The Bank of Ephraim has poured its trust and money into a polygamist enclave on the Utah-Arizona border since the 1950s, approving high-risk business and consumer loans often backed by questionable collateral.
The bank’s faith in this Arizona Strip community added to the toll on its bottom line last year — it lost more than three quarters of a million dollars — and bank officials acknowledge they are working to rectify problems.
The bank is not the only financial institution that has made loans or extended credit to residents of Hildale, Utah, or Colorado City, Ariz., which are dominated by members of the Fundamentalist Church of Jesus Christ of Latter Day Saints. And not all its bad loans have been made there.
But the bank’s small size and willingness to accept unconventional terms leave the state-chartered bank particularly vulnerable to tumult in the community, where survival is a test of faith.
Economic opportunities are limited and barter arrangements are easier to come by than money. Family sizes are the largest in the country, a result of members’ practice of plural marriage. The constant demand of FLDS leaders for tithes, material goods and labor to build the community also puts a financial squeeze on followers.
Trouble at the bank
Add it up and, as public records show, these factors have contributed to troubles at the Bank of Ephraim.
The Sanpete County-based bank lost $778,000 last year, after writing off slightly more than $1.3 million in bad loans and, as required by federal and state regulators, placing $2 million in a reserve account to cover losses.
“They have done everything we have asked in that way,” said Jim Thomas, supervisor of banks for the Utah Department of Financial Institutions. “They are closely watched.”
Already, the bank has dipped into that fund. While the bank showed a $30,000 profit in the first quarter of 2004, it wrote off $378,000 in bad loans. The filing with the Federal Deposit Insurance Corporation shows the bank has $2.4 million in loans it is no longer collecting interest or payments on.
At 5 percent of its $37 million in loans, the funds the bank is holding in reserve to offset bad loans is well above the 1 percent allotment of total loan portfolio that is the industry standard.
“The only reason they would make that large of a provision is if they expected to have some large loan losses,” said Brent Wilson, dean of the business school at Brigham Young University/Hawaii. Wilson reviewed the bank’s most recent FDIC filings at the request of The Salt Lake Tribune.
“Essentially, they had to write off all their earnings last year and put it in loss reserves,” he said.
Another indicator of the bank’s problems: The ratio of nonperforming loans — those it no longer collects interest or payments on — to capital is 80.8 percent, or 10 times the industry average of 8.1 percent, according to the latest Weiss Safety Rating.
That means potentially 80.8 percent of the bank’s capital could be needed to cover bad loans.
Bank officials told the Tribune that ratio has improved and is currently about 56 percent — which if true is still an abnormally high percentage.
Weiss, a national firm that surveys financial institutions’ strength, gave the bank a D minus as of February. That’s down from the A minus grade it held just four years ago, a decline Weiss attributes to poor asset quality, weak profitability and potential for instability. On the positive side, the report said the bank is well capitalized — with equity and assets of $56.7 million, giving it the wherewithal to handle any adverse events in the short run.
A ‘very unique’ relationship
The Bank of Ephraim, founded in 1905, has two offices in Ephraim. After years of doing business with the polygamist community, it opened a branch in Hildale in 1995. Two years ago, it opened a fourth branch in Mount Pleasant.
In an interview, Bank of Ephraim Chairman Carl Barton described its lending relationship with twin city residents — with whom it has no other connection — as “very unique.” At least it has been in the past.
“One of the messages we have been delivering for the past three or four years in Hildale and Colorado City is we have to make loans and we have to manage loans and enforce our loans in step with prudent business practices,” Barton said.
In a letter to shareholders dated April 23, Barton offered reassurances about the bank’s soundness but acknowledged the difficult position it faced because of “uncertainty” in the fundamentalist community.
Because of the reserves the bank has been forced to hold, “we simply cannot pay dividends at this time or in the coming months,” Barton wrote. “We continue to generate large amounts of income, but far too much of it must be placed into the bad loan reserve account due [to] the uncertainty in Hildale and Colorado City.”
Absent that, he said, the “bank would be enjoying a good year.”
Barton said the bank has no evidence of a pending wholesale move to a new FLDS outpost in Eldorado, Texas. He noted loan delinquencies have “dropped dramatically” in the twin cities since the first of the year.
Public records show about 15 percent of the bank’s deposits come from outside the Sanpete market, which would include the Hildale and Mount Pleasant branches. Bank officials declined to disclose the amount or proportion of its loans made to residents of the twin cities.
“It is a much smaller percentage now than it used to be,” said Keith Church, bank president. “Most of these bad loans were made several years ago and they are in the process of being cleaned up.
“Let’s just say [the bank] may have had a little higher level of confidence than [it] should have had,” said Church, who took over as president in 2000.
Good stories, no credit: Ezra Draper, a former auto salesman who left the FLDS community last summer, said prior to Church’s appointment, residents with a good story but no credit had little trouble getting a loan.
