we

Mr. VERHELLE. Yes. In the year 1930 we charged against-and when I say 66 "I am making a mistake. I should say the units that made up these totals charged against their operating expense and credited to reserve account for the purpose of meeting losses that would be incurred as a result of their own activities for that year the sum of approximately 12 million dollars. That may be out $300,000 or $400,000, and it is probably a little less than 1% million dollars.

In the year 1931, and that is in your question here, instead of that customary figure those reserves charged to operating expense were materially increased-and again I am saying it within $300,000 or $400,000 increased substantially, approximately $3,000,000. This procedure was in line with the accrual system which was in effect. That is, daily certain specific amounts were set up by these organi zations into a reserve for a contingency account, the purpose of which was to provide for losses incurred against the business then conducted.

During the year 1930, as well as during the year 1931, other amounts were charged to the undivided-profits account, as representing losses incurred during the previous years, which in the best judgment of the men conducting the affairs of the business during those years they had failed to realize. After all, they were chasing this thing down the hill.

Now, the result of taking these gross earnings, which I say were approximately $35,000,000, and deducting what must have been approximately $28,000,000 expense, was the method of arriving at the $7,000,000.

There is a very clear explanation of that, by the way, in the June 30, 1931, report, which came out in between those two dates. Mr. PECORA. Let me have a copy of that very clear explanation. Mr. VERHELLE. That is, on this particular question you have in

mind.

Mr. PECORA. Is that the only copy you have?

Mr. VERHELLE. This is the only copy I have of this report. Mr. PECORA. The document you have produced, and which you say contains "this very clear explanation", is a printed document entitled "Semiannual Report to Stockholders, June 30, 1931, of the Detroit Bankers Co."

Mr. Chairman, I offer it in evidence.

Senator COUZENS. Mr. Verhelle, was that report circulated among the public?

Mr. VERHELLE. It was circulated in exactly the same or identical manner as is done in the case of any bank to the stockholders. Mr. PECORA. Mr. Chairman, I offer it in evidence, but it need not be spread on the record as it is quite voluminous.

Senator COUZENS. The report will be received in evidence, and appropriately marked as to exhibit number, with the understanding that it is not to be spread in full on the record.

(The semiannual report of Detroit Bankers Co. to stockholders, as of the date June 30, 1931, was marked "Committee Exhibit No. 11, Jan. 25, 1934 ", and will be kept in the files of the subcommittee, not to be printed in the hearings.)

Mr. PECORA. Mr. Verhelle, will you refer me in this semiannual report, which has just been received in evidence as committee exhibit no. 11, to this very clear explanation of the question I propounded to you?

Mr. VERHELLE. The question to which this provides an explanation is the question as to what happened to the $23,000,000 referred to before. This takes into consideration only one half of the year and contains at the beginning of the statement-may I just read it?

Mr. PECORA. I will tell you what I think you better do: Just take a pencil and indicate by marginal notes or lines the portion that constitutes this "very clear explanation ", and let me have it.

Mr. VERHELLE. All right. That is now marked so as to show it. Mr. PECORA. You do not mean the pages in between where you have marked the report, do you?

Mr. VERHELLE. No, sir.

Mr. PECORA. You have marked a page which I will now read into the record:

To the stockholders of the Detroit Bankers Co.:

The report herewith submitted covers our operations during the first half of 1931:

The combined earnings of the banking units for the first 6 months of 1931, after setting aside reserves for every form of expense, including interest, taxes, depreciation, and so forth, were $5,819,569.18. Out of these earnings there was set aside reserves for contingencies of $1,918,820.70. Net earnings available for dividends were $3,908,748.48. Dividends paid were $3,036,200. The balance that was transferred to undivided profits was $872,548.48.

And the other page that you have marked in this report reads as follows:

Undivided profits on December 31, 1931, $17,218,579.01, less amount transferred to surplus, Grosse Pointe Savings Bank of $15,000, balance $17,203,579.01; less amounts set aside as reserves to guarantee deposits of other banks, $1,967,788.50, balance $15,235,790.51; less amounts transferred to reserves for contingencies, $6,000,000, balance $9,235,790.51. Add profits first half of 1931, $3,908,748.48, gives $13,144,538.99; less dividends paid first half of 1931, $3,036,200; undivided profits on June 30, 1931, $10,108,338.99.

