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Minutes for To: Members of the Board From: Office of the Secretary September 25, 1961 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 will be appreciated if you will advise the Secretary's Office. Otherwise, please initial below. If you were present at the meeting, your initials will indicate approval of the minutes. If You were not present, your initials will indicate only that you have seen the minutes. Chm. Martin Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King Gov. Mitchell Minutes of the Board of Governors of the Federal Reserve System on MOnday, September 25, 1961. PRESENT: Mr. Mr. Mr. Mr. Mr. The Board met in the Board Room at 10:00 a.m. Balderston, Vice Chairman Mills Robertson Shepardson King Sherman, Secretary Hackley, General Counsel Solomon, Director, Division of Examinations Hexter, Assistant General Counsel Leavitt, Assistant Director, Division of Examinations Mr. Landry, Assistant to the Secretary Mr. Fuerth, Legal Assistant Mr. Mr. Mr. Mr. Mr. Letter to Massachusetts Commissioner of Banks (Item No. 1). thicler date of September 13, 1961, a letter was received from the CommisBioner of Banks, Commonwealth of Massachusetts, inquiring as to the 11°4rd's views on what would be appropriate with respect to the size of 1/1.emiums offered to stockholders of merged banks. Copies of a draft I-Y indicated that, although in the discharge of its responsibilities ) el 1lAder the bank merger legislation of 1960 the amount of premium offered to stockholders was considered to be a relevant fact, the Board had not t°11ad it necessary to decide what would be a proper or improper premium. After discussion during which certain suggestions for modifie4tion of the draft reply were made and agreed upon, the letter to the Con--uussioner of Banks, Commonwealth of Massachusetts, was approved in the form of attached Item No. 1. 9 OA;t 9/25/61 -2Midyear dividends in excess of net profits (Item No. 2). Copies had been distributed of a memorandum from the Legal Division dated September 19, 1961, attaching a draft of letter to the Federal Reserve Bank c3f San Francisco in response to its letters of July 18 and August 1, 1961) relating to the First State Bank of Salina, Salina, Utah, a member State bank that on June 22, 1961, declared a dividend of $22,500 without Prior approval of the Board of Governors. The Reserve Bank had inquired '4hether the dividend declaration violated section 5199(b) of the Revised Statutes, made applicable to member State banks by the sixth paragraph c)f section 9 of the Federal Reserve Act. Section 5199(b), in effect, Provides that "The approval of the Comptroller of the Currency fo-r the Board of Governori7 shall be required if the total of all dividends declared by...La national bank or a member State bank] in any calendar year shall exceed the total of its net 131..6-fits of that year combined with its retained net profits Of the preceding two years...." In the case under consideration the amount of the dividend exceeded the total of the bank's net profits in 1961 up to the date of the dividend declaration, combined with its retained net profits of the preceding two Ye"s, which were negative figures. The General Counsel for the Reserve 844k had expressed the view in an opinion dated July 24, 1961, a copy of ch was transmitted with the Reserve Bank's letter of August 1, that "'rice section 5199(b) referred to "all dividends declared...in any elleridar year" its applicability could not be determined until the 9/25/61 -3year was completed, and for that reason it was believed that 40 violation of the statute had occurred. However, the Legal Division took the position that such an interpretation would substantially defeat the purpose of the statute as revealed by its legislative history. C°naequently, the Division recommended in its memorandum that the statutory Provisions be construed as relating to dividends declared, and to net Profits, in the calendar year up to the date of such declaration and that First State Bank of Salina be considered to have violated the statute. It was the further recommendation of the Legal Division that, should the 13°49x01 concur in this view, the substance of this interpretation be PUblished in the Federal Register and the Federal Reserve Bulletin. The ProPosed reply to the Reserve Bank would express the views indicated. At the request of Governor Balderston, Mr. Hexter commented on the memorandum of the Legal Division, noting that both the Division of EXaminations and the Legal Division felt that the purpose of the statute /40111d be lost to a large extent if the narrow interpretation thereof 11184e bY Counsel for the Reserve Bank were adopted. He observed that the Position recommended by the Legal Division had already been adopted bY the Comptroller of the Currency and that it seemed clear this interpret4tion carried out the intent of Congress. Mr. Molony, Assistant to the Board, joined the meeting at this Point. 4-10-7 • tit.)04, #40. 