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 specific 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 very clear explanation"? 66 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. 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? Mr. VERHELLE. Well, I had a number of discussions with them over the type of letter, which letter was sent out to Mr. Ballantyne that evening for his review; and I have here a letter which was sent out to him, together with a letter that was actually sent out to the stockholders containing the changes recommended by him in that particular letter. There was also that day Mr. PECORA. Before you go any further, will you produce the letter that you say was sent out to the stockholders? Senator COUZENS. First, produce the one, if you can, that was sent to Mr. Ballentyne, and then the one that was corrected by him and sent to the stockholders. Mr. VERHELLE (handing two papers to Mr. Pecora). In addition to those letters there were other methods by which the public was informed, of which I can get you copies. Mr. PECORA. You have produced here in response to a question a photostatic copy of what purports to be a letter on the letterhead of Detroit Bankers Co. addressed "To our stockholders ", dated November 21, 1931; but I see a legend or inscription in the upper right-hand corner of this photostatic copy reading as follows: "This letter was not sent out." Was this letter sent out? Mr. VERHELLE. As I have attempted to explain, that was the first draft of the letter, and the next letter was the actual one. Mr. PECORA. Suppose we put in evidence the photostatic copy of the letter that the witness has now referred to as the first draft of the letter to the stockholders but which was not sent out to the stockholders. Senator COUZENS. That may be entered. (Photostatic copy of draft of letter dated Nov. 21, 1931, addressed, on the letterhead of the Detroit Bankers Co., " To our stockholders was received in evidence, marked "Committee Exhibit No. 12, Jan. 25, 1934.") Mr. PECORA. You also have given me, in response to a request that you produce the letter or copy thereof that was sent to the stockholders, what appears to be a mimeograph copy of a letter on the letterhead of the Detroit Bankers Co., dated November 21, 1931, addressed "To our stockholders" and bearing a facsimile of the signature of John Ballantyne, president. I offer that in evidence. Senator COUZENS. That may be entered. (Mimeograph copy of letter on letterhead of the Detroit Bankers Co., dated Nov. 21, 1931, addressed "To our stockholders" and bearing facsimile signature of John Ballantyne, president, was received in evidence, marked "Committee Exhibit No. 13, Jan. 25, 1934.") Mr. PECORA. The letter last offered in evidence, or the copy of the letter last offered in evidence, marked "Exhibit 13" of this date, is a copy, you say, of the letter that was actually sent out to all stockholders of the Detroit Bankers Co.? Mr. VERHELLE. I would say so; yes, sir. Mr. PECORA. Do you know who prepared the first letter, that is, the draft which was not sent out and which has been marked as "Exhibit no. 12" of this date? Mr. VERHELLE. I believe I did, sir. Mr. PECORA. Who prepared the letter marked "Exhibit no. 13" which was sent out to the stockholders? Mr. VERHELLE. The letter, no. 13, is substantially a copy of letter no. 12, with the addition of one paragraph. Mr. PECORA. Who prepared it in the form in which it was sent out and in which it has been received in evidence? Mr. VERHELLE. The change was made by Mr. Ballantyne, but I do not know who did the actual wording of it, who is responsible for the actual wording of the paragraph itself. Mr. PECORA. The only change or difference between exhibit 12 and exhibit 13 is the inclusion in exhibit 13, which is a copy of the letter that was sent out, of what appears therein as the second paragraph; is that right? Mr. VERHELLE. I believe that is correct, sir. Mr. PECORA. And you believe that in all other respects exhibit 13 is the same as exhibit 12 in form? Mr. VERHELLE. I could read them back and determine definitely. Mr. PECORA. I will read Exhibit No. 12, the draft of the letter which was not sent out Senator COUZENS. And which was sent to Mr. Ballantyne for revision? 66 Mr. PECORA. Yes. [Reading:] To our Stockholders: The board of directors of the Detroit Bankers Company believe that greater progress in attaining the purposes of this company can be made by the consolidation of the Peoples Wayne County Bank and the First National Bank in Detroit, and accordingly have recommended the consolidation of these two institutions under the name of the First Wayne National Bank. To you as stockholders the results will be reflected in increased earnings for your company, and to you as customers in an improved and more convenient type of service. It is contemplated that this consolidation shall be effective on or about December 31, 1931. This will give Detroit, which is the fourth largest city in the United States, a bank commensurate with its importance. "According to the latest published statements the resultant consolidated institution will be among the first ten in the country in resources and deposits. "We trust that you will share the management's pride not in the size of the First Wayne National Bank, but in its usefulness to the community. The usual quarterly dividend has been declared to holders of record on December 21, 1931." The letter marked as " Exhibit no. 13 " in evidence reads as follows [reading]: "To our Stockholders: "The board of directors of the Detroit Bankers Company believe that greater progress in attaining the purposes of this company can be made by the consolidation of the Peoples Wayne County Bank and the First National Bank in Detroit, and accordingly have recommended the consolidation of these two institutions under the name of the First Wayne National Bank. "The new bank will have a capital of $25,000,000, surplus of $25,000,000, and undivided profits in excess of $7,000,000. It will have total deposits of approximately $500,000,000 and total resources of approximately $600,000,000. "We have taken this occasion to make the needed charge-offs and to set up ample reserves. To you as stockholders the results will be reflected in economy of operation, and to you as customers in an improved and more convenient type of service. "It is contemplated that this consolidation shall be effective on or about December 31, 1931. This will give Detroit, which is the fourth largest city in the United States, a bank commensurate with its importance. |