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S. HRG. 111–413 

RESTORING CREDIT TO MANUFACTURERS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC POLICY 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING WHAT POLICIES CONGRESS SHOULD CONSIDER TO HELP 

RESTORE CREDIT TO U.S. MANUFACTURERS 

OCTOBER 9, 2009 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON ECONOMIC POLICY

SHERROD BROWN, Ohio, Chairman 

JIM DEMINT, South Carolina, Ranking Republican Member 

JON TESTER, Montana 

JEFF MERKLEY, Oregon 

CHRISTOPHER J. DODD, Connecticut 

CHRIS SLEVIN, Staff Director 

PATRICK BROWN, Professional Staff Member 

NEAL ORRINGER, Professional Staff Member 

(II)
C O N T E N T S 

FRIDAY, OCTOBER 9, 2009 

Page 

Opening statement of Chairman Brown ................................................................ 1 

Prepared statement .......................................................................................... 20 

WITNESSES 

David Andrea, Vice President, Industry Analysis and Economics, Original 

Equipment Suppliers Association, Motor and Equipment Manufacturers 

Association ..................................................................................................... 3 

Prepared statement ................................................................................... 20 

Robert C. Kiener, Director of Member Outreach, Precision Machined 

Products Association ..................................................................................... 5 

Prepared statement ................................................................................... 55 

Stephen P. Wilson, Chairman and Chief Executive Officer, LCNB 

National Bank, on behalf of the American Bankers Association .............. 7 

Prepared statement ................................................................................... 57 

(III)

(1) 

RESTORING CREDIT TO MANUFACTURERS 

FRIDAY, OCTOBER 9, 2009 

U.S. SENATE, SUBCOMMITTEE ON ECONOMIC POLICY, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 9:34 a.m., in room SD–538, Dirksen 

Senate Office Building, Senator Sherrod Brown (Chairman of the 

Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN SHERROD BROWN 

Chairman BROWN. This hearing of the Economic Policy Subcommittee of the Senate Banking Committee will come to order. 

This is the fourth in a series of hearings on the challenges facing 

America’s manufacturing, one of the most important parts of our 

economy, as we know. 

Our manufacturing sector, let us face it, is in crisis. While key 

productivity indicators have shown recent signs of growth, both 

manufacturing output and employment have dropped precipitously, 

as we know too well, over the past year. We must act now to move 

from continuous erosion to consistent expansion because U.S. manufacturing is not optional for our country. It is indispensable. 

As manufacturing goes, so go our national security, our global 

economic leadership, our stability as a democracy. Our democratic 

Nation needs a strong, stable middle class, and a stable middle 

class needs manufacturing jobs. 

Manufacturing equips our military and accounts for 12 percent 

of U.S. gross domestic product. That is $1.6 trillion. It generates 

nearly three-fourths of the Nation’s research and development. It 

employs 12 million Americans. Compromised access to credit is the 

newest threat to American manufacturing. It is not a minor problem. It is a major concern. 

As one manufacturer I spoke with put it, ‘‘Credit makes this 

country great.’’ But the credit stream has slowed to a trickle. The 

Federal Reserve Board’s flow of funds accounts have shown a consistent reduction in net lending to manufacturing sectors. Every 

day there are more small and medium-sized manufacturers, like 

those in Ohio, at risk of going out of business because they cannot 

get the loans they need. 

For manufacturers in the auto supply chain, the struggle to find 

a lender is even tougher. I heard from one Ohio manufacturer who 

has been in business 25 years and has had access to credit through 

a trusted lender. The manufacturer has a strong credit history. The 

bank recently capped its credit line at $5 million because a percent-
2 

age of their business involves auto supply components. Almost 100 

percent of the manufacturer’s customers pay their invoices within 

60 days. The company feels penalized in spite of the fact that they 

have a strong record. 

To be clear, this hearing will not be about vilifying banks or anyone else. I realize some banks are only just beginning to rebound 

from the financial meltdown and are concerned about taking on too 

much risk. We have the problem also of the frozen debt 

securitization markets, which allow banks to repackage loans and 

sell them to investors. Banks and bankers are finding it increasingly difficult to repackage their loans to free up capital. 

This problem of access to credit is, unfortunately, not unique to 

Ohio and Michigan and Indiana and other manufacturing States. 

As I mentioned, the goal of this hearing is not to lay blame on anyone’s doorstep. Given the harsh economic conditions we face, we 

have an opportunity to take stock of where manufacturers and 

lenders are. 

Despite the challenges I have outlined, we must find a way to get 

credit flowing again. In that vein, I hope this hearing helps us answer the following questions: Are there signals that show credit is 

easing? How have steps the Administration has taken worked, and 

how have they evolved? What new mechanisms should Congress 

and the Administration consider to bridge the gap? 

I look forward to the testimony of our witnesses. I will introduce 

each of the three of you and take as long as you need on your opening statements. I will ask questions of all of you, and we will proceed. 

I will start with David Andrea, Vice President of Industry Analysis and Economics of the Original Equipment Suppliers Association in Michigan. The Original Equipment Suppliers Association 

represents suppliers of components, modules, systems, materials, 

equipment, and services used by the original equipment automotive 

industry. The association represents 353 companies with global 

sales of more than $300 billion. Before joining OESA as Vice President 5 years ago, Mr. Andrea was the chief financial officer at the 

Center of Automotive Research. Over the past 20 years, he has 

been director of forecasting for several financial companies. In his 

position as OESA, Mr. Andrea is responsible for coordinating research with outside consulting firms and other special projects. 

Robert Kiener is Director of Member Outreach of Precision Machined Products Association in Brecksville, Ohio. Mr. Kiener has 

been on the staff of the Precision Machines Products Association 

since February 1991. His primary duties with the association include membership development, recruitment, retention, and member communications. In his current capacity as Director of Member 

Outreach, he visits regularly with the association’s 500 member 

companies across the U.S., companies which manufacture highly 

engineered precision machine parts. Mr. Kiener has daily interaction with owners and senior managers from small to mediumsized domestic manufacturers. 

Stephen Wilson is Chairman and CEO of LCNB National Bank 

in Lebanon, Ohio. Mr. Wilson has been active within the financial 

service industry, having served in various capacities with the 

American Bankers Association, the Ohio Bankers League, the 
3 

American Institute of Banking, and the Bank Administration Institute. Mr. Wilson has served as a board member of the Federal Reserve Bank of Cleveland; Chairman of the Advisory Board for 

Miami University in Middletown, Ohio, of which he is a graduate; 

Vice Chair of the Warren County Port Authority in southwest Ohio; 

and various charitable and civic organizations. 

Mr. Andrea, your testimony, please. Welcome, all of you. Thank 

you. 

STATEMENT OF DAVID ANDREA, VICE PRESIDENT, INDUSTRY 

ANALYSIS AND ECONOMICS, ORIGINAL EQUIPMENT SUPPLIERS ASSOCIATION, MOTOR AND EQUIPMENT MANUFACTURERS ASSOCIATION 

Mr. ANDREA. Thank you, and good morning, Mr. Chairman. I 

want to thank you for the opportunity to discuss the automotive 

supplier industry and the availability of credit. My name is David 

Andrea, and I am Vice President for Industry Analysis and Economics for the Original Equipment Suppliers Association, an affiliate of the Motor and Equipment Manufacturers Association, and 

I am testifying on behalf of both of those associations today. 

Motor vehicle parts suppliers are the Nation’s largest manufacturing sector, directly employing over 685,000 U.S. workers and 

contributing to over 3.2 million jobs across the country. Suppliers 

produce two-thirds of the value of today’s vehicles and contribute 

nearly 30 percent of the total automotive research and development 

investment. 

Over the past 10 months, significant and unprecedented Government and industry actions have prevented a collapse of the U.S. 

auto industry. However, future expansion, employment, economic 

contributions and structural viability of the supply base are all dependent upon continued access to credit at reasonable terms. 

Without a doubt, the U.S. Treasury Auto Supplier Support Program and the way the U.S. Government handled the bankruptcies 

of General Motors and Chrysler helped avert a potential implosion 

of the supply base. However, ongoing with the bankruptcy, past the 

bankruptcies, as well as the Treasury support program failed to 

improve ongoing access to traditional sources of capital for the vast 

majority of the supply base. 

Even though suppliers have dramatically reduced every element 

of their working capital requirements from payroll to raw material 

inventories, they continue to require a significant cash cushion, and 

that requires ongoing access to credit. In the short term, constrained lending to the auto suppliers is showing up in an inordinate effort to keep the supply base running as production increases. In the long term, a growing number of our members are 

reporting investment challenges, including required research and 

development, restructuring, productivity enhancements, and business expansion strategies. Both these short-term and longer-term 

capital constraints will play themselves out in the ability or inability of the U.S. to support a globally competitive and productive 

auto industry. 

According to the September 2009 OESA Automotive Supplier Barometer Survey, a survey of our members, the majority of all respondents over the past 3 months have not seen a significant im-
4 

provement in lending practices. Smaller suppliers actually report 

they face even tighter terms. Lending is constricted due to the continued inherent risks in the industry, even though we are on the 

other side of the GM and Chrysler bankruptcies, but, as well, indiscriminate restrictions on lending by the banks. 

In 2010, we expect ongoing company failures as the industry continues to operate at low, albeit increasing, production volumes. Although much of this is to be expected in an industry in transition, 

adequate capital is necessary to restructure and consolidate the industry in a rational, effective manner. 

In order to help restore lending throughout the entire supply 

chain, MEMA and OESA believe that Congress and the Administration should focus on three key areas. The first is on general 

lending. 

Given low production volumes and the valuations of industry assets, many loans to viable suppliers are, in the short term, ‘‘out of 

formula’’ for banks to consider. One solution that has merit is to 

scale the Michigan Supplier Diversification Fund up to a national 

level. While we believe the current definitions in this program may 

be too restrictive to assist all of our members, we do believe, along 

with several bankers that we have spoken with, that this program 

could be one way to reengage the banks with the industry. 

The second area would be to focus on small suppliers down 

through the supply chain. A steady access to lines of credit and 

asset-backed loans is essential for the survival of the supply base. 

The Small Business Administration’s 7(a) loan guarantee program 

is limited to $2 million. Given the scale that the auto industry operates on, this limit is too low to help many even smaller suppliers. 

A recent OESA survey indicated that a $3.5 to $10 million limit 

would be more helpful for the auto supplier sector. Because of these 

requirements, actually the recent changes to the SBA program 

have not assisted auto suppliers. 

The third area we would focus on is technology funding. The 

technology needs for the auto industry require significant investment in research and development and retooling existing facilities 

to compete against global competition. 

MEMA and OESA support S. 1617, the IMPACT Act, that is currently under consideration, and H.R. 3246, the Advanced Vehicle 

Technology Act, which has passed the House. These bills will provide greater Federal funding for essential technology innovation 

and U.S. manufacturing capability. 

In conclusion, the industry does not come before you today requesting a bailout. We understand and support the need to consolidate the industry. However, we believe that without sufficient capital to provide a stable environment to restructure from, the industry and its employees will witness unnecessary disruptions. Without assistance, this country will needlessly lose manufacturing capability and capacity, technology development, and jobs. 

Thank you. 

Chairman BROWN. Thank you, Mr. Andrea. 