Is that right? These are the two pages in the semiannual report that you marked.

Mr. VERHELLE. Yes.

Mr. PECORA. These two pages constitute the "very clear explanation" that you have referred to.

Mr. VERHELLE. To one of your questions, as to the method by which it was arrived at, being an answer to one of your questions, because that takes into consideration the first half of the year, whereas your question referred to the year 1931.

Mr. PECORA. Well, so far as I can understand these two pages, which constitute this "very clear explanation ", they show, among other things, that on December 31, 1930, the undivided profits of the Detroit Bankers Co. and its units amounted to $17,218,579.01; and at the end of the first half of 1931, namely, on June 30, 1931, or 6 months later, those undivided profits had been reduced to $10,108,338.99, or a loss in the undivided profits account of over $7,000,000 for the first 6 months of the year 1931. Isn't that correct?

Mr. VERHELLE. Except for the word "losses." It is a reduction.

Mr. PECORA. Well, we will call it a reduction. Or does it represent losses, or does it represent anything other than losses, what you now call a reduction?

Mr. VERHELLE. It represents a reduction in the undivided profits account, because you asked me

Mr. PECORA (interposing). Doesn't that reduction represent, in substance and effect, losses?

Mr. VERHELLE. No, sir.

Mr. PECORA. What does it represent?

Mr. VERHELLE. I can myself clearly explain that by taking a spe cific item to which that would be applied. That is, taking one of the items that make up that group.

Mr. PECORA. Why not just take this page, embodied in the semiannual report marked in evidence "Committee Exhibit No. 11", which page you have marked as one of two pages furnishing this 66 very clear explanation"?

Mr. VERHELLE. Well, I cannot explain it your way, sir.

Senator COUZENS (presiding). We will give you until after lunch to explain it. The subcommittee will now recess until 2 o'clock p.m. Mr. VERHELLE. May I have that semiannual report, Mr. Pecora! Mr. PECORA. Yes; if you need it.

Mr. VERHELLE. I haven't another copy of it.

Mr. PECORA. All right.

(Thereupon, at 12:50 p.m., Thursday, Jan. 25, 1934, the subcommittee recessed until 2 p.m. the same date, at the same place.)

AFTERNOON SESSION

The hearing was resumed at the expiration of the recess. Senator COUZENS (presiding). The hearing will please come to order.

TESTIMONY OF JOSEPH F. VERHELLE-Resumed

Mr. PECORA. The last question and answer, Mr. Verhelle, are as follows:

Mr. PECORA. Well, so far as I can understand these two pages, which constitute this very clear explanation, they show, among other things, that on December 31, 1930, the undivided profits of the Detroit Bankers Co. and its banking units amounted to $17,218,579.01, and at the end of the first half of 1931, namely, on June 30, 1931, or 6 months later, those undivided profits had been reduced to $10,108,338.99, or a loss in the undivided-profit account of over $7,000,000 for the first 6 months of the year 1931. Is not that correct? Mr. VERHELLE. Except for the word "loss"; it is a reduction. Now, what was that reduction in the undivided-profits item of over $7,000,000 due to, Mr. Verhelle? We are talking now about a reduction established through the first 6 months of the year 1931.

Mr. VERHELLE. The principal item in that statement resulting in the reduction in the undivided-profit account is the transfer to the reserve for contingencies in the amount of $6,000,000, which figure represents amounts set aside by various units of the group to provide for the writing down of assets contained in their statements in case the amounts at which they are set up are not fully realized upon from liquidation.

Mr. PECORA. You have given us the principal item?

Mr. VERHELLE. The item directly above, of $1,967,788.50, is a similar item but pertains particularly to banks that were in liquidation, taken over by some of the other Detroit banks or banks in the immediate vicinity of Detroit.

Mr. PECORA. Are you able to give the committee the break-down of the items that produce this net operating income after customary reserves of $7,475,293.47, set forth in the annual report to the stockholders of the holding company, the Detroit Bankers Co., for the year 1931?

Mr. VERHELLE. I can give those to you approximately.

Mr. PECORA. Well, do it that way, then, please.

Mr. VERHELLE. On the income side there is a gross income of approximately $34,192,000. There are profits on investments totaling approximately $1,151,000; profits on real estate totaling approximately $38,000; recoveries on charge-off items of approximately $208,000, making a total of $35,589,000.

From that should be deducted expense of interest totaling $12,645,000; general expense of $11,525,000; depreciation of $385,000; furniture and fixtures, $117,000; building company, $340,000. All these figures are approximate. The contingent reserves were credited with $3,100,000. That makes a grand total of expense to be deducted from the $35,000,000 of $28,112,000, which, when deducted, results in net operating income of $7,477,000.

As I have indicated, these figures are approximate, and I appear to be off a couple of thousand dollars, not having the books of these units here.

Out of that income of $7,477,000 was paid $6,051,000 in dividends, resulting in a net earning over dividends of $1,425,000, approximately. We had an invested capital at the beginning of the year of $91,828,579.01. We will have to drop the end figures, because I am dealing in thousands. To that was added income over dividends of $1,425,000, resulting in a new invested capital figure of $93,253,000. Through the declaration of the special dividend by the Detroit Trust Co. this figure was reduced by $4,000,000 and was further reduced by a million and a half in connection with the special dividend of the First National Bank, and there were charged off, as nearly as I can figure, or charge down, assets totaling $19,292,000. So that we have reductions in the invested capital totaling $24,792,000 which, when deducted from $93,253,000, leaves us with $68,461,000. I was $2,000 off at the beginning

Mr. PECORA. As what?

Mr. VERHELLE. Representing an invested capital after these changes were made.

Mr. PECORA. The amount of that invested capital, as you call it, represents capital stock, surplus, and undivided profits, does it not? Mr. VERHELLE. Yes, sir.

Mr. PECORA. In the annual report for 1931 the aggregate amount of invested capital, as you call it, is given as $68,459,912.03. That is a fairly accurate figure, is it not?

Mr. VERHELLE. Yes. Pardon me, sir. The figures of course in this report are correct.

Mr. PECORA. Those that you have given us here this afternoon are approximates?

Mr. VERHELLE. Yes, sir.

Mr. PECORA. The amount of the invested capital, as you call it, for the Detroit Bankers Co. and of its units as of December 31, 1930, was $91,828,579.01, was it not?

Mr. VERHELLE. Yes, sir.

Mr. PECORA. Resulting in a reduction of invested capital or a reduction of the combined capital, surplus, and undivided profits, of over $23,000,000 between December 31, 1930, and December 31, 1931! Mr. VERHELLE. Correct.

Mr. PECORA. That reduction was due to the various transactions that you have set forth here this afternoon?

Mr. VERHELLE. Yes, sir.

Mr. PECORA. And the principal item that contributed to that reduction of over $23,000,000 in the capital assets of the company in 1 year's time was a charge-down of assets amounting to $19,292,000, approximately?

Mr. VERHELLE. Yes, sir.

Mr. PECORA. As a matter of fact, at the end of 1931 the financial condition of the company and its combined banking units was $23,000,000 worse off than its condition at the end of the preceding year?

Mr. VERHELLE. No, sir.

Mr. PECORA. Is not that the condition reflected by the capital assets of the company and its units as of the close of business in 1930 as compared with the close of business in 1931?

Mr. VERHELLE. That is the condition as reflected by those particular figures, sir, but it does not reflect the actual condition of the assets behind them.

Mr. PECORA. Well, at the end of 1931 was the Detroit Bankers Co. better off financially than it was at the end of the preceding year? Mr. VERHELLE. It was not.

Mr. PECORA. Is there anything in the annual report given to the stockholders for the year 1931 that sets that forth?

Mr. VERHELLE. Not in the annual report, sir, but in another letter written to the stockholders concerning this particular matter. Mr. PECORA. Can you produce such other letter or a copy of it! Mr. VERHELLE. I meant to bring that. [After referring to files:] I would like to explain that a letter was written during the month of November to the stockholders of these various units

Mr. PECORA. November of what year?

Mr. VERHELLE. Of 1931-which was written in the offices of the Detroit Bankers Co. after consultation with various individuals. Mr. PECORA. After consultation with whom?

Mr. VERHELLE. Various officers and directors.

Mr. PECORA. Well, who were they?

Mr. VERHELLE. Among them would be Mr. Mark Wilson, who is an officer of the Detroit Bankers Co.; and I do not specifically recall just at this particular moment-it may come to me in a momentwhat directors. This letter was drafted

Mr. PECORA. Did you have a conference with those gentlemen?