On June 20, Farmers State Bank in Dexter, Kan., became the nation's 48th bank failure in 1985. A team of Federal Deposit Insurance Corp. closing and liquidation specialists took over the bank. A Washington Post staff writer was permitted to observe the FDIC team. By James L. Rowe Jr. Washington Post Staff Writer

DEXTER, Kan. -- Representatives of General Sales Inc. began to gather at the Best Western Hallmark and the Econo Lodge motels in nearby Arkansas City in the early evening of June 19.

The 35 members of the General Sales contingent had come from offices in Kansas, Texas, Oklahoma and Nebraska for the June meeting.

But when the group gathered in the Pride Room of the Econo Lodge at 10 the next morning, the name of General Sales Inc. came up only once when Stanley Gish asked whether anyone could suggest a new company name the next time the group met.

General Sales Inc. does not exist. It is the fictitious name that Gish and his colleagues used to cover their presence in Arkansas City, about 60 miles south of Wichita. The representatives of General Sales work for the Federal Deposit Insurance Corp., the federal agency that insures bank deposits and acts as receiver when a bank fails.

The men and women gathered in the Pride Room had come to take over the assets and liabilities of Farmers State Bank, a tiny bank 25 miles away in Dexter. But until the bank could be physically closed, secrecy was of the utmost. Rumors of an impending closure could trigger a run on the institution.

Barring a financial miracle, Farmers State Bank, with assets of $3.6 million, would be closed by Kansas authorities at 2 p.m.

At that time, Farmers State could join the 47 other U.S. banks that already had been closed this year [since June 19, the total has reached 52].

The Dexter bank had had problems for several years. Those problems had grown worse in the last six months. FDIC and Kansas examiners had been poring over the bank's books for a month. They determined that Farmers State Bank, the only institution within 15 miles of the town of 360, had run up substantial losses. It was insolvent -- its liabilities exceeded its assets by at least $135,000. Its owner and chairman, Robert Loughrey, had been told the bank needed an additional investment of $470,000 by June 20.

Kansas regulators judged that Loughrey would be unable to obtain the funds and that the bank would have to be closed.

So the call had gone out to Gish a week earlier telling him to assemble a closing and liquidation team to take over the remnants of the bank if and when it failed. Gish is the FDIC's closing manager for the Kansas City region. Because of the rash of bank closings in the region, Gish had to comb the FDIC offices in several states to find available help for the closing.

When a bank insured by the FDIC fails, the federal agency first tries to find another bank to take over its deposits and some of its assets. The FDIC almost always provides financial assistance to the buying bank.

If the FDIC fails to find a bank to "purchase and assume" the estate of the failed bank, the agency itself takes over the institution. It then pays depositors in full up to the $100,000 insurance limit.

The morning of June 19, the day before the deadline regulators had set for Farmers State to come up with new money, representatives from 13 banks attended a secret meeting in Wichita and were invited to make a bid for Farmers State Bank. The bids were due by 2 p.m. June 20. Briefing the Troops

"For most of you this is your first closing," Gish noted as he opened the morning meeting at the Econo Lodge.

For many FDIC workers, Farmers State would be a training ground in the arcane process of shutting down a bank. But nearly all in the room were familiar with the aftermath of a bank failure. The closing veterans and the neophytes spend most of their time processing the bank records and trying to collect the loans passed on to FDIC offices after the initial closing and liquidation team leaves a failed bank.

"This will give you a chance to encounter a closing," Gish said. "If we haven't been doing something right in the past, you'll have a chance to have some input."

Gish, a soft-spoken 15-year veteran of the FDIC, has been the newly formed Kansas City region's closing manager for only a few months. Technically, the regional office is still being formed and does not take responsibility for Kansas until Sept. 1. But the Dallas office, which still has the formal responsibility for Dexter, faced a far bigger bank failure the next day in Oklahoma City.

"The bank is scheduled to close at 2 p.m. We don't know for sure if it will close. Hopefully there will be a purchase and assumption," Gish said as he told the FDIC team about the 13 banks represented at the bidders meeting the day before in Wichita.

That hope did not last long. At 10:30 a.m., the call came in from Washington that none of the 13 bidders was willing to plunk down the $350,000 in capital required to form a successor bank to Farmers State. Because of Kansas law, it had to be a new bank, not a branch of an existing bank, which would be less expensive.

