The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

The improving trend that the banking industry has shown for the last three years accelerated in 2012, according the FDIC’s Quarterly Banking Profile for the final quarter of 2012, which was released on February 26, 2013. Overall, the industry reported 2012 earnings of $141.3 billion, which represents a 19.3 percent improvement over 2011 and the second-highest annual earnings ever reported for the industry (behind only the $153.billion earned in 2006, before the credit crisis emerged.). The FDIC”s latest Quarterly Banking Profile can be found here.

The agency’s February 26, 2013 press release about the report (here) quotes FDIC Chairman Martin Gruenberg as saying that “the improving trend that began more than three years ago gained further ground in the fourth quarter,” and that “balances of troubled loans declined, earnings rose from a year ago, and more institutions of all sizes showed improvement.

Sixty percent of all institutions reported improvements in their quarterly net income from a year ago. Asset quality indicators continued to improve as insured banks and thrifts charged off $18.6 billion in uncollectable loans during the quarter, down $7.0 billion (27.4 percent) from a year earlier.

In another positive sign, the number of failed institutions is also declining. Eight institutions failed in the fourth quarter of 2012, which is the lowest quarterly total since 2008, when two institutions failed. (So far during the first quarter of 2013, three banks have failed.) For all of 2012, there were a total of 51 bank failures, down from 92 in 2011 and 157 in 2010. The 2012 total of 51 bank failures represents the lowest annual number of bank failures since 2008, when 25 banks failed.

One thing that is clear is that the U.S. banking industry has been through a massive winnowing effect over the last several years. The FDIC’s quarterly reports shows that as of the end of 2012, there were only 7,083 reporting financial institutions, by comparison to the 8.534 reporting institutions at the end of the 2007. The 1,451 decline in the number of reporting institutions during that period represents a decline of 17%. The number of reporting institutions has declined steadily during that intervening five year period. Indeed, the number of reporting institutions decline from 7,357 at the end of 2011 to the 2012 year end number of 7,083, a decline of 274 institutions (3.72%).

During the fourth quarter 2012, the number of reporting institutions declined by 98 banks (1.31%), from 7,181 at the end of the third quarter of 2012 to the year end number of 7,083. The FDIC’s report states that most of this decline (88 out of 98 institutions) was attributable to the merger of institutions into other banks. The remainder is due to failures and closures. The unstated inference seems to be that the industry is improving as the weaker banks are merged out of existence.

Not all of the news in the FDIC’s quarterly report is positive. Among other things, the report notes that for the sixth quarter in a row, no new reporting institutions were added. The year 2012 is the first in FDIC history in which no new reporting institutions were added, and the second year in a row with no new start-up charters (the three new reporting institutions added in 2011 were all charters created to absorb failed banks).

And though the overall banking industry continues to improve, the number of “problem institutions” remains stubbornly high. (A “problem institution” is an insured depositary institution that is ranked either a “4” or a “5” on the agency’s 1-to-5 scale of risk and supervisory concern. The agency does not release the names of the banks on its “problem” list.) Though the number of institutions on the FDIC’s problem list declined for the seventh consecutive quarter in the fourth quarter of 2012, from 694 to 651 representing a decline of 6.2% in the number of problem institutions), the number of problem institutions remains high relative to the number of reporting institutions, which, as noted above, is also declining.

The 651 problem institutions at the end of 2012 represent a significant drop in the number of problem institutions from the end of 2011, when there were 813 problem institutions, and from the end of 2010, when there were 884 problem institutions. The 162 drop in the number of problem institutions between the end of 2011 and 2012 – a decline of nearly 20% in the number of problem institutions – represents a substantial drop in one year.

But the number of problem institutions as a percentage of reporting institutions remains stubbornly high. This is in part due to the fact that as the number of problem institutions declines, the number of reporting institutions is also declining. The 651 problem institutions as of the end of 2012 still represent 9.19% of all reporting institutions. Though this is down from the equivalent percentage as of the end of 2011 (when it was 11.01%), the 2012 year end percentage of problem institutions means that as of year end, nearly one out of every ten reporting institutions is a problem institution. By way of contrast, as of the end of 2007, the FDIC ranked only 76 institutions as problem institutions. Though subsequent events suggest that the 2007 year end number was artificially low, the 2007 number does show what the percentage of problem looks like when the industry is not under stress.

Though the industry as a whole remains on the road to recovery, the problems from the credit crisis continue to haunt the industry and the number of problem institutions persists at an elevated level.

As the numbers of failed banks have decline, the number of failed bank lawsuits has continued to grow, as I detailed in a recent post (here).

• Print
• Comments
• Trackbacks
• Share Link

Insured depositary institutions continued to improve during the third quarter of 2012, while at the same time the number and percentage of “problems institutions” declined, according to the FDIC’s latest quarterly banking profile. The quarterly report for the quarter ending September 30, 2012, which the agency released on December 4, 2012, can be found here. The FDIC’s December 4, 2012 press release about the report can be found here.

According to the report, reduced expenses from loan losses and rising noninterest income helped the insured institutions’ earnings reach $37.6 billion in the third quarter, the highest quarterly earnings posted since the third quarter of 2006. The FDIC’s press release quotes FDIC Chairman Martin Gruenberg as saying that “this was another quarter of gradual bur steady recovery for FDIC-insured institutions.”

The FDIC also reported a decline in the number of “problem institutions” during the quarter, from 732 at the end of the second quarter of 2012 to 694 at the end of the third quarter. (A “problem institution” is an insured depositary institution that is ranked either a “4” or a “5” on the agency’s 1-to-5 scale of risk and supervisory concern. The agency does not release the names of the banks on its “problem” list.) The quarterly decline represented the sixth consecutive quarter that the number of “problem” banks has fallen, and it is the first time in three years that there have been fewer than 700 banks on the list.

The number of reporting institutions declined during the quarter, from 7245 at the end of the second quarter 2012 to 7181 at the end of the third quarter. The 694 problem institutions at the end of the third quarter 2012represented 9.66% of all reporting institutions, whereas the 714 problem banks at the end of the second quarter 2012 represented 10.10% of all reporting institutions. By way of comparison, at the end of the third quarter of 2011, there were 844 problem institutions, representing 11.35% of the 7436 institutions reporting as of September 30, 2011. At year end 2010, there were 884 problem institutions, representing 11.39% of all reporting institutions at the time.

The assets of the “problem banks” as of the end of the third quarter 2012 stood at $262.2 billion, down from $282.2 billion as of the end of the second quarter 2012. The problem institutions as of the end of the third quarter of 2011 represented assets of $339 billion. At the end of 2009, the 702 problem institutions at that time represented assets of $402 million.

Twelve institutions failed during the third quarter of 2012, the smallest number of failures in a quarter since the fourth quarter of 2008, when there were also 12. There were a total of 43 bank failures in 2012 through September 30, 2012. There have been seven more bank failures since that date, brining the 2012 YTD total as of December 4, 2012 to 50. Through December 4, 2011, there had been 90 YTD bank failures. At this point it appears that there will be fewer bank failures this year than during any year since 2008, when there were 25. Since January 1, 2008, there have been a total of 457 bank failures. The high water mark for bank failures was in 2012, when there were 157 – the highest annual number of bank failures since 18 years prior.

Still Another Failed Bank Lawsuit in Georgia: While the bank failure wave finally seems to be winding down, the follow-on litigation is still just ramping up. With the third year anniversaries of bank failures that occurred during the period with the most bank closures approaching, the FDIC clearly seems to be ramping up its failed bank litigation. On December 3, 2012, the FDIC filed yet another lawsuit against the former directors and officers of a failed Georgia bank. The FDIC’s complaint, filed in the Northern District of Georgia in its capacity as receiver for the failed First Security National Bank (FNSB) of Norcross, Georgia, can be found here.

FNSB failed on December 4, 2009, so the FDIC really went down to the three year statute of limitations wire on its FNSB filing. The FDIC’s complaint names seven former directors and officers as defendants. The FDIC asserts claims for both negligence and gross negligence, citing the defendants’ “numerous, repeated, and obvious breaches and violations of the Bank’s loan policy and procedures, underwriting requirements, banking regulations and sound bank practices” as “exemplified” by 17 loans made between December 20, 2995 and February 19, 2008, for which the agency seeks damages of no “less than $7.596 million.”