Mr. Kiener, thank you. 
5 

STATEMENT OF ROBERT C. KIENER, DIRECTOR OF MEMBER 

OUTREACH, PRECISION MACHINED PRODUCTS ASSOCIATION 

Mr. KIENER. Chairman Brown, Ranking Member DeMint, and 

the Subcommittee, thank you for the opportunity to testify today. 

My name is Rob Kiener. I have been with the Precision Machined 

Products Association for 18 years working for and with domestic 

manufacturing, producing highly engineered components for the defense, medical, automotive, and agriculture industries, among others. 

Many small and medium-sized manufacturers began experiencing challenges accessing credit in October 2008 and now are 

often trapped between the troubles of their much larger customers 

and lenders. Today many companies in our industry report their 

business is down roughly 40 percent and that they have significantly reduced their workforce as they struggle to secure adequate 

and timely access to credit, despite most having decades-long relationships with their banks and a history of profitability. 

Today, even when a manufacturer seeks to renew a loan with its 

existing bank, it can take 3 to 4 months to process the loan based 

on new lending requirements and the paperwork to complete, a 

process that took no more than 30 days in the past. In our industry, manufacturers are expected to deliver products just in time. 

Any delays can cause significant disruption in our Nation’s critical 

supply chain, including emerging green industries, thus stifling 

economic growth and risking national security. If our customers 

cannot receive the products they need due to the credit crisis, they 

will source from overseas, and these lost jobs will never come back 

to the United States. 

For example, a company was recently asked to leave their bank 

despite not violating loan terms over a 23-year relationship simply 

because they were reducing their exposure in manufacturing and 

automotive industries—this despite the lender receiving TARP 

funding. 

Last evening, as I prepared the testimony, I received a call from 

a PMPA member who recently completed a major acquisition to 

support their ongoing operations as a domestic manufacturer. To 

secure the necessary funding to make this acquisition possible and 

keep their business globally competitive, this member was forced to 

seek financing in Germany since they could not access the required 

financing in the United States as a small manufacturer in the current lending environment. Despite having well-established relationships with two major lending institutions and a strong record of 

profitability, this member was forced to go offshore to find the required financing to support their operations. 

As the economy picks up, will manufacturers be able to secure 

the capital required to invest in employees, equipment, and raw 

materials? If not, there is no doubt in my mind that we will lose 

those jobs to overseas manufacturers. While the Federal Government is urging manufacturers to diversify into green industries 

without adequate and timely access to capital, companies cannot 

make this investment and transition, which will only further China’s goal of producing 90 percent of the world’s solar panels. 

We already see companies trying to expand their operations due 

to consolidation in the industry who are not able to access capital 
6 

to fill job orders, purchase raw materials and machinery, and hire 

workers. The Cash for Clunkers program is a perfect example of 

the challenges ahead. As dealers and automotive manufacturers 

have depleted their inventories, they are looking to suppliers to increase their output. 

To simply blame the banks is not an accurate representation of 

the current crisis. Many lenders fear having their rating level reduced by Federal regulators, due in part to manufacturing loans on 

their books. This scenario is extremely troubling. In these economic 

times, the Federal Government’s policies should not create an environment in which manufacturers struggle to access adequate and 

timely credit. 

We must reassure financial institutions that returning to sound 

lending practices with manufacturers is good for their business and 

critical for the country. Many are simply temporarily impaired, but 

have a long history of profitability, do not break loan covenants, 

and maintain steady relationships with their lenders. These manufacturers struggle today through no fault of their own but because 

they are in the manufacturing business. 

We believe the Administration has the authority to work with 

creditors and borrowers to establish a mechanism by which lenders 

can loan to manufacturers without fear of a reduced credit rating. 

In addition, the Department of Treasury, through existing loan facility funds, should reassure the financial institutions that lending 

to small and medium-sized manufacturers will deliver a return on 

investment through a public–private guarantee of loans or accounts 

receivable program. 

Many small and medium-sized manufacturers need a return to 

traditional lending, while other companies and lenders require reassurance that their customers will pay their outstanding accounts 

receivable. With this Committee’s leadership, we are working with 

the Department of Commerce and members of the Administration 

on such proposals. 

Policymakers place much emphasis on the Small Business Administration as the primary solution to the credit crisis facing 

small and medium-sized manufacturers. However, at a meeting in 

Michigan with manufacturers, they were told in June 2009 by the 

head of the SBA in Michigan that no banks will lend to automotive 

suppliers under current SBA programs. In the current environment, lenders do not believe manufacturers are bankable, even 

under a 90-percent Government guarantee program. The Michigan 

example aside, our members report additional challenges with SBA 

programs. Most manufacturers cannot put forth the personal guarantee under SBA programs which may require their family home 

and children’s assets to secure a loan. More than 70 percent of 

manufacturers are family owned companies, meaning it is the family that must provide the guarantee; whereas, the a traditional C 

Corporation will not face similar burdens. Yet another example of 

discrimination against small manufacturers. 

Mr. Chairman, we must all work together—lenders, manufacturers, and the Government—to ensure that we foster an environment 

that encourages manufacturing in America. We must remove disincentives for lenders to invest in small and medium-sized businesses. If these trends continue, stimulus projects will go 
7 

unfulfilled, inventories will not rebound, and medical and defense 

supplies will not reach our citizens and soldiers. 

Thank you for the opportunity to testify before you today, and I 

look forward to continuing to work with you to strengthen manufacturing in America. 

Chairman BROWN. Thank you very much, Mr. Kiener. 

Mr. Wilson, please proceed. Welcome again. Thanks. 

STATEMENT OF STEPHEN P. WILSON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, LCNB NATIONAL BANK, ON BEHALF 

OF THE AMERICAN BANKERS ASSOCIATION 

Mr. WILSON. Thank you, Chairman Brown. My name is Stephen 

Wilson, Chairman and CEO of LCNB National Bank in Lebanon, 

Ohio. I am pleased to be here today on behalf of the American 

Bankers Association to share our view on the impact this recession 

is having on lending to small and medium-sized manufacturers. 

Small businesses of all kinds—including banks—are certainly 

suffering from the severe downturn. This is not the first recession 

that faces many banks. My bank has survived several economic ups 

and downs in its 132 years of existence, and we are not alone. In 

fact, there are more than 2,500 banks—or 31 percent of the banking industry—that have been in business for more than a century. 

These numbers tell a dramatic story about the staying power of 

banks and their commitment to the communities that they serve. 

We cannot be successful without such long-term philosophy and 

without treating our customers fairly. 

As you know, Mr. Chairman, in my area of Ohio, three plant closures alone have recently taken place, which have eliminated over 

13,000 jobs. This will have a sharp impact on our region. The automobile supply chain has been particularly hard hit in Ohio, Michigan, and neighboring States. The problems with the large auto 

companies, together with the loss of income and wealth by consumers, have dealt a particularly hard blow to the suppliers. Many 

of them have lowered production and slimmed down to wait out the 

storm; others have retooled in order to create parts for other industries. The economic downturn has also affected the value of their 

collateral. This double whammy of severely decreased cash-flows 

and low collateral values has made borrowing difficult to find, especially without established relationships with lenders. 

We recognize that there are some consumers and businesses 

today that are not getting the credit they have asked for. However, 

sometimes the best answer for our customer is no. It does not make 

sense for a borrower to take on more debt that would be difficult 

of impossible to repay. 

I will give you an example. We had a customer whom we turned 

down on an application for a loan. The reaction was as you would 

think. The customer was frustrated, the customer was angry, the 

customer left our bank. I recently received an e-mail that he sent 

to say that he should not have been granted the credit and that 

he is coming back to our bank. He said that if he would have accepted our ‘‘no’’ response instead of looking elsewhere, he would be 

in much better financial shape now. 

He moved back to our bank, he said, because he appreciates the 

fact that when we underwrite loans, we are concerned about the 
8 

success of the customer and whether the loan makes sense for 

them or not. 

Let me be very clear here. Even in a weak economy, there are 

very strong borrowers. Every bank in this country is working hard 

to ensure that our customers, particularly the small businesses 

that are our neighbors and are the lifeblood of our communities, 

get the credit that they deserve. 

Our effort to make loans is made more difficult by regulatory 

pressures which exacerbate rather than mitigate the problems. For 

example, because of worsening conditions in many markets, examiners often insist that the bank ask for more capital or more collateral from already stressed borrowers. These steps can set in motion 

a death spiral where the borrower has to sell assets at fire-sale 

prices to raise the necessary cash, which then drops the comparable sales figures that appraisers pick up, which lowers the 

market values of their other assets, which then increases the 

writedowns the lenders have to take on, and so on and so on. Thus, 

well-intentioned efforts to address problems can have an unintended consequence of making things quite worse. 

What regulators want is what the industry wants: a strong and 

safe banking system. Providing a regulatory environment that renews lines of credits to small businesses is vital to the economic 

recovery in communities large and small across this Nation. 

Mr. Chairman, I thank you for this opportunity to testify, and I 

would be happy to answer any questions. 

Chairman BROWN. Thank you very much, Mr. Wilson. Thank you 

for your perspective and your service to our country and to our 

communities. 

Mr. Andrea, talk to us more about the Michigan Supplier Diversified Fund. Is it large enough or are the loans they are making 

large enough? How does this reduce risk among lenders? Talk to 

me about that. Do you think that is a model we can follow? Discuss 

it more with us. 

Mr. ANDREA. Within the State of Michigan, we appropriate $12 

million for this, I would call it a pilot program. In Mr. Kiener’s testimony, as he said, to be able to diversify into these clean energy 

technology areas, you have to have a viable supply base to transition in. So that is what this fund is for. 

The fund really looks at three purposes. The first—and picking 

up on some of the issues that Mr. Wilson had in his testimony as 

well. The first is collateral shortfall. So for an asset-backed loan, 

if the bank checks off all the other boxes that it is a viable supplier 

but the collateral is under shortfall that makes it out of formula, 

public funds would come into the loan at a maximum level of 49 

percent of the loan. 

The second area would be in a cash-flow shortfall, so because of 

the reduction in production, if a bank would see that a supplier 

may not be able to meet its interest expense obligations, again, this 

fund could purchase that loan or supplement the cash-flows in that 

purchase. 

The third element of the fund was really to create a public–private mezzanine fund to help restructure the industry as well. The $12 million I believe have already been committed for in 

terms of the loans that have been applied. Several national banks 
9 

have participated in the program with suppliers, and they all mentioned that they would not have made these loans had those public 

funds not been available in a public–private partnership that way. 

Chairman BROWN. What can SBA learn from Michigan’s experience? 

Mr. ANDREA. I think this could have a—if we could create Federal funds that could ramp this up, because, again, it is only $12 

million, but at least the mechanism seems to work—seemed to 

work, that through—maybe it is through SBA that a type of loan 

enhancement program might be an ongoing solution, not just even 

for the short-term crisis here, but I think on an ongoing way that 

could help support manufacturing going forward. 

Chairman BROWN. The three things that your association urges 

Congress and the Administration to do, the third is to create—the 

first two, assure sufficient capital for restructuring, consolidating, 

diversifying the industry; second was address the specific needs of 

the smallest suppliers in the auto or other manufacturing supply 

chain; the third was technology programs. Expand on your ideas of 

creating technology funding programs, if you would. 