“They used to look at you and say ‘We’re just trying to figure out how to approve this loan,’ ” he said. “The bank has changed a lot since 2000.”
The Small Business Administration (SBA) typically backs loans to risky new businesses with unproven track records, but Bank of Ephraim opted to put its own money in Hildale and Colorado City, Thomas said.
“If that type of loan were to be done any place else in this state, it would have been done through the SBA, because no bank tries to do that type of lending,” Thomas said.
He also said that personal and business financial statements are often sketchy and reflect few assets, a reflection of the scarcity of cash and reliance on barter in the community.
“Normal bank underwriting would suggest you’re asking for a whole bunch of trouble in a big hurry,” Thomas said. “You cannot get the financial records that would show sufficient cash flow to support a loan.”
Under his watch, Church said, the bank has tightened its credit standards and no longer accepts leaseholds on property as collateral for loans. None of the FLDS followers owns their homes or buildings; they lease them from a church-controlled trust.
“Many millions of dollars of loans were based on that,” said Richard Holm, a former business leader in the polygamist community. He helped set up such loans before being expelled by the church in November.
The leaseholds grant use of a property for a set number of years — which Holm and other sources said commonly ranged between five and 15 years, shorter terms than found in a typical leasehold.
Some of those loans were used to start-up and equip businesses and build community buildings; others provided funds for home construction.
If a loan sours, the bank has only a limited window to recoup its investment if the defaulted lease is picked up by another person. And there is another problem: Entrepreneurs are not clamoring to set up businesses in Hildale and Colorado City, which limits the value of the leaseholds.
Residents’ interest in the leaseholds has never been a problem, Church maintains, because of the limited amount of commercial development in the community.
Outsiders aren’t really welcome, anyway.
“Rather than let the lease fall into the hands of the enemy, the church is quick to find someone to get in there and acquire the lease,” Draper said.
FLDS church attorney Rod Parker met recently with bank officials to discuss “less than half a dozen” loans that he said used leaseholds as collateral — deals made in some cases without written consent of the trust, potentially leaving the bank empty-handed. Parker would not disclose the nature of these loans.
“We’ll work with them to clear those up if they were given assurances at the time” of the loan, he said, adding most of these loans are not in default.
Parker also said the bank has made money in the community and “on some loans it could have been hurt a lot worse if the church hadn’t stepped up and helped get someone else” in leasehold.
The church parts company
However, Warren Jeffs’ expulsions of more than two dozen men from the faith, which cuts them off from family, associates and often their livelihoods, also has created complications for the bank.
Take Holm, for instance.
Using funds borrowed from the Bank of Ephraim, Holm said, he bought 140 model homes on a defunct California military base and, as a donation, moved about 60 of them to the community for use as residences.
In exchange, the community’s work crews were to help Holm move the rest of the buildings to Littlefield, Ariz., where he expected to sell them.
But Jeffs expelled Holm from the faith in November and, according to Holm, the work crews were told to have nothing to do with him.
Holm said the action cost him a quarter-million dollars in lost sales and extra expenses. “I had covered a whole bunch of the cost of moving the 60 [units],” he said. “I had depleted my cash resources and was expecting I could carry on to get the rest moved to replenish those funds.”
Holm said the bank has been “good as gold” in working through the problem.
Another man expelled by Jeffs, Ron Rohbock, was left with a personal debt of more than a half-million dollars he once expected the FLDS church to help repay, according to several sources. Most of those funds were spent building homes in the community to accommodate followers who moved to the Arizona Strip prior to the 2002 Winter Olympics. FLDS church leaders had warned the Olympics would fatally corrupt the capital city.
According to Holm and others, Warren Jeffs allegedly told Rohbock to take out bankruptcy.
Recouping the losses
Bankruptcy records highlight other challenges facing the Bank of Ephraim.
Since 2001, an increasing number of individuals and businesses associated with the community have declared bankruptcy, forcing the bank to go after trucks, farms and other goods to recoup its money. It foreclosed on a Green River farm, for instance, for which it had lent $670,000 to Con Holm, Richard’s brother, who died in January.
One loan that may have burdened the bank involved Blaine B. Jeffs, Warren Jeffs’ brother. According to public records, Blaine Jeffs owed the Bank of Ephraim $455,200 at the time he filed for bankruptcy in 2001. The loan was secured by a trust deed to a piece of property in the Hildale Industrial Park. The bank was awarded $10,600 in arrears and Jeffs was ordered to continue making mortgage payments.
Another example: Steeds Inc., an excavating company that moved from the Salt Lake Valley to the Arizona Strip in 2001 as part of the pre-Olympic exodus.
The Bank of Ephraim is one of dozens of creditors queuing up for payments from the once successful company, which filed for Chapter 7 bankruptcy in August 2002. Between 1998 and 2000, it lent Steeds Inc. $1.7 million, mostly to purchase equipment. The bank is trying to recoup nearly $400,000 it is still owed.