Bad-loan warnings from


(WB) - Get Report



( UB) have sparked a bank-stock selloff. The smart game now is to identify which financial institutions could act as havens in this strengthening storm.

Admittedly, the recent brouhaha over bad loans is a bit like a public-health panic in which two people get a nasty disease and everyone flees town. The

KBW Banks Index

has lost 10% since Wachovia said it was expecting more loan losses on June 15, and the index is now 15% off its 2000 peak, posted at the beginning of this month.

Still, concern is warranted. Analysts almost unanimously agree that, after six years of near-pristine credit numbers, the number of banks showing significantly greater impaired-loan data is going to rise this year. The main causes? Sloppy lending decisions are coming back to haunt banks, and higher interest rates are making it harder for less-creditworthy borrowers to pay back loans.

Grasshoppers and Ants

Needless to say, some banks are better protected than others against a hostile credit environment. The institutions without vast exposure to large corporate credits, which were responsible for most of the damage at Wachovia and UnionBanCal, will likely be safer. Ditto those that have kept well-sized reserves, called provisions, against bad loans. Witness Wachovia and UnionBanCal. Faced with more doubtful credits, both said they were adding large sums to provisions. And, critically for investors, these additions have to be deducted from profits.

There are two methods of gauging the strength of the bad-loan reserve: Measuring it as a percentage of total loans, and as a percentage of nonperforming loans, which are credits that the banks deem doubtful.


(C) - Get Report


Wells Fargo

(WFC) - Get Report



( FBF) boast the highest reserves as a percentage of total loans, according to data from the nation's top 50 banks supplied by

SNL Securities

, the Charlottesville, Va.-based financial-services consultants. (See Table A.)

In addition, these reserves appear adequate for the loan writedowns banks are experiencing. First, annualize Citi's first-quarter bad-loan losses of $752 million to reach $3 billion. Then compare that number with its provisions of $6.7 billion, and you can see that Citi's reserve covers two years of losses. That's more or less the result for Fleet, while it's over three years at Wells.

"Citi and Fleet have terrific loan-loss reserves," remarks Larry Cohn, banks analyst at

Ryan Beck

, who gives Citi and Fleet a hold rating. (Ryan Beck hasn't underwritten for either recently.) However, showing the need to look closely at each bank, this list includes Honolulu, HI-based

Pacific Century

(BOH) - Get Report

, which Wednesday announced it was taking a $55 million-$65 million provision in the second quarter due to higher actual and expected bad loans.

Looking at the reserve as a percentage of nonperforming loans,

State Street

(STT) - Get Report


Commerce Bancshares

(CBSH) - Get Report


North Fork

( NFB) come out on top. (See Table B.)

Ten banks -- listed in Table C -- have above-median scores on both measures of the bad-loan reserve. But these 10 institutions include two banks that have experienced severe earnings weakness in the past year:

National City

( NCC) and

U.S. Bancorp

(USB) - Get Report

. And, most conspicuously, it contains UnionBanCal.

Too Many Commercials

That's why it pays to apply another screen: one that shows how much exposure each of these 10 has to commercial loans, where most of the problems appear to be at the moment. Table C shows what proportion of banks' loan books were in commercial loans at the end of the first quarter (this breakdown wasn't available for

Bank of New York

(BK) - Get Report


What sticks out is that UnionBanCal had the highest level of commercial loans: 55%.

First Tennessee


follows closely, while

Fifth Third

(FITB) - Get Report


M&T Bank

(MTB) - Get Report

have the lowest levels.

In fact, Buffalo, N.Y.-based M&T is a bank that some investors are beginning to look at more closely in this environment. Felice Gelman, a manager on the

Sunova Fund

, a New York-based bank stock hedge fund, likes the lender precisely because it has strong reserve numbers and doesn't make a lot of big loans to large corporations. "M&T could be a good place to hide," adds Gelman, whose fund owns shares in the bank.