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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
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
The suit is the 23rd 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
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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