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71–291 2011

COMMITTEE ON SMALL BUSINESS FIELD HEARING 

IN COLORADO: LOCAL PERSPECTIVES ON THE 

STATE OF SMALL BUSINESS LENDING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT 

AND REGULATIONS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

AUGUST 25, 2011 

Small Business Committee Document Number 112–031 

Available via the GPO Website: www.Fdsys.gov 


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(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

ROBERT SCHILLING, Illinois 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

JANICE HAHN, California 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 


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C O N T E N T S 

Page 

OPENING STATEMENTS 

Coffman, Hon. Mike ................................................................................................. 1 

WITNESSES 

Mr. Steven Smits, Associate Administrator, Office of Capital Access, U.S. 

Small Business Administration, Washington, DC ............................................. 2 

Mr. Jay Davidson, Chairman, CEO and Founder, First American State Bank, 

Greenwood Village, CO ........................................................................................ 5 

Mr. David Brown, President, Southeast Denver Centennialbank, Centennial, 

CO .......................................................................................................................... 10

Mr. Jeff Wasden, South Metro Chamber of Commerce, Centennial, CO ............ 16 

APPENDIX 

Prepared Statements: 

Mr. Steven Smits, Associate Administrator, Office of Capital Access, U.S. 

Small Business Administration, Washington, DC ..................................... 27 

Mr. Jay Davidson, Chairman, CEO and Founder, First American State 

Bank, Greenwood Village, CO ..................................................................... 29 

Mr. David Brown, President, Southeast Denver Centennialbank, Centennial, CO .......................................................................................................... 34 

Mr. Jeff Wasden, South Metro Chamber of Commerce, Centennial, CO ..... 00 

Questions for the Record: 

None 

Answers for the Record: 

None 

Additional Materials for the Record: 

None 


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(1) 

SMALL BUSINESS COMMITTEE FIELD HEARING IN COLORADO: LOCAL PERSPECTIVES 

ON THE STATE OF SMALL BUSINESS LENDING 

THURSDAY, AUGUST 25, 2011 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND

REGULATIONS, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:11 a.m., in Greenwood Village City Hall, 6060 South Quebec Street, Hon. Mike Coffman (chairman of the Subcommittee) presiding. 

Present: Representative Coffman. 

Chairman COFFMAN. Good morning. Welcome everyone to Greenwood Village and to the 6th Congressional District of Colorado. I 

would like to start today’s hearing by thanking everyone here in 

Greenwood Village and in the city hall building for hosting this 

hearing. Is Mayor Rakowsky here? Thank you so much, Mayor, for 

making this available. I really appreciate it. 

As policymakers in Washington and specifically the Committee 

on Small Business, we seek advice on policies to create jobs. And 

today we have a unique opportunity to hear directly from leaders 

and businesses about what challenges they face and how we can 

get this economy moving again. Small businesses create 7 out of 

every 10 new private sector jobs in America. So it is important that 

any regulation or Government oversight fully takes into account 

how it will impact small businesses and their ability to access capital. 

As chairman of the Investigations, Oversight and Regulations 

Subcommittee, I wanted to hold this hearing so the people here in 

Colorado can share their perspective on how Government is affecting their businesses and their communities. We are 1,661 miles 

away from Washington, D.C., and with that distance, we gain perspective, perspective that allows us to stop looking at Government 

fixes for our struggling economy and instead focusing on what the 

people can do without Government interference and regulatory burdens to foster economic growth. 

Up first, we have a representative from the Small Business Administration who is here to discuss the SBA loan programs. The 

goal of the SBA loan programs is to help small businesses who are 

unable to secure financing elsewhere, get money to start or expand 


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a business. We want to know whether this program is actually 

helping business entrepreneurs. 

Next, we will hear from a few local businesses, including First 

American State Bank, Centennial Bank, and from the Chamber of 

Commerce here in the south Denver region. Their testimony will 

tell us what problems banks and small businesses face as they 

work to start and grow businesses and create the jobs that will 

allow our economy to recover. 

With that, I would like to again thank everyone for being here. 

Our first witness this morning is Steve Smits, Associate Administrator of the Office of Capital Access at the U.S. Small Business 

Administration. Mr. Smits has 20 years of small business banking 

experience and began at SBA in October 2010. Prior to joining 

SBA, Mr. Smits served as Vice President of Operations at Mid-Atlantic Financial Partners. He has also held small business banking 

positions at Quadrant Financial and PNC Bank. At SBA, he manages and oversees the agency’s programs and operations that are 

designed to expand access to capital for America’s entrepreneurs 

and small business owners. Mr. Smits. 

STATEMENTS OF STEVEN SMITS, ASSOCIATE ADMINISTRATOR, 

OFFICE OF CAPITAL ACCESS, U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON, D.C.; JAY DAVIDSON, CHAIRMAN, 

CEO, AND FOUNDER, FIRST AMERICAN STATE BANK, GREENWOOD VILLAGE, COLORADO; DAVID BROWN, PRESIDENT, 

SOUTHEAST DENVER CENTENNIAL BANK, CENTENNIAL, 

COLORADO; AND JEFF WASDEN, MEMBER, SOUTH METRO 

CHAMBER OF COMMERCE, CENTENNIAL, COLORADO 

STATEMENT OF STEVEN SMITS 

Mr. SMITS. Thank you, Chairman. Good morning. I am happy to 

be here in beautiful Colorado. Chairman Coffman, I want to first 

thank you for your service to this State and to our country, but 

specifically your service in the U.S. Army and the U.S. Marine 

Corps. So, again, thank you so much. 

Chairman COFFMAN. Thank you. 

Mr. SMITS. I am pleased to have an opportunity to be on the 

panel with Mr. Davidson, Mr. Brown. As you mentioned, before 

joining the SBA in October, I spent over 20 years as a banker and, 

specifically, as a small business lender. So I value their thoughts 

and their opinions and I am looking forward to having a productive 

meeting and discussion today. 

As the head of the Office of Capital Access, my job is to adhere 

to my mission. I have a ritual every morning when I come into the 

office in Washington. The first thing that I did when I joined the 

agency my very first day is I typed out my mission. I taped that 

mission to the top of my desk. Every morning I read that mission. 

I go through my day and ask myself what am I doing that is actually moving that mission forward. Every evening I glance down at 

my desk and I read that mission once again to check myself to see 

what have I done to move that mission forward. That mission in 

the Office of Capital Access is to ensure our small businesses have 

access to capital through our lending partners when access to capital is not otherwise available on reasonable terms and conditions. 


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I want to focus on a little piece of that and that is ‘‘through our 

lending partners.’’ The Small Business Administration and our 

lending partners, our community banks, our lending organizations, 

our certified development corporations all over this country form a 

partnership, an example of an excellent public/private partnership. 

So what I have realized—and my wife reminds me of this all the 

time. She says, Bud, a partnership is a two-way street. 

So when I think of SBA lending, I think of a highway. My job 

really is to identify where there are gaps in financing, to work with 

our lending partners to find ways to fill those gaps. So in a highway, I think of them as the potholes. So our job is to identify the 

potholes. As an agency, we develop tools and we ask our lending 

partners to do the heavy lifting, to use those tools and to provide 

the asphalt to fill those potholes. 

Now, what happens after a big storm? More potholes, larger potholes, more gaps. A functional, healthy partnership isn’t simply 

SBA creating more tools and asking our partners that do the heavy 

lifting to just use those tools and fill those potholes. A healthy partnership requires a very clear understanding of what challenges, 

what motivations that your partner is facing and dealing with and 

what tools work and what tools don’t work. And also, by the way, 

do they have the asphalt necessary to fill the holes? 

So to this end, the first thing that I did when I joined the agency 

is I made a decision that I would travel the country, and as I did 

so, I would take an opportunity to put together roundtables of lenders and small business owners. It wasn’t an opportunity for me to 

talk about what we are doing as much as it was an opportunity for 

me to listen. Part of a partnership is for me to listen and understand what is important to my partners. 

I also would always ask my lenders what do you see as the challenges facing our small businesses this year and next year and 

going forward that keeps you up at night. I heard working capital, 

for example, which makes perfect sense to me. As we pull out of 

a deep recession, who would have imagined at the beginning of the 

Great Recession, it would have been as long and as deep and profound as it was? 

Our small businesses do what they do. They went into survival 

mode to protect their employees, protect the house that they have 

spent their careers building, and they would take the resources 

they needed to keep their lights on. At the same time, they were 

faced with challenges such as deteriorating values of real estate. 

