Collateral Damage: The Death of a Small Town Bank

How the failure of one community bank destroyed a Georgia town's faith in government, the economy and itself

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David Walter Banks / Luceo for TIME

Mike Armstrong and his family built businesses in Cornelia's downtown with loans from Community Bank; now they're struggling to stay open.

At 6:00 p.m. on Jan. 29, 2010, Daniel Bell of the Federal Deposit Insurance Corporation (FDIC) checked his watch, got out of his car and walked into the Community Bank & Trust (CBT) headquarters in Cornelia, Ga., with four aides, a lawyer and an order from the state to close the place down. Behind Bell, a team of 25 experts swooped in, taking control of the coded Federal Reserve tokens that allow access to payment systems and seizing the terminal on which interbank transfers are made. FDIC officers instructed the tellers to count their cash and close out their drawers and took charge of all the records in the bookkeeping department.

The feds had been watching CBT for months and already knew what they would find in its two-story, 1970s-vintage, glass-and-concrete headquarters: a darkness at the heart of a small town. The bank's balance sheet was a mess. Businesses that had enjoyed easy credit in boom times had stopped making payments after the economic collapse of late 2008. Rumors swirled that the former chief lending officer had been getting kickbacks on million-dollar development loans. And in an effort to stay ahead of bank examiners, the bank was foreclosing on properties without proper documentation. As the FDIC tried to reassure employees that the government was there to save the bank, not kill it, even the clearest-eyed among them could not foresee the effects that incompetence and greed were about to unleash on the town.

CBT was the 32nd bank to fail in Georgia since the start of the financial crisis in 2008 and one of 132 to fail nationwide in 2010 so far. In many ways, it embodies what has gone wrong with America's once trusted banking system. While the big banks have pretty much stabilized, America's 7,500 small banks are just now entering their moment of greatest danger: in addition to the dozens that are expected to fail by the end of the year, the FDIC says 829 banks, most of them small ones, are at risk of failure. Economists and community leaders are only beginning to appreciate the damage. Small banks provide 64% of the loans to America's small businesses, which in turn create 65% of all new jobs and employ half of the private-sector workforce.

Though Community Bank thrived in flush times, its practices led to hundreds of residential and commercial foreclosures in and around Cornelia and may produce thousands more. Some 35 homes and 189 businesses underwritten by CBT have already been foreclosed on this year, 1,500 loans are in serious trouble, and at least 2,700 were so poorly documented that no one's sure yet whether they should be foreclosed or not.

As the small-bank crisis unfolds across the country, the FDIC is scrambling to limit the damage to its already depleted Deposit Insurance Fund, the bank-supported stash used to reimburse depositors when banks fail. That means finding the least costly way to get banks out of trouble, which in turn often means cutting off credit to shaky businesses, firing bank employees and foreclosing on bad loans. For a small community like Cornelia, where CBT's $1.2 billion in assets represented 75 times the county's $16 million annual budget, those measures can hurt. Once the gold standard of consumer confidence, the FDIC now finds itself the harbinger of economic distress.

Days after Bell seized Community Bank & Trust, the FDIC sold it to an out-of-town bank that agreed to absorb part of its losses. The buyer, South Carolina Bank and Trust, cashiered some 100 of CBT's nearly 400 employees, closed 10 branches and moved more than 200 loans toward foreclosure. The town is struggling to come to terms with the failure: though the FDIC saved Cornelia's beloved community bank, it couldn't salvage its trust. Ed Brown, president of the Habersham County Historical Society, says, "A lot of people put a lot of stock in the bank, and when it failed, it shook the whole town." So the story of Community Bank & Trust's life, death and difficult rebirth is really a story about America's broader attempt to restore faith in the function of its economy and its government.

The Fall of Community Bank
Before it got a sewer system, Cornelia got a bank. From 1900 to 1986, Cornelia Bank was, economically speaking, indistinguishable from the small town that grew up around it. Amid the productive foothills of the southern Appalachians, the bank helped diversify the town from its reliance on cotton by fueling investments in textiles and fruit, including the town's signature red apple, which was incorporated into the bank's logo. Virtually everyone, from car dealers to restaurateurs, came to rely on the bank for services. By 2005, it held nearly 50% of the deposits of the town's 3,500 mostly white, lower-middle-class citizens.

Community Bank & Trust, as it became known in 1986, was also the town's secret strength. The high school's cheerleading squad raised money by washing cars as they rode through the headquarters' four drive-through lanes. CBT sponsored huge ads in the yearbook and at the local sports arena. And beneath the p.r., hardheaded bankers personally inspected the local businesses they underwrote to ensure that they were sound. When the president's eldest son, who worked at the locally owned bank, announced that he and his wife were going to live elsewhere, the president famously said, "Not and work in this company, you're not," and promptly fired him.

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