“In an association, organized on the terminating plan, all the stock is issued as of one date. A terminating association is organized on the presumption that all the stock will be subscribed for at the open meetings. This, however, is seldom done. The consequence is, that shares sold after the first meetings must be sold at such prices as to make them equal in value to those already issued. To do this a sum must be charged equal to the amount already paid in in instalments by the subscribers to the original shares. If the regular dues on shares should be one dollar per week, a person subscribing for a share after the association has been running ten weeks must pay ten dollars for the share. In like manner, if the association has been running for a longer period, he must pay an additional dollar for each additional week. Moreover, if he does not subscribe until after the profits have been declared, he must pay such an additional amount on his share as will correspond to the earnings of the original shares up to that time. The same rule holds through the entire existence of the association, each year making it more difficult to enter. After an association, organized on this plan, has run for a time, it is impossible for many persons, who would gladly become members, to raise a sufficient sum of money to pay up the back instalments, the initiation fees, the accrued profits, and other incidental expenses. In its practical workings, therefore, an association organized on this plan is not well adapted to meet the conditions of that particular class of persons who most need such an organization, and are most likely to be benefited by it.
“In a terminating association all the shares are, of course, at all times of equal value. Whenever the total amounts of the dues paid in and of accumulated profits equal the par value of all the shares, the association terminates and its affairs must be wound up. Each stockholder who has not borrowed his money in advance receives the full value of his shares. To those who have secured their money in advance, their mortgages, cancelled and receipted in full, are returned.
“PERMANENT ASSOCIATION.
“Building associations were established originally on the terminating plan. It is obvious that working on this plan they cannot, in some respects, reach their greatest degree of popularity and usefulness. On this account there has been a gradual departure from this plan. The first departure from the terminating plan consisted in an arrangement for issuing the stock in series instead of all from the same date. Associations were chartered for a certain number of years, as before, and with a specified amount of capital stock. But instead of selling all the stock as of the same date, it was divided into series; one series being sold as of the date of the beginning of the first year, the second series as of the date of the beginning of the second year, and so on until all the shares were sold. The issuing of a new series does not necessarily occur annually, but at such periods as are made necessary or desirable by the business of the association. The serial issue may be monthly, quarterly, semi-annually, or otherwise, as the directors may determine. By the time the last series is issued and the stock is exhausted, the first one or two or more series of shares, if the business of the association has been prosperous, have usually reached their full value, and are paid back and cancelled. Associations conducted on this plan usually have the right to issue new stock to take the place of that which is cancelled from time to time, and thus their perpetuity is insured. A successful association working on this plan can usually secure the issue of a new charter, and can thus continue its existence. But there are manifest disadvantages and risks under which an association operating on this plan must labor.
“Another plan of operation has been inaugurated which has proved very popular, and which is being generally adopted by the associations in the different States. Associations are granted perpetual charters, the amount of the capital stock being fixed at a certain sum. They are allowed to begin operations as soon as a certain amount of stock is subscribed. After the association is in operation, new subscribers are allowed to enter at any time on an equality with the original subscribers, the stock of each member dating from the time of his entry. Thus the business of the association runs along from year to year, until finally all of the stock is subscribed. After a time the shares first issued begin to reach their full value. As they thus mature, the owners draw out their money,—if they have not borrowed it in advance,—and their shares are cancelled, and their membership ceases. If they have borrowed their money in advance, their bonds and mortgages are returned to them receipted in full. If a member, whose stock has thus matured, has not borrowed his money in advance, and does not wish to draw it out, a certificate of paid-up stock is issued to him, and he leaves his money in the association as a matter of investment. An association operating on this plan may, after a time, when its original stock has all been subscribed through application to the incorporating authorities, secure the right to increase its stock. If, in the course of time, this increased stock becomes exhausted, another increase may be secured in a like manner, and so on indefinitely.”
