Bank failures can be messy for depositors. The bank can be closed over several days, a great rate can be lost, and a depositor can wind up at a bank they never selected. Last week we took a look at the safest states to bank according to the Texas ratio, a widely used number that correlates well with bank failures. Now, we’ll look at the ten states with the least safe banks. The idea is not panic anyone. Even the least safe states have strong insitutions that will not fail. And while everyone should know some basic health stats on where the park their money, this is especially true for depistors in states with banks that are stressed.

To determine our list of least safe states, we generated the average Texas ratio for each state. The Texas ratio measures the amount of capital and reserves a bank has to cover loans gone bad. If a bank can't cover its bad loans, then it is insolvent and will eventually be closed.

The ten banks with the highest Texas ratios (the higher the Texas ratio, the greater the change for bank failure) are:

Ten States with the Least Safe Banks

1. Georgia
2. Oklahoma
3. South Carolina
4. North Carolina
5. Florida
6. Maryland
7. Illinois
8. Alabama
9. Arkansas
10. Tennessee

To prevent the mega-banks from distorting the state-by-state numbers the analysis only included banks with assets below $10 billion.

As the data shows, six of the ten states came from the South, where rapid population growth in several states increased speculation and led to a lending boom and bust.

Bank Closings

Now, let's look at how the Texas ratio matches up with some real data. The chart above shows bank closings to-date for 2013. Notice how Georgia, Florida, and Illinois lead the list as predicted by the list. But some of the other states like Oklahoma, Arkansas, and Maryland haven’t seen a single closing so far. The Texas ratio is directional rather than exact and just because a state is on the list, doesn’t mean it will experience drastic bank failures. If you have money deposited in a bank in one of these states, it is especially prudent to check on the health and safety of the institution. Depositors in any state should be on top of the health and safety of where they deposit their money. You can do this on BestCashCow by clicking searching for the bank at the top of the screen and then checking its Financial Details tab (click to view an example for Brookline Bank).

Why does any of this matter with FDIC coverage?

In 2013 alone, thirteen banks have failed through May 14. In the event of a bank failure:

• Not all deposits are covered. According to the FDIC, up to 20% of deposits in U.S. banks are not covered by FDIC insurance because deposits are over the $250,000 limit. In the event of a bank failure depositors can, and have lost money.
• Great rates might not be honored. Banks that fail are often acquired by stronger institutions. But these institutions do not need to honor prior CD rates and other terms from the failed bank.
• It can be inconvenient. While the FDIC generally moves quickly when taking over a failed bank, there can be a several day disruption and lack of access to cash. Depending on the timing this could be a major or minor inconvenience. A depositor of a failed bank may also find themselves a member of another institution that they never chose and prefer not to bank with.

What To Do if Your Bank Has a High Texas Ratio

In general, if you look at a profile on BestCashCow you want your bank’s Texas Ratio to be below 100%. If it’s over 100% then it is an indication that the bank does not have adequate reserves and capital to cover all of its potential losses. A bank’s Texas ratio in excess of 200% is a flashing warning sign. Ideally, your bank would fall somewhere near the national average. If it's below that national average, that's great. You can also look at the Texas ratio trend. Is it going up or down? If up, then your bank maybe accumulating bad loans, not a good sign.

If your bank is above the national average, and especially if its Texas ratio is over 100%, then it would be wise to check that all of your deposits are FDIC insured. Use the FDIC’s deposit insurance tool to make sure you are covered. If you have deposits not insured, move them to another bank so that they are fully insured.

BestCashCow released its list of the Top 10 Safest States to Bank. The list, compiled from FDIC data ranks the ability of banks in each state to absorb delinquent loans using a metric called the Texas Ratio. History has shown that banks with high Texas ratios are more likely to close. The states below have, on average, the banks with the lowest Texas ratios.

