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100 Bank Failures Expected By the End of 2009, Financial Credit Rating Firm Predicts

March 31, 2009

FREDERICK, Md. — While the fourth quarter 2008 was tough for the banking industry, the financial conditions of commercial banks and savings and loans are expected to further deteriorate in 2009 and the first part of 2010, according to Barron Putnam, president of LACE Financial Corporation, a provider of credit rating services.

LACE predicts that second quarter 2009 GDP growth will be close to the negative 6.2 percent reported in the first quarter; with a likely overall negative three percent growth for the year.

"Unemployment is likely to approach and possibly exceed 10 percent this year. The devastating decline in U.S. household wealth ($11 trillion), increasing non-performing assets in the world's banking systems, rising unemployment, deterioration in U.S. corporate wealth, as well as a deteriorating economic condition in our nation's largest trading partners, will prolong the U.S. recession," predicted Putnam.

"Although world governments are injecting capital into their banking systems, this, by itself, will not increase new lending," he explained. "You can't 'push a string,' there has to be loan demand. Currently, banks are more concerned about their increasing non-performing assets and their survival. So far this year 20 banks have failed, and we expect about 100 to 150 failures by the end of 2009."

In its "Trends in U.S. Banking Institutions -- Fourth Quarter 2008" report, LACE found that loan loss reserves and trading losses contributed to last year’s financial problems.

The report noted that commercial banks reported a net loss of $32.1 billion, resulting in a negative 0.94 percent return on assets (ROA). Although four banks accounted for half of the loss, 33 percent of all banks reported a loss for the quarter.

The report also found that assets for the banking industry remained stagnant despite an increase in deposits. Assets growth declined 2.8 percent for the fourth quarter and .04 percent for the year despite the government's infusion of capital into the banking system. Meanwhile, deposits grew 3.5 percent in the fourth quarter.

Non-performing assets increased by $44.1 billion (24 percent) across all loan categories. Provisions for loan loss reserves increased $69 billion, more than twice the amount reported in the same period a year ago. Charge offs against the loan loss reserve account were $37.9 billion, a 132 percent increase over the same period a year ago.

Net reserves for commercial banks increased $16.5 billion, but the higher increase in nonperforming assets resulted in a coverage ratio (non-performing assets to reserves) decline from 84 to 75 percent, a 16-year low. "We expect the coverage ratio to decline further over the next 12 months, putting a significant strain on bank earnings," said Putnam.

The results from LACE’s report indicate that 2009 will continue to be a difficult year. "We expect little or no loan growth for this year, and without loan growth there will be little or no economic growth," explained Putnam.

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