Security Pacific Corp. warned Wednesday that rising problem loans will cut sharply into its second-quarter profits -- the latest setback for West Coast banks.
The announcement, which came on the heels of similar news from Wells Fargo & Co. and First Interstate Bancorp, drew a downgrade from Standard & Poor's Corp. and the threat of a ratings cut from Moody's Investors Service.
SecPac's bonds, meanwhile, slumped 15 basis points, even as Treasuries eked out modest gains ahead of the July 4 holiday.
The Los Angeles-based bank's 11 1/2s of 2000 were bid to yield 10.95% late Wednesday, up from 10.80% Tuesday. Some accounts probably went into the earnings news short, traders said, giving the bonds some support as players moved to cover their positions.
Even so, "from the reaction of the bonds, [the news] did surprise some people," said one New York bank bond trader. "People were generally looking for an increase in non-performing assets consistent with a slow economy, but the magnitude of this was surprising."
Security Pacific, whose 885 billion of assets makes it the nation's fifth-largest banking company, said it expects nonperforming assets to rise by at least $660 million, mostly because of sour loans in the California commercial real estate market.
That will bring SecPac's total nonperformers to nearly $2.8 billion, or 4.3% of its portfolio, up from $2.3 billion at the end of the first quarter.
The bank expects to earn just 31 cents per share for the second quarter, about half Wall Street analysts' estimates.
SecPac Chairman Robert H. Smith said the poor results "reflect the continued impact of high credit losses and high levels of nonperforming assets as a result of weak economic conditions in the United States, as well as prolonged economic weakness in Australia and the United Kingdom.
Citing the announcement, Standard & Poor's cut the bank's senior debt to A-minus from A, and subordinated debt to BBB-plus from A-minus. The downgrade affected about $20 billion of debt and preferred stock.
Michael DeStefano, who follows the company for Standard & Poor's, noted that "historically, nonperformers tend to spike up at the end of a recession as the starting of the upturn leads to credit problems."
Moody's Investors Service, meanwhile, placed Security Pacific Corp.'s A3 senior debt and Baa subordinated debts under review for a downgrade.
Wednesday's announcement was the latest in a series of setbacks for creditors of West Coast banks.
Last week San Francisco-based Wells Fargo blindsided the financial markets with news of a 94% slide in second-quarter earnings. Earlier this week, Los Angeles-based First Interstate said a $295 million loan loss provision will leave it with an $80 million loss for the quarter.
Considering this barrage of poor news, "some of the classifications may have been driven more by regulators than the experience of deterioration [in asset quality] occurring right now," Mr. DeStefano said.
Others agreed.
"The impression we're getting is that examiners, particularly the [Office of the Comptroller of the Currency], which examines national banks, are getting tougher on West Coast banks," said one fixed-income analyst. "For three banks in a row to come up with announcements at the end of the quarter leads me to believe this is regulator-driven."
This is not the first time Security Pacific has disappointed investors. The bank shocked Wall Street in March by slashing its dividend 40% as its nonperforming assets surged by $450 million.
Such performance has helped keep SecPac's capital and funding costs high compared with its California peers.
In the first quarter, the bank issued 10-year subordinated notes at 11.00%, three-year notes at 8.90%, and preferred stock at 11.00%, suggesting lingering worries about asset quality and earnings.
By comparison, BankAmerica Corp., which has positioned itself to become a leading provider of consumer and middle market banking services nationwide, has brought its coupons into single-digit territory and trimmed its spread on new issues from 200 to just 118 basis points so far this year.
Most investment-grade and high-yield corporate bonds barely budged Wednesday as trading slowed ahead of Independence Day.
But players in the distressed debt market received some good news as Ames Department Stores Inc. announced it hopes to emerge from Chapter 11 by early 1992.
The Connecticut-based retailer, responding to a report in Women's Wear Daily that Ames was negotiating a to pay off creditors with $400 million in cash and most of the stock from a reorganized company, said it "believes negotiations are moving forward in a constructive and positive way."
The company had previously said it hoped to emerge from bankruptcy by late 1992.
Ames's 13s of 2014 were bid at 31 1/2 late yesterday, about unchanged on the day.
But "Ames [issues] have been trading up from the mid-20s over the past couple of weeks," said Marcus Lane, managing director at Credit Research & Trading, a Greenwich, Conn., firm specializing in distressed debt.
