In this class of banks the capital may be found to be impaired by losses, necessitating an assessment upon the stockholders, or a threatened impairment because of the indeterminate value of their loans or investments. They may not be insolvent, but may become so at any time. They have to be closely watched and frequently examined.
This class of banks demands the attention of the most skillful and experienced examiners, such as possess all of the qualifications described for those of the first class, but even the most experienced of these will find their resourcefulness taxed to the limit in endeavoring to extricate a bank of this kind from its perilous condition. In a majority of instances they succeed. In comparatively few they fail. The failures become a matter of public information. The successes the public knows nothing of. Consequently, the examiner and the Comptroller are usually censured for nursing a bank of this kind known to be in a bad condition in an unsuccessful endeavor to avert a failure or to save depositors from loss, and seldom, if ever, receive any credit for the numerous failures averted through the same skillful and discreet handling of a bad situation. But, even where the efforts to save banks from failure were unsuccessful, the depositors and stockholders were benefited by the nursing the banks received at the hands of the Comptroller and the examiner, which resulted in strengthening the institution in many respects. So that when it finally did suspend or fail, the losses to depositors were not so great as they would have been had the bank been closed when it was first discovered to be in a bad condition.
As an illustration of some of the successful work done by the Comptroller and the examiners in saving banks from failure and the community from the disastrous effects of a financial and business disturbance, it may be of interest to narrate a case in point.
A bank in a city of large industrial activities became badly involved through the imprudence of its president in extending an unreasonable amount of credit to several industrial concerns in the same place which were owned or controlled by practically the same interests, although they were separate corporations. The principal one of these industrial corporations became badly embarrassed financially for want of additional funds with which to carry on its operations. It was unable to meet its obligations to the bank. Its paper became past due and the interest was in default, bringing the paper within the category of statutory bad debts. The other concerns were also indebted to the bank and were dependent upon the principal corporation to meet their obligations. The solvency of the bank depended upon the solvency of two or three of these large debtors. If the bank had pressed for payment, the principal concern would have been forced to suspend, and its suspension would have compelled the others to take like action. Failure of these debtors to meet their obligations to the bank would have rendered the latter insolvent, necessitating the closing of the institution and the appointment of a receiver. The business of the community would have been paralyzed by the suspension of the bank and irreparable injury would have been done to all interests. Some of the directors of the bank were interested in these several industries and their failure would have meant their financial ruin.
This was the situation which confronted the Comptroller's office. Its seriousness was fully realized. The bank was believed to be insolvent, and the question to consider was whether the interests of the depositors would be best subserved by the immediate closing of the bank and the appointment of a receiver, or by allowing it to continue and to co-operate with the directors in their efforts to reorganize the industrial concerns, and place them upon a sound basis, thus assuring their obligations to the bank and its solvency.
The examiner and the directors of the bank were summoned to Washington for a conference. Some of the directors were men of good business judgment and integrity and were fully alive to the situation. The bank had been allowed to drift into its then dangerous condition through their negligence in not properly supervising its affairs and in leaving its entire management to the president. A plan was agreed upon by which three of these directors were to assume active charge of the bank. No loans were to be made by the officers, except upon the authority and with the written approval of this committee, and no loan for any material amount was to be made until the bank had been placed in a solvent and entirely satisfactory condition. All loans that were admitted to be worthless were to be immediately charged off, and others that were past due and claimed by the directors to be good were to be collected or adequately secured. Among the loans of this class were some to officers of the bank.
The embarrassed corporations whose large liabilities to the bank were the cause of its predicament, owned valuable properties. These properties were to be bonded and their past-due paper was to be paid partly in cash from the proceeds of the sale of the bonds, and the balance in bonds.
Of course, an agreement of this character could not be consummated in a day. It required time to perfect and carry out the plan. In the meantime the bank was in a very precarious condition. Any large creditor could have precipitated a failure by withdrawal of his balance, or any rumors as to the strained condition of the bank might have caused a run upon it and have forced the institution to close its doors.
At this juncture a correspondent bank in one of the large cities learned in some way of the straits that this bank was in and became uneasy in regard to the safety of a deposit balance which it had in the institution, amounting to over seventy-five thousand dollars. A representative of this bank called at the office of the Comptroller for the purpose of learning something of the bank's condition. He was advised that it was not the practice of the office to discuss the affairs of one bank with the representative of another bank, but as he declared it to be his purpose to withdraw the amount due unless he could receive some assurance as to its safety, it was thought best to take him into the confidence of the office and explain to him the true situation, as the embarrassed bank was in no condition to pay the demand, if made upon it, nor could one creditor be allowed to secure such a large preference over the other creditors by permitting the bank to pay this claim without being able to pay other demands of like tenor. The representative of the creditor bank was, therefore, advised of the exact situation and the plans that had been arranged to relieve the debtor bank of its embarrassment. He was advised of the confidence of the Comptroller's office in the sincerity and ability of the directors to successfully carry out the plan agreed upon, and was told that if his bank would cooperate to the extent of allowing its deposit to remain for a few months it would materially help the situation, but if demand were made for its withdrawal, the bank would be closed and placed in the hands of a receiver. The deposit was allowed to remain. The plan arranged with the directors was carried out to the letter. Bad debts were charged off, doubtful loans and overdue paper were collected or secured, the corporations were successful in bonding their indebtedness, the bank received fifty per cent, of the amount due it in cash and the remainder in bonds, and gradually disposed of the bonds until the amount held was reduced to a safe investment. The bank was finally worked into a safe and sound condition and is in successful operation at this time.