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US regulators on Friday seized Franklin Bank SSB, a Houston-based community bank, and Security Pacific Bank, a small Los Angeles-based bank, as slumping home prices and the worsening economic crisis take an increasing toll.
Franklin Bank, which has been struggling in recent days to boost its capital position, is the third-largest US bank failure this year. So far, the tally is at 19 US bank failures in 2008, compared to three in all of 2007.
Lewis Ranieri, the co-inventor of the mortgage-backed security, is chairman of the bank's parent company Franklin Bank Corp, which has been searching for fresh funds after bad mortgages drained the bank's capital position. Prosperity Bank of El Campo, Texas, will acquire all the deposits of Franklin Bank SSB, the Federal Deposit Insurance Corp said. Pacific Western Bank of Los Angeles will acquire all the deposits of Security Pacific.
Franklin Bank Corp said on Sunday that it had received proposals from parties to strengthen the capital position of Franklin Bank SSB. It said that it was in talks to restore the banking unit to a "well-capitalised" position. The bank had previously disclosed that it had submitted new third-quarter figures to banking regulators that showed the bank to be "significantly undercapitalised."
Franklin Bank SSB is the first bank to fail in Texas in more than six years. Ranieri, called the father of securitisation, helped create the mortgage packaging model that has nurtured the home finance sector. He couldn't be reached immediately for comment.
The FDIC said Franklin Bank SSB's 46 offices will reopen as branches of Prosperity Bank under their normal hours, including those with Saturday hours. As of September 30, Franklin Bank SSB had total assets of $5.1 billion and total deposits of $3.7 billion, the FDIC said.
Prosperity agreed to assume all of the deposits, including those that exceeded the insurance limit for deposits. "Prosperity is committed to taking care of their existing and new customers during this volatile time in the financial industry," Prosperity said in a statement.
The FDIC said the four branches of Security Pacific will reopen on Monday as branches of Pacific Western. Security Pacific had total assets of $561.1 million and total deposits of $450.1 million as of October 17. Franklin's failure is expected to cost the FDIC's insurance fund between $1.4 billion and $1.8 billion, the regulator said. Security Pacific's failure is expected to cost the fund $210 million.
The insurance fund stood at about $45 billion at the end of June, the last time it was publicly disclosed. A financial rescue plan passed by Congress earlier this month temporarily raised the limits on deposit insurance to $250,000 per account from $100,000.

Copyright Reuters, 2008

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