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Banks

UPDATE 1-U.S. Bancorp acquires deposits of failed Downey, PFF

(Adds details, background)

WASHINGTON, Nov 21 (Reuters) - U.S. banking regulators seized California banks Downey Savings and Loan and PFF Bank & Trust late Friday as the housing crisis claimed two more victims from the financial crisis.

U.S. Bancorp USB.N took over the two banks' branches, deposits, and most of their assets, the Federal Deposit Insurance Corp said.

Downey, which specialized in exotic mortgages known as “option ARMs,” is the third largest bank to fail this year as plummeting housing prices and the slowing economy have triggered massive mortgage defaults.

Concerns about bank credit quality pulled the stock market into a tailspin for much of the week.

U.S. Bancorp is one of the few banks that have sidestepped most of the woes of the credit market cycle. It agreed to change the terms of mortgages taken out by Downey and PFF customers, in a program similar to the one the Federal Deposit Insurance Corp is using for mortgages held by IndyMac. The FDIC agreed to share losses on the acquired loans with the bank’s U.S. Bank unit.

Downey, a thrift owned by Downey Financial Corp DSL.N, had $12.8 billion in assets and $9.7 billion in deposits, and PFF Bank had $3.7 billion in assets and $2.4 billion in deposits as of Sept. 30, the FDIC said.

So far this year, 22 banks have failed. That already represents the most bank failures in the U.S. since 1993, when 50 banks failed.

The FDIC estimated that Downey’s failure will cost the deposit insurance fund $1.4 billion, while PFF will cost another $700 million. As of the end of June, the fund had $45.2 billion, although the FDIC has multiple ways to boost the fund if necessary, including emergency lines of credit.

Downey, based in Newport Beach and PFF, based in Pomona, have a combined 213 branches that will reopen as U.S. Bank branches on Saturday.

The FDIC normally insures $100,000 per depositor, but U.S. lawmakers increased coverage to $250,000 through 2009 as part of the recent $700 billion bailout package aimed rescuing financial institutions.

NOT ACQUIRING LIABILITIES

US Bancorp said U.S. Bank will buy almost all of PFFs and Downey’s assets, but it will not acquire assets or liabilities of their parent holding companies.

The FDIC’s loan modification plan, stemming from seizure of big mortgage lender IndyMac, is the centerpiece of the agency’s efforts to rescue troubled homeowners and the U.S. economy.

The agency has repeatedly urged banks and mortgage backed security investors to systematically modify troubled mortgages, arguing that the loans are the root cause of the U.S. financial malaise but has met resistance.

U.S. Bank had 2,556 branches before this transaction, of which 353 were in California. Downey has 170 branches in California and five in Arizona, and PFF Bank has 38 branches in California.

Morgan Stanley advised U.S. Bancorp in the transaction.

Reporting by John Poirier; Editing by Gary Hill

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