Many of our small business owners rely on the equity in their 

homes, for example. And when they see the value of their homes 

going down, they see fewer and fewer resources available just to 

keep the lights on. They are beat up and they are bruised. 

As we pull out and recover, these are our job creators, these are 

our innovators. 

We also need to be aware that many of our lending partners are 

small businesses themselves. Approximately 61 percent of the dollars that we lend out through our programs are done through community banks. Just like our small businesses, our community 

banks have felt the pressure of the recession, challenges with their 

balance sheets, challenges with their portfolios. If they’ve done the 

right thing and tried to keep their small business owners in good 


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stead, it has resulted in a deterioration in their ratios and their 

balance sheets. 

The good news is our programs are not only designed to help our 

small businesses, but they are designed to provide value to our 

lending partners. Many of our lending partners have found that 

use of SBA loans helps manage balance sheet challenges, for example. Since the start of the recession, we have seen over 1,200 lenders come back to our program and make an SBA loan for the first 

time in many years. 

So what have we done? With the help of Congress, in order to 

encourage lending and to help fill these gaps that were appearing 

in lending, we increased our guarantee on our flagship programs 

up to 90 percent. We reduced fees that our small business owners 

pay. This is what I call putting our loans on sale. By increasing the 

guarantee, we have created an incentive for lenders to take additional risk. By helping to reduce fees for our small business owners, it has taken a burden off of the small business owners. 

In addition, we opened up our real estate financing program to 

allow for refinancing. 

We permanently increased our loan size from a $2 million cap up 

to $5 million. 

We have opened up our program to floor planning for struggling 

Main Street dealerships, auto and RV dealerships, that were having trouble finding financing for their inventory. 

We have also taken steps to open up more points of access. We 

rolled out what we call our Community Advantage Program, and 

what this has done is for the first time allowed nonprofit, missionbased lenders—these are community lenders in primarily underserved areas around the country who have a mission to provide a 

level of hand-holding or technical assistance on the front end for 

primarily young, startup businesses. For the first time, they can 

apply and become participants in our program to offer small loans 

up to $250,000. This is a strategy that opens up—I call it matching. A small business owner’s success or failure is sometimes determined before the first dollar is lent out. Does your business plan 

make sense? Have you thought about things like your competition 

or your challenges or your ‘‘what if’’ scenarios? Many times these 

young entrepreneurs, these startup businesses, need a level of technical assistance that many of our larger institutions are simply not 

equipped to provide. So for them, this provides another avenue 

where the organization has a mission to provide that level of assistance on the front end to lend towards a greater degree of success 

once the business is ready to borrow. 

Now, as I had mentioned, I have gone around the country and 

I have talked to lenders and I have listened to them. That is not 

where the partnership stops. What we also need to do is take the 

partnership all the way through the entire process. So when I 

heard that there are challenges, for example, for our small businesses securing sufficient working capital as they start to see opportunities for revenue growth or stabilization, they need to take 

a look at their balance sheets. They need some restructuring or 

they need some working capital in order to participate and take advantage of these growth opportunities. However, I have heard from 


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our lenders that they just feel that they continue to have a challenge to find conventional means to do that. 

So the other part of our partnership is to engage the lending 

community to help solve the problems together, to come up with 

creative solutions of what can we do with our programs that offer 

working capital solutions to our small businesses to make them relevant, to address the concerns that our lenders may have. For example, I have spent the last several months, myself and my team, 

and we have conducted well over 150 conference calls with individual community banks all over the country. We spoke to community banks in every single one of our 50 States. We have had conference calls with every one of our 68 district offices, and we listened. And what is amazing about that is we hear about the challenges, but our lenders are ready to provide us with solutions and 

suggestions, and we have taken all of that in. We have taken a look 

at our policies. Where are the barriers to entry for our lenders? 

What are thoughtful, common-sense changes to our policies where 

we can make these programs more effective? And at the end of the 

day, what that means is more access to capital for our small businesses by working and focusing on that partnership going forward. 

So again I want to thank you so much for your time today. I commend you. This is about our small businesses. This is about awareness. Our small businesses are our job creators. Our small businesses are our innovators, and this country has been built on the 

successes of our small businesses. And I would encourage communities all over this country to offer such hearings because this is 

an opportunity to create an awareness which is very, very important. So thank you. 

[The statement of Mr. Smits follows on page 27.] 

Chairman COFFMAN. Mr. Smits, thank you so much for your testimony. 

Our next witness on this panel is Jay Davidson, Chairman and 

CEO and founder of American State Bank. American State Bank 

opened in 1995 and has grown to over $220 million in assets. Mr. 

Davidson has more than 25 years’ experience in the banking, private business, and corporate sectors and has been recognized by 

numerous industry and public organizations for his expertise. 

Mr. Davidson is a graduate of the University of North Dakota. 

He and his wife Christina have two children and reside in Greenwood Village. Welcome, Mr. Davidson. 

STATEMENT OF JAY DAVIDSON 

Mr. DAVIDSON. Thank you, Congressman Coffman, for the opportunity to speak before your Committee today. 

I am a community banker. I serve the small business, the independent business market exclusively. 

I am going, I hope, today to show you that something is terribly 

wrong with the recovery which you certainly know and everybody 

here knows. I want to look at possible reasons for this poor economy. I want to prove that there is a second liquidity crisis in the 

economy, and I want to provide some suggestions for how to solve 

this problem. And since I am an engineer by training, I like slides 

and graphs. So forgive me here. 

Chairman COFFMAN. That is great. 


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Mr. DAVIDSON. I will try to coordinate this whole thing. 

The top chart shows the jobs recovery, the current recovery compared to three other recoveries. You notice that the loss of jobs 

went down further and has stayed down longer than historical. 

Gross domestic product, GDP, is the total national production. It is 

an indication of business activity. Again, it went down further than 

any other recession and has still not even returned to the 0 line. 

Actually this is one quarter out of date. So we are about 3 years 

since the beginning of the recession and we have not recovered yet. 

I want to talk to you a little bit about why I think that is, and 

I am going to take a couple of seconds here to show you another 

very busy slide. This slide is all recessions since World War II. The 

most important thing to show you that this is the job losses. This 

is the current recession. It went down further, stayed down longer, 

and has not even begun to come back really. The reason I think 

that the job market has stayed down so poorly is that we independent banks, community banks, and the independent business 

person, small business person is not hiring for a lot of reasons but 

one of which I am going to talk about lending by banks because I 

think we are the cause of the liquidity crisis. 

This is not a normal recovery. 

The next slide gives you some more—just to give you a demonstration of the 1982 to 1984 recovery and the current so-called 

recovery that we are in, you will note that in 1982–1984, we hit 

a high of 9.3 on gross domestic product growth. Here we are sitting 

down at a 1.3 today. We are not recovering. In fact, we are going 

into a double-dip recession, it looks like. 

But this is reduction in Government regulation. In my opinion, 

it is putting more money back into the market, letting people keep 

their money to build businesses and supporting capitalism. I think 

this is a perfect example of Keynesian economics and the failure of 

Keynesian economics. The Government cannot stimulate the economy. I will go into that a little bit more in the next couple of slides 

here. 

We like to talk about a technical term called the velocity of 

money, and really, it is just the number of times that money turns, 

how often is it moving into the economy. 

You will notice here that when the recession started—the gray 

area is the recession—the velocity of money dropped very precipitously down to the point where we felt that GDP had grown for two 

quarters, so by definition we were out of the recession. This was 

back in mid–2009. 

Well, look what has happened with the velocity of money. It has 

continued to trend down rather dramatically, and we are seeing 

that effect in the gross domestic product, consumer spending, et 

cetera. This is the main reason, I think, that we are not having the 

recovery that we should, and I think there is a relatively straightforward solution to this. 

The Federal Reserve and the Treasury have liquefied this Nation 

to a point that I have never seen in my life. I mean, we are talking 

trillions of dollars with TARP stimulus, QE II, QE I, you name it. 

There is so much money sitting out there. A lot of it is sitting in 

bank deposits doing nothing, and we are not lending that money 

out. 


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The analogy I like to use is that a river can generate electricity 

because the water is moving. When money moves, it generates jobs 

and it generates productivity. A lake can’t generate electricity. It 

is static. There is potential there, but there is no actual kinetic energy. 

So that is where we are today. The money is sitting in the banks, 

and I want to explore why that might be. 

