Now more than ever, it's a good idea to find out if your bank or savings and loan association is in good shape.
Each quarter, TheStreet.com Ratings publishes financial-strength ratings for the nation's approximately 8,500 banks and thrifts. As one might expect, the ratings for many institutions have drifted downward over the past year. You can look up your institution's rating, free of charge, using the Banks and Thrifts Screener.
TheStreet.com's 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:
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|Source: Regulatory filings, provided by Highline Financial, Inc.|
The year-over-year comparison is useful because it matches up the industry's distressed state to a reasonably normal "pre-crisis" quarter a year ago.
Industry net income for the second quarter of 2008 was $5.1 billion, down from $36.8 billion a year earlier. Earnings performance moved in line with efforts of banks and S&Ls to boost loan loss reserves. The aggregate quarterly provision for reserves (which directly affects earnings) was $50.3 billion in the second quarter, way up from $11.4 billion in the second quarter of 2007.
While preliminary numbers for most banks and thrifts for the third quarter will not be available for several weeks, TheStreet.com Ratings expects many institutions to come under significant further earnings pressure following losses on investments in preferred stock in Fannie Mae (FNM) and Freddie Mac (FRE) , which were pretty much wiped out when the Treasury Department took over the mortgage giants.
Looking at industry loan quality, the nonperforming assets ratio was 1.25% as of June 30, rising steadily from 0.52% a year earlier. Net charge-offs (actual loan losses) totaled $26.4 billion in the second quarter, up from just $8.9 billion in the second quarter of 2007. In its Quarterly Banking Profile, the Federal Deposit Insurance Corp. said the annualized ratio of net charge-offs to average loans of 1.32% for the second quarter was the highest since the fourth quarter of 1991.
The industry's ratio of loan loss reserves to total loans was 1.80% as of June 30, 2008, rising from 1.09% in June 2007. This ratio has continued to stay ahead of the net charge-offs ratio. Looking at total capital ratios for banks and thrifts, the leverage ratio has fallen, but the ratio of capital and reserves to nonperforming loans has actually increased.
Exposure levels may increase considerably in the third quarter, with nonperforming loans continuing to rise and the earnings pressure from investment securities write-downs.
Strongest Banks and Thrifts
Most of the highest-rated banks and thrifts have less than $1 billion in total assets.
Let's begin with a list of larger banks with strong ratings. Out of 187 banks and thrifts reporting at least $5 billion in total assets as of June 31, 13 had financial-strength ratings of B+ or higher.
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|Source: June 30, 2008 regulatory data, via Highline Financial, Inc.|
Most of the institutions on the above list are not national players, although there are some familiar names.
Most have high levels of capital. To be considered well-capitalized under regulatory guidelines, a bank or S&L needs to maintain a leverage ratio of at least 5% and a risk-based capital ratio of at least 10%.
The capital ratios and earnings figures reflect varying business models. For example, GE Capital Financial (a subsidiary of General Electric (GE) ), had the highest capital ratios on the list as of June 30.
GE Capital Financial's balance sheet consists mostly of loans to other institutions, as well as commercial loans. Not surprisingly, asset quality has remained strong. General Electric's credit-card loans are concentrated in another institution, GE Money Bank, which was rated a B- (good financial strength) by TheStreet.com Ratings.
Earnings performance for the first half of 2008 was inflated by an extraordinary gain of $502 million in the first quarter on loan sales.
General Electric's public filings don't break out the strategy or results for these bank and thrift charters, and while the company did respond to a request for comment, it was unable to make a bank officer available for comment for this article.
It may come as a surprise for readers to see on the list Lehman Brothers Commercial Bank (held by Lehman Brothers Holdings, now trading on the Pink Sheets under the symbol LEHMQ). The bank's president, Julie Boyle, said the institution was not included in the Lehman Brothers Holdings bankruptcy. "We're open for business as usual," she said, and offered no further comment.
Moving back to the top of the list, Silicon Valley Bank of Santa Clara, Calif. (held by SVB Financial Group (SVB) ) ranked the highest for large banks, with an A rating, based on June 30 financials. The bulk of the $6.7 billion institution's lending is concentrated in commercial and industrial (C&I) loans. Loans in this category are not secured by real estate. C&I loans typically have relatively short maturities and relatively high adjustable rates.
They can be considered more risky than real estate loans, since collateral typically consists of a company's accounts receivable, as well as other assets, including offices and equipment. But that risk is mitigated by the high rates and typically short maturities.
While Silicon Valley Bank has experienced a moderate decline in earnings over the past year, it has maintained strong earnings over the past five quarters, with annualized returns on assets exceeding 2% and returns on equity exceeding 20%, even while maintaining strong levels of capital.
The concentration in C&I loans is reflected in the net interest spread, which is the difference between the bank's average cost of funds and average rate received from loans and securities investments. The spread was 5.64% during the second quarter, compared with an aggregate spread of 3.31% for all U.S. banks and thrifts.
Silicon Valley Bank focuses on the life sciences, technology, private equity and wine industries, with 27 offices in the U.S. and others in China, the U.K., Israel and India. It also makes loans to private banking clients. The decline in the spread was expected, in light of the Fed's interest rate cuts.
SVB Financial Group CEO Ken Wilcox said Silicon Valley Bank has "avoided real estate lending over the years, because we have seen other banks choke on real estate at various points." He also said he has been focused on C&I lending in Silicon Valley for most of his career, and that most of the experts in that niche are "employed by our bank." Wilcox went on to point out that Silicon Valley businesses have been "relatively unaffected" by business cycles, and that Silicon Valley Bank had relatively low loan losses, even during the 2001 technology sector downturn.
Washington Federal Savings (held by Washington Federal (WFSL) ) is the highest-ranking large S&L on the list, with an A rating. Unlike many large thrifts, Washington Federal has weathered the mortgage storm quite well, maintaining returns on average assets above 1% over the past year, while keeping nonperforming assets below 1%. While loan losses have increased, the institution's ratio of net charge-offs to average loans was quite low, at 0.27% for the first half of 2008.
The following table lists the 20 highest-ranking A+ rated U.S. banks and thrifts:
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|Source: Source: June 30, 2008 regulatory data, via Highline Financial, Inc.|
Calvin B. Taylor Banking of Berlin, Md., ranked highest in TheStreet.com's ratings model, based on second quarter financial performance. The $358 million institution, chartered in 1890, consistently posts very strong earnings, with nearly perfect loan quality and very strong capital levels.
President and CEO Ray Thompson attributed the bank's strong loan quality to "knowing the customer" and "underwriting on the ability to pay, first." He also emphasized the institution's conservative investment policy, which is to mainly buy U.S. Treasury securities and steer clear of riskier paper, such as preferred stock.
In the current environment, even depositors at historically strong banks are worried. Thompson said the institution's management is actively communicating with depositors. "We explain the difference between investment firms and community banks. We also educate them on FDIC insurance."
Thompson said smaller banks were not the cause of the mortgage crisis, and despite all the bad news on large banks, "the community banks are open for business."
New Deposit Insurance Limits
On Oct. 3, the FDIC announced that deposit insurance limits on non-retirement accounts would temporarily increase from $100,000 to $250,000 per depositor through Dec. 31, 2009. For joint accounts, the limit has increased to $250,000 per depositor. The limit for retirement account balances has remained $250,000. These limits are for the total of an account holder's deposits in each bank. Your deposit coverage situation may be more complicated, so it is best to use the FDIC's Insurance Estimator to calculate your insurance limits.