XIV Loans of Country Banks

CHAPTER XIV LOANS OF COUNTRY BANKS Distinctive Features of Country Bank Loans There are several features of loans made by country banks * that contrast sharply with credit extended by the banking institutions of the cities. In the first place the basis of the country bank loan is highly personal. The country banker, through acquaintance and contact with customers over a period of years, possesses a close personal knowledge of his borrowers. He is, therefore, justified frequently in giving more consideration to character and capacity than would the city banker. The country banker feels warranted at times in extending credit to men whose assets are negligible, and in few cases can he rigidly observe the proportion of 2 to 1 of quick assets to current liabilities. While the city institution may regard loans beyond one third of the borrower's net worth as excessive, the country banker finds it safe in many cases to lend up to seventy five per cent of a borrower's net worth, when the borrower is a man of known probity and capacity, who is certain to devote his last dollar to paying his debts.

1 The term country banks is used in this chapter, not as it is employed in the National Bank Act, but to designate banks operating outside the major cities. Any bank the loans of which are made in considerable part to rural interests would fall in the class of country banks as the term is here used. 242 LOANS OF COUNTRY BANKS 243 What the country bank lacks in credit files and in "credit men" is offset in part by the fact that directors as well as the lending officers of such banks have this close acquaintance with the affairs of borrowers. The directorates of country banks are so constituted as frequently to make the combined possible contribution of credit information of the members reasonably accurate and reasonably complete. Instance the personnel of the board of a successful western bank. The president of the bank was previously to his taking up the banking business the manager of a lumber yard and "sold through the valley," one of the directors was the village doctor, whose practice extended for twenty miles around; another, the blacksmith, and still another the proprietor of a livery stable. When that board finished talking a borrower over they knew about all there was to know about his credit.1 A second distinguishing feature of country bank loans is that, unfortunately for the country banker, notes cannot always be selected from the most attractive class of customers. The customers whose notes the banker would like most to have in his note case are frequently not borrowers. The actual borrowers are those who through the use of borrowed funds will in time place themselves in that exclusive class. The country bank borrower whose paper is not gilt edged may be expected in the majority of instances to improve the quality of his paper through the use of funds borrowed and, in the fulness of years, enjoy that 1 Jas. K. Lynch, Banking in Theory and Practice, Proceedings, Seventh Annual Session, Arizona Bankers' Association, 1910, p. 38.

244 BANK CREDIT happy credit state where borrowing is no longer necessary.1 In the next place, the extension of credit by city banks is frequently based in part on the average monthly balance maintained. In country banks this is scarcely a governing factor inasmuch as it often happens that the most solvent borrowers maintain the smallest balances. The money, which is needed for a specific purpose and immediate use, is soon checked out. The size of the balance maintained at other than borrowing seasons, however, does and should influence the lending officer in determining the amount of credit to be extended.2 Many farmers do not appreciate the convenience of keeping a bank account, nor the advantage and importance of cultivating cordial and confidential relations with a banker. Again, country bankers do not generally find demand loans against collateral highly desirable. The highest type of collateral is seldom afforded the country banks; what they usually get is second or third rate securities, salable on a rising market, slow of sale in periods of dullness and quite immovable in times of panic. Then there is no automatic liquidation of such loans. The borrower usually holds for a rise and if the market is not favorable he may desire to have the loan carried indefinitely.3 1W. S. Weston, The Credit Department of a Country Bank, Proceedings, Sixteenth Annual Convention, Nebraska Bankers' Association, 1912, pp. 36, 37.

2 W. C. Gordon, Proceedings, FortySecond Annual Convention, American Bankers' Association, 1916, p. 526. 1 Cf. Jas. K. Lynch, Banking in Theory and Practice, Proceedings, LOANS OF COUNTRY BANKS 245 The loans of the country bank are also "slow" in comparison with loans made by city institutions. Loans of country banks to their merchant borrowers are likely to be characterized by renewals due to the habitual slowness of merchants in making collections. The country merchant is generally many months, sometimes more than a year, in making his collections.1 Loans to merchants in the cities where sales are for cash, or for not more than 30 days' credit, contrast sharply with those to country store-keepers whose customers are farmers with long periods between harvests. Loans to farmers in new sections of the country are very slow. One case is on record where the interest was paid for fourteen years before repayment of the principal.2 These long-time, often-renewed loans are appropriately called "sleepers."

