Strongest U.S. Banks Hoard Cash

The most highly rated financial institutions are community banks, whose reserves are swelling.
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NEW YORK (TheStreet) -- While the financial industry has strengthened enough that Citigroup (C) - Get Report, Wells Fargo (WFC) - Get Report and Bank of America (BAC) - Get Report are able to pay back their bailout packages, banks' bad loans have increased.
A total of 1,035 U.S. banks and savings-and-loans received "recommended" ratings of B-plus or higher by TheStreet.com Ratings, down from 1,100. Based on a complete analysis of third-quarter financial reports, 555 received ratings of A-minus (excellent) or higher, compared with 583 in the second quarter. Twenty-seven were awarded the highest rating of A-plus, two fewer than three months earlier.TheStreet.com Ratings uses a very conservative ratings model, with capital strength, credit quality and consistent profitability being the most important factors in determining ratings.
Banks rated A-plus had capital ratios greatly exceeding the 5% tier 1 leverage ratio and 10% total risk-based capital ratio required for most banks and thrifts to be considered "well-capitalized" under regulatory capital guidelines. In fact, most were so strongly capitalized that their ratios were at least double the thresholds for well-capitalized institutions.
Community banks dominate the A-plus list, although the largest bank on the list -- Sumitomo Trust and Banking of Hoboken, N.J. -- isn't a lender, but focuses on custody services and securities lending.
Most of the listed institutions have maintained strong earnings performance, with more than half achieving annualized returns on average assets in excess of 1.5%.
All had nonperforming assets comprising less than 1% of total assets, except for First National Bank of Camdenton, Mo., and Elizabethtown Federal Savings of Elizabethtown, Tenn., but those two banks had so much capital that the risk from problem loans was negligible. Industry headwinds: Even though many of the largest banks are breathing a sigh of relief, the pace of bank failures may accelerate this year. The Federal Deposit Insurance Corp.'s list of "problem banks" based on third-quarter results grew to 552 from 416 in the previous quarter, even after 50 institutions failed and were no longer counted.

While the banking industry reported a combined profit of $2.8 billion for the third quarter and banks continued to build capital and loan-loss reserves, nonperforming loans continued to increase:

For the fourth consecutive quarter, the industry set aside more than $60 billion for loan-loss reserves. One bright spot was that the aggregate net interest margin -- the difference between the average rate banks earned on their loans and investments, and the average cost of funds -- continued to rise as banks took advantage of low short-term rates.

Potential shock from rising rates: Regulators are concerned that banks may get squeezed if the Federal Reserve raises official rates. Federal bank and thrift regulators issued a combined advisory on interest rate risk management Thursday, reminding banks of the importance of stress-testing balance sheets and discussing ways to mitigate risk.

One of the many criticisms heaped on bank regulators has been their failure to address inadequate oversight of boards of directors, especially in credit administration, until institutions are in serious trouble. Regulators may take a more active approach, with enforcement action on otherwise-healthy banks that may lack proper interest rate risk management.

Deposit insurance:

The FDIC's increase of the basic individual deposit insurance limit to $250,000 from $100,000 has been extended through 2013. Among many other steps taken by the FDIC to mitigate the risk of runs on deposits is the Transaction Account Guarantee Program, which temporarily waived all deposit-insurance limits on non-interest-bearing transaction accounts. More than 7,100 banks and thrifts have participated in the program, which has been extended through June 30. After that, the deposit insurance limit on business checking accounts will revert to the usual $100,000.

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-- Reported by Philip van Doorn in Jupiter Fla.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.