TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach aims to highlight risks to bank and thrift depositors and insurance customers of all types, while seeking solid outperformance on a total return basis for stock, mutual fund and ETF investors.

While there are lurking fears about commercial real estate and consumer loans in the wake of the mortgage crisis, a quarterly analysis by TheStreet.com Ratings shows there are thousands of healthy banks and thrifts.

Government officials and CEOs of bank holding companies like Citigroup ( C), Bank of America ( BAC) and Wells Fargo ( WFC) have been talking up stock prices. Still, the overall risk exposure of the U.S. bank and thrift industry is likely to increase over the next few quarters.

TheStreet.com Ratings

Deutsche Bank analyst Richard Parkus recently said total delinquencies on commercial real estate loans might reach 6% by next year, coming close to the peak delinquency levels of the real estate meltdown in the early 1990s.

While many commercial real estate loans are securitized, and therefore not reflected on bank and thrift financial statements, thousands of community banks have high asset concentrations in these loans. As of Dec. 31, composite data for the fourth quarter showed that 2.68% of total commercial real estate loans (excluding construction loans and multifamily projects) were delinquent 30 days or more, up from 2.13% in September and 1.58% in December 2007.

While commercial real estate delinquency rates for U.S. banks and thrifts have increased considerably, it's conceivable that they could double by the end of the year.

A Kitchen-Sink Quarter

According to the Federal Deposit Insurance Corp.'s revised Quarterly Banking Profile, combined U.S. banks and thrifts lost $32 billion during the fourth quarter, compared with net income of $1.7 billion in the third quarter and $5.8 billion in the fourth quarter of 2007.

That was the industry's first quarterly loss since 1990, as extraordinary writedowns of goodwill and provisions for loan losses took their toll.

The number of institutions on the FDIC's "problem list" increased to 252 from 171 in September and 76 at the end of 2007.

That corresponds closely with the increase in undercapitalized banks and thrifts, TheStreet.com reported Wednesday. Here are some aggregate industry performance ratios, provided by the FDIC:

U.S. Bank and S&L Industry Aggregates ($Bil)
  Dec. 2008 Sep. 2008 June 2008 March 2008 Dec.
Net income -$32.1 $1.7 $5.0 $19.3 $5.8
Return on Assets -0.94 0.05 0.15 0.59 0.86
Return on Equity -9.88 0.53 1.46 5.72 8.17
Net Interest Margin 3.34 3.37 3.37 3.33 3.29
Provisions for LLR $69.4 $50.5 $50.2 $37.1 $31.3
Asset Quality
% NPA 1.88 1.54 1.38 1.14 0.94
Net Charge-offs to Loans & Leases 1.92 1.42 1.32 0.99 0.83
LLR/ Total Loans 2.20 1.95 1.80 1.52 1.29
LLR/ NPL 75.02 84.69 88.55 88.88 92.54
Capital Adequacy
Tier 1 Leverage Ratio 7.49 7.81 7.89 7.87 7.98
Total Risk-based Capital Ratio 12.81 12.54 12.86 12.83 12.79
LLR - Loan loss reserves.
NPL - Loans past due 90 days or more, or in nonaccrual status.
NPA - Nonperforming Assets - LLR and repossessed real estate

Source: FDIC .

Loan-loss provisions totaled $69 billion for the fourth quarter, more than double that of a year earlier. Banks and S&Ls also took goodwill and impairment charges totaling $21.9 billion, up from $11.5 billion in the fourth quarter of 2007.

Loan losses and writedowns are understandable in this environment, but there were seasonal factors. Banks and thrifts took pains to cram as much bad news as possible into the fourth quarter by aggressively writing down goodwill and impaired assets, and making sufficient loan-loss provisions to keep ahead of the pace of loan charge-offs.

That set the stage for stronger first quarter 2009 earnings for several of the largest banks.


TheStreet.com Ratings has completed its ratings process for U.S. banks and S&Ls using fourth-quarter data. The overall trend was downward. Out of 8,379 reporting institutions, 1,388 were rated B-plus (good) or higher, which was down from 1,412 the previous quarter and 1,454 a year earlier.

Institutions rated D-plus (weak) or lower totaled 1,835, up from 1,600 the previous quarter and 1,553 a year earlier.

Thirty-seven banks and S&Ls are still rated A-plus (excellent):

TheStreet.com Ratings - A+ Rated
Banks and S&LS ($Millions)
Highline Financial

All of the A-plus-rated institutions were strongly capitalized, with capital ratios greatly exceeding the 5% tier 1 leverage and 10% total risk-based capital ratios required to be considered well-capitalized under ordinary regulatory guidelines.

All reported positive earnings for 2008, with 20 achieving returns on equity exceeding 10%. Those are excellent returns when you consider that return on equity figures will be skewed lower when a bank or thrift plays it safe by holding extra capital.

Most of the institutions on the list are relatively small, with only two having total assets exceeding $1 billion. Larger banks would have a much tougher time holding extra capital, since investors tend to want capital deployed as efficiently as possible, leading to higher returns on equity and higher dividends.

Of course, as we are seeing, there are advantages to playing it safe. Only five institutions on the list have nonperforming assets exceeding 1% of total assets, and all five have plenty of excess capital to easily withstand losses from those assets.

Two banks were upgraded to A-plus ratings this quarter: First National Bank of Winnsboro, Texas, and National Exchange Bank & Trust of Fond Du Lac, Wis.

TheStreet.com Ratings issues independent and very conservative financial-strength ratings on the nation's 8,300 banks and savings and loans. These are available at no charge on the Bank & Thrift Ratings Screener. In addition, the financial-strength ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.

TheStreet.com Ratings also provides award-winning stock ratings, which are available on the Stock Ratings Screener.

TheStreet.com Ratings was recently ranked the No. 1 independent stock selector during the market meltdown by BNY ConvergEx Group's BNY Jaywalk.

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.

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