In a country where commercial and banking obligations are met with a reasonable degree of promptness bank loans are likely to be at a minimum at the turn of the year. The writer has found one instance of a bank, in the South, whose statement of condition as of December 31 showed no loans, all of its funds being in cash and on deposit with correspondents. Cotton had been marketed early and the growers had promptly paid their store bills, enabling the merchants to liquidSeventh Annual Session, Arizona Bankers' Association, 1910, p. 34. i Justice G. G. Craig, Local Bills Receivable, Proceedings, ThirtySixth Annual Convention, Illinois Bankers' Association, 1916, p. 127. 1E. N. Morrill, Reminiscences of Banking in Kansas, Proceedings, Eighteenth Annual Convention, Kansas Bankers' Association, 1905, p. 55.

246 BANE CREDIT ate their loans at the bank.1 This condition of having all loans retired is cited because of its exceptional nature. A country banker addressing the Missouri Bankers' Association in 1911, stated that during a single month, not especially chosen, for which computation had been made, 65 per cent of all maturing paper was renewed and 35 per cent paid. He believed that in many strictly agricultural districts the percentage of liquidation was even less. Every tendency seems to work against liquidation, and the measure of liquidation is very much lessened in time of stringency.2 When a renewal of a note is sought, that action in itself may be evidence that the purpose of the loan has miscarried, or that the proceeds are being diverted to uses other than those for which the loan was granted. If failure to repay promptly has been due to a bad business season or to the personal misfortune of the borrower, his efforts should be redoubled in order that the obligation may certainly be met at its next maturity. Repeated requests for renewal generally signify carelessness or financial weakness, or both, and the prudent banker ought to take prompt steps to protect his interests.3 Single name paper gives very little trouble to the banker in not being paid promptly or in being renewed.

One name paper is likely to be settled for or renewed when due simply because its maker is able to borrow 1 Bulletin, American Institute of Bank Clerks, Vol. VI, p. 243. 2E. R. Gurney, A Study in Liquidation, Proceedings, TwentyFirst Annual Convention, Missouri Bankers' Association, 1911, p. 73. * W. G. Gordon, op. eit., p. 526.

LOANS OF COUNTRY BANKS 247 from the bank without getting security and feeling complimented and not under the necessity of getting other names on his renewals he finds that renewal easy.1 Single name borrowers are prompt in meeting their bank obligations and bankers have learned to avoid taking endorsed notes when there is a possibility that the endorser may be called upon to pay the debt. It is a very difficult matter to collect notes from endorsers, representing debts which are not their own. Many men will pay their own obligations unf ailingly and cheerfully, who will pay only with great reluctance notes endorsed for others.2 It generates an unfriendly feeling toward the bank when an accommodation endorser is forced to pay. Notes with two or more names are very likely to furnish past-due paper. The reasons are, first, that a note which has to have more than one name on it to be satisfactory is itself evidence that the maker is not as successful and prompt as if his own name alone had been accepted, and, second, that the principal on the note in order to avoid the unpleasantness of going around to his endorsers to get them to renew with him will frequently try to induce the banker to defer payment on overdue paper so as to admit of its being paid off in installments.3 1 John A. Crabb, Overdrafts and Past-Due Paper, Proceedings, Seventeenth Annual Convention, Kentucky Bankers' Association, 1909, p. 121.

2 C. C. K. Scoville, The Best Class of Investments for the Average Kansas Bank, Proceedings, Sixteenth Annual Convention, Kansas Bankers' Association, 1903, p. 76. »John A. Crabb, op. cit., p. 122.

248 BANK CREDIT The borrowers of country banks frequently keep no record of and do not know the amount of their notes held by their bank and consequently inquire of the banker habitually as to the number, amounts, maturities, and perhaps the security of their obligations. If the banker has to look through the pockets of his portfolio valuable time is required, and the omission of one or more notes might cause serious trouble later. A note ledger indexed serves as a satisfactory means of ascertaining the information quickly, impressing the customer with the idea that the banker has the details of his business well in hand. A column opposite the dates of maturity should contain the dates of payment, enabling the banker to tell at a glance whether the borrower is a prompt payer. Borrowers' knowledge of the existence of a note ledger and of its nature is a spur to prompt payment. Young men applying for their first loan may be started right by simply being shown the record kept by the bank.