Mr. ANDREA. Sure. There I would look at it from almost a funded 

mandate, if you will. As you look at the CAFE requirements that 

are in front of the industry and the need to reinvest to meet the 

Corporate Average Fuel Economy provisions, as well as the investment and considerable retooling that is required for hybrid technologies and fuel cells way off into the future. 

Here I think the two bills that we are looking at I think are positive from a couple of different perspectives. One is they provide direct grants to these suppliers. They also enhance loans as well. 

And they also provide it through public–private partnerships as 

well that way. So those are the elements. 

I think that the positive things that we have seen in the bills is 

that, in addition to identifying the longer-term technology investments that the industry needs, they also allow the supply base— 

or they also allow funding into the supply base for the short-term 

current needs that we need to get in place, again, for the Corporate 

Average Fuel Economy laws that are on the books right now that 

we have to retool for. 

In the supplier industry, it takes at least 18 to 24 months to put 

any of these new programs in place, and one of the other elements 

that was not brought up earlier that is a hurdle for the supply base 

here is for tooling investment. The traditional way that the auto 

industry pays for tooling is that that is on the supplier’s back funding for until those programs go into production. So, again, the Federal funding coming into these new technologies I think would help 

in that element as well, because that also adds risk to the banks 

as these suppliers take on those types of capital requirements for 

a program that may be 2 years from now and we truly do not know 

how the volumes will come out. 

Chairman BROWN. Thank you, Mr. Andrea. More for you in a moment, too. 

Mr. Kiener, you said in your testimony, ‘‘Cash for Clunkers is a 

perfect example of the challenges ahead.’’ Would you explain what 

you mean by that? 
10 

Mr. KIENER. Well, just the fact that through the Cash for 

Clunkers program, essentially I think what we saw was taking, you 

know, current inventory loads that were there, going through 

those, going through that production very quickly, and then having 

to startup—what would happen was, for many, many months, obviously, the automobiles were sitting there. The program helped get 

them out, helped the vehicles be purchased. But at the same time, 

our members needed to ramp up for the production. 

Once those vehicles went through and they needed to rebuild the 

inventory—prior to that they did not have access to the capital. 

Now all of a sudden they need to purchase tooling that was 

brought up. They need to purchase additional pieces of equipment 

to fill those orders. And all this additional capital required was— 

I would not say unanticipated, but it certainly presents challenges 

for the companies of our association. 

Chairman BROWN. Was the success of the program, success in 

terms of number of sales and speed at which the cars were sold— 

I guess that is one definition of ‘‘success.’’ That came as a bit of a— 

the suppliers were in some sense unprepared for that? Not to 

blame them for that, necessarily. 

Mr. KIENER. No, no, absolutely not. I would not say that. To answer this question correctly, I would need to have better information at this time, and perhaps I would turn it over to my friend 

here who is a little bit better versed in that area. 

Chairman BROWN. OK. Do you want to comment, Mr. Andrea? 

Mr. ANDREA. If you look from the second half of the year to the 

first half of the year, our production numbers are going to be up 

about 42 percent for the North American industry overall that the 

supply base ships into. And if you look at any of the analysts’ reports, inventories are a green light. Production right now is a green 

light. But, still, sales, ongoing sales, are still a red light in terms 

of uncertainty. So we do not know how much of this will be carried 

over into 2010 or how much of this will just be to buildup inventory 

short term and then the industry will go down. 

But in terms of for the supply base, our members describe themselves as going into hibernation over the last 6 to 8 months. They 

took out all of the workforce that they possible could, all of the inventories in the system, and so now as you get these production 

schedules coming back up, all the way back to the steel mills who 

are operating themselves at 35 or 40 percent capacity utilization at 

that time, needs to ramp back up to these higher levels. And that 

is the situation we are in right now. 

Chairman BROWN. Thank you. One more question, Mr. Kiener, 

and then I will move on to Mr. Wilson. Mr. Andrea mentioned S. 

1617, the IMPACT Act, which I and some others introduced to set 

up a guaranteed loan fund to help companies transition—not just 

from auto but from auto supply, for example, to wind turbines, 

solar panel fuel cells, biomass, alternative energy. Can you give us 

an estimate of how many manufacturers are looking to retool or diversify into new technologies? I do not expect precise numbers, but 

can you give me your thoughts on that, Mr. Kiener? 

Mr. KIENER. I would not be comfortable giving you a percentage, 

but I could give you a couple of stories maybe that would illustrate 

what our members are doing. 
11 

Our companies are highly diversified. The majority of them are 

not in one particular sector. We do have a certain percentage of 

ours that are in the auto industry, but they produce components 

for many other industries. So they are always looking at new opportunities, whatever is out there. They can do everything from 

medical work to defense-related industries, very small components 

up to large components. 

The opportunities for the green industry, some of our members 

have begun to manufacture component parts for the wind power industry and also solar. Obviously, any new opportunities out there 

for them to expand their business and be more competitive, and 

thus a stronger company, certainly they would be looking at that. 

In terms of a percentage at this time, I would not feel comfortable in putting one to it. I just know there are a number of our 

members that are doing that. 

Chairman BROWN. Thank you, Mr. Kiener. 

Mr. Wilson, what do you need to see as a banker? Use your own 

bank as an example as you think through this, and then look at 

larger banks, community banks, regional banks, the largest banks 

in the country. What do you all need to see from manufacturers before banks start loaning to them in larger numbers? And I think 

it is accurate to say that manufacturers—people applying for loans, 

if they are manufacturers, they are less likely to get it than if they 

are not; and if they are auto manufacturers, they are less likely to 

qualify than if they are—I mean, I know each case is different, but 

give me your thoughts on that. What do you need to see from Mr. 

Kiener and Mr. Andrea and their members before credit flows a little more liberally, if you will? 

Mr. WILSON. Well, I think first of all you have to divide it into 

two different components. Number one, the customers that we have 

worked with for years, and we have loans that are on the books, 

and we are trying to continue to work with them. We know them 

and that is a whole set of circumstances where we are going to— 

we have the long-term relationship. We are going to work on loan 

modifications, if they need that. We are going to work with them 

in every way we can—short of getting in major difficulty with our 

regulators, as we can go there at some point in time. 

But that is a little different from the new customer coming in 

with a new request, which we are seeing a lot of now. Because 

some other sources of funding, whether it be the secondary market 

or whatever, have dried up, they are coming to those of us that 

have money to lend. And there we are looking at—for a new customer, we are looking for cash-flow, we are looking for collateral. 

We are looking for skin in the game. A bank our size, we look for 

a commitment from the owner of the business to sign personally, 

to inject capital, to in some way be involved. 

Chairman BROWN. What are your assets? What is the size of—— 

Mr. WILSON. $750 million in the bank. So our lending limit is $8 

million, to give you some idea of the size of business that we can 

work with, short of doing a participation with another bank. 

But that is 99 percent of the businesses and industries within 

the six-county area that we serve. Within our footprint, that allows 

us to work with most requests and most needs. We certainly cannot 

meet the needs of a Procter & Gamble or whatever, but most of the 
12 

businesses that are the lifeblood of our community are small businesses. 

So we are looking for the cash-flow, we are looking for the collateral, we are looking from the commitment from the owners to be 

part of the solution. 

Chairman BROWN. Do you see any difference between large 

banks and community banks with respect to willingness to lend to 

manufacturers? 

Mr. WILSON. I guess the answer to that would have to be no, 

with this caveat: Certainly, the large banks were hit harder by the 

liquidity crisis. I think that the banks of the size and type of ours, 

not 100 percent but for the most part, came through that time period with liquidity, with capital, with the ability to continue to 

lend. And there was a point in time—because the larger banks depend on their funding from the capital markets a lot more than we 

do. Our funding comes mostly from deposits. Depositors put their 

money in, and we loan back into the community. And those 

sources, as you know, during the liquidity crisis dried up for the 

larger banks. 

So from that standpoint, there certainly has been a difference. 

Now, that is beginning to turn. Certainly many of the programs 

that were put in place by Congress have helped restore liquidity 

back into the system. And I see a loosening of that, but we are certainly not out of the woods yet. 

Chairman BROWN. About a year ago at this time, I spent much 

of 2 weeks calling banks your size—some smaller, some larger, but 

many banks your size around Ohio. This is a bit off the subject of 

this hearing, but just for my information, if you would—about what 

was happening in their area and as we were looking to the response to what was happening on Wall Street, of course. Some 

banks spent a lot of time talking to depositors about not withdrawing their deposits because of the fear they had. 

What was the experience with your bank during that period a 

year ago? 

Mr. WILSON. We have had quite a growth in deposits, and I believe that was as a result of a flight to safety. When the stock markets were under stress, when other alternatives for dollars were 

under stress, people became more conservative. The savings rate 

went from negative to positive, which was good for our deposit 

base. We were seen, with the FDIC insurance, with the conservative nature of our institution, we were seen as a safe haven. And 

so our deposits so far this year, for example, have grown by $60 

million. When you think of us as a $750 million bank, that is significant. 

And so we have not had to go out to the capital markets for funding, et cetera, and I believe that to be the experience of many small 

banks in the State of Ohio and across the country. 

Chairman BROWN. You have mentioned, in answer to my first 

question, about the difficulty with regulators, and I would like you 

to expand on that. What regulatory requirements are hindering or 

dampening in any way the bank’s ability to lend to manufacturers? 

Mr. WILSON. Well, as I said in the testimony, certainly our goal 

and their goal is the same in that we want a safe and sound banking system. However, where we differ is that when we have a loan, 
13 

for example, with a manufacturing firm and that manufacturing 

firm is under stress, we still want them to be successful. If making 

modifications to that loan, meaning that we lower interest rates, 

ask for interest only, extend terms, whatever modification that 

would help them in a cash-flow crisis, or if we show some forbearance on capital requirements, we have an incentive to do that. 

Certainly, the regulators do not have that incentive. They are 

coming in and they are saying, ‘‘Now, wait a minute, we want your 

capital standards to be this on this loan, and we want your collateral levels to be this on this loan, and cash-flow should be 1.2 

times.’’ And they have these standards, and when they apply those 

standards without realizing or wanting to compromise in a particular situation, then that becomes very difficult. 

Again, as I said in the testimony, if we make a collateral call on 

a business that is already in stress and there is no other way to 

raise capital, they have to sell assets to increase that cash to meet 

that collateral call. That can be a death spiral for a company. And 

we do not want any company to fail. That is not in our best interest; it is not in the best interest of our customer or our community, 

the jobs in our community. 

And so we have a tendency to be more flexible than regulators 

allow, and that is where you find the conflict. 

Another example, if I may? 

Chairman BROWN. Of course. 

Mr. WILSON. Commercial real estate I think has been in the 

news a lot, because there is a supposed guideline of any bank that 

has 300 percent of their capital in commercial real estate, they 

have too much; or if they have that, they are going to have to put 

in other systems, et cetera. And that is supposed to be a guideline. 

But it is not unusual and it has not been unusual in this crisis 

for examiners to come into banks and to say you have 400 percent, 

that is above the 300, and you need to get to the 300. 

