First Interstate Will Set Aside $400 Million for Losses in Texas

In a sign that its real estate hole in Texas is deeper than originally believed, First Interstate Bancorp on Thursday disclosed that it will set aside $400 million in the fourth quarter largely to rid itself of troubled assets there.

The Los Angeles parent of First Interstate Bank did not estimate how the provision will affect its earnings. But Donald K. Crowley, senior vice president in San Francisco with the banking analyst firm of Keefe, Bruyette & Woods, estimated that First Interstate will lose $120 million in the quarter. That contrasts with earnings of $144 million a year earlier.

First Interstate said $300 million will be set aside to absorb loan losses in Texas, write down the value of real estate it has foreclosed on there and pay the costs of speeding up disposal of its troubled assets. Another $100 million will be set aside to cover potential real estate losses in unspecified areas where it operates in the West.

First Interstate’s Texas woes stem from its February, 1988, acquisition of troubled Allied Bancshares, now called First Interstate Bank of Texas. Last year, First Interstate Bancorp took several steps to deal with its problems at the Texas unit, resulting in a $214-million loss in its 1988 third quarter.

Crowley said the announcement was unexpected and speculated that First Interstate Chairman Joseph J. Pinola, who is scheduled to retire next year, wants to clean up the operation before leaving.

“I think he realized this was his folly in a way. He wants to leave as clean a ship as he can for whoever is coming after him,” Crowley said.

Some Texas real estate experts and bank executives said the announcement suggests that First Interstate has previously been too optimistic in valuing its troubled real estate in Texas. But they also note that the extraordinary declines in the Texas real estate market since the mid-1980s have made it especially difficult to value property there.

In documents filed with the Securities and Exchange Commission, First Interstate noted that the market in Texas will be soft as regulators sell real estate owned by troubled thrifts.

The move is another in a series of real estate-related problems disclosed by banks nationwide in recent weeks. First Interstate posted a $15.5-million loss in the third quarter ended Sept. 30 that stemmed from real estate-related problems in Arizona.

To replenish its capital, which is the financial cushion banks maintain to protect against losses, First Interstate said it plans to raise some $400 million by issuing 7.5 million shares of common stock. The move will dilute First Interstate’s stock by raising the number of shares outstanding by 16%, to nearly 57 million.

In addition, the stock offering comes at a time when the market has been flooded with stock of financial institutions seeking to bolster their capital. Bank and thrift stocks also have tumbled in recent weeks.

Three major New York banks alone--Chemical Bank, Chase Manhattan and Manufacturers Hanover--raised about $1.7 billion through stock offerings over the past two months to replenish capital after taking provisions for troubled foreign loans. And Coast Savings Financial, the Los Angeles parent of Coast Savings & Loan, said Thursday that it will delay issuing $150 million of convertible preferred stock because of soft market conditions.

First Interstate’s stock fell $3.50 a share to $48.50 Thursday in composite trading on the New York Stock Exchange, with nearly 2.5 million shares changing hands. First Interstate would not comment on the announcement, citing SEC rules limiting statements before stock offerings.