On the brink of failure two years ago, Cache Bank is getting back on its feet.
In October 1998 the Federal Deposit Insurance Corp. slapped the Greeley, Colo., bank with a cease-and-desist order for its drastic losses on subprime automobile lending. Since then Cache's board has infused about $10 million of capital into the bank, shrunk assets by nearly 30%, and hired a chief executive officer who disposed of the subprime portfolio.
As a result, the FDIC lifted the order Aug. 25.
According to Byron W. Bateman, Cache's new chairman, CEO, and chief operating officer, the bank's troubles began virtually from the day it opened in 1996 because of its focus on high-risk subprime automobile loans that were bought from area car dealers and funded by out-of-market certificates of deposit.
In its first two years Cache's assets grew 825%, to $111 million. However, it wrote off $40 million of subprime loans in June 1998, which led to a loss of more than $10 million for the year.
Cache's lending practices caught the attention of FDIC examiners. The cease-and-desist order instructed the bank's board of directors to "retain qualified management" and stop "engaging in hazardous lending and ineffective and lax collection practices."
In the 18 months after the writeoff, a group of minority shareholders gained control of the board and slowly rebuilt the bank by raising capital and shrinking assets. In March the new controlling group brought in Mr. Bateman, 46, an independent consultant who had advised Cache's board "behind the scenes," as he put it, since the FDIC order took effect.
Mr. Bateman has worked in the banking industry for 23 years, including a stint from 1991 to 1996 as national account manager for what was then Colorado National Bank in Denver and now is part of U.S. Bancorp. In 1996 he became a bank consultant at Profit Technologies Corp. of Davidson, N.C., and was working there when he became independently involved with Cache.
As CEO, Mr. Bateman wasted no time in making changes. He hired a president, Michael Phillips, 54, who was previously a senior vice president at 1st Choice, a $483 million-asset bank in Greeley that was recently bought by Wells Fargo & Co.
Mr. Bateman then settled lawsuits and countersuits with the car dealerships that had sold it the subprime loans. The dealerships paid the bank an undisclosed sum. That cleared the way for sale of the $20 million subprime auto loan portfolio in June for more than 90 cents on the dollar.
The sale improved the quality of Cache's overall loan portfolio: The ratio of classified loans to Tier 1 capital is now 28%, compared with 738% in June 1998. The sale also helped Cache produce first-half net income of $340,000 and a 0.8% return on assets, compared with a 5.13% negative return for the first half of 1998.
Mr. Bateman said the new management policies reflect a healthier perspective at the bank, which now has $80 million of assets.
"Before, the control group's business philosophy was to grow the bank quickly and then sell it," he said. "But I came on because I believe the bank has an opportunity to build a strong community bank without an exit strategy."
Colorado Bank Commissioner Richard J. Fulkerson said Mr. Bateman's success was aided by the fact that Cache's board was willing to do what was needed to save the bank.
"The board of directors and the shareholders stepped up to the plate and infused additional capital," Mr. Fulkerson said. "They made the hard decisions and turned the institution around. In this economy, it's easy for shareholders to cut their losses and go away, but this group didn't."
Cache's story offers a moral for other banks, he said: Be careful when entering the world of subprime.
"One of the problems of subprime lending is bank management not having the expertise before they go into it," Mr. Fulkerson said. "A bank's board has to know to set parameters about how much portfolio they are going to commit and how they are going to control collections. It's a very specialized lending area, and it takes a lot of discipline."