Capital Region banks brace for more bad loans

Banks operating in the Capital Region are increasing the money they set aside for bad loans — hintin
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Banks operating in the Capital Region are increasing the money they set aside for bad loans — hinting further at difficulties consumers are facing to make ends meet amid a relentless housing slump and high energy prices.

Area banks are only now beginning to release their fourth quarter results for 2007, but the higher provisions for loan losses disclosed so far are just the tip of the iceberg, banking experts said.

TrustCo Bank Corp in Glenville reported Tuesday that it recorded a loan loss provision of $2.5 million during the fourth quarter, up from zero dollars a year earlier. That hike marked the first time since 2004 the TrustCo Bank parent’s provision for loan losses — the sum banks need to absorb expected loan losses — stood above zero dollars, said bank Vice President and Treasurer Kevin Timmons.

Also Tuesday, NBT Bancorp in Norwich reported that its preliminary provision for loan losses almost quadrupled during the fourth quarter to $13.4 million from $3.5 million a year earlier.

M&T Bank Corp. in Buffalo last week reported an over-300 percent increase in its fourth quarter provision for credit losses to $101 million, compared to $28 million a year earlier.

The M&T Bank parent during the third quarter set aside $53 million for net chargeoffs. M&T’s loan loss problems stem partly from a 2007 spike in defaults among alternative residential loans.

“It is nothing to be alarmed about. It’s a reflection of what is going on in the banking industry, and the banking industry is faced with difficulties as we are,” said Hugh Johnson Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors, an Albany money management firm.

Compared to Citigroup in New York, which has been squirming since the onset of the subprime mortgage meltdown last summer, most upstate banks are not facing huge increases in bad loans. While local banks’ growing reserves for bad loans should not raise alarm, the trend does not bode well for consumer spending and the strength of the economy.

“With every new number, the case for a recession is becoming stronger,” said Johnson.

A series of statistics indicating weaker consumer spending — the thrust of the nation’s economy — were released Tuesday.

In New York, the National Retail Federation said holiday season spending nationwide in November and December rose by 3 percent to $469.9 billion — falling short of the trade organization’s 4 percent increase forecast. 2007 marked the worst holiday season retailers have seen since 2002, when sales rose by 1.3 percent.

The NRF also predicted retail industry sales — excluding automobiles, gasoline and restaurants — will rise 3.5 percent in 2008, compared with 3.7 percent in 2007, when it reached $2.4 trillion.

Also Tuesday, the Conference Board’s measure of chief executive confidence fell five points to 39. A reading of more than 50 points reflects more positive responses than negative. The last time the New York nonprofit business research organization recorded a reading below 40 was in 2000, when it fell to 31.

In Glenville, Timmons said the bank’s loan loss provision hike was spurred by a larger loan portfolio and a riskier banking environment. TrustCo reported a 12.8 percent drop in net income to $39.5 million for 2007, compared to $45.3 million in 2006.

“Our loan quality remains pretty strong,” he said.

Bank President and Chief Executive Officer Robert J. McCormick stressed his institution has not been embroiled in the subprime mess. By the end of 2007, nonperforming loans, which traditionally include loans 90 days in default, accounted for just 0.66 percent of TrustCo’s $1.9 billion in total loans.

Over the year, total loans grew by 10 percent, spurred by TrustCo’s branch expansion downstate and in Florida. During the fourth quarter, the bank opened offices in Schaghticoke and Apopka, Fla., bringing its branch total to 107.

By the close of trading Tuesday, TrustCo’s stock price slid 1.1 percent to $9.16 per share. NBT’s stock fell 3.1 percent to $19.89 per share.

Timmons said loans issued to borrowers in Florida, which is one of the states hit hardest by the housing slump, did not exclusively prompt the loan loss provision increase.

“Being conservative is a reasonable course of action when the environment is the way it is right now,” he said.

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