within the State in which said association is situated, if such establishment and operation are at the time authorized to State banks by the statute law of the State in question by language specifically granting such authority affirmatively and not merely by implication or recognition, and subject to the restrictions as to location imposed by the law of the State on State banks. In any State in which State banks are permitted by statute law to maintain branches within county or greater limits, if no bank is located and doing business in the place where the proposed agency is to be located, any national banking association situated in such State may, with the approval of the Comptroller of the Currency, establish and operate, without regard to the capital requirements of this section, a seasonal agency in any resort community within the limits of the county in which the main office of such association is located, for the purpose of receiving and paying out deposits, issuing and cashing checks and drafts, and doing business incident thereto : Provided, That any permit issued under this sentence shall be revoked upon the opening of a State or national bank in such community. Except as provided in the immediately preceding sentence, no such association shall establish a branch outside of the city, town, or village in which it is situated unless it has a combined capital stock and surplus equal to the combined amount of capital stock and surplus, if any, required by the law of the State in which such association is situated for the establishment of such branches by State banks, or, if the law of such State requires only a minimum capital stock for the estabilshment of such branches by State banks, unless such association has not less than an equal amount of capital stock. Recommendation

It is recommended that the last sentence of this section be amended to make it clear that in its application it is not necessary to allocate capital for inside branches of national banks even though that would be required under State law in the case of State banks.

Reasons

Under existing law a national bank wishing to establish an outside branch must have combined capital and surplus equal to that which is required for the establishment of such a branch by a State bank. Some States require additional capital for branches located within the same city as the main office as well as additional capital for branches outside the main office city. National banks have never been required to have additional capital for the establishment of inside branches. It is not clear under the last sentence of this section that if a national bank having several inside branches wishes to establish an outside branch additional capital need not be allocated for each of the inside branches as well as for the outside branch to be established, even if the law of the State in which the national bank is located would require that to be done in the case of State banks. For example, if a national bank having 2 inside branches were situated in a State in which the laws of the State required $100,000 capital for the main office and $100,000 capital for each branch, including the inside branches, wished to establish an outside branch the inside branches need not be considered and the national bank would be permitted to establish an outside branch with a capital of $200,000 even though a similarly situated State bank would have to have $400,000 capital to

establish the outside branch. This is a result of the fact that Congress has indicated that national banks must follow State law with respect to the amount of capital necessary for the establishment of branches only in the case of branches located outside the city, town, or village in which the bank is situated. This point should be clarified in the existing law.

Existing law

11. SCHOOL SAVINGS PROGRAMS

Title 12, U. S. C., sec. 36 (ƒ).—The term "branch" as used in this sction shall be held to include any branch bank, branch office, branch agency, additional office, or any branch place of business located in any State or Territory of the United States or in the District of Columbia at which deposits are received, or checks paid, or money lent. Recommendation

It is recommended that this statute be amended by adding at the end thereof a proviso to the effect that the acceptance of deposits in furtherance of a school thrift or savings plan by an officer, employee, or agent of a national bank at any school located in the trade area of the bank shall not be construed to be the operation of a branch.

Reasons

As a general rule it is the position of this office that the acceptance of deposits by an agent of a national bank at a place other than the bank's offices constitutes branch banking under the definition contained in this section. However, we believe that the school savings program is desirable and that school children should be encouraged to save. Enactment of this legislation would remove any doubt that a national bank could participate in this activity.

Existing law

12. PAYMENT OF STOCK IN NATIONAL BANK

Title 12, U. S. C., sec. 53 (U. S. R. S., sec. 5140).-At least fifty per centum of the capital stock of every association shall be paid in before it shall be authorized to commence business; and the remainder of the capital stock of such association shall be paid in installments of at least ten per centum each, on the whole amount of the capital, as frequently as one installment at the end of each succeeding month from the time it shall be authorized by the Comptroller of the Currency to commence business; and the payment of each installment shall be certified to the Comptroller, under oath, by the president or cashier of the association.

Title 12, U. S. C., sec. 26 (U.S. R. S., sec 5168).-Whenever a certificate is transmitted to the Comptroller of the Currency, as provided in this Title, and the association transmitting the same notifies the Comptroller that at least fifty per centum of its capital stock has been duly paid in, and that such association has complied with all the provisions of this Title required to be complied with before an association shall be authorized to commence the business of banking, the Comptroller shall examine into the condition of such association, ascertain especially the amount of money paid in on account of its capital, the name and place of residence of each of its directors, and the amount of the capital stock of which each is the owner in good faith, and generally

whether such association has complied with all the provisions of this Title required to entitle it to engage in the business of banking; and shall cause to be made and attested by the oaths of a majority of the directors, and by the president or cashier of the association, a statement of all the facts necessary to enable the Comptroller to determine whether the association is lawfully entitled to commence the business of banking.

Title 12, U. S. C., sec. 54 (U. S. R. S., sec. 5141).-Whenever any shareholder, or his assignee, fails to pay any installment on the stock when the same is required by the preceding section to be paid, the directors of such association may sell the stock of such delinquent shareholder at public auction, having given three weeks' previous notice thereof in a newspaper published and of general circulation in the city or county where the association is located, or if no newspaper is published in said city or county, then in a newspaper published nearest thereto, to any person who will pay the highest price therefor, to be not less than the amount then due thereon, with the expenses of advertisement and sale; and the excess, if any, shall be paid to the delinquent shareholder. If no bidder can be found who will pay for such stock the amount due thereon to the association, and the cost of advertisement and sale, the amount previously paid shall be forfeited to the association, and such stock shall be sold as the directors may order, within six months from the time of such forfeiture, and if not sold it shall be cancelled and deducted from the capital stock of the association. If any such cancellation and reduction shall reduce the capital of the association below the minimum of capital required by law, the capital stock shall, within thirty days from the date of such cancellation, be increased to the required amount; in default of which a receiver may be appointed, according to the provisions of section fifty-two hundred and thirty-four, to close up the business of the association. Recommendation

It is recommended that the requirements in sections 5140 and 5168 of the Revised Statutes that 50 percent of capital stock be paid in be amended so as to require 100 percent of capital stock be paid in cash before a national bank shall be authorized to commence business. If such a change is deemed appropriate the provisions relating to installment payments in sections 5140 and 5141 should be eliminated from the statute.