This latest complaint is the 41^st that the FDIC has filed against the former directors and officers of a failed bank as part of the current bank failure wave. It is also the 13^th the agency has filed involving a failed Georgia bank, meaning that over 31% of all failed bank D&O lawsuits have targeted failed Georgia banks. While Georgia has had more bank failures during the current bank failure wave than any other state, its approximately 80 bank failures represents only about 17.5 percent of all bank failures, meaning that the FDIC is pursuing a disproportionally high number of lawsuits in connection with failed Georgia banks, as I noted in greater detail in a recent post (here).  

Special thanks to a loyal reader for providing me with a copy of the FSNB complaint.

• Print
• Comments
• Trackbacks
• Share Link

The parties to the Citigroup subprime-related securities class action lawsuit – one of the highest profile of the remaining subprime cases – have agreed to settle the suit for $590 million, in what is the third largest settlement so far out of the subprime and credit crisis litigation wave. Southern District of New York Judge Sidney Stein preliminarily approved the settlement on August 29, 2012, and scheduled a hearing for final approval on January 13, 2013.

A copy of the parties’ stipulation of settlement can be found here. The plaintiffs’ lawyers’ August 29, 2012 press release about the settlement can be found here.

The Citigroup case was among the most prominent of the subprime cases because of Citigroup’s role in the mortgage-backed securities industry that contributed so significantly to the subprime meltdown, as well as because of the high-profile individuals involved in the case, including former Citigroup CEO Charles Prince and former Treasury secretary and Citigroup board member Robert Rubin. In addition, Citigroup’s attempt to settle the subprime-related SEC enforcement action for a payment of $285 was famously rejected by Southern District of New York Judge Jed Rakoff, a decision that is now on appeal before the Second Circuit.

As discussed in detail here, in a November 9, 2010 Judge Sidney Stein narrowed the shareholders’ action against Citigroup and dismissed a number of the individual defendants. But what Judge Stein called the plaintiffs’ “principal” allegations survived the dismissal motion and remained in the case, as did seven of the individual defendants, including Prince and Rubin. The surviving allegation was the plaintiffs’ claim that Citigroup “did not disclose that it held billions of dollars of super-senior tranche CDOs.”

The basic thrust of the plaintiffs’ CDO-related allegations is that though the company disclosed that it was deeply involved in underwriting CDOs, the company did not disclose that billions of dollars of the CDOs had not been purchased at all but instead had been retained by Citigroup. In November 2007, the company disclosed that it was exposed to super-senior CDO tranches in the amount of $43 billion and that it estimated a write down of $8 to $11 billion of those assets. The plaintiff alleged that this disclosure omitted an additional $10.5 billion worth of holdings that the company had hedged in swap transactions. 

Judge Stein found that the plaintiffs had adequately alleged that Citigroup’s CDO valuations were false between February 2007 and October 2007. In concluding that these statements were made with scienter, Judge Stein noted that the plaintiffs’ claims "concern a series of statements denying or diminishing Citigroup’s CDO exposure and the risks associated with it." These statements, Judge Stein found were "inconsistent with the actions Citigroup was allegedly undertaking between February 2007 and October 2007."

Among the subprime and credit crisis cases that have settled so far, the $590 Citigroup settlement has been exceeded only by the $627 million Wachovia bondholders’ settlement and the $624 million Countrywide settlement. As Jan Wolfe points out in his August 29, 2012 Am Law Litigation Daily article about the Citigroup settlement (here), the $590 settlement in the Citigroup case may represent the largest settlement by a single financial institution.

Among the remaining subprime and credit crisis cases, there are several that at least potentially present the possibility of similarly large settlements, including the BofA/Merrill Lynch merger case, the AIG case and the Citigroup bondholders’ case. It remains to be seen how the Citigroup settlement will stack up when all of these cases have settled. But as I had to remind several people in telephone conversations yesterday about the Citigroup settlement, at well over half a billion dollars, the Citigroup settlement is unquestionably represents a big number. Others will have to wrestle with the question whether it is “big enough.”

I have in any event added the Citigroup settlement to my running tally of subprime and credit-crisis case resolutions, which can be accessed here.

FDIC Releases Quarterly Banking Profile: If you have not yet seen it, on August 28, 2012, the FDIC released the Quarterly Banking Profile for the quarter ending June 30, 2012. In general, the report reflects a generally improving banking industry. Among other things, the report shows that the industry had collective net income of $34.5 billion, a figure that would have been even larger were it not for the J.P. Morgan “London Whale” trading losses. This net income figure represents the 12^th consecutive quarter over quarter increase in industry net income.

Consistent with this overall picture of improving industry health, the number of problem  banking institutions decreased during the quarter, from 772 to 732. However, because the number of reporting institutions overall also decreased, the number of troubled institutions at quarter’s end still represents a significant percentage (10.1%) of all banks. The number of troubled banks at the end of the first quarter represented 10.5% of all reporting institutions. The second quarter number does represent a significant decline in the number of problem institutions compared to the end of the second quarter of 2011, when there were 865. The FDIC notes that the second quarter 2012 decline in the number of problem institutions represents the fifth consecutive quarterly decline.

One interesting additional note in the FDIC’s report is that there were no new bank charters granted in the second quarter of 2012, which represents the fourth consecutive quarter in which there were no new charters. Through closure and merger, and the lack of additions of any new banks, the number of banking institutions is shrinking significantly

• Print
• Comments
• Trackbacks
• Share Link

According to the FDIC’s Quarterly Banking Profile for the first quarter of 2012, which can be found here and which was released on May 24, 2012, the banking industry generally continues to show improvement. The industry’s aggregate profits are up, and the industry is shedding bad loans, bolstering net worth, and increasing profitability. In addition, the number of banks that the FDIC ranks as “problem institutions” continues to decline. The FDIC’s May 24, 2012 press release about its Quarterly Banking Profile can be found here.

According to the report, as of March 31, 2012, there were 772 problem institutions, compared to 813 as of the year-end 2011, and 888 as of year-end 2010. (A “problem” institution is a bank to which the FDIC has rated as either a “4” or a “5” on the agency’s 1-to-5 scale of ascending order of supervisory concern. The FDIC does not identify the problem institutions by name.) The quarterly decline in the number of problem institutions represents about a 5% drop, and the decline during since March 31, 2011 represents about a 13% drop.

According to the FDIC, the 1Q12 decline in the number of problem institutions represents the fourth consecutive quarterly decline. The number of problem institutions is now at its lowest level since year-end 2009.  The assets of “problem” banks fell during the first quarter from $319 billion to $292 billion. As recently as the end of 2009, the problems institutions assets’ were as much as $402 billion.

Though the total number of problem institutions has declined, the number of reporting institutions has also continued to decline (due to mergers and closures). The 772 problem institutions represent about 10.5% of all reporting institutions as of March 31, 2012. Even though that is the lowest absolute number of problem institutions since year-end 2009, the 702 problem institutions as of year-end 2009 represented only about 8.5% of all reporting institutions at that time. Thus, though the total number of problems institutions has declined, as a percentage of all institutions the number of problem institutions remains at elevated levels.

In other words, the declining number of problem institutions does not necessarily mean that the number is declining because of improvement among problem institutions. In larger measure, the number of problem institutions is declining because many of the institutions formerly assessed as problems simply no longer exist, whether as a result of mergers or closures.

On a more positive note, the 16 bank failures during the first quarter of 2012 represents the smallest quarterly number of bank closures since the fourth quarter of 2008, when there were 12 bank failures. The 16 bank failures in 1Q12 compares to the 26 bank failures in the first quarter of 2011. (As of today, there have been a total of 24 bank failures so far during 2012, compared with 43 YTD bank failures on the same date in 2011).

The decline in the number of banking institutions during the current banking crisis really has been remarkable. As recently as year-end 2007, there were 8,649 reporting institutions. The 7,307 institution remaining as of March 31, 2012 represents a decline of 1,342 banking institutions, or a decline of about 15.5% during that period.

The remaining 7,307 banking institutions are largely concentrated in the community banking space. As of March 31, 2012, 6,643 (or about 90.9%) of the 7,307 remaining banks had assets less than $1 billion. Only about 107 institutions (or 1.5% of all institutions) had assets of $10 billion or greater.

While the number of problem institutions and failed institutions has been declining, the FDIC has been increasing the number of lawsuits it has authorized against the former directors and officers of failed institutions. As of the FDIC’s latest update on May 15, 2012, the FDIC has authorized suits in connection with 63 failed institutions against 549 individuals for D&O liability. This includes the 29 lawsuits involving 28 institutions that the FDIC has already filed, naming 239 former directors and officers. The implication is that there are many more lawsuits in the pipeline – although interestingly, the FDIC has not filed any new lawsuits in over a month. The last lawsuit that the FDIC filed was filed on April 20, 2012.

