[Senate Hearing 111-531]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-531
 
                         SMALL BUSINESS LENDING 

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

                             FIELD HEARING

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

            HEARING HELD IN PHOENIX, ARIZONA, APRIL 27, 2010

                               ----------                              

        Printed for the use of the Congressional Oversight Panel


                       Available on the Internet:
   http://www.gpoaccess.gov/congress/house/administration/index.html


















                         SMALL BUSINESS LENDING


















                                                        S. Hrg. 111-531

                         SMALL BUSINESS LENDING

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

                             FIELD HEARING

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

            HEARING HELD IN PHOENIX, ARIZONA, APRIL 27, 2010

                               __________

        Printed for the use of the Congressional Oversight Panel


                       Available on the Internet:
   http://www.gpoaccess.gov/congress/house/administration/index.html

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

57-213 PDF                       WASHINGTON : 2010 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 




















                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                              Paul Atkins
                           J. Mark McWatters
                           Richard H. Neiman
                             Damon Silvers















                            C O N T E N T S

                              ----------                              
                                                                   Page
    Opening Statement of Elizabeth Warren, Chair, Congressional 
      Oversight Panel............................................     1
    Statement of Mr. J. Mark McWatters, Member, Congressional 
      Oversight Panel............................................     5
    Statement of Mr. Damon Silvers, Member, Congressional 
      Oversight Panel............................................    10
    Statement of Mr. Richard Neiman, Member, Congressional 
      Oversight Panel............................................    14
    Statement of Robert Blaney, Arizona District Director, U.S. 
      Small Business Administration..............................    18
    Statement of Stan Ivie, Regional Director, San Francisco, 
      Federal Deposit Insurance Corporation......................    23
    Statement of Cindy Anderson, CEO, Great Biz Plans............    52
    Statement of Candace Wiest, President and CEO, West Valley 
      National Bank..............................................    59
    Statement of Paul Smiley, President and CEO, Sonoran 
      Technology.................................................    64
    Statement of James H. Lundy, President and CEO, Alliance Bank 
      of Arizona.................................................    68
    Statement of Mary Darling, CEO, Darling Environmental and 
      Surveying..................................................    75
    Statement of Lynne B. Herndon, Phoenix City President, BBVA 
      Compass....................................................    80


                FIELD HEARING ON SMALL BUSINESS LENDING

                              ----------                              


                        TUESDAY, APRIL 27, 2010

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                       Phoenix, AZ.
    The Panel met, pursuant to notice, at 10:05 a.m., at the 
University of Arizona, Phoenix, Arizona, Elizabeth Warren, 
Chair of the Panel, presiding.
    Present: Professor Elizabeth Warren [presiding], Mr. Damon 
Silvers, Mr. J. Mark McWatters, and Mr. Richard Neiman.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Chair Warren. I now call to order this meeting of the 
Congressional Oversight Panel for the Troubled Asset Relief 
Program.
    Good morning. My name is Elizabeth Warren. I am the Chair 
of the Congressional Oversight Panel. I would like to begin 
this morning by extending our sincere thanks to the City of 
Phoenix, the University of Arizona, Senator John McCain, 
Senator John Kyl, and Congressman Ed Pastor for hosting us and 
for helping to plan today's hearing.
    These hearings take a lot of people and a lot of moving 
parts and we're very grateful for the help of the congressional 
delegation.
    Congress established our panel in October of 2008 to 
oversee the expenditure of the $700 billion Troubled Asset 
Relief Program, commonly called TARP. We issue monthly 
oversight reports that analyze and evaluate the Treasury's 
administration of this program in stabilizing our economy.
    In the course of our work, we travel from time to time to 
areas of the country that have been especially hard hit by the 
financial crisis. This morning we're pleased to be in Phoenix 
to learn more about the credit crunch or the reduction of 
availability of credit for small businesses.
    Oversight of this topic is a crucial role for our panel. 
The Secretary of the Treasury recently designated small 
business credit as one of the primary focuses of the TARP and 
he pledged TARP funds for additional efforts to facilitate 
small business lending.
    This is a difficult moment for most American businesses, 
large and small. Companies of all sizes remain constrained by 
the recession, hampered by the unwillingness of banks to lend 
and weakened by the reluctance of customers to buy, but as our 
economic cycle turns towards recovery, there is a very real 
fear that, while big businesses might be able to gain credit 
through Wall Street or the debt markets, small businesses will 
be left behind.
    For Arizona this is not an acceptable outcome. Over 97 
percent of the state's employers have fewer than 500 employees. 
Nearly half of the state's workers are employed by small 
businesses. A recovery that leaves behind Arizona's small 
businesses can hardly be termed a recovery at all.
    Before the crisis, entrepreneurs who needed money to 
finance their business had many options. They could reach out 
to a local or a national bank and ask for a loan. They could 
charge expenses to a business credit card. They could contract 
with a non-bank lender to receive upfront payment on future 
income. They could take out an equity line of credit against 
their business property or their homes.
    Today most of those choices have disappeared and for most 
businesses the only credit option remaining is a small business 
loan. But for even this, the pathway is restricted. Most banks 
have suffered severe losses and many have cut back on lending.
    To make matters worse, the hardest-hit banks tend to be the 
smaller ones, the same institutions that disproportionately 
serve small businesses. The result could be a vicious cycle. 
Small businesses could find that because they cannot access 
credit, they cannot meet demand for their services. Their 
bottom line could suffer, further undermining the economy which 
in turn could further damage credit access. Breaking this cycle 
will be an important step toward economic recovery.
    [The prepared statement of Ms. Warren follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. We are grateful today for all of our 
witnesses and I'll introduce them as we go along. And with 
that, I'm going to pause and ask for an opening statement from 
McWatters.
    Mr. McWatters.

STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. McWatters. Thank you, Professor Warren. I very much 
appreciate the attendance of the distinguished witnesses, and I 
look forward to hearing their views.
    The problems presented by today's commercial credit and 
small business lending markets would be easier to address if 
they were solely based upon the mere under-supply of commercial 
and small business credit in certain well-defined regions of 
the country.
    Unfortunately, the commercial credit and small business 
lending markets must also assimilate a remarkable drop in 
demand from borrowers who have suffered reversals in their 
business operations and prospects over the past two years.
    In my view, there has been a material decrease in demand 
for commercial and small business credit and many potential 
borrowers have withdrawn from the market due to, among other 
reasons, their desire to deleverage, the introduction of 
enhanced underwriting standards by lenders and their 
regulators, the diminishing opportunities for prudent business 
expansion, the crippling effects of the recession, and the 
increasing tax and regulatory burden facing small and large 
businesses.
    Conversely, the Administration has focused on the 
undersupply of commercial and small business credit and has, 
not surprisingly, proposed a government-sponsored program to 
remedy the problem. If enacted as proposed, the Small Business 
Lending Fund will permit a subset of commercial and small 
business lenders to obtain capital from the Federal Government 
at very favorable rates, provided the lenders agree to use the 
proceeds to extend credit to small business borrowers.
    In addition to serving as arguably the first step in a 
program to nationalize small business lending, I am troubled 
that providing financial institutions with capital at below 
market rates will lead to a prudent lending activity in the 
inflation of a series of government-sanctioned and subsidized 
asset bubbles.
    If the Government convinces or pressures financial 
institutions to accept cheap credit, based on the condition 
that the recipients off-lend the proceeds, then I suspect the 
Government will accomplish just that. Yet isn't this what we 
have just recently experienced in the sub-prime credit bubble? 
Too much money chasing transactions of diminishing credit 
quality.
    The Administration's proposal appears to share much of the 
business model with those adopted by Fannie Mae and Freddie 
Mac. Treasury should have learned from Fannie and Freddie that 
the combination of below market credit, together with a single-
minded mandate to lend, regardless of credible demand, serves 
as a perfect recipe for the creation of asset bubbles.
    In addition, the Administration's program seems at cross 
purposes with the recent actions of federal banking regulators 
who have become increasingly cautious, perhaps even overly 
cautious, regarding extensions of credit and renewals by 
regulated financial institutions.
    It is indeed ironic for the Administration to propose a 
program of cheap credit-driven lending while at the same time 
federal and state banking regulators are attempting to reign in 
the excesses that inevitably followed from the Government's 
last experiment with cheap credit.
    Instead of requiring the taxpayers to subsidize another 
round of imprudent short-term credit expansion, commercial and 
small business lenders, in consultation with the regulators, 
where appropriate, should adopt long-term business models and 
strategies that incorporate objective and transparent due 
diligence standards that permit well-run borrowers to receive 
credit on reasonable terms and lenders to earn an appropriate 
risk-adjusted rate of return.
    Regrettably, some potential borrowers will fail the 
heightened underwriting standards and will not receive the 
requested extensions of credit. This should not necessarily 
serve as a sign of angst but should indicate that the credit 
markets have moved away from an anything goes mentality where 
borrowers frequently overextended their leverage and financial 
institutions survived through the clever interpretation of 
accounting rules and the implicit guarantee of their 
obligations by the American taxpayers.
    Any suggested solution to the challenges facing commercial 
credit and small business lenders and borrowers that focuses 
only on the undersupply of credit to the exclusion of the 
economic difficulties facing prospective borrowers appears 
unlikely to succeed. Until small and large businesses regain 
the confidence to hire new employees and expand their business 
operations, it is doubtful that the demand for properly-
underwritten commercial and small business credit will sustain 
a meaningful recovery.
    As long as business persons are faced with the multiple 
challenges of rising taxes and increasing regulatory burdens, 
it is unlikely that they will enthusiastically assume the 
entrepreneurial risk necessary for protracted economic 
expansion and a recovery of the commercial credit and small 
lending markets.
    Thank you for joining us today. I look forward to our 
discussion.
    [The prepared statement of Mr. McWatters follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Mr. McWatters.
    Mr. Silvers.

  STATEMENT OF DAMON SILVERS, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Silvers. Thank you, Chair Warren. Good morning.
    This hearing is an effort by our panel to learn more about 
the circumstances of small- and medium-sized businesses seeking 
to obtain credit and, in particular, to learn whether TARP, the 
federal bank bailout, has been successful in its purpose of 
ensuring the flow of credit to Main Street.
    Like my fellow panelists, I want to express my appreciation 
to our staff, to the University of Arizona for this facility, 
to the state's congressional delegation and the Mayor of 
Phoenix for their assistance with this hearing.
    Arizona has been particularly hard hit by the financial and 
economic crisis that began in 2007. Unemployment in this state 
is at 9.6 percent officially. There's testimony from one of the 
witnesses that the real rate in the Phoenix area may be 
something like 15 percent and housing prices statewide have 
fallen by 36 percent.
    Consequently, it is appropriate that our panel come here to 
learn about the state of credit provision to small- and medium-
sized businesses.
    Now, in coming here, we did not know that today Arizona 
would be the focus of a profound debate about our character as 
a nation, a debate with roots in the pain caused by the 
economic crisis, but since this debate is underway and we are 
here, I wish to say that for me America is a place where the 
police do not ask for your identity papers as you go about your 
business, and I hope we can soon say the same about Arizona.
    We have banks in substantial part that transform our 
savings into credit for business. When then-Treasury Secretary 
Paulson went to Congress to create TARP, he spoke of the dire 
threat to the banking system as a whole with serious 
consequences for small- and medium-sized businesses throughout 
our country that depend on bank credit to finance inventory and 
capital goods, to purchase real estate, and the many other ways 
to keep operating and creating jobs.
    What Secretary Paulson did not say, as far as I know, was 
that as a result of the concentration in the U.S. banking 
sector, small- and medium-sized businesses nationwide have 
depended increasingly on credit from large banks. The biggest 
banks, those with over a 100 billion in assets, provided only 
15 percent of small business loans in 1999 while in 2008 those 
banks provided 37 percent.
    Unfortunately, the largest 22 banks receiving TARP funds, 
none of which were allowed to fail in the financial crisis, 
have actually reduced business lending nationwide during the 
period from April to November 2009, a period when large banks 
were supposed to be recovering and recording very high profits. 
Meanwhile in Arizona, we have seen an epidemic of weakness 
among locally-based banks with 84 percent of the state's banks 
losing money in 2009 and six banks closed by the FDIC, an 
epidemic driven largely by residential and commercial real 
estate loan weakness.
    Economic recovery and job creation require that our banking 
sector do its job by providing credit on reasonable terms to 
creditworthy borrowers. I hope we can learn today about the 
roles played by locally-based and national banks in credit 
provision in Arizona and get a sense of the relative importance 
of the weakness of borrowers versus the weakness of lenders in 
the contraction in bank lending to small business and in 
understanding the decline of lending to small- and medium-sized 
businesses as a result of the economic crisis.
    Finally, I've long suspected that despite the TARP, our 
banks, both large and small, continue to be under-capitalized. 
In this environment and so long as banks are not sufficiently 
recapitalized or restructured, there is reason to believe that 
bank capital structures will not work to channel credit to 
small business, much as the TARP seems not to have done so 
during 2009.
    I would be interested in today's witnesses' thoughts on how 
to channel credit to small business borrowers prudently in this 
environment and, in particular, whether TARP monies should be 
channeled directly to small- and medium-sized business lending, 
much as TARP money and Federal Reserve money has been used to 
directly support Wall Street-oriented credit markets, such as 
the asset-backed securities markets through the TALF and PPIP 
Programs.
    Thank you, and I look forward to hearing from our 
witnesses.
    [The prepared statement of Mr. Silvers follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Mr. Silvers.
    Superintendent Neiman.

 STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Thank you. Good morning. I'm also very pleased 
to be here in Phoenix and to continue the Panel's commitment to 
issues around small business lending.
    I especially want to thank the witnesses--both the small 
businesses and other consumers and borrowers--who are here, as 
well as the banks and regulatory officials.
    I'd also like to thank the state's newly-appointed banking 
superintendent, Lauren Kingry, who is also in attendance here, 
and I know representing the Governor. So I very much appreciate 
your participation here today.
    The spiraling financial crisis has touched every corner of 
the credit markets, including products like small business 
lending, which were seemingly remote from the sub-prime 
mortgages that were at the heart of the crisis.
    Small businesses are engines of the economy and of job 
creation. The financial crisis and ensuing recession, however, 
have created a catch-22 that makes it difficult to restart the 
credit markets. There is a lack of confidence on both the 
supply and the demand side which reinforces this economic rut.
    Small businesses are understandably hesitant to take on 
more debt and expand at a time when their own customer base may 
be less than stable and banks are also understandably reluctant 
to take on more risk at a time when small businesses may have 
strained income.
    Community banks are frequent sources for small business 
credit, and, in this stage of the financial crisis, smaller 
banks are coming under increasing stress. We have seen growing 
numbers of smaller banks fail recently and anticipate that this 
trend will continue.
    These small bank failures, which could be increasingly 
driven by commercial real estate defaults, create holes in our 
communities. Where there was once a flourishing center for 
responsible hometown lending, there can be a vacuum. This means 
less credit may be available for small businesses as well as 
for consumer lending.
    So I see a clear connection between righting the ship for 
real estate loans and small business lending. Commercial real 
estate defaults may constrain the lending capacity of the 
smaller banks which provide credit to many small businesses and 
since many small businesses use their homes as business 
collateral, the cratering of the residential real estate market 
has reduced these borrowers' ability to qualify for loans.
    To break the stalemate, we will require old-fashioned 
underwriting to identify the good deals that are still waiting 
to be made. It may also require banks to think not only 
creatively but collectively.
    For example, we have a unique small business program in New 
York. It's centered on the New York Business Development 
Corporation which was chartered in the 1950s during a 
recessionary period, and to my knowledge we are one of the few 
such programs in the country.
    This consortium is an entity which functions similar to a 
lending consortium. Member banks provide funding to the 
corporation which in turn makes loans to small businesses, 
loans that banks would typically decline.
    The New York Business Development Corporation has had a 
very successful history with these loans and it's a real force 
for economic development in my state and I intend to explore 
the means of using TARP funds for similar small business 
lending consortiums during my question period.
    It is my hope and intent that today's hearing will assess 
the magnitude of the problem in small business lending and, 
most importantly, explore potential market-based and public 
policy solutions.
    I look forward to your testimony and to your innovative 
ideas. Thank you.
    [The prepared statement of Mr. Neiman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Superintendent Neiman. So now we 
will hear from Robert J. Blaney, the Arizona District Director 
of the Small Business Administration, and from Stan Ivie, San 
Francisco Regional Director of the Federal Deposit Insurance 
Corporation.
    I would like to give each of you five minutes for an 
opening statement. Your entire written remarks will be put in 
the record, though. So don't feel constrained about that.
    Mr. Blaney, could we start with you?

  STATEMENT OF ROBERT BLANEY, ARIZONA DISTRICT DIRECTOR, U.S. 
                 SMALL BUSINESS ADMINISTRATION

    Mr. Blaney. Thank you. Thank you, Chair Warren and Members 
Neiman, Silvers, and McWatters.
    My name is Robert Blaney. I am the District Director for 
the Small Business Administration or the SBA. I am honored to 
be testifying before you today on behalf of the SBA concerning 
current credit conditions for small businesses, especially 
those in Arizona.
    One of the main missions of the SBA is to provide small 
business owners with access to much-needed capital. We do this 
primarily by providing a partial government guarantee on loans 
given by banks and other lending partners. This guarantee helps 
provide access to capital for creditworthy small businesses 
that would otherwise be unable to get loans.
    Our programs help to support many small businesses and we 
understand the difficulties small businesses face with access 
to credit in today's economic climate. To address the financial 
crisis, Congress passed the Recovery Act which President Obama 
signed into law on February 17th, 2009. This legislation 
allowed the SBA to raise guarantees on eligible 7(a) loans to 
90 percent and reduce or eliminate fees in our 7(a) and 504 
loan programs.
    As a result, while conventional lending to small businesses 
continues to lag, SBA lending nationwide has increased 
dramatically since the weeks before the Recovery Act was 
passed. Here in Arizona, SBA lending has increased by nearly 60 
percent since the passage of the Act. Nationwide, we turned 
about $530 million in taxpayer funding into support for more 
than $25 billion in loans to small business owners which is a 
great bang for the taxpayers' buck. This includes nearly $530 
million in SBA-supported loans to Arizona small businesses.
    Despite these accomplishments, I know that times are still 
tough for small business owners. Given those ongoing 
difficulties, the SBA has worked with the President to create a 
jobs plan that targets the lending gaps that still exist. There 
are four components to this small business jobs agenda.
    First, to address the issue of banks that still have 
trouble taking risk, we've asked for a temporary extension of 
the increased 90 percent guarantee and reduced fees.
    Second, many small businesses, franchises, manufacturers, 
exporters, and others need bigger SBA loans to create jobs. 
Therefore, we want to permanently increase our top loan limits 
from $2 million to $5 million for 7(a) and $4 million to $5.5 
million for our 504 loan program.
    Third, for businesses that can't find access to working 
capital, we need to temporarily raise the SBA express loan 
limit from $350,000 to $1 million. These loans will help 
businesses restock shelves and fill orders coming in.
    Fourth, we know that many small businesses have 
conventional owner-occupied commercial real estate mortgages 
that will need to be refinanced soon. As real estate values 
have declined, many banks will find that these businesses no 
longer qualify for conventional loans, regardless of the 
strength of the businesses.
    As a result, even small businesses that are performing well 
and making their payments on time can have a hard time 
refinancing these loans and may face foreclosure.
    Chair Warren. Mr. Blaney, can I stop you there? That's five 
minutes. Thank you very much. We've all, I think, read your 
written testimony, and we'll make sure it's included in the 
record.
    [The prepared statement of Mr. Blaney follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Mr. Ivie.

