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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: New Hampshire. Title: Special report of the bank commissioners of... Place: Concord Date: 1896 MASTER NEGATIVE * COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD Business D986 G76 New Hampshire. Board of bank commissioners. Special report of the bank commissioners of New Hampshire, March, 1896, concerning the Granite state provident association, of Man- chester, H. H. Concord, Printed by the Rep\ib- lican press association, 1896. 44 p. Signed: ATpheias W. Baker, John Hatch, Ihomaf J. Walker, bank commissioners. RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: .^mnn REDUCTION RATIO: \1- 1 IMAGE PLACEMENT: lA dJA) IB IIB DATE FILMED '._uAJb. 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M m m , -»'' Columbia (BnitJmttp THE LIBRARIES Graduate SCHOOL OF BUSINESS Library i I 1 «! • t ;' 'j L-' Columbia ©nibmitp School of Business MARVYN SCUDDER FINANCIAL LIBRARY Marvyn Scuddcr Libriirj tf Maryyn Scuddcr Library SPECIAL REPORT OF THE f^ -BANK COMMISSIONERS I . « OF NEW HAMPSHIEE, MARCH, 1896, CONCERNING THE GRANITE STATE PROVIDENT ASSOCIATION, OF MANCHESTER, N. H. i CONCORD, N. H.: PRINTED BY THE REPUBLICAN PRESS ASSOCIATION 1896. f 4 ^ SPECIAL REPORT OF THB • t^ BANK COMMISSIONERS OF I . NEW HAMPSHIRE, MARCH, 1896, CONCERNING THE GRANITE STATE PROVIDENT ASSOCIATION, OF MANCHESTEK, N. H. CONCORD, N. H.: PRINTED BY THE REPUBLICAN PRESS ASSOCIATION 1896. V- .11-. ^J,. -I^^ i( r -Tl />■ EEPOET. To His Excellency the Governor : The bank commissioners respectfully report that they have made an examination of the affairs of the Granite State Provident Association, as of January 7, 1896, and find, that under a charter granted by the legislature of this state in August, 1881, with an amendment in September, 1887, reviving and continuing in force the original charter, it is empowered to carry on the business of life insurance ; or in- surance against personal injuries ; or to grant, sell, or pur- chase annuities, endowments, contingent rights, reversions or remainders ; or to furnish assistance to persons incapacitated or disabled by sickness or accident ; and of acquiring by pur- chase, lease, mortgage, or otherwise, real estate and personal property, or disposing of the same, " and otherwise acting as a building association, enabling members to purchase or build their own houses." The charter also provides that the cor- poration shall carry on business solely on the mutual plan, and that all surplus and profits arising from the business shall be ratably distributed among its members, and grants them the power to enact by-laws for their organization and management, as well as for the application of its profits as before provided. The association first commenced business as a co-operative bank, or building and loan association, in the fall of the year 1888. In the by-laws adopted December 5, 1887, it was provided that the business should be carried on upon the plan set forth in the publications of the American Allotment Asso- ciation of New York, which appears to be a corporation organized in 1887, by Geo. P. Stewart, Clark M. Eggleston, and George L. Pierce, under a statute of the state of New York authorizing the formation of corporations for manufac- turing, mining, mechanical, or chemical purposes. The objects for which the company was formed are expressed to be for the purpose of taking, holding, and possessing real estate 3 p Q c; p ^ J O u u c --' and buildings, and selling, leasing, and improving the same in such manner as may be determined by its by-laws, and in conjunction with the several like state organizations having their registry and equation in the Joint States Agency Co., in the city of New York, and in accordance with its constitu- tion and by-laws. The Joint Agency Co., referred to, was a corporation organized two years later in 1889, by Clark M. Eggleston, G. Percival Stewart and others in the state of New York for the purpose of '• acting as general agents in establishing, promoting, extending, and conducting of the business of other corporations for certain stipulated commis- sions or other compensation, to be paid by the corporation for which such services may be rendered." When it is under- stood that the promoters of these organizations have been the leading officers of the Granite State Provident Associa- tion, it will be seen from what source its methods of busi- ness were derived. The by-laws, as amended March 2, 1889, provided that every shareholder for each share owned by him should be entitled to have purchased for him property to the value of 1200, and whenever the funds in the treasury should war- rant, the money should be used in purchasing for the mem- bers homes, farms, or business properties, which properties should be sold to the members on small weekly or monthly payments. By-laws adopted in June, 1889, provided for the division of an extensive and diverse business into an insurance department, building club department, building loan depart- ment, etc., and it was not until 1890, that the by-laws seem to have been modified to meet the purpose of the business of a co-operative bank. If the intention of the legislature in granting this charter to the corporation is sought for in the light of the interpre- tation placed upon it by the association in its early by-laws, it is doubtful if the right to conduct the business of a co-operative bank, sometimes called a building and loan association, was conferred by the words, " otherwise acting as a building association, enabling members to purchase or build their own houses." BUSINESS OF THE ASSOCIATION. The present business of the association consists in the issuing of shares to its members under varying conditions of w contract, requiring monthly payments until such payments with the profits of the association mature the shares to the par value of $^200 wlien the holder has the right to withdraw that amount of money, or if a borrower, have his note cancelled and mortgage surrendered. There are some thirty- three different forms of contracts in force ; but since 1895, there have been substantially but two kinds issued. Of the principal contracts in force there is what is known as the eight year maturity contract, in which the association has guaranteed that the shares shall mature in eight years, when the member shall receive $200 as soon as outstanding obligations may be collected to enable the association to pay this sum, pending which the holder shall receive one half of one per cent, interest a month for each month's delay. There are outstanding at the present time about one thous- and of these shares. Another form of contract provides that the shareholder shall pay into the association one dollar per month for every share owned by him for seven years from the date of the certificate, when his payments cease ; and a similar one provides for the payment for eight years. His money remains with the association until the profits added thereto mature his share to $200, when, as in the above guaranteed contract, it will be paid. Of these, there are now outstand- ing about two thousand shares. There are also in force what are known as three and four year contracts, having a guaranteed withdrawal cash value printed upon them, one form of which guarantees the return of the member's money after thirty-six payments have been made, and another the return of the member's money after forty-eight payments. (See pages 5, 6, and 7, Morse.) In the three year contracts there is a condition that the holder at the expiration of any six months period may receive the cash surrender value of his shares in money or a withdrawal certificate, as he may elect, according to the table printed thereon. At the end of thirty-six months the cash withdrawal given upon the table, equals the total sum paid in by the member, but exceeds the net amount to the association by that taken for expenses ; and at longer periods up to ninety months a still larger cash withdrawal is guaranteed. In these contracts the payments of dues are limited to eight years. In the four vear contracts there is a provision that losses may be deducted from the amount which a member may withdraw at the end of the four year period ; but upon the back of the certificate is printed a table showing the amounts of the cash withdrawal value at certain periods, and under this table a note stating that the above values are guaranteed, and bear no relation to the book value of the shares. These certificates thus contain conflicting conditions, and it is uncertain how much a member would receive under them. (See page 8, Morse.) There are about ten thousand of these shares in force. Another form of contract, used only in the state of Maine, guarantees $QQ per share after payments have been made for sixty months, (see page 8, Morse), of which about ten thousand shares are in force. A few contracts are in force, not exceeding fifty shares, which provide for the re-payment of the amount paid in on de- mand, with six per cent, interest. On these contracts the mem- ber paid an admission fee of II, which cannot be withdrawn. Other contracts provide that the members may withdraw the amount paid in by them, at the expiration of one year, and at the expiration of three years, less expenses, fines, and losses, if any, which deductions were not provided for in the other contracts mentioned. It is possible for holders of these three and four year con- tracts, and the guaranteed $<^6 withdrawal contract (see Maine contract, marked " H,") to demand of the association more money than it has received ; and a liability is thus estab- lished which, with the large number of shares of this class of certificates in force, must be a constant menace to the association. The seven and eight year contracts provide that after two years a member may withdraw the value of shares together with six per cent, interest ; and also in case of default in payments a member's shares may be declared forfeited, in which case he shall be entitled to receive all moneys paid in by him on said shares, less fines, and his proportion of losses and expenses. It has been the practice of the asso- ciation to pay withdrawing members on these shares the amount paid by them, with interest, without any deduction for expenses ; and the question arises whether the practice of the association in this respect has not placed a construc- tion upon the conditions of the contract regulating with- drawal that will be binding upon them. These contracts of the association which provide for the payment of a fixed amount at a certain time, without pro- viding for the deduction of expenses or losses, are beyond the power of the association to fulfil, and all such payments