WASHINGTON – In coordinated moves late Friday, regulators closed two troubled Southern California thrifts, and sold their banking operations to Minneapolis-based U.S. Bank.

The Office of Thrift Supervision closed $12.8 billion-asset Downey Savings and Loan in Newport Beach, and $3.7 billion-asset PFF Bank & Trust in Pomona, on a busy night for bank closings. The evening began with the closing of a community bank in Georgia, the third failure in the state this year.

The acquisition by U.S. Bank includes a loss-sharing agreement with the Federal Deposit Insurance Corp., which facilitated the transaction. Under the deal, U.S. Bank will assume $1.6 billion in initial losses on asset pools covered by the agreement, while the FDIC will share in future losses. U.S. Bank also agreed to implement a loan-modification program on troubled mortgages at the two thrifts.

"The loss-sharing arrangement is expected to maximize returns on the assets covered by keeping them in the private sector," the FDIC said. "The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship."

The three failures are expected to cost the Deposit Insurance Fund $2.3 billion. The FDIC estimated the failure of Downey will cost $1.4 billion, while PFF Bank's collapse will cost $700 million. The failure of The Community Bank, a $681 million-asset institution in Loganville, Ga. is expected to cost between $200 million to $240 million.

The failures of the two California thrifts did not come as a big surprise. Both had aggressively lent in the state's volatile real estate market, and their portfolios had suffered for it. Downey's slide was widely expected, after the thrift was met with a strict enforcement order from the OTS in September, and failed to raise needed capital.

PFF, meanwhile, a victim of the severe real estate downturn in the state's Inland Empire, closed after a planned sale to Illinois-based FBOP Corp. unraveled.

PFF "had accelerating losses since last year and had no reasonable prospect of becoming adequately capitalized," the OTS said in a press release issued Friday night.

The FDIC said U.S. Bank had agreed to assume all of the deposits of both thrifts. That included $9.7 billion in deposits from Downey, and $2.4 billion from PFF. The combined 213 branches of the two institutions would reopen as U.S. Bank branches under normal hours, including those open on Saturday.

The failures were the third- and fifth-largest this year, behind two other thrifts which also succumbed to an avalanche of bad loans. On July 11, the FDIC became the conservator of $32 billion-asset IndyMac Bank in Pasadena, Calif., the third-largest failure of all time.

On Sept. 25, the OTS ended the $307 billion-asset banking business of Washington Mutual Inc. in the largest failure ever. The FDIC sold off the banking operations to JPMorgan Chase & Co. at no cost to the DIF.

Downey, though smaller than IndyMac, was still the fifth-largest thrift – and eighth-largest institution – to ever fail. Its closing followed its fifth straight quarterly loss, a cease-and-desist order from the OTS, a fruitless effort to attract buyers, and an unsuccessful quest for capital.

The lender had hinted that a collapse was inevitable in a regulatory filing Nov. 10, conceding to investors that it may not be able to right itself.

"There is a significant risk that the bank will not be able to raise sufficient additional capital to ensure compliance with the capital requirements of the bank consent order by yearend," the company said, adding that outcomes could include regulators "placing the bank into receivership."

The two insolvencies only intensify the already busy workload for regulators as the industry's credit quality problems evolve into a growing list of dead banks. Analysts have predicted more failures as the housing crisis persists and some institutions are left out of the Treasury Department's plan to inject $250 billion in capital into the banking industry.

The FDIC's resolution apparatus – largely untested since the banking crisis of the late eighties and early nineties – is seeing demand multiply.

As of Friday, there have been 22 failures this year. Earlier Friday, state regulators sold the deposits and $84 million of the assets of Georgia-based Community Bank to Virginia-based Bank of Essex.

Among thrift failures, Downey's size exceeds that of Homefed Bank, FSB, which failed in July 1992 in San Diego with $12.2 billion in assets, but falls short of $15.1 billion-asset Gibraltar Savings, which was closed in March 1989 in Simi Valley, Calif.

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