WASHINGTON — Franklin Bank, a $5.1 billion state-chartered thrift in Houston, and Security Pacific Bank, a $561.1 million-asset bank in Los Angeles, failed Friday, bringing the closure tally to 19 for the year.
The Federal Deposit Insurance Corp. estimated the two failures could cost up to $1.8 billion to resolve.
The Franklin Bank Corp. subsidiary failed largely due to bad mortgages and construction loans originated out of state.
Prosperity Bank in El Campo, Texas, is assuming all of Franklin's $3.7 billion deposits for a 1.7% premium, according to the FDIC. Prosperity also agreed to buy about $850 million in the failed institution's assets.
The FDIC estimated the failure would cost the Deposit Insurance Fund between $1.4 billion and $1.6 billion, making it the second-most expensive failure of the year, behind IndyMac Bank, which could cost as much as $8.9 billion.
Security Pacific's $450.1 million of deposits will be assumed by Pacific Western Bank, also of Los Angeles. The $4.3 billion-asset Pacific Western paid a 2% premium, and agreed to buy approximately $51.8 million of the failed bank's assets. The FDIC said Security Pacific's closure would cost the fund an estimated $210 million.
Though headquartered in Texas, Franklin was brought down by loans made in out-of-state offices. As with other banks that have failed recently, Franklin relied heavily on brokered deposits to fund these out-of-market loans. At June 30, brokered deposits made up nearly one-third of its total deposits, according to FDIC data.
"This is an example of someone who had a great core bank and leveraged it with borrowings and CDs and got into assets that are outside of their footprint, and those assets led to this failure," said Dan Bass, the managing director in the Houston office of Carson Medlin Co.
Franklin's problems first surfaced early this year, after an internal probe of its loans revealed significant accounting errors related to its residential mortgage portfolio. At that time, the company's chief executive officer and president, Anthony Nocella, resigned and its chairman, Lewis Ranieri, took over as CEO while Alan E. Master assumed the role of president.
Mr. Ranieri, who co-founded Franklin in 2002, is an industry icon. He is widely credited with creating the market for mortgage-backed securities in the 1980s and later was instrumental in building Bank United in Houston into an $18 billion-asset company before selling it to Washington Mutual Inc. in 2001 for $1.5 billion.
Call reports filed with the FDIC showed Franklin lost $246 million in the third quarter and had become significantly undercapitalized. Its total risk-based capital ratio declined to 5.11% at Sept. 30, from a reported 10.16% at the end of the second quarter.
Franklin's shares have traded at $1 or less since the middle of June. Two years ago, they were trading at around $19.
The collapse bolsters Prosperity Bank's position in the Texas market. The institution has built itself into the state's fourth-largest with $6.8 billion of assets, largely through acquisitions. Its deal for Franklin, its 22nd in Texas this decade, gives it roughly 190 branches in the state.
Four other banks have failed in the past month, as the housing crisis continues to hit the banking industry. A week ago, regulators closed $287 million-asset Freedom Bank, in Bradenton, Fla., and on Oct. 24 shuttered Alpha Bank and Trust, a $354.1 million-asset institution in Alpharetta, Ga.
On Oct. 10, two banks failed: $98 million-asset Main Street Bank in Northville, Mich., and $39 million-asset Meridian Bank in Eldred, Ill.