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A meeting of the Board of Governors of the Federal Reserve SYstem was held in Washington on Wednesday, November 15, 1939, at 11:30 a.m. PRESENT: Mr. McKee Mr. Davis Mr. Draper Mr. Mr. Mr. Mr. Morrill, Secretary Bethea, Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman The action stated with respect to each of the matters hereinafter referred to was taken by the Board: Memorandum dated November 13, 1939, from Mr. Paulger, Chief of the Division of Examinations, submitting the resignation of J. I. Connell es a Federal Reserve Examiner, to be effective as of November 15, 1939, 4 recommending that the resignation be accepted as of that date. " Approved unanimously. Letter to the board of directors of the "Farmers Bank of Mat hews", Mathews, Virginia, stating that, subject to conditions of Illebership numbered 1 to 3 contained in the Board's Regulation H and the following special conditions, the Board approves the bank's application for membership in the Federal Reserve System and for the ap111'3Priate amount of stock in the Federal Reserve Bank of Richmond: "4. Such bank shall make adequate provision for depreciation in its banking house and furniture and fixtures. "s. Prior to admission to membership, such bank shall cause its wholly owned affiliate, the Farmers' and 11/15/39 -9- "Fishermen's Company, to dispose of any shares of the bank's own stock which may be owned by the company." The letter also contained the followcomments: special ing "It has been noted that the bank is authorized to exercise trust powers but is not doinp so, and it appears that the institution possesses certain other powers which are not being exercised and which are not necessarily required in the conduct of a banking business, such as the power to guarantee the payment of bonds. Attention is invited to the fact that if the bank desires to exercise any powers not actually exercised at the time of admission to membership, it will be necessary under condition of membership numbered 1 to obtain the permission of the Board of Governors before exercising them. In this connection, the Board understands that there has been no change in the scope of the corporate Powers exercised by the bank since the date of its application for membership." Approved unanimously, together with a letter to Mr. Leach, President of the Federal Reserve Bank of Richmond, reading as follows: "The Board of Governors of the Federal Reserve System approves the application of the 'Farmers Bank of Mathews', Mathews, Virginia, for membership in the Federal Reserve SYstem, subject to the conditions prescribed in the enclosed letter which you are requested to forward to the Board of Directors of the institution. Two copies of such letter are also enclosed, one of which is for your files and the Other of which you are requested to forward to the Commissioner of Banking for the Commonwealth of Virginia for his information. "According to the report of examination for memberShip, k230.50 par value of the bank's common stock is owned by the Farmers' and Fishermen's Company, a wholly owned affiliate. In effect, ownership of the stock by the camPanY is the sane as if owned by the bank and, accordingly, €1 condition has been prescribed to require the stock to be disposed of prior to admission of the bank to membership. "It has been noted that the bank is proposing to retire 0.5,000 par value of its preferred stock and to increase common stock .';;7,500 by a stock dividend. The State 14.1 11/15/39 —3- "Department and the Federal Deposit Insurance Corporation have approved the program on condition that the dividend rate on the preferred stock be reduced from 6 per cent to 4 per cent and no cash dividend be paid on common stock until the capital account equals 10 per cent of deposits, and that certain stipulated charge-offs be made periodically against furniture and fixtures, other real estate and the carrying value of the stock of a real estate affiliate. The bank is committed to the Reserve Bank to carry out the Provisions of the agreement with the State Department and Federal Deposit Insurance Corporation, and it is assumed, Of caurse, that the matter will be followed by your office." Letter to the board of directors of the "Security Bank", Webster, South Dakota, stating that, subject to conditions of memberShin numbered 1 to 3 contained in the Board's Regulation H and the f°11owing special condition, the Board approves the bank's application r°11 membership in the Federal Reserve System and for the appropriate e aolliat of stock in the Yederal Reserve Bank of Minneapolis: "4. Such bank shell make adeQuate provision for depreciation in its banking house." Approved unanimously, together with a letter to Mr. Peyton, President of the Federal Reserve Bank of Minneapolis, reading as follows: 'The Board of Governors of the Iederal Reserve Sysapproves the application of the 'Security Bank', Webster, South Dakota, for membership in the Federal Reserve System, subject to the conditions prescribed in the