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Excessive Asset Concentration Cause Institutions’ Failures

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Texas saw its first bank failure in more than a year. The bank had a high concentration of commercial mortgages. A report on a previously failed corporate credit union indicated that its assets were too concentrated in private-label residential mortgage-backed securities. Both firms were based in the same city.

The Texas Department of Banking closed First International Bank on Friday. The last bank to fail in the Lone Star State was in February 2010.

“The bank was closed due to poor oversight of lending activities that depleted its capital, leaving the bank critically undercapitalized,” Texas Banking Commissioner Charles G. Cooper said in an announcement. “Efforts to raise additional capital were unsuccessful, resulting in the bank’s closure.”

First International was established in October 1991. The company employed around 68 people at the time of its demise.

The Plano-based institution had $209 million in deposits as of June 30. Total assets stood at $240 million and included just $7 million in residential loans and $22 million in construction-and-development loans. But its commercial real estate loans stood at a whopping $144 million — accounting for a concentrated share of its overall assets.

The Federal Deposit Insurance Corp., which was named receiver of First International, issued a prompt corrective action against the bank in April and a cease-and-desist order in March 2010.

The FDIC made a deal with American First National Bank to assume all of the deposits and acquire all of the assets of the failed bank.

Factoring in a $54 million loss-sharing agreement, the FDIC projects that its Deposit Insurance Fund will be depleted by $54 million as a result of First International’s demise — the 74th FDIC-insured bank failure this year.

Mortgage Daily has recorded the closing or failure of 105 mortgage-related entities so far this year.

A report from the National Credit Union Administration Office of Inspector General found that the management and board of directors of failed Southwest Corporate Federal Credit Union neglected to implement appropriate risk management practices that were needed to limit or control significant risks in its investment strategy.

The NCUA took control of the Plano, Texas-based credit union in September 2009. Losses to the NCUA’s Stabilization Fund as a result of the financial institution’s failure are expected to ultimately reach $141 million.

“Specifically, although management invested in high investment grade securities, management implemented an aggressive investment strategy with high limits in place that allowed for a significant concentration of investments directly in privately-issued residential mortgage backed securities, and additional indirect exposure through U.S. Central Federal Credit Union’s investments in RMBS,” the report stated. “Management’s actions resulted in substantial exposure to privately-issued RMBS, which resulted in significant concentration risk and left Southwest vulnerable to significant credit, market, and liquidity risks.”

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