Well, the problem that caused is what you read about in the 

newspapers, that the bank has two alternatives to get that ratio 

back in sync with what the examiners are demanding. And that 

would be to raise capital, which at that point in time was impossible; or lower the amount of loans outstanding. Thus, you heard 

the stories of banks calling loans, not renewing credit lines, not extending credit, cutting off certain sectors—i.e., commercial real estate. And that was real and that happened, and to my way of 

thinking, a lot of that was a result of regulatory inflexibility. 

Chairman BROWN. Take that further. After the Federal interventions of the last year, TARP and TALF—based on what you said, 

elaborate—why are manufacturers still experiencing challenges in 

accessing credit? Is it beyond what you just said? Is it regulators 

requiring capital requirements that are too high? 

Mr. WILSON. That is only a piece of it. 

Chairman BROWN. Tell me, talk through that, if you would. 

Mr. WILSON. Sure. I think it is a number of things. 

Number one, your statement is based on some situations where 

people have stories of not being able to gain credit, and it is, I am 

sure, on the fact that overall credit extended to the manufacturing 

sector is down. But I think what one must remember is that manufacturing firms, like everybody else, know how to weather a storm, 
14 

and there is simply a lot less demand for credit right now overall. 

Certainly, regulatory constraints can hurt lending, and the other 

thing is that banks, of course—as I said again in my testimony, 

banks, of course, are not going to want to make a loan to a customer if they are not going to be successful in paying it back. In 

other words, we are doing a disservice to them if we extend credit 

to them beyond their capabilities. 

I think capability, decreased demand, and regulatory intervention, all three play a major factor in the question that you ask. 

Chairman BROWN. OK. I want to get back to SBA with all of you, 

but ask Mr. Andrea and Mr. Kiener a question about manufacturing generally. We have seen a relatively positive uptick in the 

economy in recent weeks in terms of some economic growth, some 

GDP growth. Do you see it extending to manufacturing, Mr. Andrea and Mr. Kiener? Mr. Andrea, do you want to start? 

Mr. ANDREA. It is from the standpoint for our production schedules without a doubt coming off of the Cash for Clunkers program. 

But one of the councils that we run is a small and medium suppliers council, which are for the presidents and CEOs of suppliers 

under $250 million in revenue. And I asked them how their third— 

this was just a month and a half ago—how their third and fourth 

quarter production schedules were looking, but if they had enough 

confidence that that uptick in production schedules was great 

enough for them to start hiring back people. 

And I went around a room of about 20 of the CEOs there. Without a doubt, short-term production uptick, they had profits in June 

and July, which are generally unheard of in the auto industry because that is our seasonal downturn. But almost to a person, the 

increase in production was being handled by either contract workers, temporary workers, shifts coming back but were not permanently rehired. So there is not that confidence that going into the 

first quarter this uptick will hold. 

Chairman BROWN. Mr. Kiener. 

Mr. KIENER. Yes, I would agree with that statement by Dave. 

What we have seen is these inventory levels have gotten so low at 

our members customers that at some point production was going 

to begin to increase. We did have three successive months of double-digit increases on our sales index for our membership. However, you know, with them still being off 40 percent—— 

Chairman BROWN. Beginning June? Beginning July? 

Mr. KIENER. In June. In June, yes. So that is when we started 

to see these increases. But I would echo the comments of the gentleman next to me. There is no long-term confidence that, you 

know, we are out of the woods. It seems to be refilling inventory. 

Their machines are busy. They are producing components. But 

there is not a real confidence beyond the rest of the fourth quarter 

that this is going to continue. They are not seeing signs, I would 

say, from the customers of a long-term—— 

Chairman BROWN. That makes sense. Is manufacturing different 

from the rest of the economy in this way? You know, with some 

economic growth now, we are not seeing particularly—we are not 

seeing growth in jobs, obviously. On the contrary. We also, as we 

have—back up. In the last many months, especially until summer, 
15 

but in the last many months as we saw job loss, we have also seen 

number of hours per worker worked per week decline. 

So as the economy begins—as manufacturing—and historically in 

this country, as you know, auto and housing have been the sort of 

leaders in pulling us out of recession, if that historical trend reoccurs. So as auto jobs—as auto production and the supply chain increase and output increases, sales increase, do we see employers 

who have 30-hour-a-week workers move them up to 40 before we 

see new hires? Or is manufacturing not so reflective of 30-hour 

work weeks instead of 40? 

Mr. ANDREA. The employment numbers will lag in manufacturing because of just what you point out, being able to increase 

the number of hours before bringing back people permanently. 

The other thing, in terms of the restructuring, I think this is 

where this—what we just went through is so fundamentally different of every other economic cycle, is typically things came back 

very quickly. But now what you are looking at are suppliers who 

truly have gone from five or six plant locations and have consolidated those down to three. 

So in terms of the overall employment coming back, until 2014, 

2015, before people really see production come back to 2006 and 

2007 levels, you will still see weakness, at least from the auto sector side, until that production comes back. 

Chairman BROWN. Are your members as likely to have—I mean, 

I talk to employers all the time who, rather than lay people off, or 

at least to minimize layoffs, cut work back to—my wife works at 

the Plain Dealer in Cleveland, and they cut her—they required— 

I mean, the union took a vote: Do you want to lay more people off 

or do you want to take a wage cut? And the wage cut turned out 

to be 12 percent, which really turned out to be days of furlough 

where you will work fewer days or fewer hours. 

Is manufacturing as likely to do that as other parts of the economy, to say we will not lay you off, but we are cutting you back 

to 35 hours—either with a union agreement or just the management making that decision? 

Mr. ANDREA. From our members of what we saw, it was all 

across the board of however those owners could manage their workforce and keep their skilled workforce that they know they needed 

coming out of this and the critical capabilities. 

So we saw it go from three shifts to two shifts. Then we saw the 

1-day and 2-day furloughs. Without a doubt, I have never received 

more e-mails from people who at the bottom said, ‘‘I am on a 2- 

week furlough, and I cannot answer any voice mails or e-mails.’’ So 

it was all a mix of that, as well as cutting back 401(k) contributions, cutting back on health care, cutting back on all the benefits 

as well to scale down compensation and total benefit costs. 

Chairman BROWN. And the furloughs then in place of furloughing ten people instead of laying off two, or whatever the ratios 

would be at a company, were done partly to cushion the blows to 

individual employees, to share the sort of pain, but also so those 

companies, thinking of an upturn in the economy 6 months, 12 

months, 18 months out, would have the skilled workforce to startup 

in a more focused, direct way. 
16 

Mr. ANDREA. Absolutely. There are members who took people 

who were in skilled trades classifications, reclassified them for nonskilled work so that they could keep them employed, keep health 

care benefits for those employees through this downturn. 

Chairman BROWN. And none of them were leaving to look elsewhere to find—because they could not find—I mean, they—— 

Mr. ANDREA. Well, the other thing, of course, we have in the 

State of Michigan, particularly, are housing values. They have been 

hit so much that it has kept an anchor on a lot of employees as 

well. 

Chairman BROWN. Mr. Kiener, any comments on that? 

Mr. KIENER. Yes. Our members are typically smaller than the 

companies in Dave’s group, so they are 40-employee-type of companies. They work very closely with their employees, so when they do 

make that decision to eliminate positions, it is done with careful 

consideration. 

What they have attempted to do is really protect those skilled 

workers for when there is the increase back in business. They will 

be able to move forward with a highly skilled and trained workforce. 

So that is very similar to the tale that Dave has just described 

to you. 

Mr. ANDREA. If I could just pick up on one point, Mr. Chairman, 

there. I received a number of phone calls from our members as the 

consultancies were reducing their forecasts in production levels 

down through—really starting in January and February, and then 

throughout the year. I would get phone calls to say, ‘‘Do you believe 

those forecast numbers? Because if you believe that it is another 

ratchet down, I am up against taking out another 10 or another 20 

people out of my shops.’’ 

So that is how careful the people did take a look at this, because 

there was no way coming back, once you take those people out, if 

you believe those forecast numbers, which did end up coming true. 

Chairman BROWN. Mr. Wilson, let us talk for the last part of this 

hearing about the SBA and what we can do, if you have thoughts 

on improving it. Understanding the very important caution in your 

story was, I thought, illuminating about the gentleman that came 

to you that you turned down, that later was grateful that you had 

the sobering analysis that came to that conclusion, understanding 

that, why are more banks not taking advantage of the 90-percent 

guarantee on SBA loans? The SBA has tried to take hold of some 

of the problems and help struggling people that cannot get credit, 

coming to SBA and SBA has changed its patterns of behavior in 

the last few months to try to reach out better, why is that not 

mattering enough? 

Mr. WILSON. Well, I think there are a couple of answers to that 

question. I think the first is, remember what I said about the demand not really being there. Certainly in our bank, we are making 

a lot more of the SBA loans, the ARC loans. We are looking to— 

when we have a stressed manufacturing firm, business of any kind, 

a stressed loan, we are looking for any way to help them to modify. 

So definitely our SBA lending is up, our overall lending is up, because we are looking to use those. 
17 

There is a great reluctance, oftentimes, on the part of our customer. They have never been involved with a Government program. 

They have always dealt directly with us. They have seen what happened to us. You know, we accepted the CPP money at our bank, 

for example, because we thought it was our duty to do that. CPP, 

if you remember, went to the strong banks, and we did exactly 

what we were asked to do. We received on February ninth $13.4 

million. By the end of February, we had leveraged that into $65 

million worth of loans and investments. And our reward for that 

was we were vilified in the press. We were vilified in these hallowed halls. And that was seen by our customers. 

A lot of our customers are very reluctant to use a Government 

program because they fear they will be seen as taking a bailout, 

and they do not want any part of that. 

Now, SBA—— 

Chairman BROWN. Even SBA. 

Mr. WILSON. Even SBA. 

Chairman BROWN. If you are extended something that has been 

around as long with a generally good reputation. 

Mr. WILSON. But you are talking about customers that have 

never used that before. 

Chairman BROWN. So it is new to them. 

Mr. WILSON. It is new to them. I mean, yes, you and I both know 

about SBA, but customers there, they are in trouble, we say, you 

know, ‘‘We think we could help you meet this need if you are willing to let us got for an SBA 504 or an ARC loan,’’ or whatever it 

might. And they are saying, ‘‘Oh, no, no. I do not want to get involved with that. I do not want to be any part of a Government 

bailout.’’ And we say, ‘‘No, no. These programs have been in place 

for a long time. These programs are meant for this purpose.’’ And 

oftentimes we can walk that customer through that, and we can 

get that customer to understand and be part of that. 

But there is that piece of the puzzle there that there has been 

such a beating up, if you will, of those of us that participated in 

the Government programs like the CPP, the Capital Purchase Program, that they are cautious. Demand is down, another reason. 

And then simply there are some that are so stressed that they just 

do not qualify for the SBA financing. 

Chairman BROWN. Mr. Kiener, are your companies reluctant to 

use SBA? 

Mr. KIENER. Yes, very much so. 

Chairman BROWN. Based on? 

Mr. KIENER. Based on a couple of factors. One is the perceived— 

and I am not an expert in SBA by any stretch of the imagination, 

but the amount of paperwork and documentation required to go 

forward with the SBA process. Also, the personal guarantee. These 

small family owned companies that are 30 employees, for them to 

put everything in the game—you know, for them it is everything 

in the game. They feel like they have put so much into the business 

already, but then to put their personal assets into it as well as part 

of the guarantee, they are just not willing to make that type of a 

leap. 