Herewith is given an extract from the yearly report of a successful savings and loan association on the perpetual plan. It will illustrate more fully the method and results of this method than could a less formal description. It may be explained in this connection that in this society the payments are uniform for depositing and borrowing members; that is, instead of having the premium and interest added to the weekly dues, the amount of premium and interest is charged against the weekly payment of fifty cents. Ten cents is the limit of premium, the officers and stockholders believing that to be as much as any one should pay.
OBJECT.
The Plymouth Savings and Loan Association, No. 2, is organized with two main objects in view:—
First.—To furnish a convenient, safe, and profitable method of investing the savings of working people.
Members can come in and go out at will.
Subscriptions can commence at any time without having to pay back dues or wait for new series.
Withdrawing members obtain their money without loss (fines excepted), and are paid as promptly as the finances of the Association will admit, without having to wait ninety days. In the history of the Association there have been no delays.
Second.—To furnish persons who wish to borrow for any purpose the means for doing so at a reasonable rate of interest. In other words, it is an association composed of borrowers and lenders, and established for their mutual convenience. It gathers together the savings of the people, which, scattered and in small sums, could not be invested to advantage, and loans the money thus obtained on first mortgage security, and in sums to suit, to those who wish to build, to pay off mortgages, or for other purposes.
All members of the Association are, therefore, divided into two classes:—
First.—Those who desire to use the society as a means of saving or investing money. These are called depositing members.
Second.—Those who wish to make use of the organization as a means of borrowing money. These are called borrowing members.
MANAGEMENT.
The Plymouth Savings and Loan Association is a strictly co-operative or mutual organization. All the shareholders are pro rata owners of all the assets of the society. Every member is a partner in the enterprise in proportion to the amount paid in by him. He is entitled to his share of all the earnings of the Association, and he must also stand his share of the losses, if there be any.
The By-laws contain the rules and regulations under which money is received and loaned, or otherwise disposed of, and the business of the society is carried on by a Board of Directors, elected annually by the members.
SHARES AND SHAREHOLDERS.
The amount of interest which each member has in the Association is indicated by the number of his shares.
Shares are $200 each, and no member can hold more than twenty-five shares. The weekly payment required is fifty cents on each share of stock.
When a member joins the Association he indicates the amount of weekly payment he desires to make by the number of shares for which he subscribes. He may, however, if he wishes, pay more than his shares call for, and such over-payments will receive dividends the same as the regular weekly instalments.
Each member is supposed to keep up his payments until what he has paid in, together with the dividends declared thereon, shall amount to the face value of his shares, at which time he must cease payments, and either take his money out, or, if the society be willing, allow it to remain and draw dividends.
DIVIDENDS.
On the 1st of January and July of each year the net earnings of the Association are divided pro rata among all the members, and the amount due each member is credited on his pass-book.
Persons joining the association between January and July must continue payments until the following January before the dividend will be credited, and those joining between July and January must likewise pay until the following July; and if the money be withdrawn before that time, the dividend will be forfeited.
The right to dividend also ceases from the date of the notice to withdraw the stock.
When dividends are credited on the pass-books they are just like money paid, and are themselves entitled to draw dividends the same as cash payments. Thus it will be seen that all dividends compound semi-annually.
The following table will show how long it takes to pay up a share to face value by paying the regular dues only, supposing the society to earn six per cent dividends per annum.[1] It also shows the value of each share at the close of each year:—
First year Dues $26 00 “ Dividends 78 $26 78 Value at close of first year $26 78 Second year Dues $26 00 “ Dividends 2 41 28 41 Value at close of second year $55 19 Third year Dues $26 00 “ Dividends 4 53 30 53 Value at close of third year $85 72 Fourth year Dues $26 00 “ Dividends 6 10 32 10 Value at close of fourth year $117 82 Fifth year Dues $26 00 “ Dividends 8 34 34 34 Value at close of fifth year $152 16 Sixth year Dues $26 00 “ Dividends 10 41 36 41 Value at close of sixth year $188 60 Seventh year (16 weeks) Dues $8 00 “ Dividends 3 40 11 40 $200 00 Time, 6 years and 16 weeks. Total dues paid $164 00 Total dividends 36 00 $200 00 [1] The present rate of dividend is nine per cent, with an added surplus.