"That certainly changes the picture," Gish told the team. The focus of their mission immediately shifted from preparing to reopen the bank the next day with a new bank in charge to getting depositors paid as soon as possible.

Gish would have to place frantic phone calls to find FDIC experts in processing depositor accounts, verifying their balances, crediting interest to the day of closing, and printing checks (written on the Federal Reserve Bank of Chicago). Because no one's deposits exceeded $100,000, no one would lose a penny in the closing.

"I'll be going out to the bank about 1:30," Gish told the team. He would bring a small group with him, but he said that most of the closing and liquidation team would not be given the word to take off for Dexter until the bank was actually closed. By the time they arrived, Gish told the meeting, he would already have met with the bank's employes and asked them to work for the FDIC temporarily. The Takeover Strategy

"It is a difficult time for bank employes. Some of you have come from closed banks. You know the emotional impact. Be sensitive when you walk in. We have to put ourselves in their position. We're going to be asking them a lot of questions," Gish warned.

Joe Meade, one of the auditors on the bank's final examination, told the meeting that the Farmers State's five employes -- including the president, who came on board Nov. 1 to try to turn the institution around -- were aware that the bank was going to close. But the lack of a bidder was going to be a shock to them.

Gish said his immediate worry was logistics. He needed space for the team -- soon to be augmented by payout specialists -- to work. The bank was too small to accommodate everyone and the computers. Making even discreet inquiries about space that might be rented was impossible in a town as tiny as Dexter.

Meade told him there was a second story to the bank, but it was unusable. "We looked up there this morning, and there were birds up there," Meade said. Eventually, the claims team would set up their tables and their computers in the fan-cooled senior citizens center across the street from the bank -- until the computers began to overheat on Saturday.

"I gather there's nowhere to eat," Gish asked Meade.

"There's a small restaurant. But it's not open at night, and the food's terrible," was the reply. Gary Kelly, the facilities manager for the FDIC, received one more responsibility: finding a pizza place that could produce 17 pies for the FDIC team and the bank employes.

"I anticipate we'll get out of there sometime between 9 and 11 tonight and be back about 8 Friday and Saturday morning," Gish said. "We'll probably start at 9 on Sunday, but if anybody wants to go to church, they're excused for that. I forgot to mention that last time and some people didn't go."

Gary Davidson, the closing coordinator and Gish's immediate deputy in the Dexter failure, warned that this is "small-town Kansas. They're real proud folks. Be careful about what you say. Don't make any comments about it being a 'one-horse town.' "

He also warned that they might face resentment from some townspeople and law enforcement officials.

"Don't do things you wouldn't do in the big city. Don't make any U-turns in the middle of the block or things like that." At one recent closing, Davidson said, FDIC employes got a raft of tickets before they caught on.

"We're the guests, so to speak," Gish said. "Let's be sensitive."

Gish said everyone should be back to the Pride Room by 1:30 p.m., dressed more formally than they were at 10 a.m. "But don't stray too far," Gish cautioned.

"We've had situations where the president just gave up early and tossed us the keys. If there's a run, we'd have to move early too."

The group meeting broke up into smaller sessions. For some, the imminent closing of the Dexter bank was a reunion with FDIC colleagues they had not seen since the last time they closed a bank. For many others, it was a new, or nearly new, experience.

Gary Kelly, the facilities manager from Omaha, was a veteran. He was responsible for the security of the bank, inventorying all the bank property, making sure bank employes were paid and the FDIC employes' time sheets were kept.

Kelly told his people to watch for the articles of incorporation and, if they found a gun, not to touch it.

"Make sure all the gifts and premiums are boxed up and put in the vault," Kelly said. Don't take anything, he warned. "It's kind of silly to lose your job over a 25-cent pen."

Once the FDIC is in the bank -- after it is closed by Kansas authorities -- the facilities team will have to find a local locksmith to change the outside door lock and find out who handles maintenance on the bank's vault. The team also will have to visit the post office and arrange to get the bank's mail.

"Only Ed Phelan the liquidator-in-charge or someone he delegates can pick up the mail," Kelly said. Kelly ran down the check list. Charge accounts would have to be closed, and final bills sent to the bank. Utilities would have to be notified that the bank was closed and that further use would be billed to the FDIC.

