NEW YORK ( TheStreet) -- There are hundreds of small banks scattered across America that are buckling under the burden of rising loan defaults and investment losses. As a result, bank failures will accelerate into next year.

The number of undercapitalized banks has increased to 126 from 116 in the second quarter, based on preliminary third-quarter financial results for most U.S. banks and thrifts provided by SNL Financial.

At the same time, it's clear that the country's largest banks, including three that haven't begun to repay government money received the Troubled Asset Relief Program, namely Bank of America ( BAC), Citigroup ( C) and Wells Fargo ( WFC), are going to safely navigate the credit crisis.

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The ranks of undercapitalized banks swelled last quarter even though 30 banks and thrifts on the previous list had failed, including five last Friday.

Most banks and savings and loans need to maintain tier 1 leverage, tier 1 risk-based and total risk-based capital ratios of at least 5%, 6% and 10% to be considered well-capitalized under regulatory guidelines, although some trust banks have much lower capital requirements. The ratios need to be at least 4%, 4% and 8% for most to be considered adequately capitalized.

Most undercapitalized banks have taken radical steps to preserve capital, including cutting expenses, laying off workers and suspending dividends. Most are trying to raise capital from outside investors, and many are merging with other institutions. However, with the Federal Deposit Insurance Corp. providing generous loss-sharing guarantees for acquirers of failed institutions, it's hard for smaller banks and thrifts to raise money.

Undercapitalized banks and thrifts

The underlying regulatory data for the list of undercapitalized banks is subject to revision, as banks and thrifts have up to three months to restate financial information. The list also doesn't include the roughly 400 institutions that haven't yet failed their third-quarter bank-call reports or thrift financial reports. Another thing to consider is that a bank or S&L on the list may have raised capital since June.

The list is sorted by state in ascending order by total risk-based capital ratio.

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Source: SNL Financial

Most of the institutions have very weak asset quality, although some slipped to undercapitalized status because of losses on securities investments. The nonperforming-assets ratio includes nonaccrual loans and securities, accruing loans past due 90 days or more, and repossessed real estate.

Three of the listed institutions reported negative tier 1 capital as of Sept. 30. All three were relatively small banks with less than $200 million in total assets.

The largest institution on the list is AnchorBank FSB of Madison, Wis., which had $4.6 billion in total assets and is the main subsidiary of Anchor Bancorp Wisconsin ( ABCW). The holding company announced in late October that it had revised first-quarter results to reflect an additional $51 million in loan losses. AnchorBank FSB has been operating under an Office of Thrift Supervision cease-and-desist order since June. The thrift didn't succeed in meeting one of the many requirements of the regulatory order, which was to raise sufficient capital to achieve a total risk-based capital ratio of 11% by Sept. 30.

The next largest institution on the undercapitalized list is AMCORE Bank NA of Rockford, Ill., which is held by AMCORE Financial ( AMFI). Under agreements with the Federal Reserve and the Office of the Comptroller of the Currency, the holding company agreed to raise sufficient capital to achieve a 12% total risk-based capital ratio by Sept. 30. According to Securities and Exchange Commission filings made Monday, the OCC has advised the company that AMCORE Bank is now considered "significantly undercapitalized," and is required to submit by Dec. 4 a revised capital plan and "a plan for the sale or merger of the bank."

The next-biggest bank on the list held by a publicly traded holding company is Frontier Bank of Everett, Wash., the main subsidiary of Frontier Financial ( FTBK). Frontier Financial entered into a cease-and-desist order with state regulators and the FDIC in March that cited "unsafe and unsound" banking practices and ordered the institution to review the qualifications of its senior management, improve board of directors supervision and increase its tier 1 capital to 10% of total assets by July 29.

Frontier Financial said in an SEC filing last week that it met all the requirements of several regulatory orders, except for the capital requirement. The company said it had been trying to raise additional capital for over a year.

The states that have had the most bank failures this year and last continue to dominate the undercapitalized list. Georgia has 21 undercapitalized banks or thrifts on the list, followed by Florida with 18 and Illinois with 11. P/>

Bank-failure coverage

All previous bank and thrift failures for this year and last are detailed in TheStreet.com's interactive bank failure map.

Large holding companies that have acquired failed institutions during 2008 and 2009 have included JPMorgan Chase ( JPM), which bought Washington Mutual, the largest bank or thrift to fail in the U.S.; U.S. Bancorp ( USB); SunTrust Banks ( STI); Regions Financial ( RF); Fifth Third Bancorp ( FITB); Zions Bancorp ( ZION); PNC Financial ( PNC); and BB&T ( BBT).

Free financial-strength ratings

One of the most important steps the FDIC has taken to curtail the likelihood of bank failures is the temporary increase of the agency's basic limit on individual deposit insurance coverage to $250,000 from $100,000. This increase has been extended through 2013.

The FDIC has also temporarily waived all deposit insurance limits for business transaction accounts (checking accounts). This waiver is set to expire on June 30, 2010, after which business checking accounts will revert to the $100,000 deposit insurance limit.

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.

-- Written by Philip van Doorn in Jupiter Fla.

The writer owns shares in Riverside Banking Co., the holding company for Riverside National Bank of Florida, of Fort Pierce, a former employer.

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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