In addition to that, when our folks have looked at SBA, especially most recently with the automotive side of things, if they had 
18 

anything to do with automotive, as I mentioned earlier in the testimony, they are just not bankable in terms of a loan for our companies. 

So most of ours have just, frankly, written SBA off as a solution 

for them. 

Chairman BROWN. Mr. Andrea, if I could guess, I would think 

that you would say that the biggest problem with SBA for your 

members is that the loan limit is not large enough. Is that your 

biggest complaint with SBA? 

Mr. ANDREA. When we have done written surveys in terms of 

participation, it is the loan limit that comes up as the number one 

issue. As I talk individually with the executives, the personal guarantee part comes up in conversation. But I think what is interesting, though, is when you get the bankers and the SBA office, at 

least up in Michigan, in the same room with the suppliers, that 

personal guarantee piece becomes less of a specific issue. But you 

never know. But it is the limit for ours members. 

Chairman BROWN. I am going to ask all three of you to conclude 

the hearing with one question, the same question, and each of you 

start—I guess I will start right to left this time. What can Congress and the Administration do to further loosen credit for manufacturers? What is the most important thing that I should take out 

of this hearing? As you said, Mr. Wilson, two or three times, compellingly, that we all want the same thing. The three of you do, I 

do, we want to see you loan to manufacturing operations that are 

successful and you are making money and they are making money 

and they help to pull us out of this recession and we do not have 

the tragedies that are too common in your part of the State, really 

in our whole State. And you say DHL in Batavia and Moraine and 

crippling that has been for our State and our economy. 

What can Congress and the Administration—what are the most 

important one or two or three things you should tell us that we 

should be doing? 

Mr. WILSON. I think be careful of the rhetoric. Be as positive as 

possible about not only the prospects for an improving economy but 

about these programs we are talking about. Do not overreact to the 

lack of immediate acceptance of these programs by saying, well, 

that program did not work, let us cancel that. 

I think that there is an ongoing place for TALF; I think there 

is an ongoing place for SBA; I think there is an ongoing place for 

the ARC loans. I think all of those remaining in place will keep us 

from having a second dip, and I think you would not want to overreact to that. 

And then I think education is possible. What we are talking 

about, I think, is oftentimes a misperception on the part of the end 

user as to how difficult it is, how they might not be qualified, how 

it is so difficult or so onerous or they are going to be vilified or 

whatever. And I think a constant reassurance by SBA, by the 

banks, by the manufacturing trade groups that this is an alternative, this is something you ought to take a look at would be 

meaningful. 

Chairman BROWN. Thank you very much, Mr. Wilson. 

Mr. Kiener. 
19 

Mr. KIENER. What I feel, and I think I speak for our association 

on this issue, is the banks need to feel more comfortable in lending 

to manufacturers. And how do we make them feel more comfortable? A federally backed loan guarantee program that utilizes 

existing loan facilities for private lending to manufacturers. The 

banks need assurances that the Federal regulators will not come 

down on them for making sound lending decisions. And a return 

to the sound lending decisions will allow for available and affordable credit for manufacturers. 

I think it is crucial to the recovery of the economy to allow renewed capital expenditures and facility expansions, investment in 

R&D, and in the end increase hiring and employment and get 

things back and rolling. So that is really what we are looking for. 

Chairman BROWN. Mr. Andrea. 

Mr. ANDREA. When we have done surveys of our members and 

asked about the level of engagement between the bankers and their 

operations, about 20 percent of our members say that their bankers 

are very engaged with them and working with them day in and day 

out. About 20 percent of the members say that their bank is trying 

to exit the auto industry. And there is 60 percent or so that are 

in the middle. 

And so for us, we are not worried about the suppliers where their 

banks are engaged, and the 20 percent in terms of the disengagement, many of those suppliers and capacity probably do need to go 

away in terms of poor lending risk that way. So we are worried 

about the group in the middle. 

And then I think short term you have to look at reducing the 

level of risk, and it could be loan guarantees, it could be some of 

the programs that we talked about in terms of the loan enhancements, to reduce the risk as our production levels will continue to 

remain low and collateral levels are low. And then, second, I think 

you look at the types of long-term and permanent programs that 

we could provide to assist in tooling and technology investment to 

retool the industry going forward. 

Chairman BROWN. Good. Thank you. Thank you all. Your testimony was very helpful, your answers to questions were very good, 

and I very much appreciate that. 

The Subcommittee will be submitting questions for the record to 

both the Treasury Department and the Commerce Department. If 

you have thoughts that you would like us to entertain to turn into 

questions to Treasury and Commerce, certainly submit those to us. 

We will invite both Departments to testify at a future hearing on 

this issue. 

The record will remain open for 7 days, so if you have additional 

testimony or want to expand on anything you told the Subcommittee, certainly feel free to do that. 

Again, thank you from joining us, and the Subcommittee will adjourn. 

[Whereupon, at 10:39 a.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 
20 

PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN 

This hearing of the Economic Policy Subcommittee will come to order. This is the 

fourth in a series of hearings on the challenges facing manufacturers. 

Let’s face it. Our manufacturing sector is in crisis. While key productivity indicators have shown recent signs of growth, both manufacturing output and employment 

have dropped precipitously over the past year. 

We must act now to move from continuous erosion to consistent expansion, because U.S. manufacturing isn’t optional, it is indispensible. As manufacturing goes, 

so go our national security, our global economic leadership, and our stability as a 

democracy. Our democratic Nation needs a strong, stable middle class, and a stable 

middle class needs manufacturing jobs. Manufacturing equips our military and accounts for 12 percent—$1.6 trillion—of 

U.S. Gross Domestic Product (GDP). It generates nearly three-fourths of the Nation’s research and development. It employs nearly 12 million Americans. 

Compromised access to credit is the newest threat to American manufacturing. 

It’s not a minor problem, it’s a major concern. 

As one manufacturer I spoke with put it, ‘‘credit makes this country great.’’ 

But the credit stream has slowed to a trickle. The Federal Reserve Board’s flow 

of funds accounts have shown a consistent reduction in net lending to manufacturing sectors. 

Every day there are more small and medium-sized manufacturers—like those in 

Ohio—at risk of going out of business because they cannot get the loans they need. 

For manufacturers in the auto supply chain, the struggle to find a lender is even 

tougher. 

I heard from one Ohio manufacturer who has been in business for 25 years and 

has had access to credit through a trusted lender. The manufacturer has a strong 

credit history. The bank recently capped their credit line at $5 million because a percentage of 

their business involves auto supply components. Almost 100 percent of the manufacturer’s customers pay their invoices within 60 days. 

The company feels penalized in spite of the fact that they have a strong record. 

To be clear, this hearing is not about vilifying banks or anyone else. I realize that 

some banks are only just beginning to rebound from the financial meltdown and are 

concerned about taking on too much risk. 

We also have the problem of the frozen debt-securitization markets, which allow 

banks to repackage loans and sell them to investors. Banks are finding it increasingly difficult to repackage their loans to free up capital. 

This problem of access to credit is unfortunately not unique to Ohio, Indiana, 

Michigan, and other manufacturing States. 

As I mentioned, the goal of this hearing is not to lay blame on anyone’s doorstep. 

This is an opportunity to take stock of where manufacturers and lenders are given 

the harsh economic conditions. 

Despite the challenges I have outlined, we must find a way to get credit flowing 

again. 

In that vein, I hope this hearing helps answer the following questions: 

Are there signals that show credit is easing? 

How have steps the Administration has taken worked and evolved? What new 

mechanisms should Congress and the Administration consider to bridge the gap? 

I look forward to the testimony of our witnesses. 

PREPARED STATEMENT OF DAVID ANDREA 

VICE PRESIDENT, INDUSTRY ANALYSIS AND ECONOMICS, ORIGINAL EQUIPMENT

SUPPLIERS ASSOCIATION, MOTOR AND EQUIPMENT MANUFACTURERS ASSOCIATION

OCTOBER 9, 2009 

The Motor and Equipment Manufacturers Association (MEMA) represents nearly 

700 companies that manufacture motor vehicle parts for use in the light vehicle and 

heavy duty original equipment and aftermarket industries. MEMA represents its 

members through three affiliate associations: Automotive Aftermarket Suppliers Association (AASA), Heavy Duty Manufacturers Association (HDMA), and Original 

Equipment Suppliers Association (OESA). (See Attachment 1) 

Motor vehicle parts suppliers are the Nation’s largest manufacturing sector, directly employing over 685,000 U.S. workers and contributing to over 3.2 million jobs 

across the country. In fact, automotive suppliers are the largest manufacturing employer in eight States: Indiana, Kentucky, Michigan, Missouri, Ohio, Oklahoma, 

South Carolina, and Tennessee. (See Attachment 2) 
21 

Furthermore, suppliers are responsible for two-thirds of the value of today’s vehicles and nearly 30 percent of the total $16.6 billion automotive research and development investment and are providing much of the intellectual capital required for 

the design, testing, and engineering of new parts and systems. 

Without a healthy automotive supplier industry, the United States will lose a significant portion of this country’s manufacturing innovation and employment base. 

The financial health of families and communities nationwide and the promise of a 

21st century motor vehicle industry depend on a strong supplier sector. 

Over the past 10 months, significant and unprecedented Government and industry actions have prevented a collapse of the largest manufacturing sector in the 

United States—the auto industry. It is estimated that the auto industry will expand 

production by two million units or 25 percent in 2010 over 2009. However, the future expansion, employment, economic contributions and structural viability of the 

supply base are dependent on continued access to credit. Only through continued 

coordinated action by industry, the financial community and the Government will 

a future, potential crisis be prevented. 

MEMA and OESA urge Congress and the Administration to: 

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

• Address the specific needs of small suppliers for sufficient capital for ongoing 

operations; and 

• Create technology funding programs that support suppliers’ long-term product 

and manufacturing technology innovation. 

History of Auto Supplier Support Program and GM and Chrysler Bankruptcies 

To give some background, the Auto Supplier Support Program announced by the 

Auto Task Force on March 20, 2009, addressed only a finite set of issues. Small suppliers, suppliers manufacturing in the U.S. and shipping to Canada and Mexico, and 

suppliers directly providing replacement and warranty parts and tooling were 

among the entities that found themselves without access to this program. The program, as administered, assisted a portion of the industry in surviving the downturn 

in production and vehicle sales. However, the program failed to improve required 

ongoing access to traditional sources of capital for the vast majority of the industry. 

With the bankruptcy filings of GM and Chrysler, 30 percent of the North American vehicle production base is in significant restructuring and transition. The Auto 

Supplier Support Program, which provided up to $5 billion to guarantee the payment of supplier receivables, did help prevent widespread loan covenant violations 

and demands for changes in customer payment terms. However, OESA surveys indicated that while half of the direct suppliers to GM and/or Chrysler were eligible to 

participate, only half of those eligible suppliers were actually able to take part in 

the program. 

