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Minutes for
To:
Members of the Board
From:
Office of the Secretary
February
6, 1959
Attached is a copy of the minutes of the
Board of Governors of the Federal Reserve System on
the above date.
It is not proposed to include a statement
with respect to any of the entries in this set of
minutes in the record of policy actions required to
be maintained pursuant to section 10 of the Federal
Reserve Act.
Should you have any question with regard
to the minutes, it 11111 be appreciated if you will
advise the Secretary's Office. Otherwise, if you
were present at the meeting, please initial in column A below to indicate that you approve the minutes.
If you were not present, please initial in column B
below to indicate that you have seen the minutes.
A
Chm. Martin
Gov. Szymczak
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Minutes of the Board of Governors of the Federal Reserve System
on Friday, February
PRESENT:
6, 1959. The Board met in the Board Room at 10:00 a.m.
Mr.
Mr.
Mr.
Mr.
Balderston, Vice Chairman
Mills
Robertson
Shepardson
Sherman, Secretary
Kenyon, Assistant Secretary
Solomon, Assistant General Counsel
Nelson, Assistant Director, Division
of Examinations
Mr. Hill, Assistant to the Secretary
Mr.
Mr.
Mr.
Mr.
Discount rs es.
Unanimous approval was given to telegrams to
the Federal
Reserve Banks of Nev York, Philadelphia, Cleveland, Richmond,
Chicago, St. Louis, and Dallas approving the establishment without change
by those Banks on February 5, 1959, of the rates on discounts and advances
in their
existing schedules.
Application to organize a national bank at Des Moines, Iowa
(Item No
%
The Comptroller of the Currency had requested a recommendation
as to whether a pending application to establish a national bank in the
Merle Hay Plaza Shopping Center, Des Moines, Iowa, should be approved.
icalowing an investigation, the Federal Reserve Bank of Chicago suggested
an unfavorable recommendation, principally because the State banking
au
thorities had approved an application to organize a bank in the shopping
center which had priority over that of the proposed national bank and
thelle appeared to be no need at this time for more than one bank.
The
Bc/ardls Division of Examinations had submitted a draft of letter to the
S511
2/6/59
-2-
Comptroller reflecting the findings of the Chicago Reserve Bank, and
the file had been circulated to the members of the Board.
Following a discussion of the facts involved, the letter to
the Comptroller of the Currency, a copy of which is attached as
Item No. 1, was approved unanimously.
Branch application of City Bank (Item No. 2).
There had been
circulated to the members of the Board a file concerning an application
by the City
Bank, Detroit, Michigan, to establish a branch at Ann Arbor
Trail and Evergreen Road in Wayne County.
The Federal Reserve Bank
Of Chicago recommended disapproval on the basis of the applicant bank's
inadequate capitalization, and the Division of Examinations had submitted
a drof a proposed letter to City Bank which would indicate that
approval of the application could not be justified because the bank's
Present capital structure was believed to be inadequate in relation to
the
e
volume of its business and insufficient to support the proposed
xpansion.
The letter would express willingness, however, to reconsider
the application when provision was made for a satisfactory capital
structure
of the bank.
case.
Governor Mills said that he found this a very difficult
After noting that the Board on September 25, 1958, had denied an applicati°n by City Bank for a branch at another location for the same
iseason, namely, inadequacy of capital structure, and that such application
S
2/6/59
-3-
later was withdrawn, he commented that the bank had ignored the Board's
reasoning that its capital was inadequate to support expansion, which
would argue logically for denial of the present application.
However,
he had
dissented from the earlier decision, and he could find a justification
in his own reasoning to approve the present application, which represented
in effect a substitution.
In this connection, he referred to City
Bahkts good management and asset condition.
To judge from the growth
Of the
bank's deposits, he said, it was performing a useful function
in a community that deserved to have as many competing banks as could
reasonably and conservatively operate.