“The Most Serious Natural Resources Shortage You’ve Never Heard Of”: We can live without oil, but we can’t live without food. For decades, the world has been able to feed a growing population by using phosphorus-rich fertilizer to increase crop yields. The problem is, we are running out of phosphorous.

My research biologist brother-in-law has been telling me for years about the dwindling supplies of phosphorus. The looming phosphorus shortage is the subject of an April 20, 2012 article in Foreign Affairs entitled “Peak Phosphorus” (here), which warns that there “will not be sufficient phosphorus supplies from mining to meet agricultural demand within 30 to 40 years.” The consequences of the looming shortage will be felt long before the supplies finally run out. Even in the short run, increased demand and decreasing supplies “will result in higher prices, significantly affecting millions of farmers in the developing world who already live on the brink of bankruptcy and starvation.”

Tensions about control over phosphorus supplies have already been the source of significant issues involving Morocco (where the largest number of phosphorus mines are located) and Western Sahara, a disputed independent territory that is Morocco currently occupies. China, the country with the second largest reserves, has already once resorted to trade tariffs that effectively eliminated exports in 2008, which was a contributing factor to dramatically rising food prices that year. While the U.S. historically has been a leading source of phosphorus, the supplies from its most productive mines have been declining rapidly. As a result, the country, which has been a phosphorus exporter for decades, is now imports as much as 10% of its supply.

As the article notes “establishing a reliable phosphorus supply is essential for assuring long-term food security.” The most important step is to reduce the demand for phosphorus by “eliminating wasteful practices” – phosphorus can be used over and over, and effective conservation techniques could significantly expand the usefulness of remaining supplies. In addition, there is a significant promise in the development of new, phosphorus-efficient foods.

If we fail to respond to the challenge, however, “humanity faces a Malthusian trap of widespread famine on a scale that we have not yet experienced. The geopolitical impacts o such disruptions will be severe, as an increasing number of states fail to provide their citizens with sufficient food.” This “dark scenario” is not inevitable, but in order to avoid this destiny, the threats involved with the looming phosphorus shortage must be addressed.

• Print
• Comments (1)
• Trackbacks
• Share Link

The FDIC’s latest Quarterly Banking Profile for the period ending December 31, 2011, released February 28, 2012 (here), reflects a generally improving banking landscape and a continuing reduction in the number of problem institutions. But though the industry is showing improvement, the number of problem banks, though down from immediately prior periods, still remains elevated compared to historical levels.

According to the report, as of year- end 2011, there were 813 problem institutions, compared to 844 as of the end of the third quarter and 884 as of year-end 2010. (A “problem” institution is a bank to which the FDIC has rated as either a “4” or a “5” on the agency’s 1-to-5 scale of ascending order of supervisory concern.) The quarterly decline in the number of problem institutions represents about a 3.6% drop, and the decline during calendar year 2011 represents about an 8% drop. According to the FDIC, the 4Q11 decline in the number of problem institutions represents the third consecutive quarterly decline.

The total assets of problem institutions also declined during the fourth quarter of 2011, from $339 billion at September 30, 2011 to $319.4 billion at year-end 2011. The $319.4 billion 2011 year-end total represents a substantial decline from the $390 billion at the end of 2010 and the $402 billion at the end of 2009.

Though the number of problem institutions began to decline during 2011, the number of problem banks remains at elevated levels compared to historical standards. At recently as year-end 2007, there were only 76 problem institutions listed. Even at the end of 2008 during the height of the global financial crisis, there were only 252 problem financial institutions. In other words, though the number of problem financial institutions is declining, that does not necessarily mean the current banking crisis has passed.

It should also be noted that the declining number of problem institutions does not necessarily mean that the number is declining because of improvement among problem institutions. It could just be that some of the problem banks no longer exist. For starters, the number of reporting institutions overall has been declining for several years. At year end 2011, there were 7,357 reporting institutions, down from 7,658 at the end of 2010 and 8,305 at the end of 2009. The overall decline is mostly due to mergers and failures. These same factors likely also account for much of the decline in the number of problem institutions.

