(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, 52, 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 for coming in. We appreciate your testimony.

you

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

have been asked to testify, as well as SBA officials in charge of the Investment Division.

The committee is expected to look closely at the operations of the SBIC's it calls with emphasis on such matters as types of client companies, interest rates, percentage of equity, and working relationships between the licensee and the borrower. Witnesses will also be asked to make suggestions for means of improving the program.

According to the committee staff, the first 2 days of hearings in Washington are likely to be followed by further testimony-perhaps taken in the field.

[SBIC Newsletter, Mar. 15]

HOUSE SMALL BUSINESS COMMITTEE SCHEDULES 2-DAY SBIC HEARING The House Select Committee on Small Business will take a detailed look at the SBIC industry this week when it holds a 2-day hearing, Tuesday and Wednesday, March 17 and 18.

Although it is obvious that many witnesses have been called to cover specific areas and problems, the general trend of the hearings will deal with ways to help smaller small businesses obtain financing. Several witnesses were selected by the committee because they have records of successfully financing the smaller companies.

The committee is alarmed over a growing industry trend toward larger loans because, "it takes as much time and money to handle a small loan as a large one." It is not difficult after reviewing the witness list to determine the committee's other interests. Listed for Tuesday appearances are R. Lee Davis, president of L. Davis & Associates, Inc., Nashville, Tenn., organizer of Tennessee Investors, Inc., which evolved into Southeastern Capital Corp.; Allen K. Ruvelson, First Midwest Capital Corp.; Nelson Puett, Jr., Austin, Tex., leader of a proxy fight to take over Gulf Southwest Capital Corp.; B. H. Burlage, SBIC of Norfolk; George McCurrach, Florida Capital Corp., and Peter Bezanson, Iowa Growth Investment Co.

Wednesday's testimony will come from Milton Cummings, president of Brown Engineering Co., Huntsville, Ala.; T. Eugene Smith, Potomac Small Business Funds; Robert H. Pratt, Virginia Capital Corp.; Grogan Lord, Texas Capital Corp.; and SBA Administrator Eugene Foley and Deputy Administrator for the Investment Division, Richard Kelley.

Puett, who wants Gulf Southwest to either merge or liquidate because of what he considers poor company management, will not discuss the proxy battle. The committee is not interested in becoming a sounding board for proxy fights, but wants more information on the charges that Puett has made, including a claim that Gulf Southwest has excessive operating and salary expenses and gives special treatment for business interests of company officers and directors.

The committee called Pratt because it is interested in the recent merger between Virginia Capital and Southside Capital. The committee wants to know the effects of the merger on both the old and new companies.

Cummings, whose company has quickly jumped to a top position in the defense contracting field, will probably discuss the problems a company faces in attempting to obtain financing and Smith, president of the Mid-Atlantic RASBIC and NASBIC treasurer, is expected to deal in an incentive program for companies that handle loans at the lower end of the financing scale, a concept that several committee members favor.

The committee also wants to study the continuing rise of real estate financing, particularly to find out if SBIC's are concerned with real estate speculation or bona fide equity financing.

The hearings, which will be held in room 356 of the Old House Office Building beginning at 10 a.m., were originally scheduled for later in the month but had to be moved up because of other committee obligations. There is a strong possibility that additional SBIC sessions will be held later in the spring with a new set of witnesses. Most likely candidates for a later appearance are large companies with a considerable amount of uninvested funds.

The CHAIRMAN. The committee stands recessed until 10 o'clock tomorrow.

(Whereupon, the hearing recessed, to reconvene at 10 a.m., Wednesday, March 18, 1964.)

SMALL BUSINESS INVESTMENT PROGRAM

WEDNESDAY, MARCH 18, 1964

HOUSE OF REPRESENTATIVES,

SELECT COMMITTEE TO CONDUCT STUDIES AND
INVESTIGATIONS OF THE PROBLEMS OF SMALL BUSINESS,

Washington, D.C. The committee met, pursuant to recess, at 10:10 a.m., in room 356, Cannon House Office Building, Hon. Joe L. Evins, chairman, presiding. Present: Representatives Evins, Multer, McCulloch, Robison, and Harvey.

Also present: Bryan Haskell Jacques, staff director; Richard L. Mitchell, general counsel; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel.

The CHAIRMAN. The committee will come to order.

Is Mr. Milton Cummings present?

Mr. Cummings has not arrived.

Mr. Eugene Smith?

Mr. SMITH. Yes, sir.

The CHAIRMAN. Mr. Smith, will you come forward, please? I believe you represent the Potomac Small Business Funds, Inc.

Mr. SMITH. Yes, sir, Mr. Chairman.

The CHAIRMAN. We will be very pleased to hear you, Mr. Smith. The committee appreciates very much your coming to give us your views and your testimony.

Mr. SMITH. Mr. Chairman, this is Mr. Carrington Williams, who is the counsel for Potomac Small Business Funds, Inc.

The CHAIRMAN. Mr. Williams, glad to see you.

Mr. WILLIAMS. Thank you, sir.

The CHAIRMAN. Mr. Smith, are you an official of the company? Would you give the title and the name of your company? And you may proceed. Do you have a prepared statement?

Mr. SMITH. Yes, I do, sir. I am Eugene Smith. I am the executive vice president of Potomac Small Business Funds, Inc.

TESTIMONY OF T. EUGENE SMITH, EXECUTIVE VICE PRESIDENT, ACCOMPANIED BY CARRINGTON WILLIAMS, COUNSEL, POTOMAC SMALL BUSINESS FUNDS, INC., ANNANDALE, VA.

Mr. SMITH. Mr. Chairman, Potomac Small Business Funds Inc., was licensed by the Small Business Administration on December 20, 1960. Our financial structure may be summarized as follows: Initial capitalization, $302,000, composed of, private capital of $180,400; and subordinated debentures to the Small Business Administration of $121,600.