listed as doubtful and loss,
"but if this cannot " e done, the directors should review the doubtful paper and deb
termine further losses, and an assessment of capital stock should " e made* The
detail work of the hank is well kept, and it is believed that the bank could he
placed in good condition under present management, if the doubtful paper and losses are removed* Your examiner believes that the shareholders are well able to
place the bank in a satisfactory condition, if they will.11
11-18-27 Exam. F:
5-2*4-23 Exam. F: "The shareholders paid $10,000 into undivided profits on January 18, 192S, and losses of $9*152*70 sho\7n in last report were charged off* The
bank still has a large amount of slow and doubtful paper, payment and reduction of
which will depend largely upon crops this year, and the attention directors will
give tov/ard collecting from returns of crops* Directors are believed to be holding down advances to farmers this year, and since losses listed in last report
were absorbed, it is believed little can be done until fall of the year after
crops are harvested* After crops are harvested this year, it is recommended that
the directors estimate losses on all doubtful loans, and that the shareholders be
asked to place the bank in satisfactory condition. Your examiner believes that
letter from your office, urging directors to give their attention to collections
and advising that they will be expected to correct conditions next fall, will help
the examiner to make
5-2H-28 Exam. F:
6-25-29 Exam. G: "At the close of examination, a meeting of the board of directors was requested. Director C lives in another town, and has never attended a
meeting* Director G is a physician and was only present during review of criticisms and general discussion. Lines were discussed with W. B., M. B. and the
Cashier* Correction was promised where possible but a number of matters cannot
be corrected at present. This bank serves a community which has suffered from
very adverse conditions for the past three years and this is reflected in the
large volume of slow and doubtful paper, the large amount of Other Eeal Estate
Owned, and the heavy borrowings* The future of the bank depends on recovery of
farming in this vicinity for on that depend collections and ability to move Other
Eeal Estate* Director G is a physician, the B's are merchants whose time will,
be occupied in the fall, and Director C takes no active interest in affairs of the
bank. Your [examiner suggested that additional help be obtained this fall, that
the Cashier be relieved of all routine duties and devote his entire time to collections and 'following up1 crops, with the active directors giving all available
time in assisting him* The vacancy on the board was caused by the death of F*
The stock of the bank is very closely held and sale is very difficult at the
present time* The Cashier stated bank had corresponded with Office of Comptroller
in regard to this matter. Considering the conditions revealed by this examination
it is evident that this bank is in a very grave condition. The absence of any reserve strength in surplus and undivided profits account, the large amount of slow
and doubtful paper, heavy borrowings, and small volume of business done, cause
Digitizedmuch concern.
Crop conditions are reported favorable at present and if good crops

- 2US ~



Case U (Continaed)
Borrow& Profits Loans Deposits

Classified Assets
Slow Doubtful Losses

are made and fair prices obtained, most of the doubtful paper will be collected or
reduced to safe limits and much of the slow paper retired or materially reduced*
In the event of unfavorable conditions, additional capital mast be placed in bank
for it to continue to operates .Whether stockholders can contribute additional to
do this, could not be determined. Your examiner feels that no definite action
can or should be taken until end of crop year. At that time some definite course
of action should " e decided upon and the bank required to 'clean house1 by removb
ing old and undesirable assets* Farming is chief industry with cotton as principal money crop« Last year's cotton crop was about 50% of normal and oil has "been
sold* Acreage for 1929 about same as for 1928* Farmers are principally white
with 65-70% of farming done " y landowners. Only one failure in town reported.
Number of real estate loans are pledged and details could not he obtained on some
of these."
6-25-29 Exam. G:
1-28-30 Exam, &: nAs will be disclosed in the report, this hank is in a most dangerous condition with doubtful and worthless paper amounting to $50,2^2.26, with
no earning capacity, and with a large volume of slow paper. This condition is due
to several causes. The large amount of tenant paper carried along in the assets
of the hank, which under the adverse conditions prevailing in this section, has
resulted in the accumulation of a large volume of doubtful and worthless assets,
the limited volume of business handled by the bank, and the presence of an excessive extension of credit to the partnership of Directors B. The affairs of the
bank were discussed with the local directors, and at the close of the examination
the Examiner and Directors, G, M. B. and H went to a nearby town for a conference
with the stockholders who live there. This was done in order to obtain some action looking to the restoration of the hank's capital. After somewhat lengthy
discussion, Mr. I, representative of the C interests, told the gentlemen from here
to return and obtain amounts needed as voluntary assessment, from the stockholders
here and they would do their share. Mr. I seemed dissatisfied with the condition
of the bank, especially with the poor earning capacity, and he did not think very
favorably about going on with the operation of the hank. Your Examiner questions
seriously the ability of the parties here to raise the money needed in reorganization of the hank, especially the B Bros, who own 136 shares of the stock. Even
if reorganized the future of the bank appears very limited as there are strong
banks in nearby towns which serve the same territory as this bank. While the
bank is not insolvent, its condition is such that if immediate relief is not
forthcoming in the way of new capital, yourfixaminerquestions its ability to
continue. Note: Bank has suspended operations."
1-28-30 Exam. G:












