[Senate Hearing 111-413]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-413
 
                   RESTORING CREDIT TO MANUFACTURERS 

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                            ECONOMIC POLICY

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING WHAT POLICIES CONGRESS SHOULD CONSIDER TO HELP RESTORE CREDIT 
                         TO U.S. MANUFACTURERS

                               __________

                            OCTOBER 9, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia             JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

                    Subcommittee on Economic Policy

                     SHERROD BROWN, Ohio, Chairman

         JIM DeMINT, South Carolina, Ranking Republican Member

JON TESTER, Montana
JEFF MERKLEY, Oregon
CHRISTOPHER J. DODD, Connecticut

                      Chris Slevin, Staff Director

                Patrick Brown, Professional Staff Member

                Neal Orringer, Professional Staff Member

                                  (ii)



















                            C O N T E N T S

                              ----------                              

                        FRIDAY, OCTOBER 9, 2009

                                                                   Page

Opening statement of Chairman Brown..............................     1
    Prepared statement...........................................    20

                               WITNESSES

    David Andrea, Vice President, Industry Analysis and 
      Economics, Original Equipment Suppliers Association, Motor 
      and Equipment Manufacturers Association....................     3
        Prepared statement.......................................    20
    Robert C. Kiener, Director of Member Outreach, Precision 
      Machined Products Association..............................     5
        Prepared statement.......................................    55
    Stephen P. Wilson, Chairman and Chief Executive Officer, LCNB
      National Bank, on behalf of the American Bankers 
      Association................................................     7
        Prepared statement.......................................    57

                                 (iii)


                   RESTORING CREDIT TO MANUFACTURERS

                              ----------                              


                        FRIDAY, OCTOBER 9, 2009

                                       U.S. Senate,
                           Subcommittee on Economic Policy,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 9:34 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Sherrod Brown (Chairman of the 
Subcommittee) presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. This hearing of the Economic Policy 
Subcommittee of the Senate Banking Committee will come to 
order. This is the fourth in a series of hearings on the 
challenges facing America's manufacturing, one of the most 
important parts of our economy, as we know.
    Our manufacturing sector, let us face it, is in crisis. 
While key productivity indicators have shown recent signs of 
growth, both manufacturing output and employment have dropped 
precipitously, as we know too well, over the past year. We must 
act now to move from continuous erosion to consistent expansion 
because U.S. manufacturing is not optional for our country. It 
is indispensable.
    As manufacturing goes, so go our national security, our 
global economic leadership, our stability as a democracy. Our 
democratic Nation needs a strong, stable middle class, and a 
stable middle class needs manufacturing jobs.
    Manufacturing equips our military and accounts for 12 
percent of U.S. gross domestic product. That is $1.6 trillion. 
It generates nearly three-fourths of the Nation's research and 
development. It employs 12 million Americans. Compromised 
access to credit is the newest threat to American 
manufacturing. It is not a minor problem. It is a major 
concern.
    As one manufacturer I spoke with put it, ``Credit makes 
this country great.'' But the credit stream has slowed to a 
trickle. The Federal Reserve Board's flow of funds accounts 
have shown a consistent reduction in net lending to 
manufacturing sectors. Every day there are more small and 
medium-sized manufacturers, like those in Ohio, at risk of 
going out of business because they cannot get the loans they 
need.
    For manufacturers in the auto supply chain, the struggle to 
find a lender is even tougher. I heard from one Ohio 
manufacturer who has been in business 25 years and has had 
access to credit through a trusted lender. The manufacturer has 
a strong credit history. The bank recently capped its credit 
line at $5 million because a percentage of their business 
involves auto supply components. Almost 100 percent of the 
manufacturer's customers pay their invoices within 60 days. The 
company feels penalized in spite of the fact that they have a 
strong record.
    To be clear, this hearing will not be about vilifying banks 
or anyone else. I realize some banks are only just beginning to 
rebound from the financial meltdown and are concerned about 
taking on too much risk. We have the problem also of the frozen 
debt securitization markets, which allow banks to repackage 
loans and sell them to investors. Banks and bankers are finding 
it increasingly difficult to repackage their loans to free up 
capital.
    This problem of access to credit is, unfortunately, not 
unique to Ohio and Michigan and Indiana and other manufacturing 
States. As I mentioned, the goal of this hearing is not to lay 
blame on anyone's doorstep. Given the harsh economic conditions 
we face, we have an opportunity to take stock of where 
manufacturers and lenders are.
    Despite the challenges I have outlined, we must find a way 
to get credit flowing again. In that vein, I hope this hearing 
helps us answer the following questions: Are there signals that 
show credit is easing? How have steps the Administration has 
taken worked, and how have they evolved? What new mechanisms 
should Congress and the Administration consider to bridge the 
gap?
    I look forward to the testimony of our witnesses. I will 
introduce each of the three of you and take as long as you need 
on your opening statements. I will ask questions of all of you, 
and we will proceed.
    I will start with David Andrea, Vice President of Industry 
Analysis and Economics of the Original Equipment Suppliers 
Association in Michigan. The Original Equipment Suppliers 
Association represents suppliers of components, modules, 
systems, materials, equipment, and services used by the 
original equipment automotive industry. The association 
represents 353 companies with global sales of more than $300 
billion. Before joining OESA as Vice President 5 years ago, Mr. 
Andrea was the chief financial officer at the Center of 
Automotive Research. Over the past 20 years, he has been 
director of forecasting for several financial companies. In his 
position as OESA, Mr. Andrea is responsible for coordinating 
research with outside consulting firms and other special 
projects.
    Robert Kiener is Director of Member Outreach of Precision 
Machined Products Association in Brecksville, Ohio. Mr. Kiener 
has been on the staff of the Precision Machines Products 
Association since February 1991. His primary duties with the 
association include membership development, recruitment, 
retention, and member communications. In his current capacity 
as Director of Member Outreach, he visits regularly with the 
association's 500 member companies across the U.S., companies 
which manufacture highly engineered precision machine parts. 
Mr. Kiener has daily interaction with owners and senior 
managers from small to medium-sized domestic manufacturers.
    Stephen Wilson is Chairman and CEO of LCNB National Bank in 
Lebanon, Ohio. Mr. Wilson has been active within the financial 
service industry, having served in various capacities with the 
American Bankers Association, the Ohio Bankers League, the 
American Institute of Banking, and the Bank Administration 
Institute. Mr. Wilson has served as a board member of the 
Federal Reserve Bank of Cleveland; Chairman of the Advisory 
Board for Miami University in Middletown, Ohio, of which he is 
a graduate; Vice Chair of the Warren County Port Authority in 
southwest Ohio; and various charitable and civic organizations.
    Mr. Andrea, your testimony, please. Welcome, all of you. 
Thank you.

 STATEMENT OF DAVID ANDREA, VICE PRESIDENT, INDUSTRY ANALYSIS 
AND ECONOMICS, ORIGINAL EQUIPMENT SUPPLIERS ASSOCIATION, MOTOR 
            AND EQUIPMENT MANUFACTURERS ASSOCIATION

    Mr. Andrea. Thank you, and good morning, Mr. Chairman. I 
want to thank you for the opportunity to discuss the automotive 
supplier industry and the availability of credit. My name is 
David Andrea, and I am Vice President for Industry Analysis and 
Economics for the Original Equipment Suppliers Association, an 
affiliate of the Motor and Equipment Manufacturers Association, 
and I am testifying on behalf of both of those associations 
today.
    Motor vehicle parts suppliers are the Nation's largest 
manufacturing sector, directly employing over 685,000 U.S. 
workers and contributing to over 3.2 million jobs across the 
country. Suppliers produce two-thirds of the value of today's 
vehicles and contribute nearly 30 percent of the total 
automotive research and development investment.
    Over the past 10 months, significant and unprecedented 
Government and industry actions have prevented a collapse of 
the U.S. auto industry. However, future expansion, employment, 
economic contributions and structural viability of the supply 
base are all dependent upon continued access to credit at 
reasonable terms.
    Without a doubt, the U.S. Treasury Auto Supplier Support 
Program and the way the U.S. Government handled the 
bankruptcies of General Motors and Chrysler helped avert a 
potential implosion of the supply base. However, ongoing with 
the bankruptcy, past the bankruptcies, as well as the Treasury 
support program failed to improve ongoing access to traditional 
sources of capital for the vast majority of the supply base.
    Even though suppliers have dramatically reduced every 
element of their working capital requirements from payroll to 
raw material inventories, they continue to require a 
significant cash cushion, and that requires ongoing access to 
credit. In the short term, constrained lending to the auto 
suppliers is showing up in an inordinate effort to keep the 
supply base running as production increases. In the long term, 
a growing number of our members are reporting investment 
challenges, including required research and development, 
restructuring, productivity enhancements, and business 
expansion strategies. Both these short-term and longer-term 
capital constraints will play themselves out in the ability or 
inability of the U.S. to support a globally competitive and 
productive auto industry.
    According to the September 2009 OESA Automotive Supplier 
Barometer Survey, a survey of our members, the majority of all 
respondents over the past 3 months have not seen a significant 
improvement in lending practices. Smaller suppliers actually 
report they face even tighter terms. Lending is constricted due 
to the continued inherent risks in the industry, even though we 
are on the other side of the GM and Chrysler bankruptcies, but, 
as well, indiscriminate restrictions on lending by the banks.
    In 2010, we expect ongoing company failures as the industry 
continues to operate at low, albeit increasing, production 
volumes. Although much of this is to be expected in an industry 
in transition, adequate capital is necessary to restructure and 
consolidate the industry in a rational, effective manner.
    In order to help restore lending throughout the entire 
supply chain, MEMA and OESA believe that Congress and the 
Administration should focus on three key areas. The first is on 
general lending.
    Given low production volumes and the valuations of industry 
assets, many loans to viable suppliers are, in the short term, 
``out of formula'' for banks to consider. One solution that has 
merit is to scale the Michigan Supplier Diversification Fund up 
to a national level. While we believe the current definitions 
in this program may be too restrictive to assist all of our 
members, we do believe, along with several bankers that we have 
spoken with, that this program could be one way to reengage the 
banks with the industry.
    The second area would be to focus on small suppliers down 
through the supply chain. A steady access to lines of credit 
and asset-backed loans is essential for the survival of the 
supply base. The Small Business Administration's 7(a) loan 
guarantee program is limited to $2 million. Given the scale 
that the auto industry operates on, this limit is too low to 
help many even smaller suppliers. A recent OESA survey 
indicated that a $3.5 to $10 million limit would be more 
helpful for the auto supplier sector. Because of these 
requirements, actually the recent changes to the SBA program 
have not assisted auto suppliers.
    The third area we would focus on is technology funding. The 
technology needs for the auto industry require significant 
investment in research and development and retooling existing 
facilities to compete against global competition.
    MEMA and OESA support S. 1617, the IMPACT Act, that is 
currently under consideration, and H.R. 3246, the Advanced 
Vehicle Technology Act, which has passed the House. These bills 
will provide greater Federal funding for essential technology 
innovation and U.S. manufacturing capability.
    In conclusion, the industry does not come before you today 
requesting a bailout. We understand and support the need to 
consolidate the industry. However, we believe that without 
sufficient capital to provide a stable environment to 
restructure from, the industry and its employees will witness 
unnecessary disruptions. Without assistance, this country will 
needlessly lose manufacturing capability and capacity, 
technology development, and jobs.
    Thank you.
    Chairman Brown. Thank you, Mr. Andrea.
    Mr. Kiener, thank you.

