FDIC: Banks Improve, Number of Problem Institutions Continues to Decline

FDIC: Banks Improve, Number of Problem Institutions Continues to Decline

 The commercial banking industry is continuing its rebound from the subprime meltdown and the global financial crisis. According to the FDIC’s latest Quarterly Banking Profile for the period ending December 31, 2014 (here), the industry’s overall earnings continue to improve, largely as a result of reduced loan-loss provisions. However, operating revenue declined during 2013 compared to the prior year, as result of reduced mortgage activity and reduced trading revenue. The FDIC’s February 26, 2014 press release regarding the latest quarterly and year-end banking industry results can be found here.

Just as the industry overall continues to improve, the number of “problem institutions” continues to decline as well. (A “problem institution” is a bank that the FDIC ranks as a 4 or a 5 on its scale of financial stability. The agency does not release the names of the banks its regards as problem institutions.) In the fourth quarter of 2013, the number of problem institutions declined for the eleventh straight quarter, from 515 at the end of the third quarter 2013, to 467 at year end (representing a decline of 9.32%). 

While the number of problem institutions continues to decline, the problem institutions still represent about 6.86% of all reporting institutions. Moreover, as positive as the decline in the number of problem banks may be, it seems likely that the problem banks are not improving themselves out of the “problem” status – the likelier explanation for the declining number of problem institutions is that they are simply being absorbed by other more stable banks, or that they are simply failing. Along those lines, the FDIC reports that mergers absorbed 73 banks during the fourth quarter and 271 for the full year.  The 6,812 institutions remaining as of the end of the fourth quarter represents the smallest total number of U.S. banking institutions since the great depression (about which refer here).

Just the same, the number of problems institutions remaining is a far cry from the end of the first quarter of 2011, when there were 888 problem institutions. Not only has the number dropped by nearly  half since that time, but the 467 problem institutions remaining at the end of 2013 represents a decline of 184 from year-end 2012, a decline just in that one year of 28.26%.

24 institutions failed in 2012, which is the smallest number of annual bank failures since 2008, representing less than half of the 51 banks that failed in 2012, and far below the high water mark of 137 failed banks in 2010. Only two of the 2013 bank failures took place in the year’s fourth quarter, which is the smallest number of quarterly failures since the second quarter of 2008. However, it is worth noting that there have already been three bank failures so far during the first quarter of 2014.

In addition to releasing the latest Quarterly Banking Profile, the FDIC also recently updated the information on its website regarding its failed bank litigation activity. The latest update, as of February 24, 2014, shows that the FDIC has now filed 90 lawsuits against the former directors and officers of 89 failed banks. The agency has already filed six lawsuits during 2014, including five during January alone.

The likelihood is that the agency will continue to file additional lawsuits in the months ahead. The website discloses that it has authorized lawsuits connection with 135 failed institutions against 1,089 individuals for D&O liability. These figures are inclusive of the 90 D&O lawsuits the agency has filed naming 694 former directors and officers. The gap between the number of authorized and filed lawsuits suggests that there may be as many as 45 unfiled lawsuits in the pipeline, and since the number of authorized suits has increased every month for the last several years, the likelihood is that there may be even further lawsuits ahead, as well.

Parties Settle Long-Running Indy Mac D&O Insurance Coverage Dispute: According to a February 26, 2014 Law 360 article (here), the parties to the long-running Indy Mac D&O insurance coverage dispute have agreed to settle the case, just weeks before oral arguments in the Ninth Circuit were to take place in the case. As reflected in the parties’ February 21, 2014 Joint Notice of Settlements in Principle (here), the parties notified the court that they have “reached agreements in principle to resolve each of the Consolidated Appeals.”

As readers will recall, in June 2012, Central District of California Judge R. Gary Klausner said that the various claims that had been filed against the form directors and officers of the failed IndyMac bank  (including the claims filed by the FDIC in its capacity as received of the failed bank) were all interrelated with the first filed claim, and therefore triggered only one $80 million of D&O insurance, rather than two. The individuals and the FDIC appealed the ruling. For more about Judge Klausner’s ruling refer here.

In the meantime, the FDIC’s underlying lawsuits against the former IndyMac officers went forward.  As discussed here, in December 2012, the jury in the FDIC’s failed bank lawsuit  against three IndyMac officers returned a $168.8 million verdict against officers. Unfortunately, by that time, most if not all of the single $80 million tower of D&O insurance that Judge Klausner has said was the only one triggered was largely if not entirely exhausted. In other words, the FDIC’s jury verdict might not be all that valuable in the end unless the individuals and the FDIC could get Judge Klausner’s ruling overturned on appeal.  In addition to the individuals and the FDIC’ the bankruptcy trustee in IndyMac’s holding company’s bankruptcy also claimed entitled to a portion of the contested D&O insurance.

According to their Joint Notice of Settlements in Principle, the parties to the insurance dispute are now preparing settlement documents memorializing their agreement. In addition, the parties’ settlement agreement will require the approval of the bankruptcy court presiding over the bankruptcy of IndyMac’s holding company.  Unfortunately for curious people like me, neither the parties’ submission nor the Law 360 article discloses any of the details about the Court.  

If I had to guess, I would say that each of the carriers in the second tower agreed to contribute some portion of their total limit exposed. Given the magnitude of the jury verdict, I suspect that each participant in the tower contributed the same share toward to total settlement fund, although it is also possible that each successive layer contributed an increasingly smaller share toward the insurance fund. Of course, I have no idea what actually happened. I will say that this was probably a very complex, multisided negotiation.

As I impressed as I am that the parties were able to reach a negotiated resolution of this long-running dispute, I have to say that the inner insurance geek within me is a little disappointed.  It would have been interesting to see how the appellate court would address the interrelatedness issues at the center of the coverage dispute. I guess I will go have to read some policy forms or something like that to satisfy my insurance jones.

 Read 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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