THE TRUST SHOULD BE CAREFULLY GUARDED. Inasmuch as the Building and Loan Associations have demonstrated their usefulness as savings and mutual investment societies, and as they accordingly command the confidence of the community, it is to the interest of all that their high position be jealously guarded. Since all of these associations (like all operating as joint-stock enterprises) must have the special authorization of the State by incorporation, there is a moral responsibility upon the State to see that public confidence is not abused through the agency that it provides and measurably sanctions. In the case of Building and Loan Associations this is especially desirable, because their plans of operation are necessarily somewhat intricate, and very great trusts are placed in the hands of the management. Perhaps the largest share of investors do not fully understand the operations of the association with which they are affiliated. They know in a general way that the Building and Loan plan of investment is accounted a good one, and they have enough confidence in the men who are at the head of the enterprise to believe that its affairs will be conducted honestly. If a man who thus invests his hard-earned savings year after year should finally awaken to the knowledge that his confidence had been abused, and that all his labor and self-denial had come to naught, it would be a serious blow to him-sufficient perhaps to change the whole current of his life, and change him from an industrious and frugal citizen to a spendthrift and a ne'er-do-well. STATE SUPERVISION. It is to the credit of the leading men in the Building and Loan Associations in this State, that, recognizing the grave responsibility under which they were operating, and foreseeing a possible abuse of institutions grown so popular and commanding such unlimited confidence, they were the first to demand official supervision of all associations of this class. The State of California, in taking up this responsibility, has acted wisely, and has placed herself in the advance guard of a movement which is no doubt destined to become general throughout the United States. Already the States of New York, Pennsylvania, Massachusetts, New Jersey, Maryland, Georgia, Vermont, Ohio, Minnesota, South Dakota, Nebraska, Wyoming, and Washington have established special commissions, or have delegated to an officer of the State the responsibility of supervising the operations of Building and Loan Associations, and making a public report thereon. So far as we have been able to learn, this official supervision is regarded with favor both by the public and by the better class of associations in this State. The public consider it an effort for their protection, and the associations find it a direct benefit in the suppression of irregular and unsound enterprises, thereby securing to those that are solvent and well managed a greater measure of confidence. The object of these public investigations is not inquisitorial nor in the nature of an interference with legitimate private enterprise, but it should be entirely for the protection of the public against fraudulent and reckless management. A legitimate enterprise has nothing to fear from such supervision, but on the contrary should be benefited by it. It is apparent that the management most inclined to protest against official investigation, or to evade it, is the one that most requires supervision in the interest of the public. LAWS GOVERNING BUILDING AND LOAN ASSOCIATIONS. The first law adopted by the State for the government of Building and Loan Associations is to be found in Title XVI of Part IV, Division First, of the Civil Code, and is comprehended in Sections 639, 640, 641, 642, 643, 644, 645, and 647. It provides generally for land and building corporations, defining their powers and privileges. Associations. incorporated under these laws (previous to March 31, 1891), and not reincorporated under the provisions of the later law, are still doing business as originally contemplated, except that they all come under the provisions of the law of 1893, requiring supervision by the Board of Building and Loan Commissioners. The second law under this head, approved March 31, 1891, repealed all of the foregoing sections (except in cases of previous incorporation as specified above), and added seventeen new sections to the Civil Code, to be known and numbered as 633, 634, 635, 636, 637, 638, 639, 640, 641, 642, 643, 644, 645, 646, 647, 648, and 6484. This law provided a special form of incorporation for such associations, and general outlines as to their method of doing business. It provided that associations already doing business might reincorporate under this Act, or might elect to continue as first organized. All associations, whether reorganized or not, were to be under the supervision of the Board of Bank Commissioners, who were authorized to examine the same and publish reports. This law was amended and, in great measure, superseded by an Act approved March 23, 1893, creating a Board of Commissioners of the Building and Loan Associations, and prescribing their duties and powers. This Act, as well as all of the preceding laws which remain in force, will be found quoted in full as an appendix to this report. It is under the provisions of the law of 1893 that this Commission was instituted and is now operating. WORK OF THIS COMMISSION. The work of this Commission was commenced June 1, 1893, and during the fiscal year we have examined the Building and Loan Associations whose annual statements are presented herewith. The Secretaries and other officers of Building and Loan Associations of the State have generally shown a ready acquiescence in the law, offering every facility for investigation, and answering all queries propounded to them. This Commission desires to acknowledge their uniform courtesy and coöpera tion. Generally speaking, we have found the associations in a solvent and flourishing condition. One association, that had been the subject of an adverse report from the Board of Bank