Undercapitalized U.S. Banks Have Almost Disappeared, Bank Failures at Cycle Low

SNL Financial has released a report showing that the actual number of undercapitalized banks fell to the lowest level in 17 quarters at the end of the first quarter of 2013. The number of undercapitalized banks and thrifts now has dropped to the lowest level since the fourth quarter of 2008, back when only 30 banks were considered to be undercapitalized. It also shows that more banks are escaping undercapitalized territory through positive means.

The FDIC defines undercapitalized banks as those having the following criteria:

• Total risk-based capital ratio below 8.0%
• Tier 1 risk-based capital ratio below 4.0%
• A Tier 1 leverage capital ratio below 4.0%
• If the bank is considered to be a CAMELS one-rated institution, a bank would be undercapitalized if its leverage ratio is less than 3.0%.

According to SNL, only 38 banks and thrifts were undercapitalized as of March 31, versus 42 at the end of the fourth quarter. This is down from 61 undercapitalized institutions a year ago. The bad news is that, until recently, the number of undercapitalized banks has shrunk because of failure.

In 2012, some 51 banks failed and only 15 banks found their way out of trouble through recapitalizations, mergers, balance sheet reductions or other efforts. What is interesting is that eight banks actually worked their way out of being undercapitalized in the first quarter of this year.

The rate of failure is dropping precipitously, and we expect the bank failures to hit yet another cycle low in 2013, if there are only 38 undercapitalized banks.The 51 bank failures in 2012 compared to 92 failures in 2011 and 157 failures in 2010.

Read also: The Safest Banks in America for 2013

Edinburg, Texas-based First National Bank joined the list of undercapitalized banks and is the largest with $3.19 billion in assets. First Security Group unit FSGBank NA also was deemed undercapitalized at the end of the first quarter, and it has $1.04 billion in assets. Yet the bank recently recapitalized and downstreamed $65 million in capital to boost the capital ratios of the bank significantly. Below is the full list of undercapitalized banks provided by SNL Financial.