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317 A meeting of the Board of Governors of the Federal Reserve Si/Stern was held in Washington on Wednesday, March 8, 1939, at 10:30 Et. ra, PRESINT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman, (latter part of meeting) Ransom, Vice Chairman Szymczak McKee Davis Draper Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Mr. Wyatt, General Counsel Mr. Dreibelbis, Assistant General Counsel Mr. Williams', Assistant Counsel Mr. Owens, Assistant Counsel Mr. Ransom referred to the discussion at the meeting of the 8°8'11 on March 6, 1939, and the newspaper reports this morning relat14to the reorganization bills now before Congress, including the 1411 (S-l706) introduced in the Senate by Senator Byrd on March 6, 1139 '"dt at Mr. Ransom's request, Mr. Williams reported that he 444t8lked on the telephone with Senator Byrnes this morning and that the attar had advised that he had not introduced in the Senate a )141)e, or, - measure to the House reorganization bill (H.R. 4425) but 4aci et "ad outside the Senate that if the bill passed the House he *0 tak -e steps to obtain consideration of it in the Senate. There was further discussion of the questions whether (1) 318 Ws/ 9 the -2- Board Should attempt to obtain an amendment exempting it from the reo rganization provisions of the bill and (2) it should seek a chelmge in the bill to make it clear that the Board is not subject to the Budget and Accounting Act of 1921. The opinion was concurred ihthet Counsel should continue to watch developments in the situatiell in order that the Board might be fully informed regarding the Provisions of the bill. During the discussion of this matter Mr. Goldenweiser, Director of the Division of Research and Statistics, entered the roam. Ath. t-- conclusion of the discussion, Mr. Williams withdrew and Nix.. eeles alicl Mr. Smead, Chief of the Division of Bank Operations, joined the Meeting. Mr. McKee referred to the action taken in the meeting of 41)11.1, 28, 1939, with respect to the amendment, submitted to him 'ePres entatives of the American Bankers Association, to section ) c r the Federal Reserve Act relating to loans to executive ofrice 1'8 Of member banks, and recommended that the representatives of the 4 esc)ciation be advised that, in the absence of some development Whieh Illight require further consideration of the matter, the Board 11(lt object to an amendment to section 22(g) which would remove there . Tlirement that existing loans to officers of member banks Which were made prior to June 16, 1933, be liquidated not later than 319 3/V39 -3- 16, 1939, and would permit the orderly liquidation of such 10ans. Mr. McKee also stated that representatives of the American Association had submitted to him a draft of an amendment to 11 8 or the Clayton Act which would permit an officer, director, 6111151°Yee of an insured bank to serve as officer, director or emV41e. - of not more than one other blank and that it was his recanmendatiori that the representatives be advised that the Board would not kiror each an amendment. It was agreed unanimously that Messrs. McKee and Ransom should advise the representatives of the American Bankers Association informally as recommended_by Mr. McKee. There was presented a draft of letter which would be sent to th e uhetimen of the Banking and Currency Committees of the Senate and lickse or Representatives recommending that, for the reasons stated in the draft, the second paragraph of section 16 of the Federal Reserve AWEI, u8 1111eladed so as to make permanent the authority, which expires 11 3\11le 30, 1939, for the pledge of direct obligations of the United NtA -8 Ets collateral security for Federal Reserve notes. t411. tu lle 1113°h inquiry, Mr. Smead stated that, while none of the Fed"el'va banks is pledging Government securities at the present d under, existing conditions there was no need for such action, 320 3/8/39 -4it was not possible to say that such a need would not arise in the 1.411.8 and that he felt it was desirable that the authority be made PeItlansnt, particularly in view of the possibility of gold exports in the filt_ re u and the little likelihood of any substantial increase in the ernount of eligible paper in the Portfolios of Federal Reserve banks l'thich could be used as collateral security for Federal Reserve notes. During the ensuing discussion Mr. McKee suggested that certain changes should be made in the draft of letter and by unanimous vote the matter was referred to Messrs. Eccles and McKee with power to act. Chairman Eccles stated, for the information of the other members c)f the Board, that his office had received a request from Senator Pittrilahocho is Chairman of the Special Senate Silver Committee, that lie(e1/4418n Eccles) testify at hearings to be held by the committee 4ext eeks presumably on the silver program. At this point Messrs. Thurston, Wyatt, Dreibelbis, Goldenweiser eoad zke left the meeting and the action stated with respect to each or the Matters hereinafter referred to was then taken by the Board: The minutes of the meetings of the