Recession Claims more Banks as Victims

Contrary to the Federal Reserve’s indication last week that economic recession was easing in the U.S., regulators shut down 5 more banks with total assets of about $1.04 billion, bringing the total number of failed banks in the country to 45 so far this year, compared to 25 in 2008 and 3 in 2007. This marks the largest number of bank failures in one week during the 2008-2009 banking crisis.

The Federal Deposit Insurance Corp. (FDIC) was appointed as custodian of the following 5 failed banks: Community Bank of West Georgia, Neighborhood Community Bank, Horizon Bank, MetroPacific Bank and Mirae Bank. The FDIC estimates total cost to the deposit insurance fund from the failure of these banks to be approximately $265 million. The deposit insurance fund has now plunged to its lowest level since 1993 - $13 billion as of March 31, 2009.

The recent closures took the total number of failed banks in Georgia to 14, more than any other state in the U.S., primarily a result of the economic dislocation brought about by the collapse of the real estate market.

The largest U.S. bank failures during 2008 and 2009 include Washington Mutual acquired by JPMorgan Chase (JPM - Analyst Report), Wachovia Bank acquired by Wells & Fargo Co. (WFC - Analyst Report), Alliance Bank acquired by Zions Bancorp (ZION - Analyst Report), to name a few.

Although signs of an easing recession may bring losses on home mortgages to a close, we expect losses on commercial real estate loans portfolio to continue affecting profitability of banks having significant exposure, like Fifth Third Bancorp (FITB - Analyst Report), in the near term. Furthermore, based on our expectations that unemployment and loan defaults will continue to rise in the coming months, we expect more small-cap banks to succumb to this prolonged recession.