  STATEMENT OF ROBERT C. KIENER, DIRECTOR OF MEMBER OUTREACH, 
            PRECISION MACHINED PRODUCTS ASSOCIATION

    Mr. Kiener. Chairman Brown, Ranking Member DeMint, and the 
Subcommittee, thank you for the opportunity to testify today. 
My name is Rob Kiener. I have been with the Precision Machined 
Products Association for 18 years working for and with domestic 
manufacturing, producing highly engineered components for the 
defense, medical, automotive, and agriculture industries, among 
others.
    Many small and medium-sized manufacturers began 
experiencing challenges accessing credit in October 2008 and 
now are often trapped between the troubles of their much larger 
customers and lenders. Today many companies in our industry 
report their business is down roughly 40 percent and that they 
have significantly reduced their workforce as they struggle to 
secure adequate and timely access to credit, despite most 
having decades-long relationships with their banks and a 
history of profitability.
    Today, even when a manufacturer seeks to renew a loan with 
its existing bank, it can take 3 to 4 months to process the 
loan based on new lending requirements and the paperwork to 
complete, a process that took no more than 30 days in the past. 
In our industry, manufacturers are expected to deliver products 
just in time. Any delays can cause significant disruption in 
our Nation's critical supply chain, including emerging green 
industries, thus stifling economic growth and risking national 
security. If our customers cannot receive the products they 
need due to the credit crisis, they will source from overseas, 
and these lost jobs will never come back to the United States.
    For example, a company was recently asked to leave their 
bank despite not violating loan terms over a 23-year 
relationship simply because they were reducing their exposure 
in manufacturing and automotive industries--this despite the 
lender receiving TARP funding.
    Last evening, as I prepared the testimony, I received a 
call from a PMPA member who recently completed a major 
acquisition to support their ongoing operations as a domestic 
manufacturer. To secure the necessary funding to make this 
acquisition possible and keep their business globally 
competitive, this member was forced to seek financing in 
Germany since they could not access the required financing in 
the United States as a small manufacturer in the current 
lending environment. Despite having well-established 
relationships with two major lending institutions and a strong 
record of profitability, this member was forced to go offshore 
to find the required financing to support their operations.
    As the economy picks up, will manufacturers be able to 
secure the capital required to invest in employees, equipment, 
and raw materials? If not, there is no doubt in my mind that we 
will lose those jobs to overseas manufacturers. While the 
Federal Government is urging manufacturers to diversify into 
green industries without adequate and timely access to capital, 
companies cannot make this investment and transition, which 
will only further China's goal of producing 90 percent of the 
world's solar panels.
    We already see companies trying to expand their operations 
due to consolidation in the industry who are not able to access 
capital to fill job orders, purchase raw materials and 
machinery, and hire workers. The Cash for Clunkers program is a 
perfect example of the challenges ahead. As dealers and 
automotive manufacturers have depleted their inventories, they 
are looking to suppliers to increase their output.
    To simply blame the banks is not an accurate representation 
of the current crisis. Many lenders fear having their rating 
level reduced by Federal regulators, due in part to 
manufacturing loans on their books. This scenario is extremely 
troubling. In these economic times, the Federal Government's 
policies should not create an environment in which 
manufacturers struggle to access adequate and timely credit.
    We must reassure financial institutions that returning to 
sound lending practices with manufacturers is good for their 
business and critical for the country. Many are simply 
temporarily impaired, but have a long history of profitability, 
do not break loan covenants, and maintain steady relationships 
with their lenders. These manufacturers struggle today through 
no fault of their own but because they are in the manufacturing 
business.
    We believe the Administration has the authority to work 
with creditors and borrowers to establish a mechanism by which 
lenders can loan to manufacturers without fear of a reduced 
credit rating. In addition, the Department of Treasury, through 
existing loan facility funds, should reassure the financial 
institutions that lending to small and medium-sized 
manufacturers will deliver a return on investment through a 
public-private guarantee of loans or accounts receivable 
program.
    Many small and medium-sized manufacturers need a return to 
traditional lending, while other companies and lenders require 
reassurance that their customers will pay their outstanding 
accounts receivable. With this Committee's leadership, we are 
working with the Department of Commerce and members of the 
Administration on such proposals.
    Policymakers place much emphasis on the Small Business 
Administration as the primary solution to the credit crisis 
facing small and medium-sized manufacturers. However, at a 
meeting in Michigan with manufacturers, they were told in June 
2009 by the head of the SBA in Michigan that no banks will lend 
to automotive suppliers under current SBA programs. In the 
current environment, lenders do not believe manufacturers are 
bankable, even under a 90-percent Government guarantee program. 
The Michigan example aside, our members report additional 
challenges with SBA programs. Most manufacturers cannot put 
forth the personal guarantee under SBA programs which may 
require their family home and children's assets to secure a 
loan. More than 70 percent of manufacturers are family owned 
companies, meaning it is the family that must provide the 
guarantee; whereas, the a traditional C Corporation will not 
face similar burdens. Yet another example of discrimination 
against small manufacturers.
    Mr. Chairman, we must all work together--lenders, 
manufacturers, and the Government--to ensure that we foster an 
environment that encourages manufacturing in America. We must 
remove disincentives for lenders to invest in small and medium-
sized businesses. If these trends continue, stimulus projects 
will go unfulfilled, inventories will not rebound, and medical 
and defense supplies will not reach our citizens and soldiers.
    Thank you for the opportunity to testify before you today, 
and I look forward to continuing to work with you to strengthen 
manufacturing in America.
    Chairman Brown. Thank you very much, Mr. Kiener.
    Mr. Wilson, please proceed. Welcome again. Thanks.

 STATEMENT OF STEPHEN P. WILSON, CHAIRMAN AND CHIEF EXECUTIVE 
OFFICER, LCNB NATIONAL BANK, ON BEHALF OF THE AMERICAN BANKERS 
                          ASSOCIATION