The evils of slow and past due paper have attracted no small amount of attention among country bankers and with improving financial conditions among farmers country bank loans are becoming more and more liquid. Rules for Reducing Slow and Past Due Paper The banker who desires to accelerate the reduction of his slow and past due paper may well proceed along the following lines: 1. Let the seeker of credit know in conversation not directed pointedly at him how much you appreciate a LOANS OF COUNTRY BANKS 249 good prompt customer, how you make a special effort to help that class of borrowers in a stringency.1 2. Accept no notes that do not provide for waiving protest, notice of protest, and for cost of collection. 3. Send notices to borrowers from five to ten days before date of maturity. 4. Collect past due interest. 5. After a reasonable time beyond day of maturity write the sureties, stating a definite day on which enforced collection of the note will be carried out, if no adjustment is made in the meantime.2 Loans to Tenants The average tenant deserves the careful consideration of the lending banker. Tenants of the better class in the Middle West who occupy large and well improved farms are frequently worth from $4,000 to $10,000 or more in farm implements, horses and other live stock. If a tenant has lived long in the community, the banker will have no trouble in finding out whether he is honest and what chance he has of succeeding on the farm that he has rented. If the tenant is honest and industrious, has good equipment, and has a lease that is fair, the banker will generally be justified in extending credit.3 In cases where the outcome of a loan is in doubt a chattel mortgage may at times be executed, although the chattel mortgage is not in high esteem among 1 John A. Crabb, op. cit., pp. 125, 126.

•W. G. Dillon, Overdrafts, Excessive Loans, Past-Due Paper, Proceedings, Seventeenth Annual Convention, Tennessee Bankers' Association, 1907, p. 68. * Justice C. G. Craig, op. cìt., p. 127.

250 BANK CREDIT bankers, except in the rural South and in connection with financing the operations of cattle feeders in the central and southwestern states. The variety of notes that the country banker has learned by experience to prefer is given in jaunty fashion by Mr. E. R. Gurney.1 We like notes taken at farm auction sales. We like to buy the trade paper, little notes from and endorsed by the grocer, the baker and candlestick maker. I leave out of the trio the butcher because paying his notes is too much like paying for dead horses. We like all little notes except those of the lightning rod decorator and of the insurance persuader. We like the note of a merchant who discounts his bills and who pays us as religiously as he does other people. We like farmers' notes given for feeding cattle, with or without mortgages. We like the note of him who has wheat in the bin. We like the note of John William Jones who is so stingy that he uses six penny nails for cuff buttons and wakes the roosters out of sound sleep as he hammers around doing chores. We like the notes of old maids who sew for a dollar a day and we steer clear of brilliant young men who have a hundred a month outgo on a twelve dollar a week income.

Whatever the variety of note contained in the country banker's loans and discounts, the rate of interest has generally been relatively high. The Rate of Interest The rate on loans made by country banks has been notoriously high in many sections of the West and South.2 "One per cent a month and sometimes a 1 Op. dt., pp. 76, 77. 2 For a detailed account of an investigation made by the Comptroller of the Currency of usurious rates charged by national banks LOANS OF COUNTRY BANKS 251 little rake-off above that" has been not an uncommon charge that the borrower has borne. In justification of such high rates the banker concerned contends, first, that he has to charge a great deal more than citybanks because he renders more expensive service. The city banks are wholesalers of credit and lend as much to one customer in a day as some of their country correspondents would lend in a season. Relatively high costs of doing business ought to be reflected in relatively high rates.1 A second circumstance invoked in order to justify high rates is that a majority of a country banker's customers may be men whose credit at the bank is solely a matter of their being known to the banker.

"Now most of my customers," says a Georgia banker, "are men that I deal with solely on the basis that I know the men. There is many a man that I credit $100 or $200 a year, that not another bank in town would think of crediting. He will pay me and the other fellow will pay the other man."2 The customer's credit in many cases has a very limited currency, hence the high rate. The farmer has probably paid no more in the way of interest than the neighboring business man. A rural merchant's paper runs from 90 days to six months and bears 8 per cent in the Gulf States. A certain proportion of his loan he keeps on deposit to be drawn out see The Commercial and Financial Chronicle, Vol. 101, No. 2624, October 9, 1915, pp. 1137, 1138. 1 C. T. Smith, Proceedings, Twenty-Sixth Annual Convention, Georgia Bankers' Association, 1917, p. 119. 'R. H. Drake, Proceedings, Twenty-Sixth Annual Convention, Georgia Bankers' Association, 1917, pp. 129, 130.

252 BANK CREDIT gradually by means of checks. On these checks the banker may earn additional profit in the form of exchange. The farmers may pay two per cent more than the merchants, but their paper runs for six to twelve months. Very few farmers keep any balance, nor is much exchange earned on the account.1 What is true in the Gulf States and the South is measurably true in other sections. 1 Proceedings, Seventeenth Annual Convention, North Carolina Bankers' Association, 1913, p. 39.