At a seminar on risk management in financial institutions, I was asked, "Is the annual report a good source of information on a bank that is likely to be in trouble?"

I cited the comments of the chief investment officer of a major bank, who described the bank's economic department forecasts as "a lagging indicator."

I added that not only is the annual report based on data that are several months old, but that virtually all published material distributed by a bank is too late to be a good predictor of what is likely to happen. Important information moves much faster than the printing press.

Similarly, you can often question the predictions of bank analysts. They have different sources of information and different attitudes toward what the data they have gleaned really mean. As a result, one brokerage firm may well be issuing a "buy" recommendation on Schmidlap National the same week another tells its clients to forget they ever had a penny invested in old Schmidlap.

Consider the predictive signs of bank behavior that do make sense. They are less obvious, far less qualitative, and more based on sheer common sense.

For instance, a number of professional bank observers say the key to a bank headed for the tank is excessively rapid growth.

Growing too fast means the bank is taking on credits that it might otherwise reject. It means it is hiring new people and sending them out before they are either seasoned in the industry or in the bank's own past culture. It is even more significant if the bank is growing in a deteriorating economic environment.

A second test that had a pretty good batting average is whether the bank is staying in its own territory or is trying to expand elsewhere.

As one community banker put it to me, "If I can't drive to visit any borrower and still sleep at home that night, I am expanding my territory too far."

Then there is insider trading. When a bank reports in its required submissions to the regulators that a number of officers and board members have sold heavy stock positions, beware. Surely sometimes it means the director wants to buy a home or a yacht. But even so, the news is worth extra examination of what's going on in the bank.

There are also intuitive ways to make such analyses.

Harry Keefe, who in my book has been the dean of bank analysts for decades, tells of one way he decided the Franklin National originally of Long Island was headed for trouble.

"I walked over to the new skyscraper they had built the financial district of New York," he said. "I walked in from end to end - counting the length. Then I walked from front to back - counting the width. I multiplied them to get the square footage per floor.

"Then I walked outside and counted the number of floors and multiplied that by my previous total to get the square footage of the total headquarters.

"Every bank likes to have full offices," Harry added. "This means an employee every 20 or so square feet."

"So dividing by that number I figured out they would be vastly overstaffed, and too overexposed to look good. And they were."

Postscript: When Franklin went under in 1974, it was America's largest bank failure to date.

It is not only the cost of excessive employees that can kill a bank. It is also the fact that each person wants to do something, even if there is nothing economically worth doing.

So, just as officers sent to Third World countries and overseas branches made loans they should have rejected, to show they were doing something, an overstaffed bank with bright people looking to build a track record is an accident waiting to happen.

Now, these commonsense indicators don't always work.

I think back to Bank of New England, whose aggressive and bright chief executive officer, Walter Connolly, was reputedly exhorting the officers who felt that the economy of their territory was weak.

Yet at the same time, board members were buying stock on the basis of an optimistic assessment - and kept buying until just before the bank's collapse.

What can we conclude? I stick by the title of an article I wrote - "Should Bank Annual Reports Be in the Fiction Section of the Library?"

We can only keep on trying. Even the best community bankers admit that any banker worth his or her salt still wakes up in the middle of the night and laments, "I wish I really knew what is going on in my bank."

Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.

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