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100 Bank Failures Expected By End of 2009

April 01, 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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