Without question, the bank was
seriously short of capital on the basis of any formula that might be
applied, although some allowance might be made for the fact that a bank
'with clean
assets vas entitled to more liberal consideration in appraising
its
capital requirements than a bank with possibly a higher capital
ratio but an
inferior quality of assets.
l'ecent years had been running around
400,000,
Earnings of City Bank in
350,000, or possibly as high as
year, so that on the basis of retention of earnings, and
assuming that the level of earnings would be maintained, the capital
NI°1116- appear to be sufficient to protect the additional liabilities in
Prospect
the
through establishment of the proposed branch.
By establishing
branch, the bank would of course be adding to the backlog of capital
that would be necessary to make up its obvious deficiency at the present
tirnee
.100(..„
.j.
2/6/59
Considering the Board's action on the bank's previous branch
l
application, Governor Mills recognized that it might seem illogica
to grant the current application.
However, his personsl reasoning
would favor approval, with a letter to City Bank stating that it would
be unreasonable to expect favorable consideration of further branch
applications until the bank on its awn initiative took steps to correct
the capital deficit that had been repeatedly brought to its attention
by the Federal Reserve System.
d about
Governor Balderston stated that he too had been concerne
this matter for reasons similar to those expressed by Governor Mills.
He recalled having raised a question when the previous branch application
was under consideration as to how a struggling bank, with inadequate
capital but good management, could improve its position if it were
denied the
opportunity to compete in areas where additional business
could be secured; that is, to shift to new geographical areas where
the obtaining of additional business would be facilitated.
Balderston's
Governor Shepardson said that, if he understood Governor
thought correctly, it was that expansion into another area might permit
a bank's earnings to grow sufficiently to offset both the increased
need for capital and the already existing capital deficit.
In the case
sufficient
°11 City Bank, he understood that retained earnings might be
to offset the need for capital incident to further expansion of business
but that they would not eat into the existing backlog of capital deficiency.
2/6/59
-5Governor Balderston responded that for some time, perhaps a matter
Qf years after the new branch was established, there admittedly would be
a drain on the institution.
Ultimately, however, he would suppose that
the new branch, if well located, would help City Bank to build up its
If the bank were to establish too many branches too fast, it
capital.
obviously would get into a risky situation that the Board could not
Permit, and such a line of argument would favor denial of the branch
application.
On the other hand, if the Board were to deny any new
branches, it seemed questionable whether the bank would have the healthy
growth that would aid it in building up its capital from retained
earnin3s.
In this case, he had concluded that the arguments resolved
themselves in favor of denying the application but he would like to
see the System encourage the expansion of well-managed banks, even though
at the time they did not happen to be entirely free of financial problems.
Governor Robertson said that he too had an emotional reaction
in this case because he knew of the good job that the management had
done in correcting difficulties confronting the institution and he would
like to see the bank be able to expand.
that was the wise course.
However, he did not think that
As he saw it, the Board should not permit a
definitely undercapitalized bank to expand branchwise, when the purpose of
the expansion was to grow larger, any more than it should permit a bank to
go into business without any capital on the theory that eventunlly it
would earn enough to protect the depositors.
If he could see some way
0
2/6/59
-6-
justify expansion in the case of the City Bank, he would favor approval
of the application, but he could not find any such justification.
If
the Board were to approve this application simply on the basis that the
management of the bank had worked hard to improve the institution, while
at the same
time it knew that the management did not want to add more
caPital because of a fear of diluting its control of the bank, the Board
would find itself in a difficult position to deal with other institutions
that had presented the same problem in the not too distant past.
In
Other 'words, a very unfortunate precedent would have been established.
In summary, he did not see how the Board could adhere to the principle
of being absolutely impartial and objective without supporting the negative
recommendation of the Federal Reserve Bank of Chicago.
In further comments
Governor Robertson suggested that the letter
to CitY Bank include recognition of what had been done by the present
management in
correcting conditions within the institution.
Such a letter
Illight then go on to say that although the Board could not find its way
clear to approve the branch application at this time in view of the
inadaciAate capitalization of the bank, it would be glad to reconsider
the matter at such time as provision was made for a satisfactory capital
Str
UCtUre.
Governor Mills then stated that he would like to record his vote
for approval on the grounds he had stated.
He wished particularly to
"Phasize the fact that the Board was considering an application for
2/6/59
-7-
a single branch and not a trend.
