Walker County's Covenant Bank & Trust reopening, but investors lose out

An FDIC employee wheels a box past Georgia State Trooper Tony Rathel, who was providing security, and into the Covenant Bank & Trust building in Rock Spring, Ga. State regulators shut down the bank, and it reopened as a branch of Stearns Bank.

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ROCK SPRING, Ga. -- One of Walker County's biggest banks reopens today under a new flag after soured real estate loans helped push the 6-year-old institution into insolvency.

Covenant Bank & Trust, which state regulators closed Friday night, today becomes the newest branch of St. Cloud, Minn.-based Stearns Bank National Association. Stearns acquired Covenant's assets as part of an FDIC-managed transfer over the weekend. The new owners plan to reopen the main office here and a branch in Dalton, Ga.

The acquisition will give Stearns Bank, with $1.3 billion in assets and branches in Minnesota, Florida and Arizona, its first foothold in Georgia.

Norm Skalicky, CEO and biggest shareholder in Stearns Bank, said in a statement over the weekend that Covenant Bank customers "will continue to be served by the same friendly professionals," who will be hired by the new owners.

The $90.6 million of deposits in the former Covenant Bank will continue to be insured by the FDIC "and backed by the considerable capital strength of Stearns Bank," Skalicky said.

But nearly 150 Covenant Bank shareholders who invested more than $10 million through two stock offerings since 2006 stand to lose their investmenta. The FDIC estimates the bank failure will cost its insurance fund $31.5 million, although the actual loss will be determined as regulators resolve problem loans and other assets Stearns Bank won't absorb under its purchase agreement with state regulators.

Billy Neil Ellis, a Chickamauga businessman and former chairman of the 11-member Covenant board, said real estate values have plunged 25 percent or more and regulators required the bank to write down many loans.

"We were doing well in our first couple of years, but then the economy started slowing down, and business and property values began to decline," he said. "The regulators came in and starting marking down our loans, even those loans that were being paid."

Covenant Bank opened in 2006 in Rock Spring and added the Dalton branch a year later. The bank grew to more than $100 million in assets and built a $2 million home office on state Highway 95 in Rock Spring.

The 15,000-square-foot headquarters building was the largest in the town. But the bank was unable to lease unused space, Ellis said.

Then came the carpet industry slump, which helped eliminate nearly one of every five jobs in the Dalton area since 2006. According to FDIC filings, Covenant Bank never had a profitable year, and the 2009-11 slump hit it hard.

Many banks got federal assistance through the Troubled Asset Relief Program, but Covenant didn't.

"I feel like they helped out the big banks, but not most of the community banks like us," Ellis said.

Covenant was headed since its start by Trent Sanford, who declined comment when reached at his home in Ellijay, Ga., Saturday.

Over the weekend, Georgia State Patrol officers guarded the office while regulators reviewed bank records and helped transfer deposits and selected loans and assets to Stearns Bank.

Covenant is the 78th bank in Georgia to fail, including four already this year. Georgia has had the most bank failures of any state over the past four years.