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S. HRG. 111–531 SMALL BUSINESS LENDING FIELD HEARING CONGRESSIONAL OVERSIGHT PANEL ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION HEARING HELD IN PHOENIX, ARIZONA, APRIL 27, 2010 Printed for the use of the Congressional Oversight Panel ( pwalker on DSK8KYBLC1PROD with HEARING Available on the Internet: http://www.gpoaccess.gov/congress/house/administration/index.html VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00001 Fmt 6011 Sfmt 6011 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00002 Fmt 6019 Sfmt 6019 E:\HR\OC\B213.XXX B213 SMALL BUSINESS LENDING S. HRG. 111–531 SMALL BUSINESS LENDING FIELD HEARING CONGRESSIONAL OVERSIGHT PANEL ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION HEARING HELD IN PHOENIX, ARIZONA, APRIL 27, 2010 Printed for the use of the Congressional Oversight Panel ( Available on the Internet: http://www.gpoaccess.gov/congress/house/administration/index.html U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 57–213 : 2010 pwalker on DSK8KYBLC1PROD with HEARING For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00003 Fmt 5011 Sfmt 5011 E:\HR\OC\B213.XXX B213 CONGRESSIONAL OVERSIGHT PANEL PANEL MEMBERS ELIZABETH WARREN, Chair PAUL ATKINS J. MARK MCWATTERS RICHARD H. NEIMAN pwalker on DSK8KYBLC1PROD with HEARING DAMON SILVERS (II) VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 E:\HR\OC\B213.XXX B213 CONTENTS Page pwalker on DSK8KYBLC1PROD with HEARING Opening Statement of Elizabeth Warren, Chair, Congressional Oversight Panel .............................................................................................................. Statement of Mr. J. Mark MCWATTERS, Member, Congressional Oversight Panel .............................................................................................................. Statement of Mr. Damon Silvers, Member, Congressional Oversight Panel .............................................................................................................. Statement of Mr. Richard Neiman, Member, Congressional Oversight Panel .............................................................................................................. Statement of Robert Blaney, Arizona District Director, U.S. Small Business Administration ...................................................................................... Statement of Stan Ivie, Regional Director, San Francisco, Federal Deposit Insurance Corporation .................................................................................. Statement of Cindy Anderson, CEO, Great Biz Plans .................................. Statement of Candace Wiest, President and CEO, West Valley National Bank ............................................................................................................... Statement of Paul Smiley, President and CEO, Sonoran Technology ......... Statement of James H. Lundy, President and CEO, Alliance Bank of Arizona ........................................................................................................... Statement of Mary Darling, CEO, Darling Environmental and Surveying Statement of Lynne B. Herndon, Phoenix City President, BBVA Compass ................................................................................................................ (III) VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00005 Fmt 5904 Sfmt 0483 E:\HR\OC\B213.XXX B213 1 5 10 14 18 23 52 59 64 68 75 80 pwalker on DSK8KYBLC1PROD with HEARING VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00006 Fmt 5904 Sfmt 0483 E:\HR\OC\B213.XXX B213 FIELD HEARING ON SMALL BUSINESS LENDING TUESDAY, APRIL 27, 2010 U.S. CONGRESS, CONGRESSIONAL OVERSIGHT PANEL, Phoenix, AZ. The Panel met, pursuant to notice, at 10:05 a.m., at the University of Arizona, Phoenix, Arizona, Elizabeth Warren, Chair of the Panel, presiding. Present: Professor Elizabeth Warren [presiding], Mr. Damon Silvers, Mr. J. Mark McWatters, and Mr. Richard Neiman. pwalker on DSK8KYBLC1PROD with HEARING OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT PANEL Chair WARREN. I now call to order this meeting of the Congressional Oversight Panel for the Troubled Asset Relief Program. Good morning. My name is Elizabeth Warren. I am the Chair of the Congressional Oversight Panel. I would like to begin this morning by extending our sincere thanks to the City of Phoenix, the University of Arizona, Senator John McCain, Senator John Kyl, and Congressman Ed Pastor for hosting us and for helping to plan today’s hearing. These hearings take a lot of people and a lot of moving parts and we’re very grateful for the help of the congressional delegation. Congress established our panel in October of 2008 to oversee the expenditure of the $700 billion Troubled Asset Relief Program, commonly called TARP. We issue monthly oversight reports that analyze and evaluate the Treasury’s administration of this program in stabilizing our economy. In the course of our work, we travel from time to time to areas of the country that have been especially hard hit by the financial crisis. This morning we’re pleased to be in Phoenix to learn more about the credit crunch or the reduction of availability of credit for small businesses. Oversight of this topic is a crucial role for our panel. The Secretary of the Treasury recently designated small business credit as one of the primary focuses of the TARP and he pledged TARP funds for additional efforts to facilitate small business lending. This is a difficult moment for most American businesses, large and small. Companies of all sizes remain constrained by the recession, hampered by the unwillingness of banks to lend and weakened by the reluctance of customers to buy, but as our economic cycle turns towards recovery, there is a very real fear that, while (1) VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 2 pwalker on DSK8KYBLC1PROD with HEARING big businesses might be able to gain credit through Wall Street or the debt markets, small businesses will be left behind. For Arizona this is not an acceptable outcome. Over 97 percent of the state’s employers have fewer than 500 employees. Nearly half of the state’s workers are employed by small businesses. A recovery that leaves behind Arizona’s small businesses can hardly be termed a recovery at all. Before the crisis, entrepreneurs who needed money to finance their business had many options. They could reach out to a local or a national bank and ask for a loan. They could charge expenses to a business credit card. They could contract with a non-bank lender to receive upfront payment on future income. They could take out an equity line of credit against their business property or their homes. Today most of those choices have disappeared and for most businesses the only credit option remaining is a small business loan. But for even this, the pathway is restricted. Most banks have suffered severe losses and many have cut back on lending. To make matters worse, the hardest-hit banks tend to be the smaller ones, the same institutions that disproportionately serve small businesses. The result could be a vicious cycle. Small businesses could find that because they cannot access credit, they cannot meet demand for their services. Their bottom line could suffer, further undermining the economy which in turn could further damage credit access. Breaking this cycle will be an important step toward economic recovery. [The prepared statement of Ms. Warren follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 10 57213A.001 pwalker on DSK8KYBLC1PROD with HEARING 3 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 11 57213A.002 pwalker on DSK8KYBLC1PROD with HEARING 4 5 Chair WARREN. We are grateful today for all of our witnesses and I’ll introduce them as we go along. And with that, I’m going to pause and ask for an opening statement from McWatters. Mr. McWatters. pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. MCWATTERS. Thank you, Professor Warren. I very much appreciate the attendance of the distinguished witnesses, and I look forward to hearing their views. The problems presented by today’s commercial credit and small business lending markets would be easier to address if they were solely based upon the mere under-supply of commercial and small business credit in certain well-defined regions of the country. Unfortunately, the commercial credit and small business lending markets must also assimilate a remarkable drop in demand from borrowers who have suffered reversals in their business operations and prospects over the past two years. In my view, there has been a material decrease in demand for commercial and small business credit and many potential borrowers have withdrawn from the market due to, among other reasons, their desire to deleverage, the introduction of enhanced underwriting standards by lenders and their regulators, the diminishing opportunities for prudent business expansion, the crippling effects of the recession, and the increasing tax and regulatory burden facing small and large businesses. Conversely, the Administration has focused on the undersupply of commercial and small business credit and has, not surprisingly, proposed a government-sponsored program to remedy the problem. If enacted as proposed, the Small Business Lending Fund will permit a subset of commercial and small business lenders to obtain capital from the Federal Government at very favorable rates, provided the lenders agree to use the proceeds to extend credit to small business borrowers. In addition to serving as arguably the first step in a program to nationalize small business lending, I am troubled that providing financial institutions with capital at below market rates will lead to a prudent lending activity in the inflation of a series of government-sanctioned and subsidized asset bubbles. If the Government convinces or pressures financial institutions to accept cheap credit, based on the condition that the recipients offlend the proceeds, then I suspect the Government will accomplish just that. Yet isn’t this what we have just recently experienced in the sub-prime credit bubble? Too much money chasing transactions of diminishing credit quality. The Administration’s proposal appears to share much of the business model with those adopted by Fannie Mae and Freddie Mac. Treasury should have learned from Fannie and Freddie that the combination of below market credit, together with a single-minded mandate to lend, regardless of credible demand, serves as a perfect recipe for the creation of asset bubbles. In addition, the Administration’s program seems at cross purposes with the recent actions of federal banking regulators who have become increasingly cautious, perhaps even overly cautious, VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 6 pwalker on DSK8KYBLC1PROD with HEARING regarding extensions of credit and renewals by regulated financial institutions. It is indeed ironic for the Administration to propose a program of cheap credit-driven lending while at the same time federal and state banking regulators are attempting to reign in the excesses that inevitably followed from the Government’s last experiment with cheap credit. Instead of requiring the taxpayers to subsidize another round of imprudent short-term credit expansion, commercial and small business lenders, in consultation with the regulators, where appropriate, should adopt long-term business models and strategies that incorporate objective and transparent due diligence standards that permit well-run borrowers to receive credit on reasonable terms and lenders to earn an appropriate risk-adjusted rate of return. Regrettably, some potential borrowers will fail the heightened underwriting standards and will not receive the requested extensions of credit. This should not necessarily serve as a sign of angst but should indicate that the credit markets have moved away from an anything goes mentality where borrowers frequently overextended their leverage and financial institutions survived through the clever interpretation of accounting rules and the implicit guarantee of their obligations by the American taxpayers. Any suggested solution to the challenges facing commercial credit and small business lenders and borrowers that focuses only on the undersupply of credit to the exclusion of the economic difficulties facing prospective borrowers appears unlikely to succeed. Until small and large businesses regain the confidence to hire new employees and expand their business operations, it is doubtful that the demand for properly-underwritten commercial and small business credit will sustain a meaningful recovery. As long as business persons are faced with the multiple challenges of rising taxes and increasing regulatory burdens, it is unlikely that they will enthusiastically assume the entrepreneurial risk necessary for protracted economic expansion and a recovery of the commercial credit and small lending markets. Thank you for joining us today. I look forward to our discussion. [The prepared statement of Mr. McWatters follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 18 57213A.003 pwalker on DSK8KYBLC1PROD with HEARING 7 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 19 57213A.004 pwalker on DSK8KYBLC1PROD with HEARING 8 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 20 57213A.005 pwalker on DSK8KYBLC1PROD with HEARING 9 10 Chair WARREN. Thank you, Mr. McWatters. Mr. Silvers. pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF DAMON SILVERS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. SILVERS. Thank you, Chair Warren. Good morning. This hearing is an effort by our panel to learn more about the circumstances of small- and medium-sized businesses seeking to obtain credit and, in particular, to learn whether TARP, the federal bank bailout, has been successful in its purpose of ensuring the flow of credit to Main Street. Like my fellow panelists, I want to express my appreciation to our staff, to the University of Arizona for this facility, to the state’s congressional delegation and the Mayor of Phoenix for their assistance with this hearing. Arizona has been particularly hard hit by the financial and economic crisis that began in 2007. Unemployment in this state is at 9.6 percent officially. There’s testimony from one of the witnesses that the real rate in the Phoenix area may be something like 15 percent and housing prices statewide have fallen by 36 percent. Consequently, it is appropriate that our panel come here to learn about the state of credit provision to small- and medium-sized businesses. Now, in coming here, we did not know that today Arizona would be the focus of a profound debate about our character as a nation, a debate with roots in the pain caused by the economic crisis, but since this debate is underway and we are here, I wish to say that for me America is a place where the police do not ask for your identity papers as you go about your business, and I hope we can soon say the same about Arizona. We have banks in substantial part that transform our savings into credit for business. When then-Treasury Secretary Paulson went to Congress to create TARP, he spoke of the dire threat to the banking system as a whole with serious consequences for smalland medium-sized businesses throughout our country that depend on bank credit to finance inventory and capital goods, to purchase real estate, and the many other ways to keep operating and creating jobs. What Secretary Paulson did not say, as far as I know, was that as a result of the concentration in the U.S. banking sector, smalland medium-sized businesses nationwide have depended increasingly on credit from large banks. The biggest banks, those with over a 100 billion in assets, provided only 15 percent of small business loans in 1999 while in 2008 those banks provided 37 percent. Unfortunately, the largest 22 banks receiving TARP funds, none of which were allowed to fail in the financial crisis, have actually reduced business lending nationwide during the period from April to November 2009, a period when large banks were supposed to be recovering and recording very high profits. Meanwhile in Arizona, we have seen an epidemic of weakness among locally-based banks with 84 percent of the state’s banks losing money in 2009 and six banks closed by the FDIC, an epidemic driven largely by residential and commercial real estate loan weakness. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 11 pwalker on DSK8KYBLC1PROD with HEARING Economic recovery and job creation require that our banking sector do its job by providing credit on reasonable terms to creditworthy borrowers. I hope we can learn today about the roles played by locally-based and national banks in credit provision in Arizona and get a sense of the relative importance of the weakness of borrowers versus the weakness of lenders in the contraction in bank lending to small business and in understanding the decline of lending to small- and medium-sized businesses as a result of the economic crisis. Finally, I’ve long suspected that despite the TARP, our banks, both large and small, continue to be under-capitalized. In this environment and so long as banks are not sufficiently recapitalized or restructured, there is reason to believe that bank capital structures will not work to channel credit to small business, much as the TARP seems not to have done so during 2009. I would be interested in today’s witnesses’ thoughts on how to channel credit to small business borrowers prudently in this environment and, in particular, whether TARP monies should be channeled directly to small- and medium-sized business lending, much as TARP money and Federal Reserve money has been used to directly support Wall Street-oriented credit markets, such as the asset-backed securities markets through the TALF and PPIP Programs. Thank you, and I look forward to hearing from our witnesses. [The prepared statement of Mr. Silvers follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 26 57213A.006 pwalker on DSK8KYBLC1PROD with HEARING 12 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 27 57213A.007 pwalker on DSK8KYBLC1PROD with HEARING 13 14 Chair WARREN. Thank you, Mr. Silvers. Superintendent Neiman. pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. NEIMAN. Thank you. Good morning. I’m also very pleased to be here in Phoenix and to continue the Panel’s commitment to issues around small business lending. I especially want to thank the witnesses—both the small businesses and other consumers and borrowers—who are here, as well as the banks and regulatory officials. I’d also like to thank the state’s newly-appointed banking superintendent, Lauren Kingry, who is also in attendance here, and I know representing the Governor. So I very much appreciate your participation here today. The spiraling financial crisis has touched every corner of the credit markets, including products like small business lending, which were seemingly remote from the sub-prime mortgages that were at the heart of the crisis. Small businesses are engines of the economy and of job creation. The financial crisis and ensuing recession, however, have created a catch-22 that makes it difficult to restart the credit markets. There is a lack of confidence on both the supply and the demand side which reinforces this economic rut. Small businesses are understandably hesitant to take on more debt and expand at a time when their own customer base may be less than stable and banks are also understandably reluctant to take on more risk at a time when small businesses may have strained income. Community banks are frequent sources for small business credit, and, in this stage of the financial crisis, smaller banks are coming under increasing stress. We have seen growing numbers of smaller banks fail recently and anticipate that this trend will continue. These small bank failures, which could be increasingly driven by commercial real estate defaults, create holes in our communities. Where there was once a flourishing center for responsible hometown lending, there can be a vacuum. This means less credit may be available for small businesses as well as for consumer lending. So I see a clear connection between righting the ship for real estate loans and small business lending. Commercial real estate defaults may constrain the lending capacity of the smaller banks which provide credit to many small businesses and since many small businesses use their homes as business collateral, the cratering of the residential real estate market has reduced these borrowers’ ability to qualify for loans. To break the stalemate, we will require old-fashioned underwriting to identify the good deals that are still waiting to be made. It may also require banks to think not only creatively but collectively. For example, we have a unique small business program in New York. It’s centered on the New York Business Development Corporation which was chartered in the 1950s during a recessionary period, and to my knowledge we are one of the few such programs in the country. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 15 pwalker on DSK8KYBLC1PROD with HEARING This consortium is an entity which functions similar to a lending consortium. Member banks provide funding to the corporation which in turn makes loans to small businesses, loans that banks would typically decline. The New York Business Development Corporation has had a very successful history with these loans and it’s a real force for economic development in my state and I intend to explore the means of using TARP funds for similar small business lending consortiums during my question period. It is my hope and intent that today’s hearing will assess the magnitude of the problem in small business lending and, most importantly, explore potential market-based and public policy solutions. I look forward to your testimony and to your innovative ideas. Thank you. [The prepared statement of Mr. Neiman follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 32 here 57213A.008 pwalker on DSK8KYBLC1PROD with HEARING 16 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 33 here 57213A.009 pwalker on DSK8KYBLC1PROD with HEARING 17 18 Chair WARREN. Thank you, Superintendent Neiman. So now we will hear from Robert J. Blaney, the Arizona District Director of the Small Business Administration, and from Stan Ivie, San Francisco Regional Director of the Federal Deposit Insurance Corporation. I would like to give each of you five minutes for an opening statement. Your entire written remarks will be put in the record, though. So don’t feel constrained about that. Mr. Blaney, could we start with you? pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF ROBERT BLANEY, ARIZONA DISTRICT DIRECTOR, U.S. SMALL BUSINESS ADMINISTRATION Mr. BLANEY. Thank you. Thank you, Chair Warren and Members Neiman, Silvers, and McWatters. My name is Robert Blaney. I am the District Director for the Small Business Administration or the SBA. I am honored to be testifying before you today on behalf of the SBA concerning current credit conditions for small businesses, especially those in Arizona. One of the main missions of the SBA is to provide small business owners with access to much-needed capital. We do this primarily by providing a partial government guarantee on loans given by banks and other lending partners. This guarantee helps provide access to capital for creditworthy small businesses that would otherwise be unable to get loans. Our programs help to support many small businesses and we understand the difficulties small businesses face with access to credit in today’s economic climate. To address the financial crisis, Congress passed the Recovery Act which President Obama signed into law on February 17th, 2009. This legislation allowed the SBA to raise guarantees on eligible 7(a) loans to 90 percent and reduce or eliminate fees in our 7(a) and 504 loan programs. As a result, while conventional lending to small businesses continues to lag, SBA lending nationwide has increased dramatically since the weeks before the Recovery Act was passed. Here in Arizona, SBA lending has increased by nearly 60 percent since the passage of the Act. Nationwide, we turned about $530 million in taxpayer funding into support for more than $25 billion in loans to small business owners which is a great bang for the taxpayers’ buck. This includes nearly $530 million in SBA-supported loans to Arizona small businesses. Despite these accomplishments, I know that times are still tough for small business owners. Given those ongoing difficulties, the SBA has worked with the President to create a jobs plan that targets the lending gaps that still exist. There are four components to this small business jobs agenda. First, to address the issue of banks that still have trouble taking risk, we’ve asked for a temporary extension of the increased 90 percent guarantee and reduced fees. Second, many small businesses, franchises, manufacturers, exporters, and others need bigger SBA loans to create jobs. Therefore, we want to permanently increase our top loan limits from $2 million to $5 million for 7(a) and $4 million to $5.5 million for our 504 loan program. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 19 pwalker on DSK8KYBLC1PROD with HEARING Third, for businesses that can’t find access to working capital, we need to temporarily raise the SBA express loan limit from $350,000 to $1 million. These loans will help businesses restock shelves and fill orders coming in. Fourth, we know that many small businesses have conventional owner-occupied commercial real estate mortgages that will need to be refinanced soon. As real estate values have declined, many banks will find that these businesses no longer qualify for conventional loans, regardless of the strength of the businesses. As a result, even small businesses that are performing well and making their payments on time can have a hard time refinancing these loans and may face foreclosure. Chair WARREN. Mr. Blaney, can I stop you there? That’s five minutes. Thank you very much. We’ve all, I think, read your written testimony, and we’ll make sure it’s included in the record. [The prepared statement of Mr. Blaney follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 38 here 57213A.010 pwalker on DSK8KYBLC1PROD with HEARING 20 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 39 here 57213A.011 pwalker on DSK8KYBLC1PROD with HEARING 21 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 40 here 57213A.012 pwalker on DSK8KYBLC1PROD with HEARING 22 23 Chair WARREN. Mr. Ivie. pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF STAN IVIE, REGIONAL DIRECTOR, SAN FRANCISCO FEDERAL DEPOSIT INSURANCE CORPORATION Mr. IVIE. Thank you, Chair Warren and members of the Congressional Oversight Panel. I’m Stan Ivie, Regional Director for the FDIC’s San Francisco Region which covers 11 Western states, including Arizona. I appreciate the opportunity to testify today on behalf of the FDIC on the state of bank lending and access to credit for small businesses. The FDIC is the federal insurer of deposits at all banks and thrifts and serves as the primary federal supervisor for more than 5,000 state-chartered banks. We work closely with state regulatory authorities in performing our supervisory duties and understand the challenges faced by financial institutions and their customers during these difficult economic times. Bankers and examiners know that responsible lending is good business and benefits everyone. We also know that continued recovery of our economy will depend heavily on creditworthy borrowers having access to credit at our nation’s insured banks. The ailing economy has stressed the balance sheets of both banks and small businesses, creating a difficult credit environment at both banks and small businesses. The rapid deterioration has resulted in declines in both the demand for and supply of credit. Nationwide, expenses for troubled loans continue to weigh heavily on our banks. More than half of the banks in the West are not currently profitable, as costs associated with charged-off loans and provisions to increase reserves for loan and lease losses continue to negatively impact earnings. Non-current loans more than 90 days past due or on non-accrual represented 5.37 percent of all bank loans at year-end 2009, a 26year high. The rate of increase in the volume of non-current loans, however, has slowed for three consecutive quarters and we expect that trend to continue. Arizona’s banks and small businesses have been particularly hard hit by the recent economic downturn. 2009 was a particularly difficult year for Arizona banks as the state’s institutions charged off loans and reserves for future loan losses at record high levels, resulting in the second lowest median pre-tax return on assets, ROA, in the nation. Small businesses have also been severely impacted by the economic downturn. While surveys clearly reflect that bank loans have become more difficult to obtain, their own deteriorating business conditions appear to represent an even bigger problem as many cite poor sales as their biggest business problem. Bank examiners at the FDIC recognize the critical role that banks and small businesses play in our economy. Our examiners work out of 85 local duty stations and communities located across the country, including one right here in Phoenix. They are experienced, professional, and knowledgeable about their banks and local market conditions. FDIC examiners are not directly involved in a bank’s credit decisions. The FDIC provides banks with considerable flexibility in VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 24 pwalker on DSK8KYBLC1PROD with HEARING dealing with their customers and managing loan portfolios. We do not instruct banks to curtail prudently-managed lending activities, restrict lines of credit to strong borrowers or deny renewal requests solely because of weakened collateral value. We do not require new appraisals for a healthy loan that is performing according to its original terms. We leave the business of lending to those who know it best, the community bankers who provide credit every day to small businesses and consumers throughout America and here in Arizona. To ensure consistency in our approach, FDIC employees at headquarters, in the region and in the field are engaged in a continuous and ongoing dialogue about credit conditions and our supervisory approach. We also communicate regularly with other federal and state regulators and hold roundtable discussions with local bankers to gain their perspective. We emphasize that our examiners should take a balanced approach and that they should encourage banks to originate and renew properly-underwritten real estate, commercial, and consumer loans and to work with borrowers facing difficulties to restructure their obligations. In determining what is a performing loan, FDIC examiners focus on borrower cash flow as a primary source of repayment. Collateral support serves as a secondary source of repayment. When reviewing loans, we look at collateral documentation but focus on the borrower’s overall financial strength, including guarantor support and business cash flow projections. A borrower’s willingness and ability to keep payments current, especially during stressed economic times, is a primary factor in evaluating loans. The FDIC has issued a series of statements to clarify our supervisory processes and to encourage financial institutions to make prudent loans. Most recently, on February 12th, 2010, regulators jointly issued the Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers to encourage prudent lending and emphasize that examiners will apply a balanced approach in evaluating small business loans. In conclusion, while many challenges remain before bankers, small businesses, consumers, and regulators, the FDIC is confident that the banking industry as a whole is moving in the right direction toward more sound lending practices, stronger balance sheets, and a greater capacity to serve the credit needs of small businesses and their communities. Thank you. [The prepared statement of Mr. Ivie follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 47 here 57213A.013 pwalker on DSK8KYBLC1PROD with HEARING 25 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 48 here 57213A.014 pwalker