Commissioners, was found in the hands of a new Secretary, who had reformed its methods of doing business and straightened out a bad financial complication created under the former management. Another association was found somewhat crippled by reason of too extensive borrowing and the default of several loans, which had neces sitated the taking of unavailable property. The matter was duly reported to the Attorney-General, and with his advice and concurrence the management was given the alternative of changing their method of business and making good the impaired capital, or going into liquidation. They chose the first alternative, and the association is now in a much better condition than formerly. A third association was found crippled as a result of bad loans, which had necessitated the taking of property. On our advice, and the concurrence of the Attorney-General, the Directors proceeded to wind up the affairs of the association. AN ILL-ADVISED SYSTEM OF LOANING. During the latter part of our fiscal year, some of the associations of San Francisco had an experience which will, undoubtedly, prove a useful lesson to them. A certain building contractor who carried on extensive operations, had made use of these associations in a systematic way to further his business. He was a member of the directory of several associations, served on the security committee of one, and was President of one. His method was to purchase land in considerable tracts, then erect buildings on the various lots, and sell them to his employés or whomsoever he could induce to purchase. By reason of his position in the Building and Loan Associations, he managed to secure loans on these properties up to the full amount of cost and a snug profit added, which reimbursed him, and then he turned the Building and Loan contract over to his purchaser for fulfillment. The result of his plunging methods was eventual failure, when he absconded, leaving many unsettled accounts. The evil of this system, so far as the Building and Loan Associations were concerned, consisted in loaning too large amounts on these properties, and looking for payment to irresponsible parties. In a number of cases these contracts were defaulted by parties purchasing, and the associations were obliged to take the properties by foreclosure or compromise. They will be thus obliged to stand the loss of idle, or partially idle, capital until they can dispose of the properties in question, and must then suffer a probable shrinkage in values. The lessons which all of the associations should learn from this are: First: Not to allow a member of the Board of Directors to systematically further his individual schemes at the risk of the association. Second: To scrutinize each proposed loan carefully, and see that a conservative estimate is placed upon the property offered. Third: To consider carefully the standing and character of each applicant for a loan. In one association we found such a faulty system of bookkeeping that we made a formal request that the books be re-written. This was complied with in a prompt and satisfactory manner. In many cases we have detected faulty methods of account-keeping, which we have pointed out, and the Secretaries have rectified the same. In several cases we have recommended that the services of a building and loan accountant be secured to correct errors and improve methods of account-keeping. In two instances considerable deficits have been found in the finances of Building and Loan Associations, due to misappropriations of the Secretaries. In both cases the losses were made good to the associations, and the Secretaries subsequently resigned. Altogether we have endeavored to make our work helpful to Secretaries, and, whenever they sought advice, have assisted them in adopting what we regard as safe and correct methods. SYSTEM OF REPORTS. The system of reports and examination adopted by this Commission is as follows: At the close of its fiscal year every association is required to file an annual report on a blank furnished for the purpose, the same being acknowledged before competent authority by the President and Secretary of the association. The form of this blank is as follows: [Form 1.] [ANNUAL STATEMENT BLANK.] ANNUAL REPORT TO THE BOARD OF COMMISSIONERS OF THE BUILDING AND LOAN ASSOCIATIONS. STATISTICAL INFORMATION. Authorized capital stock Number of shares Par value of shares. Number of members Number of borrowing members.. Monthly installments due per share Rates of fines imposed Entrance fees per share paid to association Entrance fees per share paid to agents Profit and loss account: net profit for year.. Profit and loss account: amount apportioned to shares. Number of mortgage loans for year Amount of mortgage loans for year. Number of foreclosures since organization Amount due on foreclosures... Rate of interest allowed on advance payments. Number of shares issued since last report Number of shares canceled since last report We do solemnly swear that every allegation, statement, matter, and thing contained in this report is true, to the best of our knowledge and belief. Subscribed and sworn to before me, this day of—, 189-. The above Annual Statement, when properly filled out and attested, is filed, and becomes a record of this office, subject to the inspection of any one who wishes to ascertain the status of the association. A synopsis of this statement is made out in each instance and accompanies this report. As soon as his Annual Statement is filed, we issue to the Secretary a set of detailed blanks, the forms of which are given below. The object of these detailed statements is to secure, for the purposes of the examination, and to form a permanent record in this office, an itemized list of all the assets and liabilities of each association. The Detailed Statements are made of a date concurrent with the Annual Statement, and the footings of the former should verify every item of the first statement of assets and liabilities, as well as the repor stock outstanding. The forms of these detailed blanks are as f |