STATEMENT OF H. L. HEMBREE, CHAIRMAN OF THE BOARD & CHIEF EXECUTIVE OFFICER, ARKANSAS BEST CORPORATION

Mr. Chairman Brock and gentlemen: I strongly support the state effort to repeal Arkansas' restrictive 10% usury law and support passage of the Brock bill as a measure designed to provide temporary relief to the hard pressed economy and financial institutions of Arkansas. Arkansas-more than any other state that I know-needs a stronger banking industry to support its growth, and clearly immediate relief from our 10% interest ceiling is in the best interest of this industry and the entire state.

My company-Arkansas Best Corporation-is a diversified holding company which was formed in 1966 through the merging into the holding company of several existing companies with the principal company being Arkansas-Best Freight System, Inc. ABF is a Class 1 motor common carrier operating in 19 states from New York and the Carolinas on the east to Texas and Kansas on the west and Wisconsin, Illinois and Pennsylvania on the north to Louisiana and Georgia in the south. It ranks about 18th in total revenues in the United States; and, more importantly, 4th in its operating efficiency. Another major subsidiary-Riverside Furniture Corporation-manufactures multiple lines of quality household furniture of medium price for chain store merchandisers and independent family stores across America. Riverside's manufacturing facilities consist of six plants totaling nearly one million square feet all located in Fort Simth. Other wholly-owned subsidiaries operate in tire retreading, real estate holding and data processing.

Our company is publicly held and listed on the New York Stock Exchange. We have some 5,000 shareholders residing in almost every state of the union. ABC's total revenues exceeded $118 million in 1973.

My company's current lines of credit exceed $33 million and have grown about 15%. It is only reasonable to anticipate that our own growth will require increased use of credits in the future. We do business either directly or through our subsidiaries with approximately 50 banks. Generally speaking, our corporate financing is handled in five states, and predominantly with New York financial institutions.

From my personal and our corporate experience, it is my belief that many of our Arkansas-based institutions and growing companies have found their prospects diminished by inadequate credit available in the state. In the past and presently, Arkansas companies, which have been nurtured and helped by the Arkansas banking industry in their formative years, have had to look beyond our own Arkansas banks as their businesses grew and expanded. This phenomena has occurred-with all due credit to the very good job that Arkansas banks do-because Arkansas has no really large financial institution capable of providing the credit lines and the wide array of sophisticated financial services that a corporation like our and hundreds of others operating here in Arkansas required. More importantly, the State cannot develop such institutions while saddled with an archaic and restrictive 10% simple interest ceiling on all forms of credit.

To illustrate one aspect of this problem, I can think of at least a dozen major expansions that have occurred in Fort Smith alone within the last five years, each of which have had to have major non-Arkansas credit. It was with great disappointment that I was forced to admit in each of these cases that we had no banks in the state that possessed the resources to serve these companies. Presently my company is utilizing several services which are provided by outof-state financial institutions which could be more appropriately handled here in Arkansas. Such services include financial engineering, mathematical models, corporate financial planning, pension fund management, investment advisory services ad real estate or long-term financing for various corporate activities. Where banks exist that are large enough to provide these serives, they are usually found to be extremely profitable to the bank and in turn support further economic development in a state. But such banks cannot develop under an interest ceiling that is totally out-of-step with today's economy.

In a social context, I feel that we are in danger of losing our greatest natural resource in Arkansas-that being our trained young people. Our schools, colleges and universities are producing students with capabilities of progressive leadership, if only we provide them an environment and opportunity. But these young people will leave our state if they cannot find a parity of economic opportunities between Arkansas and her sister states.

Gentlemen, Arkansas seems to be forever presented with "do or die" types of situations. We have now through the Brock bill and our own state efforts an opportunity to start catching up with the rest of the country. I do not suggest that the Arkansas banking industry will melt away if we do not achieve some measure of interest rate parity. I do suggest that our Arkansas economy is in very real danger of withering away as other competing state economies are able to adjust to changing economic conditions while ours is not. Given the current and projected state of our nation's economy over the next few years, the recommendations you make to the full committee on this bill may very well indeed be one of the last opportunities we have to modernize our Arkansas interest rate structure without first suffering a grave economic setback. I am hopeful of the success of our state's initiated efforts; but, if we should fail in our first attempt this fall, your bill may well mean the difference between economic survival and economic chaos for Arkansas.

Senator BROCK. Mr. Mitchell and Mr. Andrews and Mr. Burdett, our next panel.