There was a significant gap between those eligible and those able to participate 

because of issues in loading the thousands of purchase orders into the Citibank system and the general limitations on the types of eligible receivables and supplier 

bank restrictions. Even though in both the Chrysler and GM bankruptcies, most direct suppliers were treated as critical vendors and received pre-petition payments 

on various terms, the process failed to address the serious needs of hundreds of suppliers to other vehicle manufacturers. 

Without a doubt, the U.S. Treasury Auto Supplier Support Program helped avert 

a potential implosion of the supply base. However, significant risks remain to the 

industry and lenders alike. The major examples include: 

1. GM—As the announcement last week of Penske Auto Group pulling out of a 

deal to purchase the Saturn distribution system shows, there is still significant 

uncertainty as to how brands, vehicle platforms, and supply base consolidation 

will occur. 

2. Chrysler/Fiat—We will not know until later this year final product cycle plans, 

manufacturing locations and other details that will provide lenders a view into 

which suppliers have forward business opportunities and which do not. 

3. The old GM and Chrysler companies in bankruptcies—Until all the assets are 

completely disposed of, there will remain uncertainty over potential liabilities. 

Bankruptcy courts can still have oversight over ongoing operations and the 

value of certain receivables to lend against. 

4. Bankruptcy of major suppliers—While it appears these bankruptcies are moving smoothly through the courts, we cannot forget that few sub-tier suppliers 
22 

are receiving critical vendor status and, as a consequence, most are not receiving full pre-petition payments. 

The Current Situation 

Suppliers have dramatically reduced every element of their working capital requirements from payroll to raw material inventories. Certainly, this is in part a response to the dramatically reduced production levels and an effort to conserve cash 

in a period of significantly reduced cash flows. 

However, many—if not most—of these changes will become permanent. These include: 

• Workforce reductions; 

• Plant closures; 

• Compensation and benefit reductions; and, of course, 

• Permanent closure of companies. 

Our research indicates that there have been 47 identified major suppliers that 

have filed for Chapter 11 protection this year. (See Attachment 3) We have no definitive number of suppliers who have closed facilities, but Plante and Moran estimates 

that up to 200 suppliers have liquidated. 

The result of this painful cost cutting and restructuring is a much lower breakeven point for the supply base. In the September survey of OESA members (See Attachment 4), the median break-even unit level for 2010 is 9.5 million units. The respondents, in turn, estimate 2010 North American production volume will be 10.1 

million units. This means that even with a modest increase in production, suppliers, 

on average, should be above their break-even point next year. However, currently 

there is significant pressure on the entire system to access adequate working capital 

to bring the manufacturing system back up. 

There must be increased access to capital through the entire supply chain—from 

the largest tier one to the smallest family owned firm in order to: 

• Rehire workers and purchase raw materials for production increases; 

• Retool for new programs; and 

• Restructure internal operations and consolidate external capacities. 

Lending conditions did improve in the second quarter of 2009 from the first quarter of the year. However, we need to keep in perspective how deeply frozen the credit markets had become (the supply side) and how significantly large the ongoing 

capital needs of the industry are (the demand side). GE Capital, in their Third 

Quarter 2009 Industry Research Monitor of the U.S. automotive base, reports that 

U.S. institutional term loan issuance was off 55 percent in the first half of 2009 

versus 2008; in the second quarter, term loan issuance was still off 31 percent year 

over year. 

The situation is improving, but is it improving fast enough? To give you a perspective of the capital requirements for this industry, it is not unusual to have a $100 

million supplier support $5 to 10 million in customer tooling costs at any point of 

time. Access to capital is the cushion that keeps our supply base liquid. As one of 

our members said, ‘‘I pay my employees weekly, my leases every 4 weeks, my vendors every 6 weeks, and my customers pay me every 8 weeks.’’ The need is evident. 

There has not been a widespread failure of the system as suppliers have restructured or liquidated. However, issues regarding access to capital are showing up and 

an inordinate amount of attention is required to keep the supply base running. 

These are just a few examples from our membership: 

• A very large international resin supplier needs to have daily phone calls with 

a domestic OEM to review production schedules as the resin supplier has supply issues with a sub-tier supplier in Chapter 11; 

• A large international supplier could not get an additional loans to purchase specialized equipment to diversify into the aerospace industry as they are up 

against tight loan covenant terms; 

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

competitive; and 

• A small metal fabricator could not raise additional capital to invest in his 

Michigan operations and lost the business to Mexico. 

These are not examples of capacity that needs to be rationalized. These are examples of suppliers that are looking to invest in the U.S., compete against global competition and support a profitable, productive domestic auto industry. 
23 

According to the OESA Automotive Supplier Barometer September survey, the 

majority of all respondents have not seen any significant change in lending practices 

as judged by metrics from the cost of credit lines to commercial loan interest rates, 

covenants or collateral requirements. In fact, 23 to 46 percent of the respondents 

actually saw tightening across these various terms over the past 3 months. When 

OESA examined the responses by size of company (above or below $500 million in 

revenue), it is clear that smaller suppliers face the possibility of even tighter terms. 

A very positive thread through the comments relates to the level of cost reduction 

and restructuring that has taken place. Here, suppliers are optimistic that even if 

production schedules do fall off in latter part of the fourth quarter and into 2010, 

the trend toward regaining profitability will continue. This is an industry worth investing in. However, industry production volumes (driven by weak consumer spending) and absolutely low levels of asset valuations restrict credit availability even to 

suppliers that will be needed on the other side of this crisis. 

Banks are forming their lists of which suppliers they will work with and those 

they will not. The OESA Automotive Supplier Barometer survey from July noted 

that 23 percent of suppliers characterized their banker as actively engaged with 

them while 19 percent described their banker as actively exiting the industry. We 

are worried about the 60 percent of the supply base in between that could be indiscriminately cut off from necessary access to capital. In fact, in a recent review of 

supplier financial distress monitoring systems, a group of chief purchasing officers 

concluded that predicting the failure of a supplier has more to do with their banking 

relationships than it does with their operational efficiency or revenue outlook. 

Outside analysts confirm the views of our membership. According to the Summer 

2009 Grant Thornton report, The North American Automotive Industry in 2012: 

Supplier Opportunities: ‘‘ . . . as many as 30 percent of North American suppliers 

are at high risk of failure.’’ Grant Thornton expects restructuring will reduce supplier capacity by 30 to 45 percent. Using 1,700 suppliers for their base numbers, 

they forecast: 

• 170 to 340 companies risk Chapter 11 restructuring; 

• 340 companies risk liquidation; 

• 170 to 340 companies need acquisition financing for consolidation; 

• 50 companies require targeted financing for restructuring; and 

• 630 to 970 companies may not need special financing assistance. 

Given the parts sector is operating just above 50 percent capacity utilization, we 

believe that there will be a continued stream of bankruptcies and closures through 

the rest of this year. In 2010, we expect ongoing closures as the industry continues 

to operate at low—albeit increasing—production volumes. Although much of this is 

to be expected in an industry in transition, adequate capital is necessary to consolidate the industry in a rational, effective manner. Otherwise, production disruptions 

and failure of companies with critical capabilities may ensue. 

There are three areas MEMA and OESA believe Congress and the Administration 

should focus on to lower the risk of potential production disruptions and unintended 

employment loss as well as to establish longer term programs to enhance product 

and manufacturing technology advancement. 

Focus on General Lending 

Given low production volumes and temporary low valuations of industry assets, 

many loans to long-term viable suppliers are, in the short-term, ‘‘out of formula’’ for 

banks to consider. One idea the industry believes—along with several bankers we 

have spoken to—has merit is the Michigan Supplier Diversification Fund. The $12 

million program, currently in a ‘‘pilot’’ stage, is being funded by the State of Michigan and addresses three critical impediments to lending: 

• Cash flow—by purchasing a portion of a commercial credit facility and offering 

preferred terms for up to 36 months to borrowers. 

• Collateral value—by supplementing the collateral value on loan requests and 

depositing cash pledged to the bank. 

• Transitional risk—by creating a mezzanine (bank of banks) model that can 

spread risk among several lenders and make both debt and equity investments. 

It is important to investigate scaling this type of program up to a national level 

in all States to support a broad range of manufacturing entities. 

Focus on Smaller Suppliers 

Given the industry’s significant capital requirements and the general mismatch 

of funding, a steady access to lines of credit and asset-backed loans is essential for 
24 

the survival of the supply base. For example, it is not unreasonable for a small supplier to be called on for the investment of $2 to $4 million to assist with the design, 

engineering and tooling for a component on a new vehicle program. However, typically suppliers receive payment for this investment after the launch of production 

through the piece price of the component. The supplier might not begin receiving 

any cash flow on their investment for 12 to 24 months and will not be completely 

reimbursed until the product ends production in another 36 to 60 months. 

Small Business Administration (SBA) programs have been at the foundation of 

small supplier support for decades. However, the SBA loan programs are limited to 

only $2 million loans. Since suppliers are expected to fund a great deal of the research and development in the projects, the net worth and loan amounts have limited utility to our industry. Given the scale the auto industry operates on, this limit 

is too low to help many suppliers. A recent OESA survey indicated that a $3.5–$10 

million level would be far more helpful to small and medium automotive suppliers. 

Although small manufacturers should be able to turn to the SBA for loan programs, 

the current system is simply not designed to meet the needs of manufacturers with 

substantial raw material, research and development costs. Because of these limitations, recent changes to the SBA program have not dramatically impacted the ability of small suppliers to access capital. 

Focus on Technology Funding 

The supplier industry has worked with its customers and developed a wide range 

of new technologies that promote increased safety and improved fuel efficiency. This 

work includes: 

• Batteries and engines for hybrid vehicles; 

• Clean diesel engines; 

• Direct fuel injection systems; 

• Fuel cell technology; 

• Lightweight materials; 

• Innovative glass; and 

• Advanced safety technology. 

Suppliers are constantly called upon to innovate. The industry works daily with 

vehicle manufacturers to make vehicles safer, stronger, lighter, more fuel efficient, 

more economical and more environmentally friendly. This innovation takes investment in people, engineering, capital equipment, and research and development. Programs aimed at the supplier industry are needed. 

MEMA and OESA support S. 1617, the IMPACT Act, currently under consideration, and H.R. 3246, the Advanced Vehicle Technology Act, which has passed the 

House. These bills will provide greater access to funding for the supply base. The 

technology needs of the auto industry will require suppliers to invest in additional 

research and development, retool existing facilities and compete with sophisticated 

technology from overseas. (See Attachment 5) 

Conclusion 

We understand and support the need to consolidate the industry. However, we believe that without sufficient capital to provide a stable environment in which to restructure, the industry and its employees will witness unnecessary disruptions. 

Without assistance this country will needlessly lose manufacturing capacity, technology development and jobs. 

This industry does not come before you requesting a bail out. However, we urge 

Congress and the Administration to invest with us in our future to achieve a stable 

economic environment, a strong employment base and a vibrant opportunity for 

technology research and development. We welcome an opportunity to work with the 

Committee. 
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PREPARED STATEMENT OF ROBERT C. KIENER 

DIRECTOR OF MEMBER OUTREACH, PRECISION MACHINED PRODUCTS ASSOCIATION

OCTOBER 9, 2009 

Chairman Brown, Ranking Member DeMint, Members of the Committee, thank 

you for the opportunity to testify before you today on restoring credit to small and 

medium-sized manufacturers (SMMs). My name is Rob Kiener and I have been with 

the Precision Machined Products Association (PMPA) for 18 years working with our 

nearly 500 members—companies from around the country. Prior to joining PMPA, 

I worked on the shop floor in a precision parts company, having spent time during 

high school and college at a screw machine shop in the secondary machining department and quality lab. More than half of our members have fewer than 50 employees. They manufacture highly engineered components using a variety of materials 

such as: steel, stainless steel, aluminum, brass, and aerospace alloys for the defense, 

medical, automotive, and agriculture industries, among others. 

