Security Pacific Corp., the giant Los Angeles banking company, announced it would set aside $850 million to cover bad loans and other investment mistakes, a signal that the financial problems infecting banks on the East Coast and in the Southwest have now spread to California.
Security Pacific's write-off "shows California is susceptible to the weakness of the national economy," said Campbell Chaney, a banking specialist with Sutro & Co., a San Francisco brokerage firm. "I don't think it's going to be as severe in California as in New England, but there still is a recession here."
The damage the recession is doing to the nation's banking system will become more evident today when the Federal Deposit Insurance Corp. issues its quarterly report on the health of the nation's banks.
The news will not be good, FDIC Chairman L. William Seidman has warned. He pointed out that bank profits have slipped so much that 75 percent of their earnings for the third quarter went to pay dividends to stockholders, leaving little money to reinvest in strengthening the business.
Security Pacific is the nation's fifth-biggest bank and the second-largest in California, with assets of about $54 billion. Wall Street banking experts and federal regulators have long ranked Security Pacific as one of the most troubled of the big banks.
Yesterday, the bank took the unusual step of announcing several weeks before the end of the year that it will report a loss of at least $320 million for the quarter that ends Dec. 31. The company blamed its impending loss on the same problems facing many of the nation's biggest banks: millions of dollars worth of bad loans on real estate developments, corporate buyouts and foreign investments.
But Security Pacific reported unique problems as well. The bank said it faces losses in Great Britain and Australia, where its biggest borrower is said by analysts to be media baron Rupert Murdoch. Murdoch's News Corp. is having trouble paying for its worldwide string of broadcasting and publishing acquisitions.
Though not considered to be in danger of failing, Security Pacific barely meets the new minimum federal standards for financial health that will go into effect a year from now. Those standards will require bank owners to put up $4 of their own money for every $100 of deposits and other bank assets. As of July 31, Security Pacific had $4.02, and that cushion will be reduced by the write-offs announced yesterday.
In its announcement, the bank said it would take a charge of $850 million in the final quarter of the year. Of that $600 million will be set aside as reserves against future losses on loans. The other $250 million will be written off to cover the cost of revamping the bank's operations. Most of that will cover the cost of shutting down Security Pacific's money-losing merchant banking division, which arranged financing for companies.
The loss from disbanding the merchant banking operation is the good news in the Security Pacific announcement, said Michael Abrams, a banking specialist with Batemen Eichler, Hill Richards, a Los Angeles investment firm. The merchant banking venture had been a steady drain on the bank's profitability, he said.
The bad news is the reserve for future loan losses, said Abrams. Even after setting aside another $600 million, Security Pacific's reserves cover only a little more than 50 percent of the loans that are not being paid on time, he said.
In contrast, Security Pacific's longtime rival, San Francisco's Bank of America, has reserves against more than 90 percent of its nonperforming loans. Analysts said yesterday that means Security Pacific will have to either do a far better job in collecting its troubled loans than Bank of America or set aside hundreds of millions more in additional reserves in anticipation that more loans will not be repaid.
Security Pacific's announcement yesterday comes several days after the bank holding company was forced to take the embarrassing step of canceling a successful $100 million bond sale. The bonds were offered for sale last Thursday and underwriters reported that the issue quickly sold out. But the next day Security Pacific said investors wouldn't get their bonds because the sale had been canceled.
Analysts said Security Pacific apparently feared it might be sued because the information given to prospective bond buyers gave no clue that a huge write-off was coming.
Investors yesterday responded positively to Security Pacific's announcement after pummeling the stock Friday following the bond-sale debacle. Its shares closed up $1.25 at $23.12 1/2.