    Mr. Wilson. Thank you, Chairman Brown. My name is Stephen 
Wilson, Chairman and CEO of LCNB National Bank in Lebanon, 
Ohio. I am pleased to be here today on behalf of the American 
Bankers Association to share our view on the impact this 
recession is having on lending to small and medium-sized 
manufacturers.
    Small businesses of all kinds--including banks--are 
certainly suffering from the severe downturn. This is not the 
first recession that faces many banks. My bank has survived 
several economic ups and downs in its 132 years of existence, 
and we are not alone. In fact, there are more than 2,500 
banks--or 31 percent of the banking industry--that have been in 
business for more than a century. These numbers tell a dramatic 
story about the staying power of banks and their commitment to 
the communities that they serve. We cannot be successful 
without such long-term philosophy and without treating our 
customers fairly.
    As you know, Mr. Chairman, in my area of Ohio, three plant 
closures alone have recently taken place, which have eliminated 
over 13,000 jobs. This will have a sharp impact on our region. 
The automobile supply chain has been particularly hard hit in 
Ohio, Michigan, and neighboring States. The problems with the 
large auto companies, together with the loss of income and 
wealth by consumers, have dealt a particularly hard blow to the 
suppliers. Many of them have lowered production and slimmed 
down to wait out the storm; others have retooled in order to 
create parts for other industries. The economic downturn has 
also affected the value of their collateral. This double whammy 
of severely decreased cash-flows and low collateral values has 
made borrowing difficult to find, especially without 
established relationships with lenders.
    We recognize that there are some consumers and businesses 
today that are not getting the credit they have asked for. 
However, sometimes the best answer for our customer is no. It 
does not make sense for a borrower to take on more debt that 
would be difficult of impossible to repay.
    I will give you an example. We had a customer whom we 
turned down on an application for a loan. The reaction was as 
you would think. The customer was frustrated, the customer was 
angry, the customer left our bank. I recently received an e-
mail that he sent to say that he should not have been granted 
the credit and that he is coming back to our bank. He said that 
if he would have accepted our ``no'' response instead of 
looking elsewhere, he would be in much better financial shape 
now.
    He moved back to our bank, he said, because he appreciates 
the fact that when we underwrite loans, we are concerned about 
the success of the customer and whether the loan makes sense 
for them or not.
    Let me be very clear here. Even in a weak economy, there 
are very strong borrowers. Every bank in this country is 
working hard to ensure that our customers, particularly the 
small businesses that are our neighbors and are the lifeblood 
of our communities, get the credit that they deserve.
    Our effort to make loans is made more difficult by 
regulatory pressures which exacerbate rather than mitigate the 
problems. For example, because of worsening conditions in many 
markets, examiners often insist that the bank ask for more 
capital or more collateral from already stressed borrowers. 
These steps can set in motion a death spiral where the borrower 
has to sell assets at fire-sale prices to raise the necessary 
cash, which then drops the comparable sales figures that 
appraisers pick up, which lowers the market values of their 
other assets, which then increases the writedowns the lenders 
have to take on, and so on and so on. Thus, well-intentioned 
efforts to address problems can have an unintended consequence 
of making things quite worse.
    What regulators want is what the industry wants: a strong 
and safe banking system. Providing a regulatory environment 
that renews lines of credits to small businesses is vital to 
the economic recovery in communities large and small across 
this Nation.
    Mr. Chairman, I thank you for this opportunity to testify, 
and I would be happy to answer any questions.
    Chairman Brown. Thank you very much, Mr. Wilson. Thank you 
for your perspective and your service to our country and to our 
communities.
    Mr. Andrea, talk to us more about the Michigan Supplier 
Diversified Fund. Is it large enough or are the loans they are 
making large enough? How does this reduce risk among lenders? 
Talk to me about that. Do you think that is a model we can 
follow? Discuss it more with us.
    Mr. Andrea. Within the State of Michigan, we appropriate 
$12 million for this, I would call it a pilot program. In Mr. 
Kiener's testimony, as he said, to be able to diversify into 
these clean energy technology areas, you have to have a viable 
supply base to transition in. So that is what this fund is for.
    The fund really looks at three purposes. The first--and 
picking up on some of the issues that Mr. Wilson had in his 
testimony as well. The first is collateral shortfall. So for an 
asset-backed loan, if the bank checks off all the other boxes 
that it is a viable supplier but the collateral is under 
shortfall that makes it out of formula, public funds would come 
into the loan at a maximum level of 49 percent of the loan.
    The second area would be in a cash-flow shortfall, so 
because of the reduction in production, if a bank would see 
that a supplier may not be able to meet its interest expense 
obligations, again, this fund could purchase that loan or 
supplement the cash-flows in that purchase.
    The third element of the fund was really to create a 
public-private mezzanine fund to help restructure the industry 
as well.
    The $12 million I believe have already been committed for 
in terms of the loans that have been applied. Several national 
banks have participated in the program with suppliers, and they 
all mentioned that they would not have made these loans had 
those public funds not been available in a public-private 
partnership that way.
    Chairman Brown. What can SBA learn from Michigan's 
experience?
    Mr. Andrea. I think this could have a--if we could create 
Federal funds that could ramp this up, because, again, it is 
only $12 million, but at least the mechanism seems to work--
seemed to work, that through--maybe it is through SBA that a 
type of loan enhancement program might be an ongoing solution, 
not just even for the short-term crisis here, but I think on an 
ongoing way that could help support manufacturing going 
forward.
    Chairman Brown. The three things that your association 
urges Congress and the Administration to do, the third is to 
create--the first two, assure sufficient capital for 
restructuring, consolidating, diversifying the industry; second 
was address the specific needs of the smallest suppliers in the 
auto or other manufacturing supply chain; the third was 
technology programs. Expand on your ideas of creating 
technology funding programs, if you would.
    Mr. Andrea. Sure. There I would look at it from almost a 
funded mandate, if you will. As you look at the CAFE 
requirements that are in front of the industry and the need to 
reinvest to meet the Corporate Average Fuel Economy provisions, 
as well as the investment and considerable retooling that is 
required for hybrid technologies and fuel cells way off into 
the future.
    Here I think the two bills that we are looking at I think 
are positive from a couple of different perspectives. One is 
they provide direct grants to these suppliers. They also 
enhance loans as well. And they also provide it through public-
private partnerships as well that way. So those are the 
elements.
    I think that the positive things that we have seen in the 
bills is that, in addition to identifying the longer-term 
technology investments that the industry needs, they also allow 
the supply base--or they also allow funding into the supply 
base for the short-term current needs that we need to get in 
place, again, for the Corporate Average Fuel Economy laws that 
are on the books right now that we have to retool for.
    In the supplier industry, it takes at least 18 to 24 months 
to put any of these new programs in place, and one of the other 
elements that was not brought up earlier that is a hurdle for 
the supply base here is for tooling investment. The traditional 
way that the auto industry pays for tooling is that that is on 
the supplier's back funding for until those programs go into 
production. So, again, the Federal funding coming into these 
new technologies I think would help in that element as well, 
because that also adds risk to the banks as these suppliers 
take on those types of capital requirements for a program that 
may be 2 years from now and we truly do not know how the 
volumes will come out.
    Chairman Brown. Thank you, Mr. Andrea. More for you in a 
moment, too.
    Mr. Kiener, you said in your testimony, ``Cash for Clunkers 
is a perfect example of the challenges ahead.'' Would you 
explain what you mean by that?
    Mr. Kiener. Well, just the fact that through the Cash for 
Clunkers program, essentially I think what we saw was taking, 
you know, current inventory loads that were there, going 
through those, going through that production very quickly, and 
then having to startup--what would happen was, for many, many 
months, obviously, the automobiles were sitting there. The 
program helped get them out, helped the vehicles be purchased. 
But at the same time, our members needed to ramp up for the 
production.
    Once those vehicles went through and they needed to rebuild 
the inventory--prior to that they did not have access to the 
capital. Now all of a sudden they need to purchase tooling that 
was brought up. They need to purchase additional pieces of 
equipment to fill those orders. And all this additional capital 
required was--I would not say unanticipated, but it certainly 
presents challenges for the companies of our association.
    Chairman Brown. Was the success of the program, success in 
terms of number of sales and speed at which the cars were 
sold--I guess that is one definition of ``success.'' That came 
as a bit of a--the suppliers were in some sense unprepared for 
that? Not to blame them for that, necessarily.
    Mr. Kiener. No, no, absolutely not. I would not say that. 
To answer this question correctly, I would need to have better 
information at this time, and perhaps I would turn it over to 
my friend here who is a little bit better versed in that area.
    Chairman Brown. OK. Do you want to comment, Mr. Andrea?
    Mr. Andrea. If you look from the second half of the year to 
the first half of the year, our production numbers are going to 
be up about 42 percent for the North American industry overall 
that the supply base ships into. And if you look at any of the 
analysts' reports, inventories are a green light. Production 
right now is a green light. But, still, sales, ongoing sales, 
are still a red light in terms of uncertainty. So we do not 
know how much of this will be carried over into 2010 or how 
much of this will just be to buildup inventory short term and 
then the industry will go down.
    But in terms of for the supply base, our members describe 
themselves as going into hibernation over the last 6 to 8 
months. They took out all of the workforce that they possible 
could, all of the inventories in the system, and so now as you 
get these production schedules coming back up, all the way back 
to the steel mills who are operating themselves at 35 or 40 
percent capacity utilization at that time, needs to ramp back 
up to these higher levels. And that is the situation we are in 
right now.
    Chairman Brown. Thank you. One more question, Mr. Kiener, 
and then I will move on to Mr. Wilson. Mr. Andrea mentioned S. 
1617, the IMPACT Act, which I and some others introduced to set 
up a guaranteed loan fund to help companies transition--not 
just from auto but from auto supply, for example, to wind 
turbines, solar panel fuel cells, biomass, alternative energy. 
Can you give us an estimate of how many manufacturers are 
looking to retool or diversify into new technologies? I do not 
expect precise numbers, but can you give me your thoughts on 
that, Mr. Kiener?
    Mr. Kiener. I would not be comfortable giving you a 
percentage, but I could give you a couple of stories maybe that 
would illustrate what our members are doing.
    Our companies are highly diversified. The majority of them 
are not in one particular sector. We do have a certain 
percentage of ours that are in the auto industry, but they 
produce components for many other industries. So they are 
always looking at new opportunities, whatever is out there. 
They can do everything from medical work to defense-related 
industries, very small components up to large components.
    The opportunities for the green industry, some of our 
members have begun to manufacture component parts for the wind 
power industry and also solar. Obviously, any new opportunities 
out there for them to expand their business and be more 
competitive, and thus a stronger company, certainly they would 
be looking at that.
    In terms of a percentage at this time, I would not feel 
comfortable in putting one to it. I just know there are a 
number of our members that are doing that.
    Chairman Brown. Thank you, Mr. Kiener.
    Mr. Wilson, what do you need to see as a banker? Use your 
own bank as an example as you think through this, and then look 
at larger banks, community banks, regional banks, the largest 
banks in the country. What do you all need to see from 
manufacturers before banks start loaning to them in larger 
numbers? And I think it is accurate to say that manufacturers--
people applying for loans, if they are manufacturers, they are 
less likely to get it than if they are not; and if they are 
auto manufacturers, they are less likely to qualify than if 
they are--I mean, I know each case is different, but give me 
your thoughts on that. What do you need to see from Mr. Kiener 
and Mr. Andrea and their members before credit flows a little 
more liberally, if you will?
    Mr. Wilson. Well, I think first of all you have to divide 
it into two different components. Number one, the customers 
that we have worked with for years, and we have loans that are 
on the books, and we are trying to continue to work with them. 
We know them and that is a whole set of circumstances where we 
are going to--we have the long-term relationship. We are going 
to work on loan modifications, if they need that. We are going 
to work with them in every way we can--short of getting in 
major difficulty with our regulators, as we can go there at 
some point in time.
    But that is a little different from the new customer coming 
in with a new request, which we are seeing a lot of now. 
Because some other sources of funding, whether it be the 
secondary market or whatever, have dried up, they are coming to 
those of us that have money to lend. And there we are looking 
at--for a new customer, we are looking for cash-flow, we are 
looking for collateral. We are looking for skin in the game. A 
bank our size, we look for a commitment from the owner of the 
business to sign personally, to inject capital, to in some way 
be involved.
    Chairman Brown. What are your assets? What is the size of--
--
    Mr. Wilson. $750 million in the bank. So our lending limit 
is $8 million, to give you some idea of the size of business 
that we can work with, short of doing a participation with 
another bank.
    But that is 99 percent of the businesses and industries 
within the six-county area that we serve. Within our footprint, 
that allows us to work with most requests and most needs. We 
certainly cannot meet the needs of a Procter & Gamble or 
whatever, but most of the businesses that are the lifeblood of 
our community are small businesses.
    So we are looking for the cash-flow, we are looking for the 
collateral, we are looking from the commitment from the owners 
to be part of the solution.
    Chairman Brown. Do you see any difference between large 
banks and community banks with respect to willingness to lend 
to manufacturers?
    Mr. Wilson. I guess the answer to that would have to be no, 
with this caveat: Certainly, the large banks were hit harder by 
the liquidity crisis. I think that the banks of the size and 
type of ours, not 100 percent but for the most part, came 
through that time period with liquidity, with capital, with the 
ability to continue to lend. And there was a point in time--
because the larger banks depend on their funding from the 
capital markets a lot more than we do. Our funding comes mostly 
from deposits. Depositors put their money in, and we loan back 
into the community. And those sources, as you know, during the 
liquidity crisis dried up for the larger banks.
    So from that standpoint, there certainly has been a 
difference. Now, that is beginning to turn. Certainly many of 
the programs that were put in place by Congress have helped 
restore liquidity back into the system. And I see a loosening 
of that, but we are certainly not out of the woods yet.
    Chairman Brown. About a year ago at this time, I spent much 
of 2 weeks calling banks your size--some smaller, some larger, 
but many banks your size around Ohio. This is a bit off the 
subject of this hearing, but just for my information, if you 
would--about what was happening in their area and as we were 
looking to the response to what was happening on Wall Street, 
of course. Some banks spent a lot of time talking to depositors 
about not withdrawing their deposits because of the fear they 
had.
    What was the experience with your bank during that period a 
year ago?
    Mr. Wilson. We have had quite a growth in deposits, and I 
believe that was as a result of a flight to safety. When the 
stock markets were under stress, when other alternatives for 
dollars were under stress, people became more conservative. The 
savings rate went from negative to positive, which was good for 
our deposit base. We were seen, with the FDIC insurance, with 
the conservative nature of our institution, we were seen as a 
safe haven. And so our deposits so far this year, for example, 
have grown by $60 million. When you think of us as a $750 
million bank, that is significant.
    And so we have not had to go out to the capital markets for 
funding, et cetera, and I believe that to be the experience of 
many small banks in the State of Ohio and across the country.
    Chairman Brown. You have mentioned, in answer to my first 
question, about the difficulty with regulators, and I would 
like you to expand on that. What regulatory requirements are 
hindering or dampening in any way the bank's ability to lend to 
manufacturers?
    Mr. Wilson. Well, as I said in the testimony, certainly our 
goal and their goal is the same in that we want a safe and 
sound banking system. However, where we differ is that when we 
have a loan, for example, with a manufacturing firm and that 
manufacturing firm is under stress, we still want them to be 
successful. If making modifications to that loan, meaning that 
we lower interest rates, ask for interest only, extend terms, 
whatever modification that would help them in a cash-flow 
crisis, or if we show some forbearance on capital requirements, 
we have an incentive to do that.
    Certainly, the regulators do not have that incentive. They 
are coming in and they are saying, ``Now, wait a minute, we 
want your capital standards to be this on this loan, and we 
want your collateral levels to be this on this loan, and cash-
flow should be 1.2 times.'' And they have these standards, and 
when they apply those standards without realizing or wanting to 
compromise in a particular situation, then that becomes very 
difficult.
    Again, as I said in the testimony, if we make a collateral 
call on a business that is already in stress and there is no 
other way to raise capital, they have to sell assets to 
increase that cash to meet that collateral call. That can be a 
death spiral for a company. And we do not want any company to 
fail. That is not in our best interest; it is not in the best 
interest of our customer or our community, the jobs in our 
community.
    And so we have a tendency to be more flexible than 
regulators allow, and that is where you find the conflict.
    Another example, if I may?
    Chairman Brown. Of course.
    Mr. Wilson. Commercial real estate I think has been in the 
news a lot, because there is a supposed guideline of any bank 
that has 300 percent of their capital in commercial real 
estate, they have too much; or if they have that, they are 
going to have to put in other systems, et cetera. And that is 
supposed to be a guideline.
    But it is not unusual and it has not been unusual in this 
crisis for examiners to come into banks and to say you have 400 
percent, that is above the 300, and you need to get to the 300.
    Well, the problem that caused is what you read about in the 
newspapers, that the bank has two alternatives to get that 
ratio back in sync with what the examiners are demanding. And 
that would be to raise capital, which at that point in time was 
impossible; or lower the amount of loans outstanding. Thus, you 
heard the stories of banks calling loans, not renewing credit 
lines, not extending credit, cutting off certain sectors--i.e., 
commercial real estate. And that was real and that happened, 
and to my way of thinking, a lot of that was a result of 
regulatory inflexibility.
    Chairman Brown. Take that further. After the Federal 
interventions of the last year, TARP and TALF--based on what 
you said, elaborate--why are manufacturers still experiencing 
challenges in accessing credit? Is it beyond what you just 
said? Is it regulators requiring capital requirements that are 
too high?
    Mr. Wilson. That is only a piece of it.
    Chairman Brown. Tell me, talk through that, if you would.
    Mr. Wilson. Sure. I think it is a number of things.
    Number one, your statement is based on some situations 
where people have stories of not being able to gain credit, and 
it is, I am sure, on the fact that overall credit extended to 
the manufacturing sector is down. But I think what one must 
remember is that manufacturing firms, like everybody else, know 
how to weather a storm, and there is simply a lot less demand 
for credit right now overall. Certainly, regulatory constraints 
can hurt lending, and the other thing is that banks, of 
course--as I said again in my testimony, banks, of course, are 
not going to want to make a loan to a customer if they are not 
going to be successful in paying it back. In other words, we 
are doing a disservice to them if we extend credit to them 
beyond their capabilities.
    I think capability, decreased demand, and regulatory 
intervention, all three play a major factor in the question 
that you ask.
    Chairman Brown. OK. I want to get back to SBA with all of 
you, but ask Mr. Andrea and Mr. Kiener a question about 
manufacturing generally. We have seen a relatively positive 
uptick in the economy in recent weeks in terms of some economic 
growth, some GDP growth. Do you see it extending to 
manufacturing, Mr. Andrea and Mr. Kiener? Mr. Andrea, do you 
want to start?
    Mr. Andrea. It is from the standpoint for our production 
schedules without a doubt coming off of the Cash for Clunkers 
program. But one of the councils that we run is a small and 
medium suppliers council, which are for the presidents and CEOs 
of suppliers under $250 million in revenue. And I asked them 
how their third--this was just a month and a half ago--how 
their third and fourth quarter production schedules were 
looking, but if they had enough confidence that that uptick in 
production schedules was great enough for them to start hiring 
back people.
    And I went around a room of about 20 of the CEOs there. 
Without a doubt, short-term production uptick, they had profits 
in June and July, which are generally unheard of in the auto 
industry because that is our seasonal downturn. But almost to a 
person, the increase in production was being handled by either 
contract workers, temporary workers, shifts coming back but 
were not permanently rehired. So there is not that confidence 
that going into the first quarter this uptick will hold.
    Chairman Brown. Mr. Kiener.
    Mr. Kiener. Yes, I would agree with that statement by Dave. 
What we have seen is these inventory levels have gotten so low 
at our members customers that at some point production was 
going to begin to increase. We did have three successive months 
of double-digit increases on our sales index for our 
membership. However, you know, with them still being off 40 
percent----
    Chairman Brown. Beginning June? Beginning July?
    Mr. Kiener. In June. In June, yes. So that is when we 
started to see these increases. But I would echo the comments 
of the gentleman next to me. There is no long-term confidence 
that, you know, we are out of the woods. It seems to be 
refilling inventory. Their machines are busy. They are 
producing components. But there is not a real confidence beyond 
the rest of the fourth quarter that this is going to continue. 
They are not seeing signs, I would say, from the customers of a 
long-term----
    Chairman Brown. That makes sense. Is manufacturing 
different from the rest of the economy in this way? You know, 
with some economic growth now, we are not seeing particularly--
we are not seeing growth in jobs, obviously. On the contrary. 
We also, as we have--back up. In the last many months, 
especially until summer, but in the last many months as we saw 
job loss, we have also seen number of hours per worker worked 
per week decline.
    So as the economy begins--as manufacturing--and 
historically in this country, as you know, auto and housing 
have been the sort of leaders in pulling us out of recession, 
if that historical trend reoccurs. So as auto jobs--as auto 
production and the supply chain increase and output increases, 
sales increase, do we see employers who have 30-hour-a-week 
workers move them up to 40 before we see new hires? Or is 
manufacturing not so reflective of 30-hour work weeks instead 
of 40?
    Mr. Andrea. The employment numbers will lag in 
manufacturing because of just what you point out, being able to 
increase the number of hours before bringing back people 
permanently.
    The other thing, in terms of the restructuring, I think 
this is where this--what we just went through is so 
fundamentally different of every other economic cycle, is 
typically things came back very quickly. But now what you are 
looking at are suppliers who truly have gone from five or six 
plant locations and have consolidated those down to three.
    So in terms of the overall employment coming back, until 
2014, 2015, before people really see production come back to 
2006 and 2007 levels, you will still see weakness, at least 
from the auto sector side, until that production comes back.
    Chairman Brown. Are your members as likely to have--I mean, 
I talk to employers all the time who, rather than lay people 
off, or at least to minimize layoffs, cut work back to--my wife 
works at the Plain Dealer in Cleveland, and they cut her--they 
required--I mean, the union took a vote: Do you want to lay 
more people off or do you want to take a wage cut? And the wage 
cut turned out to be 12 percent, which really turned out to be 
days of furlough where you will work fewer days or fewer hours.
    Is manufacturing as likely to do that as other parts of the 
economy, to say we will not lay you off, but we are cutting you 
back to 35 hours--either with a union agreement or just the 
management making that decision?
    Mr. Andrea. From our members of what we saw, it was all 
across the board of however those owners could manage their 
workforce and keep their skilled workforce that they know they 
needed coming out of this and the critical capabilities.
    So we saw it go from three shifts to two shifts. Then we 
saw the 1-day and 2-day furloughs. Without a doubt, I have 
never received more e-mails from people who at the bottom said, 
``I am on a 2-week furlough, and I cannot answer any voice 
mails or e-mails.'' So it was all a mix of that, as well as 
cutting back 401(k) contributions, cutting back on health care, 
cutting back on all the benefits as well to scale down 
compensation and total benefit costs.
    Chairman Brown. And the furloughs then in place of 
furloughing ten people instead of laying off two, or whatever 
the ratios would be at a company, were done partly to cushion 
the blows to individual employees, to share the sort of pain, 
but also so those companies, thinking of an upturn in the 
economy 6 months, 12 months, 18 months out, would have the 
skilled workforce to startup in a more focused, direct way.
    Mr. Andrea. Absolutely. There are members who took people 
who were in skilled trades classifications, reclassified them 
for nonskilled work so that they could keep them employed, keep 
health care benefits for those employees through this downturn.
    Chairman Brown. And none of them were leaving to look 
elsewhere to find--because they could not find--I mean, they--
--
    Mr. Andrea. Well, the other thing, of course, we have in 
the State of Michigan, particularly, are housing values. They 
have been hit so much that it has kept an anchor on a lot of 
employees as well.
    Chairman Brown. Mr. Kiener, any comments on that?
    Mr. Kiener. Yes. Our members are typically smaller than the 
companies in Dave's group, so they are 40-employee-type of 
companies. They work very closely with their employees, so when 
they do make that decision to eliminate positions, it is done 
with careful consideration.
    What they have attempted to do is really protect those 
skilled workers for when there is the increase back in 
business. They will be able to move forward with a highly 
skilled and trained workforce.
    So that is very similar to the tale that Dave has just 
described to you.
    Mr. Andrea. If I could just pick up on one point, Mr. 
Chairman, there. I received a number of phone calls from our 
members as the consultancies were reducing their forecasts in 
production levels down through--really starting in January and 
February, and then throughout the year. I would get phone calls 
to say, ``Do you believe those forecast numbers? Because if you 
believe that it is another ratchet down, I am up against taking 
out another 10 or another 20 people out of my shops.''
    So that is how careful the people did take a look at this, 
because there was no way coming back, once you take those 
people out, if you believe those forecast numbers, which did 
end up coming true.
    Chairman Brown. Mr. Wilson, let us talk for the last part 
of this hearing about the SBA and what we can do, if you have 
thoughts on improving it. Understanding the very important 
caution in your story was, I thought, illuminating about the 
gentleman that came to you that you turned down, that later was 
grateful that you had the sobering analysis that came to that 
conclusion, understanding that, why are more banks not taking 
advantage of the 90-percent guarantee on SBA loans? The SBA has 
tried to take hold of some of the problems and help struggling 
people that cannot get credit, coming to SBA and SBA has 
changed its patterns of behavior in the last few months to try 
to reach out better, why is that not mattering enough?
    Mr. Wilson. Well, I think there are a couple of answers to 
that question. I think the first is, remember what I said about 
the demand not really being there. Certainly in our bank, we 
are making a lot more of the SBA loans, the ARC loans. We are 
looking to--when we have a stressed manufacturing firm, 
business of any kind, a stressed loan, we are looking for any 
way to help them to modify. So definitely our SBA lending is 
up, our overall lending is up, because we are looking to use 
those.
    There is a great reluctance, oftentimes, on the part of our 
customer. They have never been involved with a Government 
program. They have always dealt directly with us. They have 
seen what happened to us. You know, we accepted the CPP money 
at our bank, for example, because we thought it was our duty to 
do that. CPP, if you remember, went to the strong banks, and we 
did exactly what we were asked to do. We received on February 
ninth $13.4 million. By the end of February, we had leveraged 
that into $65 million worth of loans and investments. And our 
reward for that was we were vilified in the press. We were 
vilified in these hallowed halls. And that was seen by our 
customers.
    A lot of our customers are very reluctant to use a 
Government program because they fear they will be seen as 
taking a bailout, and they do not want any part of that.
    Now, SBA----
    Chairman Brown. Even SBA.
    Mr. Wilson. Even SBA.
    Chairman Brown. If you are extended something that has been 
around as long with a generally good reputation.
    Mr. Wilson. But you are talking about customers that have 
never used that before.
    Chairman Brown. So it is new to them.
    Mr. Wilson. It is new to them. I mean, yes, you and I both 
know about SBA, but customers there, they are in trouble, we 
say, you know, ``We think we could help you meet this need if 
you are willing to let us got for an SBA 504 or an ARC loan,'' 
or whatever it might. And they are saying, ``Oh, no, no. I do 
not want to get involved with that. I do not want to be any 
part of a Government bailout.'' And we say, ``No, no. These 
programs have been in place for a long time. These programs are 
meant for this purpose.'' And oftentimes we can walk that 
customer through that, and we can get that customer to 
understand and be part of that.
    But there is that piece of the puzzle there that there has 
been such a beating up, if you will, of those of us that 
participated in the Government programs like the CPP, the 
Capital Purchase Program, that they are cautious. Demand is 
down, another reason. And then simply there are some that are 
so stressed that they just do not qualify for the SBA 
financing.
    Chairman Brown. Mr. Kiener, are your companies reluctant to 
use SBA?
    Mr. Kiener. Yes, very much so.
    Chairman Brown. Based on?
    Mr. Kiener. Based on a couple of factors. One is the 
perceived--and I am not an expert in SBA by any stretch of the 
imagination, but the amount of paperwork and documentation 
required to go forward with the SBA process. Also, the personal 
guarantee. These small family owned companies that are 30 
employees, for them to put everything in the game--you know, 
for them it is everything in the game. They feel like they have 
put so much into the business already, but then to put their 
personal assets into it as well as part of the guarantee, they 
are just not willing to make that type of a leap.
    In addition to that, when our folks have looked at SBA, 
especially most recently with the automotive side of things, if 
they had anything to do with automotive, as I mentioned earlier 
in the testimony, they are just not bankable in terms of a loan 
for our companies.
    So most of ours have just, frankly, written SBA off as a 
solution for them.
    Chairman Brown. Mr. Andrea, if I could guess, I would think 
that you would say that the biggest problem with SBA for your 
members is that the loan limit is not large enough. Is that 
your biggest complaint with SBA?
    Mr. Andrea. When we have done written surveys in terms of 
participation, it is the loan limit that comes up as the number 
one issue. As I talk individually with the executives, the 
personal guarantee part comes up in conversation. But I think 
what is interesting, though, is when you get the bankers and 
the SBA office, at least up in Michigan, in the same room with 
the suppliers, that personal guarantee piece becomes less of a 
specific issue. But you never know. But it is the limit for 
ours members.
    Chairman Brown. I am going to ask all three of you to 
conclude the hearing with one question, the same question, and 
each of you start--I guess I will start right to left this 
time. What can Congress and the Administration do to further 
loosen credit for manufacturers? What is the most important 
thing that I should take out of this hearing? As you said, Mr. 
Wilson, two or three times, compellingly, that we all want the 
same thing. The three of you do, I do, we want to see you loan 
to manufacturing operations that are successful and you are 
making money and they are making money and they help to pull us 
out of this recession and we do not have the tragedies that are 
too common in your part of the State, really in our whole 
State. And you say DHL in Batavia and Moraine and crippling 
that has been for our State and our economy.
    What can Congress and the Administration--what are the most 
important one or two or three things you should tell us that we 
should be doing?
    Mr. Wilson. I think be careful of the rhetoric. Be as 
positive as possible about not only the prospects for an 
improving economy but about these programs we are talking 
about. Do not overreact to the lack of immediate acceptance of 
these programs by saying, well, that program did not work, let 
us cancel that.
    I think that there is an ongoing place for TALF; I think 
there is an ongoing place for SBA; I think there is an ongoing 
place for the ARC loans. I think all of those remaining in 
place will keep us from having a second dip, and I think you 
would not want to overreact to that.
    And then I think education is possible. What we are talking 
about, I think, is oftentimes a misperception on the part of 
the end user as to how difficult it is, how they might not be 
qualified, how it is so difficult or so onerous or they are 
going to be vilified or whatever. And I think a constant 
reassurance by SBA, by the banks, by the manufacturing trade 
groups that this is an alternative, this is something you ought 
to take a look at would be meaningful.
    Chairman Brown. Thank you very much, Mr. Wilson.
    Mr. Kiener.
    Mr. Kiener. What I feel, and I think I speak for our 
association on this issue, is the banks need to feel more 
comfortable in lending to manufacturers. And how do we make 
them feel more comfortable? A federally backed loan guarantee 
program that utilizes existing loan facilities for private 
lending to manufacturers. The banks need assurances that the 
Federal regulators will not come down on them for making sound 
lending decisions. And a return to the sound lending decisions 
will allow for available and affordable credit for 
manufacturers.
    I think it is crucial to the recovery of the economy to 
allow renewed capital expenditures and facility expansions, 
investment in R&D, and in the end increase hiring and 
employment and get things back and rolling. So that is really 
what we are looking for.
    Chairman Brown. Mr. Andrea.
    Mr. Andrea. When we have done surveys of our members and 
asked about the level of engagement between the bankers and 
their operations, about 20 percent of our members say that 
their bankers are very engaged with them and working with them 
day in and day out. About 20 percent of the members say that 
their bank is trying to exit the auto industry. And there is 60 
percent or so that are in the middle.
    And so for us, we are not worried about the suppliers where 
their banks are engaged, and the 20 percent in terms of the 
disengagement, many of those suppliers and capacity probably do 
need to go away in terms of poor lending risk that way. So we 
are worried about the group in the middle.
    And then I think short term you have to look at reducing 
the level of risk, and it could be loan guarantees, it could be 
some of the programs that we talked about in terms of the loan 
enhancements, to reduce the risk as our production levels will 
continue to remain low and collateral levels are low. And then, 
second, I think you look at the types of long-term and 
permanent programs that we could provide to assist in tooling 
and technology investment to retool the industry going forward.
    Chairman Brown. Good. Thank you. Thank you all. Your 
testimony was very helpful, your answers to questions were very 
good, and I very much appreciate that.
    The Subcommittee will be submitting questions for the 
record to both the Treasury Department and the Commerce 
Department. If you have thoughts that you would like us to 
entertain to turn into questions to Treasury and Commerce, 
certainly submit those to us. We will invite both Departments 
to testify at a future hearing on this issue.
    The record will remain open for 7 days, so if you have 
additional testimony or want to expand on anything you told the 
Subcommittee, certainly feel free to do that.
    Again, thank you from joining us, and the Subcommittee will 
adjourn.
    [Whereupon, at 10:39 a.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    This hearing of the Economic Policy Subcommittee will come to 
order. This is the fourth in a series of hearings on the challenges 
facing manufacturers.
    Let's face it. Our manufacturing sector is in crisis. While key 
productivity indicators have shown recent signs of growth, both 
manufacturing output and employment have dropped precipitously over the 
past year.
    We must act now to move from continuous erosion to consistent 
expansion, because U.S. manufacturing isn't optional, it is 
indispensible. As manufacturing goes, so go our national security, our 
global economic leadership, and our stability as a democracy. Our 
democratic Nation needs a strong, stable middle class, and a stable 
middle class needs manufacturing jobs.
    Manufacturing equips our military and accounts for 12 percent--$1.6 
trillion--of U.S. Gross Domestic Product (GDP). It generates nearly 
three-fourths of the Nation's research and development. It employs 
nearly 12 million Americans.
    Compromised access to credit is the newest threat to American 
manufacturing. It's not a minor problem, it's a major concern.
    As one manufacturer I spoke with put it, ``credit makes this 
country great.''
    But the credit stream has slowed to a trickle. The Federal Reserve 
Board's flow of funds accounts have shown a consistent reduction in net 
lending to manufacturing sectors.
    Every day there are more small and medium-sized manufacturers--like 
those in Ohio--at risk of going out of business because they cannot get 
the loans they need.
    For manufacturers in the auto supply chain, the struggle to find a 
lender is even tougher.
    I heard from one Ohio manufacturer who has been in business for 25 
years and has had access to credit through a trusted lender. The 
manufacturer has a strong credit history.
    The bank recently capped their credit line at $5 million because a 
percentage of their business involves auto supply components. Almost 
100 percent of the manufacturer's customers pay their invoices within 
60 days.
    The company feels penalized in spite of the fact that they have a 
strong record.
    To be clear, this hearing is not about vilifying banks or anyone 
else. I realize that some banks are only just beginning to rebound from 
the financial meltdown and are concerned about taking on too much risk.
    We also have the problem of the frozen debt-securitization markets, 
which allow banks to repackage loans and sell them to investors. Banks 
are finding it increasingly difficult to repackage their loans to free 
up capital.
    This problem of access to credit is unfortunately not unique to 
Ohio, Indiana, Michigan, and other manufacturing States.
    As I mentioned, the goal of this hearing is not to lay blame on 
anyone's doorstep.
    This is an opportunity to take stock of where manufacturers and 
lenders are given the harsh economic conditions.
    Despite the challenges I have outlined, we must find a way to get 
credit flowing again.
    In that vein, I hope this hearing helps answer the following 
questions:
    Are there signals that show credit is easing?
    How have steps the Administration has taken worked and evolved? 
What new mechanisms should Congress and the Administration consider to 
bridge the gap?
    I look forward to the testimony of our witnesses.
                                 ______
                                 
