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.

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The Feds Step In
Bell, 61, has been closing banks for 24 years. From his Dallas base, he has shuttered more than 100 of them, 32 since the start of this crisis. By December 2009, Bell knew from experience that CBT would soon be unable to pay back its depositors. For nearly 80 years, it's been the FDIC's job to keep banks from getting to that point. As CBT neared collapse, Bell and his FDIC colleagues had three choices: close the bank, sell its assets and pay off the insured deposits; run the bank themselves, using FDIC experts to make and manage loans; or sell it to another bank. The FDIC preferred the last option because it was the cheapest and easiest; the FDIC already had the burden of running 209 banks out of receivership, and its Deposit Insurance Fund was deeply in the red itself.

Plus, the FDIC had a willing buyer before it even closed Community's doors. South Carolina Bank and Trust (SCBT), based in Columbia, saw the enormous deposits that CBT held for everyday Cornelians as a potential resource. SCBT itself was a recovering bank: it had stabilized with the help of TARP funds in 2009 and made the best of five competing bids for CBT. In exchange for taking on nearly all of CBT's assets and liabilities, SCBT received $158 million from the FDIC and agreed to cover 20% of losses on outstanding residential and commercial loans up to $233 million and to cover 5% on loans above that amount. When Bell entered CBT's headquarters on Jan. 29, John Pollok, the COO of SCBT, went with him. The closing went off without a hitch.

That didn't mean it was painless. Starting the next Monday, the new owners closed 10 branch offices, declined to rehire 120 employees and turned a team of 19 bankers loose on the credit file to figure out which of the old bank's 10,822 loans could be saved. Eventually, they moved 1,500 to a "special asset group" for loans whose borrowers hadn't made a payment in more than 90 days. They foreclosed on 224 loans originally worth $49 million—35 of them residential, the rest commercial. In an attempt to reassure Cornelians about the new austerity, SCBT kept the Community Bank & Trust name, and branch managers showed up at random restaurants around the area and bought people lunch. It is buying "smart" boards for the local high school. And in September it held a barbecue dinner in the parking lot of the headquarters to celebrate CBT's 110 years in Cornelia.

Blaming the Feds
To Judge from Cornelia, America faces twin banking crises at the moment: one of failing banks and one of failing confidence in those that survive. The current outrage over bad foreclosure processing, for example, says more about our distrust of banks than it does about the fairness of foreclosure. The vast majority of even mishandled foreclosures are valid, but America's distrust in its banks has become so deep that when sloppy notarization and incomplete title filing come to light, Americans assume the banks are purposely kicking innocent people out of their houses.

A version of that is now under way in Cornelia. Rather than blaming the shady bankers who wrote bad loans or blaming themselves for participating in a free-money frenzy, many in Cornelia blame the feds and the new bank's owners for the town's current woes. Cornelians believe SCBT is foreclosing on the bad loans so rapidly that it is taking the local economy down the tubes. "[SCBT's] really killing the town, and I blame the FDIC," says Donald Anderson, 36, the city manager. "They've given them incentives to foreclose on properties." That fits with a darker fear circulating among town commissioners: that SCBT is sucking the assets out of Cornelia to help build business in the larger city of Gainesville, 24 miles (39 km) to the southwest, a fear fueled by the fact that CBT's new market president, Jeff Fulp, has chosen to live in Gainesville rather than Cornelia. "It's like Invasion of the Body Snatchers," says Don Bagwell, a city commissioner.

In fact, SCBT's foreclosure rate is unsurprising, given CBT's condition: it has foreclosed on just 2.14% of the business loans it bought and 1.75% of the residential mortgages, all of which were more than 100 days delinquent, SCBT says. Statewide, all Georgia banks, both failed and stable, had a foreclosure rate of 0.34% in September 2010. Contrary to local rumors, SCBT can claim reimbursement on losses from the FDIC whether or not it forecloses on delinquent loans, decreasing its incentive to do so. If SCBT keeps its losses on CBT's loans to under $233 million, the FDIC will write a check to SCBT for 50% of the difference, giving SCBT a reason to keep loans that can produce interest income. "[Cornelians] don't really know us yet," says SCBT president and CEO Robert Hill, "so we have to earn their trust. But we will."

Cornelia's faith wasn't really broken by what SCBT or the FDIC has done. It was destroyed with everything CBT represented to the town: financial security, generosity and a set of values Cornelians thought they and their bankers shared. "It's like finding out an old friend has done something you don't want to believe until the facts just smack you in the face," says Sally Yates, the U.S. Attorney for the Northern District of Georgia.

Meanwhile, Washington is bailing Cornelia out in other ways. The city has tapped $1.3 million in federal grants for a wastewater plant, Anderson says, and it has received $333,000 in stimulus grants for renovating a public-housing community. SCBT and Cornelia's other banks will be eligible for a recently enacted $30 billion bill that will fund lending by stable small banks. And faith in the system may return with legal accountability. Jones' three co-conspirators pleaded guilty in federal court and are likely to get jail time; Jones is scheduled to plead guilty to at least one criminal count Nov. 18, sources familiar with the case tell TIME. Lesser charges against other bank employees could follow. "We don't just stop at the hard crimes," says Yates. "When you're looking at the impact of the bank-failure crisis on the community and our economy, we have a duty to look at who else might be responsible."

Personal accountability is a harder question for everyday Cornelians. William and Samantha Crawford handed over the deed to the Oak & More store in lieu of foreclosure and gave the bank $90,000 worth of inventory, two delivery trucks, the dump truck and bucket loader, Samantha's 2008 Honda, the spec house and some land they'd bought in a neighboring town. William bought back a delivery truck and is making money as a mover; Samantha took a job with a nonprofit working to help people stay in their houses. "All my eggs were tied up in CBT," says William.

That's a phrase you could hear in small towns from one coast to the other. Week after week, banks are failing—in Forest Lake, Minn.; Overland Park, Kans.; and Shoreline, Wash. But the story of Cornelia's Community Bank & Trust suggests that restoring the economy will take more than just saving the elements of the small-bank system or prosecuting criminals—hard as those steps are. It will also take ordinary folks in Cornelia and many other places learning some difficult lessons in personal financial responsibility.

This article originally appeared in the October 21, 2010 issue of TIME.

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