METHOD OF LOANING MONEY.
The society loans money only to members. For each $200 share held by a member he may borrow $200, secured by first mortgage on real estate, interest on which is twenty-four cents per week.
The right to precedence in borrowing is sold at auction at stated times at the office of the Association (notice of which is given beforehand) to the member who bids or agrees to pay the highest weekly premium in addition to the twenty-four cents per week interest. Ten cents per week is the average rate at which money was sold during the year 1887, and is now selling.
Members not desiring or not able to attend the sale of money in person may have some one else bid for them, or they may leave a written bid with the Secretary, on blanks prepared for that purpose, who will make it for them at the sale.
The society also loans to depositing members in sums equal to ninety per cent of the dues paid in. Security is had by the member pledging his stock for the payment of the loan and interest due (if any) on notes prepared for that purpose. Interest on such loans has for the present been placed at the rate of eight per cent per annum.
PAYMENTS.
The depositing and borrowing members alike pay fifty cents per week per share. There are no additions for expenses, interest, premiums, or fines. These are charged up at the close of each dividend period, or at the closing up of an account.
Each borrower is required to pay at least fifty cents per week on each $200 of loan made to him, which is credited as follows:—
First the premium and interest are taken out, the interest being twenty-four cents. When the premium bid is ten cents, both together would amount to thirty-four cents. Then the balance, which in this case would be sixteen cents, is credited as a payment on the share on which the loan is taken. These payments are continued until the amount credited on the shares, together with the dividends thereon, will equal the amount loaned. For instance, suppose the loan to be $200, and the premium bid to be ten cents per week,—
The payment each week would be 50 cents The premium each week would be 10 cents The interest each week would be 24 cents 34 cents The credit on the share each week would be 16 cents These credits of sixteen cents per week begin to draw dividends on the succeeding dividend period, which are compounded semi-annually, and the weekly payments must be continued until the weekly credits of sixteen cents and the dividends thereon amount to $200.
Members are at liberty to pay every two weeks or monthly, and as much beyond the required weekly payment as they may desire to. The overpayments are credited like any regular payment and share in the dividends.
This enables borrowers to pay their loans off as fast as their circumstances will admit. This method is very helpful, as the interest and premium will be stopped on as many full shares as are paid off, and the cost of a loan is materially reduced thereby.
The minimum payment only is fixed. The borrower may at any time pay the whole balance due on the loan and have it cancelled at once.
It is always good policy for a borrower to pay more than the weekly dues if he can, in order that in case of sickness, loss of work, or other unforeseen hindrance, he may be paid ahead, and hence suspend payment for a time without being fined or in danger of losing his property.
By the following table it is shown that with the premium at twenty-four cents on each $200, and that the society is able to earn six per cent per annum dividends (both of which are being done now[2]), and the required weekly dues only being paid, a loan will be paid up in fifteen years and six months. This time, as already mentioned, can be shortened at the will and ability of the borrower, and may be paid off at any time without any penalty whatever. This is a great advantage, and the society can do this only because of the great demand for loans, and the money does not have to lie idle if a loan is paid off, but is immediately loaned again. Here is a loan which you may take fifteen years to pay if you wish, or you may pay it off at any time.
TABLE.
SHOWING COURSE OF LOAN OF $1,000.
[2] Since this report was made the earnings have been nine per cent, with an added surplus.
With the reasonable prospect in view that the Association will be able to pay larger dividends at some future time, it will be easy to understand that the cost and the time of payment of a loan will thereby be correspondingly reduced.
MORTGAGES.
All loans must be secured by first mortgage on real estate in Marion County, Ind. An appraising committee, consisting of three members of the Association, appraise the value of all real estate offered as security for loans and report to the board. No loan can be made until the security has been approved by the Board of Directors.
