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Bank Failure - Franklin Bank in Texas


Franklin Bank, SSB was closed today by Texas regulators, and the FDIC was named receiver. Here's the FDIC's press release link, and here's a summary of the closure:
  • Closed Bank: Franklin Bank, SSB
  • Location: Houston, TX
  • Size: 46 branches in TX, $5.1 billion assets, $3.7 billion deposits
  • Possible Uninsured Deposits: ALL deposits transferred to acquiring bank
  • Acquiring Bank: Prosperity Bank
  • Cost to Deposit Insurance Fund: $1.4-$1.6 billion (estimated)
  • 2008 closures: 18th bank to be closed this year
  • Financial Ratings: 0 star at BauerFinancial, 1 star at Bankrate.com
This is another closure in which no depositors will lose money, even those with over the FDIC limits. As stated in the FDIC Q&A Guide, it's an All-Deposit Transfer in which all deposits have been assumed by Prosperity Bank

Similar to past closures, Franklin Bank customers may withdraw funds from a CD without an early withdrawal penalty (see Q&A). Those with Franklin CDs will likely hope to keep the high rate until maturity. According to this Q&A, "Prosperity Bank will honor all contractual rates on retail accounts."

This might be the third largest failure this year after WaMu and IndyMac. And it might be the second most costly failure for the FDIC with an estimated cost of around $1.5 billion. That's almost 3 times the cost of Silver State Bank's closure in September. Silver State Bank had $2 billion in assets (see post).

I only did one post on Franklin Bank last July when it was offering some special CDs. At the time it had a 1-star rating at BauerFinancial based on 3/31/08 data. I just checked BauerFinancial, and the rating has even fallen lower, 0 stars, based on 6/30/08 data. BauerFinancial and Bankrate have been fairly accurate with their ratings of banks that have failed.

Here's the FDIC list of all the recent bank failures. For more info on FDIC coverage, please refer to my Facts about FDIC and NCUA post and my recent post on FDIC News, Resources and History. For the recent changes to FDIC coverage, please refer to this post

Thanks to the readers who sent me news of these closures.

Update 11/08/08: A reader has noted some interesting facts about Franklin Bank. This Houston Chronicle article describes Franklin Bank's history:
Franklin was founded in 2002 by current Chairman Lewis Ranieri, a former Salomon Bros. vice chairman, and considered one of the innovators of the mortgage-backed securities market.

Bad real estate loans appear to be the main cause of the failure:
Franklin Bank has had trouble raising capital as it dealt with bad real estate loans, most of which were made in parts of the country hard hit by the housing crisis, such as California.

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Anonymous   |     |   Comment #1
Pacific Western Bank Acquires All the Deposits of Security Pacific Bank, Los Angeles, California
Anonymous   |     |   Comment #2
Why is there such a large cost to the depositor's fund if all the funds have been transferred to another bank and none of the un-insured funds have been lost? Should there be losses to un-insured funds before losses to the depositor's fund?
Banking Guy
Banking Guy   |     |   Comment #3
That's a good question.

From that Houston Chronicle article it states that the FDIC will allow Prosperity to assume Franklin Bank's $3.7 billion in deposits and purchase about $850 million of its $5.1 billion in assets. Also, the article quoted the FDIC spokesman as saying "We turn over the clean assets to Prosperity so all the headaches that brought down Franklin stay behind with the FDIC."

I guess if the assuming bank agrees to take all of the deposits, the FDIC lets them. I'm not sure why the FDIC does not take the uninsured deposits and use them to help offset the bad assets that they picked up from the failure. With the new $250K limits, the amount of uninsured deposits may be much less than the $1.5 billion in potential loss to the DIF.
Anonymous   |     |   Comment #4
Remember that deposits are liabilities to the bank. Banks accept deposits from customers (i.e., the depositors lend them money), then the banks lend the cash back out as mortgages, car loans, etc. The loans a bank makes comprise the majority of its assets. The reason the bank failed is that people stopped making payments on the mortgage loans it made, so that the bank's assets (the loans it held) become less than its liabilities (its obligations to depositors).
Anonymous   |     |   Comment #5
Further note: I realize that the Franklin Bank's assets as listed above exceed its deposits. Probably the information above lists the book value of the assets, and the estimated cost to the FDIC reflects the fact that the FDIC will have to sell the assets at a loss.