Pursuing another avenue of assistance, financial institutions in the state have sought emergency credit through the Federal Reserve System. Our bank applied to the Federal Researve in 1973 and again in 1974 for emergency credit in order to finance the agricultural economy of our state. In both instances the Federal Reserve declined our applications on the basis that it was contrary to monetary policy. In our latest rejection they said that we were not hurting badly enough since we could go into the market and purchase Fed funds at 13 or 14%. Apparently the Federal Reserve was not particularly concerned with whether or not this would eliminate the profitable operation of the largest financial institution in the state.

The point I make is that we are trying and the financial institutions in the state are trying in various and different ways to find relief to an adverse economic situation. Our efforts to date have met with little success. It would seem that the flow of funds between states is a major part of interstate commerce and must be regulated from the national standpoint. Consequently, the Brock Bill presents the best opportunity for relief of the devastating effects of Arkansas' 10% usury restriction.

3. The argument is sometimes made that the passage of this Bill would be detrimental to the consumer. I would argue just the opposite, and make these points:

(1) Without relief from the 10% ceiling, we must reduce our most expensive and least profitable loans. These are the consumer loans. Consequently, there will be fewer funds for the consumer if the 10% ceiling is retained without relief. If we continue to purchase larger amounts of Fed funds at whatever the market rates are, the profitability of this organization is severely impaired. Consequently, we have no other choice but to reduce expenses. Such a reduction simply means that the level of services to the public will suffer.

(2) Housing in our state is suffering, as will be indicated to you by one of the major developers of housing who is in our group. Most large real estate developments and multi-family housing projects are put together by corporation who are willing and able to pay the market rate for funds. Most of the men who manage these corporations realize the plight that Arkansas financial institutions are in and the look at the purchase of money the same as they look at the purchase of lumber, cement, labor, and any other product. They are willing to pay a market price for them. Arkansas law prevents this. The passage of the Brock Bill would allow the major housing developers in our state to resume business.

(3) The ability of the Arkansas banks to seek funds, pay market rates for them, and have funds available to finance the development of business and industry in our state will stimulate the economy by creating job for people who, in the final analysis, are the consumers in our economy. If we cannot compete for funds in the market, we have no other choice but to limit and restrict the financing of industry in our state. In the final analysis, this will mean the reduction in jobs and the loss of growth opportunities for many of our developing companies.

4. Arkansas' usury restriction is most damaging to the larger financial institutions who serve the larger, corporate borrowers. The owners of large certificates of deposit, $100,000 and over, are inclined to place those with the larger, more strongly capitalized banks. They naturally favor those that they are most familiar with. However, when the rate differential is 12 to 2 points, we cannot be competitive. Though we can persuade them to keep their money at home when the rate differential is much smaller, we find a complete inability to talk to a major certificate of deposit owner about loyalty to the local financial institutions when he must sacrifice 12 to 2 points. Larger businesses and industries of our state look to the larger banks to finance their credit requirements. We cannot do this at 10%. A study on bank holding companies was recently completed by Dr. John Dominick, who is a professor at the University of Arkansas and occupies the Chair of Banking sponsored by the Arkansas Bankers Association. As part of his study, he analyzed the 100 largest locally controlled business organizations in our state as to where they banked and why. His study found that those firms that responded had $66.2 million in bank deposits. $16.6 million were deposited in banks in the State of Arkansas, and $49.6 million were deposited in out of state banks. In other words, these companies had 25.1% of their deposits in Arkansas and 74.9% of their deposits

in other states. Of course, their deposits follow loans, and the loan figure indicates about the same. $197.1 million in bank loans, $40.9 million or 20.8% in Arkansas banks, and $156.2 million or 79.2% in out of state banks.. This indicates very clearly that the larger the company, the greater reliance it must have on out of state banks to provide its needed credit.

A strong profitable banking industry is essential to support the growth and development of all business and industry. Without profitable banks who are willing to take the risk of financing new and existing business, we will kill entrepreneurship in Arkansas. The key to this is the ability of the banks to pay the investing public a rate of interest that will attract their funds and the ability of the banks to operate profitably is tied directly to eliminating the 10% usury restriction and allowing them to participate in the market for funds.

