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Santa Cruz County Bank was awarded the "Superior" 5 star rating from Bauer Financial

March 20, 2008

Santa Cruz Sentinel

Stresses from the mortgage crisis are beginning to show in bank operations.

Some 166 banks -- about 2 percent of the 8,525 reviewed -- ended up on the "problem list" of Bauer Financial in the fourth quarter of 2007.

That compares to 108 on Bauer's problem list in the third quarter.

The number of banks rated "middle of the road," earning three or three and a half stars from Bauer, grew from 1,739 to 1,964, increasing from 20 percent to 23 percent. However, 71 percent of the banks rated remain on Bauer's recommended list.

Those banks have a rating of four or five stars.

"That gives consumers over 6,000 recommended banks to choose from," said Karen Dorway, president of Bauer Financial, which has been rating banks and credit unions since 1983.

She said the primary factors in the rating are capital, asset quality, profitability, liquidity and historical data. The Federal Deposit Insurance Corporation, which protects bank deposits up to $100,000, reported 77 banks on its "problem list" in 2007, up from 26 in 2006.

During the fourth quarter, the FDIC increased the funds set aside for anticipated bank failures from $54 million to $124 million due to "deterioration in banking industry financial conditions," according to chief financial officer Steven App. "Current market volatility may continue to hurt the performance of institutions with significant exposure to the resident mortgage market -- especially those mortgage lenders that relied heavily on the 'originate and sell' business model," he told the FDIC board last month.

Credit unions are not suffering as much from mortgage problems, according to Bauer Financial.

More than 6,000 credit unions are recommended by Bauer, representing 86 percent of the 7,022 institutions reviewed.

In the third quarter, 87 percent were recommended. About 12 percent of the credit unions are rated middle of the road and 2 percent are on the problem list.

Bay Federal Credit Union will report financials to members at its annual meeting Tuesday. Spokeswoman Tonee Picard said assets grew 13 percent and the mortgage loan portfolio grew by 41 percent in 2007, with one foreclosure in 2007 and none so far in 2008.

"Bay Federal did not make risky subprime loans in past years," Picard said. "Our portfolio is not filled with the high risk loans you read about from many financial institutions." Of the banks and credit unions with local offices: Bank of America slipped from four stars to three and a half stars. Citibank slipped from three and a half stars to three stars. Liberty Bank, which has offices in San Lorenzo Valley, dropped from five stars to three stars. Watsonville Hospital Employees Credit Union slipped from five stars to four stars.

Santa Cruz County Bank improved from four to five stars. Start-ups like Lighthouse Bank aren't rated until there are two years of financial data to analyze.

Dorway said Bauer does not rate credit unions that do not have federal deposit insurance.

Monterey Credit Union is in that category, with assets up to $500,000 insured by American Share Insurance rather than being federally insured.

A spokesman at Citibank referred questions about the rating to Bauer, saying the service is independent and uses its own criteria.

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