have been made at a loss. It is not clear that even theore- tically the association would have been able to comply with these methods of business without loss ; and as they destroy the idea of mutuality between the members, the question arises. Are they valid contracts? Pending the present examination by the commissioners, the Association has voted to re-organize its business and to make no payments to withdrawing members beyond the actual value of their shares as shown at the time of such withdrawal, notwithstanding any guarantee on their part of a fixed withdrawal value or promise to pay the same. PAID-UP STOCK. In order to obtain a more rapid accumulation of money upon which to do business than the instalment shares will produce, the Association has made other contracts in the form of full-paid or part-paid stock. They have in force about $5,000 of fully-paid stock bearing 10 per cent, interest, and also about 118,000 of stock upon which $100 has been paid, known as half-paid stock, bearing 8 per cent, interest per annum upon the amount paid in, and which participates in the full profits until such stock stands at its par value of $200, when it may be withdrawn, and the sum of $200 will be paid to the holder. They have also stock at 6 per cent., 7 per cent., and 8 per cent, interest which participates in the piofits above the agreed interest rate if allowed to remain for a period exceeding five years. Of this stock there is about $300,000 in force. There is also $114,000 of fully participating stock, upon which the holder receives his pro rata share of the earnings of the Association, which, how- ever, is guaranteed to not be less than 6 per cent, per annum. (See pages 9 and 10, Morse). There is also a small amount of trustee stock bearing 6 per cent, interest, for the security of which mortgages are held in trust by the Continental Trust Co. of New York ; and also stock bearing 6 per cent, and 7 per cent, interest which does not participate in the profits of the Association. This latter stock is simply a note of the Association for so much money borrowed by it, and amounts to about $54,000. >' 8 There is another class called instalment shares, providing for instalment payments of i20 each. This is nothing more than paid-up stock, and is an evasion to call it otherwise. Most of this paid-up stock is issued with the agreement that the money paid may be withdrawn by the holder after two and three years, and some of it at any time on demand ; but there is no provision for the deduction of expenses or losses. It is against the plan of building and loan associations that capitalists, under pretense of philanthropy or any other ground, should be allowed to invest their money at a greater rate of interest than could be obtained through the ordinary channels of investment ; and while it is claimed by the Association, and supported by authorities upon building and loan association law, that they have the right to issue paid- up stock, and that the holders are partners in the Association with the instalment shareholders, it may be questionable whether under the limitation of its charter an unequal share of the profits can be given to the holders of these classes of paid-up stock. At the present time only two forms of paid-up stock are issued, namely : the trustee stock and the straight fully-paid $100 par value stock, bearing 6 per cent, interest, of which about $30,000 has been issued. (See pp. 9, 10, 11, and 50 Morse.) MORTGAGES. The money thus obtained by the Association is invested by it in loans to its members upon a pledge of shares, which must be owned by them, of a par value equaling the total loan, and upon which payments must have been made for six months, and a mortgage of such real estate as may be approved by the Association. In building and loan associations it was the theory that all shareholders would at some period become borrowers; and as the bulk of the profits are derived from the borrow- ing members, an undue proportion of investors throws a dis- proportionate burden upon the members for whose benefit building and loan associations are designed. It appears that at the present time in this association the shareholders number 18,000, and with a total number of shares outstand- ing of 90,000, while the number of borrowers is but 1,700, representing 12,650 shares. The care with which the mortgage security is examined by the Association before making a loan is, and with a business extending over the whole country from Maine to Texas must necessarily be, superficial ; and great opportunity is afforded to unscrupulous persons to deceive the Associa- tion as to the character of the real estate pledged for the loan. Reliance is placed upon the reports of the local sub- agents, who are interested to the extent of fees and com- missions to make the loan, and also upon the reports of the local members, who may be careless in their replies, or in- terested to obtain loans themselves, and who expect equally favorable reports from their associates. The safeguards provided by the rules of the Association are only safe-guards when honestly administered ; and too often the application of the rules is left to the borrowers themselves. For in- stance, — in the city of Rochester, N. Y., there has been loaned $3«8,539.88 upon the representations or solicitations of the agents and members in that locality, when only $5,000 stood to the credit of the whole membership in that city upon the books of the Association and all but 442 shares are in default. Notwithstanding which, a loan was made within the past twelve months of $16,000, |3,000 being ad- vanced by the Association, together with the interest upon the first mortgage held by the Mutual Life Insurance Co., for $13,000, upon property which the inspector of the Asso- ciation now reports is insufficient to pay the first mortgage, and the member after one month's payment went into in- solvency. The bank commissioners of Massachusetts in their report of 1895 point out the danger of too wide a field of invest- ment by co-operative banks, and say that if the investments cannot be made in secure loans on property in the city where the bank is located, its idle capital should be elimi- nated. Where a co-operative bank has to invest its funds otherwise, it has outgrown its usefulness, and is encroach- ing upon the business of the savings banks. An instalment mortgage is made by the borrower pro- viding for the monthly payment of his dues upon the stock pledged and of the monthly payments of interest upon the loan at the rate of 6 per cent, or $1 for each $200 loaned, and also of a premium upon each $200 loaned varying from 50 cents, to $1 a month, until the payments of dues together with the profits of the Association shall mature the shares pledged, and thus cancel the indebted- 10 11 ness. There have been some loans made upon a different rate of premium than the above, and some loans made upon a gross premium, which was deducted from the face of the loan at the time it was made. GROSS PREMIUMS. The gross premiums thus received by the Association have amounted to $107,382.60 ; but this plan of gross premiums has not been made use of for some time. Although the contracts contain no provision for refunding to the bor- rower any portion of the gross premium in case he should pay the loan before the maturity of his shares, it has been the practice to refund a proportionate part of the gross premium ; and in certain states where they do business it is understood that they are compelled to do so by law. As, however, the total premium received has been made use of in apportioning profits to the members, the re-payment of any part to one is a loss to the others. Some f 15,000 has thus been refunded ; and the question arises how this loss should be provided for — whether it should be charged to the members' capital dues, deducted from the surplus, or made good from the $100,000 fund established for the payment of liabilities of the Association. FIRST MORTGAGES. To avail themselves of the largest earning capacity of their capital possible, the association has adopted a plan of taking from the borrower a first mortgage upon his property of from one third to three fourths of the amount loaned to him, and of selling this mortgage for its face with their guaranty of its payment, or of obtaining some third party to take the first mortgage at the time the business is trans- acted, and only advancing in cash to the borrower the difference between the amount of the first mortgage and the amount the member desires to borrow, entering into an agreement with the member that if he will promptly fulfil his contract of monthly payments it will assume and take care of the first mortgage for him when it becomes due, as well as the interest upon it. By this means, on a loan of $1,000 the investment is but $300, and it receives from the borrower interest and premium amounting to 12 per cent, per annum upon $1,000, and it pays to the holder of the first mortgage of $700 interest at the rate of from 5 per cent, to 6 per cent, per annum, thus making a profit upon its investments of at least 26 per cent, per annum, as well as receiving $60 a year upon the principle. (See pages 2 to 7, Morse.) In some instances the first mortgage has already been placed by the borrower upon his property previous to his becoming a member, and the Association has no labor in placing it. Most of the first mortgages made at the time the member borrows of the Association run for five years, and where they average $600 or $700 on $1,000, the payments by the bor- rower at the end of five years are insufficient to meet them. (See page 6, Morse.) There are $114,450 of first mort- gages payable on demand. The statement of the assets of the Association will show that of a total mortgage investment of $2,530,140.64 there have been $1,361,604.67 of first mortgages sold or placed in the hands of third parties, leaving a large portion of the assets of the Association invested only in equities. While such a plan is calculated to produce large returns for the money invested, it introduces an element of great danger as regards the solvency of the institution. If from any dis- turbing cause the members should delay or default in their regular payments of dues, interest and premium, the Asso- ciation would be without means of paying the interest upon the first mortgages or to meet them as they became due, unless the Association obtained funds from new subscribers for shares. Any default in the payment of interest upon the first mortgages would be likely, where a general state of distrust existed in regard to the institution, to cause im- mediate foreclosures ; and it is very certain from the char- acter of the property mortgaged by its members that the equities