21
THE CHICAGO BANKET
November 21, iço8)
*
The Mercantile National Bank
OF THE CITY OF NEW YORK
Surplus
$2,000,000
We offer the complete service of a safe, solid and conservative bank. Special and personal attention ¿iven to the business of banks and bankers
Willis G. Nash, Pres. Miles M. O’Brien, V.-Pres. Wm, Shinner, V.-Pres. Wm. H. Taylor, V.-Pres. Emil Klein, Cash.
Capital
$3,000,000
this is done the valuation placed on the stock is often par, although the stock may, as a matter of fact, positively be dripping with “water.” This is, of course, most misleading, but unless the banker requires such a detailed list as I have already mentioned it would be impossible for him to discover that securities of this nature were being included.
Where a corporation controls a number of subsidiary corporations it is, in my opinion, most unsafe for a banker to loan large sums until an examination of the parent company and its satellites has been made by professional accountants.
Under the heading of “Other Assets” there will, of course, often appear such items as goodwill and patent rights. While these often do possess a real tangible value with the corporation as a going concern they are generally practically worthless in the event of a liquidation, and for this reason a banker usually eliminates these from consideration in considering the available assets.
Liabilities. Bills Payable for Merchandise
The banker will naturally scrutinize the amount of this liability with a view to seeing that taken together with the open accounts due and past due it bears a normal percentage to the purchases. Any increase in this percentage as compared with the last statement would, apart from other causes, seem to indicate a lack of cash capital.
Direct Loan from Bank
This amount can, of course, be at once certified by reference to the bank’s own records.
(Continued in issue of November 28)
V
The San Francisco Chapter
The San Francisco Chapter, American Institute of Banking, one of the most energetic and active branches of the national organization, has been placed on a substantial financial footing by the action of the San Francisco Clearing House Association, which has made an appropriation of $1,800 a year to the chapter for the purpose of maintaining suitable quarters, and for the extension of its educational work. The chapter has leased part of the top floor of the First National Bank building, and will make that its future headquarters as soon as the rooms can be arranged.
V
Spokane Chapter Athletic Association
Spokane chapter of the American Institute of Banking has organized an athletic association. The officers to have full charge of all athletics connected with the chapter are: President, W. J. Smithson of the Old National; secretary, A. G. Leighton of the Exchange National; treasurer. Ray Bigelow of the Old National. The association intends to place one of the fastest indoor base ball teams in the city league. La-mont Barnes of the Fidelity National will be manager. There will also be hand ball, basket ball and bowling teams to compete with any amateur team in Spokane.
one week’s sales, it is obvious that there is something radically wrong with the business and that more capital is needed in order to enable the borrower to make prompt deliveries in response to orders received. In such a case the banker will, however, be called upon to exercise his judgment as to whether the loan being asked for is adequate to accomplish this end, or, if the borrower has put forward some other reason as his desire for securing further credit, then to call for some explanation from him as to how he proposes to “keep up with the procession” as regards turning out his finished merchandise.
On the other hand, if the percentage of merchandise on hand as compared with sales shows a very large increase over that as shown in the last statement, it is obvious that too heavy an inventory is being carried and unless this is due to extraordinary trade conditions it is a condition which should be immediately remedied. An undue increase under this caption is often an index to the fact that the figures have been deliberately overstated.
Real Estate
The basis on which this item is valued should always be stated by the borrower and where the value amounts to a considerable sum, inquiry is always made by the banker as to the nature of such real estate and whether any encumbrances on same exist.
Machinery and Fixtures
Any increase under this caption as compared with the last statement rendered by the borrower, if of a considerable amount, calls for investigation by the banker and an explanation as to its cause. If the increase is found to be due to an actual extension of the plant then some corresponding increase in business turnover should be looked for. If the increase is found to be due to a revaluation of the plant having taken place, then the banker should be careful to see that a corresponding increase in the surplus of the corporation has taken place. It is a very common business subterfuge to have a revaluation of the plant and machinery made so as to bring out increased valuations and thus conceal the depletion of the surplus arising from trade losses or other causes.
Other Assets
These must, of course, be grouped independently or else stated as individual items. Where same consist of stock in other corporations a detailed list of same should accompany the borrower’s statement on which the basis of valuation should be stated and the current market quotation of same. Where the stocks are unquoted the banker should require the production of a balance sheet of the corporation in which the stock is held, made up to a fairly recent date in order that he may judge whether the valuation placed upon such stock by the borrower is justified.
In this connection I may say that it is very customary for corporations seeking credit to include amongst their investments their holdings in subsidiary companies which are practically entirely owned by themselves and where
tempt on the borrower’s part to inflate this figure beyond a very small amount would be detected by this means.
Bills Receivable from Customers and Accounts Receivable from Customers
Taken together these two items should bear a fairly constant percentage to the amount of merchandise sales and any violent fluctuation above or below the same percentage as calculated on the last statement submitted by the borrower calls for the banker’s very close attention as demonstrating one of three things:
A.	That trade conditions are bad. (The extent to which an increase in the percentage of book debts to sales is due to this cause can generally be determined by the banker from his own knowledge of the financial situation; for instance, during the recent financial panic any reasonable banker would naturally have expected to find the percentage of book debts heavier than usual on any borrower’s statement.)
B.	That there has been a falling off in the efficiency of the credit and collection department of the borrower and that more extended credit is being given to his customers than was formerly the case.
C.	That these figures have been deliberately inflated. (If this supposition arises in the mind of the banker he would, of course, naturally refuse to grant any extended credit until the accounts of the borrower had been scrutinized in some detail by professional accountants.)
Accounts and Bills Receivable Due from Officers
Where this amount is large, the banker would naturally ask for further information as to the identity of the officers and the amounts due from each, in order that he may judge of the financial responsibility of the gentlemen in question.
It has often been my lot to find included amongst the accounts receivable as stated on a company’s balance sheet, very large sums due from the principals or officers and to find on inquiry that every dollar of their fortunes is already invested in the corporation and that in consequence were the corporation to go into the hands of a receiver, any attempt to collect these amounts would be futile.
Merchandise
The banker, as regards this item, is perhaps more at the mercy of the borrower than is the case with any other item on his balance sheet. He is obliged to accept the borrower’s own estimate of valuations and the most he can do to protect himself is to insist upon the borrower stating very clearly the basis upon which these values were arrived at and whether they are the result of an actual inventory or are merely taken from book records.
The amount of merchandise carried by the borrower calls for the very careful attention of the banker, and assuming the correctness of the figures shown on the statement some very interesting deductions can often be drawn. To take an extreme example, for instance, supposing the banker finds that the finished merchandise on hand is only equivalent to about