The approximate man-hours spent on the report were as follows:

The SBA had 5,000 copies of the report printed by the Government Printing Office at a cost of $4,229. This, combined with the salary costs for the manhours shown above, totaled $5,610.

The report represented a completely new method of presentation by SBAa shorter, and, we believe, more attractive and readable report than had been true of SBA's previous ones. For example, we had the report typeset rather than typewritten and photographed as in the past. Although this meant a higher printing cost, it also resulted in a considerable saving of paper and a great gain in readability. Despite the fact that the agency listed a record number of 3,768 business loan approvals in the 17th semiannual report-exactly 700 more loans than in the 16th report-the 17th report was 74 pages shorter than the 16th.

Mr. BROOKS. There is one further question on that. On page 5 of the semiannual report on the Cleveland office, dated May 5, 1959, the following statement appears:

One man is currently responsible for the liquidation of 53 loans.

The budget standard is 15 such loans per man. Just as a matter of real interest, the subcommittee would like to be advised of the budget standards for the other classifications of SBA employees and an explanation as to how you determined these standards.

(The information requested regarding workload standards follows:) ADMINISTRATION BUDGETARY WORKLOAD STANDARDS FINANCIAL ASSISTANCE PROGRAM

SMALL BUSINESS

Activity and work unit standard for loan specialist-loan assistant

FOR

Delinquent and problem (business and home)__
Liquidation (business and home) and collateral

purchased accounts--

15.0 Do.

Mr. HORNE. Mr. Chairman, first let me say that while I am not entirely familiar with this person in the Cleveland office who has been handling 53 loan recommendations

Mr. BROOKS. We are not critical of that.

Mr. HORNE. I want to point out in all fairness it seems very high to me and I should think if we-and I will be glad to do this if the committee wants me to do it, I will be glad to check this out and get all the details-I think what we will find here is some overtime and weekend operations and so forth because it is going to be pretty difficult for one person to handle 53 loans.

Mr. BROOKS. We are primarily interested in learning how they determine the productivity norm. That is just an example that shows there is some considerable difference between workload in one area and workload in another and we are trying to get an idea of how you determine your standard, which you say is approximately 15.

Mr. HORNE. We determine that primarily, Mr. Chairman, by keeping records, so to speak, of operations where we have enough repetition. We try to analyze and study that particular operation until we can finally with some degree of accuracy measure what would be involved and what one person would do, and what a standard should be. And we have been able to work this out in some areas of the agency better than in some other areas as to what the standard should be.

I have discussed this particular item

Mr. BROOKS. It is a difficult question and hard to determine, but that is why I am interested in any effort you are making. The art is still one which is still not fully developed this productivity question still is a tough one.

Mr. HORNE. It is. For the committee's information I have discussed this particular aspect of our operations with the appropriate people within the agency and requested that we try to not only improve standards we have already set but that we try to make them applicable to other areas. As we have enough going on in other areas, and as we have enough repetition so that we can develop fairly a work standard, that we will do. As the chairman knows, this does not include all of our activity. We are trying to make it applicable as we go along, and encompass more than we presently encompass.

Mr. BROOKS. Thank you very much,

Did you have any comments on this, Mr. Jones?

Mr. JONES. Well, Mr. Chairman, I am like you, I don't see how you are going to determine the work because one man can work a little faster than another. He might not do it as efficiently, but it seems to me you are getting into an imponderable situation.

Mr. BROOKS. Do you have anything?

Mr. WALLHAUSER. No; I have no questions.

LOAN OPERATION LOSSES

Mr. BROOKS. If not, I would like to go now to another important and significant problem and ask some questions that I think you will be interested in and that I know you have been concerned with, Mr. Horne. I would say certainly the most important operation of SBA is its small business loan program. If you can verify for me the total loans outstanding as of December 31, 1961-I have the figures furnished me by your staff: Business loans, $453,777,301.

Mr. HORNE. Yes, sir.

Mr. BROOKS. And disaster loans, $56,869,523; development company loans, $13,640,922; investment company loans, $11,304,000-for a total of $535,591,746.

89028-62-pt. 2- 4

Now, is any provision made for potential losses in these loans?

Mr. HORNE. Yes; we have reserves for losses. I can give the committee the reserve balances as of December 31, 1961, for each of these items that you mentioned.

Under our business loan reserves we have $14,211,000, approximately.

Mr. JONES. What do your reserve percentages run?

Mr. HORNE. Under our business loan program, Congressman Jones, we have two programs. We have what we call the immediate participation and the deferred participation. For immediate participation loans we set up a reserve of 2.2 percent. I believe that answers your questions.

For our direct loans it is 3.1 percent. For deferreds, it is 1 percent. Mr. JONES. In other words, you are running about the same percentage of reserve that a commercial bank would operate?

STATEMENT OF C. R. LANMAN, DEPUTY ADMINISTRATOR FOR FINANCIAL ASSISTANCE, SMALL BUSINESS ADMINISTRATION

Mr. LANMAN. It is comparable, Congressman. There are some variations because banks set up reserves a little differently based on this moving average they use, but I would say 2.2 is comparable. There is some thinking in the banks that I have discussed this with that perhaps their reserves in this reserve portfolio in this item should be 4 percent.

Mr. BROOKS. Your total reserves, as I understood, are approximately $17,806,417 ?

Mr. HORNE. That is for the business loans and for the disaster loans. Mr. BROOKS. Does that include development company and investment company loans?

Mr. HORNE. Total reserve for everything that you mentioned a moment ago, sir, is $18,621,000.

On our direct loans where we make the loans ourselves without bank participation, we set up a little higher reserve, 3.1 percent; on our disaster loans we have a higher reserve of 5 percent. In following through on our statute, the disaster loans are a little more marginal loans than are the regular business loans and our direct loans are generally a little more marginal than our bank participation loans.