would be of little or no value. SHARE LOANS. The Association also makes loans upon the security of its shares, obtaining 6 per cent, interest and 6 per cent, prem- ium from the borrower. The books of the Association show $14,066 loaned to members upon pledge of their shares. Several of these loans are in excess of the book value of the shares pledged. As the value of shares is liable to be reduced at any time by reason of losses, this se- curity is of questionable value. i I 12 FINES. If a member does not promptly make the payments provided for in his"con tracts, he is fined at the rate of 5 per cent, per month on each dollar in arrears of dues, interest and premium. For instance, if a member is three months in arrears in his payments, he owes 5 cents on every dollar for the first month, and 10 cents on everv dollar for the second month, and 15 cents on every dollar for the third month, or 30 cents for three months, and so on, which, if continued indefinitely, operates to lapse or wipe out a member's payments. The commis- sioners have been of the opinion that the statute of New Hampshire which governs local associations, limiting the fines to a period of six months from the time of the first default, gives ample latitude in this direction ; and at the conclusion of the examination in 1895 they directed that such a change be made, which the Association assented to and promised to carry out ; but the only change that has been made has been to limit the fines to a six months period upon such shares as may hereafter be subscribed for. The Association has also received about $11,000 from lapses which ceased about January, 1891. No account is now lapsed except as the fines may exhaust the total to a member's credit. (See page 9, Morse.) APPORTIONMENT OF PROFITS. It has been the practice of the Association at semi-annual periods to apportion its entire profits, but not to credit such apportionment to the members' accounts. The apportion- ment at any period is used to ascertain the book value of the members' shares until the next apportionment, when the entire profits from the beginning are reapportioned among the shares then in force. Up to October 24, 1894, these apportionments were made to shares of every age. It was then voted by the directors that the profits earned during the first three years of the life of the instalment shares and the profits of the first $36 paid upon the fully- paid or paid-up shares should not be apportioned thereto, thus diverting these profits for the benefit of the older shares, so maturing certain of the 8 per cent, half-paid stock, to which particular reference will be made hereafter. (See pages 10, et seq., Morse.) It is claimed by the Association that the authority for 13 thus depiiving shares under three years old of the earnings is contained in a clause of the member's contract wherein he agrees that in any distribution of the profits or surplus the principles and methods which may be adopted by the Association for such distribution shall be ratified and ac- cepted by him. Such a distribution must, however, be a legal one, for if illegal, no ratification of it by the member v^ill be binding upon him. It seems to the commissioners the true construction of this clause would be that there must be an equitable and pro rata distribution of the profits or surplus, as provided for in the charter, among all the mem- bers, but that the plan of making this equal division might be determined by the directors from time to time. If such a condition gives the dii'ectors the right to deprive certain members of their share of the profits upon a division of its surplus, such a condition is certainly in conflict with its charter. Whatever may have been the right heretofore of this Association to issue shares of varying conditions among its members, or to apportion its profits to one member and not to another, it seems to have obtained the right from the legislature by an act approved March 28, 1895, to hereafter issue shares entitled only to such benefits, and to distribute its surplus and profits, as it may from time to time deter- mine. We take the liberty of citing this act in full : Any existing corporation organized under the laws of this state engaged in the business of a building and loan association under a special charter, may issue shares entitled to only such benefits and distribution of surplus and profits, and with such conditions for re- tiring the same, as may be fixed by the Association, provided all the conditions are plainly stated upon the certificates of such shares. Under this law it may deprive certain shares from any distribution of the profits, providing the conditions are plainly stated upon the certificates. Who is to judge what is or what is not plain to the comprehension of the laboring man, or to persons of limited education, with whom such Associations most largely deal, is not pointed out. Such power given to an Association of this character is liable to great abuse ; and the commissioners respectfully urge that Your Excellency will call the attention of the next legisla- ture to this matter. The plans adopted for the apportionment and reapportion- !! I \ 14 ment of profits is fundamentally wrong, and works injustice to its members. The statute of New Hampshire which gov- erns local building associations defines a safe rule to follow, — that the interest, premiums, fines, and profits received by the corporation, less losses and the amount paid for the necessary expenses of the business, shall be equitably dis- tributed among the shares and added to the dues paid by the shareholders at least once a year. (Pub. Sts., chap. 166, sect. 11.) LOSSES. There is a condition in many of the contracts with the members that losses may be charged against dues paid in by them. In September, 1895 (see page 14, Morse), a by- law was passed, and also incorporated in the conditions of the contracts thereafter issued, that losses occurring as the result of a loan to a member of a local branch (into which the Association had divided itself) shall be charged to the members of that branch ; but previous to this the losses were charged pro rata against all shares existing at the time of such loss. Up to July, 1895, no losses had been charged against the members' accounts, though there had been losses by reason of certain contracts before mentioned, pro- viding for a fixed withdrawal value of a larger sum than the Association had received. This, together with expenses not provided for in the contracts, have been from time to time deducted from the surplus at the times of its apportionment. At the joint examination of the Association by the com- missioners of several states in June last, the claim was made by the Association that it had the right to charge losses and expenses not provided for against the capital dues, instead of against the accumulated profits. This claim was submitted to the attorney general of New Hampshire for his opinion, and he decided that the contracts gave such right. This practice received much criticism from the com- missioners of other states, who were in some instances sup- ported by elaborate opinions from the law officers of their states and othei-s competent to pass upon the question. They asserted that this principle, if followed, would make it possible for the Association receiving but $25,000 in profit accretions to lose $50,000, and the loss being charged against the dues capital to declare and pay out its $25,000 in dividends, while the business as a whole would show a 16 net loss of $25,000, — that there could be no surplus until losses were deducted from the profits, and therefore no un- distributed profits where there were outstanding losses not charged off ; that the claim of the Association was in op- position to the well known principle of law that construc- tion is to be avoided which leads to an absurdity, and that it was repugnant to the universal practice applied to all finan- cial and mutual corporations. We understand, however, that the opinion of tfie attorney general of New Hampshire was confined solely to the question whether under certain contracts with the members these contracts gave the right to charge off losses against capital dues, which being a plain condition in the contract could not well be answered other- and that the question of whether such contracts were wise within the scope of the authority of the Association to exe- cute was not raised or considered. 4 EXPENSES. Expenses have been provided for under conditions in the members' contracts more or less definite and plain that the expenses of the Association, exclusive of legal expenses, may equal but not exceed the dues paid in by them for the first three months and the seventh, eighth, and ninth months of the first year of the life of their shares, and the dues for the first two months of each year thereafter until the shares mature. The paid-up stock certificates, with the exception of about $12,000 of participating stock, do not seem to provide for the deduction of any portion for expenses, and it is certain that the Association would have no right to deduct from those shareholders' accounts more than the actual expense incurred. The money thus accumulated has been known as the expense fund. Under the conditions in the contracts for the limitation of the expenses of the Association, the question arises as to the right of its officers to involve the members in any other regular and foreseen expenses, such as the payment of com- missions for the sale or placing of first mortgages, which have been paid by it to its agents at a rate varying from 3 per cent, to 5 per cent, on the face of the mortgages, and have amounted to the sum of $55,161.56, and taxes and licenses paid for doing business in other states, or expenses f 16 17 not strictly in their nature legal expenses of the corporation itself; and if such right did not exist, whether the losses so occasioned should be made up from the $100,000 guaranty fund or from some other source. AGENCY COMPANY. On the 3d of October, 1891, a contract was made with a corporation organized under the laws of this state known as the Guaranty Agency Company, with a capital of $20,- 000, by which contract it was employed by the Association to solicit business for it, to establish and organize for it local agencies, solicitors, and representatives, and to perform such other reasonable services for the promotion of the business as might from time to time be required. For this service the contract provided that the Agency Company should receive all the dues paid on account of each share in the Asso- ciation during the first three and the seventh, eighth, and ninth months of the life of each share, and $2 per share for the fiist two months of each year thereafter, and