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Federal reserve notes, national bank notes, and Federal reserve bank notes.

266. Capital stock, surplus, and undivided profits."Capital stock paid-in " represents what the stockholders have contributed to the bank as required by law. A bank's capital stock must be paid in cash and nothing else. It is classed as a liability because it is an equity of the shareholders. The surplus is a similar liability as in addition to the capital each shareholder has a proportional claim upon. it. The capital and the surplus are a sort of insurance fund for depositors because in case of liquidation no stockholder can get anything until every depositor and other creditor has been satisfied. Furthermore each stockholder is additionally liable for as much as he already owns or has subscribed for of capital stock. The surplus also adds to the earning power of the bank. If the stockholders paid more than par for their shares, say 115, a surplus was created from the first equal to 15% of the capital. As the bank earns profits, instead of declaring and paying it out in dividends, it may carry a part or all of the profit to the surplus account by debiting profit and loss and crediting surplus. National banks and usually state banks are required by law to build up a surplus as an additional safeguard for the deposits. The Union Trust Co. of Pittsburgh with a capital of $1,500,000 has a surplus of $40,000,000.

The profit and loss account of the bank has debited to it the balances from all the expense accounts. It has credited to it the balances from all the income-producing accounts. The resulting balance, if the expense is less than the income as it should be, is net profits and it is called undivided profits." When a dividend is declared this account is debited and the dividend account credited. As the dividend checks are presented for payment they are charged to this last account. The balance if any is always

a credit one and appears in the statement as dividends unpaid." This is a liability to the stockholders which is due as any other demand deposit, while the capital, surplus, and undivided profits show only the equities of the stockholders in the entire property.

If the bank is losing money so fast as to have no profits into which to close its expense accounts, instead of reporting a deficit on the asset side of the statement it usually appears there in a harmless looking name expense." This item on the asset side compared with the "undivided profits on the liability side reveals the extent of the loss. 267. Miscellaneous liabilities. National but not state banks may show "circulating notes issued." These are an immediate liability of the bank. The item does not include notes which have been redeemed, are in transit from Washington to the bank, or those in the possession of the bank. Such are not in circulation and constitute no liability.

Sometimes a bank borrows rather than buys United States or other bonds to give as required securities. If so there is a liability to the extent of "U. S. or other bonds borrowed." At the same time they are shown on the asset side as bonds to secure circulation or deposits.

If a bank borrows money on its own notes it appears as "bills payable"; if it indorses and sells some of its own paper to get funds it appears as notes rediscounted." If it sells paper without any contingent liability it operates to decrease loans and discounts and increase cash. All notes and bills rediscounted with the Federal reserve bank appear here.

As expense items accrue they are charged to accrual accounts as a liability until paid. Such accounts are reserve for interest," and "reserve for taxes."

When a customer arranges for a letter of credit the bank agrees to be liable for a certain amount. The extent

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to which it has sold its credit, but against which drafts have not yet been accepted is shown as a liability in "letters of credit." As the drafts appear and are accepted this account is debited (reduced) and acceptances" credited. These two items show contingent liabilities of the bank; the obligations of its customers to cover and pay the drafts is shown on the other side of the statement as an asset.

268. Due to depositors. Banks may have the deposits of other banks, or checks which have been sent from other banks for collection and have been posted as due them. If a bank overdraws its account with another bank it is not called an overdraft but an item due from a bank. The overdrawing bank lists it as due to a bank. All items due to banks are classified as due to Federal reserve bank-deferred credits," "due to approved reserve agents,' and "due to banks and bankers."

A bank's chief liability is the money due its depositors on checking accounts, certificates of deposit, and savings accounts. These are classified as "individual deposits subject to check," "deposits requiring notice but less than 30 days," "certificates of deposit due in less than thirty days," "other certificates of deposit," "other time deposits," "United States deposits," state, county, or other municipal deposits," and "postal savings deposits." The post offices redeposit their postal savings funds in approved banks and take bonds as security.

Other demand liabilities are "cashier's (or treasurer's) checks," which account is debited when the check is written and credited when it is paid, the balance showing the checks that are outstanding; and "certified checks," the amount certified but not yet paid.

269. Trust funds. Banks which have trust funds must keep them separate. The amount of each fund is credited to the estate. The aggregate is a liability of the

bank reported as "due sundry estates." These funds are invested in income-producing properties. The aggregate of the amounts invested are assets which are due the trust bank and reported as "trust funds invested." All those funds which have not been invested are still in the hands of the bank and appear as an asset, "trust funds uninvested." The invested and uninvested funds are together equal to what is due sundry estates.

270. The choice of a bank. The choice of banking connections is a vital one for every business. It is best not to trust to luck and the convenience of location. Strong relationships develop and cause the interest of the one almost to coalesce with the interest of the other, creating practically a co-partnership. Where each has intrusted the other with funds or a task to perform, the failure of one means a loss to the other. More important is the confidence which a business imposes in its banker. The banker is told the inside facts he must keep them a sacred trust. Is he competent to give good advice? Not enough of the average business houses use their bankers in their capacity as consulting business engineers. The right bank will help to success; the wrong one will be a drag until it is discarded.

The size of a bank may be important. If a line of credit of $200,000 is wanted it may take a bank of not less than $2,000,000 capital and surplus to supply it (see 127). Many small banks have powerful allies, but sometimes a large bank has the necessary connections to give a world-wide service where a small one cannot. A small customer frequently fares better with a small bank, but some of the larger banks also bid for and look after the small accounts. If $5000 is the maximum of loans desired a small bank is as advantageous for many businesses as a mighty one. A large concern in a small locality finds it.

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convenient to use the local bank as well as its large city connection.

✓ Strength is an essential factor. It does not depend on size. A bank of $3,000,000 capitalization may be tottering while one with $50,000 is as strong relatively as Gibraltar. The capital must be properly adjusted to loans and deposits, but the way in which its capital and the deposits of its customers are invested is the most important consideration. Risks should be scattered. Too much should not be invested in the enterprises of one man or a group of men. One-man stuff has killed many a bank and crippled some depositors probably for life. A strong bank is earning profits; its deposits are growing, its loans are being proportionately expanded, and its surplus is being increased. Unless a bank is successful, something is wrong. A bank's strength depends most upon the business strength and sagacity of its officers and directors. They must have the capacity for success.

Integrity is the chief factor. The personnel of the officers and directors should be carefully scrutinized. No one can intrust his affairs his business secrets - to a banker without integrity. No one could believe what such a banker would say. The bank statement might show a profit of $400,000, but if the bank examiner found $2,000,000 of bad assets on his next trip, the customer might be in a sad plight. The state interferes to force compliance with rules in the interest of the public, but the banker who dodges the law wherever he can, or flirts with risks and speculative profits is dangerous. The history of our banks since the Civil War proves that with certain exceptions the American banker is a factor of which the Nation is proud.

Given a bank of capacity and integrity the choice hinges upon the personality of its officers, and its ability to render the services desired. The special needs of the customer must be met. The customer may find one institution that