Net Income (Gross Earnings less Expenses)
Losses Charged 0ff
Assessments before Suspension
Bad Assets Purchased by Stockholders




- 2^9 C^se 5
Bank Organized:
Bank Suspended:


Population of Town:

2000 (1910 Census)
3000 (1920 Census)
3000 (1950 Census)

Principal Crops or Industry Served by Bank:
Cotton, lumber, and hogs.
Important Excerpts from Reports of Examination: (Amounts in thousands of dollars)
BorrowClassified Assets
Cap. & Profits Loans Deposits
Slow Doubtful Losses
2-12-20 Exam, H:









9-16-20 Exam. H:









2-25-21 Exam. B: "Number of directors has been reduced from seven to five. A and
B having been dropped. iiVhen definite action is taken by the Board towards a correction of matters criticised the bank's condition will be greatly improved."
2-25-21 Exam. B;
8-6-21 Exam. B: "Bank closes at k o'clock on Saturday afternoons and reopens at
5 to accommodate out of town customers. Such transactions are carried over until
Monday and are not included in the dayfs business."
8-6-21 Exam. B:
3-25-22 Exam, B:
3-25-22 Exam. B:

"Management regarded fairly well."





12-7-22 Exam. B: "It was claimed that the excess loan to director C was an oversight and said it would be reduced at once. Tne excess loan to D and E is now in
process of liquidation and I was told that the contemplated deal would probably be
closed the next day and the loan satisfactorily adjusted."
12-7-22 Exam. B:
5-28-23 Ex-m. B: »Uo Remarks.»
5-28-23 Exam. B:







10-5-23 Exam. B: "The death of President P has occurred since my last examination; nowever, he is believed to have left quite a valuable small estate. He is
said to have had about $80M life insurance, payable largely to his wife. It was
stated, that Mrs. P had questioned the liability of her deceased husband on some
of the paper and that she desired to meet with your examiner and was called into
the meeting by the President and Cashier. Mrs. P is executrix of the P estate
and after your examiner had heard matters discussed by her and the officers of the
bank, it would not be surprising if she gave the bank some trouble. Enclosed herewith is a directors1 letter covering various criticisms, embodying promises to
10-5-23 Exam. B:
3-2H-2U Exam. B: "It appears that friction has developed among the directors,
some of tnem it appears are desirous of making a cnange as regards the Cashier,
and such a cnange, in the opinion of your Examiner would very likely be beneficial

