Modern banking methods and practical bank bookkeeping; illustrated with over two hundred forms of bank books, records and blanks

Preface

This book is the result of many years' experience as a banker, a bank examiner, and a pubhc accountant, and is presented to the banking fraternity in the hope that it may be of some service.

Many courtesies have been extended to me by the office of the Comptroller of the Currency and by various banks and clearing-houses, among which I will mention : The Fourth Street National Bank, Philadelphia; Bankers National Bank, Chicago; Chase National Bank and Mercantile National Bank, New York; Northwestern National Bank, Minneapolis; First National Bank, Birmingham, Ala. ; First National Bank and the Traders' National Bank, Scran ton, Pa., and the clearing-houses of New York, Boston, Philadelphia, Chicago, Minneapolis and Scranton, Pa. I am grateful for the aid thus received.

A. R. Barrett.

Chapter I. Organizing A Bank

The first thing to be decided in starting a bank is whether the bank is needed. This is no doubt a trite observation ; and yet many mistakes are made by starting banks where they are not needed. Usually the mistake is not in selecting a town where the business is too small to support a bank, but in establishing another bank where such facilities are already adequate. Over-competition has practically destroyed banking profits in many localities. Therefore, before starting a bank, be sure that it is needed.

Having become satisfied, after diligent investigation, that the business of a particular locality requires a new bank, the next question of importance for the mover of the enterprise is to select the men whom it is desirable to interest in the organization. Naturally, the men who have capital will be the first to suggest themselves ; but it is well not to lose sight of the fact that character is also a most desirable constituent of those who are starting a bank. Some men bear such high reputations that they are known to be incapable of associating themselves with anything unworthy of public support. Such men will add strength to a bank, though their moneyed capital may not be large.

When enough good men can be interested — say ten or twelve — a preliminary meeting should be called and a spokesman selected to explain the reasons for launching the bank, its prospects for success and who are expected to take stock.

The importance of starting right suggests the propriety of having a legal adviser, so that all laws relating to incorporation may be fulfilled.

One of the first questions to arise is, shall the bank be organized under the State or the National banking laws ; in other words, shall it be a State bank or a National bank ? A careful examination of both the State and National banking laws will show that while there is much similarity in the powers granted by both, it is evident that the restrictions as to the general management of banks are, as a rule, more rigid in the National Banking Law than in those of the laws of most of the States.

It is also shown that in a period of thirty-five years since the passage of the original National Banking Act only about 360 National banks failed, an average of about ten a year, and that dividends have been paid in winding up the affairs of these banks to the amount of about seventy-five per cent.

The relative profits to be obtained under the State and National systems depend upon circumstances. National banks are under some prohibitions which tend to restrict their earning capacity in certain localities. Profits on circulating notes and Government deposits are now so small as to be hardly worth considering. On the other hand, a National bank enjoys a degree of prestige, perhaps, from the character of its charter. In reserve cities the National form of organization will be generally found preferable, since only a National bank can act as a reserve agent for other National banks. State banks, in some States, are permitted to establish branches — a privilege not now accorded to National banks.

The Amount of the Capital Stock.

The next point to be considered is the amount of capital stock. The National Banking Law provides that in towns with a population not exceeding 3,000 a bank must have a capital of not less than $25,000; where the population does not exceed 6,000, at least $50,000 will be required; where the population is over 6,000 and under 50,000 the sum of $100,000 will be required, and in cities of 50,000 and over the sum of $200,000 is the minimum. Thus the amount of capital stock depends somewhat upon the population, also upon the character of the business of the community, some classes of business requiring much more accommodation than others, and as the National Banking Law limits the loaning power of a National bank to any one individual or corporation, on his or its own paper, to ten per cent, of the capital stock, the importance of this point is easily seen.

It is of course more difficult to pay satisfactory dividends upon a large capital, unless a bank has some unusual facilities, consequently, except in the large cities where the demand for money is extremely heavy, it is considered wise banking to have a moderate capital and build up large deposits. I have several banks in mind, that have come to my personal attention, with capital ranging from $100,000 to $300,000, and deposits from $2,000,000 to $20,000,000. These banks pay large dividends, and their stock is almost unpurchasable.

