Is Your Bank on the Mend? How to Tell

The Federal Deposit Insurance Corporation, or FDIC, has been guaranteeing deposits since 1933 -- and since then, consumers have not lost a single penny.

But now the banking system is so stressed that the FDIC itself is running out of money. Currently, the government agency covers up to $250,000 per account (that amount is good through Dec. 31 when it may drop back down to $100,000).

The organization, which is funded by insurance premiums paid by banking institutions, recently doubled those premiums to raise extra cash. Now it's turning to Uncle Sam for more help. Last week, FDIC Chairwoman Sheila Bair requested that the government more than triple the organization's borrowing authority from $30 billion to $100 billion.

We're not telling you to take your money out of the bank. Indeed, almost everyone expects the government to find a way to keep deposits insured should more banks fail.

But just how likely is it that you'll wind up relying on the FDIC's insurance anyway? If you're curious about the health of your bank, you can get a pretty solid picture by looking at some basic numbers that publicly-held banks must disclose in their annual financial reports filed with the Securities and Exchange Commission. (Privately-held banks, meanwhile, have to file what are known as “call reports” with the FDIC, which contain this information as well.)

Here are four key numbers that will tell you whether your bank is the epitome of health or gasping its final breath.

The Tier 1 ratio tells you how much capital a bank has set aside to absorb losses. “Essentially, it shows how strong its balance sheet is,” says Chris Fortune, an analyst at investment firm T. Rowe Price who covers regional banks. Generally, a Tier 1 ratio needs to be at least 6% for a bank to be well capitalized, but in today’s environment, banks should have 8% or 9% to be considered healthy, he says. Look for Tier 1 information in the Management Discussion section in 10-K Annual Report forms.

Spotlight onJ.P. Morgan Chase (JPM). According to its 2008 annual report, the bank’s Tier 1 capital ratio at year-end was 10.9%.

The nonperforming asset ratio, also known as NPA ratio, tells you how much exposure your bank has to assets that are a potential problem. Loans that are 90 or more days late, for example, are considered nonperforming assets. This ratio is determined by dividing these problem assets by the bank's total assets. “Today, anything below 1% is really good,” says Fortune. “Below 2% is OK. And, as you start to get above 4%, you start to worry.”

Spotlight onBank of America (BAC). In its 2008 annual report, the bank reported that its nonperforming loans and leases are 1.77% of its total loans and leases.

The tangible common equity ratio shows how much of a loss a bank can take, as a percentage of assets, before common shareholders are wiped clean, says Jamie Peters, an equity analyst with financial research firm Morningstar. If a bank’s common equity ratio is 3%, for example, the bank would have to write off 3% of its assets before shareholders lose everything. (As a rule of thumb, anything below 3% is too low, says Peters.)

Figuring this ratio out is tricky, since banks don't generally disclose it in their financial statements. To calculate it, divide your bank’s tangible common equity by its tangible assets. (Tangible common equity is total shareholders’ equity minus preferred stock minus goodwill and intangibles; tangible assets is total assets minus goodwill and intangibles). All of the numbers you need to calculate this are listed in the bank’s balance sheets.

Spotlight onCitigroup (C). Its tangible common ratio was 1.5% before the government stepped in to bail it out. If everything works well, the ratio should be over 4%, says Peters.

This is the amount a bank has set aside to deal with problem loans. This figure will give you a good idea of the bank's ability to remain healthy in an unhealthy environment. To calculate your bank’s loan loss reserve ratio, simply divide its allowance for loan losses by its total loan portfolio. The higher the percentage, the better your bank’s ability is to cover potential losses. A reserve of 1% or less is considered weak, according to Fortune, while anything over 2% is considered strong.

Spotlight onWells Fargo (WFC). The bank’s allowance for loan losses was slightly over $21 billion at the end of 2008, while its total loan portfolio was $864.8 billion: a healthy 2.4%.