This is another technical chart. This is what we call the money 

multiplier. Again, it is related to velocity of money. This is N2, an 

indication of money in banks, and divided by the monetary base. 

You notice that normally the turns on the money multiplier are 8 

to 10 in a normal environment. We are down here sitting below 4 

right now. Again, money is not moving. Frankly, it is banks taking 

the deposits and not lending it out again. 

Just an indication of the manufacturing to tell you that we are 

going into a potential double dip. They dropped significantly during 

the recession, came back substantially, and now we are dropping 

down in both jobs and manufacturing production. Not good for our 

economy. 

This is a survey created by the National Federation of Independent Business, NFIB. This is the future lending that independent businesses, small businesses are intending to do, and from 

around 2006, it just dropped precipitously and has continued to 

drop. The independent businesses are not borrowing money for a 

lot of reasons. One, we are not lending money in my opinion. Two, 

there is a great deal of uncertainty out there. They don’t know 

what to put the money in. They don’t know if the rules are going 

to change on them, and the rules have changed on them. So the 

money is being held on the sidelines. 

This is very telling. This is from the FDIC. This is the reduction 

in loans outstanding across the Nation. This is a cumulative number. There is almost a trillion dollars in loans that are no longer 

outstanding in our economy, $1 trillion not generating new business or generating expansion of business or generating jobs. All 

banks predominantly have stopped lending in my opinion. There 

are some anomalies here, but this is what I call the second liquidity crisis the Nation is facing. 

Just as in the Great Depression, there were two liquidity crises 

that occurred. It wasn’t just 1929 when the stock market crashed. 

There were two liquidity crises that helped bring this Nation to its 

knees. I believe that the bank lending issue is creating a second 

liquidity crisis that is extremely dangerous for our Nation. I am 

going to ask for your help and your esteemed Committee’s help on 

this issue. 

I will give you an example here in Colorado, commercial real estate lending, what we call CRE lending. In March of 2008, we had 

$10.1 billion in CRE loans outstanding. 3 years later, we only have 

$7.3 billion in CRE loans outstanding. That is a decline of $3.4 billion just in the State of Colorado in commercial real estate loans, 

a 27 percent decline. I submit to you that there is a contagion effect in this number also. $1.4 billion of that decline are banks that 

are not subjected to regulatory actions. Their capital is over 13 percent. The CRE 1 and 2 ratios are within guidelines. So they are 

not subjected to the CRE scrutiny that us community banks are, 


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and they are still not making commercial real estate loans. To lose 

this kind of money into the economy has a strangling effect on our 

economy. It is extremely dangerous. 

I would submit to you that those who own and have these commercial real estate properties are the small businesses. Hence, I believe that the independent banker is the person who serves and 

services the small business people. Since small businesses generate 

over 65 to 70 percent of all new jobs and hold 50 percent of the 

existing jobs, our effect on the small businesses as bankers not 

lending to them has a magnifying effect on the overall economy. So 

you take a $3.4 billion reduction in lending and you magnify that, 

and I don’t know what the factor is. I couldn’t find that number, 

but there is a great magnifying effect there. You can see why the 

Colorado jobs market has gone down. You can see why home foreclosures accounted for 36 percent of all home sales in the State of 

Colorado. People don’t have money today. We are being squeezed. 

I am going to tell you why now. The capital ratio is what we are 

guided by and what our regulatory agencies guide us by. This is 

probably the most important aspect of what we do as we relate to 

our regulators. It is capital divided by assets. 

There are two ways to increase your capital ratio, which is what 

is being demanded of us community banks today. You can increase 

your capital, which in this market is extremely difficult, if not impossible. The stock market for banks went away 5 years ago and 

has not recovered yet. The dilution effect of raising capital today 

is horrendous, and you can’t even raise capital today no matter 

what the price. 

The other way—and this is the crux of the problem—is that we 

can reduce our assets, reduce the denominator and increase our 

capital ratio. Well, assets are loans. There is no way I am going 

to make loans and imperil my capital ratio. If I increase my loans, 

I will decrease my capital ratio, and my regulatory agencies will 

just beat me to death. This is their decision. This is their right, but 

I think this is the crux of the problem. And I hope that we can find 

some way to work together to meet their need for safety and soundness in the banking system but let us banks survive and thrive. 

This is the issue right here. Bank regulators demanded immediate increases in capital ratios, far above the Basel Accords, to 

which we all agreed for the past 30–40 years, and they forced 

banks to reduce lending, and thereby caused a second liquidity crisis in small businesses. 

For instance, my capital is higher than it has ever been before, 

and I am sure Mr. Brown will say the same thing in his bank. And 

most other bankers will tell you that. We have been driving up our 

capital ratios for a couple of years now, and yet I can’t lend yet. 

I can’t lend because the regulatory agencies have decided that commercial real estate lending is dangerous, and I need to increase my 

capital levels. The only way I can do that is by reducing my loans. 

So I can’t increase loans. 

I submit to you that commercial real estate lending today is 

much less risky than it was before. In our studies of stress testing 

of commercial real estate, the MIT study indicates that nationwide 

commercial real estate values have dropped 48 percent in the past 

3 years. If I make a loan today, I am making it at half the collatVerDate Mar 15 2010 00:38 Jan 07, 2012 Jkt 071291 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\B291.XXX B291

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eral value of that loan 3 years ago, and I am making it to an individual who has made it through the Great Recession. This is a 

strong individual with net operating income. This loan today on a 

commercial real estate property is much safer than a loan of 3 

years ago when I am at the top of the market lending at 80–70 percent loan to value. 

Solutions. In my opinion—and I will probably get taken to task 

for this—I would ask this Committee to consider forcing regulatory 

agencies to adhere to the Basel rules on capital levels. They have 

served the industry well for the past 30 years, and the fact that 

we are having to increase our capital ratios at this time means we 

cannot lend and we are causing the second liquidity crisis. 

Allow us to use the excess capital that we have accumulated over 

these 3 years to pay off some of our bad debt, sell it off at a loss, 

and get it off our books, and let us start lending that back into the 

market. This is the crux of what the hammer that the regulators 

have over us today. 

Second, stop regulators from enforcing CRE, commercial real estate, guidelines as rules. Mr. Guggenheim asked me to define what 

are the laws that are being broken. Well, no laws are being broken. 

They are being interpreted to a much higher and more stringent 

level than ever before in the history of our Nation. For instance, 

the commercial real estate lending guidelines were sent out as 

guidelines in 2006, and we bankers viewed them strictly as guidelines. In Colorado where the ratio for CRE 2 was 300 percent of 

capital, I am at 600 percent of capital because I am a commercial 

real estate lender. This is what I do. This is what is available to 

me in Colorado. I think Mr. Brown will agree with that in his 

banking experience. 

Well, the same level occurs across the Nation. Three hundred 

percent is the number that we have to try and reach. That is absurd. Alabama, Detroit—they don’t have commercial real estate 

loans. They have P&C loans. They have business asset type lending, but they don’t have a lot of commercial loans. Colorado does. 

We are kind of a white collar market, a lot of office space, a lot of 

office, commercial, and so forth. 

The last thing is regulators have forced those banks that have 

capital loans at the bank holding company that have infused that 

capital into the bank to make it stronger. They are restricting us 

from paying the dividend on that capital loan. They are putting me 

in a direct default position with my lender because in their opinion, 

well, if I pay that dividend, I am reducing capital. Well, yes, I am. 

And they don’t care about my shareholders. I understand that. 

They are here to protect the safety and soundness. But this issue 

is putting extreme pain on the banks. I have got several million 

dollars in loans outstanding that are making my bank safer and 

sounder, and I can’t pay the dividend on that. So there are some 

very powerful effects that the regulatory agencies are having. 

Granted, my loan portfolio looks pretty ugly right now. I will 

admit that freely. I have never had OREO, other real estate owned, 

or a non-performing asset in my life. We had to dust off the books 

and learn how to handle them because we have some now, and a 

lot of banks are in this situation. But we are surviving, as are most 

community banks that have made it through this time. 


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So the final thing I would like to say is make the regulators live 

by the rules that they established years ago, the rules by which we 

have been trained to work instead of increasing and reinterpreting 

the rules that are out there and having a major impact on the independent business person. 

Thank you, sir. 

[The statement of Mr. Davidson follows on page 29.] 

Chairman COFFMAN. Well, thank you, Mr. Davidson. 