9/25/61 -4Governor Mills inquired as to the procedure contemplated for handling the case in question, where there had been a violation of the statute according to the Legal Division interpretation, with which he agreed. Mr. Hexter replied to the effect that the attention of the San Francisco Reserve Bank had been drawn to the problem under discussion in c°nnection with inspection of the most recent report of examination of First State Bsnk of Salina and subsequent inspection of the bank's report °f income and dividends for the six months' period ended June 30, 1961. Since the language of the statute could be interpreted as had been done b5r the Reserve Bank, it was suggested that under the circumstances the best course to pursue would be for the Reserve Bank to make clear to Pirst State Bank of Salina and to other banks that the statute applied t0 dividends declared for the first half of the year. 4 Caution against recurrence would be given to the member bank by drawing attention to the interpretation contained in the proposed letter to the Reserve Bank that would be published in the Federal Register and the Federal Reserve 111411etin, should the Board approve the recommendations of the Legal kvision in this regard. After further discussion during which it was indicated that all 41es1hers of the Board present favored the recommendations of the Legal piv4 .-Leion, as well as the procedure suggested for handling the violation 14 question, the letter to the Federal Reserve Bank of San Francisco gr— • eil• . 3040 9/25/61 -5- concerning dividend payments made by the First Bank of Salina was sPproved unanimously, with the understanding that the substance of the interpretation contained therein would be published in the Federal Register aaa the Federal Reserve Bulletin. A copy of the letter, as sent, is attached as Item No. 2. Eligibility for service as Class A director (Item No. 3). On September 22, 1961, a telegram had been received from the Federal Reserve 13411k of San Francisco advising that Mr. John A. Schoonover, a Class A director of the Reserve Bank, had resigned effective September 14, 1961, rrom his official position with a member bank, remaining, however, as a d irector of that bpnk, with plans to continue as director of the Reserve 4flic to the expiration of his term on December 31, 1961. The view was e4pressed in the telegram that because of the short time of Mr. Schoonover's le aining term as director of the Reserve Bank, no objection was seen to ' his continuance in this capacity through December 31, 1961. A proposed te legram to the Reserve Bank would indicate that there was no objection t° Mr. Schoonover's continuing to serve as a Class A director for the r eniainder of his term. ' Following a brief discussion, a telegram was approved unanimously r°1" transmission to the Federal Reserve Bank of San Francisco in the form Qf attached Item No. 3. Request from Congressman Patman (Item No. 4). Governor Balderston Ileferred to receipt of a letter from Congressman Patman dated September 22, 1961, requesting a list of all bank merger applications pending before the 32‘ , 9/25/61 -6Although no such list had been published by the Board, it was noted that the information sought could not be regarded as confidential, since it was available to the public at least in newspapers published in the communities where the head offices of applicants were located, as required by law. In this connection, reference was made to the fact that the Board publishes in the Federal Register notice of receipt of IIPPlications filed under the provisions of the Bank Holding Company Act Of 1956. Following a discussion, there was agreement with a suggestion that Mr. Patman be provided with the information asked for. A copy of the letter transmitting the list of merger applications pending before the Board is attached as Item No. 4. A discussion then ensued regarding the advisability of making Public on a periodic basis notice of applications received by the Board tuader the Bank Merger Act of 1960. At the conclusion of the discussion, it 143-6 agreed that such information would hereafter be made available Periodically in a release distributed to the public. Mr. Fauver, Assistant to the Board, joined the meeting during the foregoing discussion. Further request from Congressman Patman. Governor Balderston 11°ted receipt of another letter from Congressman Patman dated September 23, 1961) requesting an updating of data and provision of certain additional items in a tabulation captioned "Decreases in Number of Commercial Banks 9/25/61 -7- Because of Consolidations and Absorptions," which appeared as Table 4 On Page 27 of an interim report of the Antitrust Subcommittee of the Rouse of Representatives entitled "Corporate and Bank Mergers" published in 1955. Governor Balderston said that Mr. Patman had also requested a btleakdown for 1960 and 1961 to date showing how many bank mergers had been approved by each of the Federal bank supervisory agencies and in "'eh instance the dollar volume of deposits and the percentage of total dePcsits of all commercial banks involved. After a discussion of the advisability of furnishing some of the requested data to Mr. Pathan, it was understood that the staff would uradertake to compile such of the material as was available for transto Congressman Patman. The meeting then adjourned. c17 Secreta 1.; ft_ft BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25, D. C. Item No. 1 9/25/61 ADDRESS OFFICIAL CORRESPONDENCE TO TEIE HOARD September 251 1961 11r. Edward A. Counihan, III, Commissioner of Banks, The Commonwealth of Massachusetts, Causeway Street, °e0ston 14, Massachusetts. Dear Mr. Counihan: This refers to your letter of September 13, 1961, regarding