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If you're wondering whether your bank has enough capital, keep reading.

Capital adequacy is the most important topic for bankers as the real estate credit crisis continues. So far this year there have been three bank failures, the most recent being ANB Financial, which was considered "critically undercapitalized" by regulators, and was

closed down on May 9

. Several other institutions with capital adequacy concerns have been acquired recently, or are making merger deals as we speak.

While most depositors are protected by FDIC insurance, chances are you know someone affiliated with a business or municipality (such as a school district) with large deposits in a local bank. Since most of these deposits are uninsured, it's important to monitor bank ratings using's

Ratings Screener


In better times than these, banks and S&Ls walk a fine line. If they hold too little capital, their solvency could be at risk. If they hold too much capital, their return on equity suffers, which irritates investors.

Threats to capital levels include rapid expansion and credit quality problems. When banks feel they are holding too much capital, they increase their dividends and/or stock buybacks. As we have seen during the unfolding crisis, some banks, such as

National City

( NCC) and


( CORS) suffered from bad timing, with significant stock buybacks and generous dividends just before the real estate crisis hit them hard.

While it will be at least another week until we have finalized March 31 data for all of the nation's banks and S&Ls, Ratings has identified 113 institutions that were considered below well-capitalized per regulatory guidelines as of quarter-end. That's up from 90 last quarter, and 71 in March 2007.

An institution generally needs to maintain a leverage ratio of 5% and a risk-based capital ratio of 10% to be considered well-capitalized. These ratios need to be 4% and 8% to be considered adequately capitalized.

Leverage Ratio

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This is also known as the "tier 1 leverage ratio." Tier 1 capital (or core capital) is the institution's total equity capital, less unrealized gains on securities held-for-sale, some preferred stock and goodwill. The leverage ratio is calculated by dividing tier 1 capital by an institution's average total assets.

Risk-based Capital Ratio

This is also known as the "total risk-based capital ratio." Risk-based capital includes tier 1 capital, along with tier 2 (essentially the institution's loan loss reserves) along with tier 3, which is capital set aside for market risk and is only required for some banks. To calculate the ratio, risk-based capital is divided by risk-weighted assets. Banks and thrifts come up with this figure by assigning risk-weightings to all of their assets.

To provide a few examples, cash has a zero-weighting. Certain mortgage-backed securities have a 20% risk weighting. Performing mortgages have a 50% risk-weighting. Nonperforming mortgages have a 100% risk-weighting.

The full calculation of risk-weighted assets is much more detailed, but the idea is that the figure represents the risk of an institution's asset portfolio and reflects its loan quality. This is why the risk-based capital ratio is the one most likely to slip below the well-capitalized threshold.

Weakest Capital Positions

First, let's take a look at the largest 10 institutions that were below well-capitalized with risk-based capital ratios below 10%, as of March 31:

Three institutions on the list were considered undercapitalized per regulatory guidelines as of March 31.

Even before the real estate bubble burst, First National Bank of Arizona's risk-based capital ratio hovered pretty close to the 10% threshold. Over the past three quarters, the institution's portfolio of single family construction loans and mortgages in south-west Arizona, New Mexico and Southern California has soured. Large provisions for loan loss reserves have caused losses over the past four quarters, with a whopping net loss of $131 million for the first quarter of 2008.

Chief Administrative Officer Joel Gottesman said the privately-held institution is working hard to line up investors and raise additional capital. He was unable to project when a capital injection might take place, pointing out that the process can take longer for a privately held bank.

Mr. Gottesman also stated that First National had shut down both its wholesale and retail mortgage-origination operations.

BLC Bank was formerly held by Sterling Financial, of Lancaster, Pa., which was acquired by


(PNC) - Get PNC Financial Services Group, Inc. Report

on April 4. PNC plans to convert the institution's branches to PNC Bank branches in the third quarter of 2008.

Fremont Investment and Loan is held by


( FMT), which has been trading on the Pink Sheets since April 17. Fremont was at the forefront of the subprime saga that sparked the real estate crisis. The holding company missed a $6.6 million interest payment on its senior notes on March 17 and is in the midst of liquidating its banking unit.

Fremont General has agreed to sell Fremont Investment and Loan to CapitalSource TRS Inc., a unit of



, and is selling the banking unit's remaining mortgage servicing rights to Litton Loan Servicing, a unit of

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report


Fremont General also stated on May 9 that it expected to file for bankruptcy.

While the Fremont story has been widely covered in the business press over the past year, as of March 31, Fremont Investment and Loan had close to $2 billion in time deposits with balances of $100,000 or more. While we can't tell how much of these deposit balances were above FDIC insurance limits, it's pretty surprising that any uninsured deposits were still there.

Smaller Banks and S&Ls

Here are the institutions with most the dire capital positions, as of March 31, leaving out those listed in the first table:

One institution that would have appeared on the above list was Peachtree Bank, of Duluth, Ga. Peachtree was formerly held by Alabama National Bancorp, which was acquired by RBC Centura (a subsidiary of

Royal Bank of Canada

(RY) - Get Royal Bank of Canada Report

) on Feb. 28. Peachtree was merged into RBC Centura on April 11.

First Integrity Bank had negative capital ratios as of March 31. While the institution had $332,000 in total equity capital, or 0.63% of its total assets, deferred tax assets of $456,000 were disallowed from the tier 1 capital figure, which pushed the ratios into the negative. The $53 million institution suffered an increasing tide of nonperforming commercial construction loans over the past year. Its charge-offs during 2007 wiped out the bank's loan loss reserves. A call to the bank's CEO seeking comment was not returned.

Colorado FSB was also considered critically undercapitalized as of March 31. Patrick Fogherty, the institution's CFO, told us that a deal is in place to sell the institution.

Imperial S&LA was considered significantly undercapitalized as of March 31, with a leverage ratio of 2.16% and a risk-based capital ratio of 4.76%. While the institution was established in 1973, it is tiny, with total assets of just $9 million. Its loan portfolio is mixed, with residential mortgages, auto loans and some commercial real estate and leasing. Nonperforming assets comprised 2.74% of total assets as of March 31, which is not a terrible level in the current environment.

However, the institution has been posting losses for the past several quarters, which eat into its capital. It just can't generate enough interest income to cover its personnel and office expenses, and its fee income is negligible. In this market, interest rates spreads remain quite narrow, since there is so much competition for deposits. A call to the thrift seeking comment was not returned.

Mesilla Valley Bank of Las Cruces, N.M., had the worst loan quality on the list, with nonperforming assets comprising 26.61% of total assets as of March 31. It was also considered significantly undercapitalized at March 31, as its leverage ratio was 3.33% and the risk-based capital ratio was 5.73%.

After charging off a good portion of its loan portfolio in the early 2007, the institution was undercapitalized for two quarters, after which a drastic reduction in the size of its balance sheet brought it back to well capitalized for the third and fourth quarters of 2007. In the first quarter of 2008, the institution reported a loss of $63,000, and with loan quality continuing to worsen it was back to undercapitalized. Mesilla Valley Bank didn't return a call seeking comment.

Please see

Florida's Most Troubled Banks and Thrifts

for recent discussions on First Priority Bank and Bank of Bonifay.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, 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.