SUMMARY

As I have mentioned, we have tried the state courts, we are trying a case in the national courts, we have tried before to amend our constitution, and are now trying again to amend our constitution, but in the current situation with interest rates three and four points above the maximum rate of interest Arkansas can charge, we are in an emergency position. We must have some relief now and Congress is the only source that can give us immediate relief from this situation. Without this relief, Arkansas will be paralyzed, both from the development of the private business sector and from the ability of the public sector, i.e., the various governments, to support their financial expansion programs. This cannot be allowed to happen in our state. We want only to be able to be competitive in the general market with the other larger financial institutions of adjoining states. Our customers want to have credit available for them when they need it. Credit is only one of the essential elements of production an dits price like that of labor, raw materials, and others, must be allowed to move upward and downward with the market and must be allowed to fluctuate in a national market without the interference of state borders.

I appreciate the opportunity to appear before you and I will be happy to answer any specific questions that you may have. Sincerely,

EDWARD M. PENICK,

Chairman and Chief Executive Officer.

WICKARD & Co., INC.,

Little, Rock, Ark.

GENTLEMEN: Wickard and Company Inc. is a general construction company with business both in residential and commercial construction, I also do considerable development on a personal basis. We do approximately $2 million a year in volume. Our long record of service in the construction industry has permitted us excellent banking relations in the past. We enjoy solid credit with several of the larger banks in the central Arkansas area.

To cite the oppressive effect of the 10% usury law on our business, I only have to point to two undeniable facts. One, as of July 1, 1974, we have only $360,000 worth of construction volume under contract on our schedule. As of time time one year ago, July 1, 1973, we had over $2.1 million. Two, our work force has had to be cut by a third. Twenty-five people have been laid off due to lack of business. Normally, at this time of year we would be taking on extra summer time help for the peak period of our business.

Let me cite you the kind of construction declines that have caused a serious impact on housing and commercial development for us.

Maumelie New Town is a HUD sponsored new city in Arkansas.

We were originally scheduled to construct eight homes in this area at approximately $40,000 each and 64 zero lot line homes at about $28,000. We were turned down by three banks and two savings and loans. One savings and loan has finally agreed to commit to two of the eight houses with the understanding that it will not exceed $80,000. No money is to be dispursed in July and only limited finance will be available in August. The balance will be spread out over at least six months.

The Foxcroft Townhouse project, a series of medium priced single family dwellings, estimated at $600,000 in construction costs has had to be abandoned because of lack of funds.

A 50 unit apartment housing complex of low income efficiencies and single bedroom dwellings was to be built on a site of a church in downtown Little Rock. This project, estimated to cost approximately $560,000, has had to be shelved. We still own the land at the cost of $150,000 and have cleared the site, but cannot move.

...

Country place, a townhouse project of 43 medium priced units, has been shelved recently, its cost . . . $2 million. We also own the property for this project at a cost of $210,000. We are now paying interest on all of this land but are unable to develop it.

COMMERCIAL OFFICE BUILDING

We currently have an option on University Avenue to build a garden type office complex estimated to cost $1.5 million. We are unable to proceed on this project and will lose the option.

We have purchased a 30,000 square feet educational building of a church which was to be converted to office space for a government agency. Since we are unable to secure the $200,000 estimated for remodeling, this project has been temporarily abandoned.

Office and warehouse plans at an estimated cost of $50,000 have been shelved due to no money.

These trends paint a bleak picture for our business. If it continues, and we quite frankly see little relief in sight, housing in the central Arkansas area will suffer a substantial setback. Growth of commercial office space will face serious cut-backs. Payrolls and the construction related industries will no doubt suffer similar downturns.

I am presently preparing to go out of state to obtain additional funds. By establishing a Texas corporation in Dallas we hope to borrow funds and channel them into Arkansas. I have already funded one warehouse project this way. I think this testifies to the fact that I, and others in our business are willing to pay the money necessary if we can be assured of adequate credit.

I personally am very pessimistic about any early changes in our present usury law. I fear that without some immediate relief from a bill such as the one your are proposing the situation can easily worsen and become even more protracted.

ROBERT WICKARD, President.

BANK OF NORTHEAST ARKANSAS,

Jonesboro, Ark.

