[Senate Hearing 111-531]
[From the U.S. Government Publishing Office]
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
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
57-213 PDF WASHINGTON : 2010
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
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Paul Atkins
J. Mark McWatters
Richard H. Neiman
Damon Silvers
C O N T E N T S
----------
Page
Opening Statement of Elizabeth Warren, Chair, Congressional
Oversight Panel............................................ 1
Statement of Mr. J. Mark McWatters, Member, Congressional
Oversight Panel............................................ 5
Statement of Mr. Damon Silvers, Member, Congressional
Oversight Panel............................................ 10
Statement of Mr. Richard Neiman, Member, Congressional
Oversight Panel............................................ 14
Statement of Robert Blaney, Arizona District Director, U.S.
Small Business Administration.............................. 18
Statement of Stan Ivie, Regional Director, San Francisco,
Federal Deposit Insurance Corporation...................... 23
Statement of Cindy Anderson, CEO, Great Biz Plans............ 52
Statement of Candace Wiest, President and CEO, West Valley
National Bank.............................................. 59
Statement of Paul Smiley, President and CEO, Sonoran
Technology................................................. 64
Statement of James H. Lundy, President and CEO, Alliance Bank
of Arizona................................................. 68
Statement of Mary Darling, CEO, Darling Environmental and
Surveying.................................................. 75
Statement of Lynne B. Herndon, Phoenix City President, BBVA
Compass.................................................... 80
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.
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 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
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 off-lend 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, 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Mr. McWatters.
Mr. Silvers.
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 small- and 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, small- and 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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Mr. Silvers.
Superintendent Neiman.
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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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?
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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Mr. Ivie.
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 26-year 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 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
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?
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.
``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.
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 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.
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 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?
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 write-downs.
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.
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.
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?
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 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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Ms. Anderson. Ms. Wiest.
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
locally-owned 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 start-up 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 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
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
low-risk, 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 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Mr. Smiley. Mr. Lundy.
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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Ms. Darling.
STATEMENT OF MARY DARLING, CEO, DARLING ENVIRONMENTAL AND
SURVEYING
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
high-tech, 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 asset-based. 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you. Thank you very much.
Ms. Herndon.
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 community as we
can meet and discuss and talk about good credit loans to.
Thank you.
[The prepared statement of Ms. Herndon follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
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 $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 contracts 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. 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.
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.
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?
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. People 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 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.
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 medium-sized 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. Well-capitalized 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
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.
Thank you all.
[Whereupon, at 12:05 p.m., the meeting was adjourned.]