on DSK8KYBLC1PROD with HEARING 26 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 49 here 57213A.015 pwalker on DSK8KYBLC1PROD with HEARING 27 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 50 here 57213A.016 pwalker on DSK8KYBLC1PROD with HEARING 28 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 51 here 57213A.017 pwalker on DSK8KYBLC1PROD with HEARING 29 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 52 here 57213A.018 pwalker on DSK8KYBLC1PROD with HEARING 30 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 53 here 57213A.019 pwalker on DSK8KYBLC1PROD with HEARING 31 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 54 here 57213A.020 pwalker on DSK8KYBLC1PROD with HEARING 32 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 55 here 57213A.021 pwalker on DSK8KYBLC1PROD with HEARING 33 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 56 here 57213A.022 pwalker on DSK8KYBLC1PROD with HEARING 34 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 57 here 57213A.023 pwalker on DSK8KYBLC1PROD with HEARING 35 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 58 here 57213A.024 pwalker on DSK8KYBLC1PROD with HEARING 36 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 59 here 57213A.025 pwalker on DSK8KYBLC1PROD with HEARING 37 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 60 here 57213A.026 pwalker on DSK8KYBLC1PROD with HEARING 38 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 61 here 57213A.027 pwalker on DSK8KYBLC1PROD with HEARING 39 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 62 here 57213A.028 pwalker on DSK8KYBLC1PROD with HEARING 40 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 63 here 57213A.029 pwalker on DSK8KYBLC1PROD with HEARING 41 pwalker on DSK8KYBLC1PROD with HEARING 42 Chair WARREN. Okay. Thank you, Mr. Ivie. So we’re going to do some questions. We’ll try to hold ourselves to five minutes, at least in this first round, and I’ll start first with Mr. Blaney, if I could. SBA loans are what portion of total small business lending? What portion of small business lending comes through SBA? Mr. BLANEY. I don’t know the answer to that question. Chair WARREN. It’s a very small fraction, isn’t it? Mr. BLANEY. It’s a smaller fraction, but I do not know the answer to that question. Chair WARREN. Okay. Sir, well, let me ask it a different way then. Knowing it’s a small fraction, when the Government says it’s going to put programs in to do more SBA lending, do we have any sense of how much leverage that’s going to create; that is, how much change it’s going to make in the availability of credit for small businesses? Mr. BLANEY. Well, we have seen an increase in lending—— Chair WARREN. Can you hold the mic just a little bit closer to you? Mr. BLANEY. We have seen a general increase in lending this year as a result of the Recovery Act. Last year we only did 960 loans in this state and this year year-to-date we’ve done 684. So we’ve seen that there’s been a general increase. Chair WARREN. Do you have any idea—that’s 684 out of how many loans? Mr. BLANEY. I don’t know. I don’t know what commercial—— Chair WARREN. What I’m trying to figure out is not whether you did 680 loans but whether that’s a drop in the bucket or that half fills the bucket because we’re really trying to figure out the role the SBA plays here. Mr. BLANEY. Yes. Unfortunately, I don’t know what commercial lenders are doing. I only know what they’re doing with SBA. Chair WARREN. Okay. Let me ask a different question then of the SBA. Would the SBA be more effective if it became a direct lender again instead of working only through financial institutions? Mr. BLANEY. Well, we’ve been asked that question and many people are asked why SBA doesn’t make loans directly, and direct lending would require hiring a new workforce and significantly expanding our reach. It would require us to set up or stand up a massive bureaucracy and SBA would not be able to make its first direct loan for approximately a year or more. Chair WARREN. Okay. Well, I get the timing part. Are you telling me that the banks now have a massive bureaucracy to do this? Mr. BLANEY. Well, no, ma’am. Chair WARREN. Then why would it take you a massive bureaucracy to do? Mr. BLANEY. Well, we have to have more people to do it. Chair WARREN. Well, why would it be a massive bureaucracy when you do it but the banks are doing it now without a massive bureaucracy? Mr. BLANEY. I’m afraid that would be a policy question and I’m a civil servant, ma’am. I run this office here. Chair WARREN. But you just gave me that answer. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 43 Mr. BLANEY. Yeah. And we’d have to have a whole operations section to do it and that would be several hundred people for credit purposes. Chair WARREN. So for you to do what the banks do would require a massive bureaucracy but it doesn’t require the banks—— Mr. BLANEY. Well, massive bureaucracy is a bad term. It would take a lot of people to run a center for lending. Chair WARREN. Okay. Maybe I should ask some questions of the FDIC while we’ve got you here. So are banks contracting credit, Mr. Ivie? What are you seeing from your perspective? Mr. IVIE. I think banks, and community banks in particular, want to lend to borrowers. The trouble is finding creditworthy borrowers. The demand is—— Chair WARREN. Well, which is—— Mr. IVIE [continuing]. Not there. Chair WARREN. That’s what I’m really trying to ask—supply and demand. Are you seeing a demand contraction or are you seeing a supply contraction? I realize you may be seeing some of both, but do you have some sense of which one seems to be driving things here? Mr. IVIE. Yes. Some of both. I think our community banks clearly want to lend, but the demand is not there from the creditworthy borrowers. It appears that healthy borrowers who could borrow are not interested in borrowing at this time. I think it’s a confidence issue and once we see the economy start to recover and employment start to recover, then I think the businesses will be more willing to borrow. Chair WARREN. Okay. So you’ve just given me two demand side answers; that is, those who are asking for credit don’t deserve it and those who deserve it aren’t asking for it. So that’s why you think lending has contracted, small business lending? Mr. IVIE. And also banks—it’s true that many banks have financial difficulties right now with their credit quality and they need to reserve their capital for losses and future losses, which result in less capital and liquidity to lend to borrowers. Chair WARREN. So another problem that we’re seeing is because the banks themselves are in financial trouble, presumably because of their real estate loans or their commercial real estate loans, and don’t want to lend. They want to hang on to their capital. Do you have any sense of what they’re doing with their excess capital right now? Mr. IVIE. Yes. Again, I think banks want to lend, if they have the available capital to be able to lend. If they don’t find acceptable loan demand, Fed funds are an option for some of the banks at this time. Chair WARREN. I’m sorry. I’m not quite understanding. So are you saying the banks don’t have any excess capital right now? Mr. IVIE. Some banks do, some banks don’t. Banks that are in trouble do not have excess capital at this time. Chair WARREN. Okay. I got that part. And the banks that do have excess capital, what are they doing with it? VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 44 Mr. IVIE. I think they are striving to lend to borrowers. When they do not have sufficient borrower demand or creditworthy borrowers—— Chair WARREN. You think they’re out there trying? Mr. IVIE. I do think they’re out there trying. Chair WARREN. Okay. My time is up. Mr. McWatters, the mic is yours. Mr. MCWATTERS. Thank you. I was looking over the written testimony of James Lundy. He’s the CEO of Alliance Bank of Arizona, and on page three of his testimony he says that ‘‘increased capital requirements for the banking industry may make sense, particularly for banks with higher risk profiles. However, increased capital requirements should be phased in, perhaps over a two-to-four-year period, allowing the industry to deal with capital issues more strategically.’’ So phasing-in capital requirements. On the next page, Mr. Lundy says, ‘‘Regulators are stretched very thin but they seem to have too little flexibility in their examination procedures and process which exacerbates the resource shortage.’’ So too little flexibility. Third, Mr. Lundy says, ‘‘Recently, compliance exams have an increasingly hard edge to them, to which the community banker becomes frustrated,’’ and the like. So this is from a real live banker, not from a Member or panelist. Do you have any comments with respect to phasing in capital requirements, too little flexibility regarding examination procedures, and this so-called hard edge? Mr. IVIE. Well, I agree that many of our banks are having difficulty and they need to deal with their own problems. Prompt corrective capital ratios of five, six, and ten percent, those are for a well-managed bank in a stable environment. Capital needs to be commensurate with the risk in the bank’s portfolio and that is requiring higher levels of capital when there are risky loans on the books. In terms of flexibility, we strive to be very balanced and flexible in dealing with our banks. We issue guidance on how we would evaluate loans to try to clarify our processes to the industry, which we hope will make them more comfortable in making loans. As far as compliance exams, we take consumer protection very seriously at the FDIC. We view the FDIC seal as a Good Housekeeping Seal of Approval and if a bank is going to have the FDIC seal on its front door, we want customers to know that they’re going to be treated fairly by that institution. So we do enforce our consumer protection laws equally with our safety and soundness. Mr. MCWATTERS. Okay. Thank you. Mr. Blaney, any comments to that? Mr. BLANEY. No, sir. Mr. MCWATTERS. Okay. Lynne Herndon, President of Compass Bank, Phoenix, she writes in her opening statement that ‘‘many banks in Phoenix are beyond the current capital guidelines for commercial real estate and so much so that their ability to make business loans is impacted.’’ Okay. So too much CRE depresses regular non-CRE loans. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 45 ‘‘Many banks are shrinking their overall balance sheets in order to come closer to the guidance.’’ Okay. ‘‘Unfortunately, in many cases this means asking creditworthy borrowers to leave as these are the loans most easily placed with another bank.’’ That seems like the last thing you would want to do is ask a good customer to leave. She concludes by saying, ‘‘All these requirements serve to dampen lending in a time when we need to be expanding.’’ Any observations on her concerns? Mr. IVIE. Commercial real estate concentrations are a significant problem, especially in the West. Many banks are looking to shrink their balance sheets to preserve their capital. Their capital is being eroded from charged-off loans and provisions for future loan losses. The FDIC does not instruct a bank to get rid of its creditworthy borrowers. I think it’s more that if they don’t have the capital, they’re trying to improve their capital ratios by shrinking their balance sheet and that may be why they are not lending or running off some of their CRE loans. Mr. MCWATTERS. Okay. Thank you. I’ll stop there. Chair WARREN. Good. Thank you. Mr. Silvers. Mr. SILVERS. Thank you. Mr. Ivie, in your written testimony, which is very helpful, very detailed, there is a chart on page four of loan growth in the last quarter of last year. It shows that, all in all, insured institutions’ loan growth shrank by $128 billion. $116 billion of that shrinkage came from institutions over a $100 billion, and we actually saw growth in lending among, I guess we might call them, medium-sized financial institutions. Can you speak to this in the context of what I think most people believe was a rapidly-improving economy, whether sustainable or not is another question, but an improving economy at the last quarter of 2009 as shown by the basic GDP numbers and the like? Can you explain what is going on here and particularly talk to not the question of whether or not there was a deterioration in general business conditions during 2008 and 2009, which clearly there was, and clearly there was a decrease in demand as a result for lending, but the question of, in light of this data, how serious a problem we have as the economy begins to improve a little bit and whether the supply of credit is going to act as a brake on that improvement? Mr. IVIE. Yes, that’s definitely a concern. I think what the chart reflects is that you have community banks who are locally based and that may be why they can continue to make loans. They’re locally based. They work and live in the communities and they’re better positioned to lend locally. So I think that’s why you’ll see the community banks lending and perhaps why the larger banks that are the money center banks not lending. Mr. SILVERS. So your view would be—do I read you right to say that community banks essentially are taking a more qualitative approach? They have a more kind of three-dimensional knowledge of their borrowers and the large banks maybe are doing more quantitative model-driven lending? Am I reading you right? Mr. IVIE. I would say that’s accurate. Community banks do much more relationship lending in their communities. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 46 Mr. SILVERS. Now, one of the witnesses, one of the bank witnesses, and I apologize, I don’t recall which, points out that, at least in this area, 70 percent of the commercial bank market is four large national institutions. In light of what you’re saying and pointing out, is that type of concentration an obstacle here to adequate credit provision on the upside, given what we just exchanged? Mr. IVIE. Again, I think community bankers are best positioned to lend to small businesses because of their relationship and their knowledge of the local communities. So that would seem to make sense. Mr. SILVERS. If that’s so, how serious a problem is the looming commercial real estate problems in community banks which our panel has reported on and which you allude to, I believe, in your testimony? Mr. IVIE. Right. It’s a serious problem for our community banks. They have large concentrations. Commercial real estate was a niche that community banks fulfilled because they had that local relationship and local knowledge of the markets. We are seeing some improvement and stabilization in terms of prices. Many bankers report to me that they are able to sell their properties for what they had written them down to at this point, so that’s a good sign, but it will take some time to work through that concentration. Mr. SILVERS. So you don’t see continued pressure on the commercial real estate asset side on community banks? You think it’s bottomed out? Mr. IVIE. I don’t know if it’s bottomed out. The decline, rate of decline has slowed. Mr. SILVERS. The rate of decline is slowing. Mr. IVIE. Right. The rate of decline is slowing. We are seeing some stabilization in terms of prices. The banks have written it down to an amount that they can now sell and recover their funds. It’s still a serious problem going forward. Mr. SILVERS. Mr. Blaney—thank you, Mr. Ivie. Mr. Blaney, I understand from your response to our Chair’s questions that you’re really focused on the work of the SBA. I’m curious, though, in the course of your dealing with the borrowers that come to you and work through you, what perceptions or what sense have you gotten from that and interactions with the world of non-SBA lending because—let me just be specific. One could interpret what you say is the serious growth in SBA lending as, in part, reflecting the inability of your clients to get conventional loans because they’re not available or have become less available. Mr. BLANEY. Again, I think it also depends on the bank. There are some banks that we deal with who only do SBA lending. They don’t do any form of conventional lending. They