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Regulators Close Two More Banks

Franklin Bank SSB of Houston and Security Pacific Bank of Los Angeles turned over to FDIC as receiver.

State regulators closed two more banks Friday, bringing to 19 the number of U.S. banks and thrifts that have gone under this year.

The Texas Department of Savings and Mortgage Lending closed Franklin Bank SSB of Houston (held by Franklin Bank Corp ) and named the Federal Deposit Insurance Corporation receiver.

Meanwhile, the Commissioner of the California Department of Financial Institutions shut down the $561 million Security Pacific Bank of Los Angeles and named the FDIC as receiver.

The FDIC announced that all of Franklin's deposits, including accounts exceeding deposit insurance limits and brokered deposits, would be taken over by Prosperity Bank, of El Campo, Texas (held by Prosperity Bancshares ).

All 46 of Franklin Bank's branches were set to reopen Saturday as branches of Prosperity Bank.

With $5.1 billion in total assets, Franklin was the third-largest bank or thrift closing this year. The largest insitution to go under was Washington Mutual, which had $307 billion in total assets when it was failed on Sept. 26 and was acquired by JPMorgan Chase . The second largest was IndyMac Bank, which had $32 billion in assets when it failed in July.

Franklin Bank SSB had been assigned a D- (weak) financial strength rating by TheStreet.com Ratings, based on second-quarter financial results.

Although the bank was well capitalized at the end of the second quarter, Franklin's third-quarter report, filed Oct. 31, highlighted the institution's rapid deterioration, as it slipped to "significantly undercapitalized" as of Sept. 30, with a leverage ratio of 2.11% and a risk-based capital ratio of 5.11%. These ratios need to be at least 5% and 10%, respectively, for an institution to be considered well capitalized under regulatory guidelines.

Franklin Bank Corp.'s shares moved in line with the peak in housing activity and into the mortgage crisis. They were trading around $21 in late 2006 but slid in a pretty straight line to 26 cents at Friday's market close. Like most of the other failed institutions this year, Franklin concentrated its lending on residential mortgages and commercial construction loans. The bank was considered significantly undercapitalized as of Sept. 30, with a leverage ratio of 2.11% and a risk-based capital ratio of 5.11%. Again, these ratios need to be at least 5% and 10%, respectively, for an institution to be considered well capitalized under regulatory guidelines.

Franklin Bank Corp.'s chairman is Lewis Ranieri, former vice chairman of Salomon Brothers and a well-known pioneer in the mortgage-backed securities market. Franklin announced on Tuesday it was in negotiations with un-named investors to raise new capital.

With the bank short of capital and loan charge-offs outpacing Franklin's provisions for loan loss reserves, time simply ran out. The good news is that none of the failed bank's depositors will lose money. The bad news is that the FDIC estimated that losses to its insurance fund would be between $1.4 billion and $1.6 billion.

As for Security Pacific, the FDIC announced that all of the failed institution's deposits would be taken over by Pacific Western Bank of San Diego, a subsidiary of PacWest Bancorp .

Security Pacific Bank had been assigned an E- (very weak) financial strength rating by TheStreet.com Ratings, in September, a downgrade from D- in the previous quarter.

The institution's third-quarter report showed that it just couldn't keep pace with losses from residential construction loans. Security Pacific's net loan charge-offs during the third quarter were running at an annualized pace of 23.68% of average loans, and the bank slipped to significantly undercapitalized, with a leverage ratio of 3.14% and a risk-based capital ratio of 5.00%.

Security Pacific's four branches were to reopen Monday as Pacific Western branches.

Free Bank and Thrift Ratings

As the pace of failures accelerates, it's important to keep an eye on the health of your bank or savings and loan. TheStreet.com Ratings provides objective, conservative financial strength ratings for all U.S. banks and thrifts.

While the FDIC has temporarily raised deposit insurance limits, it is still a good idea to check out your institution's rating and ask some questions if the rating is below a C- (Fair Financial Strength).

It is also important to consider that you or someone you know may be affiliated with a business or municipal depositor (such as a school district) that keeps large uninsured balances in a local institution.

Financial Strength Ratings on each of the nation's 8,600 banks and savings and loans are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity and property/casualty insurers are available on the Insurers & HMOs Screener.

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