Our next witness today is Dave Brown, President of Southeast 

Denver Branch of Centennial Bank in Centennial, Colorado. His 

bank is a full-service community bank focused on providing a full 

suite of banking solutions for businesses in the Denver metropolitan area. Welcome, Mr. Brown. 

STATEMENT OF DAVID BROWN 

Mr. BROWN. Thank you, sir. 

I would like to reiterate everything that Mr. Davidson said, and 

he is actually the first person I have ran into recently who has a 

negative look on the current recession as deeply as I do. So it is 

refreshing to see that. [Laughter.] 

We probably shouldn’t hang out together too much, though. 

[Laughter.] 

The neat thing about this was when Mr. Guggenheim gave me 

a call, he asked for five direct things that regulations were doing 

that are stifling businesses. And honestly, I couldn’t come up with 

five. It is a neat and tidy little package. It doesn’t always work in 

the real world. And part of it is what Mr. Davidson just alluded 

to is so much of what we are dealing with isn’t necessarily the regulation. It is regulatory guidance, but that regulatory guidance in 

today’s world has taken on every bit as much of a focus and it is 

dangerous to us as regulation is without the enactment of Congress. And to me, I find that to be very disturbing, which is why 

I have to agree with him on his Basel comments and the capital 

levels. 

But when I do get into it, the first thing that I saw was the 

FIRREA, the appraisal standard that we have, Financial Institutions Reform and Recovery Act which was actually enacted during 

the last real estate crisis with the savings and loans way back in 

the 1980s. 

With that, it dictates when you have to do an appraisal on a 

property, and as Mr. Davidson pointed out, the length, depth, and 

slow recovery of this recession has been so long—we are 4 years 

into it already—that there are so many companies, businesses that 

do have a physical plant that they are using to run their business 

out of. They have come up with a renewal on a loan and they have 

to do something to refinance that with the existing lender or move 

it to another one. Well, the appraisals have gone down, in many 

instances 48 percent, and so what this has done is a business that 

has done everything that it could since 2007 to make it through the 

recession all of a sudden has to come up with a capital call, in some 

instances as much as 20 percent of the loan, just in order to get 

it refinanced. In many instances, this is being done where the business has never actually had a payment default, but I would come 

to them and I would say, for instance, on a $1.1 million loan, I 


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need $200,000 in additional capital from you in order to pay this 

loan down to an appropriate level. They simply don’t have that, Mr. 

Coffman, and that is creating a massive problem for them. 

So I talked to one of my appraisers in preparation for this, and 

he told me at this point in time that is happening as many as three 

times a month at his company. And that is only one of the commercial valuation companies here in Denver that do this sort of work. 

So it is a very prevalent problem throughout our market, and taking that capital away from small businesses right now at the worst 

possible time and putting it into the banks is a very bad thing to 

do. And it is also preventing us from lending. 

Now, one of the great things that you hear the talking heads in 

the media spout on about is that what this is doing is it is 

deleveraging the community. The businesses are deleveraging. The 

consumer is deleveraging. And I would say I completely disagree 

with that fact. If we have a building or a house that was worth $1 

million—it is now worth $750,000—the loan is still 75 percent. 

Even though it is much less than it was before, the deleveraging 

hasn’t actually occurred. It is just that the economy as a whole and 

the asset base of the economy as a whole has shrunk. The leverage 

ratio is still exactly the same. 

So, for instance, if we look at a company that would get into a 

position where they would have to refinance a loan with me, I go 

out, I get an appraisal on that house or that commercial building. 

It has fallen in value. I have to ask for the $200,000. The aftereffect of that for the company is that their building, where it used 

to be worth—I have got a specific example here. The building at 

one point in time was worth, say, $1.1 million. I apologize. $1.475 

million. Today it is worth $1,192,000. The original loan was $1 million. Now I can loan them $894,000. In that instance, it goes down 

$145,000 that they have to come up with, $145,000 that they don’t 

have. 

Unfortunately, the loan-to-value is exactly the same at 75 percent. The asset has dropped. The company is $148,000 short in capital, and they still have payroll to make and I just took their payroll money. So the 65 percent of the new jobs that are being created, the 50 percent of the existing jobs in the market right now— 

I have just materially damaged that in my local market by that 

rule—oh, guidance, not regulation. I apologize for that. [Laughter.] 

What happens, for instance, if the loan can’t be remargined, if 

that $148,000 isn’t available in that company’s business? I am now 

looking at a foreclosure. I’m looking at—I’m whole if he can come 

up with $148,000, and my primary regulator, the Federal Reserve, 

is very happy with me. That is good. The business has taken a hit. 

But if the business doesn’t have that money, I have two choices. 

I can go into a thing called the troubled debt restructure with that 

company or I can enter into a foreclosure. Foreclosure is very bad 

and that could lead immediately to a personal and corporate bankruptcy personally because most small businesses have to guarantee 

personally all of the debt that they have. So we have got two bankruptcies that I have created. And the business could quite easily— 

that could shutter the business if I do that. Or I enter into a troubled debt restructure. 


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If I go into the troubled debt restructure, at that point in time 

I now have to reserve more money for that loan because I have 

demonstrated an obvious weakness in it. And therefore, more 

money from my current net income is going to be taken out of that, 

which is going to reduce my net income, taken over to my provision 

for loan loss reserve, which also takes it out of my tier 1 capital, 

moves it into tier 2, and then the Basel ratios that Mr. Davidson 

was talking about—I’ve just materially hurt those ratios at my 

bank, and it makes it more difficult for me to lend going forward. 

That is one thing. 

The second thing that the stress testing and all of that led to 

was—the current guidance right now on just regular C&I, commercial and industrial, lending is to institute stress testing on that. 

And part of that is with global cash flow, as well as uniform credit 

analysis cash flow. I have got a lot of problems with both of those, 

and while each of them have a very strong point—they were instituted to reduce and identify risk—there is good and bad that go 

along with both of that. 

The global—what that does is it takes in everything that a business owner does, money that he has to generate from the business 

in order to pay his own personal mortgage, as well as take care of 

the liabilities of the company. And so it blends that all that together and gives you a ratio of, hopefully, over 1 to something, 

sometimes negative. 

The problem with this is that the regulators are pushing this so 

hard, and again, this is guidance. It is not necessarily a regulation. 

But it is being pushed so hard right now and there is no actual 

standard for this. RMA hasn’t come out with it. None of the community banking organizations have come out with a standard for 

it. FASB has done nothing with it. So everybody is just kind of set 

doing their own thing. I am sure it is done differently at your organization as it would be at mine, as it would be at every other bank. 

In fact, the differences in this are so universal that at our last FRB 

exam, Federal Reserve examination, two examiners on the same 

team were using different formulas in order to come up with global 

cash flow. This doesn’t do very much to help us or the business 

owners. 

Finally on the UCA, UCA is actually an industry standard. It 

works well, but the way that it is being enforced—— 

Chairman COFFMAN. UCA stands for? 

Mr. BROWN. Uniform Credit. 

Chairman COFFMAN. Okay. 

Mr. BROWN. Basically it came out of the Risk Management Association many years ago, and it determines how much free cash flow 

a company has in order to take care of its responsibilities. An excellent standard. 

The problem with it is that from the guidance that we are getting right now, the regulators would like us to come up with a specific number that we are going to lend into. So if I am going to leverage that at 1.5 times, it is going to be across the board. That 

doesn’t work. 

There are pretty amazing differences. If you look at the same 

product line, for instance, manufactured windows, the manufacturer of that window, the middleman that is going to take it and 


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do the distribution, and the retail vendor are all going to have remarkably different balance sheet to income statements, and I can’t 

leverage each of them under the same guidelines. So what it really 

comes down to is we are being asked to do something as a standard 

which really is an art. Lending is part art, part science. You can 

only do so much mathematically. The other piece of it has to be 

what the business is, the strength of management, the character of 

the people, and that art part is being moved out of this equation 

and put someplace else. We desperately need that in order to properly service the communities that we are taking deposits from. 

The next thing is I am going to get into the capital levels as well. 

I completely concur with Mr. Davidson on this. Where these capital 

levels came from was guidance again back in 2005–2006 where 

they asked us only to do 100 percent of our capital. So if I have 

$100 million in capital, I can lend $100 million in construction and 

land development. I think that is probably not necessarily a bad 

thing because if you look at all of the banks that have been closed 

over the last several years, they were predominantly in construction and land development lending. So that has helped out with 

that. 

