This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

5 Bank Stock Red Flags

NEW YORK (TheStreet) -- It can pay for bank investors to look a little deeper at financial statements.

While you are not able to see everything going on behind the scenes at a bank holding company, there are some items that can serve as red flags for trouble down the road.

We've selected five areas for bank stock investors to consider that can distort the bottom line, lead to future write-downs or -- in the worst of cases -- a dreaded restatement of financial results.

Provisions for Loan Losses

Over the past several quarters, many of the largest U.S. banks have seen a direct boost to earnings through the release of loan loss reserves. This is no surprise, since the obvious reaction to a souring loan portfolio is to sock away extra reserves. Then, after working through a significant portion of the problem loans, most of the large players have found that they had more reserves than they needed.

Each quarter, a bank will typically add to its allowance for loan losses by making a provision for loan loss reserves, which lowers its earnings. If the provision outweighs a bank's net charge-offs -- its loan losses less recoveries on previously charged-off loans -- its allowance for loan losses increases.

Since messing with the quarterly provision is an obvious way for banks to manage earnings, regulators frown upon banks "over-reserving" when the economy is strong. This, of course, is counter-intuitive, because a period of strong economic growth is when a bank will be better prepared to build reserves. No matter. What happens is they scramble to build reserves in the midst of a recession, thus front-loading their net losses, leading to the large release of reserves we are seeing now.

During the second quarter, JPMorgan Chase (JPM) reported net income of $5.4 billion, partially fed by a $1.2 billion reserve release.

Stock quotes in this article: BAC, C, JPM, COF, WFC, GSBC, FPFC 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,510.81 +9.16 0.06%
S&P 500 1,879.32 +3.93 0.21%
NASDAQ 4,149.7690 +22.8020 0.55%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs