NEW YORK ( TheStreet) -- The "Land of Lincoln" has more banks than any other state, except for Texas, and TheStreet's analysis of fourth quarter data highlights a large group of smaller institutions that are in excellent shape. However, most of the largest banks in the state still haven't returned to solid profitability.

Illinois has had two bank failures so far this year, including Valley Community Bank of St. Charles last Friday and Community First Bank-Chicago , which was shuttered by state regulators in February and sold by the Federal Deposit Insurance Corp. to Northbrook Bank & Trust Co., which is a subsidiary of Wintrust Financial ( WTFC).

Illinois had 16 bank failures during 2010, only exceeded by Florida, which had 29 and Georgia, which had 21 bank closures. .

According to data provided by SNL Financial, nine of the 605 banks and thrifts headquartered in Illinois - excluding the two that have failed this quarter - were undercapitalized per ordinary regulatory guidelines as of December 31 and were included on TheStreet's fourth-quarter Bank Watch List.

Since the Watch List is based solely on capital ratios, we take a different approach on our quarterly coverage of banks in key states, by looking at overall credit quality to identify troubled institutions.

Illinois Banks with Weakest Asset Quality

The following list includes all banks in the state with nonperforming assets comprising more than 15% of total assets:

Nonperforming assets (NPA) include nonaccrual loans, loans past due 90 days or more and repossessed assets. Government-guaranteed loan balances are excluded

The list also includes financial strength ratings provided by Weiss Ratings. Weiss Ratings uses a very conservative ratings model, placing the greatest weight on capital strength, credit quality and earnings stability to assign ratings ranging from A-plus (Excellent) to E-minus (Very Weak).

The Illinois bank with the highest level of nonperforming assets as of December 31 was Builders Bank of Chicago, which had an NPA ratio of 39.27%. The institution's holding company Builders Financial filed for chapter 11 bankruptcy protection in November.

Largest Illinois Banks

Here are the 10 largest Illinois banks, along with key metrics as of December 31:

The largest bank chartered in Illinois is Northern Trust Company, the main subsidiary of Northern Trust Corp. ( NTRS). The bank subsidiary earned $131.8 million during the fourth quarter, for a return on average assets (ROA) of 0.79%. With credit costs declining, the bank's earnings were boosted as it transferred $4.8 million out of loan loss reserves during the fourth-quarter. Net charge-offs - loan losses less recoveries - totaled $8.7 million, making a total reserve release of $13.5 million. Based on third-quarter financial reports, Weiss assigned a B rating to Northern Trust, which was the highest among the 19 largest Illinois banks.

The second-largest Illinois bank is Harris NA, which is a subsidiary of Bank of Montreal ( BMO). BMO agreed in December to acquire Marshall & Ilsley ( MI) of Milwaukee for $5.8 billion in stock, which SNL Financial said was 98% of M&I's tangible book value. The deal is expected to be completed in July. Harris NA posted a net loss of $20.5 million during the fourth quarter, as its provision for loan losses increased to $93.2 million from $35.8 million in the third quarter, although it was down from $122.5 million in the fourth quarter of 2009.

The bank's earnings were also hurt as its net interest margin - essentially the difference between the average yield on loans and securities investments and the average cost of deposits and borrowings - narrowed to 2.04%, from 2.20% the previous quarter and 2.47% a year earlier. In comparison, the aggregate net interest margin for all U.S. banks and thrifts during the fourth quarter was 3.71%, according to the FDIC.

The next largest institution in the state held by a publicly traded bank holding company is PrivateBank & Trust of Chicago, which is the main subsidiary of PrivateBancorp ( PVTB). The bank earned $18.9 million during the fourth quarter, for an ROA of 0.61%. This was PrivateBank & Trust's best earnings performance since the third quarter of 2009, when the ROA was 0.74%. With a focus on commercial mortgage and non-mortgage lending, problem loans have been a drag to earnings.

Nonperforming assets made up 3.94% of total assets as of December 31, compared to 3.79% a year earlier. The fourth-quarter provision for loan losses was $36.9 million, declining from $40.8 million the previous quarter and $70 million a year earlier. The annualized ratio of net charge-offs to average loans for the fourth quarter was 1.51%, and reserves covered 2.52% of total loans as of December 31.

MB Financial Bank, NA is held by MB Financial ( MBFI). The bank has made six acquisitions of failed institutions since the current credit cycle began in 2008, growing its balance sheet 31% since the end of 2007. The holding company's stock closed at $20.57 Monday, returning 19% year-to-date.

Two analysts on January 31 upgraded their ratings for the holding company's stock to the equivalent of a buy. Brian Martin of Fig Partners increased his rating for MB Financial to "outperform" from "market perform" with a target price of $23.60, saying the company's credit performance appeared "to be turning a corner," as inflows of problem loans had slowed and resolutions of nonperforming loans were increasing.

Bryce Rowe of Robert W. Baird & Co. upgraded his rating for MBFI to "outperform," saying his $26 target price was "supported by projected earning power of $2.33/share and return on assets of 1.3%." Rowe added that a patient approach in repaying the government $196 million in bailout funds received through the Troubled Assets Relief Program, or TARP, in December 2008, could "could allow MBFI to avoid having to raise common equity to facilitate TARP repayment."

Out of the 10 largest Illinois banks, the only other one to be rated above C-plus by Weiss was Morton Community Bank, which was assigned a B-minus rating based on third-quarter data. For the fourth quarter, Morton Community earned $10.5 million, for an ROA of 1.52%, which was the best among the group. The bank has performed well through the credit crisis, maintaining good asset quality and ROA of 1.21% for 2008, 1.72% for 2009 and 1.46% in 2010.

Strongest Illinois Banks and Thrifts

Based on third-quarter financial reports, 58 Illinois institutions were assigned "recommended" ratings of B-plus or above by Weiss Ratings:

All of the Illinois banks and thrifts on Weiss's recommended list were strongly capitalized as of December 31, with total risk-based capital ratios exceeding 13% and 31 had total risk-based capital ratios exceeding 20% or twice the level most institutions need to be considered well-capitalized by regulators. More than half had fourth-quarter returns on average assets exceeding 1% and three quarters of the institutions achieved a fourth-quarter ROA exceeding 0.75%. In comparison, the aggregate fourth-quarter ROA for all U.S. banks and thrifts was 0.65%, according to the FDIC.

Thorough Bank Failure Coverage

There have been 23 bank failures so far during 2011, following 157 during 2010.

All bank and thrift failures since the beginning of 2008 are detailed in TheStreet's interactive bank failure map:

The bank failure map is color-coded, with the states having the greatest number of failures highlighted in dark gray, and states with no failures in light green. By moving your mouse over a state you can see its combined 2008-2010 totals. Then click the state to open a detailed map pinpointing the locations and providing additional information for each bank failure.

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--Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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.