The Little Bank That Could

(MoneyWatch)  Steven Pearlstein of The Washington Post has an excellent story in his column today about how a little bank in North Carolina used its federal bailout money the right way.

Instead of using $20.5 million in federal bailout funding for executive bonuses or some secret, nefarious purpose, little Citizens South, a community bank in the textile belt of Gastonia, N.C., actually put the money to work for its local people.

Bank President Kim Price had avoided subprime lending and was exceptionally canny about the loans he did make. So, Citizens managed to post a profit of $3.1 million last year, down from $5.7 million the year before, but a profit nonetheless.

Price got an idea for how to put federal bailout money to work. His area, like many others, is being slammed by slowdowns in house sales. Price checked with builders got the idea of somehow making very low-rate mortgage loans while waving closing costs.

He offered 30-year loans with a teaser rate of 3.5 percent that would rise to a fixed, 5.5 percent rate after two years. No closing costs. He is paying for the program, including a marketing element, with the federal bailout money for which he must pay a 5 percent annual dividend payment.

The plan is a smashing success, Pearlstein writes. Builders get to unload a backed up inventory of houses. Home buyers get cheap loans.

Funny, but much of the $350 billion handed out in the bailout has not done much to stimulate lending which is exactly what the bailout program was supposed to do. Yet Price and Citizens are doing exactly that.

A couple more ironies. Citizens is next door to Charlotte, home to the giant Bank of America and formerly Wachovia which has been bought by Wells Fargo. BofA is under heavy fire for its ill-thought-out purchase of Merrill Lynch which was swamped with subprime debt. BofA has hit the federal till twice. Wachovia, a venerable North Carolina banking name, likewise got caught in some highly questionable subprime plays, forcing its merger.

One kicker in Pearlstein's column. In the banking world, there's plenty of moaning and groaning over the $500,000 a year salary cap for top executives of banks that are in "exceptional" trouble and get federal bailout money.

Guess how much Price makes a year? A whopping total of $456,146. My guess is that there are plenty of other community banks soldiering on through this war and doing good things like Citizens. Please let me know about them. It might make good examples for the big boys.