Nov. 8--Branches of troubled Houston-based Franklin Bank SSB are opening Saturday morning as Prosperity Bank.

State and federal regulators closed the 6-year old Franklin Bank and will allow Prosperity to assume its $3.7 billion in deposits and purchase about $850 million of its $5.1 billion in assets.

Franklin customers will automatically become depositors of Prosperity Bank, regulators said in a Friday night news release, and the Federal Deposit Insurance Corp. will continue to insure deposits.

"Customers will be able to go about their business as usual, and they will be able to access their money and use their ATM/debit card, Internet banking, bill pay service or other electronic banking services beginning Saturday morning," Dan Rollins, president of Houston-based Prosperity Bank, said in a prepared statement.

Franklin Bank, which has no retail operations in Harris County, had branches in Wharton, College Station, Bryan, Austin and Beaumont, among other Texas towns. Company officials did not return phone calls or e-mails Friday.

Franklin becomes the first Texas bank to fail since Bank of Sierra in West Texas went under in 2002 and the 18th in the nation this year. Also Friday, the FDIC shut down the 19th bank, Security Pacific of Los Angeles, with $561.1 million in combined assets.

The takeover of the $307 billion Washington Mutual in September stands as the nation's largest.

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.

The bank's loans and other assets, such as foreclosed real estate, will remain with the FDIC, which will sell them off to pay creditors.

Prosperity, one of three banks to bid for Franklin's assets, will take mostly cash and cash equivalents.

"We turn over the clean assets to Prosperity so all the headaches that brought down Franklin stay behind with the FDIC," said David Barr, a spokesman for the FDIC.

The process will cost the Federal Deposit Insurance Fund $1.4 billion to $1.6 billion, he said.

With the addition of Franklin's 46 branches, Prosperity will have 170 offices statewide. The acquisition will also push its assets to more than $10 billion and deposits to more than $8 billion.

Franklin was founded in 2002 by current Chairman Lewis Ranieri, a former Salomon Bros. vice chairman, and considered one of the innovaters of the mortgage-backed securities market.

To date, the struggling bank has not filed its 2007 annual report or 2008 quarterly reports. An internal investigation earlier this year uncovered accounting errors related to the bank's construction-lending business and residential mortgages.

Earlier this week, Franklin's parent company said it was discussing transactions to bolster the subsidiary's capital.

Regulators had to step in because those talks likely fell through, said Dan Bass, managing director of Houston investment bank Carson-Medlin Co., an analyst who follows Texas banks.

Franklin had said it also planned to amend its second-quarter report to show it has been "significantly undercapitalized" since at least June 30.

Though it's the first Houston bank to fail in the wake of the recent housing crisis, it is not a sign that the other shoe is about to drop locally, Bass said.

Nearly 16 percent of Franklin's loans were nonperforming, compared to an average of less than one percent for the rest of Houston's banks, he said.

"It's an exception because if they didn't have their California exposure, they'd be fine," Bass said. "Relative to other parts of the country, banking is doing great in Houston."

purva.patel@chron.com

nancy.sarnoff@chron.com

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