First Interstate to Post Big Loss, Cut Dividend
LOS ANGELES - Edward M. Carson's efforts to turn around First Interstate Bancorp were dealt a blow Monday when the company unexpectedly said it would make a $295 million provision for loan losses and cut its dividend by 60%.
The bad news, which will result in an $80 million quarterly loss, sent First Interstate's shares plunging by $5.25, or 17%, and heightened fears that loan problems were spreading among California banks.
First Interstate has been rebounding from major losses on loans booked by its Texas and Arizona banks. But Monday's announcement revealed that problems have now surfaced in its Oregon and Nevada operations. The company also expressed concern about the California real estate market.
"This is a meaningful setback in First Interstate's recovery," said Donald Crowley, director of research at Keefe, Bruyette & Woods.
While the stock of most major banks rose Monday, shares of West Coast banks were dragged down by the announcement. Wells Fargo & Co.'s shares fell $3.75, to $65.25; BankAmerica Corp. 62.5 cents, to $35.625; Security Pacific Corp. $1, to $22; and U.S. Bancorp, based in Portland, 50 cents, to $29.50.
Meanwhile, John Reed, chairman of Citicorp, said Monday that he sees loan problems worsening in the West, particularly in the consumer and real estate sectors. (See article on page 2.)
First Interstate's provision will be more than twice as high as in the first quarter, when it was $135.2 million. The company also announced it will recommend that its board cut the dividend to 30 cents from 75 cents in the third quarter.
First Interstate has been on an aggressive program to build reserves and unload nonperforming assets. By the end of the first quarter, its reserve for possible loan losses was 123% of nonperforming loans, compared with 81% for seven big Western banks and 84% for the 25 regional banks, according to Montgomery Securities.
Mr. Carson, First Interstate's chief executive, said that as a result of the second quarter provisions, the reserve coverage will go even higher. "We want to continue on our program of rapidly curing these nonperforming assets - and you need reserves for that," he said.
Despite the announcement, Mr. Carson said First Interstate's nonperforming loans "will be flat to down" this quarter. Analysts said First Interstate expects to bring nonperformers down to $1.5 billion by yearend from the $1.79 billion at March 31.
Other Woes in California
First Interstate is the third big California financial institution to announce large provisions for the second quarter. Last week, Wells Fargo said it would take a $350 million provision and would earn only about $15 million in the second quarter.
Glenfed Inc., Glendale, said it would lose about $140 million in the quarter. Each had different reasons for the poor results.
Analysts had generally been praising First Interstate's recovery and expected it to earn about $3 to $3.50 a share this year. Revised estimates now range from 25 cents a share to $1.10 a share.
Surprises from Oregon
First Interstate said it has ear-marked $118 million of its loan-loss provision for its Oregon bank, which will report a second-quarter loss of about $40 million. The unit, which has $6 billion in assets, took a $23 million provision in the first quarter.
Oregon's nonperforming loans are expected to rise by about $100 million. First Interstate said the unit's problems relate to loans in the real estate and forest-products industries.
"Oregon is a surprise," said Jay Tejera, an analyst at the Seattle office of Dain Bosworth Inc. First Interstate's "losses are out of line with the rest of the industry."
Downturn in Nevada
First Interstate said its Nevada bank, with $3.8 billion in assets, will take a provision of about $47 million, compared with $15 million in the first quarter. The Nevada economy has cooled from its white-hot growth and analysts had expected problems for banks there. First Interstate said the unit's problems relate to a handful of credits in gaming and real estate.
Because of the poor results in Nevada, chairman Donald D. Snyder, president Ronald Zurek, and a number of other top officers resigned. Mr. Snyder will be replaced by Alan R. Thompson, executive vice president at First Interstate Bank of Arizona. Mr. Zurek will be replaced by Andrew B. Studdert, a senior vice president of consumer banking and operations.
Mr. Carson said the Nevada actions were at least partly a result of a recent regulatory examination. "We were in there with them and agreed with everything," he said.
The Oregon bank will have an exam in January, Mr. Carson said. "It would be idiotic for us not to be proactive in Oregon," he said.
Another $50 million went to unallocated reserves at the holding company level. This "reflects the company's assessment of the general uncertainties in over all credit conditions," First Interstate's announcement said, citing the California real estate market as an example of the uncertainty.
Less than three weeks ago, First Interstate had reinstituted a reformatted discount dividend reinvestment plan, which it suspended Monday. Mr. Carson admitted the timing of the announcement to reinstitute the program was "unfortunate."