This is an archived article that was published on sltrib.com in 2011, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
State regulators on Friday seized SunFirst Bank in St. George, raising to six the number of banks in Utah that have failed since the U.S. financial crisis and Great Recession began in 2007.
The Department of Financial Institutions immediately appointed the Federal Deposit Insurance Corp. as receiver. Cache Valley Bank of Logan agreed to purchase most of the deposits of SunFirst.
Cache Valley will reopen SunFirst's three branches Saturday, and depositors will become Cache Valley customers. All deposits up to $250,000 are federally insured.
The bank was shuttered because "it did not have capital to continue operating in a safe and sound manner," said department spokesman Darryl Rude.
Its financial position was undermined by lack of capital and the collapse of the real estate market, which sent it searching for new capital. Amid those problems, the bank struck a deal with embattled St. George businessman Jeremy Johnson to process online poker payments, which resulted in the federal indictment of SunFirst Vice Chairman John Campos.
As of Sept. 30, the bank had assets of $198.1 million and deposits of $169.1 million. Cache Valley will assume all but about $15 million of the deposits. It agreed to buy $177.3 million of SunFirst's assets, most of which are loans. Cache Valley will take over $128.9 million of the assets in a "loss-share" deal under which it will attempt to collect the loans for the agency, said J. Gregg Miller, Cache Valley's CEO.
"We hope we can [collect]. We'll try to do our best. The losses on those loans will be shared, with the largest [percentage of any losses] going to the FDIC," Milller said.
The bank has 40 employees. Miller said senior managers were dismissed Friday by the FDIC. Cache Valley will keep many of the remaining employees as it decides over the next 12 months whether to keep the branches open, he said. Two are in St. George, while a third is in Hurricane.
Although Miller wouldn't forecast Cache Valley's actions beyond a year, he said the bank wouldn't have decided to gamble on St. George if it wasn't reasonably certain that it could succeed there.
"We've always been infatuated with the St. George market and feel that the Cache Valley and Washington County markets are the two best markets to be in," he said. "We are a small community bank. For us to play in the Wasatch Front, that's just too competitive for us to be in that market."
SunFirst's woes stretch back a decade, when one of the hottest real estate booms in the U.S. was taking shape in St. George. The bank loaned tens of millions of dollars to developers and speculators who bought land in Washington County and built thousands of homes aimed largely at retirees. All seemed well until mid-2006, when the subprime mortgage crisis began to emerge. Even so, SunFirst seemed to manage its portfolio of real estate loans reasonably well.
By September 2008, though, the accelerating collapse of home building and property values in southwest Utah, coupled with a steep rise in unemployment in the region, was beginning to hurt SunFirst. Borrowers began defaulting in increasingly unmanageable numbers as the real estate bubble collapsed.
The bank's mounting woes eventually came to the attention of the FDIC. In October 2009, the federal agency ordered SunFirst to increase its capital reserves to at least 11 percent of assets, most of which were loans. Well-capitalized banks have at least 10 percent of their loans covered by capital.
Despite the order, the bank's capital continued to dwindle. In June of this year, the FDIC notified SunFirst that the bank was significantly undercapitalized. In July the agency ordered SunFirst to raise additional capital or find a buyer. As of Sept. 30, shortly before the Department of Financial Services acted, capital stood at only 2 percent of assets.
As its financial troubles unfolded, SunFirst agreed to the poker deal with Johnson. "I would never say that situation down there didn't have an effect. It was probably a contributing factor. But the asset quality and their inability to raise capital was the primary cause," Rude said.
Federal officials have said SunFirst processed more than $200 million in payments from two online poker sites from December 2009 to November of last year. As part of the deal with the bank, Johnson and his wife received a line of credit from SunFirst for $3.4 million, using their house as collateral. Half of the money was transferred to a family trust and the rest to Johnson's brother, Andy, and all of it was then used to buy shares in SunFirst.
Because of the deal, Campos was indicted in April in federal court in New York as part of a larger crackdown on online poker sites. Campos has pleaded not guilty and is awaiting trial.
Johnson faces a criminal indictment in Salt Lake City on a single charge of mail fraud for his operation of an Internet marketing company called iWorks.
The Federal Trade Commission also is suing Johnson and others over iWorks, alleging they defrauded tens of thousands of customers out of about $275 million.
In contrast to SunFirst, Logan's Cache Valley Bank has plenty of cash reserves. Its capital stands at more than 14 percent of loans. Unlike SunFirst, Cache Valley stayed away from risky land development loans. It focused instead on lending to small businesses and agricultural borrowers. While SunFirst lost $7.5 million in the first nine months of 20110, Cache Valley earned $6 million.
So far this year, regulators have closed at least 86 banks in the U.S. The FDIC has said 2010 was the high-water mark for bank failures from the recession. In all, 157 banks were shut, the most in any year since the savings and loan crisis two decades ago.
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Other bank failures
SunFirst is the sixth bank in Utah to succumb to the effects of the 2007-09 financial crisis. The others:
MagnetBank • Salt Lake City, January 2009
American West • Layton, May 2009
Barnes Bank • Kaysville, January 2010
Centennial Bank • Ogden, March 2010
Advanta Bank • Draper, March 2010