As he had said, it would be his view
that approval of this branch, if that were the decision, should be
coupled with a denial of any further opportunities for expansion until
the capital position of the bank had been corrected.
Governor Mills went on to say that perhaps there was a philosophical position that the Federal Reserve System, as a bank supervisory
authority, might want to indicate to member banks; namely, that a bank is
a public service institution and has a responsibility to defend and protect
the public interest, and that when its growth reaches a point where the
Illanagement is no longer able to introduce its own share of new capital
the bank must cut its ties and become a publicly-owned institution.
That,
he sa4,31
-1-LL had been the history of most of the larger banks throughout the
country.
Generally speaking, the larger a bank had grown the smaller
in Proportion had become the interest of the original shareholders and
the greater the proportion of capital represented by public distribution
°f the bank's shares.
Mr. Nelson then discussed the reasons for the reluctance of
City Bank's management to sell additional stock, the recent continued
growth of
the bank's deposits, the further growth that would be in prospect
through establishment of the new branch, the efforts of the Federal Reserve
Bank of Chicago over a period of time to persuade the bank to introduce
additional capital, and the reported concurrence of the State banking
authorities in the view that more capital was needed.
The State authorities,
2/6/59
-8-
he noted, had demanded more capital when the current application was
Presented and had withdrawn that demand only when it was argued that
the application was in substitution for the previous application which
the State had approved.
In these circumstances, the Division of Examinations
did not feel that it could recommend approval of the branch.
Thereupon, it was agreed, Governor Mills dissenting, to deny
the branch application of City Bank, with the understanding that the
letter to the bank would be phrased along the lines Governor Robertson
had suggested.
A copy of the letter sent to City Bank through the
Federal Reserve Bank of Chicago pursuant to this action is attached as
Item No. 2
Branch application of Hadley Falls Trust Company (Items
Through
3 and 4).
the Federal Reserve Bank of Boston, Hadley Falls Trust Company,
1°13roke, Massachusetts, had requested the Board to approve the establishment
Of a branch in the Fairview section of Chicopee, Massachusetts.
The
Federal Reserve Bank recommended favorably, as did the Board's Division of
Examinations.
been
However, the proposed letter to the member bank, which had
circulated to the members of the Board, would state that the bank's
ealDital structure was not considered satisfactory and that establishment
the branch was being approved only in view of the minimum of expansion
involved and the convenience it would afford present customers.
letter
The
would further state that the Board wished to impress upon the
bank the need for strengthening its capital structure as rapidly as
P°asible.
2/6/59
Likewise, the proposed transmittal letter to the Federal Reserve
Bank of
Boston would note the continued undercapitalized position of
HadleY Falls Trust Company and would state that, after giving due consideration to the bank's substantial holdings of State, county, and
municipal obligations and other favorable factors, it would appear that
a minimum of $500,000 of new capital funds would be required to bring
the capital structure into an acceptable position.
In view of normal
growth expectations, it did not appear that retention of earnings alone
could be relied upon to cure the deficiency, which indicated that the
bank vas faced with the alternative of selling additional capital or of
substantially reducing its volume of
loans and/or other risk assets.
The
letter would further state that the Board would not be inclined to give
ravorable consideration to further expansion branchwise until and unless
capital funds and risk assets were brought into a more acceptable relationship
and that
the Reserve Bank's efforts to bring about a strengthening of
the capital structure should be vigorously pursued.
Governor Robertson said that he vas unable to draw a distinction
bet'ween this case and the application of the City Bank just denied by the
As between the two cases, he would in fact be inclined to grant
the branch requested by City Bank and deny the application of Hadley Falls
Trust Company.
Recalling the long history of efforts of the Board and
the Federal Reserve Bank of Boston to induce the Holyoke bank to improve
ita caPital position, he noted that the bank had resisted such efforts
6414 at times had indicated that it might withdraw from System membership.
2/6/59
-10-
48 to the contention of the applicant bank that the establishment of the
Proposed bank would not represent expansion but rather an attempt to give
better service to present customers, he said that this argument was often
Made in applications of this kind but never appealed to him.
it,
As he saw
the management of the applicant bank was simply trying to build up
the institution.