It is impossible to know how much of the decline in the number of problem institutions is due to improvement and how much is due to these other factors. The good news is that the number of bank failures is definitely down. So far, YTD 2012, there have been only 11 bank failures, compared to 23 at this same point last year. The declining rate of failures seems like a positive sign. But again, as noted above, when there are over 800 problem institutions and when banks are continuing to fail, it is hard to conclude that we are entirely out of the woods on the current wave of bank failures and problem banks.

At the same time, much of the news In the FDIC’s latest Quarterly Banking Profile is positive. The overall picture for the industry is one of recovery, with growing net income, declining loan loss provisions, and declines in noncurrent loan balances. There is a concern that revenues appear to have slipped, but overall the picture for the banking industry is positive. With these positive signs, the hope is that the improving conditions will allow even the problem institutions to benefit and recover.

Another Failed Bank Lawsuit: As the number of failed banks and problem institutions continues to decline, the number of FDIC failed bank lawsuits is ramping up. On February 24, 2012, the FDIC filed its latest lawsuit. This one was filed in the Northern District of Georgia against two former a former director and officer and a former director of the failed Community Bank & Trust of Cornelia, Georgia. A copy of the FDIC’s complaint can be found here.

Community Bank & Trust failed on January 29, 2010. In its complaint, the FDIC seeks to recover in excess of $11 million in losses allegedly caused by the two defendants’ breaches of fiduciary duty, negligence and gross negligence related to the bank’s home loan program between January 6, 2006 and December 2, 2009. The complaint alleges that the bank’s senior head of retail lending violated his legal duties in approving loans in violation of the bank’s loan policies. The bank’s CEO is alleged to have breached his duties in failing to supervise the loan officer and in failing to take corrective measures.

The suit is the 23^rd that the FDIC has filed as part of the current wave of bank failures. According to its website, as of February 14, 2012, the FDIC has authorized suits in connection with 49 failed institutions against 427 individuals for D&O liability with damage claims of at least $7.8 billion. This includes the now 23 filed D&O lawsuits naming 184 former directors and officers. In light of the differences between the number of authorized suits and the number filed to day, there clearly are many suits yet to come – and the number of suits authorized has also been increasing monthly. The banking industry may be slowly improving but the litigation levels are just now starting to ramp up.

Special thanks to a loyal reader for sending me a copy of the complaint.

• Print
• Comments
• Trackbacks
• Share Link

According to FDIC’s Quarterly Banking Profile, released on May 24, 2011 (refer here), the pace of bank failures slowed during the first quarter. However, both the absolute and relative number of problem institutions continued to increase, albeit at a reduced pace compared to recent quarters. The FDIC’s May 24, 2011 press release about the Quarterly Banking Profile can be found here.

During the first quarter of 2011, 26 banking institutions failed, compared to 41 in the first quarter of 2010. The total of 26 bank failures in the first quarter is the smallest quarterly number of bank failures in seven quarters.  (My prior post on the declining pace of bank closures can be found here.) A total of 43 banks have failed year to date in 2011 as of May 25, 2011.

As of the end of the first quarter 2011, there were 888 “problem institutions,” compared to 884 at the end of 2010 and 775 at the end of the first quarter 2010. The increase in the number of problem institutions during the twelve month period ending March 31, 2011 is 113, or about 14.5%. (The FDIC identifies banks as problem institutions as those that are graded a 4 or a 5 on a 1-to-5 scale as a result of “financial, operational, or managerial weaknesses that threat their continued financial viability.” The FDIC does not release the names of the individual problem institutions.)

 The increase of only four additional problem institutions since year-end 2010 represents only a slight increase in the number of problem institutions. In its press release, the FDIC noted that this increase is “the smallest increase in three and a half years.” However, the 888 problem institutions as of March 31, 2011 represent the larges number of problem institutions since March 31, 1993, when there were 928.

The number of problem institutions as a percentage of all reporting institutions has continued to increase. This is not only due to the increase in the absolute number of problem institutions but also because of the declining number of reporting institutions. The decline in the number of reporting institutions is not only due to bank failures, but also due to mergers and acquisitions.

