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Cache Valley Bank has bought a big stake in a new company created by federal regulators that holds hundreds of problem loans acquired from nine failed banks, including some in Utah.
The Logan-based bank paid $12.3 million for 40 percent of the limited liability company's equity. The company's portfolio contains real estate-secured loans with an unpaid balance of $279 million, the Federal Deposit Insurance Corp. said Tuesday.
Even though the FDIC will own 60 percent stake of the unnamed limited liability company (LLC) and share in its profits, Cache Valley Bank will be the managing partner, FDIC spokesman Greg Hernandez said.
"Cache Valley will do all the servicing [of the loans]. We work with partners who have experience in that," Hernandez said.
The FDIC agreed to convey 761 distressed residential and land-development loans to the LLC.
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."
Said Hernandez: "They certainly didn't enter into it not to make money. They are highly incentivized to make these types of deals work because they are on the hook for 40 percent."
Most of the properties that collateralized the loans are in Utah, Arizona, California and Nevada. The economies of those states were hurt when the real estate bubble burst three years ago.
The FDIC is often appointed receiver for banks closed by regulators.
To protect depositors and taxpayers, the agency attempts to find other financial institutions to buy the failed bank's assets.
It keeps loans that the buyers think are too risky. The FDIC tries to salvage what it can from those loans by setting up LLCs with private companies as minority partners.
"These partners have the expertise to make these types of nonperforming loans work," Hernandez said.
There are no estimates of how successful limited liability companies are, Hernandez said.
But the government usually recovers 20 to 30 percent more of a typical loan from the use of LLCs versus writing them off, he said.