Q & A: Community banking keeps Gibbon's interest

Vermont Business Magazine, Mar 01, 1998

VBM: So you reach people who are innovating, but would never get a chance if they had to pay the return and operate on the scale a venture capitalist wants.

GIBBONS: Right. Don't forget, SBA loans are priced at market. There is no discount on interest rates. The strength is that you lend to these businesses when they're small, and then they can outgrow the SBA requirements. When they do, they have to leave the program.

VBM: The number of SBA loans in Vermont has been decreasing, Why is that happening, and will that have any effect on the future of the Vermont office?

GIBBONS: SBA has been downsizing for the last few years. The Preferred Lender Program is now handled out of Arkansas. Almost all of that is done by fax or Internet.

I think that two things are responsible for the decrease in SBA activity in Vermont. The first is that SBA in effect doubled guarantee fees two years ago. In most cases, banks pass that on to the borrower, and it becomes pretty expensive.

The second is that the economy is doing better than it was in the late '80s and early '90s. Banks relied more on the SBA guarantee then than now. I suspect some of the banks memory is a little shorter than it should be.

VBM: How's the Congressional loan authorization for SBA going this year?

GIBBONS: My understanding is that it has been increased this year, and I believe it is on budge to be increased next year. "That's good news. A few years ago there was quite a bit of pressure to cut back on the lending authority of the SBA.

In addition, they have modified the rules a bit, reflecting the real SBA exposure. Rather than looking at the full balance of the loan, they're now taking into consideration, in most cases, the guaranteed portion of the loan.

In '96 and '95 they did reach their statutory lending limit, and SBA lending was curtailed for a few months. I don't think we'll see that this year.

VBM: I gather the borrowers which the SBA enables you to add to your portfolio are not a large portion of your business, but you consider them significant because they are a potential source of growth for the economy.

GIBBONS: Yes. All our SBA requests are from local business people, either starting up, which has the highest level of risk, or expanding. It all comes down to jobs. When we make SBA-backed loans, we facilitate job growth in our economy, and also cut back on some of our risk.

For a while banks were having a hard time funding commercial as well as residential loans. Now we have an active secondary market on SBA-guaranteed loans. We originate the loan, and then sell it, bring those dollars back in, and re-lend them to another entity. It's very similar to the secondary mortgage market for residential loans.

VBM: Who buys those loans?

GIBBONS: Usually investment houses, who in turn feed them to pension funds and private investors. Quite often they are variable-rate instruments, which are more readily marketable.

VBM: You serve on quite a few other boards of directors. Which organizations are closest to your heart?