A total of 17 banks reported being undercapitalized as of June 30, based on preliminary FDIC data.

This excludes First Priority Bank of Bradenton, Fla., and First National Bank of Nevada, both of which were recently shut down by regulators.

Before presenting the list of undercapitalized banks, it is important to point out a few things.

The list is based on preliminary data. Most banks have filed their call reports, which our data provider, Highline Financial, Inc., obtains from the FDIC. The set of data was not yet finalized when we downloaded it on Aug. 11, and there were at least 100 banks that had not filed yet. This data is often updated by banks before it is finalized.

The list includes only banks. The Office of Thrift Supervision does not make preliminary data available for the over 800 S&Ls supervised by the agency.

The data are for the banks themselves, not holding companies. This is particularly important, as we saw when BankAtlanic Bancorp ( BBX) sued analyst Richard Bove and his employer, Ladenburg Thalmann ( LTS). The holding company accused Bove of mixing holding company data with thrift data in his "Who is Next?" report.

To be considered well-capitalized under regulatory guidelines, a bank needs to maintain a leverage ratio of at least 5% and a risk-based capital ratio of at least 10%. These ratios need to be at least 4% and 8% for a bank to be considered adequately capitalized. Looking again at the two failed banks mentioned above, the capital ratios were 0.70% and 1.72% for First Priority Bank and 5.07% and 6.78% for First National Bank of Nevada.

All of the banks on this list failed to meet one of the thresholds for an adequately capitalized institution.

Click here for larger image.

Main Street Bankof Northville, Mich., had the lowest leverage ratio on the list, at 2.28%, and a risk-based capital ratio of just 4.20%. The $112 million institution was organized in 2004, and achieved profitability in 2006. However, loan quality declined sharply through 2007, as nonaccrual mortgages and construction loans mounted.

On an annualized basis, Main Street Bank's net charge-offs were 10.48% of average loans during the first half of 2008. With loan loss reserves covering just 2.10% of total loans as of June 30, it's clear the bank can't survive continued charge-offs at this level. With nonperforming assets comprising 9.49% of total assets as of June 30, raising capital is critical.

The president of the bank, Audrey Mistor, said Main Street Bank was working hard to raise additional capital and was having substantive discussions with several investors. She also pointed out that the vast majority of the institution's deposits were insured by the Federal Deposit Insurance Corporation.

Michael Kus, spokesman for the Michigan Association of Community Bankers, said: "Considering what the state has been going through economically, the region is holding up reasonably well. Michigan banks have historically been conservative because of the state's economic ups and downs."

Next on the list was Freedom Bank of Bradenton, which was considered significantly undercapitalized, with a leverage ratio of 3.00% and a risk-based capital ratio of 4.97%, as of June 30.

Freedom Bank recently announced an agreement with Community Bank Investors of America, LP, for $5 million in new capital, contingent upon Freedom raising an additional $15 million from other investors. Please see our recent update on troubled Florida banks for a more detailed look at Freedom Bank.

We discussed Integrity Bank of Alpharetta in detail when we looked at troubled Georgia banks back in June.

While Integrity's $8.6 million second quarter net loss was a slight improvement over the first quarter, loan quality continued to slide, and nonperforming assets comprised 32.64% of total assets as of June 30 -- the highest nonperforming assets ratio on the list. All things considered, loan charge-offs during the first half of 2008 were minimal. But with $333.7 million in nonaccrual construction loans, charge-offs can be expected to mount over the next two quarters.

As was the case when we previously discussed the institution, a call to First Integrity requesting comment was not returned.

Rivergreen Bank of Kennebunk, Maine, was established in March 2003. The institution has been below well-capitalized since the first quarter of 2006, when rapid expansion caused it to slip to adequately capitalized. This didn't represent a serious problem until the first quarter of 2008, when the bank experienced a spike in delinquencies, mainly in residential mortgages and construction loans.

The $98 million bank's nonperforming assets ratio was 1.44% as of June 30, which is not a terrible figure in this environment. Loan loss reserves covered 1.60% of total loans, keeping ahead of the annualized net charge-off ratio, which was 1.18% of average loans for the first half of the year. Reserves covered 104.50% of nonperforming loans as of June 30.

Rivergreen was undercapitalized as of June 30, with a leverage ratio of 3.67% and a risk-based capital ratio of 6.11%. There was some comfort, since loan loss reserves were more than sufficient to cover possible losses from nonperforming loans, however, this institution needs to take steps to improve earnings and build a capital base.

A call to Rivergreen Bank requesting comment was not returned.

The largest institution on the list of undercapitalized banks is Fremont Investment & Loan. Its bankrupt holding company, Fremont General Corp is now trading on the pink sheets, and while investors have been nearly wiped-out, there was a happy ending for depositors.

All of Fremont Investment & Loan's deposits and most of its assets were purchased by the newly formed CapitalSource Bank (held by CapitalSource, Inc. ( CSE)) as part of Fremont General's bankruptcy settlement.

The appearance of Thayer County Bank on bottom of the list is rather surprising, considering it was well capitalized last quarter and has excellent loan quality. Looking at the institution's preliminary call report for the second quarter, Thayer County Bank had a strong leverage ratio of 8.17%, however, its risk-based capital ratio was only 4.20%.

On the call report, the calculation of risk-weighted assets includes an item called Recourse and direct credit substitutes (other than financial standby letters of credit) subject to the low-level exposure rule and residual interests subject to a dollar-for-dollar capital requirement, which totals $80.1 million. That exceeds the institution's $64 million in total assets and pushes down the risk-based capital ratio calculation.

A call to Thayer County Bank requesting comment on the preliminary call report was not returned.

What if my bank is on the list?

It's a good idea to discuss the situation with your bank. Remember, this list is based on preliminary financial reports for the second quarter, which may have changed or been corrected since the data was pulled.

You should also consider the FDIC insurance on your deposits. Yes, the basic deposit insurance limit for an individual account is $100,000, but things get more complicated with IRAs and with joint accounts. Click here for a brief discussion on FDIC insurance limits. You can also find information on this topic at the FDIC's Web site. Discuss the insurance coverage with your bank if you have further questions.

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Philip W. van Doorn joined TheStreet.com 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.

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