NEW YORK ( TheStreet) -- A stock-market rally, government bailout and rising profits have lifted banks out of the doldrums.

Still, the number of undercapitalized U.S. banks increased to 146 as of Dec. 31, up from 116 in the previous quarter. Sixty-three banks failed in the fourth quarter.

Bank failures are continuing at a brisk pace. The Federal Deposit Insurance Corp. has been offering generous loss-sharing agreements that make acquisitions of failed banks attractive to holding companies and private-equity investors. An example is New York Community Bancorp ( NYB), which booked an after-tax gain of $84 million on its December acquisition of the failed Amtrust Bank. With such sweet deals available for failed banks, it's difficult for smaller banks still operating to be merged into stronger institutions or attract investment capital.

Nearly half of the undercapitalized banks are in the four states with the highest number of bank failures since the beginning of 2008: Georgia, Florida, Illinois and California.

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 . 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.

The largest undercapitalized bank with $10.3 billion in total assets as of Dec. 31 was Sterling Savings Bank of Spokane, Wash., the main subsidiary of Sterling Financial ( STSA). Mounting commercial-loan charge-offs in the second half led to a 2009 net loss of $830 million, and the bank slipped to undercapitalized with a total risk-based capital ratio of 7.25% as of Dec. 31. Nonperforming assets, including loans past due 90 days or in nonaccrual status, along with repossessed real estate comprised 11.38% of total assets as of Dec. 31.

Sterling Savings entered into a cease-and-desist order with state regulators and the FDIC on Oct. 9, requiring the bank to raise at least $300 million in tier 1 capital by Dec. 15. In the company's fourth-quarter earnings conference call, executives said the capital increase was forthcoming, and Chief Financial Officer Dan Byrne said the company had the capacity "to go up to about $600 million," according to a transcript provided by SeekingAlpha.

Another large undercapitalized Washington bank was Frontier Bank of Everett, held by Frontier Financial ( FTBK), which had $3.6 billion in total assets as of Dec. 31. Frontier was in a dire state, with a nonperforming-assets ratio of 24.2% even after charging-off close to 10% of its loan portfolio during 2009. During the company's earnings conference call, Chief Executive Officer Pat Fahey said Frontier was continuing "aggressive efforts in our quest for capital."

The following are undercapitalized banks in the four states with the highest number of troubled institutions. Information is based on preliminary data for 99% of U.S. banks provided by SNL Financial on Feb. 8. Thrifts aren't included. Excluded are companies that meet the ordinary capital requirements but are now saddled with specific requirements by regulators. Note that some companies may have conducted capital increases since the end of 2009.

Undercapitalized Georgia Banks

The largest undercapitalized Georgia bank as of Dec. 31 was Appalachian Community Bank of Ellijay, the main subsidiary of Appalachian Bancshares ( APAB), which had $1 billion in total assets as of Dec. 31.

Net losses of $59 million during 2009 left the institution critically undercapitalized, with a tier 1 leverage ratio of 1.73%. The nonperforming-assets ratio was 23.19%.

Undercapitalized Florida Banks

The biggest undercapitalized bank in the state is the privately held Riverside National Bank of Florida. After several quarters of large losses, Riverside earned $3.4 million in the fourth quarter, which, combined with a decline in total assets, pushed its capital ratios up a bit. The bank entered into a consent order with the Office of the Comptroller of the Currency on Nov. 10, requiring it to achieve a tier 1 leverage ratio of 8% within 60 days.

Bank of Florida - Southwest, Bank of Florida - Southeast and Bank of Florida - Tampa Bay are subsidiaries of Bank of Florida Corp. ( BOFL) of Naples. An effort in November by the holding company to raise up to $135 million in new capital through a secondary offering of common shares was canceled.

Undercapitalized Illinois Banks

The largest undercapitalized Illinois bank was AMCORE Bank NA of Rockford, the main subsidiary of AMCORE Financial ( AMFI), with $3.8 billion in total assets. The holding company last week said it had violated a credit agreement with JPMorgan Chase ( JPM), though it was current on its loan payments. The holding company also expressed doubt about its ability to continue operating if it can't raise capital this year.

Midwest Bank and Trust of Elmwood Park is a subsidiary of Midwest Banc Holdings ( MBHI), announced on Jan. 22 a successful exchange of common shares for convertible preferred shares, raising about $35 million in common equity.

While that's a positive step, it's a relatively small amount of new capital for a bank with $3.4 billion in total assets. A Dec. 30 Federal Reserve order required the bank and the holding company to submit acceptable capital plans within 60 days.

Undercapitalized California Banks

The biggest undercapitalized bank in California was Saehan Bank of Los Angeles, a subsidiary of Saehan Bancorp ( SAEB).

California regulators and the FDIC had ordered the bank to increase its tier 1 leverage ratio to 8% by Feb. 5 and 10% by March 8. On Friday, the holding company announced that the Feb. 5 due date had been extended to March 8, although Saehan Bank would have to have a leverage ratio of 10% by that date.

-- Reported by Philip van Doorn in Jupiter, Fla.

( At the time of publication, the writer held shares of Riverside Banking Co., the privately held holding company for Riverside National Bank of Florida, where he was previously employed.)
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.

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