The CHAIRMAN. We will have to find out under which hat you are speaking.

Mr. BEZANSON. I am speaking right now from the standpoint of the president of the SBIC, but I am trying to give you viewpoints

The CHAIRMAN. You are a director of the Merchants Bank.

Mr. BEZANSON. No. Director of our bank which happens to be the Jackson State Savings Bank. That shows up on our financial statement. That is why I gave you this last exhibit.

(This exhibit can be found at p. 95 of this record.)

The CHAIRMAN. The Merchants Bank at one time had stock in your small business investment company?

Mr. BEZANSON. That is right.

The CHAIRMAN. Later on they withdrew or pulled out or sold their stock.

Mr. BEZANSON. That is correct.

The CHAIRMAN. And then you contacted them for a $250,000 direct loan, and they declined or refused to make you a loan. Is that right? Mr. BEZANSON. Your assumption is correct up to the point where they would not make us a direct loan of $250,000, but they will make us a loan of $250,000 on the takeout program from SBA which is permitted under the act. They won't make it direct, however.

Now, I think that within 2 or 3 more years most of us who have been operating successful companies will be able to obtain direct loans, open line cedit loans from insurance companies, from banks and from other financial institutions, but we are too young yet. They won't talk to us until after we are at least 5 years old and have enough experience behind us.

The CHAIRMAN. Well, it is always good to have good cousins and kinsfolk and good connections, but my observation is would your company be able to succeed and to operate successfully and be profitable without these affiliates, your affiliations?

Mr. BEZANSON. Yes, I think so. Because of our SBIC program I have promoted SBIC affiliates for industrial loan companies at our association meetings around the country. I continually emphasize that this combination of experience in lending should show the best results for the program.

The CHAIRMAN. Do your other companies assume some of the management costs, salaries, and expenses?

Mr. BEZANSON. It varies.

The CHAIRMAN. Or are they borne by SBIC alone?

Mr. BEZANSON. No. The SBIC pays only its modest share of the expenses. This is handled by the controller of the company but the division of expense for overhead is very modest on the SBIC program. The CHAIRMAN. One further question here. I made a note on your statement as you went along; you state:

We recommend that small business investment companies be allowed to operate on a more independent basis.

I was thinking at the time you are not very independent of your affiliates. Is that what you are referring to?

Mr. BEZANSON. No. I am talking about the SBA as far as independence.

The CHAIRMAN. What is SBA doing to you that you object to? I thought they were trying to help you, assist you?

Mr. BEZANSON. Well, in an earlier comment that was made, they talked about occasions where we might wind up with 100-percent ownership of the business. We did happen to wind up with 100-percent ownership in one nursing home and the only reason we did was that the money wasn't forthcoming from the person whom we were to back originally. We were putting in a third of the money required and they were putting in two-thirds. When the final requirement came about, personalities clashed between this particular woman and her husband and he wouldn't sell his farm, so the money didn't come in and we had to put up all the money.

We have operated it successfully but in a nursing home it takes a year to 2 years to get onto a profitable basis. The SBA came in and said we had to divest ourselves of 51 percent of this particular operation. I have been able to forestall the divestiture for a year and a half and I think I can continue until such time as we can sell it at least to get our money back. I don't think it is the intent of the SBA, and they have agreed, to make us take a loss. They have been fair about it. But these are regulations-they are taking no risk. We are taking all the risk but we have to wind up

The CHAIRMAN. The SBA has chartered you and licensed you under an act of Congress and they have loaned you money and made advances, and when they make an advisory recommendation, it is not to damage you or hurt you. It is to help you succeed. They want to see you do well.

Mr. BEZANSON. I believe that is true. I have no objection to that point, Mr. Chairman. Let me point out just one observation, if I may, pertaining to our division of loans and equity, and this is where we as a small investment company differ from the large investment company. We have 14 loans outstanding at the present time ranging all the way from $5,000 to $160,000 in size. We also have nine equity loans. Of our nine equity loans that are variable from $5,000 to $75,000, three of them have gone by the wayside. We have taken losses on those three. Two of them are reasonably sick but they can recover and they probably will because we are giving them everything we can. Two of them are average loans that will be repaid in proper order and we will make a modest return, and two of them are excellent.

So our average isn't too bad in the equity phase of it, but because of the small size companies that we are appealing to, we have almost had to go into entirely the loan route rather than the equity program to substantiate earnings for our company.

The CHAIRMAN. Mr. Bezanson, you have submitted to the committee a consolidated statement of conditions of the Morris Plan Co. Do you have a statement of conditions of your small business investment company?

Mr. BEZANSON. That is in there. Iowa Growth Investment Co.
The CHAIRMAN. That is included.

Mr. BEZANSON. That is right.

The CHAIRMAN. How much of the stock of the Iowa Growth Investment Co. is owned by Morris Plan?

Mr. BEZANSON. 100 percent.

The CHAIRMAN. Without objection, we will place in the record this consolidated statement of the companies.

(The statement referred to follows:)

(1) Represents book value of 22 percent of the common stock of Jackson State Savings Bank held by other than the Morris Plan Co. of Cedar Rapids.

The CHAIRMAN. Do you have any questions, Mr. Harvey?

