As the credit crisis and recession drags on, it's increasingly important to monitor the health of the bank or savings and loan that holds your money. While the FDIC has temporarily increased its individual deposit insurance limit to $250,000 (from $100,000) per account and waived insurance limits on non-interest bearing business checking deposits, these increases are set to expire at the end of this year.

And the end of the year will be here before we know it.

Regarding business checking, it is pretty easy for a business or municipal entity (such a s school district) to have large amounts of somebody else's money flowing through a transaction account. Since it's important to have a stable banking relationship, you should look into your bank's health way before the deposit insurance limit waiver on business transaction accounts expires.

It's easy to get your institution's rating for free via Ratings, and if your bank or S&L has a rating of D+ or below, you might want to discuss the situation with your banker. Ratings' model places the strongest weighting on capital adequacy, earnings and asset quality. The following table includes common ratios in these categories for the past five quarters:

U.S. Bank and S&L Industry Aggregates
Highline Financial Inc.

Combined industry net income for the third quarter was $1.9 billion, compared to $29.8 billion a year earlier. While the earnings picture wasn't as dismal as the fourth quarter of 2007, when the industry posted a loss, earnings were sharply down from the second quarter as institutions continued to beef up reserves and many suffered big losses on investments in Fannie Mae ( FNM) and Freddie Mac ( FRE) preferred stock, following the mortgage giants' placement into receivership by the Treasury Department.

The industry's combined realized losses on securities was $7.2 billion for the third quarter, compared to a loss of $1.9 billion in the second quarter and a gain of $302 million in September 2007.

For the combined industry, capital ratios decline slightly during the quarter, but this is expected to be reversed when the fourth-quarter numbers come in, which will reflect the capital infusions from the Treasury's Troubled Assets Relief Program.

While the combined capital ratios for the industry were considerably higher than a year earlier, the number of institutions with leverage and risk-based capital ratios below the 5% and 10% thresholds required to be considered well-capitalized under regulatory guidelines increased to 161 as of Sept. 30, from 139 the previous quarter and 80 in September 2007. T

The industry's nonperforming assets, which include loans past due 90 days or more and repossessed real estate, comprised 1.39% of total assets as of Sept. 30, up from 1.25% the previous quarter and 0.63% a year earlier.

Net charge-offs (actual loan losses) totaled $29.4 billion, up from $26.7 billion in the second quarter and just $10.8 billion in the third quarter of 2007. The annualized ratio of net charge-offs to average loans was 1.45%, an increase from 1.32% in the second quarter and 0.60% in September 2007.

The industry's ratio of loan-loss reserves to total loans was 1.95% as of Sept. 30, rising from 1.32% in June and 1.13% in September 2007. While end-of-quarter reserve coverage was ahead of the annualized pace of charge-offs, many banks expect continued increases in loan charge-offs, including Synovus Financial ( SNV) and Regions Financial ( RF). For additional discussion of those companies and political pressure for banks receiving TARP money to expand their lending, check out Synovus Shows Why Banks Aren't Lending.

Strongest Banks and Thrifts

This quarter, 40 banks and thrifts were assigned Financial Strength Ratings of A+. Rather than list only some of these by a certain type of criteria, we have decided to list all of them this quarter, sorted by asset size.

A+ Rated Banks and S&Ls (Millions)
Highline Financial, Inc.

While this is a big list, there are 769 institutions rated A- or above. You can check your bank's rating using the link at the end of this article.

Looking at the list, it's clear that all of these institutions are very strongly capitalized. Most also posted impressive earnings results for the first three quarters of 2008, with an annualized return on average assets (ROA) well above 1%. Returns on average equity (ROE) were less impressive for some of the A+ rated institutions, simply because these banks hold what some investors might consider to be "excess capital." Of course, for depositors, excess capital is a great thing, especially in a troubled economy.

One institution whose earnings stand out is Applied Bank of Wilmington, Del., which has traditionally specialized in "providing secured and unsecured Visa and MasterCard Credit Cards to people with little or no credit history." Applied Bank's ROA for the first three quarters of 2008 was 12.28% and its ROE was 36.45%. These amazing earnings results were achieved with a minimum of loan charge-offs, and the bank has very high capital ratios.

Rocco Abessinio, Applied Bank's president, confirmed that the institution sells the credit card loans it originates and derives most of its income from servicing those loans. He also said that the privately held bank is switching directions, moving into commercial lending in the Wilmington area and would like to leverage its capital by acquiring other institutions.

The largest institution on the A+ list is City National Bank of Florida, which, despite being headquartered in the troubled Miami market and having a balance sheet with a 41% concentration in construction and commercial real estate loans, has maintained strong earnings and stellar loan quality. It sports a net charge-off ratio of just 0.01% for the first three quarters of 2008.

The loans in which City National Bank of Florida specializes tend to have relatively short maturities and relatively high adjustable rates, which allows the bank to maintain a healthy net interest spread. The spread was 4.42% for the first three quarters of 2008, compared to a total of 3.33% for the industry.

Of course, many community banks focus on local construction and commercial mortgage lending, however, with so many areas feeling the economic slowdown, very few have been able to maintain such outstanding asset quality. When commercial borrowers begin to default, earnings can quickly head south.

Despite the overall economic slowdown and challenging interest-rate environment (now mitigated with strong Federal Reserve interest rate cuts), City National Bank posted excellent earnings results for the first three quarters of 2008. Net income was $45.7 million, or an ROA of 2.17% and ROE of 17.34%.

Looking back, City National was posting returns on equity well in excess of 20% during 2005, 2006 and 2007. The year-to-date return on equity for 2008 was been lower, since the bank didn't pay any dividends during the first three quarters and its capital ratios increased considerably from December 2007.

Second on the list is Broadway National Bank of San Antonio, Texas, which had total assets of $1.8 billion, and was upgraded to an A+ Financial Strength Rating from an A by Ratings.

Broadway National's rating was upgraded because the institution's earnings have been strong for many years and have recently improved, while the bank's leverage ratio has increased and loan quality has remained strong.

Net income for the first three quarters was $25.3 million, for an ROA of 1.89% and ROE of 15.58%.

The bank is strongly capitalized, with a leverage ratio of 11.00% and a risk-based capital ratio of 15.23%, as of Sept. 30. Problem loans have been kept to a minimum, with a nonperforming assets ratio of 0.06% as of Sept. 30 and an annualized net charge-off ratio of 0.20% for the first three quarters of 2008.

While Broadway has a lower concentration in construction loans than City National, and a relatively small loan portfolio (comprising just 57% of total assets), it maintained a relatively high net interest spread of 4.85% during the first three quarters of 2008, on its portfolio of commercial real estate and commercial & industrial loans, as well as its securities portfolio. The institution was also able to avoid any of the securities losses that plagued so many banks.

When asked about Broadway National Bank's success, CEO James Goudge said the bank avoided making subprime or low-documentation loans. He also emphasized the community-based approach of the family-owned institution. Rather than pushing loan growth by pursuing individual deals, "we focus on developing full deposit and lending relationships with our customers, so we know them and they know us," he said. "This approach has served us well through our 68-year history."

Goudge also pointed out that the San Antonio area is not going through the same boom-and-bust cycle being experienced in so many areas of the country. One factor that prevented some risky lending was Texas' home equity lending law, which essentially bars banks from making second-lien home equity loans that would push the combined loan to value ratio above 80%.

Broadway National Bank has 37 branches in the San Antonio area, including seven operating on or near military bases, under the Eisenhower Bank name.

Free Bank and Thrift Ratings Ratings publishes financial strength ratings each for the nation's roughly 8,500 banks and thrifts. You can look up your institution's rating, free of charge, using the Banks and Thrifts Screener.
Philip W. van Doorn joined 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.

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