The question of capital stock being decided, the next in importance is the name ; and, simple as this may appear, it sometimes has much to do with the success of the bank. In organizing a National bank, it is well to bear in mind that the word National must form a part of the title.

The foregoing preliminaries having been settled, the next important step will be the securing of subscribers for the stock. This is generally placed in the hands of a committee.

Great care should be exercised in selecting those who are to be the stockholders, for it is here that much of the controlling power lies, and, while under any possible laws a bank may be injured or wrecked by its officers, yet its directors, primarily, and officers, secondarily, are the representatives of the stockholders.

Section 5133 of the National Banking Law provides that all stockholders of a bank must be "natural persons," that is, individuals who can legally hold and control property in their individual right — not corporations, firms, or associations.

As some who desire to be stockholders may be married women, and the laws of the several States differ as to their rights in regard to the holding of property and agreements made by them, also as to the forms of acknowledgment of papers executed by them, any organization papers bearing the signatures of women must be accompanied by the statement that, under the laws of the State, they had the power to be parties to the organization.

While the matters mentioned above are being attended to a letter should be sent to the Comptroller of the Currency at Washington, D. C, stating in full the wishes of the meeting, giving the desired name of the bank, the location and the proposed capital, and asking for instructions and for the proper blank forms. This should be signed by at least five of the contemplated stockholders with a statement of their business, and their financial standing, and endorsed by a member of the United States House of Representatives or a United States Senator for that State, or some person of some prominence vouching for the standing of the applicants. If this application be approved by the Comptroller a pamphlet will be received giving full instructions how to proceed, also blank forms in duplicate for the articles of association and for the organization certificate.

The name applied for will be reserved by the Comptroller for sixty days for the sole use of the bank first applying for it, during which time it is presumed that the bank will have completed its organization.

The following is the general form in use for the articles of association and organization certificate :

MODERN BANKING METHODS.

FORM OF ARTICLES OF ASSOCIATION.

For the purpose of organizing an association to carry on the business of banking, under the laws of the United States, the undersigned, subscribers for the stock of the association hereinafter named, do enter into the following articles of association :

First. The name and title of this association shall be "The ."

Second. The place where its banking-house or oflftce shall be located and its operations of discount and deposit carried on, and its general business conducted shall be .

Third. The board of directors shall consist of shareholders. The

first meeting of the shareholders for the election of directors shall be held

at , on the , or at such other place and time as a majority of the

undersigned shareholders may direct.

Fourth. The regular annual meetings of the shareholders for the election of directors shall be held at the banking-house of this association on the second Tuesday of January of each year ; but if no election shall be held on that day it may be held on any other day, according to the provisions of section 5149 of the Revised Statutes of the United States ; and all elections shall be held according to such regulations as may be prescribed by the board of directors, not inconsistent with the aforesaid provisions of the said section 5149 of the Revised Statutes and of these articles.

Fifth. The capital stock of this association shall be thousand dollars, to be divided into shares of one hundred dollars each; but the capital may be increased, according to the provisions of section 5142 of the Revised Statutes, to a sum approved of by the Comptroller of the Currency ; and in case of the increase of the capital of the association, each shareholder shall have the privilege of subscribing for such number of shares of the proposed increase of the capital stock as he may be entitled to according to the number of shares owned by him before the stock is increased.

Sixth. The board of directors, a majority of whom shall be a quorum to do business, shall elect one of their number to be President of this association, who shall hold his office (unless he shall be disqualified, or be sooner removed by a two-thirds vote of all the members of the board) for the term for which he was elected a director ; and they shall have power to elect a Vice- President, who shall also be a member of the board of directors, and who shall be authorized, in the absence or inabiUty of the President from any cause, to perform all acts and duties pertaining to the office of President except such as the President only is authorized by law to perform ; and to elect or appoint a Cashier, and such other officers and clerks as may be required to transact the business of the association ; to fix the salaries to be paid to them, and to continue them in office, or to dismiss them, as, in the opinion of a majority of the board, the interests of the association may demand.

They shall also have power to define the duties of the officers and clerks of the association, to require bonds from them, and to fix the penalty thereof ; to regulate the manner in which elections of directors shall be held, and to appoint judges of the elections ; and, generally, to do and perform all the acts that it may be legal for a board of directors to do under the Revised Statutes aforesaid ; and they shall also have the power to make all by-laws that it may be proper and convenient for them to make, not inconsistent with law, for the general regulation of the business of the association and the management and administration of its affairs.