the anounts of premiums offered to the stockholders of merged banks. dollar amount of premiums can be calculated on several As you know, the as book values, market values, or some such different bases ,clillstments of these; the premium so calculated can then be stated as a let,r cent of deposits (or certain kinds of deposits), of earnings, or ' one of the bases used to compute the premium. The significance of One ite comparison or another can vary depending on the circumstances, and is often difficult to make a4ropriate comparisons of premiums from 'fle situation to another. It has seemed to the Board, in the discharge of its responsillties under the bank merger legislation of 1960, that the amount of offered to stockholders is one fact to be considered, together .t1, 4 other relevant facts, in connection with a proposed merger, but that s e size of premium would not necessarily govern whether a proposed merger inad be approved or disapproved. For example, a premium judged to be ge would seem to raise doubts as to a claim arguing for a merger on the lipricis that the bank being absorbed was in distress or suffering seriousproblems of management, management succession, or the like. Conve;r°n1 eelY a small premium or a discount would somewhat tend to support such bi g a aaini, In the circumstances, the Board has not yet found it necessary ecide what would be a proper or improper premium, nor has it seemed ,27.dsible to develop meaningful statistics regarding premiums involved in to d giergers. Very truly yours, Merritt Sh Secretary. BOARD OF GOVERNORS OF THE 40'4144,9 4 CO ti)1,*0 ' Po FEDERAL RESERVE SYSTEM Item No. 2 t WASHINGTON 25. D. C. 9/25/61 ADDRESS OFFICIAL CORRESPONDENCE t,,,Akuutitv l TO THE BOARD "444u**- September 25, 1961 Mr. E. H. Galvin, Vice President, Federal Reserve Bank of San Francisco, San Francisco 20, California. Dear Mr. Galvin: This is in response to your letters of July 18, 1961 and August 1, 1961, relating to the First State Bank of Salina, Salina, Utah. ,On June 22, 1961 this member bank declared a dividend of $22,500 without na ing : Tir obtained the approval of the Board of Governors. You inquire nether this action violated Revised Statutes section 5199(b) (12 U.S.C. ?"0) and the sixth paragraph of section 9 of the Federal Reserve Act U.S.C. 324), which, in effect, provide that "The approval of the Comptroller of the Currency [or the Board of Governors] shall be required if the total of all dividends declared by... [a national bank or a member State bank] in any calendar year shall exceed the total of its net Profits of that year combined with its retained net profits of the preceding two years...." In this case, the amount of the dividend exceeded the total of the 1, bit rnkts net profits in 1961, up to the date of the declaration, cow_ et with its retained net profits of the preceding two years (which "ere negative figures). If the question related only to the literal meaning of words, vurced from the statute's underlying purpose and from the factual 8ituat10n5 to which it relates, it might be contended that, since the etat 0+1, ukie refers to "all dividends declared...in any calendar yearn and d' e":e total of its net profits of that year", its applicability cannot be ho'ermined until the calendar year is completed. As explained below, 8' 1tever, such an interpretation is not required by the language of the 1:atute and would substantially defeat its purpose, as revealed by the jgislative history; and consequently it is believed that the statute iL' l uld be construed as relating to dividends declared, and to net profits, the calendar year up to the date of such declaration. Se The purpose of the statute was described as follows by the dte Banking Committee: GOARD tire E. H.• Galvin OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM -2- "This provision is designed to restrict the payment of dividends...where such payments would result in dissipating needed capital funds. This provision strengthens the regulatory authority of the Comptroller [and the Board of Governors]. Under it, he will be able to prevent the declaration of dividends Which are not justified by current and recent accumulated earnings, and which would result in a weakened and under-capitalized bank and violate safe and sound banking practice." S. Rep. No. 730, 86th Cong. (Aug. 19, 1959), pp. 6-7. It seems that Congress had in mind the following test: At the t)fllethe dividend is declared, does the bank have available, from profits of the current calendar year and the two preceding calendar years, enough Profits to cover the dividend? If not, the dividend may not be declared !nd paid unless the Comptroller or the Board of Governors specifically v4PProves) in view of the circumstances of the particular case. Bearing in mind the Senate Committee's reference to "dissipating needed capital funds", it is obvious that the danger that a proposed (,11.-vidend would unduly weaken a bank's capital structure is just as great the dividend is declared in June as if it is declared in December. cJif a bank does not have profits on hand sufficient to cover a proposed ilvidend, the fact that the declaration is made in one month rather than 41.1 another has little or no bearing on the extent to which payment of the hividend may unduly diminish the capital "cushion" on which depend the ankl s continued existence and the safety of its depositors. An illustration may be helpful. For simplicity, let us assume a member State bank opened for business on January 1, 1959 with a Pital structure of $300,000, as required by the supervisory authoriLic. 