Members of the sect – a renegade Mormon splinter group called the Fundamentalist Church of Jesus Christ of Latter-day Saints – took out one loan after another from the small-town Bank of Ephraim for business ventures that would prove highly speculative, even half-baked.
One loan went toward a watermelon farm, but not a single melon was ever planted and the bank had to foreclose on the farm. Another loan was taken out by a business that planned to convert military barracks into motels and housing. The venture, in which the church was a partner, collapsed when the barracks were found to have lead paint, asbestos and other hazards. Still another loan was made to a construction company that so underbid municipal sewer and street contracts it was unable to pay for materials, let alone labor. The bank had to write off that loan, too.
Ultimately, the bad loans – along with the embezzlement of nearly $5 million by the bank’s head cashier – would lead to the collapse of the 99-year-old bank. Regulators shut it down in June at a cost of millions to shareholders and ordinary depositors who had nothing to do with the sect.
A bank failure was “the last thing in my mind,” said Chevrolet dealer Ron Greene, who lost about $100,000. “I thought of it as the Rock of Gibraltar.”
The Bank of Ephraim had profited for many years from higher-interest loans to the sect, whose members live in the twin cities of Hildale and Colorado City astride the Utah-Arizona state line. But eventually the bank “got in too deep,” investing heavily in increasingly risky ventures with sect members who “didn’t have much to lose,” Utah Banking Supervisor Jim Thomas said.
“They were locked into a community that is – not normal,” Thomas said.
Hildale, Utah, and Colorado City, Ariz., are a jumble of unfinished houses on dirt streets, where residents follow a strict pioneer-style dress code of long dresses, high collars and long hair for the women, and plain white shirts and dark trousers for the men. The men take multiple wives, producing dozens of children who supply cheap labor for business.
The insular sect is run by the reclusive Warren Jeffs, who lives in a compound surrounded by a 10-foot wall. Jeffs, 48, demands total obedience from his flock, and his church takes a share of business profits from members. He is buying ranches in Colorado and Texas for what authorities believe may be an exodus.
Jeffs does not grant interviews, and an attorney for the church, Rodney Parker, did not return calls for comment.
Keith Church, who joined the bank as president in 2000, said that after it failed, he learned from several people in the business community that sect members had taken a secret oath in 2000 to borrow as much money as they could to prepare for the day that civilization – along with the financial markets – collapsed.
Sect members who wanted to take out loans from the bank were allowed to put up a dubious form of collateral: their rights to use church land for business purposes.
At one point, the amount of money borrowed by members of the sect amounted to around $18 million, or about 90 percent of the institution’s loan portfolio – three times higher than what prudent bank management dictates, regulators said. According to the state, an embezzlement scheme by cashier Randy K. McArthur finally pushed the bank over the edge. He pleaded guilty in September to bank fraud and is awaiting sentencing.
Investigators blamed the loan losses on poor business decisions, not outright fraud.
Church said he puts much of the blame for the bank’s failure on a lack of aggressive oversight by regulators. He said he was trying to clean up the mess by calling in bad loans and lining up investors when the state shut the place down.
Many of the bank’s customers accused regulators of tolerating the loans until the coming of the Salt Lake 2002 Winter Olympics ushered in a renewed crackdown by Utah law enforcement on polygamists.
With the collapse, 13 of 30 bank employees lost their jobs and pensions, and some must sell their houses. The bank’s failure also left 50 uninsured depositors, including turkey farmers, the Chevy dealer and a state college, with a combined $3.6 million in losses. Many were small-business owners who learned too late that deposits over $100,000 are uninsured.
At Moroni Feed Co., which sells the Norbest brand of turkey, a $250,000 loss “comes right out of the pocket” of 65 family farms already struggling because of depressed prices, cooperative President David P. Bailey said.
“It’s gone – our retirement,” said Terrie Green, co-owner with her husband of Central Utah Title Co., a real estate title service. They lost $84,000.
Small-business owners mourned the passing of a friendly bank that gave them easy terms.
Ernest “Gus” Augustus, who opened a new restaurant on Main Street here, no longer has a $15,000 line of credit and said “you can’t get a dime” out of other Utah banks.