an amount equal to 16§ per cent, upon shares wholly or partially paid up in cash, except that upon the so-called eight-year shares the entire payments should not exceed $18 per share. The Agency Company agreed to pay all the expenses of the As- sociation in the management of its business, including ad- vertising, printing, and the amount paid to agents, solicitors, and representatives by way of commissions, excepting the legal expenses and commissions for the sale of securities, which were to be paid by the Association. This contract further provided that all agreements and contracts which the Agency Company should solicit or pro- cure to be made with other agents, solicitors, and represen- tatives, should be executed by the Association, and the con- tract was to continue in force for a period of fifty years, except that it might be terminated at the option of the Association if in any one year the Association should not receive applications for at least one million dollars of new shares reckoned at par value. The stockholders of the Agency Company consisted of G. Percival Stewart, and four others who were nominal share- holders. A question arises whether the officers of the Asso- ciation in making this contract were not dealing with them- selves, and whether it is within the power of the Association under its charter, to make a contract with a third party whereby a fixed portion of its income is taken and an un- certain and perhaps unnecessary amount of profits diverted from its members. And, further, whether it is within its power to absorb under any guise to the extreme limit the sums which the contracts permit to be taken, unless they are absolutely needed for expenses. Under the charter, any excess of the expense fund over the actual legitimate disbursements of the Association belong to the members. Under this contract with the Guaranty Agency Company it has been the practice for the officers of the Association in the regular course of business to receive all money paid in on account of the expense fund ; pay the salaries and running expenses provided for in the contract except a small amount disbursed by its treasurer ; and from time to time turn over to the treasurer of the Agency Company the balance re- maining, which between November 30, 1891, and May 18, 1895, amounted to $67,456.33. The regular salaries paid by the Agency Company to the officers of the Association amount to $14,200 per annum. The average weekly pay roll for clerk hire at this time is about $250. The Association under the provisions of the contract with the Agency Company has executed contracts with some twelve or more general agents in different parts of the country, who have general charge of the business of obtaining members and negotiating loans in their respect- tive sections. Under them were appointed sub-agents, and numerous local agents, who are all paid by the general agents. These contracts do not materially vary. The contract with Messrs. Scarborough & Hicks, general agents for New Hamp- shire and Vermont, provided that they should receive 80 per cent, of the first and second months' dues actually collected and paid in or deposited upon shares secured in their terri- tory, excepting such shares as might personally be sold by officers of the Association with their consent. For the next tenth month's dues, 20 per cent. On the monthly dues there- after, 5 per cent. For all fully paid shares sold by them, 7i per cent. flat. And in addition 2 per cent, upon all col- lections. In this contract there is a cash bonus promised of $1,000 as soon as in any one month the shares sold in their territory amount to $5,000 ; an additional bonus of $1,000 when they shall amount to $10,000, and another bonus of $1,000 as soon as they shall amount to $15,000, the bonus be- ing offered to stimulate and encourage the agents in procur- 2 ! «v i #» 18 ing a large amount of new business. (See page 29, Morse.) All the contracts with general agents examined are perpetual. In case of the agent's death or the discontinuance of his agency, all commissions and renewals due under his con- tract, so long as the shares are in force and the dues paid, are to be paid to his heirs. A contract with Mr. E. E. Burlingame, general agent for New York, provided for a commission upon the first three months' dues of 100 per cent, for the first three years of his contract,— after that time, 80 per cent. On the next three months' dues no commissions are paid. On the seventh month's dues, 60 per cent. On the eighth month's dues, 70 per cent. On the ninth month's dues, 45 per cent. On each of the first two months' dues of each and every year after the first year of the life of the share, 76 per cent. On participating fully-paid shares, 7i per cent. It has been generally believed that these contracts with the general agents have been very profitable to them. A contract made with Mr. F. A. Palmer on May 14, 1892, was recently cancelled by the Association, and he was paid $10,000 as the value of the future commissions upon the busi- ness already secured by him. The agents whom the com- missioners have been able to examine, notably Mr. H. (t. Scarborough, Mr. Burlingame, and Mr. P. B. Nettleton whose contract covers the state of New Jersey, testify that the profits of the business to themselves have not been excessive, large sums having been paid by them for salaries and commissions to their sub-agents. It appears from the books of the Association, however, that enor- mous sums have been paid for commissions. In the year 1895, 138,094.21 was paid to E. E. Burlingame, f26,487.8b to F. A. Palmer, and $19,076.15 to Scarborough & Hicks, as commissions on new business, and to other agents large sums; and in addition to this, 155,161.56 has been paid to agents as commissions for negotiating first mortgages. On the 27th of May, 1895, the arrangement with the Guaranty Agency Company was discontinued upon pay- ment by the Association to it of 1,000 shares of common stock, of the par value of $100, of the Permanent Guaranty Shareholders' Fund, leaving, however, the contracts exe- cuted by the Association with the general agents still in force, and the rates of commission therein provided, obliga- tory upon the Association to pay. A question arises whether 19 such contracts were legal and within the scope of the author- ity of the Association to execute, and whether the future perpetual commissions should not be assumed and paid by the Agency Company. The evidence derived from the contracts of the Associa- tion with the Guaranty Agency Company, and with its general agents, votes passed by the directors and amend- ments of its by-laws, together with other facts which have come to the knowledge of the commissioners, point to the conclusion that, whether or not it was necessary, in order to carry out the scheme of the Association, that it should obtain a continued increase of membership, it at least dem- onstrates that they were desirous of so doing. A provision in the contract with the Agency Company, that at least one million dollars of new shares should be obtained each year, with like provisions in the contracts with the general agents — in that of Mr. Burlingame that he should furnish 10,000 new shares each year ; Mr. Nettleton, 2,000 applica- tions ; Mr. Woodruff, whose territory covers the state of Texas, 2,000 new shares ; Mr. Crum, whose territoiy covers the state of Colorado, 1,000 applications — and so on in les- ser amounts among the other general agents, with the incentive of large commissions, and the suspension of a by- law designed for the protection of the Association against borrowers, to the effect that payments upon shares must be made for six months previous to obtaining a loan, prove this assertion, although Mr. G. P. Stewart, the former president of the Company, asserts that if the funds of the members already secured can be loaned, the shares can be matured as rapidly without any new members being obtained. It appears, from the testimony of such general agents as the commissioners were able to secure, that upon being questioned in regard to the terms and conditions of the con- tracts made, they were unable to clearly or accurately define them, and a strong suspicion is forced upon the commis- sioners that agents do not accurately or sufficiently explain to subscribers the conditions upon which shares are taken. (See page 13, H. G. Scarborough; page 23, E. E. Burlin- game ; page 6, F. B. Nettleton.) An example of this appears in inquiries made of several general agents in regard to the amount a member was enti- tled to withdraw, under the conditions of the contracts made by the Association since October, 1894. Section 12 20 of the conditions of these contracts, provides that 10 per cent, of the net earnings of the loan fund shall be carried to the guarantee fund of the Association, until such fund shall equal 10 per cent, of the liability of the Association to its members ; also, that no dividends shall be allowed for the first three years. Section 13 provides that, whenever the board of directors find that the funds of the Association are not de- manded by borrowers offering safe and profitable investments, they may offer investing shareholders as an inducement to withdraw, all money paid in by them, with the net profits thereon, less expenses to date. If this offer fails to reduce the income, or investment fund, then the directors may call in or redeem, upon the same terms, the requisite number of shares. Upon being asked to state how much money would be paid to a member whose shares were 36 months old, upon their being called in, the agents were unable to state, or an- swered incorrectly. An examination of the contract shows that a member having made 36 payments, the expenses would amount to $10, with a possible addition of a further sum for legal expenses, as provided for in section 14 ; but, as no dividends were to be allowed the members for the first three years, there were no profits to offset the deduc- tion of the expenses, and the member could be forced out without receiving the slightest benefit or return for his monev, by paying him only $26 of the 136 contributed by him. " If these conditions were not clearly understood by the agents, they certainly were not understood by the investor. • u 4. + The commissioners have been able to examine, but to a limited extent, the literature disseminated by the Associa- tion and made use of by the agents in securing new mem- bers. In a pamphlet containing the advertisements and prospectus of the Company, an illustration of the profit to an investor taking 10 shares is given as follows : Value of stock at maturity .... $2,000 Monthly dues, $1 per share, Ten dollars per month for 96 months . • ^^^ Making a profit of $1,040 Note. Whatever