Answer by Brian Crow: If your state has adopted the model language of the Uniform Commercial Code, Article 3-204 defines an endorsement as a "signature." Therefore the words "for deposit only" in the absence of the payee's signature or endorsement stamp would not constitute an endorsement.
However, the depository bank does not need to require an endorsement (except on insurance drafts that will be returned without the endorsement of all payees) as the depository bank guarantees that the payee received benefit from the funds by the presentment warranties that is makes under Article 4-208.
Answer by Ken Golliher: Said differently, "For Deposit Only" is a restriction on an endorsement, not a signature. If yours is the bank of first deposit, you guarantee any missing signature.
You could accept the item. You could also reject it.
If you are the paying bank, you already have the bank of first deposit's guarantee of the missing signature; there is no logic behind a decision to return the item so they can whack it with a rubber stamp that guarantees the missing endorsement again.
First published on BankersOnline.com 6/25/12