I am Ed Cherry, President of one of the smaller state banks in Arkansas. More specifically located in the Mississippi Delta Craighead Country, Jonesboro, Arkansas. Our bank, Bank of Northeast Arkansas, because of location, is devoted to the agricultural lending function as well as commercial and consumer functions of credit. We are fortunate in that we are surrounded by land which is suited to the production of Rice, Cotton, Soy Beans, Wheat, Milo and last but not least Cattle. Our town is located on the top of Crowley's Ridge and has considerable number of rolling hills devoted to the cattle industry. We also are pleased to have several industrial plants namely General Electric, F. M. C. Corporation, Walker Mfg. Co. (a division of Tenneco), Crane Co., Colson Corporation, Wolverine World Wide Inc., A. D. T., Stor-All Mfg. Co. and Southern Marketing Affiliates to name just a few. These things are all being accomplished with a population of less than 30,000. These remarks are made only to alert you to the fact that our area even though small, is of necessity, large in credit to many varied corporate businesses as well as large individual agricultural operations.

One of our largest problems begins in the approval of lines of credit to our crop production people in the early Spring of each year. We approve their needs at a predetermined interest rate and historically have adhered to that rate for the duration of the crop year. Credit demands and rates aare reviewed on an annual basis. If an increase is necessary in a line of credit then the rate is adjusted to the competitive rate at that particular moment. From March of this

year our rate has remained static while our costs have risen dramatically. If money had remained in our area, if Arkansas was not a capital poor state, if our demands had not been so great we would have no problem-quite the contrary.

Our supply of money has dried to the point of being a mere trickle. We are faced with having to go to the Federal funds market for reserves which in the past two weeks has fluctuated from 12% % to a high of 142%. Arkansas has many advantages the least of which is the 10% maximum rate on loans to one and all. If you can tell me how I can loan money at 10% if I have paid 12% much less 14% I will return to Crowley's Ridge and stay there forever believing there really is a Santa Claus.

I deeply regret not having had the opportunity of convening the Arkansas State Bank Commission prior to coming here. As Chairman of this Commission I would have liked to report the consenses of opinion of our combined body. Mr. Adams, our Commissioner was out of the state as well as myself so it was not possible.

Because of the ability of banks in states to loan at higher rates we became concerned about how many of our deposits might leave our bank to out-of-state competition. This would come about by their capability to negotiate higher rate for $100,000.00 and over Certificate of Deposits. When this increase first began, our assets totaled approximately 14 million dollars. In a period of 90 to 120 days we had documented a loss of 700 thousands to competition.

This then is our plight. If Arkansas bankers hands are tied then all should be treated likewise. If there are advantages in New York then we should have at least an equal fighting chance.

None of us here from Arkansas can predict with any degree of certainty the outcome of our attempt to remove the 10% usury law from our antiquated constitution. This will not be known until our November general election. In my area it is apparent to me that consumer education on this question will be most difficult and is one reason I feel that the successful removal of this law has less than a 50-50 chance. If my opinions are correct it becomes imperative for something to be done particularly before another agricultural crop is started. I am not at all certain how all bankers feel about this bill however I wish to quote one statement of Edwin Jones, President of First Union Group of St. Louis. So long as bankers are divided, legislators are reluctant to work for passage of any kind of banking legislation. When bankers unite and speak with one voice legislators are willing to weigh proposed legislation on its own merit. Gentlemen this has merit.

Thank you.

EDWARD H. CHERRY,

President.

STATEMENT Of Dr. John A. DOMINICK, CHAIR OF BANKING, UNIVERSITY OF

ARKANSAS

Gentlemen: My name is John A. Dominick; I hold the Chair of Banking at the University of Arkansas. I appreciate having the opportunity to discuss with you the impact of Arkansas' 10% usury ceiling on the Arkansas economy.

The 10% simple interest limitation was placed in the Arkansas Constitution in 1874. Its purpose was to assure fair and equitable treatment for borrowers. With the high interest rates of today, the law has become discriminatory-and those whom the law was designed to protect are now hurt the worst. The 10% percent ceiling is an arbitrary restraint on interstate commerce and it is a threat to the economic viability of the Arkansas economy.