Sandy Fairchild, who with Jack Posik was in charge of the bank's assets, explained to Ken Anderson and Carolyn Harper that, because it appeared that there would be no acquiring bank, "All the loans are ours." The asset team would have to find all the bank's loans, securities and other financial assets.

She told them to look for any differences between the repayment information kept on the envelopes in which the bank files each loan and the computer records on the loans. "It all has to balance," she said, "It's one big checkbook."

Before the liquidation specialists on the closing team could take over, the balance-sheet specialists would have to construct a complete listing of the bank's assets and liabilities -- what is called a pro forma statement. The pro forma team, headed by Ron Boyd, would have to reconcile any differences between the books kept by the bank and the information turned up in the closing.

There could be no errors or omissions to be taken care of later. June 20, 1985, was the final record for Farmers State Bank of Dexter, Kan. Marching Into Action

Kansas State Bank Commissioner Eugene T. Barrett Jr. looked at his watch. It was 2:01 p.m. "Let's go," he said.

There had been no panic in Dexter -- even though the closing of the bank was an open secret among many of the town's residents. At 1:55 p.m. a young farmer walked through the door. He was the bank's final customer. He made a deposit.

David K. Smith, the 30-year-old president of Farmers State Bank, had mingled with Barrett, the half-dozen FDIC representatives and several directors in the 15 minutes before 2 p.m. But Smith was at his desk when Barrett walked in.

He asked Smith if Chairman Robert Loughrey was present. Smith said Loughrey was not.

"I'm making you acting chairman," Barrett said.

Barrett passed out copies of his official order closing the bank. "I'm not going to read it unless you want me to," he said. No one asked him to read it. "I was here 10 days ago and demanded that $470,000 be put into the bank," Barrett said. "I also said I'd be back here today by 2 p.m. Has the capital been put into the bank?"

"No," Smith said, almost inaudibly. It was the second time in his brief career he had been hired to try to save a dying bank. It was the second time he had failed.

Barrett asked Smith for the keys to the bank. Smith stood, reached over the desk and handed them to the commissioner. "Are these your car keys," Barrett asked.

"They belong to the bank car," Smith replied.

Barrett turned to his right and held out the keys to Gish. "It's your bank," he said. The closing ceremony took less than three minutes.

Gish asked Smith to call in the bank's other four employes: Vice President and Cashier Phyllis Hoyt; her daughter-in-law, Pam Hoyt; Lyn Killingsworth; and Delores Pudden.

"We need your help," Gish said. "If you need to call home and explain that you'll be working late, please go ahead. If there's an emergency, please let me know.

"I know it's a difficult and emotional time for you. Several of us here have been through it too. I've told my employes to be courteous and understanding. If there is anyone who acts in an unacceptable manner, please let me know."

He told them that, after the 13 bidders turned down Farmers State, the FDIC had tried to find other bidders. "It does not look encouraging," he said. "As soon as we know, you'll be the first to know.

"This is the final day of work for this bank," Gish said. At 2 p.m., the bank's employes, including Smith, became FDIC employes. Gish said that all items would have to be processed as of June 20 -- even those that normally get processed only once a week or once a month, like Christmas Club contributions.

"Are there any questions?" he asked.

Pam Hoyt said the bank had received a direct payroll deposit from General Electric Co. for two customers who work for GE. "The check is . . . dated tomorrow. Can we process it today?"

Gish said he would check. The answer would be no.

"Are there any other questions?" Gish asked.

"Right now I can't think," said Phyllis Hoyt, daubing at her eyes with a tissue. She'd worked for the bank nearly 20 years.

"I thought sure we'd get a bidder," said Pam Hoyt. Surrendering the Bank

Smith met privately with his former employes for a few minutes while the skeleton FDIC crew sprang into action.

Moments before Barrett walked into Smith's office, Gary Kelly called the Econo Lodge. The troops were on the way before Gish got the keys.

Even before the employes emerged from their brief meeting with Smith a 2:12 p.m., Kelly had pasted notices of closing on the front door, the night deposit slot and the drive-in window at the rear of the bank.

Joe Meade began an intermediate close-out of the three open teller windows, putting FDIC seals on the coin holders and the cash drawers. A final count of teller and vault cash would await the arrival of the full FDIC team from Arkansas City.

At 2:27 p.m., Cowley County deputy sheriffs arrived to provide security. Dutch Stegelman positioned himself at the front door. Elmo Bonesteel would guard the senior citizens center. Only a handful of customers walked by during the next two days.

