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Banks: Paying Off One Government Bailout With Another

Sometimes, personal-finance gurus advise cash-strapped consumers to pay off their high interest-rate credit cards by using a lower-rate one.

Banks have been trying the same tactic to get out from what they owe to Uncle Sam - by borrowing from Uncle Sam. And guess what? Uncle Sam is encouraging it.

TARP, the US Treasury's $700 billion bailout of banks and the housing market, technically expired all the way back in October 2010. The exhausting debate about whether TARP was successful persisted more than two years after the program started. Neil Barofsky, the official in charge of keeping TARP accountable, stepped down in February and slammed the program in a New York Times op-ed in March.

So it's no surprise the government wants to clear its rolls of the hundreds of banks that have been dawdling in paying back their TARP bailouts from January 2009. Keefe Bruyette & Woods says that Treasury has $19.1 billion still invested in about 473 banks through TARP.

How to do that? Funnel them to yet another Treasury bank-stimulus program. So earlier this year, a Treasury official dropped a big hint: some banks might want to pay back TARP - hint, hint - by applying for loans from the newly established $30 billion Small Business Lending Fund.

As far as TARP goes, it's not a terribly expensive bailout program - for bigger banks, at least. Most banks pay dividends to the Treasury of about 5% a year, but that's for the first five years f. After that, the rate goes up to 9% if those banks do not make the deadline.

The SBLF is another Treasury program designed to encourage community banks to lend, particularly to small businesses. It started in January.

Hundreds of banks have already applied to do it. According to KBW, a total of 66 banks repaid their TARP investment either entirely or partially by refinancing through the SBLF.

Those banks are getting more than they put in. Those 66 banks received $900 million in TARP money, but after they refinance, they're getting $1.2 billion from the Small Business Lending Fund.

The benefit of the SBLF to the government, however, is clear. The Small Business Lending Fund's terms help keep banks far more accountable than does TARP. For instance, banks that lend a lot will see their interest rate on the SBLF loan fall to just 1% from 5% - and the penalty for not lending is steep. If banks get SBLF money and don't boost their lending within two and a half years, those banks will pay an interest rate of a whopping (well, whopping for these times) 7% on the money they borrowed from the Treasury. If they don't lend after four and a half years, they'll pay a 9% interest rate.

For banks, there's another benefit for paying off TARP: they don't have to get regulatory approval to buy back their shares, or announce dividends. Rather than being a ward of the state under TARP, the banks that use SBLF are a client of the state. They're just borrowers.

One bank that did the stimulus arbitrage just yesterday was First Bancorp. It's a small bank with a modest $3.3 billion of assets, based in Troy, North Carolina. It borrowed money from the Small Business Lending Fund to pay back what it owes to the government under TARP.

First Bancorp has 82 branches in North Carolina and another 15 in South Carolina and Virginia. (It is not related to The First Bancorp in Maine or First BanCorp in Puerto Rico).

First Bancorp, like many small banks, has been slow to pay back the TARP loans it took from the government in January 2009. Before TARP existed, First Bancorp spent the first 10 months of 2008 raising money in the markets or from private sources, and was on the verge of drastically reducing its lending to preserve its money, as the bank's chief financial officer, Eric Credle, told the government back in 2009. "We were therefore very happy with the announcement of the U.S. Treasury's Capital Purchase Program [aka TARP] in October 2008," Credle wrote to the Treasury enthusiastically.

First Bancorp borrowed $65 million from Treasury's TARP fund. (Just like that credit-card arbitrage consumers use, the bank used $20 million of its TARP money to pay off one of its credit lines at the time, on which it was paying a 2.25% interest rate.)

Paying off that $20 million credit line with TARP money must have seemed like a good deal at the time - except for one thing. The Treasury required all the banks that took TARP to pay a dividend back to the government every quarter, for an annual rate of 5%. Over the course of 30 months, that dividend could get expensive for a small bank. ProPublica's handy TARP database shows that First Bancorp has paid $7.6 million in TARP dividends to the government over the past thirty months.

Still, the bank is not struggling, as it has been well-liked enough by its regulators that they allowed the bank to make some acquisitions. In 2010, First Bancorp added to its insurance subsidiary, and in January, the FDIC allowed First Bancorp to buy a smaller, failing rival, The Bank of Asheville.

So yesterday, First Bancorp decided to pay off nearly all of its $65 million in TARP loans - by going through another Treasury stimulus program for banks, the Small Business Lending Fund, or SBLF, for $63.5 million.

Sandler O'Neill, a bank that researches and advises other banks, gave its stamp of approval to First Bancorp's deal to borrow from the SBLF to pay TARP: "We view the announcement as a vote of confidence from regulators given that the SBLF program is intended for healthier banks."

Of course, that doesn't mean First Bancorp is completely out of the woods. Treasury still holds the option to buy 616,308 shares of First Bancorp for $15.82 per share. Of course, that may not be a compelling proposition right now, considering that First Bancorp is trading at just around $9 a share.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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