- 250 -



Case 5 (Continued)
Borrow& Profits Loans Deposits

Classified Assets
Slow Doubtful Losses

for he appears to have grown careless in the handling of the hank's affairs*
Nearly one-third of the hank's paper is overdue, and of this amount nearly $12M
is statutory "bad* A letter was obtained from the Board at the time of my last
examination October 5» 1923, and in this letter certain promises were made (copy
is on file in your office), hut have not heen fulfilled. It is suggested and
urged that the directors take a more active interest in the management, familiarizing themselves, as far as possible with the hank's details."
3_21J-2H Exam. B:
8-20-24 Exam. C: "A large amount of paper is of indefinite value, information not
being in hands as to value of lands securing real estate loans, or as to the amount
of prior liens. Contingent losses are heavy, apparently running to 50fc of Surplus
if present estimate is substantiated. I was rather favorably impressed with Vice
President G, who has recently taken charge. I am of the opinion, after a discussion with local directors H and C, that a change for the better, in management,
is under way. I cautioned against a continuation of the one-man management."
8-20-2H Exam. C:
8-12-25 Exam. D: "Slow paper runs unusually high being more than 259^ of total
loans, showing the need of intensive work by officers in charge. Vice President
G who has recently been put in charge of the bank seems to be very capable, but
does not seem to have the proper appreciation for the laws that govern National
Banks. The number of excessive loans and unlawful real estate loans boar out
this fact. His former banking experience has been with State Banks. It is believed that he will give the bank his entire time. He at this time spends most of
his time buying cotton, and apparently considers the bank a side issue."
8-12-25 Sxam. D:
12-12-25 Exam. A: "While some of the detail work of the bank might show improvement, Vice President G, with whom the examiner went over the note case, appears
efficient and seems to be getting results in collecting and securing the bank's
paper. Conditions in general seem to be good. The condition of the bank is
12-12-25 Exam. A:
5-H-r2o Exam. B: "Vice President G is in complete charge, is a son-in-law of
President I and originaMy came from X where he was employed by the X Bank for
several years. He has only average ability but an exalted opinion of himself.
Too many loans are made to the X crowd and several of these loans are the ones
that were criticised at X and elsewhere. It is the opinion of your examiner that
the loans have not been actually paid in several years, but switched from one bank
to the other. It is to be noted that some of these notes are called tslow1 in
this report. Ground is being broken for a new building, but it is your examiner!s
opinion that the present quarters are adequate for several years to come."
5-11-26 Exam. B:
10-15-26 Exam. E: "There has been very little reduction in slow paper since the
last examination, and only small reductions can be expected in slow loans to

- 251Caso 5 (Continued)


CfiEi- & Pi*ofits




Classified Assets
Slow Doubtful iLosees

farmers on account of crop conditions. Farmers suffered heavy losses tnrough damage to crops " y storm, and low price of cotton, Not<*s of farmers are can ied overb
due until the crops are all ready for market when payments and renewals will be
made. It will " e necessary to carry loans for a number of farmers, but most of
tnese are land owners and it is believed will work out. without serious loss to the
bank. Two excess loans were found at this time. The Y Company, a corporation in
which Directors J, C and Vice President G are interested, was formed to buy cotton.
They use the bank's room for their office and for storage of cotton samples. The
bank holds warenouse receipts for cotton to secure the overdraft which caused the
excess loan. This appears to be a case of the bank furnishing the capital to buy
cotton. Tha line to K and L was also caused by an overdraft. In this case, the
bank does not no Id sufficient cotton to secure the overdraft. Cashier M stated
that tne cotton covered by warehouse receipts would be sold within a week, and the
overdrafts would be made good. Two real estate loans, listed as illegalt have
certificates attacned showing values as listed. One loan is listed as illegal
because of a prior lien. Cashier M agreed to check loans, and ledger accounts to
locate and correct errors shown in this report."
10-15-26 Exam. F: 100

5-12-27 Exam. F: "The bank still has a large amount of slow paper, Very little
reduction can be expected until the fall of the year. Security has been taken
wherever possible, and all loans which appeared to be losses have been charged
off. The bank moved into a new building on or about January 1st, It now has
suitable and convenient banking quarters. The old building was small and additional filing vaults were badly needed, A committee of directors has been appointed to sell the old building and furniture and fixtures. They claim to have
an offer of $6,000 for the old building, and expect that it will be sold in near
future. Vice President G agreed to give special attention to all matters of criticism, and to loans listed in overdue and slow and doubtful paper,"
5-12-27 Exam. F:
11-17-27 Exam. F: "Bank is believed to be well managed. Loans are closely followed, and few losses are expected. Bank's rediscounts and borrowed money will be
cleaned up in a short time when cotton begins to move* Farmers and merchants are
holding cotton, waiting for the market to steady. The bank has had several offers
of $5»000 for the old bank building, but the directors are holding for $6,000
which they claim can be had in time,"
11-17-27 Exam. F:
5-18-28 Exam. F: "Overdue and slow and doubtful paper is closely followed by the
Directors and Officers, The total of overdue paper is large at this time, but a
number of notes are carried overdue in order to urge reduction. The bank carries
old banking house on the books at $5,911,H9 and old furniture and fixtures at
$1,500. Vice-President & states that the fixtures will be sold as soon as possible in order to eliminate this item. The old bank building is located on the
same lot with the now bank building with a spaco of about twenty feet between the
two buildings. The bank has been offered $5t000 for the building and lot. At a
recent meeting the Board of Directors voted to hold the building, if the Comptroller would permit them to do so, and to repair the building so that it would
be suitable for a tenant. It is estimated that the repairs would cost about
Digitized for$3»000, which would make a total investment of about $9,000 in the old building.