Directors Floyd Reeves, Jim Bradley, Gene Brinkman and William Baucus (who was unable to make the formal closing) sat in Smith's office with Gish and FDIC attorney Brian Moffat. They had no further responsibilities for the bank, Gish told them. Moffat warned them that directors might have legal responsibility for events that caused the closing of a bank. "I can only speak in general terms," Gish said. "But it would probably take months" before the FDIC decided whether to recommend prosecuting a director for violations of the law.

At 2:48 p.m., the vanguard of FDIC team reached the bank. By 3:15 p.m., everyone had arrived. Some had missed the poorly marked Dexter turn off Route 15 by Little Mo's store.

Linda Lorch and Tony Santelli, part of the liquidation side of the team, began to question Lyn Killingsworth on the accounting practices at the bank, how to call up accounts on the computer. They were relieved to discover the bank did all its data processing and computer printouts in-house. Some banks rely upon data-processing centers that are hundreds of miles away.

Lorch and Santelli would not be busy until Sunday. Their job was to take the auditing work done by the pro forma team and convert it into records that would be used by a team that would sell the bank's assets to generate as much cash as possible to recompense the FDIC for its expenses in paying off depositors.

At 3:30 p.m., Tim Reimer and Andy Anderson began to inventory the items in President Smith's office. Both represented the FDIC's investigations unit. They were looking for items that would help the FDIC understand why the bank failed and also looking for items that might indicate criminal behavior on the part of bank officers or directors.

FDIC examiners did not feel Smith was at fault. The bad loans that led to the bank's failure were made long before Smith was hired. Indeed, the FDIC hired Smith to help it liquidate the bank.

Reimer dictated each item he picked up to Alicia Lorimor, part of the clerical unit. Smith, clutching his desk nameplate and a picture of his family, sat to Reimer's right. Lawyers Moffat and Larry Vickrey worked on legal documents five feet from Reimer and Anderson.

"This is the first desk I've come across that didn't have rubber bands," Reimer said.

"I paper-clip everything," Smith said.

It took Reimer and Anderson about half an hour to go through Smith's desk, credenza and bookcase. A few items -- including minutes of board meetings of Dexter Banking Co., the company owned by Loughrey that controlled 96 percent of the bank's stock -- were ordered held for the investigations unit. The rest of the items would become part of the physical plant that the FDIC would sell.

By 4:30 p.m., Joe Meade, Patrick Power and Pam Hoyt finished counting the cash. The bank had $69 in pennies.

Gish established his headquarters in Smith's old office. He told facilities manager Gary Kelly that he should find a place to hold a community meeting on Saturday so Gish and other FDIC officials could tell bank customers what had happened, how they could collect their checks and answer any questions.

Tables were set up across the street in the senior citizens center. Ann Donovan and Harry Moore set up their Compaq computers. More would arrive the next day when the claims agents began to prepare for the payout.

Carolyn Harper and Ken Anderson went over the consumer loans -- the bank had 141 of them totalling $550,402.09. They verified that repayments recorded on each loan jacket matched the computer printouts.

Linda Lorch and Tony Santelli, who were to play a subsidiary role in the initial stages of the closeout, drove back to the Pizza Hut in Arkansas City to bring back 17 pies.

The auditors learned that their first trial balance on the bank's computers was off because the computers are programmed to credit the interest due on loans the night before but add interest to savings accounts on the same day. They would have to do a new trial balance.

By 10 p.m., the FDIC team began to close down its operations. Gish told them to be back at 8:30 the next morning. More casual dress would be appropriate, he said. "But no cut-offs." Examining the Property

Lesylee Sullivan got the call in Atlanta at 4 p.m. Thursday. Primrose Bonta from FDIC headquarters in Washington was told to pack for Dexter at 2 p.m. Georgia Beauchamp, L. Ray Jackson and Connie Ronan were pulled in on an emergency basis. All were experienced in paying depositors and on Friday were reconstructing accounts.

The FDIC's data-processing expert Chuck Mellein coaxed the bank's computers to print out statements for all the bank's checking account customers.

It took six different computer runs to print out all the checking statements. Each run represented one of the six different days the bank normally sent out statements. The seventh run would include all the savings accounts. Mullein and Holt would have to tell the computer to credit the accounts for the interest due up to June 20 and no more.