                   PREPARED STATEMENT OF DAVID ANDREA
  Vice President, Industry Analysis and Economics, Original Equipment 
  Suppliers Association, Motor and Equipment Manufacturers Association
                            October 9, 2009
    The Motor and Equipment Manufacturers Association (MEMA) represents 
nearly 700 companies that manufacture motor vehicle parts for use in 
the light vehicle and heavy duty original equipment and aftermarket 
industries. MEMA represents its members through three affiliate 
associations: Automotive Aftermarket Suppliers Association (AASA), 
Heavy Duty Manufacturers Association (HDMA), and Original Equipment 
Suppliers Association (OESA). (See Attachment 1)
    Motor vehicle parts suppliers are the Nation's largest 
manufacturing sector, directly employing over 685,000 U.S. workers and 
contributing to over 3.2 million jobs across the country. In fact, 
automotive suppliers are the largest manufacturing employer in eight 
States: Indiana, Kentucky, Michigan, Missouri, Ohio, Oklahoma, South 
Carolina, and Tennessee. (See Attachment 2)
    Furthermore, suppliers are responsible for two-thirds of the value 
of today's vehicles and nearly 30 percent of the total $16.6 billion 
automotive research and development investment and are providing much 
of the intellectual capital required for the design, testing, and 
engineering of new parts and systems.
    Without a healthy automotive supplier industry, the United States 
will lose a significant portion of this country's manufacturing 
innovation and employment base. The financial health of families and 
communities nationwide and the promise of a 21st century motor vehicle 
industry depend on a strong supplier sector.
    Over the past 10 months, significant and unprecedented Government 
and industry actions have prevented a collapse of the largest 
manufacturing sector in the United States--the auto industry. It is 
estimated that the auto industry will expand production by two million 
units or 25 percent in 2010 over 2009. However, the future expansion, 
employment, economic contributions and structural viability of the 
supply base are dependent on continued access to credit. Only through 
continued coordinated action by industry, the financial community and 
the Government will a future, potential crisis be prevented.
    MEMA and OESA urge Congress and the Administration to:

