02/18/2011 02:19 pm ET | Updated May 25, 2011

Covering Your Assets: 7 Signs Your Bank May Be Failing

Even though the banking sector is getting healthier, there were still 157 bank failures in 2010.

When a bank fails, FDIC insurance should protect your checking and savings accounts (as long as you don't exceed the $250,000 deposit limit), but accessing money from a failed institution can be inconvenient. If you'd rather avoid that kind of trouble, you should be alert for signs that your bank is struggling.

After all, those 157 bank failures in 2010 exceeded 2009's figure of 140. The reason 2010 was deemed to be a better year for banks is that there were fewer large bank failures, so fewer customers were affected. Still, bank failures remain a regular part of the banking landscape.

Here are seven signs to watch out for if you think your bank is in trouble:

  1. Deteriorating financial ratios. You can get detailed financial ratios from the Federal Financial Institutions Examination Council. This information can be extremely complex, but if you call up a Uniform Bank Performance Report, you can see whether the capital ratios of your bank are deteriorating and/or are trailing the bank's peer group.
  2. Deposit migrations. You can look at a year-to-year comparison of total deposits for a bank on the FDIC's web site. A sharp drop means other people are heading for the exits, and you should be curious about why.
  3. Delayed financial reporting. Even if you can't make heads or tails of the detailed financial reports, if you hear that a bank has delayed releasing earnings or other financial details, it may be a sign they are struggling with extreme changes in valuations.
  4. Layoffs. Drastic cuts in employees are a bad sign. Even if the bank isn't failing, these cuts probably mean you can expect less service than in the past.
  5. Branch closures. Look at this as a more extreme version of layoffs. Don't overreact if your bank steadily reduces the number of branches over time--the trend in banking is towards more electronic banking, with less of a bricks-and-mortar presence. However, a sudden announcement of a drastic reduction of branches is not a sign of an orderly, long-term strategy.
  6. Cuts in services. Whether it's free checking accounts, rewards points, or special savings account rates for large customers, healthy banks make an effort to provide incentives for loyal customers. In a struggling bank, cost-cutting outweighs relationship-building.
  7. Sharp hikes in fees. As a general rule, healthy banks are in a mode of actively trying to attract new business--they are advertising regularly, offering competitive savings account rates, and have reasonable fees. Banks that are in trouble tend to go into a defensive posture where they don't seem interested in new business, and they hike fees to get more out of existing customers. Several banks are adjusting fees because the banking environment overall has changed, but the more extreme the fee hike, the more wary you should be.

None of these signs is the definitive kiss of death for a bank, but the more evidence of this kind you see, the more likely it is that your bank is struggling. At the very least, this can mean lousy service and uncompetitive products, and in the worst case, it could mean your bank is heading towards failure. So, if you start to see some of these signs, it may be time to shop for another bank.

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