Econintersect: Banks are now using the SBLF (Small Business Lending Fund) to borrow money to repay TARP (Troubled Asset Relief Program) money that is still outstanding from the beginning of 2009. To be sure the SBLF is not open to the TBTF (too big to fail) banks – assets must be under $10 billion. However, in January Business Week reported that there were 473 banks eligible that still had TARP loans outstanding. The sweet part of the deal is that banks which increase their lending to small business can get their interest payments lowered to as little as 1%.From Business Week:
Banks that increase their small business lending will have their interest reduced from 5 percent to as low as 1 percent. Banks that don't boost lending at all will see their interest rates on SBLF capital rise to 7 percent after 2.5 years. After 4.5 years, the cost will jump to 9 percent for all SBLF recipients, an incentive for banks to exit the program before then. Business loans that qualify include loans up to $10 million to companies with $50 million or less in annual revenue. Loans that are guaranteed by the Small Business Administration do not count.
Attorney Chris Jones, a partner who advises banks at Stinson Morrison Hecker in Kansas City, Mo., was quoted by Business Week. Jones suggested:
The program could encourage banks to make bad loans. "What got us into this mess to begin with was creating demand where it didn't exist." Still, Jones says the fund may be a good idea for banks that need more capital to make loans to healthy borrowers.
The savings on cost of capital for banks that move from a TARP outstanding balance to an SBLF loan can be considerable. ProPublica has a listing of all dividends and interest paid by banks under TARP and several hundred still have outstanding loans. Some of these have relatively small outstanding loans under $1 -$2 million dollars, but there are a number owing tens of millions. A bank with a $10 million Tarp loan can go from $500,000 a year interest payments down to $100,000 with SBLF. If a loan of $50 million is transferred the bank can save $2 million in interest a year.
According to PublicRadio.org, hundreds of banks have applied for SBLF loans and 66 have been issued as of September 2.
PublicRadio.org has documented a case study involving First Bancorp a bank with $3.3 billion of assets, based in Troy, North Carolina. The bank has paid a total of $7.6 million in interest payments to date to the Treasury for its $65 million TARP loan. Last week First Bancorp paid off its TARP loan ($65 million) by taking out a SBLF loan of $63.5 million). Presuming they can qualify by making small business loans, their cost of capital has shrunk from approximately $3.18 million a year to $0.64 million for the $63.5 million.
Editor’s note: With the added margin perhaps the bank will be able to retire more than $1.5 million in debt to the government that has been paid down over the past 30 months. After all, reduced cost of capital should send an additional $4 million to the bottom line before taxes in the next 2 ½ years. But the 1% interest option is good only for 5 years, so First Bancorp will have to find other sources to pay off the loan. The $8 million before taxes over five years is probably less than $5 million after taxes, so they will need to find another $58 million or so to retire their SBLF loan at that time. If the 1% interest can be continued for a longer time period, they will need only $53 million in addition to the improved margin income after ten years. Talk about a long work-out.
Hat Tip to Credit Writedowns