.jpg)
The Pamphlet Collection of Sir Robert Stout: Volume 75
The General Manager's Recommendations
The General Manager's Recommendations
special inquiries, Ac, 4c, as might be available. From the information derived from these sources the general manager would probably classify the items somewhat as follows:—
| (a) | Bad debts ready for writing off. |
| (b) | Debts reported bad but requiring further particulars before writing off. |
| (c) | Doubtful debts. |
| (d) | Accounts which he thought ought to be nursed, which might include all or part of (6) and (c). |
| (e) | Property accounts—i.e., accounts depending on properties not realised or not fully realised. |
| (f) | Accounts depending on contingencies. |
| (a) | The solvency of the account if carried on. |
| (b) | The capacity and character of the debtor. |
| (c) | The power of the bank to supply the funds required. |
As to this important consideration, I may say that the bank were always able to do this in every proper case.
As to class (e), the property accounts, and class (f), contingencies, every bank from time to time finds itself left with accounts which are represented only by property made over to the bank for the purpose of securing the account, and after a period of continuous depression any bank is sure to be loaded with a good many or perhaps a large number of these, and it generally happens that while the depression lasts the values of the properties held are not equal to the amounts they represent. In other words, on account of depreciation in values there would be a loss if the properties were at once realised. So far as my experience goes, it is the custom of every bank to treat depreciations of this kind on a different basis from bad debts proper. Of course, if the depreciation is of short duration and the number of properties small it may be possible to write off the depreciation with ordinary bad debts as if they were such, but the most frequent course is to wait until it seems definitely settled that the fall in value is established, and then revalue the properties and ask for a special vote from reserve fund or for reduction of capital to write down the depreciation shown by such revaluation. An instance of this is, I think, supplied in the case of the Union Bank of Australia (Limited), which recently asked for a vote of £250,000 from the reserve as contingency against depreciation in securities. I do not think that anyone supposes that this depreciation occurred in one half year, but that it had increased from year to year.
| (A) | Properties stand in the bank's [unclear: books] say, £11,519. The inspector's estimate [unclear: re] the account as bad for £26504; the [unclear: net] amount to about £300. No interest is [unclear: taken] the account, and the rents are applied [unclear: in] tion of the capital. In less than nine [unclear: year] depreciation would be wiped out, and [unclear: then] bank could turn the rents back into the [unclear: ge] profit and loss account. In such a case [unclear: the] rence between the present amount of the [unclear: ac] and the valuation of the property is [unclear: proper] serted in the estimate of bad and doubtful [unclear: of] which M prepared on a liquidation basis; [unclear: b] making up the list for writing off, which is [unclear: pre] on a carrying on basis, the difference [unclear: between] amount of the account, and the valuation [unclear: t] not to be written off, for that difference [unclear: is] gradually extinguished. |
| (B) | [unclear: s] an example of an account [unclear: depen]
a contingency 1 give the following:—[unclear: A] owed the bank £2748. The bank hold [unclear: pre] bringing in a clear rent of £75 per annum may be more, as there are other [unclear: propert] the returns do not show whether they [unclear: are] ing in rent. The whole of the properties valued at £1490 The bank also hold a [unclear: po] the life of the debtor, who was an old [unclear: ma] £1000 with bonuses. The rent was [unclear: no] sufficient to keep up the policy, and if [unclear: the] had died the bank would have [unclear: received] and the bonuses from the policy. [unclear: Addti] valuation of the properties the bank [unclear: would] £2490. Though the debt is here properly down as bad on a liquidation basis for [unclear: £1] a carryingon basis it should at most be [unclear: put] as doubtful tor £258 and not written off, [unclear: a] of the securities are good properties, and [unclear: a] rise might bring the account out clear. |
Cases A and B are accounts taken from the estimates of bad and doubtful debts.
The property accounts of the bank were [unclear: t] in the way I have mentioned. No [unclear: inter] taken from them, and everything that [unclear: ca] from the property in the way of rents, [unclear: d] applied in reduction of the [unclear: capital]. accounts, therefore, stood in the [unclear: posti] special assets, which contributed [unclear: nothing] general profit and loss account, but [unclear: were] reduced by any receipts from them.