   STATEMENT OF STAN IVIE, REGIONAL DIRECTOR, SAN FRANCISCO 
             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Ivie. Thank you, Chair Warren and members of the 
Congressional Oversight Panel.
    I'm Stan Ivie, Regional Director for the FDIC's San 
Francisco Region which covers 11 Western states, including 
Arizona.
    I appreciate the opportunity to testify today on behalf of 
the FDIC on the state of bank lending and access to credit for 
small businesses.
    The FDIC is the federal insurer of deposits at all banks 
and thrifts and serves as the primary federal supervisor for 
more than 5,000 state-chartered banks. We work closely with 
state regulatory authorities in performing our supervisory 
duties and understand the challenges faced by financial 
institutions and their customers during these difficult 
economic times.
    Bankers and examiners know that responsible lending is good 
business and benefits everyone. We also know that continued 
recovery of our economy will depend heavily on creditworthy 
borrowers having access to credit at our nation's insured 
banks.
    The ailing economy has stressed the balance sheets of both 
banks and small businesses, creating a difficult credit 
environment at both banks and small businesses. The rapid 
deterioration has resulted in declines in both the demand for 
and supply of credit.
    Nationwide, expenses for troubled loans continue to weigh 
heavily on our banks. More than half of the banks in the West 
are not currently profitable, as costs associated with charged-
off loans and provisions to increase reserves for loan and 
lease losses continue to negatively impact earnings.
    Non-current loans more than 90 days past due or on non-
accrual represented 5.37 percent of all bank loans at year-end 
2009, a 26-year high. The rate of increase in the volume of 
non-current loans, however, has slowed for three consecutive 
quarters and we expect that trend to continue.
    Arizona's banks and small businesses have been particularly 
hard hit by the recent economic downturn. 2009 was a 
particularly difficult year for Arizona banks as the state's 
institutions charged off loans and reserves for future loan 
losses at record high levels, resulting in the second lowest 
median pre-tax return on assets, ROA, in the nation.
    Small businesses have also been severely impacted by the 
economic downturn. While surveys clearly reflect that bank 
loans have become more difficult to obtain, their own 
deteriorating business conditions appear to represent an even 
bigger problem as many cite poor sales as their biggest 
business problem.
    Bank examiners at the FDIC recognize the critical role that 
banks and small businesses play in our economy. Our examiners 
work out of 85 local duty stations and communities located 
across the country, including one right here in Phoenix. They 
are experienced, professional, and knowledgeable about their 
banks and local market conditions.
    FDIC examiners are not directly involved in a bank's credit 
decisions. The FDIC provides banks with considerable 
flexibility in dealing with their customers and managing loan 
portfolios. We do not instruct banks to curtail prudently-
managed lending activities, restrict lines of credit to strong 
borrowers or deny renewal requests solely because of weakened 
collateral value. We do not require new appraisals for a 
healthy loan that is performing according to its original 
terms.
    We leave the business of lending to those who know it best, 
the community bankers who provide credit every day to small 
businesses and consumers throughout America and here in 
Arizona.
    To ensure consistency in our approach, FDIC employees at 
headquarters, in the region and in the field are engaged in a 
continuous and ongoing dialogue about credit conditions and our 
supervisory approach. We also communicate regularly with other 
federal and state regulators and hold roundtable discussions 
with local bankers to gain their perspective.
    We emphasize that our examiners should take a balanced 
approach and that they should encourage banks to originate and 
renew properly-underwritten real estate, commercial, and 
consumer loans and to work with borrowers facing difficulties 
to restructure their obligations.
    In determining what is a performing loan, FDIC examiners 
focus on borrower cash flow as a primary source of repayment. 
Collateral support serves as a secondary source of repayment. 
When reviewing loans, we look at collateral documentation but 
focus on the borrower's overall financial strength, including 
guarantor support and business cash flow projections. A 
borrower's willingness and ability to keep payments current, 
especially during stressed economic times, is a primary factor 
in evaluating loans.
    The FDIC has issued a series of statements to clarify our 
supervisory processes and to encourage financial institutions 
to make prudent loans. Most recently, on February 12th, 2010, 
regulators jointly issued the Interagency Statement on Meeting 
the Credit Needs of Creditworthy Small Business Borrowers to 
encourage prudent lending and emphasize that examiners will 
apply a balanced approach in evaluating small business loans.
    In conclusion, while many challenges remain before bankers, 
small businesses, consumers, and regulators, the FDIC is 
confident that the banking industry as a whole is moving in the 
right direction toward more sound lending practices, stronger 
balance sheets, and a greater capacity to serve the credit 
needs of small businesses and their communities.
    Thank you.
    [The prepared statement of Mr. Ivie follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Okay. Thank you, Mr. Ivie. So we're going to 
do some questions. We'll try to hold ourselves to five minutes, 
at least in this first round, and I'll start first with Mr. 
Blaney, if I could.
    SBA loans are what portion of total small business lending? 
What portion of small business lending comes through SBA?
    Mr. Blaney. I don't know the answer to that question.
    Chair Warren. It's a very small fraction, isn't it?
    Mr. Blaney. It's a smaller fraction, but I do not know the 
answer to that question.
    Chair Warren. Okay. Sir, well, let me ask it a different 
way then. Knowing it's a small fraction, when the Government 
says it's going to put programs in to do more SBA lending, do 
we have any sense of how much leverage that's going to create; 
that is, how much change it's going to make in the availability 
of credit for small businesses?
    Mr. Blaney. Well, we have seen an increase in lending----
    Chair Warren. Can you hold the mic just a little bit closer 
to you?
    Mr. Blaney. We have seen a general increase in lending this 
year as a result of the Recovery Act. Last year we only did 960 
loans in this state and this year year-to-date we've done 684. 
So we've seen that there's been a general increase.
    Chair Warren. Do you have any idea--that's 684 out of how 
many loans?
    Mr. Blaney. I don't know. I don't know what commercial----
    Chair Warren. What I'm trying to figure out is not whether 
you did 680 loans but whether that's a drop in the bucket or 
that half fills the bucket because we're really trying to 
figure out the role the SBA plays here.
    Mr. Blaney. Yes. Unfortunately, I don't know what 
commercial lenders are doing. I only know what they're doing 
with SBA.
    Chair Warren. Okay. Let me ask a different question then of 
the SBA. Would the SBA be more effective if it became a direct 
lender again instead of working only through financial 
institutions?
    Mr. Blaney. Well, we've been asked that question and many 
people are asked why SBA doesn't make loans directly, and 
direct lending would require hiring a new workforce and 
significantly expanding our reach. It would require us to set 
up or stand up a massive bureaucracy and SBA would not be able 
to make its first direct loan for approximately a year or more.
    Chair Warren. Okay. Well, I get the timing part. Are you 
telling me that the banks now have a massive bureaucracy to do 
this?
    Mr. Blaney. Well, no, ma'am.
    Chair Warren. Then why would it take you a massive 
bureaucracy to do?
    Mr. Blaney. Well, we have to have more people to do it.
    Chair Warren. Well, why would it be a massive bureaucracy 
when you do it but the banks are doing it now without a massive 
bureaucracy?
    Mr. Blaney. I'm afraid that would be a policy question and 
I'm a civil servant, ma'am. I run this office here.
    Chair Warren. But you just gave me that answer.
    Mr. Blaney. Yeah. And we'd have to have a whole operations 
section to do it and that would be several hundred people for 
credit purposes.
    Chair Warren. So for you to do what the banks do would 
require a massive bureaucracy but it doesn't require the 
banks----
    Mr. Blaney. Well, massive bureaucracy is a bad term. It 
would take a lot of people to run a center for lending.
    Chair Warren. Okay. Maybe I should ask some questions of 
the FDIC while we've got you here.
    So are banks contracting credit, Mr. Ivie? What are you 
seeing from your perspective?
    Mr. Ivie. I think banks, and community banks in particular, 
want to lend to borrowers. The trouble is finding creditworthy 
borrowers. The demand is----
    Chair Warren. Well, which is----
    Mr. Ivie [continuing]. Not there.
    Chair Warren. That's what I'm really trying to ask--supply 
and demand. Are you seeing a demand contraction or are you 
seeing a supply contraction? I realize you may be seeing some 
of both, but do you have some sense of which one seems to be 
driving things here?
    Mr. Ivie. Yes. Some of both. I think our community banks 
clearly want to lend, but the demand is not there from the 
creditworthy borrowers. It appears that healthy borrowers who 
could borrow are not interested in borrowing at this time. I 
think it's a confidence issue and once we see the economy start 
to recover and employment start to recover, then I think the 
businesses will be more willing to borrow.
    Chair Warren. Okay. So you've just given me two demand side 
answers; that is, those who are asking for credit don't deserve 
it and those who deserve it aren't asking for it. So that's why 
you think lending has contracted, small business lending?
    Mr. Ivie. And also banks--it's true that many banks have 
financial difficulties right now with their credit quality and 
they need to reserve their capital for losses and future 
losses, which result in less capital and liquidity to lend to 
borrowers.
    Chair Warren. So another problem that we're seeing is 
because the banks themselves are in financial trouble, 
presumably because of their real estate loans or their 
commercial real estate loans, and don't want to lend. They want 
to hang on to their capital.
    Do you have any sense of what they're doing with their 
excess capital right now?
    Mr. Ivie. Yes. Again, I think banks want to lend, if they 
have the available capital to be able to lend. If they don't 
find acceptable loan demand, Fed funds are an option for some 
of the banks at this time.
    Chair Warren. I'm sorry. I'm not quite understanding. So 
are you saying the banks don't have any excess capital right 
now?
    Mr. Ivie. Some banks do, some banks don't. Banks that are 
in trouble do not have excess capital at this time.
    Chair Warren. Okay. I got that part. And the banks that do 
have excess capital, what are they doing with it?
    Mr. Ivie. I think they are striving to lend to borrowers. 
When they do not have sufficient borrower demand or 
creditworthy borrowers----
    Chair Warren. You think they're out there trying?
    Mr. Ivie. I do think they're out there trying.
    Chair Warren. Okay. My time is up. Mr. McWatters, the mic 
is yours.
    Mr. McWatters. Thank you. I was looking over the written 
testimony of James Lundy. He's the CEO of Alliance Bank of 
Arizona, and on page three of his testimony he says that 
``increased capital requirements for the banking industry may 
make sense, particularly for banks with higher risk profiles. 
However, increased capital requirements should be phased in, 
perhaps over a two-to-four-year period, allowing the industry 
to deal with capital issues more strategically.'' So phasing-in 
capital requirements.
    On the next page, Mr. Lundy says, ``Regulators are 
stretched very thin but they seem to have too little 
flexibility in their examination procedures and process which 
exacerbates the resource shortage.'' So too little flexibility.
    Third, Mr. Lundy says, ``Recently, compliance exams have an 
increasingly hard edge to them, to which the community banker 
becomes frustrated,'' and the like.
    So this is from a real live banker, not from a Member or 
panelist. Do you have any comments with respect to phasing in 
capital requirements, too little flexibility regarding 
examination procedures, and this so-called hard edge?
    Mr. Ivie. Well, I agree that many of our banks are having 
difficulty and they need to deal with their own problems. 
Prompt corrective capital ratios of five, six, and ten percent, 
those are for a well-managed bank in a stable environment. 
Capital needs to be commensurate with the risk in the bank's 
portfolio and that is requiring higher levels of capital when 
there are risky loans on the books.
    In terms of flexibility, we strive to be very balanced and 
flexible in dealing with our banks. We issue guidance on how we 
would evaluate loans to try to clarify our processes to the 
industry, which we hope will make them more comfortable in 
making loans.
    As far as compliance exams, we take consumer protection 
very seriously at the FDIC. We view the FDIC seal as a Good 
Housekeeping Seal of Approval and if a bank is going to have 
the FDIC seal on its front door, we want customers to know that 
they're going to be treated fairly by that institution.
    So we do enforce our consumer protection laws equally with 
our safety and soundness.
    Mr. McWatters. Okay. Thank you. Mr. Blaney, any comments to 
that?
    Mr. Blaney. No, sir.
    Mr. McWatters. Okay. Lynne Herndon, President of Compass 
Bank, Phoenix, she writes in her opening statement that ``many 
banks in Phoenix are beyond the current capital guidelines for 
commercial real estate and so much so that their ability to 
make business loans is impacted.'' Okay. So too much CRE 
depresses regular non-CRE loans.
    ``Many banks are shrinking their overall balance sheets in 
order to come closer to the guidance.'' Okay.
    ``Unfortunately, in many cases this means asking 
creditworthy borrowers to leave as these are the loans most 
easily placed with another bank.'' That seems like the last 
thing you would want to do is ask a good customer to leave.
    She concludes by saying, ``All these requirements serve to 
dampen lending in a time when we need to be expanding.''
    Any observations on her concerns?
    Mr. Ivie. Commercial real estate concentrations are a 
significant problem, especially in the West. Many banks are 
looking to shrink their balance sheets to preserve their 
capital. Their capital is being eroded from charged-off loans 
and provisions for future loan losses. The FDIC does not 
instruct a bank to get rid of its creditworthy borrowers.
    I think it's more that if they don't have the capital, 
they're trying to improve their capital ratios by shrinking 
their balance sheet and that may be why they are not lending or 
running off some of their CRE loans.
    Mr. McWatters. Okay. Thank you. I'll stop there.
    Chair Warren. Good. Thank you. Mr. Silvers.
    Mr. Silvers. Thank you. Mr. Ivie, in your written 
testimony, which is very helpful, very detailed, there is a 
chart on page four of loan growth in the last quarter of last 
year. It shows that, all in all, insured institutions' loan 
growth shrank by $128 billion. $116 billion of that shrinkage 
came from institutions over a $100 billion, and we actually saw 
growth in lending among, I guess we might call them, medium-
sized financial institutions.
    Can you speak to this in the context of what I think most 
people believe was a rapidly-improving economy, whether 
sustainable or not is another question, but an improving 
economy at the last quarter of 2009 as shown by the basic GDP 
numbers and the like? Can you explain what is going on here and 
particularly talk to not the question of whether or not there 
was a deterioration in general business conditions during 2008 
and 2009, which clearly there was, and clearly there was a 
decrease in demand as a result for lending, but the question 
of, in light of this data, how serious a problem we have as the 
economy begins to improve a little bit and whether the supply 
of credit is going to act as a brake on that improvement?
    Mr. Ivie. Yes, that's definitely a concern. I think what 
the chart reflects is that you have community banks who are 
locally based and that may be why they can continue to make 
loans. They're locally based. They work and live in the 
communities and they're better positioned to lend locally. So I 
think that's why you'll see the community banks lending and 
perhaps why the larger banks that are the money center banks 
not lending.
    Mr. Silvers. So your view would be--do I read you right to 
say that community banks essentially are taking a more 
qualitative approach? They have a more kind of three-
dimensional knowledge of their borrowers and the large banks 
maybe are doing more quantitative model-driven lending? Am I 
reading you right?
    Mr. Ivie. I would say that's accurate. Community banks do 
much more relationship lending in their communities.
    Mr. Silvers. Now, one of the witnesses, one of the bank 
witnesses, and I apologize, I don't recall which, points out 
that, at least in this area, 70 percent of the commercial bank 
market is four large national institutions.
    In light of what you're saying and pointing out, is that 
type of concentration an obstacle here to adequate credit 
provision on the upside, given what we just exchanged?
    Mr. Ivie. Again, I think community bankers are best 
positioned to lend to small businesses because of their 
relationship and their knowledge of the local communities. So 
that would seem to make sense.
    Mr. Silvers. If that's so, how serious a problem is the 
looming commercial real estate problems in community banks 
which our panel has reported on and which you allude to, I 
believe, in your testimony?
    Mr. Ivie. Right. It's a serious problem for our community 
banks. They have large concentrations. Commercial real estate 
was a niche that community banks fulfilled because they had 
that local relationship and local knowledge of the markets.
    We are seeing some improvement and stabilization in terms 
