in San Francisco. This association will undoubtedly represent the ultimate drift of the times-the entire abandonment of premiums. We are unable to make our statistics of premiums as full as would be desirable, because there is such a great diversity of systems that we have found it impossible to arrange them in classes. It may be stated that gross premiums in the Local Associations range generally from 10 to 25 per cent of the amount of the loan, or face value of stock borrowed upon. In one instance a premium of 60 per cent is secured, this amount being added to the face of the loan. The installment premiums average about 30 per cent, being divided generally into ten equal payments of 3 per cent each. PREMIUM STOCK. In some of the Nationals and Coöperative Banks, the plan of issuing premium stock is in vogue. If a member borrows on 100 shares of stock he is required to take out an additional 100 shares, the latter of which is known as premium stock. He is then required to pay dues on 200 shares until maturity of the loan, as well as the agreed interest on amount borrowed. At maturity the premium stock is not liquidated, but is covered into the profits of the association. This amounts, on the part of the borrower, to the payment of a premium of 100 per cent on the amount of loan. Of course the 100 per cent is not taken out of the loan at the outset, as there would then be no loan; but it is paid in annual installments, extending through the life of the loan, and at maturity the premium stock, which is surrendered by the borrower, exactly equals the amount of borrowing stock-i. e., the amount borrowed. This is 100 per cent on the loan. The premium plans in vogue with Building and Loan Associations of the State are as follows: We desire to commend a feature in the plan of some associations, which is the maintenance of a Reserve Fund. This fund is secured by setting aside a certain percentage of the profits, and it is held for the general betterment and strengthening of the association. The Reserve Fund stands as a liability to stockholders, but it is not subject to distribution, except as it may be carried up in fixed installments to the credit of Capitalized Profit or Accrued Earnings Account. The objects of this fund may be: First-In case the association is in debt to outside parties, to provide an additional guaranty for the payment of such debt, and to equalize the profits as between stockholders of various series. An association operating under the gross premium plan, where the premiums are at once carried up to Profit and Loss Account, may have an active demand for money during a certain year, and, in order to meet that demand, may borrow at bank. The result is an abnormally large business, and the premiums carried up will swell the Profit and Loss Account of that year correspondingly. During the succeeding year the demand for loans may be less, and the association may devote a large part of its income to the discharge of its indebtedness at bank. In this case, the premiums entered will be few, and the Profit and Loss Account will show a decided falling off. Now, in case of the older series which have participated in the profits of both years, this variance of apparent profits makes no difference; but it is manifest that a new series, coming in at the beginning of the year of debt-paying, would not secure its proper share of the gains. The money which its stockholders contribute in dues will be largely devoted to paying up the association's indebtedness, and the premium gains on this capital will have been absorbed by older series. Consequently the Reserve Fund is established to carry over a percentage of the profits on borrowed capital for distribution during subsequent years. The rule is to keep back from the aggregate profits 15 per cent of the amount of outside indebtedness. All in excess of this 15 per cent of the indebtedness which may be standing in the Reserve Fund is carried up to Accrued Earnings and is subject to distribution. Second-A Reserve Fund may be established, and a certain small percentage of profits set off to it each year. This is to provide against any losses that the association may sustain from shrinkage of values in property taken under foreclosure, etc., so that the accrued earnings. which have figured in the establishment of book values may not be impaired. In cases where an association is about to mature one of its series, this Reserve Fund becomes very serviceable and very just. During the life of this maturing series a number of loans may have been made which turned out badly; i. e., the association may have been obliged to take the property to satisfy the loans. This property, under a general shrinkage of values and a depressed real estate market, may not be readily salable for the amount at which it was taken. But the maturing series is about to retire, taking out its share of assets in cash, and leaving the other series to contend with the problem of getting their money from these unavailable assets. Under these conditions it is proper that there should be a Reserve Fund of profits to make good any possible losses from such hold-over property. When the retiring series takes out its share of the assets in cash or its equivalent, it should resign all interest in this Reserve Fund as an indemnity to the persistent members. It is proper to state that a Reserve Fund as above outlined is entirely separate and distinct from the Unearned Premium Account previously discussed. The two have nothing in common, and the Reserve Fund cannot be recruited from Unearned Premiums, but must be drawn from profits that would otherwise be subject to immediate distribution. APPORTIONMENT OF PROFITS. There are in vogue among the associations of this State no less than ten separate rules, or plans, for distribution of profits, which are briefly stated as follows: Dexter, or Compound Interest rule. Wrigley Second Dividend Share and share alike. 