time the stock matures less than estimated, profits will be proportionately larger. While there is no distinct promise that the Association 21 will mature its shares in eight years, the investor is led to infer that it can do so, or even better. It is clear that the methods of the Association, as above referred to, have placed the management of its affairs entirely in the hands of persons who benefit from the com- missions received for new members, regardless of whether they are persons likely to continue their payments for more than the first two or three months, or to be of any substan- tial benefit to the Association, and from the commissions for placing mortgages, regardless of whether the property is a suflScient security for the loan. In instances widely sepa- rate, in New York, Texas, and Colorado, it appears that extreme recklessness has been practised in loaning money to persons who were deeply in debt, or upon property having fictitious values, thus throwing a suspicion upon the character of all its mortgage security. When the contract with the Guaranty Agency Company was cancelled, an earnest effort was made by Mr. Stewart to stimulate and enlarge the growth of the Association by providing for a guaranty fund. A meeting was called, and the by-laws amended to provide for a permanent guaranty shareholders' fund, not exceeding f 200,000 ; 1100,000 of preferred shares were to be issued for cash, and $100,000 of common shares issued for the purpose of paying for the Guaranty Agency Company's contract. At that meeting the following preamble and resolution were adopted : Whereas, The unlooked-for growth of the business of the Asso- ciation has produced results requiring changes and modifications of the contract of October 3, 1891, between the Association and its general agent, and the further growth of the Association may be impeded by the existence of a valid contract placing its entire busi- ness in the charge of a single agent, and contention having arisen as to the amounts now due the agent under this contract, and it is therefore deemed desirable to acquire the rights of such agent for the sole benefit of the Association, and Whereas, By said contract it was provided tliat in the event of a discontinuance of the Agency the agents should continue to re- ceive all commissions and renewals on business written while the contract should be in force, and the present value of the agent's rights to the commissions and renewals amount to a very large sum, estimated at more than one hundred thousand dollars, and is con- stantly increasing, and Whereas, The agent has consented to surrender said contract 22 and all its rights thereunder, together mth all claims against the Association, and accept in payment therefor $100,000 in the com- mon shares of the Permanent Guaranty Shareholders' Fund, this day established by the by-laws : Resolved, That the Association will purchase all the rights of the Guaranty Agency Company, under said contract, together with all its claims against the Association, and in full payment therefor will issue to such agent, or its stockholders, common shares in the Per- manent Guaranty Shareholders' Fund to the amount of $100,000, the certificates of such common shares to contain the following con- ditions: (See certificate marked Q.) The 1100,000 preferred stock was to be maintained as a guaranty fund for the payment of all the legal liabilities of the Association, though its availability for this purpose was limited to the case of an insufficiency of assets upon a gene- ral distribution of the property of the Association among its members. This stock was to be invested with the other capital of the Association, and was to participate in the earnings, and upon which there was to be a dividend not exceeding 8 per cent, per annum. The earnings of this preferred stock, together with all moneys received by the Association from the expense fund before described, which was formerly taken by the Guaranty Agency Company, were to be credited to this guaranty fund. Out of said fund, the entire expenses of the Association were to be paid, with certain limitations as to the amount, from the balance the 8 per cent, dividend was to be paid, and the remainder then paid to the common shareholders. Mr. G. P. Stewart at once presented a subscription for the entire preferred stock of this fund, which was accepted. In order to make payment of this fund, he gave his promissory note to the As^sociation for 140.000, payable upon demand, at 6 per cent, interest, with half-paid 8 per cent, stock of the Association as security. He surrendered $14,814 of mortgages, which he had purchased from the Association, and which it has been repre- sented the Association was liable to pay under its guarantee. He also surrendered $15,252 of trustee stock, above de- scribed, making in all the sum of 170,066 obtained from the Association. These transactions received much adverse criticism from the commissioners of various states at the general examination made by them in the summer of 1895 ; and it appearing to this board that the advertised guarantee for the payment of the liabilities of the Association was 28 misleading and elusive, they directed, and it was promised, that this guaranty fund should be withdrawn, Mr. Stewart agreeing to obtain releases from all members of the Asso- ciation who had subscribed for shares since its creation. No such releases have been presented to the commissioners, and the $100,000 still remains as a part of the assets, though its feature as a guaranty fund for the payment of the legal liabilities of the Association has been eliminated, by vote of the directors. On the 3d of October, 1895, Mr. Stewart withdrew from the Association $50,000 upon his 250 shares of 8 per cent, stock, as shown hereafter, which was cancelled, and took up his note of $40,000, paying in addition to the interest a bonus or premium of 6 per cent. The substitute for the Guaranty Agency Company, which took the form of the Permanent Shareholders' Fund of $200,000, still exists, and so far as the diversion of the funds belonging to the members, and the absorption of any surplus over meeting the actual expenses of the Association, applies to this with the same force that it applied to the Agency Company. It appears that the common stock of this fund is divided between two of the principal officers of the Association, Mr. G. Percival Stewart owning 750 shares, and Mr. Philip Car- penter, the general counsel of the Association, the remaining, 250 shares ; and that Mr. Stewart is the owner of 971 shares of the preferred stock of the $100,000, upon which 8 percent, is paid annually. There has been credited to this Perma- nent Shareholders' Fund, as appears by the books of the Association, the sum of $10,933.33, from May 18, 1895, to January 17, 1896, which was derived from that portion of the dues set aside for expenses. G. PERCIVAL STEWART. Reference has been made to the maturing of certain shares under the system of apportioning profits adopted by the As- sociation in October, 1894. On December 5, 1889, a certificate for 250 shares in the building and loan fund class, July, series 1889, was issued to Mr. Stewart. This is the 8 per cent., half-paid stock described above. The ledger of members' accounts, num- bered 1 to 2,500, shows the transaction as follows : 24 I Account No. 1,050, G. Percival Stewart, Manchester, N. H. Half-paid. 1889. Dr. Cr. Total. July. $4,166.67. $25,000. $20,833.33. It was explained that Mr. Stewart deducted from the price of the shares the commissions and amount that would go to the expense fund, which at that time belonged to him under a contract with the Association similar to the contract with the Guaranty Agency Company, leaving the sum of 120,833.33 net to the Association. At some time the word " July " in the certificate was altered to the word " Jan'y," thereby making these shares six months older than it first appeared by the certificate or by the ledger. In January, 1893, this certificate was broken up into a number of certificates of smaller denomination, and upon a new ledger the transaction was placed under date of Janu- ary 1, 1889. It will be seen by a following statement that these shares would not have matured in July, 1895, if they had commenced at the date of the issue of the certificate, December 5, 1889, nor if they had began July 1, 1889. On this stock he regularly received 8 per cent, interest upon $25,000 for six and one half years, ending July 1, 1895. The method of apportioning profits adopted in October, 1894, was modified in January, 1895, to the effect that prof- its earned from the first three years of the life of install- ment shares were not to be apportioned thereto, nor should fully-paid or paid-up shares share beyond the dividend guaranteed, except upon a corresponding basis. On July 8, 1895, an apportionment of the surplus of the Association was directed to be made by the secretary as of July 1, 1895, under the above method adopted by the directors. In mak- ing this apportionment the book surplus of the Association at that date was taken. This surplus had been increased in 1894 by the sum of $5,411.50, previously credited to a guar- anty fund, for the reason that it had originally been taken from lapsed accounts, making the sum of $200,742.16. To this was added an item of $23,000, being about 50 per cent, of the amount of discounts on mortgages sold. This sum was derived from the theory that sums paid as commissions for placing first mortgages which were to run for a term of years should not all be charged off at the time of payment. The diversion of this surplus excluded installment shares un- der three years of age, and paid-up shares upon a correspond- 25 ing basis of eighteen months, maturing the 8 per cent, stock held by Mr. Stewart, and ten shares held by other individuals, which have not been paid. The following statement shows the manner of the apportionment of Mr. Stewart's shares ; Cr. Amount of net capital paid in . . . . . $20,833.33 Interest on capital for five years (dividend being de- ferred 1^ years) at 29 per cent., compounded monthly ........ 