of prices. Many bankers report to me that they are able to sell 
their properties for what they had written them down to at this 
point, so that's a good sign, but it will take some time to 
work through that concentration.
    Mr. Silvers. So you don't see continued pressure on the 
commercial real estate asset side on community banks? You think 
it's bottomed out?
    Mr. Ivie. I don't know if it's bottomed out. The decline, 
rate of decline has slowed.
    Mr. Silvers. The rate of decline is slowing.
    Mr. Ivie. Right. The rate of decline is slowing. We are 
seeing some stabilization in terms of prices. The banks have 
written it down to an amount that they can now sell and recover 
their funds. It's still a serious problem going forward.
    Mr. Silvers. Mr. Blaney--thank you, Mr. Ivie. Mr. Blaney, I 
understand from your response to our Chair's questions that 
you're really focused on the work of the SBA.
    I'm curious, though, in the course of your dealing with the 
borrowers that come to you and work through you, what 
perceptions or what sense have you gotten from that and 
interactions with the world of non-SBA lending because--let me 
just be specific.
    One could interpret what you say is the serious growth in 
SBA lending as, in part, reflecting the inability of your 
clients to get conventional loans because they're not available 
or have become less available.
    Mr. Blaney. Again, I think it also depends on the bank. 
There are some banks that we deal with who only do SBA lending. 
They don't do any form of conventional lending. They do SBA 
lending. They sell their loans in the secondary market and that 
funds other additional loans.
    People come to us usually when they're having difficulties 
with their loan and we have worked throughout this state to--
we've run a number of programs for people to teach them to ask 
for deferments and that sort of thing so that they have some 
idea of what to say when they go back to the bank when they're 
having difficulty.
    As far as folks coming to us, we have people every day that 
are looking for money. We run workshops where we talk about 
that for people so that they can go to a bank and apply for an 
SBA loan and again, you know, it depends on the bank. Some 
banks do both conventional and SBA. Some banks here in Arizona 
just do SBA lending, period.
    Mr. Silvers. Thank you. My time has expired.
    Chair Warren. Thank you. Superintendent Neiman.
    Mr. Neiman. I first want to thank Mr. Ivie especially, for 
traveling from San Francisco to participate in this hearing.
    The public should also know, as well as the panel members, 
that we did try to get some of the large lenders, including a 
large San Francisco lender, Wells Fargo, to participate here 
with us to get the perspective of one of the largest lenders. 
They declined to participate, in fact even in providing an 
executive from the Arizona operations, and we were greatly 
disappointed.
    What we have been hearing from the borrowers and small 
businesses is a common thread--a common theme--that banks are 
tightening and, in many cases, in my opinion, correctly 
tightening underwriting standards are not distinguishing 
between sound creditworthy borrowers and weak risky borrowers, 
and, in fact, one of the bankers identified as painting with a 
broad brush. Hence, if that is true, banks are missing good 
lending opportunities.
    You know, based on your experiences within the 
institutions, is this true?
    Mr. Ivie. Again, I think banks are in the business of 
making loans. They want to make loans. We recently issued our 
Interagency Statement on Meeting the Credit Needs of Small 
Business Borrowers. We put that out particularly to try to 
ensure that our supervisory policies are not indirectly 
curtailing lending at our financial institutions and to let our 
banks know we expect them to monitor concentrations, but they 
should not automatically refuse credit and they will not be 
subject to criticism if they do a comprehensive analysis and 
restructure their loans.
    Mr. Neiman. And one way to get banks to identify good 
business opportunities is to work with borrowers, whether in an 
educational program or in restructuring the loans or telling 
them what do they have to do in order to become a creditworthy 
borrower.
    Are you seeing those levels of interaction between banks? 
I'm also interested: Is there a distinction between the small 
banks, the regional banks, and the large banks in their 
commitment to working with borrowers to assure that they are--
so that you're not losing the opportunities for those 
creditworthy borrowers?
    Mr. Ivie. Right. We've issued numerous statements and 
guidance to the industry encouraging our banks to work with 
their borrowers to restructure their loans. That's critically 
important in this economic period.
    In fact, we've actually just reached a partnership with the 
Small Business Administration where we are going to provide 
financial education to small businesses to help them understand 
the financial system.
    What I can speak to is that I know community banks, the 
smaller banks, do want to lend and they are working with their 
customers.
    Mr. Neiman. So, you're seeing a greater reluctance from the 
larger banks in working with customers, or, if you can put it 
another way, you're seeing a greater effort on the part of 
community banks?
    Mr. Ivie. Yes. I'm seeing a strong effort on the part of 
community banks.
    Mr. Neiman. Okay. Do you see a need--you heard me in my 
opening statement talk about our New York Business Development 
Corporation that facilitated through a consortium of both 
equity and financing from member banks expanded opportunities 
to lend to small businesses where the investing banks would 
maybe not have taken on those loans and very likely would have 
declined those loans, but because of the singular focus of this 
Business Development Corporation to have the underwriting 
standards, to be able to work with borrowers, it's proven to be 
a successful model.
    Is that something that you have seen in other regions or 
would endorse as an approach worth exploring?
    Mr. Ivie. I have not seen that approach in other regions. 
It sounds like it's definitely an approach worth exploring. I 
think the more avenues that are available to creditworthy 
borrowers the better we will all be.
    Mr. Neiman. Great. Mr. Blaney, you know, one of the 
challenges and in fact frustrations is in the collection of 
data and you got that very clear from Chair Warren's first 
question.
    Are there any recommendations that you have that could help 
the country get a better sense of the data around small 
business lending, particularly the effectiveness of SBA 
programs?
    Mr. Blaney. Sir, that's really a policy question, and, at 
my level, I'm the district director here in Arizona. I do not 
make policy. I implement policy from Washington and so, 
respectfully, I don't have an answer for you on that.
    Mr. Neiman. Thank you. Are there any policy, regulatory--
I'll ask Mr. Ivie--any regulatory or policy responses that we 
could be addressing, either by regulators or others, to address 
this, the issue of having banks, both large and small, ensure 
that they're not missing business opportunities?
    Mr. Ivie. I think we've structurally put that in place with 
our various announcements and statements to the industry on 
what our approach is going to be, trying to make them 
comfortable and less cautious, so they will make prudent loans 
to creditworthy borrowers.
    Mr. Neiman. And are they understood from your perspective?
    Mr. Ivie. That's an ongoing process. I frequently hold 
banker roundtables to discuss that with them. We hold 
conference calls with the industry and internally, as well, to 
explain to our own staff what our approach is going forward. So 
it's a continuing communication effort that we will continue to 
do.
    Mr. Neiman. Thank you. My time has expired.
    Chair Warren. Thank you. I just want to follow up on this 
question about data.
    We asked, I asked earlier about your impression about the 
supply and demand difference. Some banks are looking, you say, 
for loans, others are not. Are there any hard data that help us 
sort any of this out? You know, the banks say, ``gee, I just 
don't see any good customers''. The people who are looking for 
loans are saying, ``I just don't see any banks that want to 
lend'', and unless there's some giant disconnect occurring in 
America, one side must have a better handle on the truth than 
the other here.
    Are there any data to support one claim over the other?
    Mr. Ivie. We do track loan volumes and loan volumes are 
declining.
    Chair Warren. Okay. So we know for a fact credit is 
shrinking.
    Mr. Ivie. That's correct.
    Chair Warren. Okay.
    Mr. Ivie. That's right. Underwriting standards are being 
tightened. Banks are shrinking to try to preserve their capital 
ratios. So there is a lower volume of lending at this time.
    Chair Warren. Right. So it sounds like banks are making 
less money available.
    Mr. Ivie. Well, I think they have less money to make 
available because they have their own credit quality problems. 
They have to--they've charged off loans. They have reserves for 
future loan losses. That's reduced the amount of money they 
have to lend to borrowers. That's for troubled banks.
    Chair Warren. Okay. So you'd recommend we take a look at 
charge-offs as a way to understand this?
    Mr. Ivie. I think the way to understand it is to look at 
the----
    Chair Warren. I just mean in shrinking the money available? 
This is the supply side. I'm still trying to focus on the 
question.
    Mr. Ivie. That's right.
    Chair Warren. Okay. Let me ask you another one along this 
same line. We hear the complaint from banks, and sometimes from 
their customers because it's been related by banks, that 
supervisory standards have gotten too tough and I think Mr. 
McWatters alluded to this in one piece of the testimony.
    I would expect people to complain that their regulators are 
too tough. The question is again do we have any data on this? 
Is there any way to assess this independently?
    Mr. Ivie. I don't know if you're going to get actual data 
on that. The problem is banks that have credit quality 
problems, they need to cleanse their balance sheets and have an 
accurate recording of their assets on their balance sheet. 
That's the first step to recovery. Once the problem is defined 
and investors can identify the extent of the problem, then new 
money can come into these institutions to lend to borrowers.
    Chair Warren. Okay, one last question. There's a new 
program coming out, the Small Business Lending Fund, and the 
argument is that banks will participate in this who didn't want 
to take TARP money because of the stigma associated with TARP 
money.
    Do you believe banks will want to participate in this? It's 
going to be a different kind of program. Do you anticipate 
something different here?
    Mr. Ivie. Yes. I hope banks will want to participate. I 
know they do want to lend. There obviously is a perception 
issue with TARP and kind of a bailout backlash.
    Chair Warren. And do you think this fixes that problem?
    Mr. Ivie. It's a step in the right direction.
    Chair Warren. And how is it a step in the right direction?
    Mr. Ivie. Well, it's a tool.
    Chair Warren. By giving it a name?
    Mr. Ivie. It's a tool that should help. It's funds that 
will be available for banks to access to lend to their 
customers.
    Chair Warren. But this is presumably for banks that 
wouldn't take the funds through another program.
    Mr. Ivie. Well, I think you will see banks that will apply 
for the funds.
    Chair Warren. That will want the funds?
    Mr. Ivie. Yes.
    Chair Warren. Okay. Alright. That's it for me. Mr. Silvers, 
do you have any questions? Mr. McWatters? We're good? Mr. 
Silvers.
    Mr. Silvers. Like Elizabeth, I have one or two questions.
    Mr. Ivie, I think that the data in your testimony would 
suggest that the Capital Purchase Program under TARP may have 
been less than fully successful in reviving business lending, 
particularly at the small end.
    But what lessons can we take away from this experience for 
the program Treasury's proposing that would require 
congressional action or some other steps? What can we learn?
    Mr. Ivie. I think one difference is a year ago when TARP 
was being offered, we were still in a declining economic 
environment. Losses were continuing to accumulate. No one knew 
where that bottom was.
    Today, things are starting to stabilize and I think banks 
will be more willing to access that money and actually lend 
that money because they're not trending downwards as fast as in 
the past when new capital was eaten up by continuing losses.
    Mr. Silvers. Okay. So you're suggesting that a dollar today 
might not be quite so swallowed up by losses as a dollar a year 
ago or a dollar a year and a half ago?
    Mr. Ivie. I would agree with that. Banks have taken really 
heavy provisions and losses in 2009. Our data shows that the 
third quarter of '09 was probably the peak period for 
provisions and write-downs.
    Mr. Silvers. And this is--I'm not taking my questions out 
of order, but you said a moment ago that there are continuing 
issues, in response to a question from our Chair, you said a 
moment ago there are continuing issues with write-downs.
    In your view, and I would ask you to answer this question 
with respect to community banks and with respect to very large 
institutions separately, are the balance sheets clean? Do we 
have institutions that have gotten themselves to the point 
where that transparency, that realism exists on those balance 
sheets, such that lending can move forward?
    Mr. Ivie. Yes. We're a lot closer than we were a year ago. 
We monitor institutions closely, not just through examinations 
but through quarterly call reports. There's been large amounts 
of provisions that have been taken and I think the balance 
sheets are much more accurate than in the past.
    As a result of that, we are starting to see capital come in 
to some of our institutions. We've had several of our 
institutions recently have success in accessing the capital 
markets and raising capital.
    Mr. Silvers. Finally, this hearing in large part is focused 
on small business lending. Obviously we have a representative 
from the SBA here, Mr. Blaney, but something that concerns me 
deeply is that we have essentially very small enterprises on 
the one hand and then we have public corporations that can 
access public credit markets and then there is a lot of 
business in between that does a lot of the work of our economy, 
employs a lot of our citizens, whose financing needs are larger 
than the SBA limits but who can't access the public credit 
markets efficiently.
    For that type of business, the 200 to 400 employee kind of 
business, what kind of credit environment does the FDIC see 
there?
    Mr. Ivie. It's a difficult credit environment everywhere. I 
think there are banks, regional banks and community banks, that 
can service those customers. They can do participations with 
other institutions to be able to increase their lending limit 
to be able to serve those types of customers.
    Mr. Silvers. We've taken a lot of your time and so my time 
has, I think, probably come to an end, but I would very much 
appreciate if the FDIC and its staff could work with our staff 
on data that describes the lending environment for that segment 
of our economy.
    Mr. Ivie. Okay. I'm sure we will follow up on that.
    Chair Warren. Thank you. Thank you, Mr. Ivie. 
Superintendent Neiman.
    Mr. Neiman. Just a few questions. I do encourage you to 
review the testimony of the banks as well as the borrowers and, 
to the extent that your time permits you, to stay and hear not 
only their testimony but our questions and answers. I think we 
would appreciate that, as well.
    Two of the points that were raised were of particular 
interest to me as a state regulator. One of the bankers, in 
talking about the CRE guidance that is out there in the world 
dealing with and applying it to banks, was a recommendation 
that banks could benefit, and the public could benefit, if 
there was a differentiation in the vintage year for calculating 
CRE concentrations, that certainly there are distinctions 
between loans made in 2004 and CRE made in 2006.
    So I don't know if you have given any thought to that or 
would like to comment on that particular recommendation.
    Mr. Ivie. Yes. 2005 and 2006 were difficult vintage years. 
We encourage our examiners not to take a blanket approach, to 
take a case by case approach. There are good loans and bad 
loans made during all those periods and we encourage them to 
look at the specific credit and make that decision and not take 
a blanket approach. We have flexibility to assign capital 
ratios based on our assessment of that individual bank's 
portfolio.
    Mr. Neiman. So similar concentrations at two different 
banks may not be treated the same, based on the quality and 
vintage of those commercial credits?
    Mr. Ivie. That's correct. Concentration is one factor. How 
the loans were underwritten when they were initiated is 
probably the bigger factor.
    Mr. Neiman. Another banker raised an issue around to the 
extent that loan loss reserves should be treated in capital 
ratios and should be given more weight.
    Do you have a particular view? I know it's been reported 
that Chairwoman Bair has a different view on the increases in 
the ability to take into consideration loan loss reserves in 
capital ratios from the Comptroller.
    Mr. Ivie. Well, my view would be the same as Chairwoman 
Bair's.
    Mr. Neiman. Thank you.
    Chair Warren. Thank you. With that, we thank this panel 
very much. Thank you, Mr. Ivie. Thank you, Mr. Blaney. The 
witnesses are excused.
    I'm going to call the other witnesses to the stand, please, 
and I'll introduce them as we do.
    Candace Wiest, President and CEO of West Valley National 
Bank; Lynne Herndon, Phoenix City President for BBVA Compass 
Bank; James Lundy, President and CEO of Alliance Bank of 
Arizona; Mary Darling, CEO of Darling Environmental and 
Surveying; Cindy Anderson, CEO of Great Biz Plans; and Paul 
Smiley, President of Sonoran Technology and Professional 
Services.
    We thank all of you for your willingness to share your 
perspectives today and we look forward to hearing from you. As 
before, I'm going to ask you to keep your initial remarks to 
five minutes, even less if you possibly can, so that we will 
have time for some questions afterwards. How about if we start 
down here with Ms. Anderson?