The 300 percent would be inclusive of that 100 percent, and then 

you would be able to lend 200 percent to the rest of the commercial 

real estate, people who have apartment buildings, office buildings, 

retail centers, plant and equipment for plants for their businesses. 

The problem with this is that we are combining two areas that 

don’t need to be combined. If you are looking at a plant and equipment for an owner-occupied business and that becomes part of your 

300 percent ratio, you could quickly exhaust that ratio and no 

longer be in a position where you can lend money to people who 

are trying to do something. 

A case in point with this is we just completed a loan. Actually 

Myron Spanyer in your office gave me a great deal of help through 

the SBA. It is a Golden Corral that is under construction right now 

at the intersection of Parker and Arapaho. This business, when 

open, is going to employ 180 people in the 6th Congressional District in the City of Centennial. I am looking very forward to that. 

And at the end of the day for a banker, when I go home and I know 

that what we did at my bank had a small piece, minuscule, in employing 180 people, not to mention all the construction people that 

are over there, that is why we do what we do. You don’t get paid 

for that, but there is a lot more of that that hits you, and it is 

worth more than the money that you get at the end of the day. It 

is what keeps you coming in day after day. 

Unfortunately, that now, when it is finished, is going to become 

part of my 300 percent CRE. That real estate has absolutely no 

bearing on—as an income-generating piece, it has no bearing on 

what is going to happen with that. Golden Corral sells food. I am 

going to be repaid from the sale of food, not from rental income 

that is coming off of the real estate. 

So at the end of the day, if there is one thing that I could ask 

for, it would be to remove owner-occupied from those guidance levels if we do nothing else with them because that is really restrictive to the business that we have here. 


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The last thing that I want to get into on that is that right now 

in Colorado, you have effectively got a number of banks. I don’t 

know how many it is, but several that are actively looking to sell 

commercial real estate loans out of their portfolio. And I have personally looked at a number of these from several banks. I have purchased a lot of them, and I know that these things are getting sent 

out to investors, hedge funds, et cetera. And so what this is doing 

is helping to take care of that capital-to-asset ratio, that 300 percent, that these companies have. 

The problem with that is that the banks that are doing that right 

now, if you are selling loans, you certainly aren’t making any. They 

no longer have the ability to service the community that they are 

in because of these capital restraints. And on top of that, the loans 

that they are selling are absolutely the best loans in their portfolio, 

otherwise investors won’t buy them, and it further weakens the 

bank going forward. So it is highly negative on every front that I 

look at for that. 

In fact, this is so pervasive that Community Banks of Colorado 

last week just sold 16 branches to the NBH Group out of Boston, 

Massachusetts. Again, it had a lot to do with the fact that they 

needed to raise capital and they couldn’t do it in the market, and 

selling half of their franchise was the only way that they could do 

this. 

So the last thing that I want to say is that the regulatory change 

that we have is going at warp speed. Dodd-Frank is not entirely 

written. The regulators don’t understand what is going to happen 

with it. The Consumer Financial Protection Bureau was underway. 

Have no idea how that is going to affect it. And while most of the 

banks in Colorado are too small for it, the rules that they are going 

to enforce through the CFPB are going to drill down to us through 

our primary regulators. That is also included in the law. 

The effect of this is primarily what really frightens me individually as a banker right now is that this pace of regulation, the fact 

that we don’t understand what is going on with it. A lot of what 

we have already enacted hasn’t worked out very well. I will give 

you a case in point. 

Several years ago, they redid the good faith estimate for home 

mortgages, as well as the HUD–1, to help to prevent people from 

becoming victims of predatory lenders. And the stated goal for this 

was to provide more simplicity, clarity, transparency, and certainty 

of mortgage costs for consumers. What this effectively did, however, 

was it took a good faith estimate that was one page, increased it 

to three, and when it was one page, the average consumer could 

look at it, understand it, and figure it out. The three-page one, a 

CPA really has to be brought in so that you can understand what 

that is. That is not simplicity. It certainly isn’t clarity. Most people 

aren’t going to go to their CPA to take a look at it. 

The same thing with the good faith estimate, from three pages 

to four—or the HUD–1. The HUD–1 as a three-page document was 

completely unintelligible. As a four-page document, it has been further muddied. And again, people don’t take these to their CPA’s to 

look at them beforehand. So who is actually giving them guidance 

on these very complex, non-simplistic things that the Government 


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has asked us to do? It is that same predatory lender that this was 

designed to get it out of the hands of. 

So that is what scares, again, just me personally. That is what 

scares me the most about this upcoming regulation. 

Jamie Diamond several weeks ago asked Ben Bernanke in an 

open hearing, have you given any thought to how all of this regulation is going because you are writing so much of it? Ben Bernanke 

gave a very flippant, off-the-cuff remark that I think he would 

probably regret at this point in time. 

But when I look at the HUD and the good faith estimate, I am 

very frightened for the stuff that is coming out. In the last couple 

of weeks, four banks have trimmed 9,500 people from their payroll 

because, stated fact, the regulation was too great—regulatory burden was too great and they couldn’t afford it. So they have to cut 

costs someplace else. So they get rid of the people that have to 

check into this regulation. Regulatory staff, on the other hand, has 

increased at the United States Government and it is the fastest 

growing part of the United States Government right now. And that 

was given to me by Mr. Spanyer. I have it on page 4 of my testimony. I should have done a PowerPoint on that. But that is actually coming out of the Office of Personnel Management and the Bureau of Labor Statistics. 

So at the end of the day, regulators are growing in numbers. 

Bankers are decreasing in numbers, and we have to take care of 

the same amount of regulatory burden or an increased amount of 

regulatory burden with fewer people. And the Government is sending more people to make sure that we are doing it. It is not a recipe 

for success in my estimation. 

In fact, this regulation—and I will end right here—is so prevalent that the number of emails that I personally get right now from 

the Colorado Bankers Association, the American Bankers Association, the ICBA, the RMA, the ABA, on and on and on, if I read and 

tried to understand every bit of it on a daily basis, it would take 

over 2 hours of my time. I and the rest of the community bankers 

in this country cannot afford to spend a quarter of our time looking 

at proposed regulation trying to understand it, but if we don’t, we 

are in even more trouble. 

Chairman COFFMAN. Mr. Brown, thank you so much for your testimony. 

Our next witness is Jeff Wasden and he is the owner of 

PROformance, a small business here in Colorado. Jeff is a member 

of the South Metro Chamber of Commerce, and I believe you are 

the chairman—am I correct—of the South — 

Mr. WASDEN. Public Policy. 

Chairman COFFMAN. Of the Public Policy Committee in the 

South Metro Chamber of Commerce, and he is filling in for Chamber President John Brackney who could not be here today due to 

a family illness. 

Jeff, I know that you don’t have an opening statement, but I 

would like to give you the opportunity to give opening remarks if 

you would like. 


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STATEMENT OF JEFF WASDEN 

Mr. WASDEN. Thank you, Mr. Coffman. I appreciate the opportunity to be here and I do send out regards and regrets from John 

Brackney. His father is having some health issues. 

I would also like to take a second to thank Mr. Smits, Mr. Davidson, Mr. Brown for their candor and their insight and your expertise in these issues. 

I come with a little bit of unique perspective today as probably 

one of the most recent recipients to capital in the State, having just 

closed on a loan last week, and then certainly as a board member 

for the South Metro Denver Chamber of Commerce and also dealing with the public policy arm of that particular chamber. 

Talking a little bit on behalf of the Chamber and the Chamber 

investors are things that you repeatedly hear over and over from 

fellow investors of that Chamber, not just the access to working 

capital to stay afloat to keep the businesses to meet their weekly 

commitments. But there are opportunities out there and there are 

people that understand the new technologies and the new opportunities that they can do to reconfigure their business, to realign 

their business in new trends and what is out there is equally as 

important, and having that access to that I think Mr. Smits alluded to earlier is equally as important certainly on certainty of the 

regulatory environment. 

The Chamber numbers continue to maintain strong. You lose 

some investors due to various factors with their marketing dollars, 

with businesses closing. But there are people that understand the 

impact and importance of maintaining those relationships, cultivating new relationships, being in an environment and marketing 

their businesses are important to them. 

Unscientifically I think from our business side and who work 

with and then from the Chamber side, I think you are seeing about 

10 percent of the businesses that are thriving in this economy and 

this environment. There is about 20 percent, in my understanding, 

that are slightly up. About 30 percent are basically flat, which 

leaves over 40 percent of the businesses that are basically down or 

struggling on some various level. And I think that is concerning to 

all of us as you sit down and know not only as a Chamber person 

but the people that we work with on a day-to-day basis. 