Mr. HARVEY. I would just like to ask Mr. Bezanson this question: Assuming that the Congress does not revise the SBA operational procedures and regulations, would you expect to continue with the Iowa Growth Investment Co. ?

Mr. BEZANSON. Yes, I would; very much. It fits into our overall picture.

Mr. HARVEY. In other words, the present SBA setup you would consider a reasonably satisfactory one?

Mr. BEZANSON. Yes, I would.

Mr. HARVEY. Do you feel that your expansion will come in the area of more small or more large loans?

Mr. BEZANSON. I believe that our loans are going to fit this same average portfolio that we have now, but they are all going to be loans, very little equity, and I say that because we can't fight the battle for the little businessman that can't afford to keep and maintain records. He can't afford the sales distribution and these other problems. We will loan him money if he can collateralize that loan and we will loan it to him for 5 years, up to 10 years, and this fits that bracket that he can't get anywhere else. This is going to be the long-range picture as far as our company. We will continue our growth in that direction. We wish that the money was available to us that we borrow from SBA, at a lower cost. I will tell you why. We borrow money in our bank. We borrow in our Morris Plan at 4 percent but the differential there at our present level isn't that serious. But we do feel that there is no risk being taken by SBA at the present time. We are taking it all.

And before SBA loses a dime on us, we have got to lose $400,000. And we are not about to lose that if we can help it.

Mr. HARVEY. In other words, one of your chief recommendations has to do with the rate of interest charged by SBA.

Mr. BEZANSON. That is one of the recommendations, very strongly. I wish Mr. Multer had stayed because the direct questions he was posing earlier about this borrowing for 5 percent and expecting to loan it back to somebody else for 5 percent, that is just ridiculous. I mean, who pays the cost of overhead? Who pays to run the operation? We can work on a margin between 11 and 12 percent like many of the rest of them do on our loans. Most of them are 6 percent add-on loans. Well, heavens, we have got to advertise, we have got to employ personnel, we have got to do all the necessary responsibilities to conduct a profitable business. You can't do it at 5, 512, or 6 percent if you are borrowing at 5.

Mr. HARVEY. Although I don't presume to speak for him, I don't believe Mr. Multer indicated that he thought the SBIC should operate without a profit. I am sure Mr. Multer expects them to make a profit. I will not go any further into what his conclusions might be, but I am sure the chairman would agree with me that it wasn't contemplated by the Congress or by this committee or even by Mr. Multer that the SBIC's should operate without a profit.

The CHAIRMAN. It is fine if you should take some risks and make small business loans. We know that banks and other types of investment companies can make other types of loans and these SBIC's were licensed and created to aid and assist small business by making long-term and equity capital loans.

The Morris Plan bank, in your instance, as it is chartered and established, and which owns and controls this SBIC, if they can't make a loan from the bank, then they can refer it over to the SBIC for a 5or maybe a 10-year loan as I see the picture.

Mr. BEZANSON. But remember, the Morris Plan does not make those term loans, that long loan. There is nobody in the industry, nobody will make this kind of a loan even on collateral between the 5 and

10 years.

The CHAIRMAN. I am saying that a facility, an instrument has been devised for you to take another type loan and we want to encourage you if we can to

Mr. BEZANSON. That is correct.

The CHAIRMAN (continuing). To make these small business loans. Mr. BEZANSON. This is what we intend to continue doing.

The CHAIRMAN. Mr. Mitchell?

Mr. MITCHELL. Mr. Bezanson, on the question of affiliated transactions, has your firm entered into such transactions, often referred to as self-dealing?

Mr. BEZANSON. No.

Mr. MITCHELL. Do you have any firm opinions about whether such transactions should be allowed or not?

Mr. BEZANSON. Well, being in the banking business as well as the industrial loan business and leasing business, we feel that there should definitely be arm's length at any time. So we would be very much against any self-dealing program. :

The CHAIRMAN. Thank you very much, Mr. Bezanson. Thank you for coming in. We appreciate your testimony.

Mr. HARVEY. Mr. Chairman, if I might, I just want to ask one other question. Do you have any estimate at all as to how many jobs per se have been created by the businesses that you have helped to get underway?

Mr. BEZANSON. Are you asking about the number of employees involved?

Mr. HARVEY. Yes.

Mr. BEZANSON. Well, this would have to be rather a wild-somewhat of a wild guess-but it runs way up in the hundreds as far as our area is concerned. Several of those, the nameplate company that I spoke of has 20 employees and the Braymer Engineering has about 15 employees, and on down the line. If we add them all together, I am quite sure we would come up well in the hundreds that would not have been created otherwise.

The CHAIRMAN. Thank you very much.

Recognizing the value of trade journals, it is noted that NASBIC News has a story concerning these hearings, and also one of the trade journals, SBIC Newsletter. Without objection, we will include these in the record of the hearing at this point.

(The documents referred to follow :)

[From NASBIC News, Washington, D.C., March 1964]

HOUSE COMMITTEE BEGINS HEARING ON SBIC PROGRAM

Joe L. Evins, chairman of the House Small Business Committee, has just announced that his group will begin its 1964 survey of the SBIC program with 2 days of public hearings on March 17 and 18. A number of SBIC executives