The term during which a series is open for subscription differs, but it usually extends over three or six months, and sometimes a year. Some associations, usually known as perpetual associations, issue a new series of stock without regard to the time of maturity of previous issues. It is the practice in such associations to issue a new series of stock every year. Instead of shares that are paid in instalments, some associations issue prepaid shares and paid-up shares. Prepaid shares, known also as partly paid-up shares, are issued at a fixed price per share in advance. They usually participate as fully in the profits as the regular instalment shares, and when the amount originally paid for such shares, together with the dividends accrued thereon, reaches the maturing or par value, they are disposed of in the same manner as regular instalment shares. Some associations, instead of crediting all the profits made on this class of shares, allow a fixed rate of interest on the amount paid therefor at each dividend period, which is paid in cash to the holder thereof.
This interest is then deducted from the profits to which the shares are entitled, and the remainder is credited to the shares until such unpaid portion of the profits, added to the amount originally paid, equals the maturing or par value. Paid-up shares are issued upon the payment of the full maturity or par value, when a certificate of paid-up stock is issued, the owners being entitled to receive in cash the amount of all dividends declared thereon, subject to such conditions or limitations as may be agreed upon. These shares sometimes participate as fully in the profits as the regular instalment shares, but in most cases a fixed rate of interest only is allowed, the holders of the shares usually assigning to the association all right to profits above that amount. Certificates of matured shares are also issued to holders of regular instalment shares, who prefer to leave their money with the association as an investment.
Prior to the maturing of a share it has two values, the holding or book value and the withdrawal value. The book value is ascertained by adding all the dues that have been paid to the profits that have accrued; that is to say, it is the actual value of a share at any particular time. The withdrawal value is that amount of the book value which the association is willing to pay to a shareholder who desires to sever his connexion with the association before his share is matured. Some associations do not permit their members to withdraw prior to the maturing of their shares. Then the only way a shareholder can realize upon his shares is by selling them to some other person at whatever price he can obtain. There are twelve or more plans for the withdrawal of funds. Every association has full regulations on all such matters.
The purchase of a share binds the shareholder to the necessity of keeping up his dues, and thus secures to him not only the benefits Variations in methods. of a savings bank, but the benefit of constantly accruing compound interest. This accomplishes the first feature of the motive of a building and loan association. The second is accomplished by enabling a man to borrow money for building purposes. It is a moot question whether this method of obtaining money for the building of homes is more or less economical than that of obtaining it from the ordinary savings banks or from other sources. Sometimes the premium which must be paid to secure a loan increases the regular interest to such an amount as to make the building and loan method more expensive than the ordinary method of borrowing money, but a building and loan association has a moral influence upon its members, in that it encourages a regular payment of instalments. Some associations have a fixed or established premium rate, and under such circumstances loans are awarded to the members in the order of their applications or by lot. The premium may consist of the amount which the borrower pays in excess of the legal interest, or it may consist of a certain number of payments of dues or of interest to be made in advance.
There are very many plans for the payment of premiums, nearly seventy relating to real estate loans being in vogue in different associations in different parts of the United States; but in nearly all cases the borrower makes his regular payments of dues and interest until the shares pledged have reached maturing value. There is also a great variety of plans for the distribution of profits, something like twenty-five such plans being in existence. The methods of calculating interest and profits are somewhat complicated, but they are all found in the books to which reference will be made. The various plans for the payment of premiums, distribution of profits, and withdrawals, and the calculations under each, are given in full in the ninth annual report of the U.S. commissioner of labour.
Most building and loan associations confine their operations to a small community, usually to the county in which they are situated; but some of them operate on a large scale, extending their business enterprises even beyond the borders of their own state. These national associations are ready to make loans on property anywhere, and sell their shares to any person without reference to his residence. In local associations the total amount of dues paid in by the shareholders forms the basis for the distribution of profits, while in most national associations only a portion of the dues paid in by the shareholders is considered in the distribution. For instance, in a national association the dues are generally 60 cents a share per month, out of which either 8 or 10 cents are carried to an expense fund, the remainder being credited on the loan fund. The expense fund thus created is lost to the shareholders, except in the case of a few associations which carry the unexpended balances to the profit and loss account, and whatever profits are made are apportioned on the amount of dues credited to the loan fund only. The creation of an expense fund in the nationals has sometimes been the source of disaster.
Safety or security in both local and national associations depends principally upon the integrity with which their affairs are conducted, and not so much upon the form of organization or the method of distribution. Some of the states - New York, Massachusetts, New Jersey, Ohio, Illinois, California and others - bring building and loan associations under the same general supervision of law thrown around savings banks. In some states nothing is officially known of them beyond the formalities of their incorporation. Though the business of the associations is conducted by men not trained as bankers, it yet meets with rare success. Associations disband when not successful, but when they disband great loss does not occur because the whole business of the association consists of its loans, and these loans are to its own shareholders, as a rule, who hold the securities in their associated forms. The amount of money on hand is always small, because it is sold or lent as fast as paid in. A disbanded association, therefore, simply returns to its own members their own property, and but few real losses occur.
Investment in a building and loan association is as nearly absolutely safe as it can be, for the monthly dues and the accumulated profits, which give the actual capital of the association, are lent or sold, as it is termed, by the association as fast as they accumulate, and upon real estate or upon the stock of the association itself. The opportunities for embezzlement, therefore, or for shrinkage of securities, are reduced to the minimum, and an almost absolute safety of the investment is secured.
The growth of these associations has been very rapid since 1840, and at the opening of the 20th century they numbered nearly 6000. The Federal government, through the department of labour, made an investigation of building and loan associations, and published its report in 1893. The total dues paid in on instalment shares amounted then to $450,667,594. The business represented by this great sum, conducted quietly, with little or no advertising, and without the experienced banker in charge, shows that the common people, in their own ways, are quite competent to take care of their savings, especially when it was shown that but thirty-five of the associations then in existence met with a net loss at the end of their latest fiscal year, and that this loss amounted to only a little over $23,000. Bulletin No. 10 (May 1897) of the U.S. department of labour contained a calculation of the business at that date, based upon such states' reports as were available. That calculation showed a growth in almost every item.
During the years of depression ending with 1899 the growth of building and loan associations was naturally slower than in prosperous periods.
See Ninth Annual Report of U.S.A. Commissioner of Labour (1893); Bulletin, No. 10 (May 1897), of the Department of Labour; Edmund Rigley, How to manage Building Associations (1873); Seymour Dexter, A Treatise on Co-operation Savings and Loan Associations (New York, 1891); Charles N. Thompson, A Treatise on Building Associations (Chicago, 1892).
(C. D. W.)