Mr. BROOKS. Generally speaking, though, the reserves are roughly comparable with those that a bank would have for a comparable loan risk?

Mr. HORNE. We think so.

Mr. Moss. Mr. Chairman?

Mr. BROOKS. Mr. Moss.

Mr. Moss. The question is whether or not the reserve is adequate to meet the losses incurred. Do you have a continuing adjustment here so that your set-aside for reserves is adequate to meet the losses actually experienced?

Mr. HORNE. We believe they are, Congressman, but we do have the flexibility so we can increase our reserves.

Mr. Moss. To what point are they increased? How often do you review your expense and test the adequacy? Mr. HORNE. Annually.

Mr. Moss. What has been the history on adjustments of the reserves on your direct loans, for example?

Mr. HORNE. Do we have that, Mr. Hanna?

STATEMENT OF KEITH L. HANNA, ASSISTANT ADMINISTRATOR (CONTROLLER), SMALL BUSINESS ADMINISTRATION

Mr. HANNA. Approximately 2 years ago we did make an adjustment of our reserves. If my recollection is correct, we adjusted the business loans upward slightly. We made a slight downward adjustment on the disaster loan rate.

Mr. Moss. What has your experience been? Are the reserves adequate?

Mr. HORNE. We think they are, Congressman.

Mr. Moss. You can test that very quickly. What are your losses? Are your losses covered by your reserves?

Mr. BROOKS. May I note here, Mr. Moss, that the financial statement in the semiannual report submitted as of December 31, 1961, indicates the net loss for the first half of fiscal year 1962-that is the 6 months ending December 31, 1961-amounted to $9,813,000. Of that $9 million, the $3.8 million or almost $4 million represented the additional increment to be added to the reserve for losses covering this 6-month period. And the GAO in February in their audit report recommended that they review its determination of reserve amounts covering expected losses and the SBA did make it, so that reflects an increase at that time of the revolving fund of roughly $4 million to meet the loss.

Mr. Moss. That is when you made the adjustment to 3.1 percent? Mr. HORNE. Yes, sir.

Mr. Moss. That has proven since then to be adequate to meet the losses?

Mr. HANNA. The analysis is made as of June 30 of each year. Since we made the one adjustment to which I referred, we have found generally speaking the reserve to be adequate and we have not found it. necessary to make any further adjustments. But we do watch it. each year and make this analysis to be certain that our reserves and our ratios do appear to be adequate based on the information we have and the appraisal and evaluation of the outstanding loans.

Mr. BROOKS. This $3.9 million in addition to the reserves as determined after you made the review requested by the GAO?

Mr. HANNA. Mr. Chairman, the $3.9 million to which you referred represented the charges during the 6 months period for new loans. which were made by the application of the ratio

Mr. SCHWEIKER. There are no adjustments in your reserves?
Mr. HANNA. No adjustments in the $3.9 million.

Mr. SCHWEIKER. You haven't adjusted reserves since 2 years ago? Mr. HANNA. We have made only the one surplus adjustment, which was 2 or 3 years ago.

(NOTE.-There was a change in the factor for deferred participation loans on July 1, 1961, from 1 to 1.35 percent. This did not require a surplus adjustment, however.)

Mr. BROOKS. Thank you, Mr. Schweiker, for clarifying that.
Mr. Moss. I have one further question.

Mr. BROOKS. Mr. Moss.

Mr. Moss. Would it be true that your loss expense might reasonably be expected to be a little higher than the normal commercial bank because of the greater risk involved and the longer term of the loans made under the SBA program?

Mr. HORNE. I think, Congressman Moss, that it would be expected that our loss reserves would be a little higher than the bank.

Mr. Moss. This would not reflect adversely on management but would be normally expected.

Mr. HORNE. Also as the committee I am sure knows, before we accept a loan application the applicant first goes to his bank and we encourage the bank to make all the loan. If the bank won't make all of it, at least to make part of the loan on what we call the participation plan.

I wouldn't want to leave the impression that the bank necessarily always turns down good loans. Our loss on direct loans is a little higher than where the bank participates and this would be expected, but many of our direct loans are complete loans and excellent loans and they are excellent because we do something sometimes a bank doesn't do. We give them a longer period of time, for example, in which to amortize their loans. Like buying a house. As the Congressman knows, you can buy a house for 5 or 20 years. The 20-year risk may be as good as the 5-year risk but the one with the 20 years takes longer to pay it out. The banks sometimes go for 5 years and rarely 10 years. The banks have requirements on their portfolio. They do not want their portfolio to be overburdened with one particular type of loan.

So for all of these reasons the Small Business Administration frequently makes direct loans just as good as those where the bank makes the entire loan itself.

Mr. BROOKS. It is for a longer period of time. It is not like being under the gun to determine whether they are going to renew the note. Mr. HORNE. That is right.

Mr. BROOKS. Mr. Schweiker.

Mr. SCHWEIKER. You gave us a figure for the last 6 months of 1961. What would be the comparable figure for the first 6 months of 1961? Mr. HANNA. I don't have that but I can supply it for you.

Mr. HORNE. Would you like to have that supplied, Congressman? Mr. SCHWEIKER. Yes.

(The requested information follows:)

The provisions for losses during the period Jan. 1-June 30, 1961, were as follows:

Mr. SCHWEIKER. Did we substantially change from the first to the second 6 months insofar as what we set aside for reserves is concerned? Mr. HANNA. I believe that this is higher because this is directly related to the volume of loans actually disbursed but I would have to verify the amounts. I will be glad to submit it to the committee.

Mr. SCHWEIKER. Do you have an average percentage as far as the reserves go? I know it breaks down into categories but what is the average percentage reserve?