Santa Ana Bank Closed by U.S. for Insolvency

Capistrano National Bank of Santa Ana was declared insolvent and closed Friday by the U.S. Comptroller of the Currency, becoming the third California bank and the first in Orange County to fail this year.

All four offices of the bank will reopen Monday as branches of Farmers & Merchants Bank of Long Beach, which signed an agreement with the Federal Deposit Insurance Corp.--the failed bank’s receiver--to assume operation of the Orange County facilities and to take over Capistrano National’s $41 million in deposits, an FDIC spokesman said Friday.

Capistrano National’s 8,900 depositors will automatically become depositors of Farmers & Merchants, the FDIC said, and checks written on their Capistrano National accounts over the weekend will be honored.

All Deposits Protected

Because of the assumption of deposits by Farmers & Merchants, no depositors will lose any of their funds, including those with accounts in excess of the $100,000 maximum federal insurance level.

The bank, which lost $4.1 million in 1984, $1.3 million in 1983 and $2.4 million in 1982, was closed, the Comptroller’s office said Friday, because it has “experienced substantial deterioration in the quality of its loan portfolio. It has been unable to remedy its problems and its losses exhausted its capital funds.”

With only $50 million in assets as of March 29, Capistrano National was not a particularly large or significant bank, with branches in San Juan Capistrano, Fullerton and Irvine, in addition to its main office in Santa Ana. But the FDIC took advantage of the closing Friday to issue one of its strongest attacks yet on banks that use brokered deposits and on the brokers and other institutions who place deposits with financially troubled banks that are willing to pay premium interest rates to obtain the funds they need to finance loans.

In a statement issued by the FDIC board of directors in Washington, the agency Friday named all of the deposit brokers that had placed money with Capistrano National--a total of $2.5 million--and lashed out at the Federal Bureau of Indian Affairs for depositing an additional $1.5 million at the bank in order to take advantage of the high interest it was offering.

The brokered funds at Capistrano National, the FDIC said, were placed by American Money Market Services Inc. of Irvine, Diversified Financial of Alhambra and First Empire Funding Corp. and Pioneer Service, both of New York.

Large Deposits by Other Lenders

In addition, the FDIC said eight savings and loan associations, seven banks and seven credit unions had placed large deposits with Capistrano to take advantage of the bank’s high interest rates. The FDIC did not name those institutions.

Such deposits, the FDIC statement said, enable banks with problems to continue operating longer than they ordinarily might, which can compound their problems.

“The cost to the deposit insurance fund is substantially and unjustifiably increased” when banks with brokered deposits fail, the agency complained. Large deposits are most often broken into units of $100,000 each to obtain FDIC insurance coverage.

Nationally, 22 banks have failed so far this year and federal banking regulators said they expect about 100 failures by the end of the year. Although most of those failures are expected to occur in the financially hard-hit agricultural states, several banking industry specialists, including California Bankers Assn. director Gus Bonta, have said they expect 10 or more California banks to fail this year.

Three Failures Last Year

Last year, with 79 failures nationally, was the worst year for bank collapses since the Depression. California, with six bank failures in 1984, tied with Texas for third place on the list of states with bank problems. Orange County led all other areas of California with three bank collapses and, industry observers said, could account for three or more again this year.

Within minutes of the Friday closing of Capistrano National, the Federal Deposit Insurance Corp. was appointed receiver of the failed bank and a crew of more than two dozen FDIC accountants and bank liquidation specialists marched into Capistrano’s main office to begin a marathon weekend of inventories, audits and account reconciliations.

The FDIC, acting as receiver and liquidator of the bank, has held on to $37 million in loans and other assets, including real estate obtained by the bank through foreclosure, and has given Farmers & Merchants an “advance” of $33.6 million in cash to cover the deposits it assumed.

Farmers & Merchants is not required to repay the advance, except for a $3.5-million “premium” payment it made to gain FDIC approval of its takeover bid. In addition to the bank’s deposits, Farmers & Merchants also has agreed to purchase $13 million worth of Capistrano National’s real estate and installment loans from the FDIC.

Shareholders May Lose All

Although depositors will not lose any money because of the failure, shareholders--including the investors who last year pumped nearly $5 million into the bank in what proved to be a fruitless attempt to save it--have little chance of recovering any of their investment.

Before shareholders can see any money, the FDIC must pay off all of Capistrano National’s creditors and recover all of its own costs through liquidation of the assets it has retained. Shareholders of other failed banks have received payments in the past, but an FDIC spokesman in Washington said Friday that the agency, based on an early examination of Capistrano National’s assets, does not believe there will be any funds left for shareholders.

Two Customers, Two Views

The investors who attempted to prop up the bank last year included former Iranian Finance Minister Rostem Pirasteh; Los Angeles industrialist Ghassem Ladjevardi; the Los Angeles brokerage firm of Morgan, Olmstead, Kennedy & Gardner Inc. and the company’s deputy chairman, Rockwell Schnabel; Del Mar Avionics, an Irvine medical products company headed by Schnabel’s father-in-law, Bruce Del Mar, and investors Ali Razi, Hormoz Shahrokshahi and Amanollah Sarbaz.

A man who said he was Sarbaz’s nephew walked up to the locked doors at Capistrano National at about 1 p.m. Friday, read the sign declaring that the bank had been closed and turned over to the FDIC and slowly shook his head.

He said that he had come to deposit some money in a business account and that he used the bank because his uncle was a shareholder and had assured him it was a good bank.

Another customer who arrived after the closing, Tustin attorney John Farmer, said he had come to clean out his accounts because he had been reading about Capistrano National’s financial problems and wanted to get out before it failed. Farmer said he had intended to withdraw his individual retirement account and personal and business accounts on April 1, the day after the last interest period ended, but just hadn’t had time.

Capistrano National opened for business in San Juan Capistrano in October, 1975, under the chairmanship of Donald Douglas Jr., son of Douglas Aircraft Co. founder Donald Douglas.

Profitable Until ’82

It was fairly profitable until 1982, emphasizing real estate construction and mortgage lending.

But, as with several other failed or currently troubled Orange County banks, Capistrano National ran into problems when the Southland’s real estate industry entered a depression in 1979, a depression that only began ending last year. Many real estate borrowers defaulted on loans, properties that originally had been appraised at high prices dropped in market value and Capistrano had to begin taking huge loan losses and loan write-downs.

In its 1984 financial statement, Capistrano National reported a loss of $4.1 million. It reported $57.7 million in assets, $56 million in deposits and $39 million in loans, but said its basic capital consisted of only $81,000 in shareholder equity plus $1.5 million in reserves against possible future loans.

Under an order issued by the FDIC more than a year ago, the bank’s capital, including loan loss reserves, should have been in excess of $6 million.