STATEMENT OF CINDY ANDERSON, CEO AND PRESIDENT, GREAT BIZ PLANS

    Ms. Anderson. Certainly. Good morning, Ms. Warren and 
members of the Congressional Oversight Panel.
    My name is Cindy Anderson. I own Anderson Business 
Development, Inc., also doing business as Great Biz Plans, 
based in Scottsdale, Arizona. We provide customized business 
planning and consulting services--can you guys hear me? Okay. 
Good.
    Chair Warren. Why don't you pull the microphone up just a 
little bit closer so everyone else can?
    Ms. Anderson. Glad to do that. We provide customized 
business planning and consulting services to business owners 
looking to start and grow their business. Our clients are 
almost always in need of funding from lenders or investors and 
many are franchises and start-ups.
    Like many entrepreneurs, I personally funded the start-up 
and expansion of my business. In 2005 to 2006, I tapped into a 
$150,000 of the equity in my home to launch the Great Biz Plans 
brand. We've served nearly 200 clients in the United States, 
Canada, Mexico, Germany, and my newest international client is 
in Kuwait.
    My business has changed pretty dramatically since I started 
consulting in 1998 and I've been greatly affected by the 
financial crisis and credit contraction. September 2007 was our 
largest revenue month ever, yet based on the negative trends in 
my business, that same month was also when I laid off employees 
and radically cut expenses, including my payroll. My business 
was at the start of what would become a steady two-year 
decline. My clients and prospects no longer were able to 
capitalize or collateralize loans to start and fund their 
businesses. My business was in the ICU. Running and growing a 
small business isn't for the faint of heart.
    Also, the credit and financial crisis had an extreme impact 
on my clients. For the past 10 years, business owners have used 
their home equity and other personal assets to fund and secure 
their working capital needs. I particularly appreciated 
Superintendent Neiman's comments. Those personal loan funds and 
assets just aren't there anymore.
    My clients have a hard time coming up with the capital or 
the collateral to make themselves attractive enough to lenders. 
Most of the business owners I'm referring to are genuinely 
solid. They look great on paper. Yet somehow they just don't 
fit that elusive lending criteria. They're almost never given 
an honest helpful explanation as to why their loan application 
was rejected again, just that it wasn't approved.
    It's fair to generalize that banks just aren't lending 
anymore and when they are, it's with a select few that are in 
fortunate circumstances and fit the banks' changing and silent 
lending criteria. It's not that loan demand is down, the 
problem is that supply has dried up. Most small business owners 
are just not able to access capital. The rules of the game have 
changed, admittedly for the lenders and for the borrowers. The 
problem is that most often these rules, ratios, and criteria 
and even the terminology are not made plain to the prospective 
borrowers.
    The lending market needs innovative ways to support 
business owners and start-ups to fuel economic growth. Lending 
needs to be there for them with plainspoken criteria and enough 
funds to support smaller, non-real estate-linked small business 
loans in a way that works for both the lenders and the 
borrowers.
    I have three concerns about the current situation I'd like 
to share with you now.
    First, the bottom line appears to us that lenders have more 
money now than they've ever had with record profits. Among many 
other policies, their lending criteria have changed, as they 
should have, yet they have been given or were forced to take 
funds to stabilize the financial situation. Instead of moving 
those funds and profits through to the marketplace in the form 
of new loans which would stimulate economic recovery, they've 
held on to those funds and the resulting profits without 
releasing them back into the very markets they were chartered 
and funded to serve.
    Second, well-intentioned bankers are still networking in 
the community, meeting with prospects, marketing their banks' 
services, though few are personally making claims that lending 
is up. They're out there looking for that top 10 in their local 
market for owners and niche industries. Most businesses don't 
fit lenders' new and often closely-held criteria. These mixed 
messages are very confusing to borrowers.
    Third, lenders are still largely not loaning money to the 
small businesses, to the start-ups, to those that create the 
majority of jobs in this state. Lending may be up from its dead 
standstill but it's still stalled.
    In closing, there is good news. My business is up 
remarkably from last year. March of 2009, my revenue was $438 
in my business. March of 2010 was my company's second highest 
revenue month ever. Demand is definitely bouncing back in 
response to improving economic conditions and entrepreneurs are 
on the move bootstrapping and self-funding their growth.
    Thank you.
    [The prepared statement of Ms. Anderson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Ms. Anderson. Ms. Wiest.

  STATEMENT OF CANDACE WIEST, PRESIDENT AND CEO, WEST VALLEY 
                         NATIONAL BANK

    Ms. Wiest. Good morning, Madam Chair and members of the 
Panel.
    I am the President of West Valley National Bank. We are a 
$39 million community bank centered in the West Valley which is 
one of the hardest-hit areas in the Valley. We opened at the 
start of the financial storm on December 21, 2006, and we were 
founded to serve small business, the medical and dental 
professionals throughout Maricopa County.
    Our main focus, though, continues to be in the West Valley 
where approximately 95 percent of the businesses, according to 
our opening research, were small businesses.
    In 2007 we realized that there was about to be an economic 
hailstorm and we went out and doubled our capital, believing 
that we would be in a much stronger position to provide 
opportunities for small businesses or also for bank 
acquisitions. We did utilize some of those funds to go into 
Buckeye. We felt a little like the firemen at 9-1-1 going into 
the hardest hit area out there where the banks were pulling 
back.
    In 2008 we sought SBA approval so that we could continue to 
start funding more small business loans and in 2009 we did fund 
three SBA 504 loans and recently, in fact just a week ago, 
closed our first 7(a) loan. So we're very excited about that.
    The government increase in SBA funds, combined with the 90 
percent guarantee in waiver of fees, has been extremely 
helpful, both from the bank and the client standpoint. It 
provides us a much lower risk loan which you've heard a lot of 
testimony about the condition of community banks and even 
though we are not in that bucket, certainly it has been 
important to us to be able to originate quality loans just 
because of the amount of scrutiny.
    The question of market demand, I think, is complex. The 
locally-owned community banks control less than 4 percent of 
the market share of deposits. Unlike states like Georgia and 
Florida, who have several hundred community banks, I think 
right now there are 25 in this state and that is it. So that is 
also, I think, an issue out there for small businesses.
    We could expand. We have 39 percent Tier 1 capital and 50 
percent leveraged capital. We have looked at a lot of 
borrowers. I think last year we looked at somewhere around $250 
million in new credit and found that many of the borrowers were 
in a start-up situation which is, I think, considered highly 
risky for a small community bank like ours.
    We've also found a number of people who didn't cash flow 
when you look at debt service coverage ability of one to one 
and we certainly found that collateral was impacted and that's 
why the SBA loan status was critical for us and I do want to 
say that I think they have been fabulous. Our last loan turned 
around in less than one week because we do not have preferred 
lender status there.
    The real issue is, as you've heard over and over, the real 
estate loans. We chose not to leverage up in 2007 because we 
saw this decline coming. So we didn't do as much real estate 
because for every one percent the cap rates go up, the value 
drops by 15 percent. So you could almost bet that if cap rates 
went up even 2 percent you'd be looking at a problem loan. So 
we did not do that.
    Unfortunately, we are not profitable and I think the only 
thing that is going to cure that for us--it's not from loan 
losses, it's really strictly from the ability to source quality 
borrowers.
    The regulatory environment has had an impact on us. It's 
not from the standpoint of affecting our lending decisions but 
just from a pure oversight compared to the manpower. We have 11 
employees. Right now the OCC is in our bank. When, in 2008, 
they finished a full scope of safety and soundness, they were 
in our bank for a month, two weeks with the training team, 
there were 10 of them, 11 of us. In 2009 they had been in our 
bank at year-end 2008, they were in, we had a BSA exam, a fair 
lending exam, and a CRA exam.
    [The prepared statement of Ms. Wiest follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Ms. Wiest. And we will have all of 
your written statement in the record, as we will for everyone.
    Mr. Smiley.

STATEMENT OF PAUL SMILEY, PRESIDENT AND CEO, SONORAN TECHNOLOGY 
                   AND PROFESSIONAL SERVICES

    Mr. Smiley. Ms. Warren, members of the Panel, thanks for 
having me this morning.
    My name is Paul Smiley. I'm a retired Air Force lieutenant 
colonel and combat veteran. I am also the President and CEO of 
Sonoran Technology and Professional Services.
    Sonoran Technology and Professional Services is an SBA-
certified 8(a) and service-disabled, veteran-owned small 
business that provides professional services in the federal 
market arena. We specialize in a variety of services that 
include but are not limited to military training operations, 
leadership training, information technology, help desk 
services, call center support, facility management, logistics 
support, accounting, and office administration.
    The strength of our company lies in our ability to deliver 
low-risk, best value, and transformational services to the 
Government. Moreover, Sonoran has a unique ability to recruit 
and retain highly-qualified and experienced personnel and 
professionals for the Government who have security clearances.
    Since 2007, Sonoran has grown by 700 percent and expanded 
our operations to six states and maintained a 96 percent 
retention rate. Although not publicly acknowledged until 
December 2008 that the United States was in the midst of the 
worst recession since 1932, Sonoran Technology has not only 
managed to survive but we have grown by 700 percent since 
winning our first government contract in July 2007.
    Like a majority of other small businesses, the major 
obstacle we faced then and, to a certain degree, today is 
access to working capital to support new employee payroll. It 
is my opinion that, due to the financial crisis, increased 
regulatory oversight, and, to a large degree, banks painting 
small businesses with the small broad brush, those of us with 
proven business track records of success and whose financials 
are strong still have a difficult time obtaining capital to 
grow our businesses and put Americans back to work.
    This broad brush approach fails to recognize small 
businesses like Sonoran Technology, which operate in a market 
that has monthly receivables that are guaranteed and consistent 
and guaranteed by the Federal Government. Moreover, as an SBA-
certified 8(a) small business, program certification 
requirements and orders are far more stringent than any bank 
will require for a small business.
    In fact, if more banks understood federal contracting and 
how it works, I believe you would see an upsurge in small 
business lending and companies like Sonoran Technology would 
have not been rejected by five banks.
    There is, however, a good news story here today. In July 
2008 I was able to prove to Ms. Candace Wiest, the CEO of West 
Valley National Bank, that Sonoran Technology was creditworthy 
and very low risk. In July 2009, after winning a $3 million 
contract with the Air Force, Ms. Lisa McCarthy, Vice President 
of Arizona Business Bank, took the time to understand our 
company business model and we were able to obtain a Patriot 
Express Line of Credit and able to hire 20 new employees and to 
compete for several multimillion dollar contracts which we are 
competing for today.
    Without the cooperation and understanding of Ms. Wiest and 
Ms. McCarthy, Sonoran Technology may not be in business today.
    I am convinced that during the past two years there could 
have been a lot more small business success stories had there 
not been a lack of access to capital.
    [The prepared statement of Mr. Smiley follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Mr. Smiley. Mr. Lundy.

