Mr. EDWARD M. PENICK, FEDERAL RESERVE BANK OF ST. LOUIS, Chairman and Chief Executive Officer, Little Rock, Ark. DEAR ED: This is a terribly belated response to your letter of July 1, but I still want to tell you how much we enjoyed having you here. Also, all of us appreciated receiving the article from the Arkansas Democrat of June 26. We are well aware of your problem and continue to hope that the situation in general will improve at an early date. With kindest regards, Sincerely, Mr. JOHN F. BREEN, Vice resident and Manager, DARRYL R. FRANCIS. WORTHEN BANK & TRUST Co., Little Rock Branch Federal Reserve Bank of St. Louis, P. O. Box 1261, Little Rock, Ark. DEAR JOHN: This letter is to request of the Federal Reserve Bank a stand-by line of credit in the amount of $10 million to be available over the next six months period under Regulation A as its various provisions apply to Worthen Bank & Trust Company, National Association. You will remember that in September, 1973, we made an emergency request for a Federal Reserve Bank loan in the amount of $20 million under Section 201.2E of Regulation A. This request was declined, but in declining, you expressed your desire to be kept abreast of our needs. We now feel that current economic developments in our market area have expanded our need for funds to the point where emergency credit is justified. Worthen Bank has been operating under severely restricted credit policies since March, 1973, and it only has been due to these policies that we have been able to maintain our funds position as well as we have. We are currently experiencing a rapid decline in our deposit base, however, and we are unable to find support from correspondent banks (either big city or country banks) to assist us in handling the very basic credit requirements of this market area. The situation in Arkansas is unique among the states due to our Constitutional maximum interest rate of 10% simple interest. This effectively holds our maximum chargeable rate 12% under the prime rate now existing elsewhere. The usury law also makes it impossible for us to pay a competitive rate for certificates of deposit. This is resulting in a substantial outflow of funds from Arkansas to adjoining states where rates are currently above 10% on certificates of deposit. Coupled with the reduction in correspondent bank balances due to the country banker utilizing his funds in out of state participations and in the Fed funds market at 11% and 112%, this has caused a critical situation among the major banks of Arkansas. Without relief from the Federal Reserve we will be forced to rely on dangerously high levels of Fed funds purchased or a complete shutdown in the lending activities throughout our market area. (See Enclosure II.) We hoped to avoid the necessity of applying for this credit by severely restricting lending activities and we have been reasonably successful in this effort until the last several weeks. Our success has been due to several factors: 1. Stricter rationing of credit through the operation of a Funds Allocation Committee. This has been particularly effective in curtailing commercial loans. We were able to reduce gross commercial loans from $128.1 million on March 15, 1973, to a level of $123.0 million on May 1, 1974-the approximate duration of the operation of our Funds Allocation Committee. 2. Strong requests to our national lines of credit that they "rest" their borrowings at Worthen. 3. Near cessation of real estate lending except to honor existing commitments. 4. Accelerated efforts to sell loan participations. 5. Reduction of line of credit commitments. Since March 15, 1973, we have reduced our commercial line of credit commitments from $112,340,000.00 to $100,580,000.00 on May 1, 1974. This represents a reduction of 10.05% in the face of expanding needs by our customers. 6. Stricter credit requirements. We have established stricter credit requirements in the consumer lending area and eliminated dealers in the FHA home repair loan, small appliance loan and automobile loan categories. During the past several weeks certain indicators point toward the probability of a more rapidly deteriorating liquidity position for Worthen Bank. (See Enclosure 2.) First, we are having considerable difficulty in obtaining new certificates of deposit of $100,000 or more, and we are finding it virtually impossible to renew maturing ones. Although we are paying the maximum rate we can reasonably pay in Arkansas, we are not competitive with the major money center banks who are paying well over 10% for such certificates. As a result Worthen Bank had a net outflow of $3 million in these funds during May. Similar experiences are occurring throughout the state. Second, "Due to Banks" and "Participations Sold" are decreasing at a rapid rate due to normal seasonal factors as funds from downstream correspondent banks are diverted to agricultural uses. However, the magnitude of this reduction is being abnormally exaggerated due to attractive earnings rates available to correspondents wishing to (1) enter the Federal fun 's market, (2) purchase participations from non-Arkansas banks at rates in excess of the 10% permitted by our state law. (See Enclosure 3.) We are reluctant to extrapolate the current adverse trends except to anticipate a more difficult position through September, 1974. (See Enclosures 4 and 5 for historical and current deposit trends.) The period of June, July, and August is historically the lowest deposit period due to the seasonal factors relative to our agricultural market. The recent devastating tornadoes and floods in Arkansas will require additional outlays of funds to assist those damaged communities in rebuilding. The only other possible relief would be a change in the 10% simple interest usury provision of the Arkansas Constitution. The earliest time this could be accomplished is the legislative session of January, 1975, assuming that the current effort to amend the Constitution is successful in the November, 1974, general election. If successful, this action will come too late to avoid serious economic consequences in our community. (See Enclosure 6.) Our request for Federal Reserve credit is not intended in any way to avoid the normal difficulties to be encountered by any aggressive bank in dealing with the effects of current Federal Reserve monetary policies. Rather it is an expression of our concern that (1) the community we serve will experience serious economic difficulty if we restrict the credit activities of this bank even further, and (2) the best way to prevent the economic collapse of our market is for the major banks to be able to continue to supply the credits essential for the basic business needs of our market. Yours very truly, EDWARD M. PENICK, Chairman and Chief Executive Officer. ENCLOSURE 1 TABLE 1.-NET FEDERAL FUNDS PURCHASED 1 [Dollar amounts in thousands-Weekly Averages for Weeks Ending as Indicated] 1 Includes direct borrowings from the Federal Reserve Bank-a broader definition than commonly made. 4 11 18 25 1 8 15 22 1 8 15 22 29 5 12 19 26 3 10 17 24 31 ENCLOSURE 6 [From the Arkansas Democrat, Sunday, June 9, 1974.] INSOLVENCY HITTING LARGER BUSINESSES, 14 IN STATE FAILED IN FIRST 4 MONTHS OF 1974 Historically, commercial and industrial failures are more common among smaller concerns. The past 12 to 18 months have begun to emphasis that larger businesses are experiencing the sting of insolvency and liquidation. This trend is showing up in Arkansas and the United States as a whole. However, regionally, Arkansas consistently since 1969 has had a lower failure rate per 10,000 firms listed with Dun & Bradstreet than Texas, Oklahoma, Louisiana and Mississippi. In 1972 Texas had 58.0 failures per thousand, the highest of any of the five states, and Arkansas had 13.0 per thousand, the lowest. Bill Waldron, credit reporting manager of Dun & Bradstreet's Little Rock office, said: "This year, as far as total numbers (of business failures) compared to last year are concerned, it's down a little. But, we've had some larger ones. The whole state is doing well (in terms of industrial growth). "Of course, there are always rumors that there are supposed to be more. There are some companies getting on shaky ground, but I don't see any increase (in failures) for this year." The first four months of 1974 have seen 14 business failures in Arkansas. This is an average of .875 per week, though not enough time has passed for this to be an indication of the final year-end weekly average. The average liability of failed businesses in Arkansas has been $213,200 so far. In 1973, with a weekly average of .769 failures, there was a $460,000 average liability figure. During the last two months of 1973, two major concerns liquidated, pushing up that average. |