Salt Lake Tribune
 Salt Lake City, Utah

Bank of Ephraim's collapse is bad news for big depositors June 27, 2004 By Brooke Adams     Regulators say bad loans and an alleged multimillion-dollar embezzlement scheme sank the Bank of Ephraim -- and could also cost some of the bank's largest depositors.     While it will be business as usual for most customers following the bank's takeover Friday by Far West Bank of Provo, the 125 accounts holding large deposits -- which total $4.8 million -- are not insured by the Federal Deposit Insurance Corp., which limits coverage to $100,000.     Owners of those accounts could wait as long as three years to recoup funds and are unlikely to get all their money back. Robert Schoppe, the FDIC receiver now overseeing the Bank of Ephraim, said typically such account holders get back about 65 percent of their investment, "but I haven't had time to look over their assets."     Some accounts held about $1 million, according to Schoppe, but he declined to identify the account owners.     But Ephraim Mayor Morris Casperson said his city is one of them.     "I had been getting ready to make some loan payments, so we had built the account up pretty good," Casperson said. "I'm sure it's well over $1 million."     Casperson said he believes state law requires banks to hold securities to protect government investments. He plans to meet Monday with FDIC regulators to find out what protection, if any, exists.     "We're certainly hoping we don't end up losing some money," he said.     Casperson said Snow College and the Sanpete County Landfill are among other large investors at the bank.     Schoppe said the large account holders will be given deposit certificates and will be paid dividends as the bank's assets are sold.     Ed Leary, director of the Utah Department of Financial Institutions, also said shareholders of the 98-year-old, privately held bank will lose out.     "The shareholders will lose their investments unless the FDIC collects enough from receivables to pay everybody off," Leary said. "But it's very unlikely."     Bank of Ephraim Chairman Carl Barton did not return a telephone call from The Salt Lake Tribune on Saturday. Bank President Keith Church, who was at the bank Saturday cleaning out his office, referred calls to Schoppe.     Leary declared the Bank of Ephraim insolvent on Friday -- the first bank collapse in Utah since 1988, when Tracy-Collins Bank and Trust failed -- and turned it over to the FDIC.     A crew of 45 FDIC employees were at the Bank of Ephraim's main office on Saturday, sorting through its financial records.     In anticipation of the closure, the FDIC solicited bids for the bank's insured deposits and some assets.     Far West, with 14 branches stretching from Sandy to St. George, submitted the winning bid, offering to pay a premium of 7.5 percent to acquire $40.4 million in deposits.     The Bank of Ephraim, founded in 1905, had two offices in Ephraim and branches in Hildale and Mount Pleasant. Branches in Ephraim and Mount Pleasant were open on Saturday under Far West's management and will open as usual on Monday. Small depositors will be able to use their checks and debit cards without interruption.     Suzanne Dean, publisher of the Sanpete Messenger, said the Bank of Ephraim had been a big supporter of local businesses and agriculture and was "willing to take risks that Salt Lake banks haven't been willing to take.     "I'm not sure if there will be something lost there and people won't be able to get loans as easily as in the past," Dean said.     Far West has said it will not reopen the Hildale branch, which will leave the polygamous community and its twin, Colorado City, Ariz., without local banking services. Residents will be able to have their existing accounts serviced at existing Far West branches.     Current and former residents of the polygamist community said the loss of the branch office is a blow.     "The bank has been an excellent service," said Jethro Barlow, an accountant who left the community about 16 months ago and now lives in Creston, British Columbia. "We remember the days before the bank was there and how badly the community needed that service. So I hope they would reconsider."     The bank had conducted business with the polygamist community since the 1950s and set up a branch in Hildale in 1995 at the urging of then-resident Richard Holm, a contractor who built the bank's branch office.     "I feel terrible about this end result," said Holm, who was exiled from the FLDS community last November by church leader Warren Jeffs. "I feel like I talked them into [having] confidence in the community and the extension of many things, like loans."     The Salt Lake Tribune reported on May 5 that the state-chartered bank was in trouble, in part because of risky loans it had made to residents of the polygamist enclave at the Utah-Arizona border. Among those who received loans were men, like Holm, who Jeffs exiled from the community over the past year.     Last year, the Bank of Ephraim wrote off $1.3 million in bad loans and ended the year with a loss of $778,000.     Bank officials told The Tribune they had tightened lending standards and no longer accepted property leaseholds from Hildale and Colorado City residents as loan collateral.     Most residents of the twin cities are members of the Fundamentalist Church of Jesus Christ of Latter Day Saints. Because the church owns all property in the community, residents and business owners used leaseholds to secure loans.     Bank officials claimed in May that the bank was on solid footing and its problems were over, though its first-quarter report for 2004 showed a net income of just $30,000.     The same report showed the bank charged off $378,000 in bad loans and had more than $2 million in loans it listed as "nonaccrual" -- no longer providing interest income. It had $1.8 million in a reserve account to cover such losses.     Bad loans weren't its only troubles, however.     On May 19, a federal grand jury indicted Randy Kay McArthur and Dean Johnson on charges of defrauding the bank. McArthur, who worked at the bank, allegedly took bank checks and cashed them -- including one for $20,000 he deposited, coincidentally, at Far West Bank in February. The two men allegedly worked together to hide the theft, according to the indictment.     But the embezzlement went well beyond that single check, according to Leary, who first characterized it as a "significant amount" and then confirmed the total is likely in the millions.     While the Bank of Ephraim had "loan quality problems," the embezzlement was "the real knock-out punch," Leary said.     Schoppe agreed with that assessment, saying, "Between the two of them, the bank ran out of capital."     Leary said the bank had no internal auditor who might have noticed missing funds. But state examiners also failed to pick up any problem.     "We are reviewing our examining procedures and if changes are warranted, we'll make them," he said.     After learning of the alleged embezzlement, bank officials made "a good effort" but were unsuccessful in attracting additional investors or a buyer, he said, and added the bank's problems were exacerbated by withdrawals of investments in recent months.     Its March report lists assets of $56.7 million. As of Friday, the Bank of Ephraim had $46.4 million in assets, according to an FDIC news release.