While the present management had done a good job in
working out of a difficult situation, he felt the Board could not take
the position in any section of the country that an undercapitalized bank
was going
to be permitted to expand its business.
Accordingly, he would
favor turning down this application, with advice to the applicant bank
that when it was in a properly and adequately capitalized position the
Board
would be glad to reconsider the matter.
In response to a question by Governor Balderston, Mr. Nelson
reviewed the extent of capital deficiency, as indicated by the form
f°r analyzing bank capital, and suggested that the considerable volume
(3f holdings of high-grade municipal securities might constitute something
"an offsetting factor.
He also reviewed the revision of capital
structure last year whereby the bank retired its outstanding preferred
stc)ck and sold $150,000 of additional common stock. While the bank
had been
tO
forced to increase the rate of interest paid on time deposits
3 Per cent, it had agreed to restrict the payment of dividends and
"ticipated adding about $100,000 a year to its capital structure
through
retention of earnings.
2/6/59
-11Mr. Nelson then described the location of the proposed branch
as being just outside an Air Force base where the bank was already
operating a
facility and referred to the contention of the bank that
the proposed branch was intended principally to expand the services
now offered to users of the facility.
The Reserve Bank, he said, did
not feel that establishment of the branch would lead to any material
expansion of the bank's deposits, particularly since a competing
national bank had recently established a branch only about two miles
from the proposed site.
He added that the Hadley Falls Trust Company
was very conscious of the expansion of Springfield banks into its area
and wished to maintain its own position as well as possible.
Referring
to 4 recent conversation with First Vice President Latham of the Boston
Reserve Bank, he said Mr. Latham felt definitely that the bank needed
to
b
strengthen its capital position.
On the other hand, Mr. Latham
elieved that the present management was doing a good job and he was
strongly of the opinion that the bank should be given the right to
Protect its business in the Chicopee area.
Mr. Nelson acknowledged that it was very difficult to distinguish between this case and that of the City Bank since both banks
welie undercapitalized to about the same extent percentagewise.
However,
the Division of Examinations had differentiated between the two cases
°II the basis that this branch application did not contemplate any
2/6/59
-12-
substantial expansion of business while in the other case the applicant
bank was definitely expanding and hoped to gain more business through
establishment
of the new branch.
Mr. Solomon commented that these two cases offered a good example
of a situation where judgment must enter into the picture.
After noting
that they were of particular interest to him because of his participation
in preparing the form for analyzing bank capital, he pointed out that use
of the form indicated almost exactly the same percentage of capital
deficiency
in each case.
However, use of the form could provide only
a snapshot picture at one particular time and did not serve to answer
the final
question, for it was necessary to take into account many other
factors, including apparent trends.
For example, it might be asked
whether a particular application represented one step in a large branch
Program or a relatively small step to maintain the bank's existing
P°sition.
From the legal point of view, he felt that in either of the
eases before the Board today a decision to approve or to deny could be
slIPPorted.
In the City Bank matter, he felt that the Board's decision
1448 thoroughly defensible, and he also thought that a distinction between
that ease and this one would be defensible.
not
In other words, there would
necessarily be a conflict in making different decisions in spite of
the fact that use of the analysis form produced similar results.
Referring to previous comments by Governor Mills, Mr. Solomon
observed that if a bank grows to a certain point it reaches the stage
herC the original organizers usually are not prepared to provide
,
2/6/59
-13-
adequate capitalization.
Studies in connection with the form for
analyzing bank capital had indicated that banks in the size group of
City Bank (deposits around $100,000,000) tended more generally to be
undercapitalized than banks in other size groups, which might afford
some indication that banks in that range had reached a point where
more capital was needed to enable them to go further.
Governor Mills said that he would be willing to accept the
recommendation of the Division of Examinations and the reasoning
exPressed by Messrs. Nelson and Solomon.
He pointed out that within
the last year or so the Hadley Falls Trust Company had sold $150,000
of additional common stock.
At the same time, the bank retired its
Preferred stock and this resulted in a reduction of total capital.