From our business perspective and how we look at things and 

what we were doing, we had moved into a new location. We expanded to about 2,500 square feet and hired some new employees 

and needed some additional equipment that we now had room to 

place and put there because of those new opportunities, some new 

contracts we have received, some new schools, some different bids 

that we were awarded. It puts you in a difficult position when you 

have the opportunity to grow your business and have that work to 

be able to try and chase the equipment, things to be able to do to 

produce what you ultimately received and were awarded. And I 

think that is where some of that opportunities that people are 

struggling with. There are some carrots out there and people’s access and ability to get that and maintain those have been severely 

limited. 

The term ‘‘uncertainty’’—I think I could say with certainty that 

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ple put blinders on. They are focused on the day-to-day. Yes, they 

are aware that there are these regulatory issues. They are aware 

of the Government and the impacts on these things that are out 

there. They are trying to produce goods. They are trying to produce 

product. They are trying to make sure that they meet the demands 

and timelines of the businesses. They are trying to make sure that 

their employees are paid, that their lights on, their bills are paid. 

And I think that is what they are focused on. I think they hear 

these things about the Government and the regulations and the environments that are out there, but deep down, I think most of those 

are too busy and struggling too much in some ways to pay attention to those. 

You mentioned spending hours a day trying to stay up with those 

things. I think most of these businesses, because of their trade associations who they are involved with, get those same things but 

don’t have the time or ability to research and to study them, to pay 

attention to how those things are impacting their businesses. 

There was a business in our complex where our business resides 

that was doing, on a day-to-day basis, quite well. The problem was 

there were some tax issues and things that were behind and they 

couldn’t catch back up and went to try and get some loans and access to capital to try and take care of some of those past debts because they knew they were poised to continue to be successful. Unfortunately, their doors were shuttered and it is another one of 

those casualties of our State right now. 

So I appreciate the dialogue, appreciate you being here and an 

opportunity to be here to address that. Thank you, Congressman. 

Chairman COFFMAN. Thank you so much, Mr. Wasden. 

Let me just start out with a question for Mr. Smits from the 

SBA. Many banks claim the SBA’s procedures are cumbersome. 

What steps are being taken to further reduce the complexity associated with making an SBA loan? 

Mr. SMITS. It starts with engaging our lending partners. So I had 

mentioned that as we take a look at our policy and procedures, 

what is real barriers to entry and what is perceived barriers of 

entry, by engaging our lenders to communicate to us a possible solution, it adds a level of real-world application and it helps us direct towards what really makes a difference. 

It is interesting. When I was managing a lending department division, my day-to-day involved dealing with real small business 

challenges. You know, the local mechanic on the corner has this 

challenge. How can we make this work? How can we restructure 

this? You felt very engaged to what was happening outside. 

What I have discovered, as I came to work for the Government 

just 10 months ago, is we run the risk of becoming isolated—I call 

it the ‘‘Washington bubble,’’ which you probably are well aware of— 

from real-world application of our programs. It is very easy to identify risks, and it is very easy to create policies and procedures to 

protect against that risk. It is really challenging to take the next 

level and step back and say what risks have I created by creating 

this policy to protect against this risk. Have I quantified? How does 

that play out in the real world? 

And so what I have challenged the team to do is to take that 

extra step, and that extra step often involves having an underVerDate Mar 15 2010 00:38 Jan 07, 2012 Jkt 071291 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\B291.XXX B291

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standing of how this really plays out. And the best thing that we 

can do as an agency is to be very engaged with the banks and the 

small businesses out in the communities to hear the real-world 

challenges that this policy could possibly create. 

So, again, we are looking at all of our programs. We are taking 

a look at what are policies, why do we have these policies, what 

are we protecting against, is there another way to do that. Too 

often in the past, we have said it is simply a matter of making our 

applications or our forms shorter. Well, see, I know that most lenders—you know, TurboTax. So forms aren’t as important as they 

were when I was a young underwriter 20 years ago where I had 

to fill out just hours and hours and hours. There is software now 

that populates a lot of these forms. So making a change to a form 

doesn’t have the impact as maybe taking a look at the process. 

So we have to remind ourselves that when a lender is taking advantage of an SBA loan, for example, the process isn’t just we see 

the loan and we see the application and we work through our guarantee and we issue the guarantee. It starts when the small business owner approaches his or her banker, and it doesn’t end until 

the dollars are funded through a loan closing. So there’s a great 

deal of process that is outside of our scope of vision. The best thing 

that we can do is to be proactive to gain an understanding of the 

entire process and map out to say, Mr. Banker, what do you do 

when you originate a conventional loan, what do you have to do to 

originate an SBA loan, and map out where the differences are. 

There is a reason for some of the differences. There are other 

things we can improve upon. 

And I always say this. When a banker looks and a lending partner makes a decision to participate in our programs, if they are 

going to originate a $100,000 loan, they know they have this much 

resources to put towards the origination and the closing in order 

for that to be a profitable transaction and everybody wins. When 

out of this much resources, this much is for us to—you know, the 

burden from the Government to obtain the guarantee—they are left 

with this much, which is sometimes the most important part of the 

origination, which is the underwriting. Is this small business owner 

positioned for success? Have we looked at the business plan and 

does it make sense? Have we forced our lenders to underwrite towards the Government guarantee as opposed to the success of the 

business? 

So my argument is this is our responsibility as an agency to continue to look for ways and process improvements and efficiencies 

that we can pass on to our lenders so that the small business 

owner has a chance of success, a greater chance of success, because 

we have allowed our bankers and our lending partners to do what 

they do best, which is assess the risk and still be able to make economic sense to originate that. 

Chairman COFFMAN. Thank you. 

SBA’s 2012 budget request that was released in March claims to 

increase the number of participating lenders to 3,000 projected. 

What steps are you taking to meet that goal? 

Mr. SMITS. I will make this comment. My experience with the 

Small Business Administration stretches across 20 years, and I will 

say that I have never seen a time period in my 20-year experience 


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where the agency has been more engaged with their lending partners. As I had mentioned, we saw 1,200 new lenders use our program for the first time in many, many years. A lot of those lenders 

have found it for what we have talked about, managing their capital ratios, the advantages of having a guarantee in order to manage their balance sheets. 

We need to keep those new lending partners in the fold. And that 

is good, old-fashioned customer service. That is providing support 

at the local level. It is providing streamlined and efficiencies as we 

move forward with our programs. It is to make the program accessible and easy for them. And it is good, old-fashioned contact with 

them. It is about making them part of the solution as we look for 

working capital solutions to benefit our small businesses, make 

them part of the process to make thoughtful changes to our programs because then, first of all, there is validation from them. 

They are part of the solution so that they feel some ownership. All 

of that leads towards building a stronger and stable base of our 

lending partners. 

Chairman COFFMAN. You know, we have had a lot of consolidation in the banking industry, and how has that affected your SBA 

loan programs? 

Mr. SMITS. One of the things I also look at is I look at the concentration, you know, good, old-fashioned concentration analysis of 

who is using our programs. And we have seen more communitybased organizations that have gravitated or used our programs. So 

we have seen a shift in community banks using our program. We 

have seen a rise in credit unions to take advantage of our programs. We have seen a decline in some of the finance companies, 

the national finance companies, that focus on the SBA product sets 

as being the primary drivers that use our programs. So we have 

definitely seen a shift in concentration of the makeup, which isn’t 

necessarily a bad thing. 

Chairman COFFMAN. How are SBA loans performing right now, 

and how would you compare that to the private sector? 

Mr. SMITS. I pulled the numbers before I came out here, and surprisingly—the good news is—what I watch closely is delinquency 

because that gives me a real close indication of what is happening 

today. So our 7(a) program, for example, as of June 30th, the current month, the delinquency was about 1.75 percent compared to 

a year ago. It was 3.24. So that is the good news. Our portfolio appears to have turned the corner. It looks like we really turned the 

corner in January of 2010. It has seen a steady improvement in the 

portfolio performance. 