- 252


Case 5 (Continued)
Cap. & Profits Loans Deposits


Classified Assets
Slow Doubtful Losses

The total investment in old and new buildings would be about $38,000. The new
building gives the bank suitable quarters for years to come, and the only object
in holding the old building would be to prevent erection of a building near the
new building and thereby darken the banking room. Your examiner has urged the
Directors to sell the property, and understands that President I is in favor of
selling it. Cashier G stated that he intended to write to your office, for an
opinion* It is recommended that the Directors be urged to dispose of the old
property and thereby reduce the large total of real estate
5-18-28 Exam. F:
10-12-28 Exam. E: "The bank is believed to be well managed. The large amount of
overdue paper at this time is due to late crops, and the fact that paper matures
in September and October, and is not renewed until returns for crops have been
applied to loans. Several of the lines carried overdue since last year, have been
so carried in order to reduce or come to some settlement at the end of this season. The condition of the loans and general affairs may be partly due to the fact
that Vice President G has some outside interests that take up too much of his
time. He buys cotton, sells fertilizer and is also interested in the mule business with a partner. President I, who is president of the Z National Bank, Z, and
a successful business man of that place, is believed to be desirous of having this
bank in first class condition. President I was notified of the examinerfs visit,
for the reason that he had requested to be advised so that he could discuss the
loans and affairs of the bank, but he could not arrange to be present, and a board
meeting could not be had at this time. However, your examiner expects to be in X
in the near future, and will arrange a conference there with President I, and possibly Director J, to discuss the affairs. The loans are in most cases amply secured, and the bank is not believed in serious condition, but the slow lines, and
the old overdue loans, need attention and your examiner also holds that every effort should be made to relieve the bank of other real estate owned, including the
old bank building and furniture and fixtures. Vice President G stated that the
directors have discussed these matters, and have been giving consideration to
forming a corporation among themselves to take the old building and other real
estate out of the bank, so that they can hold it for better prices. It is hoped
that this may be done. The officers expressed the belief that the loans and discounts can be reduced a sufficient amount to pay up the rediscounts and bills payable within thirty days. It is requested that a letter be sent to the bank, urging directors to dispose of the old banking house, and other real estate, and the
collection of overdue and slow paper."
10-12-28 Exam. E:
10-31-29 Exam. G: ,fA meeting of the Board of Directors was requested at the close
of the examination. Loans and matters subject to criticism, were discussed with
the directors present. Correction was promised on matters which can be remedied.
The territory served by this bank had a very bad season and this has resulted in
the accumulation of a large volume of slow paper, and quite a bit of doubtful and
worthless paper. The depressed condition of farming in this section prevents the
turning of real estate and low values of real estate have caused some of the estimated losses. The active management of the bank has been left to Vice President
G in the past and he has also beon in charge of the Y Company and other interests
which have placed demands upon his time. He appears capable and realizes the



- 253 Case 5 (Continued)
& Profits Loans Deposits


Classified Assets
Slow Doubtful Losses

condition of the bank* He is the soit-in-law of President I# He had the reputation of drinking to excess at times, and N, a former director, resigned "because of
dissatisfaction over the way G managed the affairs of the Y Company and the "bank*
Mr, I told the examiner the board of directors informed G that any further indulgence in this weakness would result in his dismissal and he has kept sober, attended to business, and appears to be trying to do his work in the proper manner*
Mr. I has been very attentive to the affairs of the bank and attends all the meetings. He is president of the Z National Bank, Z, a bank which is in excellent
condition and he appears most capable. He will look after the affairs of the bank
as much as possible and it is thought the directors will give the bank's affairs
close attention in the future. Management hopes to retire Borrowings or reduce to
small carryover. It was stated that bank has cleaned up in the past and effort
would be made to do this. It seems that some carryover will be inevitable* The
territory served by this bank is engaged in farming and lumbering. Cotton is the
principal money crop* Yield was smaller than last year and is about 50$ of normal
crop* Some hogs are grown* The lumber holdings have been cut out to a considerable extent and it is estimated the holdings of timber in this section will last
about two years longer* Deposits are off compared with previous years. While
the condition of the bank is serious, the management and the directors appear to
realize its condition and are trying to correct matters in every way possible."
10-31-29 Exam. G:

1926- 1927


192§® Total

Net Income (Gross Earnings less Expenses)
Losses Charged Off
Assessment before Suspension
Bad Assets Purchased by Stockholders

( 1 ) Unable to obtain data for Dec. 31, 1929*
as follows:

















Figures reported for June 30, 1929

Net Income (Gross Earnings less Expenses)
Losses Charged Off
Assessment before Suspension
Bad Assets Purchased by Stockholders





25^ Case 6
Bank Organized:
Bank Suspended:


Population:-of Tosm:

1100 (1§3,0 Census)
1 3 ^ (1920 Census).
2000 (1930 Census)

Principal Crops or Industry Served by Bank:
Cotton and corn.
Important Excerpts from Reports of Examination: (Amounts in thousands of dollars)
BorrowClassified Assets
Cap, & Profits Loans Deposits
Slow Doubtful Losses
6-7-20 Exam* H:









11-26-20 Exam. H:









U-7-21 Exam. B: "The management of this bank is left entirely with the Cashier
Mr. A. He is apparently an easy going sort of fellow, anxious to make money and
in his eagerness to make money it appears that he loses sight of the principal to
a great extent and can see only the interest or discount received. A large amount
of the loans are to negro farmers. The negro as a rule is poor pay and does not
try to accumulate money and get ahead* Three negroes have "borrowed from the "bank
a total of $23,192.57 of which amount $3,000. is admitted as being doubtful. There
are many other notes of negroes but are for small amounts and in event of losses
on this class of paper the aggregate will not seriously impair the profits. I do
not look favorably upon the contents of the note case as a whole for the lines of
credit extended are in my judgment too large in view of the security furnished and
it will take some time to work out* A great deal depends on the crops this year
and the prices received in the fall* The bank has $81,610.69 surplus and undivided
profits and there is no immediate danger. The main crop is cotton which is being
held up due to low prices offered for same, however there seems to be slight improvement in the market, and the anticipated marketing of same within the next few
weeks will materially relieve the strained situation."
U-7-21 Exam. B:
5-18-21 Exam. B: "An examination of this bank was made in compliance with your
office letter of May 12, due to the expiration of their charter on Aug* 16, 1921.
When the following matters have been corrected, I recommend that their charter
be extended. The line to the X Co*, of $115,866*35 is paid or very greatly reduced. A says that the entire line will be paid by Aug. 1, 1921 and charter does
not expire until Aug. l6, 1921. The doubtful and loss paper is completely charged
5-18-21 Exam. B:
U-11-22 Exam. B: "The large amount of slow paper is due to the lending of too
much money to the farmers during the period of inflation. It appears that it
will take several years to liquidate paper in general* It is to be noted that
many loans are made to negroes in large amount. The Southern negro is as a rule
very poor pay. One line in particular is that of B a negro tenant. This negro
owes the bank $5#9^9*37 and his landlord owes the bank $lU,673.30. When Cashier

A was questioned


these notes,

he stated that they were perfectly


- 255Case 6 (Continued)


& Profits




Classified Assets
Slow Doubtful Losses

and that B was helping his landlord pay off his mortgage on the farm, and I asked
A what part of the farm the negro got when the mortgage was paid and he said •
tJJone.1 The above is related in order that you may "better understand the situation and see it as it is.n
1^11-22 Exam. B:
9-22-22 Exam. B: "It is to he noted from this report that a very unsatisfactory
condition exists* Prom the manner in which the accounts were kept, I became very
suspicious as to the genuineness of the various transactions and accordingly proceoded very carefully. While I was experiencing considerable difficulty in balancing the notes, my assistant was having similar experience with the bahkfs details. Cashier A is to blame for the condition that exists, and also the Board,
to a certain extent. An earnest effort was made to impress upon the Board that
they had certain duties to perform, which could not be delegated to someone else*
At a directors1 meeting on Sept. 20th, the board voted to decrease surplus account $25,000 and credit undivided profits with a like amount. It is to be noted
that there is an outstanding judgment of $70,000 against the bank with a 10$
penalty and interest. This judgment was obtained in the lower courts and sustained by the Supreme Court in connection with the bankfs refusal to pay on deman to the executor of the estate of C because of* an indebtedness to the bank of
the X Co. a partnership composed of C et al and claiming an offset. The bank has
asked for a new hearing in the case and the matter is now pending."
9-22-22 Exam. B:
3-8-23 Exam. B: "Federal Reserve Bank was paid by a new note on December l6, 1922
and has not been recalled. It was necessary to rediscount bills receivable to
extent of $46,950.00 in order to pay off the claim of $84,8^5.01 including interest and penalty to the C estate* The shrinkage in deposits is due to the bank
having lost the lawsuit against the C estate. Competition is keen between the
two banks and a very unfriendly feeling exists."
3-8-23 Exam. B:
9-25-23 Exam. B: "There is unquestionably a large amount of slow and doubtful
assets in the bank, requiring most careful attention. Litigation on account of
the X Company continues and it is about a fifty-fifty chance of winning in the
end. Because of the litigation the bank has met with unfavorable outside comments
and no doubt has lost some business. All matters of criticism have been incorporated in the report proper with a view to bringing the bankfs condition squarely
before them. The cotton crop in this immediate vicinity has fallen short of expectations and their hope now is in the present crop, which is reported above the
9-25-23 Exam. B:
U-18-24 Exam. C: "There has been no improvement in the condition or management
since the last examination. No constructive attention has been given to eliminate
the objectionable features reported in the examination on Sept# 25th. 1923. A
major portion of the investments are highly unliquid as the X Co., and the large
capital loans, these lines running from $5f000« and below up to $13,000#00. It

- 256 *



Case 6 (Continued)
& Profits Loans Deposits


Classified Assets

is merely a waiting proposition to determine what the outcome will be with reference to these investments. The bank is financing the Y Company in the amount of
$28,896*82 in purchases in the form of acceptance^ or drafts, drawn on this concern at face value. The Y Company is said to be a corporation capitalized at
$10,000#00t the stock owned in equal parts by A, Cashier, G. A, son of cashier,
D, son-in-law of Cashier and E. The crops are not stored in an independent or
bonded warehouse, but in the mill of the corporation and are therefore out of the
possession of the bank and the advance would appear to be upon moral risk only,
and constituting an excessive line. I inspected the plant and found that there was
on hand some crops in bags, and some in bulk. No way to determine except approximately, the value on hand. A deposit of this concern was carried on the individual ledger amounting to $8,236.57 > representing, I was informed, the proceeds of
the sale of a part of the original purchase of crops* There is no doubt that the
bank is carrying contingent losses in large amounts, in addition to the contingent loss in the Y Co. There is rather definite Iocs in the J1 paper. It would
appear to be extremely hazardous to advance this party additional funds. This
paper should be accepted as a loss and cleared off the books before the close of
the year. The business of the bank is running very light. One man could take
care of the clerical part of the work. Four men were on the pay roll on date of
examination in addition
to Cashier A # I understand, however, that one man was
temporarily employed."
U-18-2U Exam. C:
9-25-2U Exam. C: "Note the decline in deposits since the last examination and
this in the face of the fact that cotton is moving freely and deposits should
(normally) be materially increased. The large amount of contingent losses, one
item of which is known by the general public to be in contest, and being delayed
in adjudication for so long a time, is evidently having its adverse effect upon
the bank. This territory although adjoining one of the safest cotton producing
sections of this state, is unfortunately located for the profitable production
of cotton, the lands being more subject! to the depredations of the boll weevil
than those just south, and are therefore not attractive for investment purposes.
And it is of this property that the bank is so abundantly loaded in fOther Real
Estate1 and in loans upon the land, with a mere equity in most of these lands.
Note the aggregate of slow paper, $10^,^37,63, and of Doubtful, $77t6lS.67 and
the amount of loss charged off $12,738.33. The bank benefits only to a limited
degree from the generally good crops in this section, for except in a few instances, as crop improvement over former years is shared by those whose obligations are in the list of the slow and doubtful loans, especially to the extent
of lifting that paper out of the slow and doubtful column. Mr. A has been in
bad health for several months. He has been in bed for possibly three weeks. I
visited his home and went over the affairs at the bank."
9-25-2H Exam. C:

~ 257Case 6 (Continued)


& Profits Loans









Classified Assets
Slow Doubtful Losses





Net Income (Gross Earnings less Expenses)
Losses Charged Off
Assessments "before Suspension
Bad Assets Purchased by Stockholders

(V Deficit.









Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102