FDIC Sells Failed Bank Assets For Pennies On The Dollar To Bank With Outstanding TARP Loans

December 22, 2010 – The FDIC closed on the sale of $279 million of assets from nine failed bank receiverships.   The winning bidder of the asset pool was Cache Valley Bank, Logan, Utah, with a purchase price of 22.2% of the unpaid principal balance of $279 million.  The failed bank assets will be placed into a newly formed limited liability company (LLC) with the FDIC retaining a 60% stake and the balance owned by Cache Valley Bank.

The FDIC offered 1:1 leverage financing to the LLC with a 0% interest rate.  The LLC will issue a Purchase Money Note in the amount of $30.6 million to the FDIC which will be repaid from disposition proceeds of the failed bank assets.  Cache Valley will service, manage and ultimately dispose of the failed bank assets held by the LLC.

The $279 million of failed bank assets consist of 761 distressed residential acquisition and development loans.  81% of the collateral backing the failed bank assets are located in Arizona, Utah, Nevada and California and more than 50% of the portfolio is delinquent.

Cache Valley Bank Poised To Profit From Banking Industry Crisis

Cache Valley Bank, owned by holding company Cache Valley Banking Company, has an interesting background.  Cache still owes the US Treasury $9.4 million received under the Capital Purchase Program (CPP) provisions of the Troubled Asset Relief Program (TARP).   The US Treasury, in return for providing $9.4 million of taxpayer money to Cache, received preferred stock that pays a 5% dividend which increases to 9% after 5 years.  The US Treasury maintains that the Capital Purchase Program was not a bailout but rather a means of providing capital to “healthy” institutions to encourage lending.

Cache Valley Bank is closely held, owned by two local families and officers of the Bank.

According to The Salt Lake Tribune, Cache Bank is expecting a huge return on the asset pool acquired from the FDIC.

More than half of the loans are delinquent. Even so, Cache Valley CEO J. Gregg Miller thinks his bank will eventually profit from them. Though it’s unlikely, the bank could recover as much as$117 million, a return of more than 800 percent.

“We think there’s substantial value there,” Miller said. “Who knows how much” the bank will make. “Only time will tell.”

Cache Valley Bank, with total assets of $276 million, is profitable and appears to be well capitalized.   The troubled asset ratio at Cache is only 7.5%, about half the national median.

Cache Valley Bank entered into a Written Agreement on April 19, 2004, with the Federal Reserve and the Utah State Department of Financial Institutions designed to “correct certain deficiencies at the Bank relating to safety and soundness”.  In March 2007, the Federal Reserve issued a Cease and Desist Order to Cache noting that the “Bank has taken steps to comply with the 2004 Written Agreement but has not yet fully complied with all of the provisions of the 2004 Written Agreement”.

In May 2009, Cache Bank acquired failed America West Bank in an FDIC assisted transaction.  Cache assumed all of America West’s deposits but purchased only $10.9 million out of $299.4 million of failed America West assets, leaving the FDIC stuck with the balance of $288.5 million.

FDIC Still Holding Huge Amount Of Failed Bank Assets

The FDIC’s recent dispositions of failed banking assets (at huge discounts) still leaves the FDIC holding a huge amount of poor quality loans from failed banks.  At September 30, 2010, the FDIC held a total of $49.7 billion in failed banking assets, classified as “resolution receivables”.  The previous high in resolution receivables over the past 20 years was in 1991 when the FDIC held $18.7 billion in failed banking assets.  (See FDIC’s Mountain Of Failed Bank Assets Grow).

The FDIC also sold this week $341 million in failed bank assets to an investment group lead by Colony Capital, a private real estate firm.

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