(1) To be more specific, the 10% ceiling has led to an outflow of funds from the state, thereby reducing the availability of loanable funds to consumers, homeowners and businesses. The money market is probably the most fluid market in the nation. During times of high interest rates, Arkansas banks cannot compete in this market. We cannot sell large CD's at 12% and then lend the funds at 10% and remain profitable. Large CD money has virtually disappeared from the state.

Arkansas is a capital-poor state. To sustain our rate of growth we have to rely on out-of-state sources of funds. Two of these sources come from out-of state loans and the sale of loan participations to out-of-state banks. With a

10% ceiling, why would out-of-state banks want to lend in Arkansas? And why would out-of-state banks want to buy participations in Arkansas? They don'tin fact, the situation is just the reverse. Oue-of-state banks are selling loan participations to in-state banks at rates of 12% and better. Clearly, this reduces the supply of loanable funds to Arkansas residents.

At the end of 1973 I surveyed large Arkansas based firms to determine the ability of Arkansas banks to service their credit needs. In total, these firms obtained $156.2 million or 80% of their bank loans out-of-state. As a result of borrowing out-of-state, these firms had to keep most of their deposit balances out-of-state. In total, this amounted to $50 million or 75% of their deposits. This has the effect of reducing the credit base of Arkansas.

(2) When credit is "tight" and rates are high, high risk loans and costly loans are squeezed. This means that consumer loans, mobile home loans, home construction loans, risk capital loans, and loans to marginal borrowers are curtailed. A survey of Arkansas banks with deposits in excess of $25 million was conducted in June, 1974. Ninety-two percent of the respondent banks reported that they had adjusted their loan policies within the past 90 days due to higher rates. This took the form of requiring more security, fewer loans, shorter maturities. higher rejection rates, and higher compensating balances.

(3) The 10% ceiling has a devastating impact on risk capital and risk takers. There can be no adjustment in the risk element of a national prime rate of 12%. This restricts the formation of new businesses in Arkansas.

(4) Surveys of furniture dealers, automobile dealers, appliance dealers, and mobile home dealers reveal that it is becoming more difficult for them to sell their customer credit contracts to financial institutions. The survival of many dealers depends upon their ability to sell indirect paper-our 10% ceiling has led to higher rejection rates, unusually high dealer reserves, high acquisition costs and, in some instances, to selling the paner at a discount plus a 10% rate. Dealers have been forced to raise the prices of their goods in order to maintain profit margins. Price surveys conducted by Dr. Gene Lynch at the University reveal that prices of consumer durable are considerably higher in Arkansas than in surrounding states. (One survey was conducted in 1968 and another has just been completed). This means that cash buyers are subsidizing the credit customer.

One mobile home dealer reported that his customer credit rejections usually run 30%, but with tight money they have jumped to 70%. Another mobile home dealer reported that he made a profit of $22,500 in 1973, but that his dealer reserve increased $35,000. It's easy to understand why this dealer is having a problem financing his business.

Fourteen months ago we had 268 mobile home dealers in Arkansas: two weeks ago we had 142: and one week ago we had 133. It's difficult to finance mobile homes in Arkansas at a rate of 10% when the FHA financing rate on mobile homes is in excess of 11%.

(5) Lower cash prices of consumer durables in neighboring states encourage Arkansas residents to shop out-of-state, especially if they live near border cities. Part of this is due to the fact that dealers in these areas tend to move to another state in order to offer competitive prices. A prominent example is Texarkana, Arkansas-Texas. A number of merchants on the Texas side moved from Arkansas in recent years, giving as their reason the Arkansas 10% ceiling. The table at page 41 provides an illustration of this point.

(6) Loans and deposits of the Arkansas banking system are still rising. Many of our smaller banks have not experienced severe financial disintermediation. Most people don't have the amount of funds required to invest in money market instruments. Consequently, funds become "trapped" in convenience money, i.e., savings deposits and consumer CD's. The new variable rate notes are designed to attract this type of money. Unless our 10% ceiling is changed, we can't compete with these instruments-and it is likely that in the future we will experience severe disintermediation in Arkansas. This would cripple our economy.

A Federal solution is about the only way to accomplish swift change. The usury problem is a complicated issue which the public doesn't fully understand. Educating the public on this issue would be very lengthy and expensive and before this could be done it might be too late. We need Federal regulation now. We aren't asking for special privileges. We are asking for the right to compete for funds in a free market economy.