How to tell if Air Dryer is bad or needs the filter replaced?

Air drier is basically a filter to take moisture out of the air. As with any filter, they do need to be replaced from time to time. Once or twice a year is probably enough. If you drain your air tanks out and are consistently seeing a lot of water, I'd start with changing out the cartridge on the drier.

Water in the airlines won't hurt anything in warm weather immediately but it isn't great to have it inside your tanks and aluminum valves. The water will freeze up in winter though.

 

All that mist might point to another guilty party.
The compressor.

 

That much water is not the filter. Air dryer is not cycling to purge to get rid of the water.

 

Replace the air dryer. They aren't expensive, and that way everything is operating correctly. There's only a couple different ones that are mainly used, so crawl under and identify the model and start shopping. They can be rebuilt, but time and labor wise it's easier to just swap them.

 

Is the mist you see when you drain your tanks just water or is it greasy(oily)?

 

Then you might be ok if you just replace the airdryer.
How old is the compressor?