 STATEMENT OF JAMES H. LUNDY, PRESIDENT AND CEO, ALLIANCE BANK 
                           OF ARIZONA

    Mr. Lundy. Thank you, Chairwoman Warren and Members of the 
Panel, for this opportunity to speak today.
    I've been a commercial banker in Phoenix for over 25 years 
and during that time I've spent my career basically making 
loans to Arizona-based businesses in virtually all businesses 
in Arizona within the 500-employee definition and so I have 
considerable experience lending to both really small 
businesses, such as Mr. Smiley's or those under an SBA program, 
and also the businesses that Mr. Silvers referred to, those 
with perhaps 100-to-300 employees.
    I think that the Panel, in each of your statements--I was 
interested in those, and I think that the four of you 
summarized pretty well the various issues. They're complex and 
they're interactive and it's difficult. So I know I provided 
this written statement. So let me just try to summarize 
quickly.
    I think that the Alliance Bank has run against the grain a 
little bit and we did grow loans in 2009 and we've grown loans 
in the first quarter of 2010. That's been difficult.
    As relates to the specific subject of today's hearing, I 
would think that we would have to testify that the TARP has 
been helpful because we're fortunate, many community banks 
aren't part of a larger bank holding company structure. We're 
part of a small regional, I would say, and as my testimony 
points out, we've been able to raise $420 million in the last 
little over two years. $140 million of that came from the TARP. 
They've downstreamed about $35.5 million to us over the last 24 
months and so one could say that $12 million of our capital 
stock came through the TARP and then it's also true that we 
have expanded our lending when many banks have not. So I think 
from that perspective, the TARP has been helpful.
    I would like to comment a little bit on some of the things 
that I think we could do to improve things. I was the one that 
mentioned, Mr. McWatters, the phase-in capital requirements. I 
think--and I would agree with Mr. Silvers. I basically think 
that one of the things that we all should have learned from 
this crisis, bankers, policy-makers, Congress, the regulators--
I do think that probably the banking industry needs more 
capital, but I do think, as I say in here, that we ought to 
phase those capital requirements in strategically over the next 
two to three years.
    I think it's difficult at the moment, though. Our bank, as 
I say in my testimony, has had better credit quality metrics 
than most in a very difficult environment, but they're still 
not great. We lost money last year, primarily due to charge-
offs. We made money the first quarter and I'm hopeful that that 
trend will continue.
    But I do think that, understandably so, people are 
concerned about safety and soundness of banks and so there is 
tremendous pressure from all sources to have banks raise their 
capital as a buffer against problem loans--but that's an issue 
that I think is difficult.
    I think the other----
    Chair Warren. Mr. Lundy, I'm going to stop you right there.
    Mr. Lundy. I'm sorry.
    Chair Warren. That's all right. We have your written 
testimony.
    Thank you. I want to save time for us to ask questions.
    [The prepared statement of Mr. Lundy follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Ms. Darling.

   STATEMENT OF MARY DARLING, CEO, DARLING ENVIRONMENTAL AND 
                           SURVEYING

    Ms. Darling. Thank you, Madam Chair and Members of the 
Panel.
    I'm very honored to be here today. Darling Environmental 
and Surveying is a small, woman-owned business. We provide 
high-tech, avatar-style 3-D surveying to engineers and 
architects that design in 3-D.
    I agree 100 percent that small business will be left behind 
unless we break the stalemate with the banks. We are very 
creditworthy, as I said. We have been under-capitalized since 
we started the company. We hired our first CFO in 2008 and he 
saw that as the biggest problem. He helped get our banking 
books together in a way that we could go to each bank very 
professionally.
    We were turned down 100 percent of the time in Tucson. We 
actually ended up getting a bank in Phoenix that understood 
business banking, Bank of Arizona, and finally, in mid 2009, 
got our finances in order.
    However, as soon as the TARP funding became available and 
we saw what was in the newspapers about SBA loans, in February 
and March of 2009, we tried hard to get SBA loans. We were told 
by every bank that SBA told us to go to that even though we 
read SBA loans were not asset-based loans, we were turned down. 
Every bank said that's what you read but in reality SBA loans 
are asset-based. So unless we had commercial real estate, we 
were told we were not going to get an SBA 7(a).
    So we slashed expenses. We rode out the fact that clients 
went bankrupt and didn't pay us. We cut employee numbers. We 
had the one loan from Bank of Arizona that held us through and 
now we're in a position where we're really building our 
business in that we have more clients than ever. We have a 
fabulous service that we're offering and yet we are at that 
point where we're going to need lending and our past experience 
shows that banks are going to ask for three years of our taxes 
and personal guarantees and they're going to look at 2009, even 
though it was an anomaly, and we're going to be denied the 
funding we need to grow our business.
    I think it's a very big concern for a lot of small 
businesses, not just mine. I'm a member of the National 
Association of Women Business Owners, and I'm talking with a 
lot of other women with the same problem. So I'm very excited 
to know that you're here and that you're addressing this issue.
    Thank you.
    [The prepared statement of Ms. Darling follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you. Thank you very much.
    Ms. Herndon.

