First-quarter earnings reports for the nation's banks are pointing to signs of improvement on the bad-loan front, but it may be too soon for investors to start cheering.

Banks ranging from

Citigroup

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to

Bank of America

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to

SunTrust

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have reported a slowdown in the rise of bad loans in their portfolios. They also recorded sharp drops from the fourth quarter to the first quarter in the amount of money set aside to cover potential loan losses.

All of this is good news for investors, of course, because it means banks down the road may not need to take as many charges against earnings to write down their loans as uncollectible debts. Last year the main burden weighing on bank profits was a rising tide of charge-offs for bad loans made by banks to the energy, telecom and airline sectors.

But in a reality check, bank analysts say the nation's lenders won't be able to declare victory over the bad bets they made over the past few years until there's a substantial decline in the dollar value of new loans that are being classified as nonperforming -- loans that are overdue by 90 days or more.

In other words, it's not enough for the banks to report a slowdown, or a leveling off, in the rise of new bad loans in their portfolios. What investors should be looking for are signs that there's a substantial decline in the dollar value of new loans being classified as nonperformers each quarter.

By that measure, the initial results from the nation's banks are less decisive in pointing to real improvement in the credit cycle.

Bank of America, for instance, listed $4.8 billion of its commercial and consumer loan portfolio as nonperforming, down 5% from the fourth quarter of 2002 but up 4% from a year ago. SunTrust, meanwhile, reported $548 million in nonperforming assets, up slightly from $542 million in the fourth quarter. At

FleetBoston Financial

(FBF)

, nonperforming assets in the quarter declined 14% from the end of last year to $2.97 billion. But that figure was 43% higher than the dollar value of all the bank's nonperforming loans a year ago.

To some degree, any comparisons with the fourth quarter can be a bit misleading, because banks have a long tradition of using that period to take big charges and try to clean up their fiscal houses for the coming year.

"People, as they look out, will want to see new inflows to the nonperformers start to abate," said Reilly Tierney, a financial services analyst with Fox-Pitt, Kelton. "And in general I would describe us as modestly more negative than our peers."

The outstanding bank loans that Fox-Pitt Kelton analysts remain most worried about are ones to the auto manufacturing sector and to commercial real estate developers. Other analysts, meanwhile, are focusing on loans made by banks to troubled utilities and power companies and to the airline sector. And some are concerned about an increase in consumer defaults, especially if the economy weakens in the second half of this year.

If there are a rash of new bankruptcy filings in any of these sectors, it could lead to a surge in loan defaults and force banks to sharply increase the money they set aside each quarter for loan losses. And that could mean lower profit numbers for some banks.

"The jury is still out," said Sean Egan, president of Egan-Jones Ratings, a small bond-rating company. "On the negative side, there are still some potential massive failures working their way through the system."

Indeed, some already doubt the banks will be able to hold the line on the money set aside each quarter for loan losses in the coming fiscal quarters.

Jon Balkind, another Fox-Pitt Kelton bank analyst, said in a research note that he expects Citigroup to increase its provision for corporate loan losses later this year. "Credit was stable. However, we believe corporate provision's levels have to go higher," he said.