Santa Ana Bank Fails but Funds of Its 8,900 Depositors Called Safe

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 22nd nationally 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, a spokesman for the federal receiver said Friday.

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

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

Loan Portfolio

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,” the comptroller’s office added.

With only $50 million in assets as of March 29, Capistrano National was not a particularly large or significant bank. However, the Federal Deposit Insurance Corp. took advantage of the closure Friday to issue one of its strongest attacks yet on banks that use brokered deposits and on the brokers and other institutions that place deposits with financially troubled banks willing to pay premium interest rates to obtain funds to finance loans.

In a statement issued Friday by the insurance corporation’s board in Washington, the agency named all of the deposit brokers who 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 in the bank in order to take advantage of the high interest it was offering.

Brokered Funds

The brokered funds at Capistrano National, the insurance corporation 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.

In addition, the insurance corporation 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 insurance corporation did not name the institutions.

Such deposits, the insurance corporation said, enable banks with problems to continue operating longer than they ordinarily might, which in turn enables them to compound their problems.

Federal banking regulators have said they expect about 100 failures by the end of the year. Although most of the 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.

Worst Year

Last year was the worst year nationally for bank collapses since the Depression, with 79. 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 it could account for three or more again this year.

Capistrano National was the first Orange County bank to fail this year.

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.

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 insurance corporation must pay off all of Capistrano National’s creditors and recover all of its own costs through liquidation of the assets it has retained.