do SBA lending. They sell their loans in the secondary market and that funds other additional loans. People come to us usually when they’re having difficulties with their loan and we have worked throughout this state to—we’ve run a number of programs for people to teach them to ask for deferments and that sort of thing so that they have some idea of VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 47 what to say when they go back to the bank when they’re having difficulty. As far as folks coming to us, we have people every day that are looking for money. We run workshops where we talk about that for people so that they can go to a bank and apply for an SBA loan and again, you know, it depends on the bank. Some banks do both conventional and SBA. Some banks here in Arizona just do SBA lending, period. Mr. SILVERS. Thank you. My time has expired. Chair WARREN. Thank you. Superintendent Neiman. Mr. NEIMAN. I first want to thank Mr. Ivie especially, for traveling from San Francisco to participate in this hearing. The public should also know, as well as the panel members, that we did try to get some of the large lenders, including a large San Francisco lender, Wells Fargo, to participate here with us to get the perspective of one of the largest lenders. They declined to participate, in fact even in providing an executive from the Arizona operations, and we were greatly disappointed. What we have been hearing from the borrowers and small businesses is a common thread—a common theme—that banks are tightening and, in many cases, in my opinion, correctly tightening underwriting standards are not distinguishing between sound creditworthy borrowers and weak risky borrowers, and, in fact, one of the bankers identified as painting with a broad brush. Hence, if that is true, banks are missing good lending opportunities. You know, based on your experiences within the institutions, is this true? Mr. IVIE. Again, I think banks are in the business of making loans. They want to make loans. We recently issued our Interagency Statement on Meeting the Credit Needs of Small Business Borrowers. We put that out particularly to try to ensure that our supervisory policies are not indirectly curtailing lending at our financial institutions and to let our banks know we expect them to monitor concentrations, but they should not automatically refuse credit and they will not be subject to criticism if they do a comprehensive analysis and restructure their loans. Mr. NEIMAN. And one way to get banks to identify good business opportunities is to work with borrowers, whether in an educational program or in restructuring the loans or telling them what do they have to do in order to become a creditworthy borrower. Are you seeing those levels of interaction between banks? I’m also interested: Is there a distinction between the small banks, the regional banks, and the large banks in their commitment to working with borrowers to assure that they are—so that you’re not losing the opportunities for those creditworthy borrowers? Mr. IVIE. Right. We’ve issued numerous statements and guidance to the industry encouraging our banks to work with their borrowers to restructure their loans. That’s critically important in this economic period. In fact, we’ve actually just reached a partnership with the Small Business Administration where we are going to provide financial education to small businesses to help them understand the financial system. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 48 What I can speak to is that I know community banks, the smaller banks, do want to lend and they are working with their customers. Mr. NEIMAN. So, you’re seeing a greater reluctance from the larger banks in working with customers, or, if you can put it another way, you’re seeing a greater effort on the part of community banks? Mr. IVIE. Yes. I’m seeing a strong effort on the part of community banks. Mr. NEIMAN. Okay. Do you see a need—you heard me in my opening statement talk about our New York Business Development Corporation that facilitated through a consortium of both equity and financing from member banks expanded opportunities to lend to small businesses where the investing banks would maybe not have taken on those loans and very likely would have declined those loans, but because of the singular focus of this Business Development Corporation to have the underwriting standards, to be able to work with borrowers, it’s proven to be a successful model. Is that something that you have seen in other regions or would endorse as an approach worth exploring? Mr. IVIE. I have not seen that approach in other regions. It sounds like it’s definitely an approach worth exploring. I think the more avenues that are available to creditworthy borrowers the better we will all be. Mr. NEIMAN. Great. Mr. Blaney, you know, one of the challenges and in fact frustrations is in the collection of data and you got that very clear from Chair Warren’s first question. Are there any recommendations that you have that could help the country get a better sense of the data around small business lending, particularly the effectiveness of SBA programs? Mr. BLANEY. Sir, that’s really a policy question, and, at my level, I’m the district director here in Arizona. I do not make policy. I implement policy from Washington and so, respectfully, I don’t have an answer for you on that. Mr. NEIMAN. Thank you. Are there any policy, regulatory—I’ll ask Mr. Ivie—any regulatory or policy responses that we could be addressing, either by regulators or others, to address this, the issue of having banks, both large and small, ensure that they’re not missing business opportunities? Mr. IVIE. I think we’ve structurally put that in place with our various announcements and statements to the industry on what our approach is going to be, trying to make them comfortable and less cautious, so they will make prudent loans to creditworthy borrowers. Mr. NEIMAN. And are they understood from your perspective? Mr. IVIE. That’s an ongoing process. I frequently hold banker roundtables to discuss that with them. We hold conference calls with the industry and internally, as well, to explain to our own staff what our approach is going forward. So it’s a continuing communication effort that we will continue to do. Mr. NEIMAN. Thank you. My time has expired. Chair WARREN. Thank you. I just want to follow up on this question about data. We asked, I asked earlier about your impression about the supply and demand difference. Some banks are looking, you say, for VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 49 loans, others are not. Are there any hard data that help us sort any of this out? You know, the banks say, ‘‘gee, I just don’t see any good customers’’. The people who are looking for loans are saying, ‘‘I just don’t see any banks that want to lend’’, and unless there’s some giant disconnect occurring in America, one side must have a better handle on the truth than the other here. Are there any data to support one claim over the other? Mr. IVIE. We do track loan volumes and loan volumes are declining. Chair WARREN. Okay. So we know for a fact credit is shrinking. Mr. IVIE. That’s correct. Chair WARREN. Okay. Mr. IVIE. That’s right. Underwriting standards are being tightened. Banks are shrinking to try to preserve their capital ratios. So there is a lower volume of lending at this time. Chair WARREN. Right. So it sounds like banks are making less money available. Mr. IVIE. Well, I think they have less money to make available because they have their own credit quality problems. They have to—they’ve charged off loans. They have reserves for future loan losses. That’s reduced the amount of money they have to lend to borrowers. That’s for troubled banks. Chair WARREN. Okay. So you’d recommend we take a look at charge-offs as a way to understand this? Mr. IVIE. I think the way to understand it is to look at the—— Chair WARREN. I just mean in shrinking the money available? This is the supply side. I’m still trying to focus on the question. Mr. IVIE. That’s right. Chair WARREN. Okay. Let me ask you another one along this same line. We hear the complaint from banks, and sometimes from their customers because it’s been related by banks, that supervisory standards have gotten too tough and I think Mr. McWatters alluded to this in one piece of the testimony. I would expect people to complain that their regulators are too tough. The question is again do we have any data on this? Is there any way to assess this independently? Mr. IVIE. I don’t know if you’re going to get actual data on that. The problem is banks that have credit quality problems, they need to cleanse their balance sheets and have an accurate recording of their assets on their balance sheet. That’s the first step to recovery. Once the problem is defined and investors can identify the extent of the problem, then new money can come into these institutions to lend to borrowers. Chair WARREN. Okay, one last question. There’s a new program coming out, the Small Business Lending Fund, and the argument is that banks will participate in this who didn’t want to take TARP money because of the stigma associated with TARP money. Do you believe banks will want to participate in this? It’s going to be a different kind of program. Do you anticipate something different here? Mr. IVIE. Yes. I hope banks will want to participate. I know they do want to lend. There obviously is a perception issue with TARP and kind of a bailout backlash. Chair WARREN. And do you think this fixes that problem? VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 50 Mr. IVIE. It’s a step in the right direction. Chair WARREN. And how is it a step in the right direction? Mr. IVIE. Well, it’s a tool. Chair WARREN. By giving it a name? Mr. IVIE. It’s a tool that should help. It’s funds that will be available for banks to access to lend to their customers. Chair WARREN. But this is presumably for banks that wouldn’t take the funds through another program. Mr. IVIE. Well, I think you will see banks that will apply for the funds. Chair WARREN. That will want the funds? Mr. IVIE. Yes. Chair WARREN. Okay. Alright. That’s it for me. Mr. Silvers, do you have any questions? Mr. McWatters? We’re good? Mr. Silvers. Mr. SILVERS. Like Elizabeth, I have one or two questions. Mr. Ivie, I think that the data in your testimony would suggest that the Capital Purchase Program under TARP may have been less than fully successful in reviving business lending, particularly at the small end. But what lessons can we take away from this experience for the program Treasury’s proposing that would require congressional action or some other steps? What can we learn? Mr. IVIE. I think one difference is a year ago when TARP was being offered, we were still in a declining economic environment. Losses were continuing to accumulate. No one knew where that bottom was. Today, things are starting to stabilize and I think banks will be more willing to access that money and actually lend that money because they’re not trending downwards as fast as in the past when new capital was eaten up by continuing losses. Mr. SILVERS. Okay. So you’re suggesting that a dollar today might not be quite so swallowed up by losses as a dollar a year ago or a dollar a year and a half ago? Mr. IVIE. I would agree with that. Banks have taken really heavy provisions and losses in 2009. Our data shows that the third quarter of ’09 was probably the peak period for provisions and writedowns. Mr. SILVERS. And this is—I’m not taking my questions out of order, but you said a moment ago that there are continuing issues, in response to a question from our Chair, you said a moment ago there are continuing issues with write-downs. In your view, and I would ask you to answer this question with respect to community banks and with respect to very large institutions separately, are the balance sheets clean? Do we have institutions that have gotten themselves to the point where that transparency, that realism exists on those balance sheets, such that lending can move forward? Mr. IVIE. Yes. We’re a lot closer than we were a year ago. We monitor institutions closely, not just through examinations but through quarterly call reports. There’s been large amounts of provisions that have been taken and I think the balance sheets are much more accurate than in the past. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 51 As a result of that, we are starting to see capital come in to some of our institutions. We’ve had several of our institutions recently have success in accessing the capital markets and raising capital. Mr. SILVERS. Finally, this hearing in large part is focused on small business lending. Obviously we have a representative from the SBA here, Mr. Blaney, but something that concerns me deeply is that we have essentially very small enterprises on the one hand and then we have public corporations that can access public credit markets and then there is a lot of business in between that does a lot of the work of our economy, employs a lot of our citizens, whose financing needs are larger than the SBA limits but who can’t access the public credit markets efficiently. For that type of business, the 200 to 400 employee kind of business, what kind of credit environment does the FDIC see there? Mr. IVIE. It’s a difficult credit environment everywhere. I think there are banks, regional banks and community banks, that can service those customers. They can do participations with other institutions to be able to increase their lending limit to be able to serve those types of customers. Mr. SILVERS. We’ve taken a lot of your time and so my time has, I think, probably come to an end, but I would very much appreciate if the FDIC and its staff could work with our staff on data that describes the lending environment for that segment of our economy. Mr. IVIE. Okay. I’m sure we will follow up on that. Chair WARREN. Thank you. Thank you, Mr. Ivie. Superintendent Neiman. Mr. NEIMAN. Just a few questions. I do encourage you to review the testimony of the banks as well as the borrowers and, to the extent that your time permits you, to stay and hear not only their testimony but our questions and answers. I think we would appreciate that, as well. Two of the points that were raised were of particular interest to me as a state regulator. One of the bankers, in talking about the CRE guidance that is out there in the world dealing with and applying it to banks, was a recommendation that banks could benefit, and the public could benefit, if there was a differentiation in the vintage year for calculating CRE concentrations, that certainly there are distinctions between loans made in 2004 and CRE made in 2006. So I don’t know if you have given any thought to that or would like to comment on that particular recommendation. Mr. IVIE. Yes. 2005 and 2006 were difficult vintage years. We encourage our examiners not to take a blanket approach, to take a case by case approach. There are good loans and bad loans made during all those periods and we encourage them to look at the specific credit and make that decision and not take a blanket approach. We have flexibility to assign capital ratios based on our assessment of that individual bank’s portfolio. Mr. NEIMAN. So similar concentrations at two different banks may not be treated the same, based on the quality and vintage of those commercial credits? Mr. IVIE. That’s correct. Concentration is one factor. How the loans were underwritten when they were initiated is probably the bigger factor. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00057 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 52 Mr. NEIMAN. Another banker raised an issue around to the extent that loan loss reserves should be treated in capital ratios and should be given more weight. Do you have a particular view? I know it’s been reported that Chairwoman Bair has a different view on the increases in the ability to take into consideration loan loss reserves in capital ratios from the Comptroller. Mr. IVIE. Well, my view would be the same as Chairwoman Bair’s. Mr. NEIMAN. Thank you. Chair WARREN. Thank you. With that, we thank this panel very much. Thank you, Mr. Ivie. Thank you, Mr. Blaney. The witnesses are excused. I’m going to call the other witnesses to the stand, please, and I’ll introduce them as we do. Candace Wiest, President and CEO of West Valley National Bank; Lynne Herndon, Phoenix City President for BBVA Compass Bank; James Lundy, President and CEO of Alliance Bank of Arizona; Mary Darling, CEO of Darling Environmental and Surveying; Cindy Anderson, CEO of Great Biz Plans; and Paul Smiley, President of Sonoran Technology and Professional Services. We thank all of you for your willingness to share your perspectives today and we look forward to hearing from you. As before, I’m going to ask you to keep your initial remarks to five minutes, even less if you possibly can, so that we will have time for some questions afterwards. How about if we start down here with Ms. Anderson? pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF CINDY ANDERSON, CEO AND PRESIDENT, GREAT BIZ PLANS Ms. ANDERSON. Certainly. Good morning, Ms. Warren and members of the Congressional Oversight Panel. My name is Cindy Anderson. I own Anderson Business Development, Inc., also doing business as Great Biz Plans, based in Scottsdale, Arizona. We provide customized business planning and consulting services—can you guys hear me? Okay. Good. Chair WARREN. Why don’t you pull the microphone up just a little bit closer so everyone else can? Ms. ANDERSON. Glad to do that. We provide customized business planning and consulting services to business owners looking to start and grow their business. Our clients are almost always in need of funding from lenders or investors and many are franchises and start-ups. Like many entrepreneurs, I personally funded the start-up and expansion of my business. In 2005 to 2006, I tapped into a $150,000 of the equity in my home to launch the Great Biz Plans brand. We’ve served nearly 200 clients in the United States, Canada, Mexico, Germany, and my newest international client is in Kuwait. My business has changed pretty dramatically since I started consulting in 1998 and I’ve been greatly affected by the financial crisis and credit contraction. September 2007 was our largest revenue month ever, yet based on the negative trends in my business, that same month was also when I laid off employees and radically cut VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00058 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 53 expenses, including my payroll. My business was at the start of what would become a steady two-year decline. My clients and prospects no longer were able to capitalize or collateralize loans to start and fund their businesses. My business was in the ICU. Running and growing a small business isn’t for the faint of heart. Also, the credit and financial crisis had an extreme impact on my clients. For the past 10 years, business owners have used their home equity and other personal assets to fund and secure their working capital needs. I particularly appreciated Superintendent Neiman’s comments. Those personal loan funds and assets just aren’t there anymore. My clients have a hard time coming up with the capital or the collateral to make themselves attractive enough to lenders. Most of the business owners I’m referring to are genuinely solid. They look great on paper. Yet somehow they just don’t fit that elusive lending criteria. They’re almost never given an honest helpful explanation as to why their loan application was rejected again, just that it wasn’t approved. It’s fair to generalize that banks just aren’t lending anymore and when they are, it’s with a select few that are in fortunate circumstances and fit the banks’ changing and silent lending criteria. It’s not that loan demand is down, the problem is that supply has dried up. Most small business owners are just not able to access capital. The rules of the game have changed, admittedly for the lenders and for the borrowers. The problem is that most often these rules, ratios, and criteria and even the terminology are not made plain to the prospective borrowers. The lending market needs innovative ways to support business owners and start-ups to fuel economic growth. Lending needs to be there for them with plainspoken criteria and enough funds to support smaller, non-real estate-linked small business loans in a way that works for both the lenders and the borrowers. I have three concerns about the current situation I’d like to share with you now. First, the bottom line appears to us that lenders have more money now than they’ve ever had with record profits. Among many other policies, their lending criteria have changed, as they should have, yet they have been given or were forced to take funds to stabilize the financial situation. Instead of moving those funds and profits through to the marketplace in the form of new loans which would stimulate economic recovery, they’ve held on to those funds and the resulting profits without releasing them back into the very markets they were chartered and funded to serve. Second, well-intentioned bankers are still networking in the community, meeting with prospects, marketing their banks’ services, though few are personally making claims that lending is up. They’re out there looking for that top 10 in their local market for owners and niche industries. Most businesses don’t fit lenders’ new and often closely-held criteria. These mixed messages are very confusing to borrowers. Third, lenders are still largely not loaning money to the small businesses, to the start-ups, to those that create the majority of jobs in this state. Lending may be up from its dead standstill but it’s still stalled. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 54 pwalker on DSK8KYBLC1PROD with HEARING In closing, there is good news. My business is up remarkably from last year. March of 2009, my revenue was $438 in my business. March of 2010 was my company’s second highest revenue month ever. Demand is definitely bouncing back in response to improving economic conditions and entrepreneurs are on the move bootstrapping and self-funding their growth. Thank you. [The prepared statement of Ms. Anderson follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 94 57213A.030 pwalker on DSK8KYBLC1PROD with HEARING 55 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 95 57213A.031 pwalker on DSK8KYBLC1PROD with HEARING 56 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 96 57213A.032 pwalker on DSK8KYBLC1PROD with HEARING 57 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 97 57213A.033 pwalker on DSK8KYBLC1PROD with HEARING 58 59 Chair WARREN. Thank you, Ms. Anderson. Ms. Wiest. pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF CANDACE WIEST, PRESIDENT AND CEO, WEST VALLEY NATIONAL BANK Ms. WIEST. Good morning, Madam Chair and members of the Panel. I am the President of West Valley National Bank. We are a $39 million community bank centered in the West Valley which is one of the hardest-hit areas in the Valley. We opened at the start of the financial storm on December 21, 2006, and we were founded to serve small business, the medical and dental professionals throughout Maricopa County. Our main focus, though, continues to be in the West Valley where approximately 95 percent of the businesses, according to our opening research, were small businesses. In 2007 we realized that there was about to be an economic hailstorm and we went out and doubled our capital, believing that we would be in a much stronger position to provide opportunities for small businesses or also for bank acquisitions. We did utilize some of those funds to go into Buckeye. We felt a little like the firemen at 9–1–1 going into the hardest hit area out there where the banks were pulling back. In 2008 we sought SBA approval so that we could continue to start funding more small business loans and in 2009 we did fund three SBA 504 loans and recently, in fact just a week ago, closed our first 7(a) loan. So we’re very excited about that. The government increase in SBA funds, combined with the 90 percent guarantee in waiver of fees, has been extremely helpful, both from the bank and the client standpoint. It provides us a much lower risk loan which you’ve heard a lot of testimony about the condition of community banks and even though we are not in that bucket, certainly it has been important to us to be able to originate quality loans just because of the amount of scrutiny. The question of market demand, I think, is complex. The locallyowned community banks control less than 4 percent of the market share of deposits. Unlike states like Georgia and Florida, who have several hundred community banks, I think right now there are 25 in this state and that is it. So that is also, I think, an issue out there for small businesses. We could expand. We have 39 percent Tier 1 capital and 50 percent leveraged capital. We have looked at a lot of borrowers. I think last year we looked at somewhere around $250 million in new credit and found that many of the borrowers were in a startup situation which is, I think, considered highly risky for a small community bank like ours. We’ve also found a number of people who didn’t cash flow when you look at debt service coverage ability of one to one and we certainly found that collateral was impacted and that’s why the SBA loan status was critical for us and I do want to say that I think they have been fabulous. Our last loan turned around in less than one week because we do not have preferred lender status there. The real issue is, as you’ve heard over and over, the real estate loans. We chose not to leverage up in 2007 because we saw this decline coming. So we didn’t do as much real estate because for every VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 60 pwalker on DSK8KYBLC1PROD with HEARING one percent the cap rates go up, the value drops by 15 percent. So you could almost bet that if cap rates went up even 2 percent you’d be looking at a problem loan. So we did not do that. Unfortunately, we are not profitable and I think the only thing that is going to cure that for us—it’s not from loan losses, it’s really strictly from the ability to source quality borrowers. The regulatory environment has had an impact on us. It’s not from the standpoint of affecting our lending decisions but just from a pure oversight compared to the manpower. We have 11 employees. Right now the OCC is in our bank. When, in 2008, they finished a full scope of safety and soundness, they were in our bank for a month, two weeks with the training team, there were 10 of them, 11 of us. In 2009 they had been in our bank at year-end 2008, they were in, we had a BSA exam, a fair lending exam, and a CRA exam. [The prepared statement of Ms. Wiest follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 103 here 57213A.034 pwalker on DSK8KYBLC1PROD with HEARING 61 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 104 here 57213A.035 pwalker on DSK8KYBLC1PROD with HEARING 62 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 105 here 57213A.036 pwalker on DSK8KYBLC1PROD with HEARING 63 64 Chair WARREN. Thank you, Ms. Wiest. And we will have all of your written statement in the record, as we will for everyone. Mr. Smiley. pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF PAUL SMILEY, PRESIDENT AND CEO, SONORAN TECHNOLOGY AND PROFESSIONAL SERVICES Mr. SMILEY. Ms. Warren, members of the Panel, thanks for having me this morning. My name is Paul Smiley. I’m a retired Air Force lieutenant colonel and combat veteran. I am also the President and CEO of Sonoran Technology and Professional Services. Sonoran Technology and Professional Services is an SBA-certified 8(a) and service-disabled, veteran-owned small business that provides professional services in the federal market arena. We specialize in a variety of services that include but are not limited to military training operations, leadership training, information technology, help desk services, call center support, facility management, logistics support, accounting, and office administration. The strength of our company lies in our ability to deliver lowrisk, best value, and transformational services to the Government. Moreover, Sonoran has a unique ability to recruit and retain highly-qualified and experienced personnel and professionals for the Government who have security clearances. Since 2007, Sonoran has grown by 700 percent and expanded our operations to six states and maintained a 96 percent retention rate. Although not publicly acknowledged until December 2008 that the United States was in the midst of the worst recession since 1932, Sonoran Technology has not only managed to survive but we have grown by 700 percent since winning our first government contract in July 2007. Like a majority of other small businesses, the major obstacle we faced then and, to a certain degree, today is access to working capital to support new employee payroll. It is my opinion that, due to the financial crisis, increased regulatory oversight, and, to a large degree, banks painting small businesses with the small broad brush, those of us with proven business track records of success and whose financials are strong still have a difficult time obtaining capital to grow our businesses and put Americans back to work. This broad brush approach fails to recognize small businesses like Sonoran Technology, which operate in a market that has monthly receivables that are guaranteed and consistent and guaranteed by the Federal Government. Moreover, as an SBA-certified 8(a) small business, program certification requirements and orders are far more stringent than any bank will require for a small business. In fact, if more banks understood federal contracting and how it works, I believe you would see an upsurge in small business lending and companies like Sonoran Technology would have not been rejected by five banks. There is, however, a good news story here today. In July 2008 I was able to prove to Ms. Candace Wiest, the CEO of West Valley National Bank, that Sonoran Technology was creditworthy and very low risk. In July 2009, after winning a $3 million contract with the Air Force, Ms. Lisa McCarthy, Vice President of Arizona VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 65 pwalker on DSK8KYBLC1PROD with HEARING Business Bank, took the time to understand our company business model and we were able to obtain a Patriot Express Line of Credit and able to hire 20 new employees and to compete for several multimillion dollar contracts which we are competing for today. Without the cooperation and understanding of Ms. Wiest and Ms. McCarthy, Sonoran Technology may not be in business today. I am convinced that during the past two years there could have been a lot more small business success stories had there not been a lack of access to capital. [The prepared statement of Mr. Smiley follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 110 here 57213A.037 pwalker on DSK8KYBLC1PROD with HEARING 66 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 111 here 57213A.038 pwalker on DSK8KYBLC1PROD with HEARING 67 68 Chair WARREN. Thank you, Mr. Smiley. Mr. Lundy. pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF JAMES H. LUNDY, PRESIDENT AND CEO, ALLIANCE BANK OF ARIZONA Mr. LUNDY. Thank you, Chairwoman Warren and Members of the Panel, for this opportunity to speak today. I’ve been a commercial banker in Phoenix for over 25 years and during that time I’ve spent my career basically making loans to Arizona-based businesses in virtually all businesses in Arizona within the 500-employee definition and so I have considerable experience lending to both really small businesses, such as Mr. Smiley’s or those under an SBA program, and also the businesses that Mr. Silvers referred to, those with perhaps 100-to-300 employees. I think that the Panel, in each of your statements—I was interested in those, and I think that the four of you summarized pretty well the various issues. They’re complex and they’re interactive and it’s difficult. So I know I provided this written statement. So let me just try to summarize quickly. I think that the Alliance Bank has run against the grain a little bit and we did grow loans in 2009 and we’ve grown loans in the first quarter of 2010. That’s been difficult. As relates to the specific subject of today’s hearing, I would think that we would have to testify that the TARP has been helpful because we’re fortunate, many community banks aren’t part of a larger bank holding company structure. We’re part of a small regional, I would say, and as my testimony points out, we’ve been able to raise $420 million in the last little over two years. $140 million of that came from the TARP. They’ve downstreamed about $35.5 million to us over the last 24 months and so one could say that $12 million of our capital stock came through the TARP and then it’s also true that we have expanded our lending when many banks have not. So I think from that perspective, the TARP has been helpful. I would like to comment a little bit on some of the things that I think we could do to improve things. I was the one that mentioned, Mr. McWatters, the phase-in capital requirements. I think—and I would agree with Mr. Silvers. I basically think that one of the things that we all should have learned from this crisis, bankers, policy-makers, Congress, the regulators—I do think that probably the banking industry needs more capital, but I do think, as I say in here, that we ought to phase those capital requirements in strategically over the next two to three years. I think it’s difficult at the moment, though. Our bank, as I say in my testimony, has had better credit quality metrics than most in a very difficult environment, but they’re still not great. We lost money last year, primarily due to charge-offs. We made money the first quarter and I’m hopeful that that trend will continue. But I do think that, understandably so, people are concerned about safety and soundness of banks and so there is tremendous pressure from all sources to have banks raise their capital as a buffer against problem loans—but that’s an issue that I think is difficult. I think the other—— Chair WARREN. Mr. Lundy, I’m going to stop you right there. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 69 pwalker on DSK8KYBLC1PROD with HEARING Mr. LUNDY. I’m sorry. Chair WARREN. That’s all right. We have your written testimony. Thank you. I want to save time for us to ask questions. [The prepared statement of Mr. Lundy follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00076 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 116 here 57213A.039 pwalker on DSK8KYBLC1PROD with HEARING 70 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 117 here 57213A.040 pwalker on DSK8KYBLC1PROD with HEARING 71 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00078 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 118 here 57213A.041 pwalker on DSK8KYBLC1PROD with HEARING 72 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00079 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 119 here 57213A.042 pwalker on DSK8KYBLC1PROD with HEARING 73 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00080 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert offset folio 120 here 57213A.043 pwalker on DSK8KYBLC1PROD with HEARING 74 75 Chair WARREN. Ms. Darling. STATEMENT OF MARY DARLING, CEO, DARLING ENVIRONMENTAL AND SURVEYING pwalker on DSK8KYBLC1PROD with HEARING Ms. DARLING. Thank you, Madam Chair and Members of the Panel. I’m very honored to be here today. Darling Environmental and Surveying is a small, woman-owned business. We provide hightech, avatar-style 3–D surveying to engineers and architects that design in 3–D. I agree 100 percent that small business will be left behind unless we break the stalemate with the banks. We are very creditworthy, as I said. We have been under-capitalized since we started the company. We hired our first CFO in 2008 and he saw that as the biggest problem. He helped get our banking books together in a way that we could go to each bank very professionally. We were turned down 100 percent of the time in Tucson. We actually ended up getting a bank in Phoenix that understood business banking, Bank of Arizona, and finally, in mid 2009, got our finances in order. However, as soon as the TARP funding became available and we saw what was in the newspapers about SBA loans, in February and March of 2009, we tried hard to get SBA loans. We were told by every bank that SBA told us to go to that even though we read SBA loans were not asset-based loans, we were turned down. Every bank said that’s what you read but in reality SBA loans are assetbased. So unless we had commercial real estate, we were told we were not going to get an SBA 7(a). So we slashed expenses. We rode out the fact that clients went bankrupt and didn’t pay us. We cut employee numbers. We had the one loan from Bank of Arizona that held us through and now we’re in a position where we’re really building our business in that we have more clients than ever. We have a fabulous service that we’re offering and yet we are at that point where we’re going to need lending and our past experience shows that banks are going to ask for three years of our taxes and personal guarantees and they’re going to look at 2009, even though it was an anomaly, and we’re going to be denied the funding we need to grow our business. I think it’s a very big concern for a lot of small businesses, not just mine. I’m a member of the National Association of Women Business Owners, and I’m talking with a lot of other women with the same problem. So I’m very excited to know that you’re here and that you’re addressing this issue. Thank you. [The prepared statement of Ms. Darling follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00082 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 124 57213A.044 pwalker on DSK8KYBLC1PROD with HEARING 76 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00083 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 125 57213A.045 pwalker on DSK8KYBLC1PROD with HEARING 77 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00084 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 126 57213A.046 pwalker on DSK8KYBLC1PROD with HEARING 78 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00085 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 127 57213A.047 pwalker on DSK8KYBLC1PROD with HEARING 79 80 Chair WARREN. Thank you. Thank you very much. Ms. Herndon. pwalker on DSK8KYBLC1PROD with HEARING STATEMENT OF LYNNE B. HERNDON, PHOENIX CITY PRESIDENT, BBVA COMPASS Ms. HERNDON. Thank you for having me here today. My name is Lynne Herndon, and I’m the City President for BBVA Compass. I, too, am fortunate to work for a bank that was able to loan money through 2009 and also in the first quarter of 2010. It certainly has not been an easy environment to loan money in. I think all of us, all the bankers at the table, understand and appreciate the purpose of regulatory bodies and the policies, but we also are struggling to try to continue to foster new loan production while, I think, keeping as many of our customers as we can in business and continuing to extend credit. Phoenix, more so than a lot of other cities, has experienced a complete fallout in the real estate market that does make it a little bit more difficult to recover from, if you compare it to other cities, and so, as we work with our regulators and work through exams, I do believe, as a bank, that we are trying to work with our borrowers, find out their needs and give guidance, if you will, to borrowers as to what it does take to be conventionally financed. Some of the constraints that we face, and I’ll mention just a couple examples to be a little more specific, are—and it does keep going back to the capital issue, we can’t ignore that. As borrowers, you know, experienced maybe a loss in 2008 but definitely a loss in 2009, we have to rate the performance of those companies. We have to acknowledge it. Obviously as credit becomes watched, it requires more capital. From a real estate perspective, interpreting the laws of FIRREA and trying to understand whether we have to get an appraisal solely because the economy has declined or only when we’re looking at a renewal or maturity. Our bank right now has a question in to the examiners asking for some rulings on that. Our preference would be to opt for cash flow, look for cash flow first, look for the performance in a company that shows that the company’s going to be a survivor and possibly not be constrained, if you will, by having to get an appraisal, even though there’s not a maturity or renewal in place. But if we do have to get that, we are forced to possibly rate that loan as a high loan to value transaction, again requiring more capital. So I know we’ve talked about a lot of this today. My message to you is I do think banks are in the business to loan money. We want to do that. We want to support our communities. Yes, we are having to balance the rules and the regulations of what our regulatory bodies want us to do, but I do think we’re trying to find the ways that we can to leave the money and leave the access to capital out there where possible. It is our responsibility, I think, to talk about creditworthiness. I think to use the SBA—we are a preferred lender—we use the SBA in start-up situations or in situations where we can’t quite qualify our borrower to be banked conventionally. They’re a great partner. I think we will continue to use them, but it’s my personal goal to make as many conventional loans to business owners in this com- VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00086 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 81 pwalker on DSK8KYBLC1PROD with HEARING munity as we can meet and discuss and talk about good credit loans to. Thank you. [The prepared statement of Ms. Herndon follows:] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 132 57213A.048 pwalker on DSK8KYBLC1PROD with HEARING 82 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00089 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 133 57213A.049 pwalker on DSK8KYBLC1PROD with HEARING 83 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00090 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 134 57213A.050 pwalker on DSK8KYBLC1PROD with HEARING 84 VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00091 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 Insert graphic folio 135 57213A.051 pwalker on DSK8KYBLC1PROD with HEARING 85 pwalker on DSK8KYBLC1PROD with HEARING 86 Chair WARREN. Thank you very much, Ms. Herndon. I want to make sure, as we start this, that we’re taking a full picture. So I just want to focus, if I can for a minute, on the banks here. How concerned are you about interest rate risk? I want to make sure we’re getting the full picture here. Is it deterring you? Does it deter you from lending at current low rates? Are you concerned about that? Ms. Herndon? Ms. HERNDON. Specifically rising interest rates? Chair WARREN. Yes. Ms. HERNDON. We certainly, when we underwrite loans, in particular, if they’re going to be floating rate-based, apply a sensitivity analysis. In some cases, if we determine that a borrower would be rate-sensitive with, let’s just say it’s a 200 basis point rise in interest rate, we would probably encourage a borrower to go with a fixed rate which, in today’s environment, the fixed rates that are being offered are certainly very good rates for small businesses. So I think our path would be if we found a borrower to be interest rate-sensitive, we would encourage a fixed rate so that the borrower would not experience that. Chair WARREN. Okay. I just want to be sure that I’m getting the picture. You’re saying it doesn’t discourage you from lending, it just has you—you manage for it? Ms. HERNDON. That is correct. We manage for it. Chair WARREN. Mr. Lundy. Mr. LUNDY. I would agree with that. At this point in the cycle our bank is mildly liable sensitive and, you know, we certainly have entire programs in place to manage our interest rate sensitivity and it’s one of the areas that I think the regulators do a good job of asking good questions and I don’t believe that interest rate sensitivity in and of itself is a particular—it’s not one of the major issues with respect to more lending. Chair WARREN. And same answer, Ms. Wiest? Ms. WIEST. It would be the same answer for my bank, but for banks in general, I think when you look at the overall risk profile of the bank, if the bank has a number of low fixed rates, certainly when you’re concerned about rising interest rates and the sensitivity of your institution, there may be a change in the way the borrowers are financed. You’re not going to be able to just give everyone a lower rate and fix it for a period of time. I mean that’s the reality. Chair WARREN. You remind me with your answer, and I observed this as we were reading the testimony, we only have three banks in front of us, we may not have the banks we should be talking with. Superintendent Neiman noted we had to ask Wells Fargo to join us and they declined. There may be other banks we should be talking with, as well. But I just want to make sure I’m getting the picture. The overall economy, the question about the overall economy, is this causing you to hold back on lending decisions, Mr. Lundy. Mr. LUNDY. The overall economy is very difficult and so I think—— Chair WARREN. What’s your overall outlook? Mr. LUNDY. I think locally we are—— Chair WARREN. Your local and there’s been a lot of trouble. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00092 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 87 Mr. LUNDY [continuing]. Bumping along the bottom and we’re somewhat encouraged that things have turned and will get slowly better, but it’s not robust out there at all. So, yes, sure, we’re concerned about the economy and it does impact decisions we make and the decisions our prospective borrowers make. Chair WARREN. Ms. Wiest, did you want to add anything on that? Ms. WIEST. Yes. I’ll just give you an example. I bought my home in 2006 when I moved here and I asked about the lot next door. They said it was $250,000. I just bought it a month ago for $30,000 from a bank. So we’ve got a ways to go here in Phoenix. Chair WARREN. And is this—the question I have is how much it plays into lending decisions. Do you worry that the people you’re lending to are not going to have business out there? I’m just concerned about this. I just want to understand how this factors in. Ms. Herndon. Ms. HERNDON. Well, I think clearly if you take a look at a business loan decision that we made three years ago, we didn’t worry very much about the economy and the economic impacts. So it is certainly a larger factor in our decision, but we’ve also seen a lot of borrowers do all the right things last year, whether through looking at expenses, becoming more efficient, or preparing themselves from a balance sheet perspective to where we are. So I don’t think it’s something that is deterring us from making loans to all borrowers in general. Chair WARREN. Are you seeing any fallout at the level where you’re lending from the loss of CIT and Advanta, shrinking trade credit, you know, the other places that people once went for credit? Let’s talk about even smaller businesses. Credit cards, home equity lines of credit. Are you seeing an impact from that? Ms. Wiest, you’re shaking your head. Ms. WIEST. Yes, absolutely, we are. I mean, I think what I saw that was interesting was I looked at a franchisee about a year ago and I saw them recently. They have 38 franchises, this guy that started a game truck thing, thought that was very interesting. I asked where they were getting their financing because typically it had been through traditional sources, credit cards, home equity, whatever. They are now—there is now a company out there that will actually take your 401(k), roll it into an entity where it becomes a self-directed 401(k) which allows you to buy stock in your company. So, as a banker, I’m very concerned about the shadow banking system that’s out there, but the fact that those kind of entities are gone, I think is forcing people to look at those types of vehicles. Chair WARREN. Thank you. Mr. McWatters. Mr. MCWATTERS. Thank you. Ms. Wiest, you mentioned this in your opening remarks, but I’m also looking at your testimony and I find this just extraordinary, that your financial institution has 39 percent Tier 1 capital and only 50 percent leverage. You have originated $25 million in loans and you still have $16 million of capital, but the punch line is that you say, ‘‘We could grow the bank by VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00093 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 88 $100 million in new assets and not need any new capital.’’ That’s extraordinary. So you are ready to go. You’re ready to lend money, is that correct? Ms. WIEST. Well, it occurs to me I should have just come to these kind of hearings before to find customers instead of the way we were doing it. Mr. MCWATTERS. Well, I mean, I was going to say Ms. Darling may want to talk to you afterwards. But you’re ready to go. You have a $100 million and obviously you’re out looking. You’re beating the bushes. You’re talking to people. Why is this number here? Why aren’t you telling me you only have $5 million of additional lending capacity? Ms. WIEST. Well, first of all, as to the question of whether we want to loan, I can assure you we want to loan. We are only going to be profitable by wanting to loan, and I did, I think, in my testimony outline a lot of the reasons for that. We have looked at a lot of credit, I mean a lot of credit, and I hear the frustration in the small business owners’ voices and I think there is a perception out there that, in general, the banks aren’t lending but there are, I think, a lot of banks like me who could and want to lend. We don’t have the distribution center necessarily to get out there. We don’t have large advertising budgets. We depend upon our boards. We depend upon our community boards. So I think that’s part of the issue, as well, is just getting the word out there that we are looking. Having said that, I’ve spent 25 years in credit. I understand that, even though the person might be the best bet in the world, I’m not playing with my money. I’m playing with my shareholders’ money and I have to make decisions based on fact. Is there a secondary source of repayment? Just so you know, the comment about how we talk about credit, Paul and I have put together for the City of Goodyear some small business lending and one of the things I took in there was our loan policy with a grid that showed this is how much we’ll advance on each type of credit, this is what you need to look like. So we’re very transparent in that process. Mr. MCWATTERS. Well, I noticed that Mr. Smiley went through five rejections. Then he went to you and you saw something in his business that five people passed by. Five opportunities were lost to other financial institutions. What did you see? Ms. WIEST. I liked a lot of things about his background. I liked the fact that he was an 8(a) lender. At my last bank I took two women from their kitchen tables to multistate companies and I understand the 8(a) process. The flaw in the 8(a) process, though, is they put guys like Paul out there with this floodgate of work but no credit access. So they really need a working capital line that sort of dovetails to that. Now the reason he had to leave my bank is we weren’t qualified to do the Patriot Lines and it was the only way because he didn’t have a historic proven record in this industry and again I have 10 employees. I basically could not really monitor the government con- VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00094 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 89 tracts correctly, but because he could get a Patriot loan, there was another bank that was able to take him to the next level. So I’m determined that doesn’t happen in my bank again. Mr. MCWATTERS. Okay. You submitted a TARP application and you withdrew your application and you say in your written testimony, ‘‘As our application was processing, we saw new conditions being added daily and witnessed the growing stigma being directed at TARP banks. Because we did not want to enter into an agreement with the Government who could alter the terms at any time, we chose to withdraw our application.’’ I mean that speaks for itself. I mean, do you have anything to add? Ms. WIEST. No. The risk was greater than the reward of the amount of TARP money we would have been eligible for. Mr. MCWATTERS. Okay. Do you have a slightly different feeling on the SBLF, Small Business Lending Fund, which may or may not become law? Ms. WIEST. You know, I heard Mr. Ivie say that the banks will take that. I will only take it if it’s clearly defined, if the process to get the money is very transparent, if it doesn’t just flow through regulatory agencies, and if there is a measurement, I mean, because I think the public deserves that. If you take the government money, you’ve got to be able to prove that you put it back for the purpose as intended. You heard Jim Lundy say that they took TARP money and they grew their bank and I think that’s admirable and I think in his case, the TARP money worked. I’ve got to know the process has a lot of transparency. Mr. MCWATTERS. Thank you. Chair WARREN. Thank you. Mr. Silvers. Mr. SILVERS. Thank you. Well, first, let me say how grateful I am to all of you for being here. The point of our holding field hearings is to hear from people like yourselves with businesses like yours. That very specific detailed experiential voice often doesn’t come through in Washington. Let me begin. Let me ask the small business people on the panel. I’m not sure it’s clear from all of our statements and so forth, but there are really kind of three policy choices facing the Treasury Department in using TARP money to try to help small business and we’re trying to oversee those choices. Choice one is, and I think perhaps Mr. McWatters sort of stated it, is basically don’t do anything, don’t try to change the market incentives and structures and so forth. Don’t put any money in. Choice two is to give money to banks. That’s essentially the SBLF proposal. Give money to banks, perhaps with some conditions and hope and try to manage it so that the money flows through from banks and small businesses. Choice three is something along the lines of what Superintendent Neiman said earlier, which is to try to create specialized vehicles that will do small business lending only. What advice would you have for the folks in Washington as to what to do? Ms. ANDERSON. I’ll leap on that one. I don’t know that the do nothing else option is a viable option. The money’s been out there. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00095 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 90 It’s been working as best it can with banks as best they can and they’re not lending on their own criteria. We know that. They’re not widely lending. They are lending some. Giving the money to the banks for any of the programs, I would like to see transparency and a requirement that makes that happen, yet I’m also anti-involvement. We’re a capitalistic society. I like to see the free economy flow. I’m very, very intrigued by Mr. Neiman’s proposal, having a consortium with specific requirements and taking a look at something that has worked in other areas, so that those that wouldn’t necessarily get credit—start-ups, I’ve specialized in start-ups. There isn’t a banker in this room or probably within 10 miles of me that right now is interested in doing a start-up. The larger lenders have done that under the guise of some of the SBA preferred lender programs and other kinds of things but when you get right down to it, they’re all preferring to go find the top 10 people in an industry and to collateralize and securitize as best they can. So we do need an innovative idea, I think, that doesn’t bind us for eternity into more government intervention and handouts. I love that consortium idea. Mr. SMILEY. For six years I was an associate professor, a faculty member at Arizona State University School of Global Business, and at the national level in Washington, D.C., we hear about jobs, jobs, jobs. I tell you, there’s not a day that goes by that my heart is not just pumped with gladness when I put someone back to work because I understand that people with jobs can now spend money at restaurants and other services. Those establishments now pay city and state taxes and that’s how the economy works. It’s not very difficult to understand. When it comes to small business, as I mentioned in my testimony, there’s this broad brush that some big banks use. They’re not willing to listen to you. Every business is the same. Our business is totally different, you know. I thank God every day for the 30-some employees I have that they can have a home. They can go buy goods and services. They can send their kids to school. They pay taxes, which we all have to do and that’s what makes the economy. Since 2007, as I said in my testimony, we started with four employees. We now almost have 40 and that’s amazing, but without people like Candace Wiest who sat down and said let me explain to you how lending works and she taught me about the five Cs of banking. From my perspective those five Cs of banking have been given the Heisman for small business and it’s become very subjective lending versus objective lending, and I’m not going to send a small business colleague of mine to any bank whose balance sheets aren’t correct, they don’t have a stable business, they don’t have a stable infrastructure. So the small banks understand that, but when the big banks don’t listen to you and they don’t return a phone call or they tell you as a preferred lender that the SBA turned you down, which is not a true statement, you know, people give up. I’ve had four or five colleagues of mine in the last year say I give up, I give up, I give up because they can’t get capital, access to capital. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00096 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 91 At Sonoran, we’re a good news story, but we will only continue to be a good news story if the small banks and the large banks start to listen to us, understand what we do and then give us a fair shake. Are you a risk? Are you creditworthy? Just give me a straight answer. I’ll grow my business and I’ll grow this economy, and just think, if every small business in Arizona hired 10 people, where would we be on the national perspective of putting people back to work and fixing our state budget and our city budgets and our county budgets. This is not rocket science. It’s about doing the right thing, having regulatory oversight, but giving everyone a fair shake to make the American reality, not the American dream. Chair WARREN. If you’ll bear with us, Superintendent Neiman, why don’t we let Ms. Darling have an opportunity to respond, as well, since we’ve asked the small business owners? Ms. Darling. Ms. DARLING. Thank you. Just quickly, I agree with Ms. Anderson and Mr. Smiley. To do nothing would be terrible and what we need is more transparency, definitely, because we were turned down by a lot of banks, but I don’t think that ever went on the books. I don’t think you see the data because those banks never told us our loans were denied. They just went silent. It was very difficult. Sometimes I would wait four to six weeks and the banker wouldn’t call me, the banker wouldn’t answer my questions. So I never knew whether or not my loan would go through. So we do need to have respect. We do need to have different criteria that include service-based industries that don’t have as many assets. We also have a tax issue where we accelerate depreciation 50 percent the first year. We buy a $150,000 laser scanner. We write-off $75,000. The banks look at it like it’s a loss. It is nonsensical. So I’m going to be very happy to see some changes. Chair WARREN. Thank you. Superintendent Neiman. Mr. NEIMAN. Thank you. This is probably our first experiment in having a panel, to my memory, where we mixed bankers and borrowers, and you see we’ve actually interspersed the bankers. So maybe we can play our little role in hooking up creditworthy borrowers with bankers. But I do want to follow up on the concept of a consortium and if TARP funds could be directed to banks but, in addition to utilizing those funds to leverage and to lend directly, could also use those funds to either invest in equity or to extend credit to a lending consortium. Would that be of appeal? I’d like to get the bankers’ perspective, if that would be a legitimate and viable use of those funds. Mr. Lundy, I know Arizona has the concept of a banker’s bank. We talked earlier that banker’s banks do not actually do direct lending, but is that something that, in your understanding, could be developed and would it be a legitimate use—a viable use—of additional TARP funds? Mr. LUNDY. My honest answer is I would be concerned that it could not be developed quickly enough in the short run. I think it’s a good long-term idea. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 92 Arizona does have what’s called a multi-bank. It’s been around for a long time and it’s basically a similar vehicle to what you’ve described that focuses on making community development loans and CRA loans, and some of the larger banks invest money in it and it in turn makes loans. I believe, as I said in my testimony, that the SBA programs generally work pretty well and I would like to see some more support. I would support the suggestions that the director made to perhaps expand the size of those loans up to five million. It might address some of the issues that Mr. Silvers raised. Frankly, Mr. Neiman, I think it’s a good idea, and I don’t know how long it would take to get it set up, but in terms of the immediate solution, I’m not so sure it would have a great impact in the next year or year and a half. It’s something to put in the hopper for down the road. That’s my opinion. Mr. NEIMAN. Ms. Wiest. Ms. WIEST. I worked in California for 18 years prior to coming here and the state had a program there that was really terrific. It was strictly for working capital, no real estate, and they would guarantee up to 75 percent of a loan, a term loan, because so many of the small businesses do need permanent working capital. So they’re not going to keep being able to escalate accounts receivable lines. These guys would come in. They had a committee of regional bankers that looked at the loan requests and then they would guarantee 75 percent based on the covenants we put to monitor. I participated in that program for probably, I think, 12 years and I never had a loss and so while I like the idea of your program, there is also another solution, which would be to maybe have a state fund used for the purpose of guaranteeing smaller business loans. These would be $350,000 or under. So that might be another solution to think about because that was a very successful program in California for a long period of time. Mr. NEIMAN. Another appeal I think a consortium bank would have, particularly to a bank of your size where you don’t have necessarily the expertise necessary to focus in a new area, whether it be franchisee loans where a consortium could develop that. Ms. Herndon, any thoughts? Ms. HERNDON. I think my comments are similar. I think the multi-bank concept that already exists in Phoenix has worked. Obviously, I think they would love to have access to more capital to be able to participate in more lending opportunities. I also think that the SBA has played a great role, even in good times the SBA was very active, but right now more than ever with borrowers being more capital distressed than previously. I think having expansion, in particular the permanent working capital, the working capital line of credit programs, offered would be another way to stimulate loan growth. Mr. NEIMAN. Great. Thank you. Ms. Wiest, you talked about your reluctance to enter the TARP due to the stigma. Mr. Lundy, you were successful in taking it. What’s your view on this concept of stigma? You seem to have weathered the storm and it hasn’t seemed to have had a negative impact on you. Is that a correct way to assess? VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 93 Mr. LUNDY. Well, I think, early on it was sort of a batch of worthiness but we weren’t one of the