  STATEMENT OF LYNNE B. HERNDON, PHOENIX CITY PRESIDENT, BBVA 
                            COMPASS

    Ms. Herndon. Thank you for having me here today. My name is 
Lynne Herndon, and I'm the City President for BBVA Compass.
    I, too, am fortunate to work for a bank that was able to 
loan money through 2009 and also in the first quarter of 2010. 
It certainly has not been an easy environment to loan money in. 
I think all of us, all the bankers at the table, understand and 
appreciate the purpose of regulatory bodies and the policies, 
but we also are struggling to try to continue to foster new 
loan production while, I think, keeping as many of our 
customers as we can in business and continuing to extend 
credit.
    Phoenix, more so than a lot of other cities, has 
experienced a complete fallout in the real estate market that 
does make it a little bit more difficult to recover from, if 
you compare it to other cities, and so, as we work with our 
regulators and work through exams, I do believe, as a bank, 
that we are trying to work with our borrowers, find out their 
needs and give guidance, if you will, to borrowers as to what 
it does take to be conventionally financed.
    Some of the constraints that we face, and I'll mention just 
a couple examples to be a little more specific, are--and it 
does keep going back to the capital issue, we can't ignore 
that. As borrowers, you know, experienced maybe a loss in 2008 
but definitely a loss in 2009, we have to rate the performance 
of those companies. We have to acknowledge it.
    Obviously as credit becomes watched, it requires more 
capital. From a real estate perspective, interpreting the laws 
of FIRREA and trying to understand whether we have to get an 
appraisal solely because the economy has declined or only when 
we're looking at a renewal or maturity. Our bank right now has 
a question in to the examiners asking for some rulings on that.
    Our preference would be to opt for cash flow, look for cash 
flow first, look for the performance in a company that shows 
that the company's going to be a survivor and possibly not be 
constrained, if you will, by having to get an appraisal, even 
though there's not a maturity or renewal in place.
    But if we do have to get that, we are forced to possibly 
rate that loan as a high loan to value transaction, again 
requiring more capital. So I know we've talked about a lot of 
this today.
    My message to you is I do think banks are in the business 
to loan money. We want to do that. We want to support our 
communities. Yes, we are having to balance the rules and the 
regulations of what our regulatory bodies want us to do, but I 
do think we're trying to find the ways that we can to leave the 
money and leave the access to capital out there where possible.
    It is our responsibility, I think, to talk about 
creditworthiness. I think to use the SBA--we are a preferred 
lender--we use the SBA in start-up situations or in situations 
where we can't quite qualify our borrower to be banked 
conventionally. They're a great partner. I think we will 
continue to use them, but it's my personal goal to make as many 
conventional loans to business owners in this community as we 
can meet and discuss and talk about good credit loans to.
    Thank you.
    [The prepared statement of Ms. Herndon follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you very much, Ms. Herndon. I want to 
make sure, as we start this, that we're taking a full picture. 
So I just want to focus, if I can for a minute, on the banks 
here.
    How concerned are you about interest rate risk? I want to 
make sure we're getting the full picture here. Is it deterring 
you? Does it deter you from lending at current low rates? Are 
you concerned about that? Ms. Herndon?
    Ms. Herndon. Specifically rising interest rates?
    Chair Warren. Yes.
    Ms. Herndon. We certainly, when we underwrite loans, in 
particular, if they're going to be floating rate-based, apply a 
sensitivity analysis. In some cases, if we determine that a 
borrower would be rate-sensitive with, let's just say it's a 
200 basis point rise in interest rate, we would probably 
encourage a borrower to go with a fixed rate which, in today's 
environment, the fixed rates that are being offered are 
certainly very good rates for small businesses.
    So I think our path would be if we found a borrower to be 
interest rate-sensitive, we would encourage a fixed rate so 
that the borrower would not experience that.
    Chair Warren. Okay. I just want to be sure that I'm getting 
the picture. You're saying it doesn't discourage you from 
lending, it just has you--you manage for it?
    Ms. Herndon. That is correct. We manage for it.
    Chair Warren. Mr. Lundy.
    Mr. Lundy. I would agree with that. At this point in the 
cycle our bank is mildly liable sensitive and, you know, we 
certainly have entire programs in place to manage our interest 
rate sensitivity and it's one of the areas that I think the 
regulators do a good job of asking good questions and I don't 
believe that interest rate sensitivity in and of itself is a 
particular--it's not one of the major issues with respect to 
more lending.
    Chair Warren. And same answer, Ms. Wiest?
    Ms. Wiest. It would be the same answer for my bank, but for 
banks in general, I think when you look at the overall risk 
profile of the bank, if the bank has a number of low fixed 
rates, certainly when you're concerned about rising interest 
rates and the sensitivity of your institution, there may be a 
change in the way the borrowers are financed.
    You're not going to be able to just give everyone a lower 
rate and fix it for a period of time. I mean that's the 
reality.
    Chair Warren. You remind me with your answer, and I 
observed this as we were reading the testimony, we only have 
three banks in front of us, we may not have the banks we should 
be talking with. Superintendent Neiman noted we had to ask 
Wells Fargo to join us and they declined. There may be other 
banks we should be talking with, as well. But I just want to 
make sure I'm getting the picture.
    The overall economy, the question about the overall 
economy, is this causing you to hold back on lending decisions, 
Mr. Lundy.
    Mr. Lundy. The overall economy is very difficult and so I 
think----
    Chair Warren. What's your overall outlook?
    Mr. Lundy. I think locally we are----
    Chair Warren. Your local and there's been a lot of trouble.
    Mr. Lundy [continuing]. Bumping along the bottom and we're 
somewhat encouraged that things have turned and will get slowly 
better, but it's not robust out there at all.
    So, yes, sure, we're concerned about the economy and it 
does impact decisions we make and the decisions our prospective 
borrowers make.
    Chair Warren. Ms. Wiest, did you want to add anything on 
that?
    Ms. Wiest. Yes. I'll just give you an example. I bought my 
home in 2006 when I moved here and I asked about the lot next 
door. They said it was $250,000. I just bought it a month ago 
for $30,000 from a bank. So we've got a ways to go here in 
Phoenix.
    Chair Warren. And is this--the question I have is how much 
it plays into lending decisions. Do you worry that the people 
you're lending to are not going to have business out there? I'm 
just concerned about this. I just want to understand how this 
factors in.
    Ms. Herndon.
    Ms. Herndon. Well, I think clearly if you take a look at a 
business loan decision that we made three years ago, we didn't 
worry very much about the economy and the economic impacts. So 
it is certainly a larger factor in our decision, but we've also 
seen a lot of borrowers do all the right things last year, 
whether through looking at expenses, becoming more efficient, 
or preparing themselves from a balance sheet perspective to 
where we are.
    So I don't think it's something that is deterring us from 
making loans to all borrowers in general.
    Chair Warren. Are you seeing any fallout at the level where 
you're lending from the loss of CIT and Advanta, shrinking 
trade credit, you know, the other places that people once went 
for credit? Let's talk about even smaller businesses. Credit 
cards, home equity lines of credit.
    Are you seeing an impact from that? Ms. Wiest, you're 
shaking your head.
    Ms. Wiest. Yes, absolutely, we are. I mean, I think what I 
saw that was interesting was I looked at a franchisee about a 
year ago and I saw them recently. They have 38 franchises, this 
guy that started a game truck thing, thought that was very 
interesting. I asked where they were getting their financing 
because typically it had been through traditional sources, 
credit cards, home equity, whatever. They are now--there is now 
a company out there that will actually take your 401(k), roll 
it into an entity where it becomes a self-directed 401(k) which 
allows you to buy stock in your company.
    So, as a banker, I'm very concerned about the shadow 
banking system that's out there, but the fact that those kind 
of entities are gone, I think is forcing people to look at 
those types of vehicles.
    Chair Warren. Thank you. Mr. McWatters.
    Mr. McWatters. Thank you. Ms. Wiest, you mentioned this in 
your opening remarks, but I'm also looking at your testimony 
and I find this just extraordinary, that your financial 
institution has 39 percent Tier 1 capital and only 50 percent 
leverage. You have originated $25 million in loans and you 
still have $16 million of capital, but the punch line is that 
you say, ``We could grow the bank by $100 million in new assets 
and not need any new capital.'' That's extraordinary.
    So you are ready to go. You're ready to lend money, is that 
correct?
    Ms. Wiest. Well, it occurs to me I should have just come to 
these kind of hearings before to find customers instead of the 
way we were doing it.
    Mr. McWatters. Well, I mean, I was going to say Ms. Darling 
may want to talk to you afterwards. But you're ready to go. You 
have a $100 million and obviously you're out looking. You're 
beating the bushes. You're talking to people.
    Why is this number here? Why aren't you telling me you only 
have $5 million of additional lending capacity?
    Ms. Wiest. Well, first of all, as to the question of 
whether we want to loan, I can assure you we want to loan. We 
are only going to be profitable by wanting to loan, and I did, 
I think, in my testimony outline a lot of the reasons for that.
    We have looked at a lot of credit, I mean a lot of credit, 
and I hear the frustration in the small business owners' voices 
and I think there is a perception out there that, in general, 
the banks aren't lending but there are, I think, a lot of banks 
like me who could and want to lend.
    We don't have the distribution center necessarily to get 
out there. We don't have large advertising budgets. We depend 
upon our boards. We depend upon our community boards. So I 
think that's part of the issue, as well, is just getting the 
word out there that we are looking.
    Having said that, I've spent 25 years in credit. I 
understand that, even though the person might be the best bet 
in the world, I'm not playing with my money. I'm playing with 
my shareholders' money and I have to make decisions based on 
fact.
    Is there a secondary source of repayment? Just so you know, 
the comment about how we talk about credit, Paul and I have put 
together for the City of Goodyear some small business lending 
and one of the things I took in there was our loan policy with 
a grid that showed this is how much we'll advance on each type 
of credit, this is what you need to look like. So we're very 
transparent in that process.
    Mr. McWatters. Well, I noticed that Mr. Smiley went through 
five rejections. Then he went to you and you saw something in 
his business that five people passed by. Five opportunities 
were lost to other financial institutions.
    What did you see?
    Ms. Wiest. I liked a lot of things about his background. I 
liked the fact that he was an 8(a) lender. At my last bank I 
took two women from their kitchen tables to multistate 
companies and I understand the 8(a) process.
    The flaw in the 8(a) process, though, is they put guys like 
Paul out there with this floodgate of work but no credit 
access. So they really need a working capital line that sort of 
dovetails to that.
    Now the reason he had to leave my bank is we weren't 
qualified to do the Patriot Lines and it was the only way 
because he didn't have a historic proven record in this 
industry and again I have 10 employees. I basically could not 
really monitor the government contracts correctly, but because 
he could get a Patriot loan, there was another bank that was 
able to take him to the next level. So I'm determined that 
doesn't happen in my bank again.
    Mr. McWatters. Okay. You submitted a TARP application and 
you withdrew your application and you say in your written 
testimony, ``As our application was processing, we saw new 
conditions being added daily and witnessed the growing stigma 
being directed at TARP banks. Because we did not want to enter 
into an agreement with the Government who could alter the terms 
at any time, we chose to withdraw our application.''
    I mean that speaks for itself. I mean, do you have anything 
to add?
    Ms. Wiest. No. The risk was greater than the reward of the 
amount of TARP money we would have been eligible for.
    Mr. McWatters. Okay. Do you have a slightly different 
feeling on the SBLF, Small Business Lending Fund, which may or 
may not become law?
    Ms. Wiest. You know, I heard Mr. Ivie say that the banks 
will take that. I will only take it if it's clearly defined, if 
the process to get the money is very transparent, if it doesn't 
just flow through regulatory agencies, and if there is a 
measurement, I mean, because I think the public deserves that.
    If you take the government money, you've got to be able to 
prove that you put it back for the purpose as intended. You 
heard Jim Lundy say that they took TARP money and they grew 
their bank and I think that's admirable and I think in his 
case, the TARP money worked.
    I've got to know the process has a lot of transparency.
    Mr. McWatters. Thank you.
    Chair Warren. Thank you. Mr. Silvers.
    Mr. Silvers. Thank you. Well, first, let me say how 
grateful I am to all of you for being here.
    The point of our holding field hearings is to hear from 
people like yourselves with businesses like yours. That very 
specific detailed experiential voice often doesn't come through 
in Washington.
    Let me begin. Let me ask the small business people on the 
panel. I'm not sure it's clear from all of our statements and 
so forth, but there are really kind of three policy choices 
facing the Treasury Department in using TARP money to try to 
help small business and we're trying to oversee those choices.
    Choice one is, and I think perhaps Mr. McWatters sort of 
stated it, is basically don't do anything, don't try to change 
the market incentives and structures and so forth. Don't put 
any money in.
    Choice two is to give money to banks. That's essentially 
the SBLF proposal. Give money to banks, perhaps with some 
conditions and hope and try to manage it so that the money 
flows through from banks and small businesses.
    Choice three is something along the lines of what 
Superintendent Neiman said earlier, which is to try to create 
specialized vehicles that will do small business lending only.
    What advice would you have for the folks in Washington as 
to what to do?
    Ms. Anderson. I'll leap on that one. I don't know that the 
do nothing else option is a viable option. The money's been out 
there. It's been working as best it can with banks as best they 
can and they're not lending on their own criteria. We know 
that. They're not widely lending. They are lending some.
    Giving the money to the banks for any of the programs, I 
would like to see transparency and a requirement that makes 
that happen, yet I'm also anti-involvement. We're a 
capitalistic society. I like to see the free economy flow.
    I'm very, very intrigued by Mr. Neiman's proposal, having a 
consortium with specific requirements and taking a look at 
something that has worked in other areas, so that those that 
wouldn't necessarily get credit--start-ups, I've specialized in 
start-ups.
    There isn't a banker in this room or probably within 10 
miles of me that right now is interested in doing a start-up. 
The larger lenders have done that under the guise of some of 
the SBA preferred lender programs and other kinds of things but 
when you get right down to it, they're all preferring to go 
find the top 10 people in an industry and to collateralize and 
securitize as best they can.
    So we do need an innovative idea, I think, that doesn't 
bind us for eternity into more government intervention and 
handouts. I love that consortium idea.
    Mr. Smiley. For six years I was an associate professor, a 
faculty member at Arizona State University School of Global 
Business, and at the national level in Washington, D.C., we 
hear about jobs, jobs, jobs. I tell you, there's not a day that 
goes by that my heart is not just pumped with gladness when I 
put someone back to work because I understand that people with 
jobs can now spend money at restaurants and other services. 
Those establishments now pay city and state taxes and that's 
how the economy works. It's not very difficult to understand.
    When it comes to small business, as I mentioned in my 
testimony, there's this broad brush that some big banks use. 
They're not willing to listen to you. Every business is the 
same. Our business is totally different, you know. I thank God 
every day for the 30-some employees I have that they can have a 
home. They can go buy goods and services. They can send their 
kids to school. They pay taxes, which we all have to do and 
that's what makes the economy.
    Since 2007, as I said in my testimony, we started with four 
employees. We now almost have 40 and that's amazing, but 
without people like Candace Wiest who sat down and said let me 
explain to you how lending works and she taught me about the 
five Cs of banking. From my perspective those five Cs of 
banking have been given the Heisman for small business and it's 
become very subjective lending versus objective lending, and 
I'm not going to send a small business colleague of mine to any 
bank whose balance sheets aren't correct, they don't have a 
stable business, they don't have a stable infrastructure.
    So the small banks understand that, but when the big banks 
don't listen to you and they don't return a phone call or they 
tell you as a preferred lender that the SBA turned you down, 
which is not a true statement, you know, people give up. I've 
had four or five colleagues of mine in the last year say I give 
up, I give up, I give up because they can't get capital, access 
to capital.
    At Sonoran, we're a good news story, but we will only 
continue to be a good news story if the small banks and the 
large banks start to listen to us, understand what we do and 
then give us a fair shake. Are you a risk? Are you 
creditworthy? Just give me a straight answer. I'll grow my 
business and I'll grow this economy, and just think, if every 
small business in Arizona hired 10 people, where would we be on 
the national perspective of putting people back to work and 
fixing our state budget and our city budgets and our county 
budgets.
    This is not rocket science. It's about doing the right 
thing, having regulatory oversight, but giving everyone a fair 
shake to make the American reality, not the American dream.
    Chair Warren. If you'll bear with us, Superintendent 
Neiman, why don't we let Ms. Darling have an opportunity to 
respond, as well, since we've asked the small business owners?
    Ms. Darling.
    Ms. Darling. Thank you. Just quickly, I agree with Ms. 
Anderson and Mr. Smiley. To do nothing would be terrible and 
what we need is more transparency, definitely, because we were 
turned down by a lot of banks, but I don't think that ever went 
on the books. I don't think you see the data because those 
banks never told us our loans were denied. They just went 
silent.
    It was very difficult. Sometimes I would wait four to six 
weeks and the banker wouldn't call me, the banker wouldn't 
answer my questions. So I never knew whether or not my loan 
would go through.
    So we do need to have respect. We do need to have different 
criteria that include service-based industries that don't have 
as many assets. We also have a tax issue where we accelerate 