"The Chairman: I was asked a question meeting respecting properties held by apart from our own premises. [unclear: Gentlema] are all aware we have to make returns [unclear: of] properties to the Land Tax department, [unclear: and] is our list—it amounts to £52,925. [unclear: The] valuation put on any one property is £38 the lowest £1. From the valuations of [unclear: th] page 5
[unclear: ax] department which are now coming in the [unclear: apertment] itself appears to have a better idea of [unclear: heir] worth than we have; but we mean to stick [unclear: e] our own values, and if the department are [unclear: esirons] of acquiring the properties they have [unclear: ower] under the act to claim them, and we shall [unclear: e] quite satisfied if we get our own valuation, [unclear: eantitne], I am glad to say, hardly a wees passes [unclear: ut] some of them are disposed of. Now, con-[unclear: dering] our ramifications in business throughout [unclear: ae] colony, and the depression in laud values that [unclear: e] have come through, I think you will admit [unclear: hat] the figures I have given are not such as to [unclear: ive] you concern. With these remarks I propose [unclear: he] adoption of the report.
"Mr J. Edmund Smith: I have great pleasure, [unclear: Mr.] Chairman, in seconding the adoption of the [unclear: eport]. It is unnecessary for me to make any [unclear: engthened] remarks, but I think I am only ex-[unclear: ressing] the fe lings of the shareholders when I [unclear: ay] that it is exceedingly gratifying, notwith[unclear: tending] the disturbances that are taking place all [unclear: round] us, that we are still able to hold our own [unclear: nd] pay the usual dividend. But I think the [unclear: host] gratifying feature of the chairman's remarks [unclear: was] the reference to what may be called the [unclear: obo] assets.—(Hear, hear.) No doubt there has [unclear: een] a great deal of anxiety felt by shareholders [unclear: n] this point—the fate of some of our neighbours [unclear: as] stirred up our anxiety,—and it must be ex-[unclear: remely] gratifying to us to find that the amounts [unclear: ocked] up in such assets come to so small a sum.—[unclear: Hear], hear.) When in addition to that we are [unclear: old] that the highest security is only £3000 there [unclear: s] double reason for congratulation, and I think [unclear: hat] any fear that any particular shareholder may [unclear: ave] had on that p>int will be entirely removed. [unclear: think] that it is the most gratifying information [unclear: we] have had for a long time, and it shows that [unclear: he] shareholders in the institution may all go on [unclear: heir] way rejoicing. I have great pleasure in [unclear: econding] the adoption of the report.
. . . . . . . . .
"The Hon. W. J. M. Larnach, C.M.G.: . . . [agree with Mr Smith in what he has said in [unclear: reference] to the state of the 'dead assets' you [unclear: have] on hand, and I think it will be satisfactory [unclear: to] the public to know that the amount is encom[unclear: passed] within some £50,000."
"The Hon. W. J. M. Larnach: Seeing that you [unclear: have] not referred to the old securities account, [unclear: which] you brought prominently before the meeting this time last half-year, when it was announced that the account had been reduced, and stood only at some £50,000, I should like to ask whether it has remained in a dormant state or whether it is in a liquid condition, or whether it has been reduced in any way; because it would be satisfactory to the public to be assured afresh that there is no nucleus of an assets account.
"The Chairman: Hardly a week passes but what we sign some deeds of sale, and such sales have been at satisfactory prices to us. Last half-year, I think, we have signed for £3000 worth of deeds, and got the money for them. The total amount is reduced now under £50,000."
"I would like also to say that no return from rent or from any other source in connection with the properties which have come into the bank's hands and are unrealised is ever taken into the bank's profit account. Every such source of revenue is applied to write down individually the amount the property stands at in the bank's books until realisation or extinction of the debt. The first list of such properties in the bank's hands sent in to the tax commissioner by us in accordance with the act of 1891 amounted to £52,925. Our lint up till April 1 of this year amounts to £45,418, and we are prepared to sell each and every one of these properties at the value set down in that list."
It will be seen, therefore, that at these meetings 1 told shareholders exactly the state of the dead assets of the bank and how they were being treated by the directors.
Class (f) consists of accounts depending on contingencies—viz., those in which there was little or no property, but to which some contingency was attached which it was thought gave the account a chance of coming out as good. I have already given an example.