Current SMM Credit Crisis 

Small and medium-sized manufacturers are often trapped between the troubles of 

their much larger customers and financial institutions. SMMs began reporting challenges accessing traditional lines of credit in October 2008. Today, many companies 

in our industry report their business is down roughly 40 percent and that they have 

significantly reduced their workforce. 

Countless members I speak with who still manage to maintain profitability tell 

me they have held decades long relationships with their bank but are now being 

told they must offer their life insurance collateral to help secure a loan—this is a 

true story from an Ohio-based manufacturer. 

Even when a manufacturer seeks to renew a loan with its existing bank, it can 

take 3 to 4 months to process based on all the new lending requirements and paperwork to complete, despite taking no more than 30 days in the past. In our industry, 

small manufacturers are required to purchase raw materials on their own, in some 

cases not seeing full payment for up to 6 months. Without access to adequate and 

timely credit, these delays can cause significant disruptions in the Nation’s critical 

supply chain including in emerging green industries, stifle economic growth, and 

risk national security. If our customers cannot receive the products they need, they 

will source them from overseas—these lost jobs, once outsourced, will never come 

back to the U.S. 

Several surveys of metalworking manufacturing companies estimate that roughly 

75 percent of these businesses cannot secure sufficient credit for day-to-day operations, equipment acquisition, and expansion, among other activities. In most cases, 

an SMM will see their line of credit significantly reduced, revoked, or a loan called 

due to the health of their manufacturing customers or lenders and not because of 

their own business decisions. While we understand some in the Administration and 

industry believe we have an overcapacity in the manufacturing sector that requires 

some consolidation, without a financial bridge to support acquisition by those remaining companies disruptions in the supply chain will continue. 

I recently heard a story of a company asked to leave their bank despite violating 

no terms of their loans over a 23-year relationship with the lending institution. The 

bank told this business that they were reducing their exposure in manufacturing 

and automotive industries and that they would have to leave the bank—this despite 

the lender receiving TARP funding. Another Ohio company incurred more than 

$600,000 in added expenses due to changes their lender demanded in their loan 

agreement. 

Beyond access to credit today, one of our major concerns is as the economy picks 

up and we see an increase in job orders, will manufacturers be able to have the capital they need to invest in employees, equipment, and raw materials? If they do not, 

there is no doubt in my mind that we will lose those jobs to overseas manufacturers 

who already maintain a production cost advantage over U.S. businesses. The Federal Government is urging manufacturers to diversify into green industries, but 

without adequate and timely access to capital companies cannot make this investment and transition, which will only further China’s goal of producing 90 percent 

of the world’s solar panels. 

A survey of metalworking companies shows 72 percent anticipate challenges accessing adequate lines of credit when volume grows. We are already seeing companies that are trying to expand their operations due to consolidation in the industry 

who are not able to access capital to fill job orders, purchase steel, and hire workers. 

The cash-for-clunkers program is a perfect example of the challenges ahead. As 

dealers and automotive manufacturers have depleted their inventories, they are 

looking to suppliers to increase their output. Similarly, manufacturers of wind tur-
56 

bines and solar panels will see shortages of domestic suppliers if SMMs cannot adequately ramp up production to meet a surge in demand as Federal funds continue 

to flow to those technologies. The current system does not even reward our small 

business exporters, as manufacturers are unable to borrow against their foreign 

sales even if their customer’s headquarters is in the U.S. A lack of access to capital 

to fill these job orders will cause disruption in the supply chain, risk our national 

and economic security, and Americans will lose the opportunity to sustain and create jobs to overseas competitors. 

To simply blame the banks is not an accurate representation of the current crisis. 

Several manufacturers who also serve on the boards of financial institutions have 

indicated that many banks are not lending to manufacturing businesses because of 

fear of having their rating level reduced by Federal regulators. This scenario is extremely troubling if indeed widespread. In these economic times, the Federal Government’s policies should not create an environment in which manufacturers struggle to access adequate and timely credit. The Nation’s economy, in which manufacturing accounts for 12 percent of GDP, cannot recover without a sound manufacturing base. 

Restoring Credit to SMMs: Opportunities and Potential Challenges 

In order to ensure a timely and sustained recovery, the Administration and Congress must take proactive steps to support manufacturing in America. The first step 

is to reassure financial institutions that returning to sound lending practices with 

manufacturers is good for their business and critical for the country. Many of these 

companies are simply temporarily impaired and need a bridge into the next year 

as business conditions improve. These temporarily impaired manufacturers have a 

long history of profitability, did not break loan covenants, and maintained steady 

relationships with their lenders—they struggle today through no fault of their own 

but because they are in the manufacturing business. 

We believe the Administration has the authority to work with creditors and borrowers to establish a mechanism by which lenders can loan to manufacturers without fear of a reduced credit rating. In addition, the Department of Treasury, through 

existing loan facility funds, should reassure financial institutions that lending to 

small and medium-sized manufacturers will deliver a return on investment through 

a public–private guarantee of loans or accounts receivable program. Many SMMs 

need a return to traditional lending, while other companies and their lenders require reassurance that their customers will pay their outstanding accounts receivable. While guaranteeing loans is critical to supporting all manufacturers, guaranteeing accounts receivable is particularly important to SMMs requiring an immediate injection of cash to continue operations. PMPA and other metalworking industries are working with the Department of Commerce Manufacturing Council and 

members of the Administration on such proposals. 

Since enactment of the stimulus bill, policymakers place much emphasis on the 

Small Business Administration as a primary solution to the credit crisis facing 

SMMs. One anecdote from Michigan tells much of the story: when a metalworking 

executive asked an SBA official in June 2009 if he was aware of any banks lending 

to automotive suppliers under SBA programs in the State he stated he was not. In 

the current environment, lenders do not believe many manufacturers are ‘‘bankable.’’ If these businesses are not ‘‘bankable’’ even under a 90 percent Government 

guarantee program, then it is clear the Federal Government must take additional 

steps to reassure lenders that investing in manufacturing is a sound decision. 

The Michigan example aside, our members report additional challenges with SBA 

programs such as 7(a) and 504 from the borrower’s perspective. The first concern 

remains the personal guarantee required under SBA programs. Most manufacturers 

cannot put forth their family home and children’s assets to secure a loan. More than 

70 percent of SMMs are structured as family owned S Corporations or LLPs, meaning it is the family that must provide the guarantee whereas a traditional C Corporation will not face similar burdens. This is another aspect of the current financial structure that demonstrates a discrimination against small and medium-sized 

manufacturers. Even when an SMM decides that they have no choice but to apply 

using a personal guarantee, the lengthy and costly process and paperwork involved 

is too much for smaller applicants who lack the full time and unlimited internal accounting services that their larger competitors maintain. Although several of our 

members indicated that increasing the SBA 7(a) loan limit to $5 million may make 

this program more attractive, most still cite an even larger personal guarantee requirement. 

Mr. Chairman, we must all work together—lenders, manufacturers, and Government—to ensure we foster an environment that encourages manufacturing in America. A number of factors in the current financial conditions serve as disincentives 
57 

for lenders to invest in small- and medium-sized businesses. Our customers will still 

require parts, regardless of our financial condition. We must maintain a strong domestic supply chain with solid and stable lending to manufacturers to fill job orders 

and are prevent millions more manufacturing jobs from going offshore. If these 

trends continue, stimulus projects will go unfulfilled, inventories will not rebound, 

and medical and defense supplies will not reach our citizens and soldiers. 

We appreciate your efforts and that of your staff in drawing additional public attention to this important issue. Thank you for the opportunity to testify before you 

today and I look forward to continuing to work with you to strengthen manufacturing in America. 

PREPARED STATEMENT OF STEPHEN P. WILSON 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER, LCNB NATIONAL BANK, ON BEHALF OF

THE AMERICAN BANKERS ASSOCIATION

OCTOBER 9, 2009 

Chairman Brown, Ranking Member DeMint, and Members of the Subcommittee, 

my name is Stephen Wilson, Chairman and CEO, LCNB Corp. and LCNB National 

Bank, Lebanon, Ohio. I currently serve as the chairman of the Government Relations Council of the American Bankers Association (ABA) and will assume the role 

of Chairman-Elect of the association at the end of this month. LCNB National Bank 

is a full-service bank offering trust and brokerage services, along with insurance 

through a subsidiary. We have over $700 million in assets, and our bank has served 

our community for 132 years. I am pleased to be here today on behalf of ABA. 

The American Bankers Association brings together banks of all sizes and charters 

into one association. ABA works to enhance the competitiveness of the Nation’s 

banking industry and strengthen America’s economy and communities. Its members—the majority of which are banks with less than $125 million in assets—represent over 95 percent of the industry’s $13.3 trillion in assets and employ over two 

million men and women. 

We are pleased to share the banking industry’s perspective on the impact this recession is having on lending to small and medium-sized manufacturers. Small businesses of all kinds—including banks—are certainly suffering from the severe economic recession. While some might think the banking industry is composed of only 

large global banks, the vast majority of banks in our country are community 

banks—small businesses in their own right. In fact, over 3,000 banks (41 percent) 

have fewer than 30 employees. 

This is not the first recession faced by banks. In fact, most banks have been in 

their communities for decades and intend to be there for many decades to come. The 

LCNB National Bank has survived many economic ups and downs for 132 years. 

We are not alone, however. In fact, there are 2,556 banks—31 percent of the banking industry—that have been in business for more than a century; 62 percent 

(5,090) of banks have been in existence for more than half a century. These numbers 

tell a dramatic story about the staying power of banks and their commitment to the 

communities they serve. My bank’s focus, and those of my fellow bankers throughout the country, is on developing and maintaining long-term relationships with customers, many of which are small businesses. We cannot be successful without such 

a long-term philosophy and without treating our customers fairly. 

In this severe economic environment, it is only natural for businesses and individuals to be more cautious. Businesses are reevaluating their credit needs and, as a 

result, loan demand is declining (see chart below). Banks, too, are being prudent in 

underwriting, and our regulators demand it. With the economic downturn, credit 

quality has suffered and losses have increased for banks. Fortunately, community 

banks like mine entered this recession with strong capital levels. As this Subcommittee is aware, however, it is extremely difficult to raise new capital in this 

financial climate. The difficult recession, falling loan demand, and loan losses have 

meant that loan volumes for small businesses have declined somewhat this year (see 

chart below). Let me be very clear here: even in a weak economy there are very 

strong borrowers. Every bank in this country is working hard to ensure that our 

customers—particularly the small businesses that are our neighbors and the life 

blood of our communities—get the credit they deserve. 
58 

We believe there are actions the Government can take to assist viable community 

banks to weather the current downturn. The success of many local economies—and, 

by extension, the success of the broader national economy—depends in large part 

on the success of these banks. Comparatively small steps taken by the Government 

now can make a huge difference to these banks, their customers, and their communities—keeping capital and resources focused where they are needed most. 