STATEMENTS OF WILLIAM W. MITCHELL, PRESIDENT, TENNESSEE BANKERS ASSOCIATION; NELSON ANDREWS, PRESIDENT, MCCLURE'S DEPARTMENT STORE, NASHVILLE, TENN.; AND J. GARRETT BURDETT, PRESIDENT, TENNESCO, KNOXVILLE, TENN.

Senator BROCK. I have your statements.

I want to just compliment the people that have been here this morning from Tennessee, Arkansas, and Montana. I have never participated in a hearing where the testimony was more to the point and as brief as the way we have had it here today. I appreciate it. We have accomplished an awful lot.

Mr. MITCHELL. Thank you.

I'm William Mitchell. I'm president of the Tennessee Bankers Association this year. I'm also a chairman of the board of the First National Bank of Memphis, Tenn. I will certainly briefly summarize my testimony (see p. 61 for full statement).

During recent years unusually high rates of inflation and national policies designed to control this inflation have tended to make obsolete the usury laws written under very different economic and social conditions.

We in Tennessee believe immediate passage of this legislation is imperative to the well-being of the people of Tennessee as well as to those people in other States that have the same antiquated usury laws.

First we believe that the ceiling that has been set before the prevailing market rates do not protect anyone. There are three

reasons.

One is those ceilings limit the flow of funds into the State. They encourage the flow of funds out of the State. And third, and this is longlasting, they limit the real economic growth of the affected

areas.

We have brought with us evidence that both local lenders and out-of-State lenders have reduced their lending in the State of Tennessee, not because of any general tightness in the economy but solely because of the 10 percent usury law.

One Tennessee banker, when asked to summarize his current loan policy, put it this way:

Our present policy is very restrictive in that we are not making loans to any new customers and we plan to reduce our loans to present customers by 20 percent to 25 percent before September of this year from their April levels.

Another Tennessee banker describes his policy this way: "We are soliciting no new loan business whatsoever."

We believe statements such as these are typical of the positions being taken by Tennessee lenders.

As I mentioned before, Tennessee is a capital-poor State. Because of this fact, the large commercial banks in Tennessee have been dependent upon outside-purchased money to finance the State's economic growth.

To sustain the State's current level of growth, the eight largest Tennessee banks are purchasing over $2 billion at rates between 11 and 13 percent.

Because of the region's heavy dependence on agriculture, this situation will become even more severe as the demand for loans at these banks increases this fall to finance the marketing and storage of what is expected to be a heavy agricultural crop. Our major banks have continued to absorb losses associated with these borrowed positions in the hope that relief would come from either a special session of our legislature or from the significantly lower money market rates that were widely forecasted by both private and Government economists during the early part of 1974.

Unfortunately, neither scenario has materialized and this obviously unprofitable dependence upon purchased funds leaves these banks no alternative except to cut back on their commitments. This change in their basic balance sheet structure will necessarily reduce the availability of funds in the State.

A recent discussion with Robert Cannon, president of the Tennessee Mortgage Bankers Association, suggest to some extent the degree to which national lenders have also withdrawn funds from Tennessee. In that discussion, Mr. Cannon said that he could document at least $75 million of commercial construction projects that could not be completed because national funds have left the State since the first of the year. He went on to say several large national insurance companies have completely withdrawn from making loans in the State of Tennessee.

Third, as the flow of loanable funds into our State has been restricted, it is our belief that the economy of the State of Tennessee has been adversely affected. In support of this hypothesis, Dr. Pat Choate, Tennessee Commissioner of Economic Development, recently stated that through the first 6 months of 1974, he could definitely attribute the loss of at least $200 million of capital investment to the 10 percent usury law.

Dr. Choate went on to point out that the majority of these losses were expansions planned by relatively small Tennessee firms that did not have access to national money markets.

Based upon current tax rates and median family income of $7,500, a $200 million loss in capital investment means an approximate $15 million loss in State and local government taxes per year and the loss of at least 14,000 jobs.

And fourth, having demonstrated, I believe conclusively, that the economy of Tennessee is being adversely affected by the current usury

laws. You will find on pages 32-35 of our testimony a brief discussion of the legislative problems we have encountered in Tennessee. We are attempting to have the Tennessee statutes changed; however, because of the State constitutional issues involved, it is possible that this process could take several years. In the meantime, Tennessee's economic growth, especially Tennessee-generated growth, would be totally dependent on national monetary policy.

Finally, since these periods of tight money and high interest rates are beyond the direct control of Tennesseans, or any other individual State or group of States. we feel that the passage of this legislation will help insure a more even application of restrictive monetary and fiscal policies throughout the Nation instead of singling out individual geographic regions.