In the senior citizens center, the statements were organized in 26 piles, each representing a letter of the alphabet. There were only 1,000 or so deposit accounts.

As each run came in, Beauchamp and Debbie Haresnape sorted them alphabetically and checked the statement balance against the bank's records. There were three copies of each statement: one for the customer, one for the FDIC claims processors and another for the files.

The liquidation team was edgy and bored. Jonnie Hensley, the chief of the liquidation accounting systems group, Linda Lorch and Tony Santelli filled in where they could. Santelli helped out by doing the payroll. But until the pro forma team prepared the balance sheet and the records showing every point of discrepancy between bank and FDIC figures, their role was limited.

Liquidation accountants reassigned an identification number to every asset in preparation for collecting payments and selling off the remains of Farmers National Bank. They set up the books of the new "bank" and converted the recordkeeping to a straight cash basis. Interest payments on loans no longer would be accrued every day. They will be recorded only when received.

Hensley had a loan payment in her pocket that would be recorded as soon as possible.

Robert Seay of the pro forma team spent Friday checking out the three pieces of property the FDIC now owned -- including a warehouse half a block away. He put FDIC seals on all the properties.

By 5:41 p.m., the checking accounts were all in balance. All that remained for the claims team were the savings accounts and the printing of the checks.

An emergency call came from headquarters. A New York bank was about to fail. Several of the Dexter team, including Beauchamp, headed for New York.

By late afternoon on Saturday, 50 hours after Barrett closed the bank's doors, Maxine Robbins of the pro forma team was preparing settlement jackets for each of the balance sheet's accounts. Each settlement jacket pointed out any differences between bank and FDIC records and contained documents explaining the FDIC adjustments. For example, she said, the FDIC found two $25,000 certificates of deposit that the bank did not have on its books.

Santelli and Hensley did a spot audit of the interest credited to various accounts.

The bank computer seemed to be paying a few cents more per thousand dollars than it should have. They resolved the discrepancy. The bank compounded interest daily even though it credited the interest every three months.

Overheated computers in the unair-conditioned senior citizens center had twice lost deposit account data that had to be reentered. The computers were moved to the air-conditioned bank. Confronting Townspeople

About 170 bank customers filled the bleachers in the Dexter High School gymnasium to hear Gish, chief claims payer Sullivan, and liquidators Ed Phelan and Bud Johnson explain what was happened to their money.

Gish told a generally friendly audience that, although he could not relieve the stress of a bank failure, he "could relieve some of its uncertainty."

Checks would be available Monday. No account exceeded $100,000. Everyone would be paid in full.

Bud Johnson would be in the bank until the loans were transferred from Dexter to Wichita (to join the detritus of five other banks). Loan payments -- whether on a 30-year mortgage or a three-month personal note -- should be paid to the FDIC on the same schedule as they were due the bank.

But the FDIC is not a lending institution, he said. Borrowers should try to find a new bank as soon as possible. He said the FDIC planned to try to sell the good loans to area banks -- the nearest are in Burden, about 15 miles away, and Winfield, about 18 miles up the road.

He said that Johnson would work with loan customers, especially those having difficulties repaying, but said that, like a bank, the FDIC could be only so lenient.

Sullivan told pensioners that July Social Security payments would be deposited directly in another bank, which then would make checks available at the old Farmers Bank.

In August, however, checks would be sent to their homes unless they made direct deposit arrangements with another institution.

She said the handful of Individual Retirement Account customers would get separate checks that they would have to put in a new IRA account in 60 days. Gish said safety deposit boxes would be open Monday. Customers who paid for a year will get a pro rata refund.

On Sunday, the pro forma auditing team handed off to Hensley, Lorch and Santelli. The liquidation accountants took over. Disbanding the Troops

On Monday, June 20, at 9 a.m., the doors of the Farmers State Bank were opened by the FDIC to allow depositors to claim their money. By the close of business that day, half the $2.8 million in insured accounts have been claimed. By Thursday night, 80 percent had been paid out.

By Saturday, June 25, less than a week after they gathered under cover of General Sales Inc. in Arkansas City, most of the FDIC team had left Dexter. Bud Johnson and a handful of others were to hold the fort until all the assets were transferred to Wichita.

The FDIC probably will keep the doors of Farmers State open until Bud Johnson and his crew finish their work -- possibly another month.

Once the doors close, regulators will mail checks to any depositors who have not claimed their money.