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Small Business Loans Getting TARP Jolt

NEW YORK ( TheStreet) -- If you are a bank and still haven't repaid government bailout money, Uncle Sam has a deal for you.

Lenders that previously received federal funds through the Troubled Assets Relief Program, or TARP, are using the U.S. Treasury's newly created Small Business Lending Fund (SBLF) to pay off TARP IOUs.

The government and banks see the swap of one loan for another a win/win.

The banks can cut the interest on their government bailout money by huge amounts. Banks that still owe TARP are currently paying 5% dividends, while dividends paid through SBLF are as little as 1%.

The U.S. Treasury sees the program as a way of expanding small business lending. Like TARP, Treasury continues to take preferred stakes in banks receiving money through the SBLF but dividend payments can range from 1% to 5% depending on how successful a lender is in growing its small business loan portfolio.

The $30 billion SBLF was created when President Obama signed the Small Business Jobs Act, last September.

The Washington Post reported on Sunday that Eagle Bancorp (EGBN - Get Report) of Bethesda, Md., had redeemed the remaining $23.2 million in preferred shares held by the government for TARP assistance, with some of $56.6 million the bank holding company received through the Small Business Lending Fund, or SBLF.

Two Connecticut bank holding companies that are "already taking advantage" of the opportunity to convert TARP preferred shares to SBLF preferred shares include BNC Financial Group (BNFI) of Fairfield, and SBT Bancorp (SBTB) of Simsbury, according to the Hartford Business Journal, which also reported that Connecticut Bank and Trust (CTBC) had applied for SBLF money.

First California Financial Group (FCAL) of Westlake Village, Calif., used the $25 million in SBLF money received this month to repay TARP, although, according to company's July 14th announcement, its initial dividend for the SBLF money will be the same 5% it was paying for the TARP money. The dividend "may be decreased to as low as 1% if growth thresholds are met for outstanding small business loans," the company said.

SNL Financial in May identified 53 banks that said they were applying for SBLF, also commented at that time that "applying banks [continued] to indicate that the fund will mostly be used as a mechanism to refinance TARP."
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