    Assure sufficient capital for restructuring, consolidating 
        and diversifying the industry;

    Address the specific needs of small suppliers for 
        sufficient capital for ongoing operations; and

    Create technology funding programs that support suppliers' 
        long-term product and manufacturing technology innovation.
History of Auto Supplier Support Program and GM and Chrysler 
        Bankruptcies
    To give some background, the Auto Supplier Support Program 
announced by the Auto Task Force on March 20, 2009, addressed only a 
finite set of issues. Small suppliers, suppliers manufacturing in the 
U.S. and shipping to Canada and Mexico, and suppliers directly 
providing replacement and warranty parts and tooling were among the 
entities that found themselves without access to this program. The 
program, as administered, assisted a portion of the industry in 
surviving the downturn in production and vehicle sales. However, the 
program failed to improve required ongoing access to traditional 
sources of capital for the vast majority of the industry.
    With the bankruptcy filings of GM and Chrysler, 30 percent of the 
North American vehicle production base is in significant restructuring 
and transition. The Auto Supplier Support Program, which provided up to 
$5 billion to guarantee the payment of supplier receivables, did help 
prevent widespread loan covenant violations and demands for changes in 
customer payment terms. However, OESA surveys indicated that while half 
of the direct suppliers to GM and/or Chrysler were eligible to 
participate, only half of those eligible suppliers were actually able 
to take part in the program.
    There was a significant gap between those eligible and those able 
to participate because of issues in loading the thousands of purchase 
orders into the Citibank system and the general limitations on the 
types of eligible receivables and supplier bank restrictions. Even 
though in both the Chrysler and GM bankruptcies, most direct suppliers 
were treated as critical vendors and received pre-petition payments on 
various terms, the process failed to address the serious needs of 
hundreds of suppliers to other vehicle manufacturers.
    Without a doubt, the U.S. Treasury Auto Supplier Support Program 
helped avert a potential implosion of the supply base. However, 
significant risks remain to the industry and lenders alike. The major 
examples include:

  1.  GM--As the announcement last week of Penske Auto Group pulling 
        out of a deal to purchase the Saturn distribution system shows, 
        there is still significant uncertainty as to how brands, 
        vehicle platforms, and supply base consolidation will occur.