This Association is now paying four per cent semi-annual dividends, and adding largely to its surplus.
| First year | Dues | $26 00 | |
| “ | Dividends | 78 | $26 78 |
| Value at close of first year | $26 78 | ||
| Second year | Dues | $26 00 | |
| “ | Dividends | 2 41 | 28 41 |
| Value at close of second year | $55 19 | ||
| Third year | Dues | $26 00 | |
| “ | Dividends | 4 53 | 30 53 |
| Value at close of third year | $85 72 | ||
| Fourth year | Dues | $26 00 | |
| “ | Dividends | 6 10 | 32 10 |
| Value at close of fourth year | $117 82 | ||
| Fifth year | Dues | $26 00 | |
| “ | Dividends | 8 34 | 34 34 |
| Value at close of fifth year | $152 16 | ||
| Sixth year | Dues | $26 00 | |
| “ | Dividends | 10 41 | 36 41 |
| Value at close of sixth year | $188 60 | ||
| Seventh year (16 weeks) | Dues | $8 00 | |
| “ | Dividends | 3 40 | 11 40 |
| $200 00 | |||
| Time, 6 years and 16 weeks. | |||
| Total dues paid | $164 00 | ||
| Total dividends | 36 00 | ||
| $200 00 | |||
| The payment each week would be | 50 cents | |
| The premium each week would be | 10 cents | |
| The interest each week would be | 24 cents | |
| 34 cents | ||
| The credit on the share each week would be | 16 cents | |
A new feature in building-association work has recently been put into practice. The association will buy for cash a house and lot, or buy a lot and build a house thereon, and sell at a fair price to the member whose application is accepted. Where the house and lot are bought at a cash price, it is usual to charge a ten per cent bonus when selling it on time to a member. The purchaser then completes the transaction by securing the purchase money to the association, the same as in case of a loan on any other property, except that instead of a deed from the association he will receive a lease, with an agreement to sell and convey to him the premises as soon as one-third of the purchase money shall have been paid in regular dues on his stock. His stock will be assigned as collateral security, and the payments will be credited as rent until the deed is made. Then the purchaser will execute his mortgage for the unpaid balance due on the property on the terms of his original bid for the money. It is usual to require a cash payment equal to the amount of the bonus; that is, ten per cent of the purchase price. This is a valuable feature in building-association methods. It adds to the profits of the association. This plan is adaptable to private enterprise, and is liberal in its terms to the purchaser.
In most associations organized on the perpetual plan, as previously described, the demand for funds is greater than can be supplied from depositing members. This has given rise to the “paid-up stock” feature of building associations. Under this plan one may invest money in any sum according to the terms of the charter and secure from the association a certificate of paid-up stock which participates in the regular dividends of the company. In this way, funds in larger amounts may be secured than come from the ordinary payments by regular weekly dues. It is not unusual for individuals to purchase paid-up stock to the amount of several thousand dollars. This is a great help to an association which is short of funds, as it serves to increase its membership by addition of borrowers. There is no better place to invest trust funds than in the paid-up stock of well-managed building associations. Primarily, for the reason that each stockholder is pledged in the amount of his stock to pay principal and six per cent interest on all withdrawals; hence, the funds may be withdrawn at any time, and six per cent interest thereon demanded. Furthermore, building-association stock is not taxable in most States.
Individual and moneyed corporations are coming to consider the matter of loans, and means leading to their repayment, on the building-association plan. This will be brought about largely by the low price of money throughout the country at this time. Savings banks, mortgage companies, and life-insurance organizations are finding it difficult to loan their funds at a price that will pay their fixed obligations; hence, they are seeking means which will lead to a more profitable investment of their funds. The building-association plan of loaning money is one solution of the problem. The low price of money is one of the elements which within the next few years will enable nearly every one who so desires to secure a home through the building association, or some plan which has its outgrowth therefrom.