depreciation 50 percent the first year. We buy a $150,000 laser 
scanner. We write-off $75,000. The banks look at it like it's a 
loss. It is nonsensical. So I'm going to be very happy to see 
some changes.
    Chair Warren. Thank you. Superintendent Neiman.
    Mr. Neiman. Thank you. This is probably our first 
experiment in having a panel, to my memory, where we mixed 
bankers and borrowers, and you see we've actually interspersed 
the bankers. So maybe we can play our little role in hooking up 
creditworthy borrowers with bankers.
    But I do want to follow up on the concept of a consortium 
and if TARP funds could be directed to banks but, in addition 
to utilizing those funds to leverage and to lend directly, 
could also use those funds to either invest in equity or to 
extend credit to a lending consortium.
    Would that be of appeal? I'd like to get the bankers' 
perspective, if that would be a legitimate and viable use of 
those funds.
    Mr. Lundy, I know Arizona has the concept of a banker's 
bank. We talked earlier that banker's banks do not actually do 
direct lending, but is that something that, in your 
understanding, could be developed and would it be a legitimate 
use--a viable use--of additional TARP funds?
    Mr. Lundy. My honest answer is I would be concerned that it 
could not be developed quickly enough in the short run. I think 
it's a good long-term idea.
    Arizona does have what's called a multi-bank. It's been 
around for a long time and it's basically a similar vehicle to 
what you've described that focuses on making community 
development loans and CRA loans, and some of the larger banks 
invest money in it and it in turn makes loans.
    I believe, as I said in my testimony, that the SBA programs 
generally work pretty well and I would like to see some more 
support. I would support the suggestions that the director made 
to perhaps expand the size of those loans up to five million. 
It might address some of the issues that Mr. Silvers raised.
    Frankly, Mr. Neiman, I think it's a good idea, and I don't 
know how long it would take to get it set up, but in terms of 
the immediate solution, I'm not so sure it would have a great 
impact in the next year or year and a half. It's something to 
put in the hopper for down the road. That's my opinion.
    Mr. Neiman. Ms. Wiest.
    Ms. Wiest. I worked in California for 18 years prior to 
coming here and the state had a program there that was really 
terrific. It was strictly for working capital, no real estate, 
and they would guarantee up to 75 percent of a loan, a term 
loan, because so many of the small businesses do need permanent 
working capital. So they're not going to keep being able to 
escalate accounts receivable lines.
    These guys would come in. They had a committee of regional 
bankers that looked at the loan requests and then they would 
guarantee 75 percent based on the covenants we put to monitor. 
I participated in that program for probably, I think, 12 years 
and I never had a loss and so while I like the idea of your 
program, there is also another solution, which would be to 
maybe have a state fund used for the purpose of guaranteeing 
smaller business loans. These would be $350,000 or under. So 
that might be another solution to think about because that was 
a very successful program in California for a long period of 
time.
    Mr. Neiman. Another appeal I think a consortium bank would 
have, particularly to a bank of your size where you don't have 
necessarily the expertise necessary to focus in a new area, 
whether it be franchisee loans where a consortium could develop 
that.
    Ms. Herndon, any thoughts?
    Ms. Herndon. I think my comments are similar. I think the 
multi-bank concept that already exists in Phoenix has worked. 
Obviously, I think they would love to have access to more 
capital to be able to participate in more lending 
opportunities.
    I also think that the SBA has played a great role, even in 
good times the SBA was very active, but right now more than 
ever with borrowers being more capital distressed than 
previously.
    I think having expansion, in particular the permanent 
working capital, the working capital line of credit programs, 
offered would be another way to stimulate loan growth.
    Mr. Neiman. Great. Thank you. Ms. Wiest, you talked about 
your reluctance to enter the TARP due to the stigma.
    Mr. Lundy, you were successful in taking it. What's your 
view on this concept of stigma? You seem to have weathered the 
storm and it hasn't seemed to have had a negative impact on 
you. Is that a correct way to assess?
    Mr. Lundy. Well, I think, early on it was sort of a batch 
of worthiness but we weren't one of the top 20 banks that posed 
systemic risk or anything of the kind.
    But the fact that we were able to qualify for it was sort 
of an endorsement. The Government believes that we're not going 
to fail and so I think that was helpful and, frankly, the 
capital itself was helpful. But I would agree that from a 
public perception standpoint and for how capital actually works 
in a bank and that at the end of the day all funds are fungible 
and that's one of, I think, the--we don't have time to talk 
about that today, but that's one of the problems that makes 
accountability and tracing it difficult.
    So I do agree there is a stigma. We were successful, but I 
would not rule out--as I said in my testimony, I think if 
Congress is going to do something, it should be done fairly 
quickly. So, on balance, I support the program.
    Chair Warren. I'm going to just ask a few more. I'd like to 
ask the business owners about your experiences with the SBA. 
We've been hearing about the banks' experiences with the SBA 
and maybe you could say just a bit more.
    Mr. Smiley, you're pulling the mic over like you're ready 
to go.
    Mr. Smiley. Yes. I have colleagues all over the United 
States and there are various SBA offices here and I'm here to 
tell you that the Phoenix office is absolutely outstanding. 
They have monthly meetings. If you don't have information about 
the Small Business Administration, then you live under a rock. 
They do great work with workshops, with SCORE, outreach to the 
community. They were in Goodyear last fall and so Mr. Blaney 
and his staff--you know, they're undermanned. I think their 
office was probably reduced by about 40 percent the last couple 
of years, you know. I tip my hat to them. They do outstanding 
work.
    Chair Warren. Okay. Thank you, Mr. Smiley. Ms. Darling.
    Ms. Darling. Well, we went to SBA. We got a list of lending 
institutions. We went to each one of those institutions. We 
were turned down because we didn't have the assets, partly 
because we utilize an accelerated depreciation schedule of 
assets for tax purposes. The other reason was because we don't 
own commercial real estate.
    Chair Warren. So your concern about SBA lending is that 
you're saying it's really far more asset-based than it is 
alleged to be?
    Ms. Darling. Yes, for service industries.
    Chair Warren. Ms. Anderson.
    Ms. Anderson. Yes, that's my experience, as well. The 
sba.gov website is amazing. There's all kinds of great 
information out there. The control and power is definitely 
within the individual lenders, the individual bankers, and the 
reason that you see community and regional banks here today is 
because these are the people that are lending. These are the 
people that are in the community. These are the people that 
are--it is a relationship-based business and the SBA loans are 
a minuscule number of the loans that are out there.
    The 90 percent guarantee definitely helped, but the stories 
that you've heard from the two of them and in my testimony--
I've given you a story, also, of some of my clients and I could 
go on and on with many of them where they're in the exact same 
situation. People have been bankrupted because they've not been 
advised that that loan that they got a letter of credit for, a 
letter of intent for actually went through.
    It's the terminology. It's the devil is in the details, you 
know, not understanding what those criteria are. For example, a 
lender will look at a loan package and the business plan and we 
coach our clients through this whole process and they might be 
looking at a hair salon and they might compare the industry 
ratios to a different kind of salon that isn't a booth rental 
and it isn't a med spa and it isn't whatever and so they've got 
two or three reasons why they don't want to do this loan from 
the get-go. It's a start-up. It's whatever it is. It's going to 
be too small. They don't like the location. The person has 
never owned a successful chain of salons before, whatever that 
elusive criteria is, and the criteria needs to be made plain. 
The SBA can help with that.
    Chair Warren. Thanks very much. Mr. McWatters.
    Mr. McWatters. Thank you. That was pretty much my question, 
but I noticed in Ms. Darling's testimony that she makes the 
point that there's a lot of real estate lending that's been 
going on in Phoenix for the last several years.
    Now all of a sudden that's stopped or at least it's slowed 
down. So you take a business like hers which is a cash flow 
business which is based off of earnings before interest, taxes, 
depreciation, amortization-type standard, and she's running 
into bankers who don't really know how to lend against that 
credit.
    I mean, I lived in Dallas during the S&L crisis. We knew 
how to loan against real estate but once it blew up, it was a 
different story.
    So the bankers on the panel, are you lending against cash 
flow now, is it changing, or are you still looking at real 
estate transactions?
    Ms. Wiest. Well, you're looking at me, so I'll go first 
here, but two things.
    Number one. Yes, we are lending and it really isn't that 
difficult if you understand cash flow lending in general, 
whether it's real estate or C&I loans, whatever, and I think 
the banks have better models. I survived the recession in 1988 
over here and 1991 in California. So there are plenty of models 
out there who help you do it better.
    I also think the interesting part is, we were talking about 
the SBA, we've done three SBA loans, 504s, for small business 
owners to be able to take advantage of this rotten real estate 
market. So that is going on out there, but we are lending on 
accounts receivable. Government receivables are difficult. 
You've really got to have a staff that could get in there and 
control your collateral is the problem.
    So I think if you asked any regulatory body, they would 
tell you that you can't just have a primary source of repayment 
be we're going to collect these receivables. There has to be 
some secondary source of repayment because stuff happens.
    Mr. Lundy. I would agree with that. I mean, the whole 
banking model--the community bankers here aren't investment 
banks. We don't get entrepreneurial return. We rent money, and 
we need to have two ways out and the first way out, we can all 
agree on, the business is going to make money and that cash 
flow is going to pay the loan off and if it doesn't, we need 
some other source of money, whether it's personal guarantees 
that have something behind them, whether it's a lien on real 
estate, residential or commercial, and obviously those two 
things have been impacted. The values have been impacted.
    Sometimes the second way out, because the nature of the 
business and the collateral is somewhat specialized, that's 
where I think the SBA and that guarantee can come in. 
Everything else makes sense, but there's sort of a hole because 
of perhaps the intangible nature of the assets, but at the end 
of the day, bankers rent money. We lend our shareholders' money 
and the depositors' money that are FDIC-insured and we cannot 
take entrepreneurial risk, and I think there's a disconnect 
sometimes between that reality and the borrowing public, but it 
is a reality.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. Thank you. Ms. Wiest, where is the money that 
you are not lending out invested in?
    Ms. Wiest. Actually, we have some in securities where we 
are earning a whopping three to four percent and we have right 
now about $3 million in overnight funds where we are earning 
.25 percent.
    Mr. Silvers. When you say--I mean, obviously without 
getting into specific names, when you say securities, what----
    Ms. Wiest. Mortgage-backed. I had one corporate which we 
sold recently, but, yes, mortgage-backed securities.
    Mr. Silvers. Thank you. Mr. Lundy, you said a few moments 
ago in response, I think, to Superintendent Neiman's question 
that you thought one of the major issues around TARP and the 
declining prestige of being a TARP recipient was that money's 
fungible and it was very difficult for there to be any 
accountability in the capital purchase program as to what the 
money was really being used for.
    That strikes me as, in relation to any further TARP 
activity around small business lending, that you'd want to silo 
it, that you'd want to be sure it was really going to small 
business and small business only. Am I hearing you right?
    Mr. Lundy. Well, I think to get the accountability that you 
talked about, some mechanism to do that would be--from a policy 
standpoint--if Congress decides to do this and this is a 
specific result that you want, I believe that some sort of 
segregation or accountability of that nature would be ideal, 
but it is difficult.
    Capital ratios are capital ratios and you asked her what 
her excess liquidity is invested in. We've now got about $240 
million in AAA mortgage-backed, Ginnie Mae, et cetera, 
securities and, unfortunately, about $275 million in overnight 
at 25 basis points.
    So we do need to put money out and we are putting money 
out, but it's difficult.
    Mr. Silvers. I should just note a moment of self-
congratulations to us that we've been calling for some 
accountability around how the TARP money was used within banks 
since, I think it is, December of 2008. That's the nature of an 
advisory oversight panel.
    Ms. Herndon, in your written testimony you talked about the 
fact that your bank is an affiliate of a large Spanish 
institution that I gather is fairly healthy as large 
institutions go these days.
    Can you observe, and I'd welcome any other panelists to 
observe, really this question of capital strength. You know, 
each of you, because of your affiliates, because of capital 
raises, each of you are pretty strong in terms of capital.
    When you look across the banking sector as a whole, the 
large institutions that dominate the deposits in Phoenix, and 
other small institutions, have we sort of picked out all the 
outliers to have with us here today and what conclusions can we 
draw about that, about the question of capital strength in 
relation to small- and medium-sized business lending?
    Ms. Herndon. Well, I actually think it compares the same 
when you talk about borrowers in general. I mean, clearly a lot 
of what borrowers are finding is their excess liquidity, their 
excess capital that they had maybe heading into these times has 
been diminished because they've had to use it.
    Again, because of the strength of our parent, they were 
able to inject capital for us so that we could continue to loan 
money. Had we not been acquired by them two years ago, we would 
have had a much larger percentage of real estate unable to be 
offset, if you will, by the overall portfolio of the bank. So 
it's clearly been an added benefit for us.
    But I do think that there are many banks in Phoenix that 
are strong that do want to loan money but are struggling to 
sort of get around the whole issue of the capital constraints, 
dealing with a lot of the issues that we've been talking about 
today, either the existing risk in the portfolio or the pending 
risks that might be coming from reappraisal due to real estate.
    I mean, no banks here have been able to escape the impact 
of the real estate market.
    Ms. Warren. Superintendent Neiman.
    Mr. Neiman. Mr. Lundy, a follow-up on your question about 
transparency, and we all acknowledge that money is fungible and 
when capital goes in how that's converted to loans.
    But can you identify loans that would not have been made 
but for the receipt of that $35 million that came through the 
TARP Fund?
    Mr. Lundy. Well, consistent with my comment, not 
specifically, no, but I can tell you that, as I said in my 
written testimony,----
    Mr. Neiman. There were loans that were made but----
    Mr. Lundy. Well, sure. We made--we grew loans.
    Mr. Neiman. But only the result of----
    Mr. Lundy. $66 million last year. We've grown loans $34 
million in the first quarter. That's a $100 million in loans. 
That's pretty good loan growth for our banks.
    Mr. Neiman. Loans that would not have been made but for the 
TARP?
    Mr. Lundy. Yes, and if we--well, let's just put it this 
way. Well-capitalized basic capital is 5 percent. You know, you 
can get a lot of conversation. Is eight the new five or is 
eight the new six, but there is, from every direction, pressure 
on capital and we're maintaining 6 percent leverage capital.
    Were we not doing that, we would not have felt comfortable 
growing and expanding the balance sheet to the extent that we 
have on both loans and deposits. So indirectly it has had a 
positive effect.
    Mr. Neiman. I want to ask the borrowers and maybe even the 
bankers, since the large banks are not here, I'd like to 
understand from the small businesses, do you see discernible 
differences in underwriting standards or dealing with you in 
the application process?
    Ms. Anderson. Absolutely. Night and day, an absolute night 
and day difference. The smaller banks spend the time to 
shoulder to shoulder--start out with like a 15-to-20-minute 
quick back of the napkin, here's what needs to happen, here's 
what I don't like about your financials, here's what I don't 
like about your package, and they really befriend that borrower 
nine times out of 10 in a way that the large lender does not 
do.
    The loan application goes off into the abyss of an 
application center in Houston somewhere and it's lost. Arguing 
the merits of the loan package for the borrower or their 
financial condition is much more successful in a relationship-
based application than it is in a larger bureaucracy.
    Mr. Neiman. And maybe from the bankers' perspective, now in 
the role of competitors, are you seeing differences in 
competing against those three largest institutions that 
comprise 70 percent of the deposits?
    Mr. Lundy. Well, a couple of things. I think Mr. Silvers' 
point earlier is worthy of everyone's note. Didn't you say 
that, in 1999, 15 percent of these loans were made and then, by 
2008 or something, before the great abyss, 38 percent or 
something were made by large national institutions and that's 
basically been the trend about the last 15 years. Increasingly 
smaller business loans because of the economies of scale are 
underwritten essentially as consumer loans with credit scoring 
models.
    I think this recent huge recession has surprised 
everybody's models. So, there are industry dynamics that have 
forced--you know, I mean, we're dealing with what we're dealing 
with and it took 20 years to do it and so now the more hands-on 
relationship approach that I think is a friendlier way to do 
it, I mean, if you're really going to get that to happen, you 
have to have community bankers who are willing to meet with 
people one on one, but it's difficult.
    Chair Warren. I want to thank you all very much. We really 
appreciate your coming and spending your time here with us 
today.
    We also appreciate your giving us your written testimony. 
We will make sure that everything that you've submitted to us 
will be made part of the record for this hearing. So this panel 
is also dismissed. Thank you, again. We really appreciate it.
    If there are members of the public who would like to make 
any comments, we have a microphone set up. We keep them brief 
but people are welcome to, if they want. Seeing no one rushing 
to the microphone, I am going to assume then that we have 
concluded our business.
    Again, thanks to the University of Arizona, thanks to the 
senators and congressmen here from Arizona. We appreciate all 
their help so that we could come here in order to learn more 
about small business lending. What we've learned today will 
very much help us in this process.
    Thank you all.
    [Whereupon, at 12:05 p.m., the meeting was adjourned.]