Reasons

It is no longer deemed necessary that the statutes permit a national bank to open for business when only 50 percent of the capital stock has been paid in. It has been the practice of the Comptroller of the Currency since at least 1935 to require that 100 percent of the capital stock of a newly organized national bank must be paid in cash before it shall be authorized to commence business.

Before a national bank is permitted to open for business 100 percent of the capital stock should be paid in cash in order to provide a sound capital structure.

Existing Law

13. UNEARNED DIVIDENDS

Title 12, U. S. C., sec. 56.-No association, or any member thereof, shall, during the time it shall continue its banking operations, with

draw, or permit to be withdrawn, either in the 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 netprofits 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.

Title 12, U. S. C., sec. 60.-The directors of any association may, semiannually, 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 on its shares of common stock, carrying not less than one-tenth part of its net profits of the preceding half year to its surplus fund until the same shall equal the amount of its common capital: Provided, That for the purposes of this section, any amounts paid into a fund for the retirement of any preferred stock of any such association out of its net earnings for such half-year period shall be deemed to be an addition to its surplus fund if, upon the retirement of such preferred stock, the amount so paid into such retirement fund for such period may then properly be carried to surplus. In any such case the association shall be obligated to transfer to surplus the amounts so paid into such retirement fund for such period on account of the preferred stock as such stock is retired. Recommendations

It is recommended that appropriate amendment to the statutes be enacted to require the approval of the Comptroller of the Currency before the directors of any national bank may declare and pay to shareholders of the association cash dividends which exceed the amount of net profits after taxes realized from banking operations during the previous 6 months' period. Furthermore, that amendment be made to the statutes to permit directors of national banks to declare dividends quarterly, semiannually, or annually, as long as all legal requirements are met.

Reasons

There have been cases where national banks have paid dividends in excess of net profits after taxes for the previous 6 months' period to shareholders even though such payment resulted in the dissipation of needed capital funds.

A recent instance occurred in which the controlling block of the capital stock of a strongly capitalized and well-managed national bank was sold to another shareholder. The new majority shareholder negotiated a deal whereby the quarters of the bank were sold for a large sum in excess of the book value, the profit of over $400,000 was credited to the undivided profits of the bank, and the bank entered into a longterm lease at unduly heavy rental expense for its occupancy of the banking house it formerly owned. It seems possible, if not likely, that the exorbitant terms of the lease rather than the real value of the property may have been the principal factor in the negotiation of the selling price of the banking house.

Under the new majority share ownership, the directors of the bank declared over $1 million in dividends which exceeded by $480,000 the profit on the sale of the banking house as well as net profits from operations for the year. Theretofore, the annual dividend to shareholders amounted to $30,000 and today no dividend is being paid. Although this depletion of the capital funds of the bank did not violate the above-quoted statutes, its effect was the creation of an undercapitalized position, particularly so in the light of the policies of the new management which engaged in self-serving lending activities of an unsafe and unsound nature. The Comptroller of the Currency warned the entire board of directors of the bank under title 12, United States Code, section 77 (Banking Act of 1933, sec. 30) which is a preliminary step toward their removal from office. However, the majority share ownership of the bank changed hands again and resulted in the election of another new board of directors. This bank still remains in an undercapitalized condition. Although the present management, which is the third within 2 years since the initial sale of control in 1954, has been advised of the need for additional capital funds, the matter must be delayed until the settlement of litigation between former and present principal shareholders arising out of charges of fraud and misrepresentation in the sale of the shares and the banking house.

It is deemed necessary to ask for the reasonable legal requirement that the Comptroller approve the payment of cash dividends exceeding the bank's net profits after taxes for the previous 6 months to prevent such situations from arising.

With respect to the recommendation concerning the frequency of declaration of dividends, many banks find it desirable to declare dividends at intervals more frequently than semiannually as now specifically provided in the law. To answer many inquiries concerning this subject the Comptroller of the Currency has incorporated the following ruling in the Digest of Opinions of the Office of the Comptroller of the Currency Relating to Operations and Powers of National Banks:

"6310A. Declaration and payment of dividends more frequently than semiannually

"Under R. S. 5199 and 5204 (12 U. S. C. 60 and 56), the directors of a national bank are expressly empowered to declare dividends semiannually out of the bank's 'net profits.' However, until the bank's surplus equals its common capital, the bank must first carry 'not less than one-tenth part of its net profits of the preceding half year to its surplus fund.' (The 'preceding half year' refers to the sixmonths' period ending June 30 or December 31, as the case may be.) Such dividends may be made payable more often than semiannually, such as quarterly.

"The reference in R. S. 5199 to semiannual declaration of dividends is related to the requirement in the same sentence that, before declaration of a dividend, the bank shall carry not less than one-tenth part of its net profits to surplus until the same shall equal the amount of its common capital. There is no objection on the part of this office to more frequent declarations of dividends (for example, quarterly) so long as the bank's surplus fund is at least equal to its capital." This ruling is based upon the opinion that the law is intended to