top 20 banks that posed systemic risk or anything of the kind. But the fact that we were able to qualify for it was sort of an endorsement. The Government believes that we’re not going to fail and so I think that was helpful and, frankly, the capital itself was helpful. But I would agree that from a public perception standpoint and for how capital actually works in a bank and that at the end of the day all funds are fungible and that’s one of, I think, the— we don’t have time to talk about that today, but that’s one of the problems that makes accountability and tracing it difficult. So I do agree there is a stigma. We were successful, but I would not rule out—as I said in my testimony, I think if Congress is going to do something, it should be done fairly quickly. So, on balance, I support the program. Chair WARREN. I’m going to just ask a few more. I’d like to ask the business owners about your experiences with the SBA. We’ve been hearing about the banks’ experiences with the SBA and maybe you could say just a bit more. Mr. Smiley, you’re pulling the mic over like you’re ready to go. Mr. SMILEY. Yes. I have colleagues all over the United States and there are various SBA offices here and I’m here to tell you that the Phoenix office is absolutely outstanding. They have monthly meetings. If you don’t have information about the Small Business Administration, then you live under a rock. They do great work with workshops, with SCORE, outreach to the community. They were in Goodyear last fall and so Mr. Blaney and his staff—you know, they’re undermanned. I think their office was probably reduced by about 40 percent the last couple of years, you know. I tip my hat to them. They do outstanding work. Chair WARREN. Okay. Thank you, Mr. Smiley. Ms. Darling. Ms. DARLING. Well, we went to SBA. We got a list of lending institutions. We went to each one of those institutions. We were turned down because we didn’t have the assets, partly because we utilize an accelerated depreciation schedule of assets for tax purposes. The other reason was because we don’t own commercial real estate. Chair WARREN. So your concern about SBA lending is that you’re saying it’s really far more asset-based than it is alleged to be? Ms. DARLING. Yes, for service industries. Chair WARREN. Ms. Anderson. Ms. ANDERSON. Yes, that’s my experience, as well. The sba.gov website is amazing. There’s all kinds of great information out there. The control and power is definitely within the individual lenders, the individual bankers, and the reason that you see community and regional banks here today is because these are the people that are lending. These are the people that are in the community. These are the people that are—it is a relationship-based business and the SBA loans are a minuscule number of the loans that are out there. The 90 percent guarantee definitely helped, but the stories that you’ve heard from the two of them and in my testimony—I’ve given you a story, also, of some of my clients and I could go on and on with many of them where they’re in the exact same situation. Peo- VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00099 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 94 ple have been bankrupted because they’ve not been advised that that loan that they got a letter of credit for, a letter of intent for actually went through. It’s the terminology. It’s the devil is in the details, you know, not understanding what those criteria are. For example, a lender will look at a loan package and the business plan and we coach our clients through this whole process and they might be looking at a hair salon and they might compare the industry ratios to a different kind of salon that isn’t a booth rental and it isn’t a med spa and it isn’t whatever and so they’ve got two or three reasons why they don’t want to do this loan from the get-go. It’s a start-up. It’s whatever it is. It’s going to be too small. They don’t like the location. The person has never owned a successful chain of salons before, whatever that elusive criteria is, and the criteria needs to be made plain. The SBA can help with that. Chair WARREN. Thanks very much. Mr. McWatters. Mr. MCWATTERS. Thank you. That was pretty much my question, but I noticed in Ms. Darling’s testimony that she makes the point that there’s a lot of real estate lending that’s been going on in Phoenix for the last several years. Now all of a sudden that’s stopped or at least it’s slowed down. So you take a business like hers which is a cash flow business which is based off of earnings before interest, taxes, depreciation, amortization-type standard, and she’s running into bankers who don’t really know how to lend against that credit. I mean, I lived in Dallas during the S&L crisis. We knew how to loan against real estate but once it blew up, it was a different story. So the bankers on the panel, are you lending against cash flow now, is it changing, or are you still looking at real estate transactions? Ms. WIEST. Well, you’re looking at me, so I’ll go first here, but two things. Number one. Yes, we are lending and it really isn’t that difficult if you understand cash flow lending in general, whether it’s real estate or C&I loans, whatever, and I think the banks have better models. I survived the recession in 1988 over here and 1991 in California. So there are plenty of models out there who help you do it better. I also think the interesting part is, we were talking about the SBA, we’ve done three SBA loans, 504s, for small business owners to be able to take advantage of this rotten real estate market. So that is going on out there, but we are lending on accounts receivable. Government receivables are difficult. You’ve really got to have a staff that could get in there and control your collateral is the problem. So I think if you asked any regulatory body, they would tell you that you can’t just have a primary source of repayment be we’re going to collect these receivables. There has to be some secondary source of repayment because stuff happens. Mr. LUNDY. I would agree with that. I mean, the whole banking model—the community bankers here aren’t investment banks. We don’t get entrepreneurial return. We rent money, and we need to have two ways out and the first way out, we can all agree on, the VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00100 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 95 business is going to make money and that cash flow is going to pay the loan off and if it doesn’t, we need some other source of money, whether it’s personal guarantees that have something behind them, whether it’s a lien on real estate, residential or commercial, and obviously those two things have been impacted. The values have been impacted. Sometimes the second way out, because the nature of the business and the collateral is somewhat specialized, that’s where I think the SBA and that guarantee can come in. Everything else makes sense, but there’s sort of a hole because of perhaps the intangible nature of the assets, but at the end of the day, bankers rent money. We lend our shareholders’ money and the depositors’ money that are FDIC-insured and we cannot take entrepreneurial risk, and I think there’s a disconnect sometimes between that reality and the borrowing public, but it is a reality. Chair WARREN. Mr. Silvers. Mr. SILVERS. Thank you. Ms. Wiest, where is the money that you are not lending out invested in? Ms. WIEST. Actually, we have some in securities where we are earning a whopping three to four percent and we have right now about $3 million in overnight funds where we are earning .25 percent. Mr. SILVERS. When you say—I mean, obviously without getting into specific names, when you say securities, what—— Ms. WIEST. Mortgage-backed. I had one corporate which we sold recently, but, yes, mortgage-backed securities. Mr. SILVERS. Thank you. Mr. Lundy, you said a few moments ago in response, I think, to Superintendent Neiman’s question that you thought one of the major issues around TARP and the declining prestige of being a TARP recipient was that money’s fungible and it was very difficult for there to be any accountability in the capital purchase program as to what the money was really being used for. That strikes me as, in relation to any further TARP activity around small business lending, that you’d want to silo it, that you’d want to be sure it was really going to small business and small business only. Am I hearing you right? Mr. LUNDY. Well, I think to get the accountability that you talked about, some mechanism to do that would be—from a policy standpoint—if Congress decides to do this and this is a specific result that you want, I believe that some sort of segregation or accountability of that nature would be ideal, but it is difficult. Capital ratios are capital ratios and you asked her what her excess liquidity is invested in. We’ve now got about $240 million in AAA mortgage-backed, Ginnie Mae, et cetera, securities and, unfortunately, about $275 million in overnight at 25 basis points. So we do need to put money out and we are putting money out, but it’s difficult. Mr. SILVERS. I should just note a moment of self-congratulations to us that we’ve been calling for some accountability around how the TARP money was used within banks since, I think it is, December of 2008. That’s the nature of an advisory oversight panel. Ms. Herndon, in your written testimony you talked about the fact that your bank is an affiliate of a large Spanish institution that I gather is fairly healthy as large institutions go these days. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00101 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 96 Can you observe, and I’d welcome any other panelists to observe, really this question of capital strength. You know, each of you, because of your affiliates, because of capital raises, each of you are pretty strong in terms of capital. When you look across the banking sector as a whole, the large institutions that dominate the deposits in Phoenix, and other small institutions, have we sort of picked out all the outliers to have with us here today and what conclusions can we draw about that, about the question of capital strength in relation to small- and mediumsized business lending? Ms. HERNDON. Well, I actually think it compares the same when you talk about borrowers in general. I mean, clearly a lot of what borrowers are finding is their excess liquidity, their excess capital that they had maybe heading into these times has been diminished because they’ve had to use it. Again, because of the strength of our parent, they were able to inject capital for us so that we could continue to loan money. Had we not been acquired by them two years ago, we would have had a much larger percentage of real estate unable to be offset, if you will, by the overall portfolio of the bank. So it’s clearly been an added benefit for us. But I do think that there are many banks in Phoenix that are strong that do want to loan money but are struggling to sort of get around the whole issue of the capital constraints, dealing with a lot of the issues that we’ve been talking about today, either the existing risk in the portfolio or the pending risks that might be coming from reappraisal due to real estate. I mean, no banks here have been able to escape the impact of the real estate market. Ms. WARREN. Superintendent Neiman. Mr. NEIMAN. Mr. Lundy, a follow-up on your question about transparency, and we all acknowledge that money is fungible and when capital goes in how that’s converted to loans. But can you identify loans that would not have been made but for the receipt of that $35 million that came through the TARP Fund? Mr. LUNDY. Well, consistent with my comment, not specifically, no, but I can tell you that, as I said in my written testimony,—— Mr. NEIMAN. There were loans that were made but—— Mr. LUNDY. Well, sure. We made—we grew loans. Mr. NEIMAN. But only the result of—— Mr. LUNDY. $66 million last year. We’ve grown loans $34 million in the first quarter. That’s a $100 million in loans. That’s pretty good loan growth for our banks. Mr. NEIMAN. Loans that would not have been made but for the TARP? Mr. LUNDY. Yes, and if we—well, let’s just put it this way. Wellcapitalized basic capital is 5 percent. You know, you can get a lot of conversation. Is eight the new five or is eight the new six, but there is, from every direction, pressure on capital and we’re maintaining 6 percent leverage capital. Were we not doing that, we would not have felt comfortable growing and expanding the balance sheet to the extent that we VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00102 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 pwalker on DSK8KYBLC1PROD with HEARING 97 have on both loans and deposits. So indirectly it has had a positive effect. Mr. NEIMAN. I want to ask the borrowers and maybe even the bankers, since the large banks are not here, I’d like to understand from the small businesses, do you see discernible differences in underwriting standards or dealing with you in the application process? Ms. ANDERSON. Absolutely. Night and day, an absolute night and day difference. The smaller banks spend the time to shoulder to shoulder—start out with like a 15-to-20-minute quick back of the napkin, here’s what needs to happen, here’s what I don’t like about your financials, here’s what I don’t like about your package, and they really befriend that borrower nine times out of 10 in a way that the large lender does not do. The loan application goes off into the abyss of an application center in Houston somewhere and it’s lost. Arguing the merits of the loan package for the borrower or their financial condition is much more successful in a relationship-based application than it is in a larger bureaucracy. Mr. NEIMAN. And maybe from the bankers’ perspective, now in the role of competitors, are you seeing differences in competing against those three largest institutions that comprise 70 percent of the deposits? Mr. LUNDY. Well, a couple of things. I think Mr. Silvers’ point earlier is worthy of everyone’s note. Didn’t you say that, in 1999, 15 percent of these loans were made and then, by 2008 or something, before the great abyss, 38 percent or something were made by large national institutions and that’s basically been the trend about the last 15 years. Increasingly smaller business loans because of the economies of scale are underwritten essentially as consumer loans with credit scoring models. I think this recent huge recession has surprised everybody’s models. So, there are industry dynamics that have forced—you know, I mean, we’re dealing with what we’re dealing with and it took 20 years to do it and so now the more hands-on relationship approach that I think is a friendlier way to do it, I mean, if you’re really going to get that to happen, you have to have community bankers who are willing to meet with people one on one, but it’s difficult. Chair WARREN. I want to thank you all very much. We really appreciate your coming and spending your time here with us today. We also appreciate your giving us your written testimony. We will make sure that everything that you’ve submitted to us will be made part of the record for this hearing. So this panel is also dismissed. Thank you, again. We really appreciate it. If there are members of the public who would like to make any comments, we have a microphone set up. We keep them brief but people are welcome to, if they want. Seeing no one rushing to the microphone, I am going to assume then that we have concluded our business. Again, thanks to the University of Arizona, thanks to the senators and congressmen here from Arizona. We appreciate all their help so that we could come here in order to learn more about small business lending. What we’ve learned today will very much help us in this process. VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00103 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213 98 pwalker on DSK8KYBLC1PROD with HEARING Thank you all. [Whereupon, at 12:05 p.m., the meeting was adjourned.] VerDate Mar 15 2010 01:29 Jul 20, 2010 Jkt 057213 PO 00000 Frm 00104 Fmt 6633 Sfmt 6602 E:\HR\OC\B213.XXX B213