In my statement, I would like to focus on the following points: 

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

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

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

business lending. 

I will address each of these points in turn. 

1. Banks Continue To Lend in This Difficult Economic Environment, but 

the Broadening Economic Problems Have Already Started To Impact 

Lending 

Since the recession began over 21 months ago, banks have continued to provide 

credit to their customers. The impact of the downturn, however, is being felt by all 

businesses, banks included. As the economy has deteriorated, it has become increasingly difficult for consumers and businesses to meet their financial obligations. The 

cumulative impact of six straight quarters of job losses—7 million since the recession began—is placing enormous financial stress on some individuals. With jobs lost 

and work hours cut, it does not take long for the financial pressure to become overwhelming. This, in turn, has increased delinquencies at banks and resulted in 

losses. The impact of job losses on delinquencies is illustrated in the chart above. 
59 

1These trends have meant that banks continue to experience losses and are also aggressively 

setting aside reserves to cover expected losses in the future given the severity of the recession. 

Setting aside reserves has reduced income and impaired earnings for banks. In fact, two out 

of every three institutions (64.4 percent) reported lower quarterly earnings than a year ago, and 

more than one in four (28.3 percent) reported a net loss for the quarter. 

Job loss and other reductions or interruptions of income remain the number one 

cause of loan delinquencies and losses. 

What makes our current national economic circumstances so difficult to discuss 

is that there are such dramatic regional differences in economic performance. This 

chart, showing unemployment levels for States across the U.S., makes the variability clear. Most States are either in recession or very close. The causes of these 

problems are varied. In the West and Southeast, the housing sector collapse has 

now broadened to a deep recession. States such as Michigan, Indiana, and Ohio are 

suffering fundamental economic problems, which are largely tied to the fortunes (or 

misfortunes) of the auto industry. 

For example, in southwest Ohio, where our bank operates, the employment picture is expected to deteriorate even further in the short run. Several factors are involved, but most important are three major plant closures. In Batavia, Ohio, Ford 

is closing a transmission plant, which will eliminate over 1,000 jobs. In Moraine, 

Ohio, GM is closing an assembly plant, which will eliminate over 2,500 jobs. And 

in Wilmington, Ohio, DHL is closing a hub, which will eliminate over 10,000 jobs. 

The effect of job losses and closings is a major concern, but these are not the only 

events impacting small businesses, including small banks. Individuals are saving 

more and buying less, which reduces foot traffic for retail and other businesses. As 

a consequence, business bankruptcies have risen from 28,000 in 2007 to more than 

43,000 at the end of 2008. Those trends have continued into this year with 30,000 

business failures already. 1
60 

One small business segment that has been particularly hard hit in my region is 

the automobile supply chain. Manufacturers that produced for the automobile industry were dealt a hard blow with the economic downturn and the subsequent dropoff in automobile sales. Suppliers’ customers went bankrupt, wiping out receivables 

in the process. Many suppliers lowered production and slimmed down to wait out 

the storm; others hoped to retool in order to create parts for other industries. The 

economic downturn had also affected the value of their collateral. This doublewhammy of severely decreased cash flows and low collateral values made new borrowing difficult to find, especially without established relationships with lenders. 

However, even this segment is seeing some improvements. In the September 2009 

Supplier Barometer survey, produced by the Original Equipment Suppliers Association (OESA), automotive suppliers report a growing optimism for the 12-month outlook. In addition, they report they are ‘‘generally confident that they will have access over the short-term to capital in the amounts and costs necessary to fund their 

businesses.’’ This echoes the sentiment reported in PNC’s recent Small Business 

Survey, released this week, which noted small business owners are much less pessimistic about their own company’s prospects over the next 6 months. Last spring, 36 

percent of owners reported pessimism, whereas this autumn, that figure had 

dropped to 25 percent, comparable with the outlook among small business owners 

prior to the Lehman collapse. There is still a long way to go, but we remain hopeful 

that the recovery is underway. 

2. Lenders and Borrowers Are Exercising a Prudent Approach to Credit 

Against the backdrop of a very weak economy it is only reasonable and prudent 

that all businesses—including banks—exercise caution in taking on new financial 

obligations. Both banks and their regulators are understandably more cautious in 

today’s environment. Bankers are asking more questions of their borrowers, and 

regulators are asking more questions of the banks they examine. This means that 

some higher-risk projects that might have been funded when the economy was 

stronger may not find funding today. 

It comes as no surprise, then, that businesses are being very cautious. As a result, 

loan demand is down considerably. This is due, according to the National Federation 

of Independent Businesses (NFIB), to ‘‘widespread postponement of investment in 

inventories and historically low plans for capital spending.’’ The NFIB reports that 

in spite of the difficult economic environment, 32 percent of businesses reported regular borrowing in August (down one point from July) compared to 7 percent who 

reported problems in obtaining the financing they desired (down 3 points). The 

NFIB also noted that only 4 percent of business owners reported ‘‘financing’’ as their 

number one business problem. This is extremely low compared with other recessions. For example, in 1983—just after the last big recession—37 percent of business 

owners said that financing and interest rates were their top problem. 

Our expectation is that loan demand in this economy will continue to decline. 

Loan delinquencies and losses, which often lag the overall economy, will also continue to impact banks. Thus, realistically, the level of lending outstanding to all 

businesses will continue to decline for the rest of this year. However, we believe that 

as business confidence continues to improve, inventory and capital investments will 

increase, and lending volumes will rebound. As the economy starts to grow again 

and loan demand increases, the ability of banks to meet these needs will be stunted 

if adequate capital is not available to back increased lending. 

We recognize that there are some consumers and businesses in the current situation that believe they deserve credit that is not being made available. In some cases, 

it makes no sense for the borrower to take on more debt. Sometimes, the best answer is to tell the customer no, so that the borrower does not end up assuming an 

additional obligation that would be difficult if not impossible to repay. 

I have an example that illustrates this. We had a customer who we turned down 

on an application for a loan. The customer was frustrated and angry, and left our 

bank. Recently, he e-mailed me to say he should not have been granted that loan 

and that he is coming back to our bank. He said that if he would have accepted 

our response instead of looking elsewhere, he would have been in better financial 

stature now. He moved back to our bank, he said, because he appreciates the fact 

that when we underwrite loans, we are concerned about the success of our customers and whether the loan makes sense for them. 

We do not turn down loan applications because we do not want to lend—lending 

is what banks do. When banks consider an individual loan application, we have to 

place it in the context of the economic environment. For small local businesses, 

banks will consider local economic conditions in addition to any specific issues that 

may affect the business. 
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The July Senior Loan Officer Opinion Survey by the Federal Reserve bears this 

out. The survey found that the number one reason for a more conservative approach 

to underwriting was the poor outlook for the economy. Of that segment of the banks 

that had tightened lending, more than 70 percent said that the ‘‘less favorable or 

more uncertain economic outlook’’ was a ‘‘very important’’ reason for tightening 

credit standards or loan terms (and 30 percent said it was ‘‘somewhat important’’). 

Concerns with the outlook in individual business sectors was also noted as a problem. ‘‘Worsening of industry-specific problems’’ was cited by 43 percent as a ‘‘very 

important’’ driver of these changes (with another 49 percent saying it was ‘‘somewhat important’’). This is the context that banks must consider when evaluating a 

loan application. For example, if a developer came into our office wanting to build 

spec homes, we would be very hesitant to make this kind of loan in today’s housing 

environment. 

The current credit markets have tightened largely because of problems outside the 

traditional banking sector. Many large manufacturing companies, like the auto companies, relied on funding that came directly from investors, not banks. However, 

when those funding sources dried up, the impact cascaded down the supply chain. 

In fact, because of the funding problems associated with individual investors, the 

traditional banking sector will have to play an even larger role in providing credit 

to get the economy growing again. Banks are anxious to meet the credit needs of 

businesses and consumers, and we know that such lending is vital to an economic 

recovery in communities large and small across the country. 

3. Changes in the Regulatory Environment Would Improve the Situation 

for Small Business Lending 

As I noted above, banks are not immune from the economic downturn; job losses 

and business failures have resulted in greater problem loans and much higher loan 

losses. Nonetheless, banks are working every day to make credit available. Those 

efforts, however, are made more difficult by regulatory pressures and accounting 

treatments that exacerbate, rather than help to mitigate, the problems. 

Of course, the current regulatory environment is unquestionably impacted by concerns flowing from the economic downturn. A natural reaction of regulators is to intensify the scrutiny of commercial banks’ lending practices. But just as too much 

risk is undesirable, a regulatory policy that discourages banks from making good 

loans to creditworthy borrowers also has serious economic consequences. Wringing 

out the risk from bank loan portfolios means that fewer loans will be made, and 
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that only the very best credits will be funded. Here are a couple of the factors that 

are impeding greater bank lending: 

• FDIC premium payments are impacting banks’ ability to make new loans: Perhaps the most immediate threat hampering banks’ ability to make new loans 

is the very high premiums being paid by banks to the FDIC. This year alone, 

the banking industry will be paying at least $17 billion to the FDIC. The recent 

proposal by the FDIC to pay expenses over a longer period of time, rather than 

having a huge payment all at once, is promising. Banks have paid the full cost 

of the FDIC for 75 years now, and banks will assure the financial health of the 

FDIC during this difficult period. It is absolutely critical how those obligations 

are repaid so as not to further exacerbate the poor economic conditions. 

• Supervisory responses to the crisis threaten to stifle new lending: Worsening conditions in many markets have strained the ability of some borrowers to perform, 

which often leads examiners to insist that a bank make a capital call on the 

borrower, impose an onerous amortization schedule, or obtain additional collateral. These steps can set in motion a ‘‘death spiral,’’ where the borrower has 

to sell assets at fire-sale prices to raise cash, which then drops the comparable 

sales figures the appraisers pick up, which then lowers the ‘‘market values’’ of 

other assets, which then increases the write-downs the lenders have to take, 

and so on. Thus, well-intentioned efforts to address problems can have the unintended consequence of making things worse. We also have heard complaints 

from other banks about examiners being inappropriately tougher in their analysis of asset quality and consistently requiring downgrades of loans whenever 

there is any doubt about the loan’s condition. 

What the regulators want for the industry is what the industry wants for itself: 

a strong and safe banking system. To achieve that goal, we need to remember the 

vital role played by good lending in restoring economic growth and not allow a credit 

crunch to stifle economic recovery. Commendably, the bank regulators are publicly 

encouraging lenders to work with their borrowers who are doing the right thing in 

good faith during these challenging times. But the current regulatory environment 

essentially precludes banks from being able to do that. We must work together to 

get through these difficult times. Providing a regulatory environment that renews 

lines of credit to small businesses is vital to our economic recovery. 

Conclusion 

I want to thank you, Chairman Brown, for the opportunity to present the views 

of the ABA on the challenges ahead for the banks that serve small businesses and 

manufacturers. These are difficult times and the challenges are significant. In the 

face of a severe recession, however, bankers are working hard every day to ensure 

that the credit needs of our communities are met. 

I am happy to answer any questions the Subcommittee may have.