66,436.44 Dr. Cash dividends paid .... Interest on $1,000 at 29 per cent., com- pounded monthly for 72 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 66 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 60 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 54 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 48 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 42 months . Interest on $1,000 at 29 ])er cent., com- pounded monthly for 36 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 30 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 24 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 18 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 12 months . Interest on $1,000 at 29 per cent., com- pounded monthly for 6 months . Less percentage of losses paid . Less capital paid in . Apportioned profits withdrawn . Cash dividends withdrawn as above $87,269.77 $13,000.00 4,579.96 3,834.19 3,188.96 2,629.85 2,145.37 1,725.58 1,361.81 1,046.58 773.41 536.78 331.72 154.01 $35,308.22 • • $51,961.55 3,710.05 • • $48,251.50 20,833.33 • • $27,418.17 $13,000.00 > 26 27 After the examination by the commissioners in June, 1895, certain losses were charged off by the Association, a proportionate part of which was charged to Stewart's shares. If these losses were to be deducted at the time of the appor- tionment, it will be seen by the above statement that the shares do not mature to the par value of $50,000 ; but, not- withstanding this, on October 3, 1895, Mr. Stewart with- drew $48,251.50. It appears by the testimony of the secretary (see page 47, Morse) that if the apportionment of the surplus had been made upon all the shares in force June, 1895, that this half-paid 8 per cent, stock would not have been matured. No other shares but those belonging to the then president, Mr. G. P. Stewart, were withdrawn under this apportion- ment. On October 28, 1895, the method of apportioning the profits was again changed, so that a distribution should be had to all the shares of the members from the date of their issue. Mr. Stewart and Mr. Morse, the secretary, in their testi- mony before the bank commissioners February 4, 1896, gave as the reason for and in justification of the apportion- ment of the profits derived from shares under three years old to those above that age that the deposits made in sev- eral states, to enable the Association to do business there, which deposits amount to $200,000, inflict a burden upon the older shareholders from whose funds these deposits were derived, because this money produced but 4i per cent, in- terest, while the other funds of the Association were pro- ducing a much larger rate. The insufficiency of this reason is apparent when it is considered, in the first instance, that the deposits were made for the sole purpose of obtaining the right to do business in these states, and that the differ- ence in the rate of earnings was off-set by the profits from the increased business obtained. (See page 8, Stewart.) Further, the securities deposited in Maine, amounting to $67,987.90, in Vermont amounting to $2,100, and in New Jersey amounting to $30,000, were made for the security of the shareholders in those states respectively ; and in the case of the Maine deposit it was given as a reason for ex- tending the estimated maturity of the shares from 8 to 10 years, so that any loss of earnings because of these deposits should have been borne by those members for whose bene- fit they were made. A deposit of $100,000 was made in \ New York, but whether this was solely for the benefit of the members who were citizens of that state, or for the benefit of all shareholders of the Association, is disputed. But, waiving these suggestions, it appears that by the ap- portionment of profits under which this stock was matured, $503,899 was the amount of capital diverted, or to which no profits were apportioned. If this money was paid in in regular amounts each month for the three years time, the Association would have had the use of the $503,899 for a period of 9 months. The state deposits of $200,000 had been made for two years. If any arbitrary percentage of earnings is adopted, — for instance 20 per cent., which was the amount of the earnings as shown by their books at the last previous apportionment of the profits upon all the shares as testified to by the secretary, Mr. Morse, — and if this $200,000 earned but 4i per cent., the loss to the Asso- ciation in profits on this deposit would be 15^ per cent, per annum, or, for the two years, $62,000. The earnings, how- ever, of the $503,899 for 9 months at the same rate of in- terest would be $75,584, or a gain to the shareholders over three years of age of $13,584, by reason of this method of apportionment. At a meeting of the directors held on January 17, 1896, the president was directed to employ a certain building and loan expert to make an examination of its business and to report, among other things, *' whether the methods hereto- fore adopted, of apportioning the profits to the various classes of shareholders are fair and equitable for all mem- bers and should be continued, and in what respects, if any, the same should be modified." In reply, the expert wrote : " I am firmly of the opinion that the division of profits should not be based on deferring dividends on any class of stock." From this state of facts the question arises whether the half-paid 8 per cent, stock was lawfully matured, and whether Mr. G. P. Stewart had the right to withdraw the par value of his shares in cash. The following is a financial statement as appears by the books of the Association January 7, 1896: \ 28 GRANITE STATE PROVIDENT ASSOCIATION. Statement of assets and liabilities, as shown by the books of the Association, January 7, 1896 : Assets. Mortgage loans .... Deposits with states : Vermont ..... Maine ..... New York New Jersey .... Loans on shares .... Notes receivable .... Guaranty fund .... Accounts receivable Real estate, acquired by foreclosure Office fixtures .... Accrued interest and premium Cash on hand, and in banks $2,100.00 67,987.90 100,000.00 30,000.00 LIABILITIES. Installment shares Advance fund .... Paid-up stock, .... Permanent shareholders' fund First mortgages sold, and assumed Due on uncompleted loans Due permanent shareholders' fund Surplus as per Association books : $806,837.94 28,354.35 488,781.51 100,000.00 1,391,654.67 8,719.29 7,932.61 Apportioned Undivided . Guaranty fund $157,215.04 44,295.70 28,765.53 $2,530,140.64 $200,087.90 14,066.00 12,190.40 6,500.00 66,598.30 99,897.09 6,274.06 68,339.98 58,462.27 $3,062,556.64 $2,832,280.37 $230,276.27 $3,062,556.64 29 ANALYSIS OF FINANCIAL STATEMENT.— MORTGAGE LOANS, $2,530,140.64. Real estate mortgages in possession of Association . Of this $77,576.32 represent first mortgages sold but not redeemed by the Association and their equities. Equities on real estate in possession of the Associa- tion, with " first mortgages sold "... First mortgages sold, and in hands of others . Of the above mortgages $114,450 are on demand, $53,580 are over due, and $155,885 will become due during the remainder of the year 1896. First mortgage, included in New York state de- posit, erroneously included in this item $741,279.82 419,956.15 1,361,604.67 8,000.00 $2,530,140.64 DEPOSITS WITH STATES, $200,087.90. Vermont : First mortgages, deposited with banking department . Maine — Deposit with state treasurer : Stock, Cocheco National Bank, Do- ver, N. H., par value . Stock, Traders' National Bank, Low- ell, Mass., par value . Bonds, Maine Central & E. & N. R'y., 4s, 1933 .... Bonds, Concord & Montreal, 4s, 1920 Bonds, Maine Central R'y, 4^s, lyzu ...•.• Interest coupons on last item . Certificate of deposit, Merchants' National Bank, Manchester Certificate of deposit, Franklin Na- tional Bank, New York Certificate of deposit, Portland Trust Company ..... Certificate of deposit, Portland Trust Company . . . . . $1,100.00 4,000.00 10,000.00 10,000.00 10,000.00 200.00 10,000.00 10,232.60 6,399.00 6,056.30 $2,100.00 $67,987.90 $70,087.90 / / 30 Brought forward. This deposit is made under the re- quirements of the Public Laws of Maine, 1891, chap. 79, sec. 2, which provides that an association shall not transact business in the state unless it shall first deposit with the state treas- urer $25,000, and a sum equal to 15 per cent, of the deposits made in such association by citizens of the state, to be held in trust by said treasurer for the protection and indenmity of the residents of the state, to be paid out or disposed of only on the order of some court of competent jurisdiction. New York — Deposit with Superintendent of Banks : Certificate of deposit. National Sav- ings Bank, Albany . . . Sl.OOO.OO First mortgages .... 99,000.00 $70,087.90 This deposit is made under the re- quirements of the General Laws of New York, chap. 37, sec. 14, and chap. 682 of the Laws of 1892, which provides that the deposit shall be held by the superintendent of banks "in trust as security for the depositors with and creditors of such corporation, and sub- ject to sale and transfer and to the disposal of the proceeds thereof by the superintendent only on the order of a court of competent jurisdiction." New Jersey — Deposited with banking department : First mortgages .... This deposit is made under the laws of New Jersey, 1890, chap. 251 , sec. 3, which requires every such corporation to deposit with the secretary of state such securities as they may prescribe, amounting to at least $30,000, which securities shall be held by the secre- tary of state in trust for the benefit of creditors of such corporation within this state. 100,000.00 30,000.00 $200,087.90 31 LOANS ON SHARES, $14,066. This item represents loans made by the Association on its own shares, ranging from $25 to $1,000. There are seventy-three loans in all, aggre- gating the above amount. On forty- six loans, aggregating $6,024, no in- terest has ever been paid ; and interest on the remainder is generally in de- fault. In several instances loans have been made in excess of book value of shares, such excess amounting to $823. In other cases fines charged against the shares have entirely closed them out as assets, under this item. NOTES RECEIVABLE,— $12,190.40. This item is made up as follows : Note of A. C. Garcia & Co., of New York, dated September 26, 1894, for six months, endorsed by C. S. Osborn and J. C. Moore, . The note was duly protested, and other efforts made to collect, in- volving costs of .... Joint note of O. B. Crum and F. B. Crum, dated June 8, 1893, for three years, endorsed by E. W. Lowrey and G. P. Stewart, . 1,000.00 Note of J. C. Moore, dated Novem- ber 22, 1894, on demand, with col- lateral, as follows : — Fifty shares Union Publishing Co.'s stock, par value, $5,000 ; note of Hali- fax Mills Co., dated April 26, 1893, for four months, for $5,000, endorsed by the New Hampshire Trust Co., which endorsement is protected by collateral described below. On this note $2,000 has been paid, leaving as collateral for tlie Moore note, $3,000, $14,066.00 $1,000.00 27.22 8,000.00 $10,027.22 .