Seventh. This association shall continue for the period of twenty years from the date of the execution of its organization certificate, unless sooner placed in voluntary liquidation by the act of its shareholders owning at least two-thirds of its stock, or otherwise dissolved by authority of law.

Eighth. These articles of association may be changed or amended at any time, by shareholders owning a majority of the stock of the association, in any manner not inconsistent with law ; and the board of directors, or any three shareholders, may call a meeting of the shareholders for this or any other purpose, not inconsistent with law, by publishing notice thereof for thirty days in a newspaper published in the town, city or county where the bank is located, or by notifying the shareholders in writing thirty days before the time fixed for the meeting.

In witness whereof, we have hereunto set our hands, this day of

, nineteen hundred and .

I certify that the articles of association of the are executed

in duplicate, and that one of the instruments so executed is the foregoing ; and that the other, in all respects like the foregoing, is on file with said bank.

— , 190 — . Cashier or President.

At least five persons are required to sign these articles.

In regard to article third, the first board of directors may be appointed by the stockholders instead of elected. It may also be thought advisable, instead of specifying the number that shall constitute the board, to state the minimum and maximum number that may serve, in which case this article will read as follows :

' ' The board of directors shall consist of not less than nor more than

shareholders, and the following persons (here insert their names) are

hereby appointed directors of this association, to hold their offices as such until the regular annual election takes place, pursuant to the fourth article of these articles of association, and until their successors are chosen and qualified. The number of directors elected at each annual meeting shall constitute the board for the year, all vacancies to be filled in accordance with the provisions of section 5148."

FORM OF ORGANIZATION CERTIFICATE.

We, the undersigned, whose names are specified in article fourth of this certificate, having associated ourselves for the purpose of organizing an association for carrying on the business of banking, under the laws of the United States, do make and execute the following organization certificate:

First. The name of the association shall be the .

Second. The said association shall be located in the of county of and State of , where its operations of discount and

deposit are to be carried on.

MODERN BANKING METHODS.

Third. The capital stock of this association shall be dollars

), and the same shall be divided into shares of one hundred dollars each.

Fourth. The name and residence of each of the shareholders of this association, with the number of shares held by each, are as follows :

Name. Residence. No. of Shares

Fifth. This certificate is made in order that we may avail ourselves of the advantages of the aforesaid laws of the United States.

In witness whereof we have hereunto set our hands this day of

, 190—.

State of , County of , ss. :

On this, the day of , a.d. 190 — , before me, a of

, personally came , to me well known, who severally

acknowledged that they executed the foregoing certificate for the purposes therein mentioned.

Witness my hand and seal of oflBlce the day and year aforesaid. [Seal of Notary or Court.]

The two documents above mentioned must now be filled out and signed in duplicate, according to the instructions sent by the Comptroller of the Currency, one copy to be retained in the bank and the other to be sent to the Comptroller, care being taken that the same men sign both documents.

All these preliminary meetings mentioned should be carried on in a business-like manner, a chairman and secretary being selected, and careful minutes kept, which should be entered in a minute book, and become part of the records of the bank after the organization is perfected.

The name, etc., of each shareholder, but not necessarily his signature, is required in the fourth subdivision.

Choosing the Directors.

The next important matter to be considered is the election of a board of directors by the shareholders, unless they have been designated in the articles of association.

The National Banking Law requires that every bank shall have at least five directors, and that every director shall be a citizen of the United States, and that three-fourths of them at least must be residents of the State, Territory or District in which the bank is located during their continuance in office, and must have been so for a year or more immediately preceding their election.

Each director must also during his whole continuance in office be a bona fide owner of not less than ten shares of the capital stock of the bank, which shares must not be hypothecated or in any way pledged as security for any loan or debt.

Obligations and Duties of Directors.

There are few more responsible positions than that of a bank director. To be able to carefully direct the affairs of a bank holding in its vault the funds of so many people is no light task, yet how few really seem to recognize it, and are willing to take the oath prescribed, and in reality give little attention to their duties.

No man who is so situated that he cannot give the necessary attention to the duties should accept the position. Upon the directors devolves the responsibility of loaning the money, and they should remember that these funds are not theirs but are held in trust, and they are bound to return them when called for.