Chairman COFFMAN. Does the SBA communicate with your counterparts in the Fed, in the FDIC, with the Comptroller of the Currency? Could you—— 

Mr. SMITS. So one of the real values to our proactive approach 

to being engaged with our lenders has been that when you start 

to hear the same—you know, when you hear the same concern 

from a banker in Seattle as you do from a banker in Denver, you 

say, okay, there is something here. We need to look at this. And 

it has really helped us. And what we have done is reached out and 

been proactive. We said, well, gosh, we need to be very engaged 

with the FDIC, the OCC for a number of reasons. One, it is an opVerDate Mar 15 2010 00:38 Jan 07, 2012 Jkt 071291 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\B291.XXX B291

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portunity for us to continue to educate. The more touch we have, 

the more opportunity we have to talk to them about business lending and some of the things that we are seeing from our lending 

partners and the nuances and the value of our Government guarantee and our enhancements, it is also an opportunity for them to 

share with us from their perspective. So there is real value to having an ongoing dialogue. 

So the FDIC, for example, we have made some great progress 

where I have been putting the credit groups together with a focus 

on having monthly productive meetings to just discuss what we are 

seeing and what they are seeing. And it all goes back to what I was 

saying, that you need to—you can’t simply look at these regulations 

as an academic exercise. You have to actually take it further and 

look at it as a real-world. So I feel we as an agency—we have a 

real value where we can communicate out to them, and we have 

a very large network of lending partners. And it is an opportunity 

for us to continue to disseminate what we are hearing, and they 

seem very open and perceptive to that. So I am encouraged by that 

progress. 

Chairman COFFMAN. Thank you. 

Well, let me ask some questions of our bankers, Mr. Davidson 

and Mr. Brown. 

The Wall Street Journal recently reported that a banker in Texas 

decided to give up his charter because of the regulatory environment, and I remember reading that story. Is this an isolated story 

or a common concern among bankers? Mr. Davidson. 

Mr. DAVIDSON. It is an isolated story. It is unheard of, Congressman Coffman. However, it tells you how onerous the burden is on 

this bank that he would consider doing it. We can work on some 

pretty nice margins in banking because our cost of funds are relatively low. It is deposit cost basically. He has got to borrow money 

to lend money, and so his margin is going to get squeezed. But he 

has decided that the regulatory burden is too great and it overshadows that margin squeeze. So I think it is indicative at a very 

extreme end of excessive regulation. 

Chairman COFFMAN. Mr. Brown. 

Mr. BROWN. I would absolutely concur with that, Congressman 

Coffman. It didn’t seem to me like the most intelligent choice that 

he could have made on that. I will leave it there. 

Chairman COFFMAN. If you were going to give me your top priority to lower the regulatory burden on banks to allow more small 

business lending, what would that be? What would the top priority 

be? 

Mr. DAVIDSON. If I could, Congressman Coffman, the number one 

request would be that the regulators live according to the rules 

that have been set in the past, the Basel Accord rules, for capital. 

Let me use the excess capital I have generated over these past 3 

years to lend money out to the small business market. Capital is 

the key issue. Capital ratios is the key issue. 

Mr. BROWN. I would concur with that. 

And then in addition to that, the difference between actual regulation and guidance needs to be—you guys need to really take a 

strong look at that because if an examiner happens to be in the 

bank and they make a statement that we would like you to do this, 


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that becomes as strong as regulation. And if you don’t comply with 

what their requests are, it is going to end up causing you a myriad 

of problems in the very near future. And I don’t think that it needs 

to carry as much weight as the actual regulation. 

Chairman COFFMAN. I think you kind of went over this, but if 

you would just—you know, in a very brief statement, how would 

you really bring it down to summarize how the regulatory burden 

has constricted your ability to do small business lending. Would it 

just go back to not complying with the Basel rule? And was that 

the 20 percent, the 10–12 percent issue in terms of—— 

Mr. DAVIDSON. The Basel rules in this case for our bank controls 

risk-based capital. The rule for a well-capitalized bank on total 

risk-based is 10 percent or greater. 

Chairman COFFMAN. Right. 

Mr. DAVIDSON. We have managed our bank to that level, as have 

a lot of community bankers, to maximize the return on equity for 

our shareholders. That rule has changed, and we don’t know what 

the new target is but it is much higher than that. My current total 

capital is over 12.5 percent over the past 3 years in the worst recession that I have ever experienced. I am not getting any credit 

from the regulators. I am getting beat to death because I am not 

up higher. So, yes, I would say capital. 

Ask the regulators to adhere to the rules that were established. 

They are concerned about safety and soundness, and I respect their 

jobs. It is a very difficult job. They do not look at the unintended 

consequences of their actions, and I submit to you the second liquidity crisis that we are in today is the unintended consequence 

of regulators trying to protect the safety and soundness of the 

banking system while at the same time, in my opinion, destroying 

the national economy. 

Chairman COFFMAN. Let me ask you both. Do you think that regulators in a way overreact simply because of the fact—obviously, in 

the free market system, there is always going to be an element of 

risk. There is certainly no incentive for them to keep an institution 

open, but there is every incentive to close an institution in the 

event that down the road something happens to that institution 

and their fingerprints are on a particular audit. Is there any—— 

Mr. BROWN. Oh, yes. I would absolutely agree with that. I think 

that is human nature. If you came in as an examiner to a bank 

you took a look at and something had you feeling just a bit 

squeamish about it and you didn’t bring it up and then 6, 8, 12 

months down the road something happened with that institution, 

that is the first thing that you are going to go back to is whatever 

made you feel squeamish. So from a fear instinct, they aren’t looking at that anymore. If there is something that is even giving them 

the slightest tinge, they are going to go into it at great depth and 

it is going to cost a lot of money for the bank to comply with all 

of those things. And while a couple of those may actually be relevant, there are so many more that simply aren’t. 

Chairman COFFMAN. So your position is, for both of you, that it 

is not simply the troubled institutions that the regulators are coming down on. It is well capitalized institutions. 

Mr. DAVIDSON. It is everyone, absolutely. We are excessively well 

capitalized, and they are coming down on us. 


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Chairman COFFMAN. How would you both in a way quantify, I 

mean, just anecdotally to talk about the increase or decrease in 

loan demand—or I suppose it is a decrease—over the last 2 years? 

Mr. DAVIDSON. The loan demand has decreased over the last couple of years. 

Chairman COFFMAN. Okay. 

Mr. DAVIDSON. There is a triumvirate here. We stopped lending 

because of the regulatory environment. They stopped asking for 

money because we stopped lending I think. Mr. Brown may disagree with that. 

But there is certainly a lower demand but there are still loans 

out there. I am making loans right now, much to the chagrin of my 

regulators, because I have to maintain my net interest margin. So 

we are trying to work around a regulatory environment that 

shouldn’t be there today. 

One other point, if I could make, Congressman Coffman. Right 

now, the requirement of the banking regulators is to promote the 

safety and soundness of the banking system. It is a respectable 

goal. But if you were able to include to promote credit availability 

under the guidelines of safety and soundness, then they might be 

modified. They might modify their actions and understand there is 

another element here. They are shutting down lending. They don’t 

care about lending. They don’t care about—and that is not their 

job. I understand that. They should and I think it has come to the 

point where the legislators, the gentlemen in Congress and the 

Senate, have to step up to protect the banking system from this 

egregious overreaction by the regulatory agencies. So I would like 

to say—and I will give the credit to Don Childers with the CBA. 

I would like to have you say their job is to promote credit availability within the safety and soundness guidelines. 

Chairman COFFMAN. Okay. 

Mr. Brown. 

Mr. BROWN. I agree that the regulatory burden has a measure 

of an effect on what is happening in lending right now. The bank 

that I am at—we bought it in—the group that I am with bought 

it May of 2010. And at the outset, we had such a small loan-to-deposit ratio that the only thing we can do is lend. So we have been 

very active. And there’s really not as much loan activity that is out 

there that the general public would expect that you would see. 

In my estimation, regulation certainly has an effect on the limitation of availability of credit, but the economic environment has 

a very strong role to play in that right now. Again, we are coming 

out of a recession as slowly as I have ever seen a recession crawled 

out of. And the companies that have survived it—their balance 

sheets are weaker than they were. Their profitability is weaker 

than it was, and many of them simply aren’t good candidates to receive credit. As much as I hate to say that, it happens to be true. 

And then on top of that, the third layer that I look at is the fear 

perception. The stock market moves on perception. It isn’t moving 

on reality. The entire world right now, I believe, is moving on perception. And with all of the negative forces that we have going economically right now, the companies that have weathered it that do 

have a good balance sheet and could look at it, I don’t know that 

they are necessarily looking to borrow a lot of money. I have asked 


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the same question a hundred times to a lot of different people. If 

I gave you $1 million right this minute and asked you to return 

8.5 percent to me within a year, what would you do with the $1 

million? In the last 4 years, I haven’t had a good answer. 