49 associations. 39 associations. 27 associations. 11 associations. 4 associations. For the formulation of these rules and the exemplifications, we are indebted to the Fourteenth Annual Report of the Bureau of Statistics of Labor and Industries of New Jersey, and to Hon. O. Albert Bernard, Special Agent of the United States Department of Labor. Mr. Bernard collected statistics for his department relative to Building and Loan Associations on the Pacific Coast, and has made a special study of the subject. We are under obligations to him for many valuable suggestions. GENERAL FORMULA FOR EXEMPLIFICATION. Exemplar Building and Loan Association, of California. Par value of shares, $200. Payments, $1 per share per month. Net assets, $125,000. Accrued profits for five years, $20,600. Profits for last year, $9,000. Required: To find the present book value of one share in each series. AVERAGE INVESTMENT FOR THE YEAR. Each share's investment for the year is $12, or $1 per month, supposed to be paid monthly in advance. By an equation of payments it will be found that the association has had the use of $78 for one month, or $6 50 for one year ($78÷12=$6 50). To make this point clear, we will carry out the calculation as follows: The association has had the use of $1 for 12 months, which equals $12 for 1 month. Total dues collected, $12, the use of which has been equal to $78 for 1 month. The use of $78 for one month is equivalent to the use of of $78 for twelve months. $78 divided by 12-$6 50. Therefore, by the payment of $1 per month, in advance monthly installments for one year, the payer has given the association the use of money whose equivalent is expressed as $6 50 for one year. Had the payments been made in the middle of each month, instead of the beginning, the equivalent would stand $6. Had the payments been made at the last of each month, the equivalent would stand $5 50. THE WRIGLEY RULE. 1. Give to each series, except the last, interest at the legal rate upon the value as declared by the last report. 2. Deduct this interest from the profit of the year and divide the remainder equally among the shares. This rule was first published in a work entitled "How to Manage Building and Loan Associations," by E. Wrigley, a well-known expert. It is used by many associations in this State. It recognizes the compound interest principle, or profits on accrued profits, but is found to award too large a share of earnings to the younger series. Profit for year, $9,000 $5,901 = $3,099 (net profit)÷2,800 (total number of shares) = $1 10 (proportion awarded to each share). In this case, the percentages awarded to shares in the various series on their respective investments are as follows, one share taken as a basis: First Series-Former book value...... Average investment of the year Profit, $5 26 nearly 8 per cent. Second Series-Former book value $59 51 6 50 $66 01 Average investment for the year.. Profit, $4 078.3 per cent. Profit, $2 988.9 per cent. $42 48 650 $48 98 $26 88 6 50 $33 38 Thus it appears that on the basis of capital invested, first series shares earned a little less than 8 per cent; second series, 8.3 per cent; third series, 8.9 per cent; fourth series, 10.3 per cent, and fifth series, nearly 17 per cent. This is certainly not an equitable apportionment. Of course, if the net profits of the association had amounted to just 7 per cent on the invested capital of the older series, the fifth series would have received no profit at all. This would not have been equitable either. If the margin between the 7 per cent allowed and the whole profit had been smaller than shown above, the last series would not have derived such an undue percentage, and the discrepancy would have been nearly equalized. But we submit that this hit-and-miss method is not to be depended upon for meting out equal and exact justice in a Building and Loan Association. The profits in California Building and Loan Associations generally exceed 7 per cent on the invested capital, and when the Wrigley rule is in vogue, the greater the excess the greater will be the discrimination in favor of the younger series. THE DEXTER RULE. 1. To the value of all shares at the last annual report, add the average investment for the year. 2. Divide the net profit for the year by this sum, for the per cent of the profit. 3. Multiply each share's investment by the per cent of profit, for the gain on one share. This rule was first formulated by Judge Seymour Dexter, of New York, author of a treatise on Building and Loan Associations, late President of the United States League of Building and Loan Associations, and a leading authority in such matters. Each share's average investment for the year is $6 50; there are 2,800 shares; the total average investment of the year by all of the shares is 2,800 $6 50, or $18,200. |