According to the FDIC’s Quarterly Banking Profile for the 1st Quarter of 2010, released on May 20, 2010 (here), results for reporting banks "contained positive signs of recovery for the industry," reflecting "clear improvement in certain performance indicators." Nevertheless, the number of "problem" institutions at quarter end increased to 775, up from 702 at the end of 2009 and representing 10% of all reporting institutions.


The positive signs include such things as lower provisions for loan loss reserves and reduced expenses for goodwill impairment. These and other factors contributed to reported earnings at FDIC-insured institutions of $18 billion, the highest quarterly total since the first quarter of 2008.


However, some of these positive sign look somewhat less reassuring on closer scrutiny. Thus, for example, though the reporting institutions reported $10.2 less in loan loss reserve increases than they had in the first quarter of 2009, only about one-third of all institutions reported year-over-year declines, with most of the overall reduction concentrated among a few of the largest banks.


In addition, there are indicators that some concerns have not yet started to improve. For example, the total number of loans at least three months past due climbed for the 16th consecutive quarter. The Wall Street Journal quotes FDIC chairman Sheila Bair as saying that "The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility,"


This uneven distribution of the positive signs and the continuing concerns in some areas helps explain at least in part how the number of "problem" institutions continues to grow despite the positive signs in the industry.


The FDIC defines "problem" institutions as those with "financial, operations or managerial weaknesses that threaten continued financial viability." These institutions are rated as "4" or "5" on the FDIC’s 1-to-5 scale of financial and operational criteria.


As of March 31, 2010, there were 725 "problem" institutions, which is the highest number since 1993. The 775 institutions represent total assets of $431,189 million. These figures also represent increases in the number of "problem" institutions and total assets of 154% and 96% respectively over the equivalent figures as of March 31, 2009, when there were 305 "problem" institutions representing $220,047 million in assets.


This increase over that period is all the more striking given that during the same 12 month period, the number of "problem" institutions was being reduced as some of those institutions changed their status from "problem" to "failed." During the period March 31, 2009 to March 31, 2010, the FDIC took control of 160 banks, which makes the growth in the number of "problem" institutions during that period all the more striking.


The March 31, 2010 "problem" institution figures also represent increases of 10% and 7%, respectively, in the number of institutions and total assets since December 31, 2009, when there were 702 "problem institutions" representing $402,782 in total assets.


Though the number of "problem" institutions continues to grow, the pressure on the FDIC may be beginning to ease. According to a May 19, 2010 New York Times article (here), the growing willingness of private investors to step in with financial investments in some trouble institutions is a positive sign that may mean fewer failed banks.


Interestingly, among the specific institutions the Times article mentions as having attracted private investment capital are banks that have also recently attracted securities class action lawsuits, including Synovus Financial, Sterling Financial, and Pacific Capital Corporation. (Perhaps the investment explains in part why the class action plaintiffs voluntarily dismissed their suit against Pacific Capital Bancorp, about which refer here.)


Once consequence of the improving banking industry conditions and the increasing willingness of private investors to step in is that there may be few total number of bank failures than some observers had previously projected. Thus, even those who had predicted 1,000 bank failures (a figure I questioned at the time they were first pronounced), now, according to the Times article, "foresee perhaps 500 to 750 bank failures."


If the continued pace of bank failures continues unabated through the end of 2011, we could perhaps reach a total number of bank failures of as many as 500 to 750 banks. (There have been 357 bank failures since January 1, 2008.) However, the positive signs indicating improvements in the banking sector and the return of private investors offers some hope that at some point the number of bank failures may begin to decline. Indeed, the Journal article quotes FDIC officials as saying that the bank failures will probably peak in 2010.


But for now, with the most current FDIC figures indicating an increase in the number of "problem" institutions, signs are that bank failures will continue to accumulate, at least for the near term.


"Beyond Tone Deaf": Though the $250 million punitive damages award in the Novartis class action gender discrimination case is outside of The D&O Diary’s usual bailiwick, it still caught our attention. There undoubtedly will be further proceedings in the case, but for eye-popping jury verdict is attracting scrutiny.


Those interested in trying to understand what the company may have done to get his with a punitive damages award of that magnitude will want to read Susan Beck’s scathing May 19, 2010 Am Law Litigation Daily column (here).


According to Beck, referring to the company’s trial counsel Richard Schnadig of the Vedder Price firm, "this was a company – and a lawyer – that simply didn’t know how to deal with the plaintiffs’ accusations. Their response to the women’s testimony was beyond tone deaf. It was, to put it bluntly, insulting and stupid."


As support for this statement, Beck cites Schnadig’s characterization in his closing arguments of the testimony of one the named plaintiffs, who testified that her manager had pressured her not to have children. Schnadig dismissed the plaintiff as hysterical, stating "I’ve never seen anybody cry so much on the witness stand in my life…She didn’t have very much to cry about…It’s like she had been knifed. Honestly, what’s wrong with this woman? She was so fragile." Her manager, Schnadig argued, was more credible because according to Schnadig, he was "a nice Southern guy."


Beck cites numerous other statements in closing arguments very much in the same vein.


Novartis may have had many other things to say in its defense, but these kinds of statements apparently did not play well with the jury. Jurors are scary enough as it is, but trying to convince a jury that the plaintiffs are just a bunch of crazy hysterics seems like a particularly ill-advised strategy.