"There were certain accounts in the Colonial Bank, as in every other institution, that required nursing; but the policy of that bank, and one that was strictly adhered to, was that no profit or interest was ever taken from a doubtful dependency in the bank's own hands—that is, if a property fell into the bank's hands every source of income arising from it was always placed to the capital debt, and no interest was charged; and, besides that being done, the bank was steadily putting aside on an average about £20,000 every year towards depreciation in values ana doubtful page 6
debts. Whenever any property in the bank was sold and an account was left without any thing against it, that account was always written off There was no account that I remember in the Colonial Bank that stood on a bad debt; there was always some property against it, and therefore the thing was simply a matter of estimate as to what was doubtful in connection with it.
"Mr Mackenzie is then asked: 'And did you satisfy yourself at the time that the balance sheet was correct in August, 1894?' To which he replied: 'I satisfied myself to this extent: that the balance sheet was correct up to this point after estimating the earning power of the bank and making a fair allowance for recuperation in values. As a going concern, the balance sheet was approved.'"
It is clear from these extracts that Mr Mackenzie satisfied himself as to the correctness of the balance sheet, and that Mr Watson did not intend that all the accounts in his estimates should be written off may, I think, also be shown.
A reference to the minute book will show that many of the lists of bad debts submitted to the board for writing off are in Mr Watson's handwriting, and I believe that most, if not all, the other lists prepared while he was inspector which are not in his handwriting were copied from lists prepared by him. It appears, therefore, that the writing-off lists, or some of them, were, in fact, prepared by Mr Watson, submitted by him to Mr Mackenzie, adopted by Mr Mackenzie, and by him submitted to the board.
I wish at this point to disclaim in the most emphatic manner the suggestion that the value of the goodwill of the bank, or any increased value in the Dunedin premises was ever taken into account in making up the balance sheets of the bank, or that bad debts were ever treated as good on account of the value of the goodwill or any such increased value of the premises, Such an idea never entered my mind, or, so far as I know, the mind of any other director. No such suggestion was ever made at any board meeting. I wish, however, to make it clear that I do not disclaim all knowledge on the subject of the estimates, nor do I wish in any way to shelter myself from any responsibility by throwing everything on the shoulders of the general manager. It was my duty to know the position of the bank, and I clearly recognise my responsibility in respect of such duty. 1 certainly saw several of the inspector's estimates, and considered them in u general way. Obviously I knew the way in which the property accounts were being treated, as I communicated the position of these accounts to shareholders in 1892 and 1894. As to the balance of such estimates as I saw, I considered that if things got no worse, making a fair allowance, a good part would come back as good, and that what might mature as bad could easily be written down at the proper time. In addition, I believed that the list had been gone through and analyised by the general manager with the advice of the inspector, and that nothing was retained unwritten off without fair reason. Further, the balance books of the bank were laid on the table and gone through in each half-year, and the advances over £500 considered. Explanations were given by the general manager when such seemed necessary, and the directors then gave such directions as they thought necessary. On these occasions satisfactory reasons were given for the retention of any amount still remaining on the [unclear: ba] books.
With regard to the value of these [unclear: estima] think it is not out of place to call attention [unclear: to] "D" list. This was intended to include [unclear: the] worst accounts in the bank. It is make [unclear: u] accounts which the Bank of New Zealand, [unclear: s] an exhaustive examination by their own [unclear: off] rejected as bad, and absolutely declined [unclear: to] over. Such rejection implied that these [unclear: acc] were absolutely bad and worthless, and [unclear: it] matter of fair inference that the amount, [unclear: w] is £102,274, is made up of pretty nearly the [unclear: s] items as those included in Mr Vigers's list [unclear: of] debts of the 31st of May, 1895, which [unclear: amount] £91,917. Now, out of the "D" list the [unclear: liq] tors had at the date of their report recovered sum of £20,902, and state that they [unclear: expes] recover a further substantial sum. I [unclear: underst] that the total recovery will be [unclear: something] £40,000 out of the £102,000 rejected as [unclear: wort] and wholly bad, and this under a forced [unclear: liq] tion.
The preceding remarks apply to all Mr [unclear: Wat] estimates.