The 888 problem institutions as of March 31, 2011 represent about 11.7% of all 7574 reporting institutions. By way of comparison, the 775 problem institutions as the end of the first quarter 2010 represented only about 9.7% of all 7,934 reporting institutions as of that date. So both the absolute and relative numbers of problem institutions has increased substantially during the 12 months ending March 31, 2011.

Though the number of problem institutions has continued to increase, the aggregate assets those problem institutions represent has decreased. Thus the 775 problem institutions as of March 31, 2010 represented assets of $431 billion, whereas the 888 problem institutions as of March 31, 2011 represented assets of $387 billion.

With all of the remaining numbers of problem institutions, there are still a lot of challenges in the banking industry. There may yet be more bank failures yet to come, perhaps many more. However, the overall message of the Quarterly Banking Profile is guardedly upbeat. The press release quotes the FDIC Chairman Sheila Bair as saying that “the industry shows signs of improvement, “ and adding that “the process of repairing bank balance sheets is well along, but is not yet complete.”

As I have noted elsewhere, the numbers of bank failures overall may be slowing, but the lawsuits involving directors and officers of failed institutions may just be ramping up – slowly

• Print
• Comments
• Trackbacks
• Share Link

Though 2010 was a "turnaround" year for banks, the number of problem institutions continued to increase  during the year, according to the FDIC’s Quarterly Banking Profile for the fourth quarter of 2010. A copy of the FDIC’s February 23, 2011 press release about the report can be found here, and the Quarterly Banking Profile itself can be found here.

The FDIC defines a problem institution as one the agency has rated as a 4 or 5 on a 1 to 5 scale of ascending regulatory concern. Problems institutions are those with financial, managerial or operational weaknesses that threaten their continued viability. The FDIC does not publish the names of the institutions that it defines as problem institutions.

Of the 7,667 institutions that were federally insured as of December 31, 2010, the FDIC rated 884 as problem institutions, or about 11.5% -- or one out of nine -- of all banks in the country. These problems banks represented $390 billion in assets. These year end 2010 figures compare with the 702 banks rated as problem institutions at the end of 2009, representing $402 billion in assets.

The year-end 2010 tally of problem banks is not only up from the end of 2009, it is also up from the end of the third quarter of 2010. There were 860 problem institutions as of September 30, 2010, representing $379 billion in assets.

Though the number of problem institutions has continued to increase, the rate of increase has slowed. The FDIC noted in its press release that the rate of increases in the number of problem institutions has declined in each of the last four quarters.

The number of problem institutions as of the end of 2010 is the largest number of problem institutions since March 31, 1993, when there were 928.

The number of problems institutions has continued to grow even as the number of bank failures has continued to mount, which has the effect of reducing the number of institutions rated as problems. The 157 bank failures in 2010 were the highest number of bank failures since 1992 (when 181 banks failed.) Though the FDIC stated in its press release that it expects 2010 to be the high water mark of the current bank failure wave, 22 additional banks have failed already in 2011, putting this year’s bank closure pace ahead of last year’s.

Overall, however, the news in the Quarterly Banking Profile was relatively good. The FDIC characterized 2010 as a "turnaround" year, one in which the banking industry reported four consecutive quarters of positive income. The industry’s fourth quarter aggregate profit of $21.7 billion represented a $23.5 billion increase from the industry’s $1.8 billion loss in the year prior quarter. Almost two thirds of reporting institutions reported improvements in quarterly net income from a year ago. Much of the improvement in earnings is attributable to reductions in provisions for loan losses.

The DealBook blog’s summary of the FDIC’s report can be found here.

More Investors Opting Out?: Luke Green has an interesing February 23, 2011 post on his Risk Metrics Insights blog (here) about the number of large institutional investors that have opted out of the $624 million Countrwide securities class action settlement. As many as 33 large investors have opted out of the settlement, which has resulted in changes to the class action settlement, including the reduction of the settlement amount to $601.5 million. Many of the opt outs apparently have initiated separate litigation, as well. Green notes that there are a host of arguments against and in favor of opting out, but he nevetheless asks whether the willingness of large investors to opt out possibly represents a larger trend.

D&O Case Law Survey: The policyholder side coverage law firm Lowenstein & Sandler has published a "Review of 2010 Case Law on D&O Insurance Coverage," which can be found here. The memo provides brief reviews of critical D&O insurance coverage decisions from the past year.

• Print
• Comments
• Trackbacks
• Share Link