The Top 10 Safest States to Bank Are:

1. Alaska
2. Nebraska
3. North Dakota
4. Massachusetts
5. New Hampshire
6. Iowa
7. Rhode Island
8. Vermont
9. Delaware
10. Utah

For the analysis and to remove distortions from mega-banks, only banks with less than $10 billion in assets were considered.

As in previous years, banks from the mid-West and the Northeast dominate the list. Both of these regions avoided the worst of the housing crash. States like North Dakota, Alaska, Iowa, and Nebraska have benefited from surging commodity prices and a resurgent domestic oil market. The Northeast, mindful of the banking crisis in the 1980s, avoided the worst of the mortgage and sub-prime excesses from 2002-2005.

Why Does Bank Safety Matter?

Even with FDIC coverage, it’s important to know the general safety of your bank for several reasons. In 2013 alone, thirteen banks have failed through May 14. In the event of a bank failure:

• Not all deposits are covered. According to the FDIC, up to 20% of deposits in U.S. banks are not covered by FDIC insurance because deposits are over the $250,000 limit. In the event of a bank failure depositors can, and have lost money.
• Great rates might not be honored. Banks that fail are often acquired by stronger institutions. But these institutions do not need to honor prior CD rates and other terms from the failed bank.
• It can be inconvenient. While the FDIC generally moves quickly when taking over a failed bank, there can be a several day disruption and lack of access to cash. Depending on the timing this could be a major or minor inconvenience. A depositor of a failed bank may also find themselves a member of another institution that they never chose and prefer not to bank with.

Then there is the small, yet real specter of a massive financial collapse, like what nearly happened in 2008. If one or two of the too-big-to-fail banks go under, the government may not have the cash to prop up other banks. This is essentially what happened in Cyprus, where massive bank failures bankrupted the government. Despite providing deposit insurance, Cyprus officials considered forcing losses on insured funds before the public outcry forced them to backpeddle. There are over $7 trillion in insured deposits and the government does not have the money to insure even half of it with today’s high public debt.

How to Check the Safety of Your Bank

Even if you live in one of the safest states, it’s wise to check the safety of your bank. There are several ways to do this. Sites like Bauer Financial offer ratings of every FDIC insured bank in the country. BestCashCow provides financial data and guidance on every FDIC insured bank and NCUA insured credit union in the United States.

Beyond checking on the health ratings of your bank or credit union, be sure to stay below FDIC or NCUA insurance levels.

No depositor has ever lost money from funds covered by FDIC or NCUA insurance. But housing values had never dipped on a national basis since the great depression until 2008. It pays to spend a few minutes understanding the financial position of the bank that you trust with your money.

Here is our list of the 10 Least Safe States to Bank.

In this 2012 article, I discussed the Bank Direct American Airlines program which was a one-of-a-kind account that enabled depositors to earn as much as 240,000 American Airlines Airmiles a year on deposit balances of $200,000. Depending on your use of the miles, many depositors had found that this compares favorably with the returns on online and branch savings accounts. Even after the implementation of a $12 monthly service change in early 2012, the program remained interesting for those depositing close to the $200,000 limit; those depositing much less found that the charge and the forgone interest ate away the value of the American Airlines Airmiles.

Effective June 1, the terms of the program will change dramatically. Bank Direct will only be giving 100 miles per month per $1,000 deposited on your first $50,000 deposited, and 25 miles per month per $1,000 on all amounts over $50,000. A $200,000 deposit will now earn no more than 105,000 American Airlines miles, fewer than half of the amount previously awarded. Given that you can now earn this many miles by opening a Citibank credit card, it hardly makes sense anymore to tie up your money in an account where you are basically buying miles at $12 a month and foregoing interest.

While American Airlines has averted bankruptcy, it has also agreed to a merger with US Airways. Its miles have already become less valuable due to decreased availability of "Saver" awards on most domestic and international routes. If it follows Delta's precedent, the merger will render its miles close to worthless.

In short it is foolhardy to stay with Bank Direct. It is time to move your money to an interest bearing account.