The people will measure the standing of a bank very much by the men known to have the direction of its affairs ; for that reason only the very best men, and those of the most careful business methods, should be selected, and it is wise to have representative men from various lines of business.

No man is obliged to be a director, but having assumed such a position he is under absolute obligations to perform the duties to the best of his ability.

In all matters relating to the policy and administration of the bank the board of directors should act as a unit, as a harmonious body. In one of the most successful banks of the United States it is the rule with the board of directors that if any proposition or motion brought before the board is seriously opposed by any member, the matter is dropped. This preserves a spirit of unanimity, which is essential.

The directors of a bank should be broad-minded men ; the small, petty spirit will only prove a bar to success. Let me give an instance. A National bank was organized in one of our principal cities. At one of the meetings for organization the question of a name came up. Various branches of trade were well represented. One branch, the produce, became so aggressive in their determination to have it named after their particular branch, going so far as to state that the bank was especially for their particular line of business and no other was wanted, that they succeeded in driving off many of their best stock subscribers. Naturally, this bank lived only a few years. The management was contentious and petty from the start, and the bank died a natural death, went into liquidation.

The duties of directors of National banks are very specifically described in the National Banking Laws, together with the penalties for the neglect of such duties.

These have been compiled by the Comptroller's office and issued in the form of a circular, and their importance is such that I embody them in full in this chapter.

SECTIONS OF THE REVISED STATUTES (NATIONAL BANK ACT) WHICH DEFINE CERTAIN DUTIES OF DIRECTORS OF NA- TIONAL BANKS AND PRESCRIBE PENALTIES FOR NEGLECT THEREOF.

Number and Election of Directors. — Term of Office.

27. (Sec. 5145.) The affairs of each association shall be managed by not less than five directors, who shall be elected by the shareholders at a meeting to be held at any time before the association is authorized by the Comptroller of the Currency to commence the business of banking; and afterward at meetings to be held on such day in January of each year as is specified therefor in the articles of association. The directors shall hold office for one year, and until their successors are elected and have qualified.

Qualifications of Directors.

28. (Sec 5146.) Every director must, during his whole term of service, be a citizen of the United States, and at least three-fourths of the directors must have resided in the State, Territory, or District in which the association is located, for at least one year immediately preceding their election, and must be residents therein during their continuance in office. Every director must own, in his own right, at least ten shares of the capital stock of the association of which he is a director. Any director who ceases to be the owner of ten shares of the stock, or who becomes in any other manner disqualified, shall thereby vacate his place.

Oath Required from Directors.

29. (Sec 5147.) Each director, when appointed or elected, shall take an oath that he will, so far as the duty devolves on him, diligently and honestly administer the affairs of such association, and will not knowingly violate, or willingly permit to be violated, any of the provisions of this Title, and that he is the owner in good faith, and in his own right, of the number of shares of stock required by this Title, subscribed by him, or standing in his name on the books of the association, and that the same is not hypothecated, or in any way pledged, as security for any loan or debt. Such oath, subscribed by the director making it, and certified by the officer before whom it is taken, shall be immediately transmitted to the Comptroller of the Currency, and shall be filed and preserved in his office.

ORGANIZING A BANK.

Vacancies, How Filled.

30. (Sec. 5148.) Any vacancy in the board shall be filled by appointment by the remaining directors, and any director so appoiwted shall hold his place until the next election.

Limit of Liabilities for Money Borrowed.

78. (Sec. 5200.) The total liabilities to any association, of any person, or of any company, corporation, or firm for money borrowed, including, in the Uabilities of a company or firm, the liabilities of the several members thereof, shall at no time exceed one-tenth part of the amount of the capital stock of such association actually paid in. But the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed.

Dividends and Surplus Fund.

77. (Sec. 5199.) The directors of any association may, semi-annually, declare a dividend of so much of the net profits of the association as they shall judge expedient ; but each association shall, before the declaration of a dividend, carry one-tenth part of its net profits of the preceding half-year to its surplus fund until the same shall amount to twenty per centum of its capital stock.

Withdrawal of Capital Prohibited. — Dividend Not to Exceed Net Profits.— Bad Debts Defined.

