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Regulators shut banks in Texas, California

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[November 08, 2008]  WASHINGTON (AP) -- Regulators shut down Houston-based Franklin Bank and Security Pacific Bank in Los Angeles on Friday, bringing the number of failures of federally insured banks this year to 19.

The Federal Deposit Insurance Corp. was appointed receiver of Franklin Bank, which had $5.1 billion in assets and $3.7 billion in deposits as of Sept. 30, and of Security Pacific Bank, with $561.1 million in assets and $450.1 million in deposits as of Oct. 17.

Auto RepairThe co-founder and chairman of parent Franklin Bank Corp., Lewis Ranieri, is credited with inventing mortgage-backed securities two decades ago, but apparently was unable to save his own company from getting ensnared in the home-loan bust.

The bank's failure is a bitter irony because it is the mortgage securitization business of which Ranieri is known as a pioneer - the repackaging of home loans as bonds that are sold to investors - that was at the heart of the mortgage and credit crises. Last spring, the audit committee of the company's board found in an investigation certain weaknesses in accounting, disclosure and other issues relating to residential real estate loans.

Franklin Bank Corp. just Sunday said it had received proposals for transactions to strengthen Franklin Bank's capital position and was keeping regulators informed of the talks' progress.

The FDIC said all of Franklin Bank's deposits will be assumed by Prosperity Bank of El Campo, Texas. Its 46 offices will reopen as branches of Prosperity Bank with their normal business hours, including those that open on Saturday. In addition to assuming Franklin Bank's deposits, Prosperity Bank also will acquire about $850 million of the failed bank's assets.

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Parent company Franklin Bank Corp. just Sunday said it had received proposals for transactions to strengthen Franklin Bank's capital position and was keeping regulators informed of the talks' progress.

Meanwhile, all of Security Pacific's deposits will be assumed by Pacific Western Bank of Los Angeles. Its four offices will reopen Monday as branches of Pacific Western, a unit of PacWest Bancorp. In addition, Pacific Western will purchase around $51.8 million of Security Pacific's assets.

The FDIC will retain the remaining assets of the two banks for eventual sale.

The agency said depositors of Franklin Bank and Security Pacific Bank will continue to have full access to their deposits, which will continue to be insured by the FDIC.

The FDIC estimated that the resolution of Franklin Bank will cost the federal deposit insurance fund between $1.4 billion and $1.6 billion, while that of Security Pacific Bank will cost the fund $210 million.

Regular deposit accounts are now insured up to $250,000 as part of the new financial rescue law enacted in early October. The limit on individual retirement accounts held in banks remains at $250,000.

The 19 bank failures so far this year compare with three for all of 2007 and are more than in the previous five years combined. It's expected that many more banks won't survive the next year of economic tumult. The pressures of tumbling home prices, rising mortgage foreclosures and tighter credit have been battering many banks, large and small, across the nation.

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The failures this year include that of Seattle-based thrift Washington Mutual Inc. in late September, the biggest bank collapse in history. It had $307 billion in assets. In July another big savings and loan, IndyMac Bank based in Pasadena, Calif., failed and was seized by regulators with about $32 billion in assets.

The FDIC estimates that through 2013 there will be about $40 billion in losses to the deposit insurance fund, including an $8.9 billion loss from the failure of IndyMac Bank. The FDIC is raising insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $45.2 billion, below the minimum target level set by Congress and the lowest level since 2003.

In addition, the FDIC may guarantee nearly $2 trillion in U.S. banks' debt and deposit accounts in an effort to break the crippling logjam in bank-to-bank lending.

Well over half of the roughly 8,500 federally-insured banks and savings and loans are expected to tap the FDIC's temporary guarantees. The agency will provide as much as $1.4 trillion in insurance for more than three years for loans between banks, guaranteeing the new debt in the event the issuing bank fails or its holding company files for bankruptcy.

Of the 8,500 FDIC-insured banks, 117 were considered to be in trouble in the second quarter - the highest level in about five years and up from 90 in the first quarter. The agency doesn't disclose the banks' names.

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Franklin Bank customers seeking more information can contact the FDIC toll-free at 1-800-591-2845. Security Pacific Bank customers can call 1-866-934-8944.

[Associated Press; By MARCY GORDON]

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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