Opinion ID: 1473033
Heading Depth: 1
Heading Rank: 6

Heading: Increase of the Stock of the Bank.

Text: On February 10, 1925, the board of directors and the stockholders at their respective meetings authorized an increase of stock from $1,800,000 to $3,000,000; i. e., 12,000 shares. At that time the bank had made loans amounting to $26,900,000 in round numbers. It still had a leeway for making loans of $1,500,000, and it had applications for loans equal to that amount. Clearly, if the bank was to expand its business, an increase of stock was necessary as a basis for an issue of further bonds. The Farm Loan Board knew of the proposed issue of stock. Commissioner Cooper testified: I discussed with W. H. Gold, on one occasion that I recall, and also with Mr. Huston, the matter of increasing the capital stock of the Southern Minnesota Bank. I think that began in 1924. After these conversations with Mr. Gold and Mr. Huston, the capital stock of this bank was increased. At those conversations, I knew the bank had acquired some land, and believed it would have to take on more. I told Mr. Gold I thought it would be advisable to increase his capital stock, so he could take care of all good applications that I believed at that time were available to the bank. I had on my desk at the time, which I think I either showed him or told him about, a report covering this territory, and particularly the territory in which the Southern Minnesota Bank was operating, which showed that during a period of four or five months previous, mortgage loans in the sum of about $19,000,000 had been made by companies other than Federal or Joint Stock Land Banks, and that made me believe that there must be available here good business which the bank could take, if it had the necessary capital and was able to sell those bonds, and which it would be desirable for the bank to do. As far back as July, 1924, W. H. Gold had favored an increase of stock. Early in 1925 it was the opinion of the Golds that they could make loans amounting to $15,000,000 within the next two years. Glenn Gold testified as follows: In early 1925, the Southern Minnesota Bank had not loaned up to 15 times its capital  within about $1,500,000.00. In April, 1925, we had sold so many bonds that $40,000.00 of stock had to be paid in so the bank could finish delivering the $2,000,000.00 of bonds to the Guy Huston Company, that they had sold for them. Some time in April, 1925, the bank had loaned as far as it could, without selling more stock, except for such money as would be paid in on mortgages. On February 28, 1925, the bank reports to the Farm Loan Board, the bank reports applications awaiting closing $889,000.00. On April 30, 1925, the bank had, awaiting closing, $751,000.00, and on May 31, 1925, $686,000.00. $407,000.00 worth of applications were received during May. Of course, there would be a considerable weeding out on that. We were not making that many loans, because that list would be pruned. If the bond market remained in the condition it was at that time, the capital could be loaned out during the balance of the year 1925 and 1926. Q. You are speaking about this new issue of stock, this 11,000 share issue? A. Yes, the 11,000 share issue. The bond market was in good condition at that time, and the stock market also in good condition to sell stock, and there was a demand in the field for the loans this bank could make. In order to extend, in an efficient way, as it should be done, there should be three things working together, a good stock market, so the stock will bring the price it ought to; a good bond market, so the bonds can be sold on favorable terms; and a good demand for loans. All three of those elements were present during May and June, 1925, when this stock was issued. William G. M. Smith, a director and one of the defendants who was acquitted, testified relative to the increase of stock as follows: Prior to this time the bank would take on an organization to handle a good line of loans and just about the time that this organization was going in good shape, they would be either unable to dispose of the stocks or bonds, and the result was that their organization would have to be cut and slowed up, and they were unable to keep up the best cont[r]act with their correspondents. The figures were submitted at that time, showing that the potential loan field in which we were working was, oh, I should say, would absorb five or six times the amount of the bonds issued and stock. Mr. Streater, another director, testified as follows: I voted for    the expansion of the bank, in the year 1925, the issuing of the new stock that was issued that year. I was not very enthusiastic about as large an expansion, but I did approve it and voted for it. I believed that there was a very fair volume of applications for loans available. I knew of the depression that has been described here, between the years 1921 and 1924. In the latter part of 1924, and early part of 1925, it was my opinion that conditions were gradually improving, and that was one of the things I took into consideration in voting for that increase in stock. I thought the sale of that stock and the making of loans, based on that stock, and in general the future of the bank would work out well, and I voted for it. Mr. Huston testified: I was getting reports from Washington daily, almost, of the splendid condition of the crops through this territory, through the whole corn belt, as a matter of fact. And the corn was worth $1.25 then, and we were figuring on its going higher. The Department of Agriculture was very enthusiastic on that at that time. The election was over and the economists were saying that we were going to have six to ten years of the greatest era of prosperity that America had ever known. I came to Chicago, and visited the Federal Reserve Bank, and all the other banks, that have country correspondents through this community. I had gone to the Metropolitan Life Insurance Company, in Newark, N. J., and visited the vice president that has charge of the farm mortgages. When I arrived in Chicago I visited the office there of their farm mortgage department, handling this section through here, and they were telling me of the general comeback and the soundness of values, and I was tremendously surprised when they told me that they had advanced their general loaning rate per acre approximately 20 per cent. in southern Minnesota. I made a very thorough investigation, and every one was so sure that the bottom had been reached, and that the turn had come, that there remained practically no doubt in my mind that the situation had definitely turned. I was furnished from Des Moines, a list of more than 200 farms that had sold for over $200 an acre in the last 30 days, at that time.    I could not find any one but that was sure that things were coming right. Then I saw Mr. Gold and talked about the increase in stock of the bank, and I told him that I thought this was the time to increase the stock; that the market was in such condition that stock would sell. I felt that bonds would be of a much better price, and that we had the market in very good shape for the bonds, having sold $2,000,000 at approximately one point, or half a point to a full point above the general level of the market on Joint Stock Land Bank bonds at that time. The general stock market was getting lots better. The general level of stocks was 10 to 20 points above what it had been 12 months before, all of which were favorable indications. All of these men were mistaken in the views they held early in 1925 as to the outlook for the future business prosperity of the bank. They did not foresee the agricultural depression which set in during 1926. Nor did they foresee the change in policy soon to be made by the Farm Loan Board in regard to the payment of dividends and in regard to the handling of lands acquired under foreclosure. But in passing upon the guilt or innocence of these defendants, in respect to this increase of stock, due consideration must be given to the facts and circumstances as they saw them in 1925. Erroneous judgment may be as consistent with good intentions as with bad. And in this matter of the increase of stock, we think the record fails to show any substantial evidence of bad faith or intent to defraud on the part of the defendants. At most, the evidence shows erroneous judgment on their part when considered in the light of subsequent events.