82. (Sec. 5204.) No association, or any member thereof, shall, during the time it shall continue its banking operations, withdraw, or permit to be withdrawn, either in tl^e form of dividends or otherwise, any portion of its capital. If losses have at any time been sustained by any such association, equal to or exceeding its undivided profits then on hand, no dividend shall be made; and no dividend shall ever be made by any association, while it continues its banking operations, to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts. All debts due to any association, on which interest is past due and unpaid for a period of six months, unless the same are well secured, and in process of collection, shall be considered bad debts within the meaning of this section. But nothing in this section shall prevent the reduction of the capital stock of the association under section fifty-one hundred and forty-three.

Liabilities and Penalties for Violating the Law.

118. (Sec. 5239.) If the directors of any National banking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate any of the provisions of this Title, all the rights, privileges, and franchises of the association shall be thereby forfeited. Such violation shall, however, be determined and adjudged by a proper circuit, district, or territorial, court of the United States, in a suit brought for that purpose by the Comptroller of the Currency, in his own name, before the association shaU be declared dissolved. And in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation.

Penalty for Embezzlement, Making False Entries in Books,

Reports, Etc.

137. (Sec. 5209.) Every President, director. Cashier, teller, clerk, or agent of any association, who embezzles, abstracts, or wilfully misappUes any of the moneys, funds, or credits of the association ; or who, without authority from the directors, issues or puts in circulation any of the notes of the association ; or who, without such authority, issues or puts forth any certificate of deposit, draws any order or bill of exchange, makes any acceptance, assigns any note, bond, draft, bill of exchange, mortgage, judgment, or decree; or who makes any false entry in any book, report, or statement of the association, with intent, in either case, to injure or defraud the association or any other company, body politic or corporate, or any individual person, or to deceive any officer of the association, or any agent appointed to examine the affairs of any such association ; and every person who with like intent aids or abets any officer, clerk, or agent in any violation of this section, shall be deemed guilty of a misdemeanor, and shall be imprisoned not less than five years nor more than ten.

In all elections of directors, and in deciding all questions at meetings of stockholders, one vote for every share of stock present or by proxy is permitted, but no officer, director, clerk, teller, or bookkeeper of the association can act as proxy, and no stockholder vs^hose liability upon his subscription for stock is due and unpaid shall be allow^ed to vote.

The usual form of proxy used is as follows :

FORM OF PROXY.

Know all men by these presents, that I, , do hereby constitute and appoint , attorney and agent for me, and in my name,

place and stead, to vote as my proxy at any and all elections of directors of

, according to the number of votes I should be entitled

to vote if there personally present.

In witness whereof, I have hereunto set my hand and seal this day of

, one thousand nine hundred and .

Sealed and delivered ^ in the presence of I

Under the National Banking Law every director must take an oath showing that he is justly entitled to fill the office and that he will faithfully perform the duties.

The following are the prescribed forms :

OROANIZINQ A BANK.

FORM OF DIRECTOR'S OATH.

-, County of ss;

I the undersigned, director of the

-, of

— , of the State of

, do solemnly swear that I am a citizen of the United States, and resident of the State of , and that I will, so far as the duty devolves on

me, dihgently and honestly administer the affairs of said bank ; and that I will not knowingly violate, or willingly permit to be violated, any of the provisions of the statutes of the United States under which this bank has been organized ; and that I am the bona fide owner, in my own right, of the number of shares of stock subscribed by me or standing in my name on the books of the said bank, and required by said statutes ; and that the same is not hypothecated, or in any way pledged as security for any loan or debt.

Subscribed and sworn to this

signed, a of said county.

day of

[Post office address.]

,190 — , before the under-

FORM OF JOINT OATH.

-, County of

We, the undersigned directors of the , of , of the State

of , do, each for himself and not one for the other, solemnly swear that

we are citizens of the United States, and residents of the State of , and that we will severally, so far as the duty devolves upon us, diligently and honestly administer the affairs of said bank ; and that we will not knowingly violate, or willingly permit to be violated, any of the provisions of the statutes of the United States under which this bank has been organized ; and each for himself does swear that he is the bona fide owner, in his own right, of the number of shares of stock subscribed by him, or standing in his name on the books of the said bank, and required by said statutes; and that the same is not hypothecated, or in any way pledged as security for any loan or debt.