Chairman COFFMAN. So, Mr. Davidson, let me, if I can sum—because I believe, Mr. Brown, you agree with. The regulatory framework today does not take into account anything about preserving 

lending. It is all about reducing risk. And the optimistic goal, the 

idealistic goal would be no risk. 

So how did you frame that then again? So what you are doing 

is you are going in and changing in a way that the mission statement of the regulators to add a dimension to it. How would you define that dimension again? 

Mr. DAVIDSON. Yes, sir. The dimension I would add is that they 

need to promote credit availability within the guidance of safety 

and soundness. Life does not exist without risk. I know that certain 

individuals have a higher tolerance for risk than others. Those individuals that are perceived to have a higher tolerance are probably the people that start the businesses. I think we could conclude 

that. Bankers don’t like risk. We don’t have a big enough margin 

for it. But we do take some risks. Regulators in my opinion have 

no tolerance for risk and don’t understand the risk that we feel 

that we understand. And I think we have done a pretty good job 

managing that risk. 

You can’t make a system totally without risk. Life is risk. Business is risk. It is managing that risk that makes the difference. 

But the regulators have now taken away our ability to manage our 

bank to a business standard for the benefit of our shareholders and 

our borrowers, and now we run our bank to a regulatory standard. 

It is extremely difficult. And that regulatory standard changes with 

every examination. There is no hard and fast rules. The rules that 

we used to live by are gone. I have never seen that in 30 years. 

My chief financial officer, John Phillips, and Nick Lepetsos, my 

president, who helped me put together this presentation—in their 

combined 50 years’ experience in banking—and I can say John was 

in Texas in the 1980s during the oil crisis and, in fact, helped Continental Illinois try to work out of their issues that caused the 

whole issue. That is what he saw at ground zero. And he says this 

is nothing like what it was back then. It was bad back then. This 

is beyond the pale. It is indescribable. 

Chairman COFFMAN. The final question, and that is, so if we 

were going to go back—so you believe that the risk-based capital 

standards prior to 2009 were adequate. 

Mr. DAVIDSON. Yes. The Basel rules are certainly adequate. Absolutely. 

Chairman COFFMAN. Mr. Wasden, in your view being a small 

business owner and a Chamber member, how high is access to capital on the list of things your membership is struggling with? 

Mr. WASDEN. I want to address that after I let Mr. Brown know 

I want to be the recipient of that $1 million challenge you are 

throwing out there. I would like to take a shot at that. [Laughter.] 

You know, you brought up the question about loan demand, and 

I think using the analogy of running into the wall, running into the 

wall, at some point you stop running into the wall. And so there 


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are certainly going to be some businesses out there that have 

asked, that have gone to the banks that have opened the doors to 

try and have those conversations that have been turned down on 

that and then stopped doing that. 

I think what is happening, Congressman, is we are being forced 

to evaluate your aspects of your business, how to run more efficiently, how to trim fat, how to shed waste, to re-function where 

your business is, what your core strengths are, what your market 

will tolerate, where your business plan is heading. And I agree 

with Mr. Brown there. There are certain people—and it is hard 

from, I think, a business perspective from a Chamber that they 

have someone that comes in that wants to be a business coach, a 

life coach. You have someone that wants to come in and open a 

martial arts studio, and that is all they know about and that is 

what they are good at and they are passionate about it and they 

know how to run that. It does not make them necessarily a great 

risk in saying that this is somebody that we want to lend money 

to. And so I think part of the challenge from the Chamber’s standpoint and some of these organizations is to try and help them 

through that and look at those challenges and those opportunities 

that are out there so they can see that so we can better prepare 

them to go and open that door to try and make them a better recipient of those cash and funds that are available that banks clearly are wanting to lend. 

Chairman COFFMAN. So what do you think is the biggest factor 

for small businesses in this area when deciding to hire an additional employee? 

Mr. WASDEN. I appreciate that question. Actually our president 

and CEO did make it back in here. So if he has any insight and 

there is time for that, I would certainly like to recognize John 

Brackney who is here and who might be more suited to answer 

some of those questions. 

But I think as you are sitting there and you are talking about 

hiring or expanding or purchasing new equipment, you are looking, 

Congressman, at a couple of factors. You are looking at your bottom line. You are looking at what is out there as far as your markets or past history. We came into a very unique situation in our 

business, but believe it or not, we have had six straight record 

years of sales in our company. I know that is kind of an unheard 

of thing, but we have reevaluated. We have opened up a fire and 

safety division that didn’t exist previously. And you find niches. 

You find roles. You look for opportunities that are there. 

When we look at that impression of hiring and it comes down to 

very simple—I spent till 1:30 on Thursday night, until 3:30 on Friday night not with my wife, not on a great date night, but doing 

football jerseys in preparation for. Could we hire more staff to do 

those? Certainly but then it comes out of your bottom line. Then 

you are worrying about being able to make payroll. And so you are 

constantly chasing that tail of going back and doing those things 

yourself as owners and spending that time versus what are the 

costs of hiring additional staff to take on those burdens and those 

times to do those. 


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Chairman COFFMAN. For you and your fellow members of the 

South Metro Chamber, what do you think is the outlook in terms 

of hiring over the next 6 months? 

Mr. WASDEN. I don’t see a lot of businesses within the Chamber—and John, certainly you can correct this statement—that are 

looking at hiring and expanding as a great percentage. And I mentioned that before. I think you have got 10–15 percent that are 

thriving, that are doing well in this economy, that are growing and 

hiring today. I think the rest are sitting on their hands and being 

very cautious and very concerned about the uncertainty that exists 

out there and are probably not going to leap at that opportunity. 

Chairman COFFMAN. So for businesses that are looking for additional capital, what do you think their biggest impediment is to 

getting a loan? 

Mr. WASDEN. I think it is creating that business plan, that opportunity that comes to let them know that you have thought about 

this, that you are a safe risk, that you have the ability to make 

good those loans. And I think that is certainly something that they 

have to understand going forward. And I think certainly Chambers—and we have within our South Metro Denver Chamber the 

small business center that is there. I think it is understanding how 

to proceed with those business plans and how to go to a bank. I 

think a lot come in there and say, look, I need money, I need 

money, but don’t necessarily take the steps and the plans and the 

thought process to generate that plan to make them a safe investment. 

Chairman COFFMAN. Well, I just want to thank you all so much 

for your testimony, for coming today. I think it was very insightful 

for me as a subcommittee chairman in the Small Business Committee to certainly take your comments back and make some 

changes I think that need to be made and I will certainly work 

with my colleagues on other committees of reference in the Congress such as the Financial Services Committee to make some of 

these changes a reality I think that we talked about today that are 

hurting, I think, access to credit in the United States for small 

businesses. 

Now that the questions are completed, I would like to again 

thank the folks here at Greenwood Village. Thank you, Mayor 

Rakowsky, and your staff for hosting us and for all of our witnesses 

that were here today testifying. I know you are busy. So I appreciate your taking the time out of your schedules to share your 

views with us. 

Small businesses will lead our economic recovery. So we need to 

do everything we can to make sure that they have the capital necessary to grow and create jobs. It is not every day that we can hold 

hearings outside of Washington. So I am pleased that we were able 

to have local witnesses testify about what is going on in this area 

in the 6th Congressional District. We heard today about some of 

the problems that bank regulators are causing, as we work to get 

money into the hands of our Nation’s job creators. We will make 

sure that the Committee of Small Because follows up with banking 

regulators so they know what is going on outside of Washington. 


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Mr. Smits, I want to thank you so much for your testimony 

today. I really appreciate all that you do to help small businesses 

in this country. 

Mr. Davidson, God bless you for all you do. And I know these are 

tough times, and I really appreciate what you do. 

Mr. Brown, a great job again. And I just want to thank you for 

all you do. Stick with it. I know it is tough. And thank you. 

Mr. Wasden, as a former small business owner myself, I know 

how tough it is. It is a matter of surviving these tough economic 

times and holding on to the employees you got. But if you can create some more, I would certainly appreciate that. 

And I thank everybody else for coming today. This has been extremely helpful and very insightful in terms of, I think, making a 

difference to get this economy moving again. Thank you. 

The Committee is adjourned. The hearing is adjourned. 

[Whereupon, at 11:38 a.m., the subcommittee was adjourned.] 


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