Thank you.

Senator BROCK. Thank you.

Without objection, the entire statement and the appended supporting materials, which are excellent, will be put in the record.

Mr. ANDREWS. Senator, I am Nelson Andrews, president of McClure's Department Stores. McClure's is a family-owned corporation operating five stores in Nashville and Middle Tenn. These range from ladies specialty stores doing a volume of $150,000 a year to small department stores in the slightly over $1,000,000 category. Our competition consists of other stores similar to our own but principally comes from national chains including Sears-Roebuck, J. C. Penney, Allied and Mercantile.

You have undoubtedly heard much of the plight of the lenders to this type of business, but let me today speak principally to the problems of the small business borrower in Tennessee.

We are, of course, tied to the general business climate which is now suffering and will continue to suffer under conditions that exist in regard to interest rates in Tennessee. We share, along with other businesses, the bad effects of a poor business climate, but let me first speak to the more immediate and specific problem that faces us. I would like to put several facts before you to give you a frame of reference of this problem.

First of all, we require two kinds of money to operate our business somewhat longer term capital and short-term seasonal borrowings. The longer term capital finances our expansion-in our case we have within the year completed our newest and largest store and we plan that this borrowing will be repaid over a longer period of time out of contemplated profits. Our seasonal borrowings are on a short term basis and are used to finance the peaking of inventory and accounts receivables, principally in the fall and Christmas seasons. Our profits come principally in the fall and Christmas seasons, so obviously the aforesaid borrowings are essential to our profit picture.

The source of our borowings is entirely from our banking connection in Nashville, Tenn. We are neither large enough nor financially strong enough to float bonds or sell commercial paper. Being a closely held corporation, we do not have the opportunity of selling additional stock to raise new capital. Unlike national corporations, we cannot go to the New York or other money center banks for loans, because their loan demand is also high and they are in no position to make what they would consider small loans to distant

borrowers who have not previously been customers of their banks. If such arrangements could be made, they would naturally and properly insist that we move our bank accounts out of our Tennessee banks to their institutions. This, of course, would compound the problems of the availability of credit to other smaller Tennessee borrowers. The necessity of some of Tennessee's larger borrowers having to do this has undoubtedly affected our ability to receive our full credit needs from our Tennessee bank. In any event, we are totally dependent on the aforementioned bank for the source of our borrowings.

Now to the specific problem we face. If credit is to be refused by the bank in Tennessee, and at this point this seems logically to be the only solution they have [certainly we must expect a rationing of valuable funds], and if in turn that means we would not be able to obtain seasonal borrowings, the fact is that we simply could not compete with those competitors who have access to borrowings outside of Tennessee. In even simpler terms, if Allied or SearsRoebuck or Mercantile could and would bring in the proper inventories for the Christmas season and we could not and did not, we would be in an extremely critical and serious position as to profits and, in fact, survival. In this regard we are like all other retail businesses in Tennessee who are dependent upon sources within Tennessee for their seasonal borrowings. Because of the money supply situation, we have, of course, completely stopped any expansion plans that we had entertained and have curtailed other promotional efforts that would have required additional capital.

The conflict between Tennessee's usury laws and the cost of funds imported in Tennessee by banks and other financial institutions is well known by the business community in Tennessee. Businessmen know that Tennessee banks are rationing credit by refusing many loans that would ordinarily be made by insisting that those loans that must be made for essential business operations be reduced to minimal amounts.

In June of this year we adopted the Master Charge and Bankamericard programs to lessen the need for accounts receivable borrowing. This is but one illustration that we are doing what we can to continue to operate our business in the restrictive environment created by our outmoded usury laws.

Specifically the problem we have got is we have to compete. If we can't compete for money on a fair and competitive basis we are going to be out of business. We understand the problems of the banks but we also feel that banks can and will pull in their horns, so to speak. All they have to do is lessen their lending by a borrowing lending ration or a money cost lending ration if it is profitable for them and if they do that it is the borrower on the other end that is going to feel the real crunch. I think in Tennessee up until now, and you can look at the larger banks' statements to see this. They have bent over backwards to take care of borrowers like us but they are not going to for long do this. We understand too the problems of inflation. This hits harder in Tennessee. We have to survive there. If we have that crunch in Tennessee we are dependent upon it there and no place else. In conclusion, we are not asking for any unfair advantage. We don't want to borrow money or get along on any other basis than a competitive with other corporations.