* 32 Brought forward^ This was given to the Association in payment of the Halifax Mills Compa- ny's note of $5,000, and $3,000 in cash, Moore leaving the Halifax Mills Company's note with the Association as collateral for his note. The $2,000 paid on the Halifax Mills Company's note is also a payment on the Moore note, therefore this item of assets is shown as $2,000 too large. Certificate of deposit, New Hampshire Trust Co. for $25,000, dated June 27, 1893, less office rents and payments applied of $22,- 836.82, leaving a balance due on this and protected by collateral as shown below, .... The New Hampshire Trust Com- pany, for its own debt of $2,163.18, and liability as endorser of the Hali- fax Mills Company's note (which the Association purchased from the Trust Company), deposited with the Associa- tion certain mortgages, notes with col- lateral, and an assignment of its equity in notes pledged for a debt, with Pear- main & Brooks of Boston. $10,027.22 2,163.18 $12,190.40 SECURITIES FOR GUARANTY FUND, $6,500. Notes of Moosehead Pulp & Paper Co., secured by first mortgage bonds of the same company, de- posited with New Hampshire Trust Co. ..... 100 shares of stock of the National Bank of the Commonwealth at Manchester, carried at 25 per cent, of par value These items are the only assets set aside for the guaranty fund, now amounting to $28,765.53, as shown in liabilities. $4,000 2,500 $6,500 I i 33 ACCOUNTS RECEIVABLE,— $66,598.30. In hands of agents and attorneys : Col- lections and advances for loans, not accounted for by proper vouchers $42,917.30 Included in this is $9,163.90 in hands of Denver agent, the amount of which is in dispute; also $24,775 sent to Texas agents to complete loans, for which the Associar tion has neither notes nor mortgages. National Bank, of Barre, Vt., collections, . 5,235.99 G. P. Stewart, personal . . • 412.60 New Hampshire Trust Co., deposit trusteed, 600.00 Clerk of Supreme Court, Hillsborough Co., deposit as tender on account of pending litigation, (paid to claimant by order of court,) .... 488.60 J. J. Wilmarth: Error in ledger account, offset in liabilities, "first mortgages sold," 600.00 Foreclosure costs, and repairs on real es- tate, to which title has not been per- fected 1,236.40 $51,490.89 Insurance paid : On real estate, . Advanced to members. On loans, since cancelled. Taxes paid : On real estate. Advanced to members, On accounts closed. State taxes : Maine, Kentucky, . X 6XwS^ • • • Michigan, . City of Richmond, Va., 3 $1,133.30 859.43 72.25 2,064.98 $4,034.20 1,063.04 9.53 5,106.77 $130.31 142.17 110.00 722.71 25.00 1,130.19 $59,792.83 34 Brought forward, UncoUectable accounts ; being sundry ac- counts of agents' shortage, collections attached, costs, etc.. Less journal cross entry. $59,792.83 6,872.47 $66,665.30 67.00 $66,598.30 REAL ESTATE,— $99,897.09. This item represents real estate acquired by foreclosure of mortgages, with ex- penses added, and payments from members substracted, as follows : Amount loaned, $107,000.00 Expenses added, .... 15,773.42 Total cost, $122,773.42 Less dues, interest, premiums, and rents received, 22,876.33 There are also mortgages foreclosed and in process of foreclosure amounting to $223,250.00 which have not been trans- ferred to real estate account, but are carried as mortgage loans. OFFICE FIXTURES. Furniture, etc., in Manchester office, ACCRUED INTEREST AND PREMIUM.-$68,339.98. Unpaid interest and premium, as follows : On loans secured by mortgages which have been foreclosed, but not trans- ferred to real estate account, and on loans secured by mortgages, in pro- cess of, and to be foreclosed, $36,468.54 On loans secured by mortgages, where de- fault warrants expectancy of fore- closure, ....•• 12,656.41 On loans secured by mortgages, which may be regarded as good, . . • 19,215.03 $99,897.09 /. $6,274.06 $68,339.98 i 35 CASH ON HAND AND IN BANKS,— f58,462.27. This item is made up of deposits in : Mercantile Nat'l Bank, Dallas, Tex. Manchester Nat'l Bank, Franklin Nat'l Bank, N. Y., Nashua Trust Co. .... Merchants Nat'l Bank, Manchester, . $3,181.18 35,699.16 10,628.72 7,000.00 4,000.00 Less deposits Jan. 7, 1896, not entered on books of Association ...... $60,509.06 2,046.79 $58,462.27 LLA.BILITIES. INSTALMENT SHARES,— $806,837.94. This item represents amount of capital dues on instalment shares paid in by members, less expenses, fines and losses occurring by withdrawals, commis- sions paid agents, and shrinkage of values. Amount of dues paid in Less expense fund " fines *' losses " legal expenses . $532,399.50 16,273.22 64.656.09 42,803.83 $1,462,970.58 656,132.64 $806,837.94 ADVANCE FUND,— $28,354.35. This item represents payments in advance on instalment shares, less losses. Amount paid in ...... Less losses ....... . $30,626.57 2,272.22 $28,354.35 PAID-UP STOCK,— $488,781.51. This item represents fully-paid stock bearing inter- est from 6 to 10 per cent., together with withdrawal certificates, bearing 4 per cent, interest, less expenses, as follows : 1" a 14 It 36 PAID-UP FUND. Amount paid in by members : Fully-paid stock, 10 per cent. and part-paid stock, 8 per cent. . . . • stock, 6 per cent. " 7 per cent. " 6 and 7 per cent, participating stock, 6 per cent. .... Trustee stock, fully-paid, 6 per cent. Withdrawal certificates, 4 per cent. (Face value $77,800.90) . Deducted for Expense Fund : * Fully-paid stock, 10 per cent. and part-paid stock, 8 per cent. .... stock, 6 per cent. 7 per cent. 6 and 7 per cent, participating stock, 6 per cent. .... $5,300.00 108,600.00 129,425.00 95,550.00 54,175.00 114,365.00 3,545.00 235,097.25 $746,057.25 n ki 44 44 ii ii * Trustee stock, fuUy paid, 6 per cent. Withdrawal certificate, 4 per cent. Deducted for losses . $18,100.04 13,434.87 12,421.50 5,417.50 11,436.50 $60,810.41 157,296.75 $218,107.16 $527,950.09 39,168.58 Liability under this, as shown by Association's book, $488,781.51 *0n the 10 per cent, fully-paid stock $16.67 per share was charged to profit and loss account as expenses. * On the trustee stock, 10 per cent, was charged to profit and loss account as expenses. PERMANENT SHAREHOLDERS' FUND,— $100,000.00. This fund was created as a substitute for the Guar- anty Agency Co., as described on pages 23 to 26, inclusive, of this report. The $100,000 common stock therein referred to is not shown on the Association's books as a liability. This item represents the " Preferred Stock," . $100,000.00 < > 87 FIRST MORTGAGES SOLD AND ASSUMED,— $1,391,654.67. Tliis item is made up of first mort- gages sold and in hands of others, of 11,360,904.67 First mortgages sold, in liands of others, on real estate acquired by foreclosure of the instalment mortgage ..... 22,150.00 First mortgage on deposit with New York Banking Dept., erroneously included with "first mortgages sold," . . . . . 8,000.00 J. J. Wilmarth, error, erroneously in- cluded with "first mortgages sold," 600.00 $1,391,654.67 DUE ON UNCOMPLETED LOANS, $8,719.29. This item is made up of amounts due to borrowers on loans made . . $2,537.81 Due agents ..... 3,890.09 Due Berlin Manufacturing Co. . . 1,818.00 Due sundry credit balances . . 540.39 Less journal cross entry $8,786.29 67.00 $8,719.29 DUE PERMANENT SHAREHOLDERS' FUND, $7,932.61. Due expense fund from members' payments. From 1888 to Nov. 1890 . . . $140,550.75 From 1890 to Jan. 7, 1896 . . 752,961.19 From sundry accounts . . . 67,825.74 Paid expense fund from 1888 to Jan. 7, 1896 Balance due ...... $961,337.68 953,405.07 $7,932.61 REVISION BY THE BANK COMMISSIONERS OF THE FINANCIAL STATEMENT. As the result of this examination, the Commission- ers find the cash account should be increased $5,835.99 by transfers from accounts receivable, and that sundry corrections amounting to $10,635.00 A r 38 should be made reducing both assets and liabilities that amount. After these corrections, which are mere matters of bookkeeping, the Commissioners believe the assets are overstated and the liabilities understated on the books of the Association, as shown by the foregoing statement, and should be revised as follows : REDUCTION OF ASSETS. The assets should be reduced under the several accounts, as shown below, for reasons given : Mortgage Loans : Shrinkage in value of securities, as estimated by the Association's officers at the annual meeting held Feb. 8, 1896 . Loans on Shares : Because of in- sufficient collateral Securities for Guaranty Fund: Stock of Commonwealth National Bank, Manchester, N. H. . Notes Receivable: Note of A. C. Garcia & Co., and costs (worth- less) ...... Note of J. C. Moore, payment of $2,000 not credited on note, and $3,000 because of insufficient col- lateral ..... Accounts Receivable: In hands of agents, estimated loss . Uncollectable accounts . Sundry amounts expended; fore closure costs, etc. Insurance paid, where mortgages have been foreclosed . Insurance paid on accounts closed Taxes paid on real estate foreclosed Taxes paid on accounts closed State taxes paid Deposit with clerk of Supreme Court, paid to claimant by order of court, Real Estate : Shrinkage in value as estimated by Association's officers at annual meeting Office Fixtures: For depreciation discount of one third . $1,027.22 5,000.00 $4,000.00 6,872.47 1,236.40 1,133.30 72.25 4,034.20 9.53 1,130.19 488.60 V J » » $80,000.00 823.00 2,500.00 6,027.22 1 I 4 • 18,976.94 20,000.00 2,090.67 39 Accrued Interest and Premiums : Accrued interest and premium on loans secured by mortgages fore- closed ..... On loans secured by mortgages that should be foreclosed . Cash on Hand and in Banks : Differ- ence between bank balances and cash account. Association carrying a check to T. K. Dissette as a cash item, check having been paid by bank reducing cash in Man- chester National Bank $36,468.54 12,656.41 49,124.95 2,135.86 $181,678.64 INCREASE OF LIABILITIES. In revising the statement of liabilities the Commissioners have restored to members' accounts amounts deducted for losses and legal expenses, which, in their opinion, are more properly charge- able to earnings or assets than deductible from liabilities; also amount improperly deducted from paid-up stock, for expense fund. There has been added interest due and unpaid on first mortgage loans and on paid-up stock ; also unearned premium on mortgage loans, representing that proportion of the gross premium charged when loans were made, not earned at the time of this examination by reason of the maturity of certain loans being beyond January 7, 1896. Instalment Shares: Should be in- creased by restoration of amount charged to capital dues as "losses," As " legal expenses " . Payment for national homestead certi- ficates ..... $64,656.09 42,803.83 287.10 Advance Fund : Restoration of amount charged to advance payments, as losses Paid-up Stock: Restoration of amount deducted for expense fund Deducted for '' losses "... $60,810.41 Interest Due and Unpaid : On first mortgages sold . . . . On paid-up stock .... 39,168.58 $13,398.20 3,631.01 Unearned Premium : On mortgage loans $107,747.02 2,272.22 99,978.99 17,029.21 83,488.40 $310,515.84 .' V -• I *■ 40 ADJUSTMENT OF SUNDRY ACCOUNTS. 