1 bank had no net profit in 1959 or 1960. Up to June 30, 1961 it still : 1 Ihs no net profits, but nevertheless the directors declare a dividend (: reduced on that date. The bank's capital structure is thereby i214 $300,000 to :iii280,000. It seems that this was precisely what Coni7e,:. d';tended should not happen unless the Board of Governors approved the thvidend, for adequate reasons. An undesirable situation would exist, and ,e„Congressional purpose would be defeated, if such a weakening of the b. 7i s capital structure were permissible if the dividend was declared and pa inld (without supervisory approval) in June, whereas the same action would i _ v(ave a violation of the statute if the dividend was declared and paid, of secuistitead, in December. This might actually mean that no violation dividends end-of-year to respect 1 - 5199(b) could occur except with 4h° when directors, bank's the that 3, perhaps, it could be established th" heIY declared the dividend earlier in the year, knew (or had reason to ilfs.ipeve) that the bank's net profits for the entire year would not be -'ioient. that Z SOAR° OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM • 4 3, • 44# 141 r. E. H. Galvin The statutory reference to Hall dividends declared..bin any calendar year" can be interpreted, even from the viewpoint of literal meaning, as referring to dividends declared in a calendar year up to the cla. -of declaration. Particularly because the clear Congressional purpose 14culd otherwise be largely defeated, it is concluded that this is the correct interpretation and that, consequently, the declaration by First State Bank of Salina on June 22, 1961, without the Boardts approval, of a dividend in the amount of $22,500 was in violation of the applicable tatutes, since the amount of that dividend exceeded "the total of [the ! Ilk's] net profits of that year combined with its retained net profits °I. the preceding two years. Z Very truly yours, (signed) Merritt Sherri= Merritt Sherman, Secretary. I .) • 3 eTh 4 , Item No. TELEGRAM 3 9/25/61 LEASED WIRE SERVICE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON September 25, 1961. Swan — San Francisco Re your wire September 22, 1961, no objection to Mr. Schoonover c°1tinuing to serve as Class A director for remainder of term. For Y.°0 information, Board has heretofore taken position that Class'A clitor continues to be "representative of the stockholding banks" Where he continues as director of member bank even though without °facial position. (Signed) Merritt Sherman Sherman ar Ct ' A _orrdr:r " e BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON Item No. 4 9/25/61 OFFICE OF THE VICE CHAIRMAN SepteMber 25, 1961 The Honorable Wright Patman, House of Representatives, Washington 25, D. C. Dear Mr. Patman: In accordance with your request of September 22, 1961, there is enclosed a list of bank merger applications PendinE before the Board of Governors. This list contains the names of the banks involved, tho type of action for lihich permission has boon requested (i.e., merger, consolidation, purchase of assets, etc.), and the date on which the aPPlication was received by the Board. Sincerely yours, (Signed) C. Canby Balderston C. Canby Balderston, Vice Chairman. 4sure. cf3 APPLICATIONS PENDIM BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM UNDER SECTION 18(c) OF THE FEDERAL DEPOSIT INSURANCE ACT AS AMENDED September 25, 1961 TYPE OF ACTION DATE APPLICATION RECEIVED BY BOARD . United California Bank, Los Angeles, California, and The Southwest Bank, Inglewood, California. Merger May 2, 1961 2. Wells Fargo Bank American Trust Company, San Francisco, California, and The Farmers and Merchants National Bank of Santa Cruz, Santa Cruz, California. Merger Juno 2, 1961 NAEES OF BANKS INVOLVED 3. Elston Bank & Tryst Company, Crawfords- Purchase of assets, etc. July 13, 1961 ville, Indiana, and The Waynetown State Bank, Ilaynetown, Indiana. 4. United California Bank, Los Angeles, California, and The First National Bank, La Verne, California. Merger July 170 1961 5. Liberty Bank and Trust Company, Buffalo, Merger July 25, 1961 New York, and Exchange Bank, Oakfield, New York. The Fifth Third Union Trust Company, Cincinnati, Ohio, and Norwood-Hyde Park Bank and Trust Company-, Norwood, Ohio. Purchase of assets, etc. July 25, 1961 -2- September 25, 1961 NAMES OF BANKS INVOLVED T/PE OF ACTION Farmers State Bank of Alto, Alto, Michigan, and The Edwin Nash State Bank, Clarksville, Michigan. Consolidation July 31, 1961 8. Chemical Bank New York Trust Company, New York, New York, and Long Island Trust Company, Garden City, New York. Merger August 30 1961 9. The Chase Manhattan Bank, New York, Merger August 28, 1961 Merger September 8, 1961 Consolidation September 19, 1961 DATE APPLICATION RECEIVED BY BOARD New York, and Hempstead Bank, Hempstead, Long Island, New York. 10, The Hackensack Trust Company, Hackensack, New Jersey, and The Bank of Saddle Brook & Lodi, Saddle Brook, New Jersey. U. The Elyria Savings and Trust Cornpany, Elyria, Ohio, and The First Wellington Bank, Wellington, Ohio.
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