The ABCs of GE’s ILC

Lately ILCs — or “industrial loan companies” — have been in the news, finding themselves unnecessarily drawn into debates about reforms that are needed in the wake of the global financial crisis. Well-known companies such as Toyota, Harley-Davidson, John Deere — and GE — all have ILCs, which are state-chartered banks that can be owned by non-financial firms and provide important credit to customers. Proponents of ILCs note that they are regulated by their respective states and the FDIC and that they perform vital lending to small and medium-sized businesses — the backbone of the economy. Critics charge that they have the potential to generate risks because their parent companies are not regulated in the same way that the parent companies of banks are.

Cooking up business: What’s an ILC do? In the case of the Aslam family of Texas, it’s helping them add 14 new restaurants to their popular Jack in the Box portfolio in the Dallas area.

GE’s ILC is located in Utah, which is one of the 7 states that charter ILCs. Its physical footprint in Utah is relatively small — mostly headquarters functions — because the ILC has more than half of its employees located in cities where its customers live and work in order to provide direct oversight of bank originations and servicing activity.

Most ILCs accept deposits in the form of certificates of deposit, but unlike some commercial banks, such as Citibank or Bank of America, ILCs typically don’t have a traditional branch network due to restrictions in the type of deposits they can receive. GE’s ILC is a member of the Federal Deposit Insurance Corporation (FDIC) and is regulated directly by the FDIC and Utah Department of Financial Institutions (UDFI). It provides financing to US middle market dealers and end-users for basic goods and services like restaurants, forklifts and skid-loaders.

When it comes to actually making loans to customers, the financing that is available directly from the ILC comes from deposits. They represent just one of many funding sources available to GE Capital customers. For example, when a U.S. borrower comes to GE Capital in need of financing, they may choose to do business with GE’s ILC if the product offering is available, or they may do business directly with GE Capital, which has traditionally funded transactions by raising money on the open market by selling short to medium term notes.

A recent transaction originated by GE’s ILC was with a firm called Tribox — which is better known in the Dallas, Texas area as the owner of seven Jack in the Box franchises. The Aslam family that owns the popular eateries started working the grills 35 years ago and now, with the help of GE’s ILC, they’re adding 14 new restaurants in Texas to their Jack in the Box portfolio and are providing jobs throughout the area as a result. It’s the same type of loan that helped another customer, Meridian, remodel its El Pollo Camparo restaurant and Burger King franchise in Utah.

So, if ILCs are helping support jobs in places like Texas and Utah, why is there concern about them? It stems from a fear that ILCs will take unnecessary risks if the parent companies, such as GE, are not directly regulated under banking laws. Although critics claim ILCs are riskier than other banks, they did not cause — or even worsen — the credit crisis. And no industrial bank has failed during the current crisis. As Chris Stinebert, head of the American Financial Services Association, recently noted in the House Financial Services Committee, while over 52 community banks have failed already in 2009, industrial banks have been the best capitalized and most profitable banks in the nation.

In fact, proponents of ILCs note that their very structure — being tied to a commercial enterprise, was a source of strength that banks did not have during the credit crisis. For example, GE was able to leverage the strength of its industrial balance sheet to inject $15 billion into GE Capital during the unprecedented liquidity crisis in 4Q 2008 and 1Q 2009. And unlike banks, GE Capital never took federal bailout or TARP funds.

ILCs are an important source of credit in our economy for bread-and-butter, mid-market businesses that are a critical part of our economy. They provide around $130 billion in credit to mainstream businesses — and keeping that financing intact is vitally important. In the first half of 2009, in one of the toughest credit environments in recent memory, GE Capital provided over $32 billion in new loans, leases and inventory finance to U.S. businesses. That’s financing that keeps small and medium-sized business growing. Just ask the Aslam family in Texas.

* Read “GE Capital’s loan helps grow 150 jobs in Shreveport” on GE Reports
* Read “Dallas keeps on truckin’ with GE Capital” on GE Reports
* Read about GE Capital’s work with Boscov’s department store
* Read GE Reports’ 5-part series on GE Capital, “My Favorite Slide”
* Read about GE Capital’s investment partnership with Mubadala Development Co.
* Read “Key congressman: No need to split banking, commerce” on GE Reports