  2.  Chrysler/Fiat--We will not know until later this year final 
        product cycle plans, manufacturing locations and other details 
        that will provide lenders a view into which suppliers have 
        forward business opportunities and which do not.

  3.  The old GM and Chrysler companies in bankruptcies--Until all the 
        assets are completely disposed of, there will remain 
        uncertainty over potential liabilities. Bankruptcy courts can 
        still have oversight over ongoing operations and the value of 
        certain receivables to lend against.

  4.  Bankruptcy of major suppliers--While it appears these 
        bankruptcies are moving smoothly through the courts, we cannot 
        forget that few sub-tier suppliers are receiving critical 
        vendor status and, as a consequence, most are not receiving 
        full pre-petition payments.
The Current Situation
    Suppliers have dramatically reduced every element of their working 
capital requirements from payroll to raw material inventories. 
Certainly, this is in part a response to the dramatically reduced 
production levels and an effort to conserve cash in a period of 
significantly reduced cash flows.
    However, many--if not most--of these changes will become permanent. 
These include:

    Workforce reductions;

    Plant closures;

    Compensation and benefit reductions; and, of course,

    Permanent closure of companies.

    Our research indicates that there have been 47 identified major 
suppliers that have filed for Chapter 11 protection this year. (See 
Attachment 3) We have no definitive number of suppliers who have closed 
facilities, but Plante and Moran estimates that up to 200 suppliers 
have liquidated.
    The result of this painful cost cutting and restructuring is a much 
lower break-even point for the supply base. In the September survey of 
OESA members (See Attachment 4), the median break-even unit level for 
2010 is 9.5 million units. The respondents, in turn, estimate 2010 
North American production volume will be 10.1 million units. This means 
that even with a modest increase in production, suppliers, on average, 
should be above their break-even point next year. However, currently 
there is significant pressure on the entire system to access adequate 
working capital to bring the manufacturing system back up.
    There must be increased access to capital through the entire supply 
chain--from the largest tier one to the smallest family owned firm in 
order to:

    Rehire workers and purchase raw materials for production 
        increases;

    Retool for new programs; and

    Restructure internal operations and consolidate external 
        capacities.

    Lending conditions did improve in the second quarter of 2009 from 
the first quarter of the year. However, we need to keep in perspective 
how deeply frozen the credit markets had become (the supply side) and 
how significantly large the ongoing capital needs of the industry are 
(the demand side). GE Capital, in their Third Quarter 2009 Industry 
Research Monitor of the U.S. automotive base, reports that U.S. 
institutional term loan issuance was off 55 percent in the first half 
of 2009 versus 2008; in the second quarter, term loan issuance was 
still off 31 percent year over year.
    The situation is improving, but is it improving fast enough? To 
give you a perspective of the capital requirements for this industry, 
it is not unusual to have a $100 million supplier support $5 to 10 
million in customer tooling costs at any point of time. Access to 
capital is the cushion that keeps our supply base liquid. As one of our 
members said, ``I pay my employees weekly, my leases every 4 weeks, my 
vendors every 6 weeks, and my customers pay me every 8 weeks.'' The 
need is evident.
    There has not been a widespread failure of the system as suppliers 
have restructured or liquidated. However, issues regarding access to 
capital are showing up and an inordinate amount of attention is 
required to keep the supply base running. These are just a few examples 
from our membership:

    A very large international resin supplier needs to have 
        daily phone calls with a domestic OEM to review production 
        schedules as the resin supplier has supply issues with a sub-
        tier supplier in Chapter 11;

    A large international supplier could not get an additional 
        loans to purchase specialized equipment to diversify into the 
        aerospace industry as they are up against tight loan covenant 
        terms;

    A smaller metal fabricating business could not get a loan 
        to purchase equipment for a new line to deepen his capital base 
        and keep his Midwest workforce competitive; and

    A small metal fabricator could not raise additional capital 
        to invest in his Michigan operations and lost the business to 
        Mexico.

    These are not examples of capacity that needs to be rationalized. 
These are examples of suppliers that are looking to invest in the U.S., 
compete against global competition and support a profitable, productive 
domestic auto industry.
    According to the OESA Automotive Supplier Barometer September 
survey, the majority of all respondents have not seen any significant 
change in lending practices as judged by metrics from the cost of 
credit lines to commercial loan interest rates, covenants or collateral 
requirements. In fact, 23 to 46 percent of the respondents actually saw 
tightening across these various terms over the past 3 months. When OESA 
examined the responses by size of company (above or below $500 million 
in revenue), it is clear that smaller suppliers face the possibility of 
even tighter terms.
    A very positive thread through the comments relates to the level of 
cost reduction and restructuring that has taken place. Here, suppliers 
are optimistic that even if production schedules do fall off in latter 
part of the fourth quarter and into 2010, the trend toward regaining 
profitability will continue. This is an industry worth investing in. 
However, industry production volumes (driven by weak consumer spending) 
and absolutely low levels of asset valuations restrict credit 
availability even to suppliers that will be needed on the other side of 
this crisis.
    Banks are forming their lists of which suppliers they will work 
with and those they will not. The OESA Automotive Supplier Barometer 
survey from July noted that 23 percent of suppliers characterized their 
banker as actively engaged with them while 19 percent described their 
banker as actively exiting the industry. We are worried about the 60 
percent of the supply base in between that could be indiscriminately 
cut off from necessary access to capital. In fact, in a recent review 
of supplier financial distress monitoring systems, a group of chief 
purchasing officers concluded that predicting the failure of a supplier 
has more to do with their banking relationships than it does with their 
operational efficiency or revenue outlook.
    Outside analysts confirm the views of our membership. According to 
the Summer 2009 Grant Thornton report, The North American Automotive 
Industry in 2012: Supplier Opportunities: `` . . . as many as 30 
percent of North American suppliers are at high risk of failure.'' 
Grant Thornton expects restructuring will reduce supplier capacity by 
30 to 45 percent. Using 1,700 suppliers for their base numbers, they 
forecast:

    170 to 340 companies risk Chapter 11 restructuring;

    340 companies risk liquidation;

    170 to 340 companies need acquisition financing for 
        consolidation;

    50 companies require targeted financing for restructuring; 
        and

    630 to 970 companies may not need special financing 
        assistance.

    Given the parts sector is operating just above 50 percent capacity 
utilization, we believe that there will be a continued stream of 
bankruptcies and closures through the rest of this year. In 2010, we 
expect ongoing closures as the industry continues to operate at low--
albeit increasing--production volumes. Although much of this is to be 
expected in an industry in transition, adequate capital is necessary to 
consolidate the industry in a rational, effective manner. Otherwise, 
production disruptions and failure of companies with critical 
capabilities may ensue.
    There are three areas MEMA and OESA believe Congress and the 
Administration should focus on to lower the risk of potential 
production disruptions and unintended employment loss as well as to 
establish longer term programs to enhance product and manufacturing 
technology advancement.
Focus on General Lending
    Given low production volumes and temporary low valuations of 
industry assets, many loans to long-term viable suppliers are, in the 
short-term, ``out of formula'' for banks to consider. One idea the 
industry believes--along with several bankers we have spoken to--has 
merit is the Michigan Supplier Diversification Fund. The $12 million 
program, currently in a ``pilot'' stage, is being funded by the State 
of Michigan and addresses three critical impediments to lending:

    Cash flow--by purchasing a portion of a commercial credit 
        facility and offering preferred terms for up to 36 months to 
        borrowers.

    Collateral value--by supplementing the collateral value on 
        loan requests and depositing cash pledged to the bank.

    Transitional risk--by creating a mezzanine (bank of banks) 
        model that can spread risk among several lenders and make both 
        debt and equity investments.

    It is important to investigate scaling this type of program up to a 
national level in all States to support a broad range of manufacturing 
entities.
Focus on Smaller Suppliers
    Given the industry's significant capital requirements and the 
general mismatch of funding, a steady access to lines of credit and 
asset-backed loans is essential for the survival of the supply base. 
For example, it is not unreasonable for a small supplier to be called 
on for the investment of $2 to $4 million to assist with the design, 
engineering and tooling for a component on a new vehicle program. 
However, typically suppliers receive payment for this investment after 
the launch of production through the piece price of the component. The 
supplier might not begin receiving any cash flow on their investment 
for 12 to 24 months and will not be completely reimbursed until the 
product ends production in another 36 to 60 months.
    Small Business Administration (SBA) programs have been at the 
foundation of small supplier support for decades. However, the SBA loan 
programs are limited to only $2 million loans. Since suppliers are 
expected to fund a great deal of the research and development in the 
projects, the net worth and loan amounts have limited utility to our 
industry. Given the scale the auto industry operates on, this limit is 
too low to help many suppliers. A recent OESA survey indicated that a 
$3.5-$10 million level would be far more helpful to small and medium 
automotive suppliers. Although small manufacturers should be able to 
turn to the SBA for loan programs, the current system is simply not 
designed to meet the needs of manufacturers with substantial raw 
material, research and development costs. Because of these limitations, 
recent changes to the SBA program have not dramatically impacted the 
ability of small suppliers to access capital.
Focus on Technology Funding
    The supplier industry has worked with its customers and developed a 
wide range of new technologies that promote increased safety and 
improved fuel efficiency. This work includes:

    Batteries and engines for hybrid vehicles;

    Clean diesel engines;

    Direct fuel injection systems;

    Fuel cell technology;

    Lightweight materials;

    Innovative glass; and

    Advanced safety technology.

    Suppliers are constantly called upon to innovate. The industry 
works daily with vehicle manufacturers to make vehicles safer, 
stronger, lighter, more fuel efficient, more economical and more 
environmentally friendly. This innovation takes investment in people, 
engineering, capital equipment, and research and development. Programs 
aimed at the supplier industry are needed.
    MEMA and OESA support S. 1617, the IMPACT Act, currently under 
consideration, and H.R. 3246, the Advanced Vehicle Technology Act, 
which has passed the House. These bills will provide greater access to 
funding for the supply base. The technology needs of the auto industry 
will require suppliers to invest in additional research and 
development, retool existing facilities and compete with sophisticated 
technology from overseas. (See Attachment 5)
Conclusion
    We understand and support the need to consolidate the industry. 
However, we believe that without sufficient capital to provide a stable 
environment in which to restructure, the industry and its employees 
will witness unnecessary disruptions. Without assistance this country 
will needlessly lose manufacturing capacity, technology development and 
jobs.
    This industry does not come before you requesting a bail out. 
However, we urge Congress and the Administration to invest with us in 
our future to achieve a stable economic environment, a strong 
employment base and a vibrant opportunity for technology research and 
development. We welcome an opportunity to work with the Committee.

