FDIC Blitz Stuns Small Texas Town : Shutdown: Liquidation experts pour in, giving bank takeover the feel of a massive police raid. It is in such places that the crisis packs the most punch.

Speeding across the scrub prairie of central Texas in a fleet of rental cars, Jack Goodner and his team wheeled into Main Street right at 3 p.m. on an abnormally warm Thursday last February, looking like the advance elements of a massive police drug raid.

But Goodner wasn’t after drugs. As head of the Houston liquidation office of the Federal Deposit Insurance Corp., he was there to shut down the insolvent First National Bank of Wortham, which had dominated this little town’s business district since 1903.

By Friday morning, First National would be set to reopen as a branch of the Farmers State Bank of Groesbeck, Tex., a slightly larger rural bank that specializes in agribusiness loans and was interested in making inroads into Wortham.

In the meantime, First National would be picked apart, dissected and then put back together again by Goodner and his team of bank-liquidation experts--as an out-of-town reporter looked on.

“Have you ever been to a hog auction?” asked Marjorie Parks, head cashier at First National, as she stared in wonder at the regulators swooping through the bank’s cramped offices. “Well, a hog auction looks a lot like this.”

First National’s closing offers a rare, ground-floor glimpse into the growing role that the FDIC and its foot soldiers are playing as they struggle to deal with the banking crisis, which has led to more bank failures than at any time since the Great Depression.

An estimated 180 banks are expected to be seized by the federal government this year.

But while the shutdowns of big institutions in New York and New England have been getting all the headlines, it is in small towns--where the local banker still plays a critical role in holding the community together--that the banking crisis packs the most punch.

And it is in places such as Wortham where much of the banking crisis is being played out. Of the 896 banks that closed across the nation during the last half of the 1980s, fully 676 were small institutions with less than $50 million in assets.

The regulators’ final sortie on First National had begun earlier that morning, when Jose Hernandez and Jeannie Dawley, examiners with the U.S. Comptroller of the Currency who had been monitoring the bank for months, arrived for one final look at the bank’s books.

It was to have been management’s last chance to avoid a shutdown.

Two days earlier, in secret bidding at the FDIC’s regional office in Dallas, Farmers State had beaten out the First Bank of Katy, Tex., a larger bank from the Houston area, for the rights to First National if the comptroller’s office went ahead with the closing.

The deal would force the FDIC to pay Farmers State $3.6 million to take over First National, but it would protect all of the $7.4 million in depositors’ money--even $286,000 worth that exceeded the $100,000 limit on federal insurance coverage.

Although E. A. (Little Mack) Strange, grandson of the bank’s founder, and other bank officials already had figured out that the bank regulators were on the way, Goodner and his team had taken extraordinary steps to try to mask the fact that the bank was about to be closed.

FDIC staff members, assigned to one of five main specialized teams, spent the morning ensconced in a Holiday Inn 20 miles from Wortham, where they plotted the takeover under the pretense of a routine corporate meeting of JAG Inc.--Goodner’s initials.

Now, it was happening. Once they were in the door, Goodner and Hernandez quickly made the closing official by slapping a press release on the outside and removing the bank’s charter from the lobby wall, as if ripping the epaulets off the uniform of a disgraced soldier.

Then they gathered the bank’s four remaining employees in the lobby and announced that the bank was closed and would come under the control of the FDIC. Stunned employees agreed to work through the weekend to complete the takeover.

By 3:10 p.m., the rest of Goodner’s staff of FDIC liquidators poured in, ready to make a final determination on why First National failed, and how much the government would have to shell out to Farmers State to keep the bank’s doors open.

Twenty minutes later, Farmers State chief executive David Hughes and a half dozen bank employees arrived to claim their prize. “We’ve never done this before,” a sheepish Hughes told Goodner. A locksmith changed the locks to fit a new set of keys.

Suddenly, chaos hit the sleepy bank: Frantic customers who had witnessed the FDIC invasion were ringing the phone off the hook, demanding to know if the bank would reopen. Newspaper and television reporters from Waco, 40 miles away, were already seeking interviews.

At the same time, a squad of armed off-duty state troopers had arrived to guard the bank’s time-lock vault, which would be kept open around the clock while the FDIC counted the bank’s money. Delivery trucks pulled up with copying machines and other office equipment.

By the time Gandy’s Chicken began delivering dinner for 60 in a lobby designed to hold a dozen customers, Goodner was desperate to find more work space, so FDIC analysts moved into an old funeral parlor down the block, carrying mountains of files they would catalogue that night.

By midnight, they would have determined the full value of the bank’s small portfolio of 1,800 loans, cash and other assets, wired $3.6 million to Farmers State, and alerted the Federal Reserve to change its check-clearing codes for First National.

Back in the bank’s office, FDIC analysts checked reams of computer printouts listing depositors against delinquent loans, looking for matches where liens could be placed before the deposits were turned over to the new bank the next morning.

Meanwhile, a separate FDIC team of investigators was searching for the reasons the bank failed--and for any hints of fraud--burrowing more deeply into the files. Before they headed home, they would interview virtually everyone connected with First National.

Friday morning, the bank re-opened--under a temporary banner that Farmers State had used for parade floats in Groesbeck. And the bank and its customers were ready to get back to normal.

The FDIC staff was already getting ready to clear out, and Hughes was personally greeting his new customers, reassuring them that all their money was safe, and that they could still use their old checks until new ones were sent out.

Why did First National fail?

Regulators and the bank’s owners disagree on what tipped it over the brink.

Certainly, the crumbling state of the economy in this desolate stretch of central Texas played a role in First National’s demise.

First National, a one-office bank with less than $8 million in assets, had been on the edge of insolvency for years. Its problems were severe enough to land it a place on the comptroller’s watchlist of troubled banks as far back as 1985.

While there has been no evidence of fraud at First National, regulators say the bank’s owners committed the cardinal sin--common among small country banks--of basing lending decisions on trust and friendship rather than on credit reports.

Often, they lent more than their customers could afford to repay.

“They were lending to people who were praying next to them on Sunday,” Hernandez says. “And in a little town like that, it’s hard to tell people that they can’t borrow a couple thousand dollars for a new car after you’ve just seen them in church.”

Hernandez adds that regulators gave First National plenty of time to recover, but the bank was simply in too deep. “We really didn’t want to close the First National Bank of Wortham,” he insists.

Yet Benji Reed, First National’s attorney, argues that the regulators brought the bank down. First National, he says, had invested in loans that had originally been made by another small Texas bank, the Marlin National Bank, which failed in 1987.

When Marlin National, which was owned by a friend of Little Mack Strange, was seized by the government, the FDIC took over the job of collecting on the delinquent loans that First National counted among its investments.

But the government’s overworked staff, faced with hundreds of bank closings all over Texas and the rest of the nation, never got around to it, and First National lost as much as $750,000.

“Granted, it was a mistake to invest in those loans with Marlin in the first place,” Reed acknowledges. “But if we had that money, it would have been a lot easier for us to try to meet the capital requirements.”

By last winter, First National needed $863,000 to meet the federal government’s guidelines for bank reserves--the cash needed to back up its deposits--and it simply didn’t have the money. Strange tried to sell the bank, but there were no takers. Now he would lose millions.

“People were sad to see what happened to Little Mack,” says Wendy Hall, a local store owner.

That afternoon, Little Mack Strange had had suspicions that the Feds would be coming. So he called in sick, and left the keys to his company car in his desk--in an envelope marked “FDIC.”