CHAPTER XXII MEANING OF A BANK STATEMENT CHOICE OF A BANK 261. A bank statement. In this chapter the prin cipal terms used in a bank statement will be explained. The following is a very condensed statement but it illustrates a form that is often printed in newspapers because it is not hard to understand. The terms which are used in more detailed statements are explained in succeeding paragraphs. Loans and discounts.. ASSETS -$9,018,247.93 This is the total amount of money this bank has loaned on collateral and indorsements which have been approved by our board of directors. Stock in Federal reserve bank..... .48,000.00 Every national or state bank to become a member is required to subscribe for stock of the Federal reserve bank a certain per cent of its capital and surplus, and is thereby entitled to use the facilities of this strong system for the benefit of itself and its depositors. U. S. and other high grade bonds..... .116,692.00 This represents the amount we have invested in Government and other obligations, all of which are readily convertible into cash. Banking house, furniture and fixtures... ..76,108.38 This is the amount we have invested in building and equipment for the transaction of our business. Customers' liability under letters of credit.. .163,104.51 This represents our liability under letters of credit issued for the convenience of customers. LOANS AND INVESTMENTS Cash in our vaults and banks... 349 .2,475,719.99 This is the amount of cash in our vaults and on deposit with the Federal reserve bank and other approved depositors, and is payable on demand. Total LIABILITIES . $11,897,872.81 Capital stock.. $400,000.00 This stock is divided into 4,000 shares of $100.00 each, and represents the amount of cash paid in by the stockholders. Surplus and profits, net... .1,337,430.04 This represents additional funds left by the stockholders for the protection of depositors, in furtherance of their desire to build here a strong banking institution. Letters of credit..... .163,104.51 This represents the liability of our customers to us under letters of credit issued for their benefit. Reserved for unearned interest.... .67,612.00 Unearned interest represents the interest paid in advance on notes discounted for customers, but which has not actually been earned. Reserved for taxes and interest.. .36,403.54 This represents an amount set aside for taxes and interest on time deposits which are paid out of this fund as they come due during the year. reveal how much the bank has loaned on notes payable to it and advanced on notes and bills of exchange payable on their face to others but now owned by and payable to the bank. The quality, distribution, and maturity of the risks determine the bank's security. These may be classified in various ways. Sometimes they are reported as "loans on call with collateral," "time loans with etc. collateral," "loans on call with two or more names," "loans on mortgages," "commercial paper with one name,' "commercial paper with two or more names," The security is entirely personal for the last two items. "Overdrafts" should be small, as it indicates what the bank has advanced upon checks against insufficient funds (see 67). A bank often gets a depositor to give security for such a forced loan. Practically every bank has purchased bonds and often stocks, which are "U. S. Government securities owned," and "bonds and other securities owned." They yield an income, but none should be bought except what can be readily sold if cash should suddenly be required. To obtain governmental deposits security has to be given. The bank deposits bonds with the government or a trustee and at the same time receives the income. These are "bonds to secure deposits." A national bank must also have United States bonds as the basis of its note issue. These appear as "bonds to secure circulation." If the premium, the amount above par which was paid for a security, is carried as part of the value, it is included in the bond item, but should be written off as the bond approaches maturity, because at maturity, only the face of the bond will be paid. If the bonds are carried at par and the premium carried separately, "premium on bonds for circulation" and "premium on other bonds" are listed. Most banks buy only high class bonds and stocks for investment or resale (see 126), but now and then a bank is wrecked by its purchases to finance some of the outside enterprises of its officers and directors, or its dealings in speculative securities in the hope of large profits. Such is beyond the sphere of honest banking, since a bank should regard itself as a trustee of the funds intrusted to its care. A national bank is required to own stock to 6% of its capital and surplus in the Federal reserve bank of REAL ESTATE, BANKING HOUSE, ETC. 351 its district. Of this 50% has been paid, and it appears in the statement as Stock in Federal reserve bank." 263. Real estate, banking house, etc. The "banking house" and "furniture and fixtures" are reported separately from "other real estate owned." The latter item represents chiefly property taken in satisfaction of debts previously contracted, as national banks and usually state banks are allowed to own only their banking property, except when it is necessary to take over real estate to protect a loan. In such a case the property is to be sold within five years. A depreciation reserve should be provided for the building and all furnishings. 264. Miscellaneous assets. When the customer of a bank arranges for his bank to accept bills of exchange drawn upon it for his account and pledges that he will pay these bills before they are due, the bank has a contingent asset to offset its possible liability which it carries as "customers' liability under letters of credit," and "customers' liability account of acceptances." Banks collect interest in advance before it is earned or at the end of the period after it is earned. National banks are now called upon by the Comptroller to keep account daily of "interest earned but not collected" and interest collected but not earned." The former appears on the asset side as an accrued asset. The latter on the liability side as an accrued liability. 265. Cash on hand and in banks. Banks keep deposits with other banks. A national bank is required to keep its legal reserve (cash held for the payment of deposits) with Federal reserve banks. State banks keep a part of their reserves with other banks which have been approved as agents. Any bank may carry a deposit account with another bank, against which it may draw drafts, upon which it may receive interest, or as a compensating balance for collectional services. Such items are classified as "lawful reserve with Federal reserve bank," items with Federal reserve bank in process of collection," "lawful reserve with approved reserve agents," "due from national banks not approved reserve agents," "due from banks," and "due from private banks and bankers, trust companies, and savings banks." These include all checks for payment which can be charged to any banker's account upon the dispatch of the check. All checks, money orders, and items which are collectible upon demand by messenger from banks and others are included in "checks and other cash items," while checks and other items which are collected through the clearing house the next day are "exchanges for clearing house." Every national bank that has notes outstanding must keep 5% of its circulation as a "redemption fund with the U. S. Treasurer." This fund no longer counts as a part of the bank's reserve. Currency on its way between the bank and Washington where it has been sent for redemption is due from the U. S. Treasurer." Mutilated paper money and bank notes for which lawful money is wanted are sent there. National banks cannot count their own notes as an asset; they diminish the liability on notes outstanding. Notes of other banks appear as part of cash in vault. "Fractional paper currency, nickels, and cents" are usually separated from other money. The paper includes denominations of less than a dollar some of which was issued during the Civil War. Kniffin says one bank has carried 75 cents' worth on its daily statement for about 30 years. Besides what is due from the reserve agents to banks not members of the Federal reserve system, a part of the legal reserve must be kept in a bank's own vaults as "cash in bank." Specie includes gold and silver coin and gold and silver certificates including clearing house certificates. Other money embraces U. S. notes and |