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                 PREPARED STATEMENT OF ROBERT C. KIENER
  Director of Member Outreach, Precision Machined Products Association
                            October 9, 2009
    Chairman Brown, Ranking Member DeMint, Members of the Committee, 
thank you for the opportunity to testify before you today on restoring 
credit to small and medium-sized manufacturers (SMMs). My name is Rob 
Kiener and I have been with the Precision Machined Products Association 
(PMPA) for 18 years working with our nearly 500 members--companies from 
around the country. Prior to joining PMPA, I worked on the shop floor 
in a precision parts company, having spent time during high school and 
college at a screw machine shop in the secondary machining department 
and quality lab. More than half of our members have fewer than 50 
employees. They manufacture highly engineered components using a 
variety of materials such as: steel, stainless steel, aluminum, brass, 
and aerospace alloys for the defense, medical, automotive, and 
agriculture industries, among others.
Current SMM Credit Crisis
    Small and medium-sized manufacturers are often trapped between the 
troubles of their much larger customers and financial institutions. 
SMMs began reporting challenges accessing traditional lines of credit 
in October 2008. Today, many companies in our industry report their 
business is down roughly 40 percent and that they have significantly 
reduced their workforce.
    Countless members I speak with who still manage to maintain 
profitability tell me they have held decades long relationships with 
their bank but are now being told they must offer their life insurance 
collateral to help secure a loan--this is a true story from an Ohio-
based manufacturer.
    Even when a manufacturer seeks to renew a loan with its existing 
bank, it can take 3 to 4 months to process based on all the new lending 
requirements and paperwork to complete, despite taking no more than 30 
days in the past. In our industry, small manufacturers are required to 
purchase raw materials on their own, in some cases not seeing full 
payment for up to 6 months. Without access to adequate and timely 
credit, these delays can cause significant disruptions in the Nation's 
critical supply chain including in emerging green industries, stifle 
economic growth, and risk national security. If our customers cannot 
receive the products they need, they will source them from overseas--
these lost jobs, once outsourced, will never come back to the U.S.
    Several surveys of metalworking manufacturing companies estimate 
that roughly 75 percent of these businesses cannot secure sufficient 
credit for day-to-day operations, equipment acquisition, and expansion, 
among other activities. In most cases, an SMM will see their line of 
credit significantly reduced, revoked, or a loan called due to the 
health of their manufacturing customers or lenders and not because of 
their own business decisions. While we understand some in the 
Administration and industry believe we have an overcapacity in the 
manufacturing sector that requires some consolidation, without a 
financial bridge to support acquisition by those remaining companies 
disruptions in the supply chain will continue.
    I recently heard a story of a company asked to leave their bank 
despite violating no terms of their loans over a 23-year relationship 
with the lending institution. The bank told this business that they 
were reducing their exposure in manufacturing and automotive industries 
and that they would have to leave the bank--this despite the lender 
receiving TARP funding. Another Ohio company incurred more than 
$600,000 in added expenses due to changes their lender demanded in 
their loan agreement.
    Beyond access to credit today, one of our major concerns is as the 
economy picks up and we see an increase in job orders, will 
manufacturers be able to have the capital they need to invest in 
employees, equipment, and raw materials? If they do not, there is no 
doubt in my mind that we will lose those jobs to overseas manufacturers 
who already maintain a production cost advantage over U.S. businesses. 
The Federal Government is urging manufacturers to diversify into green 
industries, but without adequate and timely access to capital companies 
cannot make this investment and transition, which will only further 
China's goal of producing 90 percent of the world's solar panels.
    A survey of metalworking companies shows 72 percent anticipate 
challenges accessing adequate lines of credit when volume grows. We are 
already seeing companies that are trying to expand their operations due 
to consolidation in the industry who are not able to access capital to 
fill job orders, purchase steel, and hire workers. The cash-for-
clunkers program is a perfect example of the challenges ahead. As 
dealers and automotive manufacturers have depleted their inventories, 
they are looking to suppliers to increase their output. Similarly, 
manufacturers of wind turbines and solar panels will see shortages of 
domestic suppliers if SMMs cannot adequately ramp up production to meet 
a surge in demand as Federal funds continue to flow to those 
technologies. The current system does not even reward our small 
business exporters, as manufacturers are unable to borrow against their 
foreign sales even if their customer's headquarters is in the U.S. A 
lack of access to capital to fill these job orders will cause 
disruption in the supply chain, risk our national and economic 
security, and Americans will lose the opportunity to sustain and create 
jobs to overseas competitors.
    To simply blame the banks is not an accurate representation of the 
current crisis. Several manufacturers who also serve on the boards of 
financial institutions have indicated that many banks are not lending 
to manufacturing businesses because of fear of having their rating 
level reduced by Federal regulators. This scenario is extremely 
troubling if indeed widespread. In these economic times, the Federal 
Government's policies should not create an environment in which 
manufacturers struggle to access adequate and timely credit. The 
Nation's economy, in which manufacturing accounts for 12 percent of 
GDP, cannot recover without a sound manufacturing base.
Restoring Credit to SMMs: Opportunities and Potential Challenges
    In order to ensure a timely and sustained recovery, the 
Administration and Congress must take proactive steps to support 
manufacturing in America. The first step is to reassure financial 
institutions that returning to sound lending practices with 
manufacturers is good for their business and critical for the country. 
Many of these companies are simply temporarily impaired and need a 
bridge into the next year as business conditions improve. These 
temporarily impaired manufacturers have a long history of 
profitability, did not break loan covenants, and maintained steady 
relationships with their lenders--they struggle today through no fault 
of their own but because they are in the manufacturing business.
    We believe the Administration has the authority to work with 
creditors and borrowers to establish a mechanism by which lenders can 
loan to manufacturers without fear of a reduced credit rating. In 
addition, the Department of Treasury, through existing loan facility 
funds, should reassure financial institutions that lending to small and 
medium-sized manufacturers will deliver a return on investment through 
a public-private guarantee of loans or accounts receivable program. 
Many SMMs need a return to traditional lending, while other companies 
and their lenders require reassurance that their customers will pay 
their outstanding accounts receivable. While guaranteeing loans is 
critical to supporting all manufacturers, guaranteeing accounts 
receivable is particularly important to SMMs requiring an immediate 
injection of cash to continue operations. PMPA and other metalworking 
industries are working with the Department of Commerce Manufacturing 
Council and members of the Administration on such proposals.
    Since enactment of the stimulus bill, policymakers place much 
emphasis on the Small Business Administration as a primary solution to 
the credit crisis facing SMMs. One anecdote from Michigan tells much of 
the story: when a metalworking executive asked an SBA official in June 
2009 if he was aware of any banks lending to automotive suppliers under 
SBA programs in the State he stated he was not. In the current 
environment, lenders do not believe many manufacturers are 
``bankable.'' If these businesses are not ``bankable'' even under a 90 
percent Government guarantee program, then it is clear the Federal 
Government must take additional steps to reassure lenders that 
investing in manufacturing is a sound decision.
    The Michigan example aside, our members report additional 
challenges with SBA programs such as 7(a) and 504 from the borrower's 
perspective. The first concern remains the personal guarantee required 
under SBA programs. Most manufacturers cannot put forth their family 
home and children's assets to secure a loan. More than 70 percent of 
SMMs are structured as family owned S Corporations or LLPs, meaning it 
is the family that must provide the guarantee whereas a traditional C 
Corporation will not face similar burdens. This is another aspect of 
the current financial structure that demonstrates a discrimination 
against small and medium-sized manufacturers. Even when an SMM decides 
that they have no choice but to apply using a personal guarantee, the 
lengthy and costly process and paperwork involved is too much for 
smaller applicants who lack the full time and unlimited internal 
accounting services that their larger competitors maintain. Although 
several of our members indicated that increasing the SBA 7(a) loan 
limit to $5 million may make this program more attractive, most still 
cite an even larger personal guarantee requirement.
    Mr. Chairman, we must all work together--lenders, manufacturers, 
and Government--to ensure we foster an environment that encourages 
manufacturing in America. A number of factors in the current financial 
conditions serve as disincentives for lenders to invest in small- and 
medium-sized businesses. Our customers will still require parts, 
regardless of our financial condition. We must maintain a strong 
domestic supply chain with solid and stable lending to manufacturers to 
fill job orders and are prevent millions more manufacturing jobs from 
going offshore. If these trends continue, stimulus projects will go 
unfulfilled, inventories will not rebound, and medical and defense 
supplies will not reach our citizens and soldiers.
    We appreciate your efforts and that of your staff in drawing 
additional public attention to this important issue. Thank you for the 
opportunity to testify before you today and I look forward to 
continuing to work with you to strengthen manufacturing in America.
                                 ______
                                 
                PREPARED STATEMENT OF STEPHEN P. WILSON
Chairman and Chief Executive Officer, LCNB National Bank, on Behalf of 
                    the American Bankers Association
                            October 9, 2009
    Chairman Brown, Ranking Member DeMint, and Members of the 
Subcommittee, my name is Stephen Wilson, Chairman and CEO, LCNB Corp. 
and LCNB National Bank, Lebanon, Ohio. I currently serve as the 
chairman of the Government Relations Council of the American Bankers 
Association (ABA) and will assume the role of Chairman-Elect of the 
association at the end of this month. LCNB National Bank is a full-
service bank offering trust and brokerage services, along with 
insurance through a subsidiary. We have over $700 million in assets, 
and our bank has served our community for 132 years. I am pleased to be 
here today on behalf of ABA.
    The American Bankers Association brings together banks of all sizes 
and charters into one association. ABA works to enhance the 
competitiveness of the Nation's banking industry and strengthen 
America's economy and communities. Its members--the majority of which 
are banks with less than $125 million in assets--represent over 95 
percent of the industry's $13.3 trillion in assets and employ over two 
million men and women.
    We are pleased to share the banking industry's perspective on the 
impact this recession is having on lending to small and medium-sized 
manufacturers. Small businesses of all kinds--including banks--are 
certainly suffering from the severe economic recession. While some 
might think the banking industry is composed of only large global 
banks, the vast majority of banks in our country are community banks--
small businesses in their own right. In fact, over 3,000 banks (41 
percent) have fewer than 30 employees.
    This is not the first recession faced by banks. In fact, most banks 
have been in their communities for decades and intend to be there for 
many decades to come. The LCNB National Bank has survived many economic 
ups and downs for 132 years. We are not alone, however. In fact, there 
are 2,556 banks--31 percent of the banking industry--that have been in 
business for more than a century; 62 percent (5,090) of banks have been 
in existence for more than half a century. These numbers tell a 
dramatic story about the staying power of banks and their commitment to 
the communities they serve. My bank's focus, and those of my fellow 
bankers throughout the country, is on developing and maintaining long-
term relationships with customers, many of which are small businesses. 
We cannot be successful without such a long-term philosophy and without 
treating our customers fairly.
    In this severe economic environment, it is only natural for 
businesses and individuals to be more cautious. Businesses are 
reevaluating their credit needs and, as a result, loan demand is 
declining (see chart below). Banks, too, are being prudent in 
underwriting, and our regulators demand it. With the economic downturn, 
credit quality has suffered and losses have increased for banks. 
Fortunately, community banks like mine entered this recession with 
strong capital levels. As this Subcommittee is aware, however, it is 
extremely difficult to raise new capital in this financial climate. The 
difficult recession, falling loan demand, and loan losses have meant 
that loan volumes for small businesses have declined somewhat this year 
(see chart below). Let me be very clear here: even in a weak economy 
there are very strong borrowers. Every bank in this country is working 
hard to ensure that our customers--particularly the small businesses 
that are our neighbors and the life blood of our communities--get the 
credit they deserve.

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    We believe there are actions the Government can take to assist 
viable community banks to weather the current downturn. The success of 
many local economies--and, by extension, the success of the broader 
national economy--depends in large part on the success of these banks. 
Comparatively small steps taken by the Government now can make a huge 
difference to these banks, their customers, and their communities--
keeping capital and resources focused where they are needed most.
    In my statement, I would like to focus on the following points:

  1.  Banks continue to lend in this difficult economic environment, 
        but the broadening economic problems have already started to 
        impact lending.

