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Brace yourself, bank-stock investors: Earnings season is upon you.

This week, regional banks should begin to release second-quarter earnings, and many of the

large banks do so next week. Parsing bank earnings has become a brain-busting task. What other industry has more than 100 firms of good size that trade in respectable volumes?

During the reporting period, it's quite often that several banks will report quarterly results on the same day, offloading 10-page press releases full of numbers and often obtuse prose.

As well as being customarily voluminous and complex, this quarter's numbers will draw extra attention from investors trying to gauge how much financial institutions are being hurt by higher interest rates and rising

problem loans.

How to deal with this information avalanche? Take a page from the analysts' book. They face the same challenge of making sense of the deluge, so they start by approaching each press release in a very systematic fashion. Here, we share some of their methods, using real bank earnings as an example.

Grains of Salt

The first rule is to approach the releases with a healthy level of skepticism: Banks don't often give the full story in the explanatory text of the release, preferring instead to underline whatever they think might look impressive.

Let's start with



first-quarter earnings (still available on the bank's

Web site).

Tips for Bank-Stock Investors
Confronting the earnings report

*Compare earnings with analysts' consensus estimate.

*Check for nonrecurring items that should be omitted from comparisons.

*Determine how much the estimate has changed over six months.

*Add net interest income to noninterest income to get revenue, excluding nonrecurring income.

*Note whether revenue has grown or fallen compared with the previous quarter and the year-ago period.

*Calculate whether the bank is borrowing expensively to fuel loan growth.

*Make sure noninterest income growth isn't being fueled through big rises in expenses.

*Look out for extraordinarily large gains or drops. Ask for reasons.

*Call investor relations if you have questions or need clarification.

Amsouth, in the first quarter, boasted that operating earnings were 39 cents per share, up 11% from a year earlier. The bank's chief exec added: "AmSouth's first-quarter operating results remain among the best in the industry."

Digging deeper shows that the per-share number was below analysts' consensus estimate, gained from data firms like

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First Call/Thomson Financial



, and a shortfall, even small, invariably leaves a bad taste in the market's mouth. (A quick aside on analysts' estimates: A bank may meet the consensus profits number, but that may not amount to much if that estimate has come down in advance. A recent example of this is

Bank of America

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, whose First Call second-quarter earnings estimate has fallen to $1.24 from the $1.31 analysts were expecting six months ago.)

Clean Your Plate

A critical step is to clean up the data in the release. Michael Granger, banks analyst at

J.P. Morgan

, says that early in his analysis he always eliminates nonrecurring items to get a more realistic handle on what's going on. This is usually done in calculating a bank's revenue, or net interest income (interest payments to the bank minus its own interest costs) plus noninterest income (the revenue banks make from fee-based businesses and trading, among other things).

Looking at revenue is key, as a failure to increase the top line at a good clip means having to rely on cost savings and stock buybacks to boost profits. Neither of those gains can go on forever.

Granger says that in the first quarter, AmSouth's noninterest income, excluding securities gains of $4 million and branch-sale gains of $5 million, was $211 million, not the $220 million reported. (He rates AmSouth a market perform, and J.P. Morgan hasn't done recent underwriting for the bank.)

Nonrecurring items are often small sums, but when it comes to calculating growth rates, they can be significant, says James Record, head of banks research at

SNL Securities

, the financial-services consultants based in Charlottesville, Va.

Amsouth reported sluggish year-on-year revenue growth of 1.9%, even including nonrecurring items. But taking them out of both first quarters, the growth rate slowed to an anemic 1%. The large effect of nonrecurring items was clearly

seen in the first quarter at


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, which also failed to boost the top line by much in that period.

Breaking It Out

One frequent problem, however, is that banks don't usually break out all their nonrecurring items. AmSouth's were embedded in its "other noninterest revenue" line. What's more, individual investors don't get access to AmSouth's conference call, at which analysts usually ask about things such as nonrecurring gains. With banks that deny access in this manner, it's necessary to call up the investor relations department, which should share such details (as AmSouth's said it would have done).

Some banks are keen to trumpet strong loan growth. Again, Amsouth, according to its press release, was proud of its 13% uptick in loans in the first quarter. But net interest income actually went down slightly. Why? Because higher interest rates pushed up the cost of the money that the bank borrowed to lend out.

That's why investors have to check whether a bank is borrowing more to fuel loan growth, rather than relying on generally cheaper new deposits. This can be determined by looking in the liabilities section of the balance sheet, where the bank's debts are listed separately from its deposits. Unsurprisingly, at AmSouth, noninterest-bearing deposits, a bank's cheapest source of funds, dropped marginally in the first quarter from year-earlier levels, while borrowing jumped substantially, with so-called "other interest-bearing liabilities" soaring 65%, to $8.2 billion.

In the next installment,

will examine the thorny issue of doubtful loan accounting and how that can affect earnings.