Board of Governors of the Reserve System held on March 6 and 7, 199, were approved 141,411481y. Latter to Mr. Martin, President of the Federal Reserve Bank 1431118 , reading as follows: 321 3/8/39 -5- "Reference is made to your letter of February 23, 1939) recommending that condition of membership numbered 201 which was prescribed in connection with the admission of The Plaza Dank of St. Louis to membership, be modified by waiving the requirement for annual depreciation Charges of not less than 10 per cent. The condition now reads as follows: '20. The bank shall make adequate provision for depreciation in furniture and fixtures to be acquired from the GuarantyPlaza Trust Company, in amounts which in any one year shall be not less than 10 per cent of the value at which such furniture and fixtures are acquired.' "It is understood that The Plaza Bank of St. Louis ecqUired from the Guaranty-Plaza Trust Company at a value ?I '07,100 furniture and fixtures which had cost the pre”cessor institution :119,600; that subsequent purchases by The Plaza Bank of St. Louis have aggregated 0,400; and at the furniture and fixtures account has been "42,200 through depreciation charge-offs. It !also understood that the account includes some items °I fixed character, such as vault construction; that the Predecessor institution acquired practically all of its a rniture and fixtures in connection with various mergers he Plaza Bank of St. Louis does not have available de i nnite infoation information as to the original cost of the various it ll and that by reason of the nature of the account Bureau of Internal Revenue has permitted for tax purl-loses an annual deduction of only 6-2/3 per cent for dePr eciation. "In view of all the circumstances, and in accordance 1th Your recommendation, the Board waives that part of ;" m condition of membership requiring that the provision cElde for depreciation be at a rate of not less than 10 per trt Per annum. It is understood, however, that under ci elended condition you will insist that annual depreas4t1on Charge-offs be made to the maximum extent permitted a deduction by the Bureau of Internal Revenue. or "Please furnish the Board, for its files, with a copy Your letter to the bank advising of the action which been taken in this matter." Approved unanimously. 322 3/8/39 -6Letter to Mr. Parker, President of the r'ederal Reserve Bank or Atlanta, reading as follows: "Reference is made to the report of examination of the Citizens State Bank, Marianna, rlorida, as of December 17, 1938, and to the supplamentary information submitted in connection therewith, particularly your letter of FebFuarY 6, 1939, transmitting a copy of a letter dated Februa-1--y 2, 1939, addressed to Mr. W. H. Nobles, President of the Citizens State Bank, by Federal Reserve Agent Neely iflarning Mr. Nobles against unsafe and unsound practices in conducting the business of the bank, such warning be111 issued pursuant to the provisions of Section 30 of the Banking Act of 1933. "It appears that credit advances were made to or for the benefit of Brandon Tall and Elevator Company and V. B. ender, customers of the bank, in amounts which, in the aggregate, exceeded $150,000 and that certain of such adflees were secured, or purported to have been secured, y pledges of warehouse receipts calling for peanuts; that the combined capital and surplus of the bank was 45,000 fld a total of the advances which were actually made to (311 for the benefit of each of these customers largely exceeded advances which the bank was permitted to make under the laws of the State of Florida to any one borrower even ' c °ugh secured by coadodities; that the borrowers caused i?Itain notes to be executed by employees or persons closely Gentified with the actual borrowers; that such nominal or , ')IrPorted borrowers had. no substantial financial responsiallitY t and President Nobles was familiar with the facts i the time the funds were advanced; that the warehouses w88111ng receipts for the stored peanuts were not independent rshouses but were warehouses, owned, controlled or dominated by the actual beneficiaries of the credit extended; all, or a very large percentage of the obligations Ile rediscounted by the Federal Reserve Bank of Atlanta without any disclosure of the facts as to the actual borrowers or of the dependent nature of the storage of the ;;Iedged commodities; and that the facts as regards these a, t ers were discovered by the Federal Reserve bank upon investigation made to determine the solvency and retrlInsibility of the several notemakers. In the investigaon information was also developed that the quantities 1 323 3/8/39 -7- ti 01 peanuts actually in storage in the warehouses which issued the receipts were substantially less than the quantities called for by the outstanding warehouse receipts. "It further appears that the Brandon Mill and Elevator ComPany was also borrowing considerable funds from other banks) of which circumstance the Citizens State Bank was aPParently not aware, and that the State bank may sustain Substantial loss in its advances. It is noted that the examiner expects the Pender indebtedness to work out without difficulty, "Your exsminer expresses the opinion that the diffi2ulties being experienced by the bank are the result of -Fresident Nobles' desire to increase the business of his bank and his reluctance to see any funds borrowed from 2ther sources by the Brandon interests. It is observed resident Nobles has expressed to Federal Reserve Agent lleelY his assurance that in the future he 'will not get caUght in this way again'. The transactions indicate not °IllY an inadequate checking by President Nobles of the !arious aspects of the credit extended but an inclination u° extend to customers of the bank credit facilities bePrudent and legal limits, all of which have exposed ulle stockholders, and possibly depositors, to undue risk (If loss. v_ "As you know, the condition of this bank has been " 4 cause of some concern in the past and the Board in ,!_a letter of March 25, 1935, to Assistant Federal Reserve .Zent Clark, expressed the view that a strengthening of 2_ bank's capital was desirable in view of certain uni; sfectory feares features of the bank's asset condition. The 2nk, however, was not disposed to sell additional stock d contended that adequate increase could be obtained t1 011gh earnings and in submitting the report of examine,°33. as of December 28, 1936, Mr. Clark stated that a merkab1e improvement had taken place in the condition !he bank within the two or three years previous and .0,-Et G President Nobles deserved credit for the progress Made by the bnnk. ., "The examination as of December 17, 1938, reflected adjusted capital of $54,300, which was 9.9 per cent deP0eit8 of 546,100. This, however, is before any °wence for possible loss in the Brandon line or for theble loss in the 0.0,000 Iudgment rendered against bank, which, if upheld, would apparently result in Z 4 324 3/8/39 -8"a loss of approximately :;.4,000 after allowance for offsets. In view of such possible losses and the substantial Portion of the capital account represented by bank premises and other real estate, it would seem that means for strengthfling the bank's capital position should be considered. .1.011r views in this connection will be appreciated. "It is observed from the information transmitted with Your letter of February 11, 1939, that President Newton .oncurred in your recommendation that no action be taken ?Y the Board of Governors at this time and that it is your intention to participate with the State authorities in the 1.ext examination of the bank which will probably be made 111 June 1939. It will be appreciated if you will continue t? keep the Board advised of any developments in connection with the situation of the bank." Approved unanimously. Letter dated March 7, 1939, to Mr. Young, Vice President of the •1. Reserve Bank of Chicago, reading as follots: "Reference is made to your letter of February 14, 1) 69, stating that Vice President Lofborn of The State ,allk of Geneva, Geneva, Illinois, has been elected presi'lent to succeed Mr. Oscar Nelson whose resignation was effective December 31, 1938. "It is noted that you have carefully checked the palifications of Yr. Lofborn with the Assistant Chief lniner of the Office of Auditor of Public Accounts of • inois, who lives in Geneva, and that he is confident 'r. Lofborn is a conservative banker and that no loans extensions of credit in any form will be made to Mr. 4 ecar Nelson and his interests as long as Mr. Lofborn • President of the bank. "It is observed from the comments of your examiner who conducted a review of the bank's assets as of Novem, ler 19, 1938, that he has serious reservations as to the of Mr. Lofborn to manage the bank properly, alii".°1-Igh recognizing him to be a conscientious individual. be stated that Mr. Lofborn had been broupht into the bank Mr. Nelson and recently had been made vice president that Lofborn has been connected with Mr. Nelson in various ways for many years and, in fact, in r 325 3/8/39 -9.- "discussing the matter with Nelson, Nelson said this: "Lofborn will think as I think". Nelson himself is fully aware of the fact that if he is to leave entirely, he needs a stronger executive than Lofborn, for there are too many assets in the bank which need the supervision of one who has more initiative and is more aggressive than the new vice president.' "In discussing President Lofborn's qualifications with the representative of the Auditor of Public Accounts you Undoubtedly had in mind the comments of your examiner. however) in view of the criticisms which have been directed in recent years toward Mr. Nelson's management of the bark, which Were mentioned in the Board's letter addressed to YOU on October 31, 1938, and the indication that Mr. Nelson ,xPects that his judgment will guide President Lofborn, 18 apparent that President Lofborn's management of the be should have your close and continued scrutiny until such time me as his ability to manage the bank's affairs Pr is clearly demonstrated. "The chief problem of the new management and the directors is the improvement in the asset condition of the 113,nk end particularly the