Even so, however, the bank had made an effort and had successfully
accoMplished the introduction of additional common shares. For a
bank of this relatively small size (4'34 million total deposits), the
sale of that amount of common stock could be considered rather substantial,
since it represented something more than 10 per cent of the
bank's total capital.
There would appear to be a question as to how
Often the bank could go back to its shareholders for additional capital
and how
successful it might be in attracting new shareholders when one
considered the size of the community and of the bank.
As Mr. Nelson
had indicated, when one looked at the whole trade area it seemed
reasonable to encourage the growth of the smaller banks so that they
2/6/59
might become stronger competitors of the large banks in Springfield.
In response to questions, Mr. Nelson discussed the relative
size of City Bank and Hadley Falls Trust Company and the capital
structure of each institution.
He also commented on the repeated
proposals of the Hadley Falls bank to retire its preferred stock, the
history of the present management, and the extent of the financial
interest of the present management in the bank.
It appeared possible,
he said, that the management could not buy much more stock at present;
there was some indication that the bank would endeavor to continue on
a dividend basis for five consecutive years after which its stock would
be eligible for purchase by mutual savings banks.
The bank's capital
Position, he acknowledged, had been a matter of debate between the
Reserve Bank and the member bank for a long period of time, although
at present
the conflict was reported to be less severe.
Governor Robertson commented that it was only as the result
of extreme pressure that the member bank agreed to sell new common
StOck when it retired its preferred stock.
the
According to Mr. Latham,
degree of conflict between the bank's management and the Reserve
Bank had now subsided, but the Reserve Bank was going to continue to
Use all available means to encourage the bank to improve its capital
Position.
Mr. Latham, he noted, hpfl said that he would not recommend
sapProval of the application if he felt the bank was expanding.
2/6/59
-15Governor Shepardson then stated that he would concur in the
recommendation
of the Reserve Bank and the Division of Examinations
on the basis of the explanation mane by Mr. Nelson, and Governor
Balderston indicated that he too would concur.
Thereupon, it was agreed, Governor Robertson dissenting, to
approve the branch application of Hadley Fells Trust Company.
Copies
Of the
letters sent to the applicant bank and to the Federal Reserve
Bank of Boston pursuant to this action are attached as Items 3 and 4,
respectively.
The meeting then adjourned.
Secretary's Note: Pursuant to the recommendations
contained in memoranda dated February 6, 1959, from
appropriate individuals concerned, Governor Shepardson
today approved on behalf of the Board increases in the
basic annual salaries of the following persons on the
Board's staff, effective February 8, 1959:
Ifatherine G. Black, Statistical Assistant, Division of Research and
6t
atisti08, from $4,325 to $4,490.
Maurice H. Schwartz, Chief Analyst, Division of Research and Statistics,
Ir• ma $10,850 to
$11,355.
Theodore A. Veenstra, jr., Technical Assistant, Division of Bank
• ratios, from $7,510 to $8,330.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Item No. 1
2/6/59
WASHINGTON 25, D. C.
X g.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
44411L Mat
:
'4*
February 6, 1959
Co
mptroller of the Currency,
Treasury Department,
Washington
25, D. C.
Attention Mr. W. M. Taylor,
Deputy Comptroller of the Currency.
Dear mr.
Comptroller:
eference is made to a letter from your office dated
November 5,
11 1958, enclosing copies of an application to organize
national bank in the Merle Hay Plaza, Des Moines, Iowa, and
a recommendation as to whether or not the application
Should be
approved.
Information contained in a report of investigation of
the a
Pplication made by a representative of the Federal Reserve
Bank of Chicago discloses favorable findings with respect to the
trActors usually considered in connection with such proposals.
ever, it is reported that the Superintendent of Banking of
State of Iowa has approved the application to organize a
:rte bank in the merle Hay plaza shopping center and since the
1,4e. will not support two banking institutions there is not sufirlent need for the proposed national bank. Accordingly, the
rd of Governors recommends that the application be disapproved.
r
Board's Division of Examinations will be glad to
disc 88
-`iss any aspects of this case with representatives of your
—Lice if you so desire.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
BOARD OF GOVERNORI-1
OF THL
Item No. 2
2/6/59
FEDERAL RESERVE SYSTEM
WASHINGTON 25. D. C.