600.00 Transferred from accounts receivable to cash : Deposit National Bank, Barre, Vt. $5,235.99 Deposit New Hampshire Trust Co. Deducted from assets and liabilities : Berlin Manufacturing Co. pay- ment ; from " mortgage loans " and " due on uncompleted loans ' . Perrin payment ; from " mortgage loans" and "due on uncom- pleted loans" .... New York state deposit; from ** mortgage loans," and " first mortgage sold " J. J. Wilmarth, error ; from " ac- counts receivable," and "first mortgages sold "... Journal cross entry ; from " ac- counts receivable " and " due on uncompleted loans " $5,835.99 $1,818.00 150.00 8,000.00 600.00 67.00 $10,635.00 U 41 EEVISED STATEMENT OF ASSETS AND LIABILITIES. ASSETS. Mortgage loans Deposits with states Loans on shares Notes receivable Accounts receivable Guaranty fund Real estate Ofl&ce fixtures Accrued interest and premium Cash in hand and in banks $2,440,172.64 200,087.90 13,243.00 6,163.18 41,118.37 4,000.00 79,897.09 4,183.39 19,215.03 62,162.40 $2,870,243.00 LIABILITIES. Instalment shares Advance fund .... Paid-up stock .... Permanent shareholders' fund . First mortgages sold . Due on uncompleted loans, etc. . Due permanent shareholders' fund Interest due and unpaid Unearned premium . Deficit .... $914,584.96 30,626.57 588,760.50 100,000.00 1,383,054.67 6,684.29 7,932.61 17,029.21 83,488.40 $3,132,161.21 261,918.21 While the deficit shown is sufficient cause for grave alarm as to the ability of the Association to mature its shares within any reason- able term of years, it does not clearly indicate its actual condition, owing to the practice (possibly warranted by the contracts with members) of deducting expenses from capital dues, thus making its liabilities to members less than the sum paid in by them. If to the deficit is added the sum of $548,672.72,— the amount of dues taken for expenses, and fines,— $810,590.93 is found as the amount the Association must earn in order to pay back to members what they have paid in, and the question, when the shares can be matured, in accordance with the Association's published plans, is not worth dwelling upon, as it is perfectly apparent that the earning power of the Association can never accomplish it, and shares can only be matured by receipts from new members. The analysis of the financial statement shows, among other things, the doubtful value of the mortgage investment, on which it largely relies to produce the profits to mature its shares. Deducting the < 42 first mortgages sold and in hands of others from the $2,530,140.64 real estate mortgages, they have $1,169,235.97 in mortgage loans ; but of this sum over $77,000.00 are mortgages the Association has had to redeem, nearly $420,000.00 are simply second mortgages or equities, $8,000.00 are pledged to the state of New York, and $223,250.00 are in process of foreclosure, leaving but $440,453.50 in straight mortgage investments to meet a liability of $1,663,972.03 for money received. A brief recapitulation of the condition of the Association as found by the commissioners, and the questions that seem to arise there- under, are as follows : 1st. Does the charter authorize the business as conducted hereto- fore and at the present time by the Association ? 2d. Are the contracts entered into by the Association with its members mutual and equitable ? In the judgment of the commissioners, a business having so many and diverse plans is liable to misuse ; it is not susceptible of intel- ligent supervision by examiners, and must inevitably lead to mis- understandings and disappointment on the part of those who join in it, of which many instances have already come to the knowledge of the commissioners. That the Association proposes to repudiate such portions of its contracts as are unequal, does not obviate the objection. It cannot set up its own wrongful acts as an excuse for not fulfilling its promises, and retain the confidence of the members and of the public. To what extent contracts are invalid and are to be disregarded should be determined only by the court, who will administer such property as there is for the equal benefit of all. 3d. Certain losses have occurred from the withdrawal of larger sums than the member's proportionate share by reason of unwise or invalid contracts made by the management, by rebating gross premiums, and by the maturing of shares by an unequal division of the profits. Whether it is possible to reimburse the members for these losses, from whom, and by what proceedings, is the province of the attorney general to determine. 4th. The practice of issuing paid-up stock which shares in the profits of the Association, and at the same time receives high rates of interest on the money invested, is a burden on the instalment shareholder and borrower, which, in the judgment of the commis- sioners, should not be permitted. 5th. The proportion of shares borrowed upon is so small in com- parison with the total number, that it shows the principles on which building and loan associations are founded have been disregarded by this Association in its business, throwing so large a burden on the borrowers that, in the judgment of the commissioners, the shares cannot be matured within a reasonable time. 6th. The great extent of territory over which investments are \ I^ i f -( I 43 made, and the impossibility of proper inspection of the property, render the mortgages of the Association of uncertam value. 7th. The sale to third parties of a first mortgage on property in which the greater part of the money of the Association is invested, and without a fund which can be used to redeem the dominant encumbrance, destroys the value of the investment as an asset whenever a disturbance occurs or a distrust is created m the insti- tution, and is Ukely to result in a very serious shrinkage to the members. , , ^. i 8th. The right to carry a surplus, without deducting losses as they occur, and to apportion it as a profit among its members as the managers may from time to time determine, whether it exists by virtue of agreements with its members, or by statute, is so con- trary to equity and sound business principles, that it should not be permitted to be exercised. 9th. In the judgment of the Commissioners, the expenses ot the Association have been larger than the business warranted,— so large that a suspicion of want of good faith on the part of those author- izing the expense is created. The members should not be made to suffer longer by the enormous commissions paid to agents or absorbed in dividends to the permanent guaranty shareholders fund ; and it would be more to their advantage that the Associa- tion should be wound up rather than to continue such payments. 10th. The payment of items of expense incurred in the sohcita- tion of business, taxes by banking departments, traveUing expenses, influence, losses by agents, and legal expenses, are properly charge- able against the Guaranty Agency Company if its contract with the Association is valid, and should be recovered back from its stock- holders. 11th. If the contract with the Guaranty Agency Company was a valid one, can the burden of the contracts with its employees, the general agents, be shifted onto the Association whenever the Agency Company dissolves its connection with the Association ? 12th. In a mutual company there can be no question but that any excess of the expense fund over the actual expenditures should be repaid to the members, Whether the contracts with the Agency Company, providing for the diversion of such surplus, is valid, and whether money unlawfuUy paid to the company can be recovered of it or its stockholders, are questions for the determination of the attorney general. 13th. It is evident that great efforts have been made to secure a large number of new members, whose money seems to have been needed by the Association in order to fulfil the promises held out to the public. Any business depending upon the collections from new members is against public policy, and has not been permitted to continue in New Hampshire. 14th. The diversion of any surplus of the amount set aside for u 44 expenses from the members' dues, over the actual cost of carrying on the business of the Association, is no more justifiable under the plan adopted by the directors creating the permanent shareholders' fund than under the contract with the Guaranty Agency Company. Whether the adoption of this plan by the Association is valid, is submitted to the attorney general. 15th. When a financial institution under state supervision makes contracts with its patrons which are generally misunderstood, it should be prohibited from continuing the business. While it is impossible to state how many of the members of this Association understand the conditions annexed to their shares, so many in- stances of a total misconception of them, and of the rights of with- drawal, have come to the attention of the commissioners that they are led to believe the larger part of the shareholders are ignorant of the true nature of their investment. 16th. It clearly appears that the 250 sharps of 8 per cent, stock held by Mr. Stewart were not matured ; because of the improper apportionment of profits; because the age of the shares was in- creased by ante-dating them six months before the time of their issue ; and because losses were not deducted from the profits cred- ited to them at the time of the apportionment. The payment of $48,251.50 to Mr. Stewart on Oct. 3d, 1895, was illegal, and steps should be taken for its recovery. The many doubtful, if not dangerous, plans and methods of busi- ness adopted by the Association, the extreme uncertainty of the value of its assets, the almost certain shrinkage or dissipation of values in case the members default in their regular payments, and the many questions of a legal nature which arise upon consideration of its contracts, have caused the commissioners to deem it neces- sary for the public safety that they lay the facts in writing before the attorney general, and require him to file an information against the corporation for the purpose of vacating its charter, as author- ized by section 14, chapter 162 of the Public Statutes, as well as to petition the supreme court that a receiver be appointed to take charge of the property and effects of said Association, and that the court will prescribe such orders and rules as may be necessary in the premises. Alpheus W. Baker, John Hatch, Thomas J. Walker, Bank Commissioners. \ I I m :*i^. - - I *. ' '1 ( '^SSk "^ '.^u^gj^^^^^^^^^^^^^^^ D986 G76 D986 G76 Ne;v Hampshire Ba of Bank Coimniss loners. Special report March 1896 mn 66^^^ *4Ri7 m FEB - 1 iq?6 4^-n:^ >< - 3* >- i^' '^' V^' ? ^- ' j? - ^■^ .-^•^- t.- f t f. ^y^\ f^-^? - •»^> #.: *3[y ^^^-i?-* >i^' .^1 =«..- .<* . i' '^^^- .... ■-- • - g-l m t' END OF TITLE