enclosed letter Which you are requested to forward to the Board of Directors Of the institution. Two copies of such letter are also enclosed, one of which is for your files and the other of which you are requested to forward to the Superintendent of Banks for the State of South Dakota for his information. "It is assumed that you will satisfy yourself that the matters referred to in your counsel's letter of October 27, 1939, to Mr. Swanson with respect to the amendment of the bank's articles of incorporation have been Properly disposed of." 11/15/39 -4- Letter to Mr. Robert R. Spooner, Assistant Secretary, Morris Plan Rankers Association, Washington, D. C., reading as follows: "I have your letter of November 7 in regard to the Proposed requests for rulings by the Board upon the question whether certain Morris Plan banks or companies are banks within the meaning of the Clayton Act. It is my understanding that, during the conference to which you referred in your letter, the suggestion was made that the communications asking for such rulings be addressed to the Federal Reserve bank of the district in which the institution in question is located, in accordance with the practice generally followed with respect to requests for interpretations or rulings. It is therefore assumed that this procedure will be followed in the cases to Which you refer in your letter. It is also assumed that in such communications to the Federal Reserve banks the applicants will undertake to furnish all factual information which may be necessary in passing upon the question raised. In this connection, since the question to be passed upon will relate to the status of the particular institution, it would seem unnecessary for each individual director involved to submit a separate request." Approved unanimously, together with a letter to Mr. Paddock, First Vice President of the Federal Reserve Bank of Boston, reading as follows: "The Morris Plan Bankers Association has advised the Board of the possibility that several Morris Plan companies maY submit to your Bank requests for rulings similar to that contained in the Board's letter of October 19, 1939 (S-189-a). In order to facilitate the consideration of any requests of this kind which may be referred to the Board, it will be appreciated if you will furnish the Board with copies of any amendments to the laws of Massachusetts affecting Morris Plan companies or Morris Plan banks which may have been enacted since Jenuary 1, 1939. "In the event that you have occasion to refer any Fach requests to the Board, it will also be appreciated lf YOU will review them in the liqht of the Board's letter of October 19, 1939, referred to above, in order to 1474_9 11/15/39 "ascertain whether all the important facts relating to the business of the company are described in sufficient detail to enable the Board to determine Whether the principles underlying the above ruling are applicable." Letter to Mr. Swanson, Vice President of the Federal Reserve 13enk of Minneapolis, reading as follows: 'This refers to your letter of September 13, 1939, relating to a reauest from Ma.. R. F. Mactavish, SecretaryComptroller, Northwest Bancorporation, Minneapolis, Minnesota, that the Board define the terms 'net earnings' and 'actual net earnings' used in subsections (c) and (e) (4), respectively, of section 5144 of the Revised Statutes of the United States. The Board believes that it is not feasible for it to furnish comprehensive definitions of these terms which would cover all of the specific questions rhich may arise in various cases and circumstances. It is believed, however, that the following views on the matter will furnish the information which Mr. ' 1 actavish de, sires regarding undistributed earnings of subsidiary banks. "Subsection (e)(4) requires that a holding company affiliate shall agree, in its application for a voting permit, that thenceforth it will declare dividends only out of actual net earnings. The Board feels that the amount of the 'actual net earnings' of a holding company affiliate, within the meaning of such subsection, should be arrived at on the basis of the most conservative accounting principles. Accordingly, it is felt that the actual net earnings of a holding company affiliate generally should not be construed to include earnings of subsidiary banks which have not been distributed to the holding company affiliate in the form of dividends. "With respect to the provisions of subsection (c) regarding the establishment and maintenance by a holding company affiliate of a reserve of readily marketable assets °I.it of net earnings over and above 6 per centum per annum on the book value of its own shares outstanding, it is felt that 'net earnings' should not be construed to in?llide undistributed earnings of subsidiary banks which, in accordance with the canments in the preceding paragraph, Eire not regarded as 'actual net earnings' of the holding company affiliate." Approved unanimously. Thereupon the meeting adjourned.
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