NEW YORK (TheStreet) -- Lehman Brothers and Bear Stearns have disappeared, the U.S. government has gotten into the banking business, Bank of America's (Stock Quote: BAC) Ken Lewis has crumbled under pressure, and global banks still have more than a trillion dollars in toxic assets to write down.

So what else is new?

Well, more than 1,100 U.S. banks and savings-and-loan institutions have been assigned financial-strength ratings of at least B-plus by TheStreet.com Ratings, which equates to "recommended." Yes there are still many strong institutions out there.

Still, 29 of 8,200 banks and thrifts received A-plus financial-strength ratings in the second quarter, down from 32 three months earlier, according to a complete review by TheStreet.com Ratings. A total of 583 institutions got ratings of A-minus (excellent) or better, and 1,100 were awarded B-plus or higher. To be sure, that was a decline from 1,175 in the previous quarter.

The most important factors in determining those ratings are strong capital levels, consistent profitability and good loan quality.

The institutions 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 guidelines.

The A-plus list is dominated by community banks, which need to build close relationships with local business customers to make profitable loans while also attracting low-cost checking deposits. Knowing the customer plays a major role in maintaining credit quality.

Without regulatory reform, the largest banks, including Bank of America, JPMorgan Chase (Stock Quote: JPM), Citigroup (Stock Quote: C) and Wells Fargo (Stock Quote: WFC)  will continue to enjoy the competitive advantage of the "too big to fail" label. After all, the government owns a significant stake in three of the big four.

However, judging from the long-term conservative ratings model used by TheStreet.com Ratings, well-run community banks will still be able to compete.

Another Difficult Quarter for the Industry

There were 24 bank and thrift failures during the second quarter, up from 21 in the first quarter. The Federal Deposit Insurance Corp.'s "Problem List" of troubled institutions rose to 416 from 305 the previous quarter. TheStreet.com Ratings assigned financial-strength ratings of E-plus (very weak) or lower to 396 banks and thrifts, up from 338 the previous quarter.

Industry loan losses typically trail economic cycles, as reflected in the following statistics provided by the FDIC:

The banking industry reported a combined net loss of $3.7 billion in the second quarter. Banks continued to make large provisions for loan-loss reserves to cover charge-offs and expected loan losses. They also took impairment charges on securities investments.

Nonperforming assets continued to increase. Banks and thrifts hoarded capital by cutting or eliminating dividends, raised money in the public markets or from private investors and through the Troubled Asset Relief Program, or TARP.

While banks and thrifts haven't yet filed regulatory financial reports for Sept. 30, there were 50 bank or thrift failures during the third quarter, more than double that of the second quarter and all of 2008.

The FDIC proposed last week that banks and thrifts prepay their deposit insurance assessments for the next three years as deposit insurance funds continue to decline. Three years' prepayments would have a major effect on most institutions.

Free Financial-Strength Ratings

Along with TARP, an important factor in limiting the number of bank failures during the crisis was the temporary increase of the FDIC's basic limit on individual deposit insurance coverage to $250,000 from $100,000. This increase has been extended through 2013.

An even more important step that prevented deposit runs on banks has been the FDIC's temporary waiver of all deposit insurance limits for business-transaction accounts (checking accounts). This waiver is set to expire on June 30, after which business checking accounts will return to a limit of $100,000.

That means it will be more important than ever for business and municipal entities such as school districts to carefully monitor the health of their banks. It's easy to have more than $100,000 of somebody else's money flowing through a business account.

TheStreet.com Ratings issues independent and very conservative financial strength ratings on each of the nation's 8,500 banks and savings and loans. They are available at no charge on the Banks & Thrifts Screener.

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