  2.  Lenders and borrowers are exercising a prudent approach to 
        credit.

  3.  Changes in the regulatory environment would improve the situation 
        for small business lending.

    I will address each of these points in turn.
1. Banks Continue To Lend in This Difficult Economic Environment, but 
        the Broadening Economic Problems Have Already Started To Impact 
        Lending
    Since the recession began over 21 months ago, banks have continued 
to provide credit to their customers. The impact of the downturn, 
however, is being felt by all businesses, banks included. As the 
economy has deteriorated, it has become increasingly difficult for 
consumers and businesses to meet their financial obligations. The 
cumulative impact of six straight quarters of job losses--7 million 
since the recession began--is placing enormous financial stress on some 
individuals. With jobs lost and work hours cut, it does not take long 
for the financial pressure to become overwhelming. This, in turn, has 
increased delinquencies at banks and resulted in losses. The impact of 
job losses on delinquencies is illustrated in the chart above. Job loss 
and other reductions or interruptions of income remain the number one 
cause of loan delinquencies and losses.

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    What makes our current national economic circumstances so difficult 
to discuss is that there are such dramatic regional differences in 
economic performance. This chart, showing unemployment levels for 
States across the U.S., makes the variability clear. Most States are 
either in recession or very close. The causes of these problems are 
varied. In the West and Southeast, the housing sector collapse has now 
broadened to a deep recession. States such as Michigan, Indiana, and 
Ohio are suffering fundamental economic problems, which are largely 
tied to the fortunes (or misfortunes) of the auto industry.

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    For example, in southwest Ohio, where our bank operates, the 
employment picture is expected to deteriorate even further in the short 
run. Several factors are involved, but most important are three major 
plant closures. In Batavia, Ohio, Ford is closing a transmission plant, 
which will eliminate over 1,000 jobs. In Moraine, Ohio, GM is closing 
an assembly plant, which will eliminate over 2,500 jobs. And in 
Wilmington, Ohio, DHL is closing a hub, which will eliminate over 
10,000 jobs.
    The effect of job losses and closings is a major concern, but these 
are not the only events impacting small businesses, including small 
banks. Individuals are saving more and buying less, which reduces foot 
traffic for retail and other businesses. As a consequence, business 
bankruptcies have risen from 28,000 in 2007 to more than 43,000 at the 
end of 2008. Those trends have continued into this year with 30,000 
business failures already. \1\
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     \1\ These trends have meant that banks continue to experience 
losses and are also aggressively setting aside reserves to cover 
expected losses in the future given the severity of the recession. 
Setting aside reserves has reduced income and impaired earnings for 
banks. In fact, two out of every three institutions (64.4 percent) 
reported lower quarterly earnings than a year ago, and more than one in 
four (28.3 percent) reported a net loss for the quarter.
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    One small business segment that has been particularly hard hit in 
my region is the automobile supply chain. Manufacturers that produced 
for the automobile industry were dealt a hard blow with the economic 
downturn and the subsequent drop-off in automobile sales. Suppliers' 
customers went bankrupt, wiping out receivables in the process. Many 
suppliers lowered production and slimmed down to wait out the storm; 
others hoped to retool in order to create parts for other industries. 
The economic downturn had also affected the value of their collateral. 
This double-whammy of severely decreased cash flows and low collateral 
values made new borrowing difficult to find, especially without 
established relationships with lenders.
    However, even this segment is seeing some improvements. In the 
September 2009 Supplier Barometer survey, produced by the Original 
Equipment Suppliers Association (OESA), automotive suppliers report a 
growing optimism for the 12-month outlook. In addition, they report 
they are ``generally confident that they will have access over the 
short-term to capital in the amounts and costs necessary to fund their 
businesses.'' This echoes the sentiment reported in PNC's recent Small 
Business Survey, released this week, which noted small business owners 
are much less pessimistic about their own company's prospects over the 
next 6 months. Last spring, 36 percent of owners reported pessimism, 
whereas this autumn, that figure had dropped to 25 percent, comparable 
with the outlook among small business owners prior to the Lehman 
collapse. There is still a long way to go, but we remain hopeful that 
the recovery is underway.
2. Lenders and Borrowers Are Exercising a Prudent Approach to Credit
    Against the backdrop of a very weak economy it is only reasonable 
and prudent that all businesses--including banks--exercise caution in 
taking on new financial obligations. Both banks and their regulators 
are understandably more cautious in today's environment. Bankers are 
asking more questions of their borrowers, and regulators are asking 
more questions of the banks they examine. This means that some higher-
risk projects that might have been funded when the economy was stronger 
may not find funding today.
    It comes as no surprise, then, that businesses are being very 
cautious. As a result, loan demand is down considerably. This is due, 
according to the National Federation of Independent Businesses (NFIB), 
to ``widespread postponement of investment in inventories and 
historically low plans for capital spending.'' The NFIB reports that in 
spite of the difficult economic environment, 32 percent of businesses 
reported regular borrowing in August (down one point from July) 
compared to 7 percent who reported problems in obtaining the financing 
they desired (down 3 points). The NFIB also noted that only 4 percent 
of business owners reported ``financing'' as their number one business 
problem. This is extremely low compared with other recessions. For 
example, in 1983--just after the last big recession--37 percent of 
business owners said that financing and interest rates were their top 
problem.
    Our expectation is that loan demand in this economy will continue 
to decline. Loan delinquencies and losses, which often lag the overall 
economy, will also continue to impact banks. Thus, realistically, the 
level of lending outstanding to all businesses will continue to decline 
for the rest of this year. However, we believe that as business 
confidence continues to improve, inventory and capital investments will 
increase, and lending volumes will rebound. As the economy starts to 
grow again and loan demand increases, the ability of banks to meet 
these needs will be stunted if adequate capital is not available to 
back increased lending.
    We recognize that there are some consumers and businesses in the 
current situation that believe they deserve credit that is not being 
made available. In some cases, it makes no sense for the borrower to 
take on more debt. Sometimes, the best answer is to tell the customer 
no, so that the borrower does not end up assuming an additional 
obligation that would be difficult if not impossible to repay.
    I have an example that illustrates this. We had a customer who we 
turned down on an application for a loan. The customer was frustrated 
and angry, and left our bank. Recently, he e-mailed me to say he should 
not have been granted that loan and that he is coming back to our bank. 
He said that if he would have accepted our response instead of looking 
elsewhere, he would have been in better financial stature now. He moved 
back to our bank, he said, because he appreciates the fact that when we 
underwrite loans, we are concerned about the success of our customers 
and whether the loan makes sense for them.
    We do not turn down loan applications because we do not want to 
lend--lending is what banks do. When banks consider an individual loan 
application, we have to place it in the context of the economic 
environment. For small local businesses, banks will consider local 
economic conditions in addition to any specific issues that may affect 
the business.
    The July Senior Loan Officer Opinion Survey by the Federal Reserve 
bears this out. The survey found that the number one reason for a more 
conservative approach to underwriting was the poor outlook for the 
economy. Of that segment of the banks that had tightened lending, more 
than 70 percent said that the ``less favorable or more uncertain 
economic outlook'' was a ``very important'' reason for tightening 
credit standards or loan terms (and 30 percent said it was ``somewhat 
important''). Concerns with the outlook in individual business sectors 
was also noted as a problem. ``Worsening of industry-specific 
problems'' was cited by 43 percent as a ``very important'' driver of 
these changes (with another 49 percent saying it was ``somewhat 
important''). This is the context that banks must consider when 
evaluating a loan application. For example, if a developer came into 
our office wanting to build spec homes, we would be very hesitant to 
make this kind of loan in today's housing environment.
    The current credit markets have tightened largely because of 
problems outside the traditional banking sector. Many large 
manufacturing companies, like the auto companies, relied on funding 
that came directly from investors, not banks. However, when those 
funding sources dried up, the impact cascaded down the supply chain.

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    In fact, because of the funding problems associated with individual 
investors, the traditional banking sector will have to play an even 
larger role in providing credit to get the economy growing again. Banks 
are anxious to meet the credit needs of businesses and consumers, and 
we know that such lending is vital to an economic recovery in 
communities large and small across the country.
3. Changes in the Regulatory Environment Would Improve the Situation 
        for Small Business Lending
    As I noted above, banks are not immune from the economic downturn; 
job losses and business failures have resulted in greater problem loans 
and much higher loan losses. Nonetheless, banks are working every day 
to make credit available. Those efforts, however, are made more 
difficult by regulatory pressures and accounting treatments that 
exacerbate, rather than help to mitigate, the problems.
    Of course, the current regulatory environment is unquestionably 
impacted by concerns flowing from the economic downturn. A natural 
reaction of regulators is to intensify the scrutiny of commercial 
banks' lending practices. But just as too much risk is undesirable, a 
regulatory policy that discourages banks from making good loans to 
creditworthy borrowers also has serious economic consequences. Wringing 
out the risk from bank loan portfolios means that fewer loans will be 
made, and that only the very best credits will be funded. Here are a 
couple of the factors that are impeding greater bank lending:

    FDIC premium payments are impacting banks' ability to make 
        new loans: Perhaps the most immediate threat hampering banks' 
        ability to make new loans is the very high premiums being paid 
        by banks to the FDIC. This year alone, the banking industry 
        will be paying at least $17 billion to the FDIC. The recent 
        proposal by the FDIC to pay expenses over a longer period of 
        time, rather than having a huge payment all at once, is 
        promising. Banks have paid the full cost of the FDIC for 75 
        years now, and banks will assure the financial health of the 
        FDIC during this difficult period. It is absolutely critical 
        how those obligations are repaid so as not to further 
        exacerbate the poor economic conditions.

    Supervisory responses to the crisis threaten to stifle new 
        lending: Worsening conditions in many markets have strained the 
        ability of some borrowers to perform, which often leads 
        examiners to insist that a bank make a capital call on the 
        borrower, impose an onerous amortization schedule, or obtain 
        additional collateral. These steps can set in motion a ``death 
        spiral,'' where the borrower has to sell assets at fire-sale 
        prices to raise cash, which then drops the comparable sales 
        figures the appraisers pick up, which then lowers the ``market 
        values'' of other assets, which then increases the write-downs 
        the lenders have to take, and so on. Thus, well-intentioned 
        efforts to address problems can have the unintended consequence 
        of making things worse. We also have heard complaints from 
        other banks about examiners being inappropriately tougher in 
        their analysis of asset quality and consistently requiring 
        downgrades of loans whenever there is any doubt about the 
        loan's condition.

    What the regulators want for the industry is what the industry 
wants for itself: a strong and safe banking system. To achieve that 
goal, we need to remember the vital role played by good lending in 
restoring economic growth and not allow a credit crunch to stifle 
economic recovery. Commendably, the bank regulators are publicly 
encouraging lenders to work with their borrowers who are doing the 
right thing in good faith during these challenging times. But the 
current regulatory environment essentially precludes banks from being 
able to do that. We must work together to get through these difficult 
times. Providing a regulatory environment that renews lines of credit 
to small businesses is vital to our economic recovery.
Conclusion
    I want to thank you, Chairman Brown, for the opportunity to present 
the views of the ABA on the challenges ahead for the banks that serve 
small businesses and manufacturers. These are difficult times and the 
challenges are significant. In the face of a severe recession, however, 
bankers are working hard every day to ensure that the credit needs of 
our communities are met.
    I am happy to answer any questions the Subcommittee may have.
