Failed Bank Reopened by New Owners

The four branches of the failed Capistrano National Bank opened for business Monrday as offices of Farmers & Merchants Bank of Long Beach. There were lots of questions from customers but no signs of panic.

Lobby traffic at the Santa Ana branch was slightly heavier than usual when bank doors opened at 10 a.m., but within half an hour the customer load returned to about normal, according to manager David Pilliod. He attributed the heavy morning traffic to the bank’s early closure on Friday, which prevented many customers from making deposits.

Capistrano National was declared insolvent Friday and sold by federal banking officials to Farmers & Merchants, which successfully bid $3.05 million for the assets of the failed lender. Capistrano National was the third California bank and the first in Orange County to fail this year.

With some hyperbole, Farmers & Merchants hung new signs at its Santa Ana, San Juan Capistrano, Irvine and Fullerton offices proclaiming, “You are now banking with the nation’s strongest financial institution.”

Although several customers dropped by to deposit money, “not one” customer closed an account, Pilliod said. Steven Utley, manager of the Irvine branch, said there was “a slight increase in foot traffic” Monday and “a lot of questions, but everything has been relatively normal.”

Employees were stationed near branch entrances to answer customer questions about the change of ownership. Most questions, Pilliod said, centered on whether outstanding checks drawn on Capistrano National would be honored and if passbook holders could make deposits.

Daniel Walker, Farmers & Merchants vice president, said customers could make deposits and the bank will honor all outstanding checks drawn on Capistrano National. New checks will be issued over the next three to five weeks, but customers who don’t want to wait may order new ones before then.

The future prospects for former Capistrano National employees were also a topic of numerous customer queries, branch managers said. Farmers & Merchants’ Walker said the employees are being kept on, but the bank is currently reviewing each of the newly absorbed workers. Walker said the review process is “just like with new hires” and is intended to help the bank place the workers in appropriate positions.

Under Federal Deposit Insurance Corp. regulations, lenders buying failed banks are not obliged to retain the old bank’s employees or honor previous pay scales or benefit packages.

Among State’s Strongest Banks

With $670 million in assets, $124 million in capital and net income of about $15 million in 1984, Farmers & Merchants is one of the strongest banks in California, an analyst said. Gerry Findley, a Brea-based banking consultant and publisher of the Findley Reports, said “conservative” operation has been the secret of success for the 78-year-old Long Beach bank.

“They don’t get themselves into a lot of ridiculous binds by playing hot money games,” he said. About half the bank’s $185-million loan portfolio is in commercial and industrial loans. “They don’t engage in a lot of more specialized or advanced banking,” Findley said. “They stick to fundamental banking.”

Keeping a tight lid on costs is another major factor behind Farmers & Merchants’ strength, Findley said. As a percentage of gross income, Farmers & Merchants had non-interest costs of about 17.4% in 1984, making its costs of operation the lowest in the state, he said. The average California lender has non-interest costs of about 45%.

Price Believed Too High

Still, Findley believes the $3.05 million paid for Capistrano National was more than three times what the failed bank was worth. Findley said he was “surprised at the extent” of Farmers & Merchants’ bid and speculated that the lender “might have gotten caught up in the emotion of the chase and forgotten what it was chasing.”

Nevertheless, Findley said, Farmers & Merchants got a “clean package” when it acquired Capistrano National last week. Even if the Long Beach bank paid more than it should have, he said, Farmers & Merchants had a total equity return of $17.4 million last year and is cash-rich enough not even to notice it. “They’re so fat with money, they don’t know what the hell to do with it,” Findley said.

In a related development, the former management of Capistrano National is blaming the bank’s failure, at least in part, on one of its directors, who is accused in a lawsuit of negligently managing the bank and breaching his fiduciary duties to the institution.

The suit, filed in Orange County Superior Court, claims that director and senior loan officer Myles L. Ketchum and 25 unnamed officers and employees mismanaged the bank’s loans.

‘Substantial Deterioration’

The bank, which lost $7.8 million over the last three years, had “experienced substantial deterioration in the quality of its loan portfolio,” which exhausted its capital funds, according to the U.S. Comptroller of the Currency.

The suit, filed Friday, accuses Ketchum and others to be named later of failing to formulate and adhere to a “reasonable and prudent loan policy” and failing to “administer, collect and enforce loans and other extensions of credit” in accordance with loan policies and practices.

The suit also claims that Ketchum caused the bank to violate federal and state laws and regulations as well as its own written loan policies. The suit alleges that he also failed to supervise others properly and failed “to cure” the problems he created.

Ketchum could not be reached for comment.