AOOF4E5, OrrICIAL CORRESPONDENCE
TO THE laDARO
February 6, 1959
Boald of Directors,
City Bank,
Detroit, Michigan,
Gentlemen:
Reference is made to your application submitted
through the Federal Reserve Bank of Chicago for permission
to establish a branch at Ann Arbor Trail and Evergreen
Read, Dearborn Township, Wayne County, Michigan.
The Board of Governors has been pleased to note
the progress made by City Bank under the present management.
However, its review of all available information has caused
the Beard to conclude that it would not be justified in
approving this application because the present capital
structure of City Bank is belteved to be inadequate in
relation to the volume of its business and ingufficient to
3upport the proposed expansion. lane the Board can not
find its may clear to approve the application at this time,
it mould be glad to reconsider the matter when provision
is made for a satisfactory capital structure for your bank.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
BOARD OF GOVERNORS
44.4{0*4.4
OF THE
COP,
J
* 0
FEDERAL RESERVE SYSTEM
gl
Item No. 3
2/6/59
WASHINGTON 25, D. C.
32ital
*Oa,
°,,t7
041t tat
otia*#
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
February 6, 1959
Board of Directors,
Hadley Falls Trust
Company,
Holyoke, Massachusetts,
G
entlemen:
Pursuant to your request submitted through the
!?deral Re
Reserve Bank of Boston, the Board of Governors of
Federal Reserve System approves the establishment of a
uirlleh in the vicinity of the intersection of James Street
Uemorial Drive in the Fairview Section of Chicopee,
ass
achusetts, by Hadley Falls Trust Company, provided the
j
allch is established within one year from the date of this
tattCr and approval of the State authorities is in effect
48 or the date of the establishment of the branch.
t
While the present amount of capital structure of
the trust company is not satisfactory, the establishment of
thie
branch is being approved in view of the minimumof ex,
1,
3a11810n involved and the convenience which it will afford
l'resent customArs. The Board wishes to impress upon you the
18°d for strengthening the capital structure of the trust
°mPany as rapidly as possible.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
BOARD OF GOVERNORS
OF THE
Item No.
FEDERAL RESERVE SYSTEM
2/6/59
Y.1
WASHINGTON 25. D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE HOARD
4
kt's!
t,
'`"kxtt4,11.4
Febi.uary o
1959
Mr. Benjamin F. Groot, Vice President,
Federal Reserve Bank of Boston,
Boston 6, Massachusetts.
Dear Mr. Groot:
Reference is made to your letter of January 13, 1959,
with regard to the request of Hadley Falls Trust Company,
Holyoke, Massachusetts, for permission to establish a branch in
the vicinity of the intersection of James Street and Memorial
Drive in the Fairview Section of Chicopee, Massachusetts.
After consideration of the information submitted, the
Board concurs in your recommendation and has approved the establishment of the branch as Shown in the enclosed letter to be
forwarded to the board of directors of the bank. Two copies are
enclosed for your use.
It is understood that Counsel for the Reserve Dank will
review and satisfy himself as to the legality of all steps taken
to establish the branch.
The Board has noted the continued undercapitalized
Position of this institution, and after giving due consideration
to its substantial holdings of State, county and municipal obligations, and other favorable factors, it would appear that a
Tinlmum of ,500,000 of new capital funds would be required to
uring its capital structure into an acceptable position. In view
of normal growth expectations, it would not appear that the retention of earnings alone can be relied upon to cure the deficiency.
It appears that the bank is faced with the alternatives of
selling additional capital or of substantially reducing its
v°1ume of loans and/or other risk assets. In any event, the
If
BOARD
OF
OOVERNORli
Mr. Benjamin F. Groot
OF THE
FEDERAL RESERVE SYSTEM
-2
Board of Governors would not be inclined to give favorable
consideration to further expansion, branchwise, by this bank
until and unless capital funds and risk assets are brought
into a more acceptable relationship, and your efforts to bring
about a strengthening of the banks capital structure should
be vigorously pursued.
Very truly yours,
Kenneth A. Kenyon,
Assistant secretary.
Enclosures 3
@FedFRASER