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Norstar Bank in Buffalo suffered an unusual $23.9 million loss during the first quarter in the wake of an extensive examination of its loans by the Comptroller of the Currency.

Fleet/Norstar Financial Group, parent of Norstar Bank here, disclosed the loss in the first-quarter report being mailed to shareholders.

Norstar Bank in Buffalo was the only one of Fleet/Norstar's four banks in the state to lose money during the quarter.

The disclosure of the rare quarterly loss and other information on non-performing loans shows that examiners from the Comptroller's office were extremely conservative in their evaluation of the bank's assets.

Fears that a deteriorating real estate market in New England could trigger banking failures similar to those that have struck the southwestern states led to a series of lengthy examinations of New England's commercial banks earlier this year.

The Comptroller's office conducted examinations of Norstar in Buffalo and of Fleet National Bank in Rhode Island, also owned by Fleet/Norstar.

Many bankers complained that the Comptroller's office, which conducted the examination campaign, were being too strict in their evaluations of loan portfolios.

After the examination, the Buffalo-based bank's non-performing loans increased to $133 million in the first quarter from $30 million in the fourth quarter of 1989.

Many of the loans classified as non-performing by Norstar are not commercial real estate loans, however -- 57.9 percent are commercial and industrial loans and 40.6 percent are commercial real estate loans.

The quarterly report also revealed that two large commercial loans in Buffalo -- one for $11.8 million and one for $10 million -- have been classified as non-performing.

Traditionally, non-performing loans are loans on which payments are past due by 90 days or more.

Examiners from the Comptroller's office told Norstar to place in the non-performing category $118 million worth of loans on which payments either were current or were past due for less than 90 days.

By traditional measurements only $15 million of its loans are non-performers.

"Buffalo is a perfect example" of the debate over the Comptroller's examinations, said Don J. Kauth, banking analyst for First Albany Corp. "Buffalo had a big increase but most of it is in the 'performing/non-performing' category," he said.

Since the economy in Western New York is sound, it is questionable whether many of those loans will end up causing the bank serious problems, he said.

"The question is whether the OCC is right or not," he said. "If many of those loans fall into the 'performing/non-performing' category, then the early warning from the OCC was a good thing."

However, if the loans do not deteriorate further, Norstar will reap profits in future quarters because it will be able to set aside smaller amounts of money each quarter for possible loan losses.

The reclassification of millions of dollars in loans during the first quarter forced the bank to make a larger-than-usual quarterly provision for loan losses.

That provision is what caused the quarterly loss.

Much of that money remains in Norstar's coffers as a reserve against possible future losses, said Thomas Garlock, the bank's spokesman.

"It's not like that is a loss of money to the bank; we simply moved it over into the reserves," he said.

The quarterly loss was a rare event both for Norstar and for its parent.

Fleet/Norstar has not had a quarterly loss since 1974, the quarterly report said. Norstar Bank in Buffalo has not had a quarterly loss for at least the last 24 years, Garlock said.

Fleet-Norstar expects to return to profitability in the current quarter, the quarterly report said.

Kauth is withholding judgment until he sees the quarter's financial results and whether any of the non-performing loans that are less than 90 days past due fall into the traditional non-performing category of more than 90 days past due, he said.

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