The number of undercapitalized banks fell to the lowest level in 17 quarters at the end of the first quarter, with more banks escaping undercapitalized territory through positive means, according to an SNL report released on Tuesday.

Thirty-eight banks and thrifts were undercapitalized, based on the criteria of having Tier 1 ratios below 4 percent, at March 31, compared to 42 institutions at the end of the fourth quarter and 61 institutions a year ago, according to SNL data, representing linked-quarter and year-over-year decreases of 9.5 percent and 37.7 percent, respectively.

The number of undercapitalized institutions has fallen to the lowest level since the fourth quarter of 2008, when 30 banks were considered undercapitalized.

The number of undercapitalized banks in the industry has steadily declined for the last 10 quarters, with failures – rather than banks finding their way out of trouble through other means – accounting for the bulk of the decline.

In 2012, the number of undercapitalized banks decreased by 26 to 44 institutions. During that period, a number of banks joined the ranks of the undercapitalized and 51 banks failed, while just 15 banks found their way out of trouble through recapitalizations, mergers or balance sheet shrinkage and de-risking, coupled with modest earnings in some cases.

The trend was more positive in the first quarter of 2013, though, with eight banks finding their way out of undercapitalized territory without failing.