reduction of the Oscar Nelson 4.1nes to reasonable limits with the individual items main'ained on a sound credit basis. ci "The management of the bank has been subject to critii n for a long time and the resignation of President Nelson i, a Preliminary step in effecting the desired improvement ' s the bank's condition. Equally important, if not more is the necessity for the bank to obtain management it°roughly competent to achieve the necessary results, end b is apparent that there is some question that this has ieen accomplished. It is assumed that you will continue, in cooperation with the State banking authorities, to fol_?w the situation closely, and it will be appreciated if mil 'will keep the Board advised as to developments." Approved unanimously. ot chi Letter to Mr. Young, Vice President of the Federal Reserve Bank Cat'0, reading as follows: v'ith "This refers to your letter of December 17, 1978, regard to a possible violation of the provisions of 326 3/8/39 -10- "section 11(m) of the Federal Reserve Act by The Fidelity Savings Bank of Antigo, Antigo, Wisconsin, by reason of loans made to Mr. C. N. Melgaard, secured by stocks, in an amount in excess of 10 per cent of the bank's capital and surplus. "You called attention to the fact that the greater Part of the original loan was made to enable Mr. Melgaard to remove from the bnnk a line of credit upon which Mr. Melgaard was a guarantor. However, it appears from reP°Its of examination of the bank that Mr. Melgaard was hot the only guarantor of the line of credit, and it is Possible, therefore, that even the greater pert of the °riginal loan may merely represent a decision by Mr. ilelgaard to purchase the property securing the loon 11Pon which he was one of the endorsers. Since this l c iCihal transaction, Mr. Melgaard has obtained other tc)ans from the bank, secured by stock collateral, which ; ling his total loans above the 10 per cent limit re'erred to in the law. It appears, therefore, that The t x idelity Savings Bank of Antigo has exceeded the limi,"ions contained in section 11(m) in making these loans ") Mr. Melgaard. "It is understood that you feel, as a practical matter) that these are sound loans, and it is not the pur1) 3(38e of this letter to suggest that you insist that the flk immediately reduce the loans, however, it is suggested that the matter be surveyed with the member bank t the time of the next examination in order that it may joid other violations of section 11(m) and correct this violation as soon as it is practicable." Z Approved unanimously. Letter dated March 7, 1939, to Mr. C. B. Upham, Deputy Compof the Currency, reading as follows: "This refers to your letter of February 16, 1939, 1!esting a ruling on the question whether a loan made ; b -1, ot national bank to the wife of an executive officer the bank on the security of a first mortgage on a tnlY constructed residence property is in violation of " Act.Provisions of section 22(g) of the Federal Reserve 327 3/s/39 —11— "We have given careful consideration to the information contained in your letter, but some of the facts surrounding the transaction are not clear. It is not stated Whether the proceeds of the loan were used by the husband in hie business or applied to the purchase price of the Property or were devoted to some other purpose. It is noted that it is understood that the loan was made in good faith and not with the intent to evade the provisions of section 22(g) of the Federal Reserve Act. On the other Illand, it is stated that the wife has no separate estate 0F income, that the property was conveyed to her a short tlIze prior to the loan and that the payment of the debt f ePends upon the earning ability of the executive officer. t ese facts indicate that the loan may have been obtained ulnugh the medium of the wife in order to evade the res lactions of section 22(g), and it is difficult to recon,?lle them with the understanding stated. Since neither ° . 1e. note nor the mortgage is signed by the executive tricer, it is assumed that neither the officer nor his ! 0Party is in any way liable on account of the loan, ulrectly or indirectly, but this does not clearly apPear. "In the circumstances, in the absence : , c- Irring up the points mentioned above and er facts as may be pertinent, the Board is not in a position to attempt to express ' l eference to the question presented." of information as to such feels that it an opinion with Approved unanimously. Itemorandum dated March 6, 1939, from Mr. slot ,ead, Chief of the Of Bank Operations, recommending that Form F.R. 105e, Pub- 11 he ":)Plr of Report of Condition of State Bank Members, be amended 111 the, - -tanner indicated on the copy of the form attached to the memoNiti 1411. The memorandum stated that no change in substance was pro- 13t,sed elld that the changes were designed merely to facilitate the "tia joint publication of condition reports rendered by State bank 3/8/39 -12to their respective Federal Reserve banks and State bRpking de Partments. Thereupon the meeting adjourned. Assistant Secretary.
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