Security Pacific Announces 40% Cut in Dividend : Banking: The move comes in anticipation of a big increase in problem loans.

Security Pacific Corp. on Tuesday slashed its dividend by 40% to bolster its finances as it announced that its problem loans will rise sharply in the current quarter because of the weak economy.

It was the latest sign of problems at Security Pacific, which until the middle of last year had largely escaped the bad-loan woes plaguing major banks nationwide.

The Los Angeles-based banking firm reported that its problem loans will increase between $350 million and $450 million in the first quarter. Chief Financial Officer John F. Kooken said in an interview that while the bank will earn less in the current quarter than the $188.4 million earned in the year-ago quarter, problems stemming from sour loans will not cause a first-quarter loss.

The cut in the quarterly dividend, to 38 cents from 63 cents, makes Security Pacific the first major West Coast bank to trim its payout during the current economic downturn.

The move, expected by some securities analysts, is believed to be Security Pacific’s first such cut ever. Just last year, it boosted its dividend 10.5% following a strong 1989 performance.

The cut follows dividend reductions at large New York banks such as Citicorp and Manufacturers Hanover. Banks have been slashing dividends to boost capital in the wake of souring real estate and corporate loans--and also at the urging of regulators, who believe that many institutions should be using the money to strengthen their balance sheets.

The rise in Security Pacific’s problem loans stems largely from difficulties outside California, particularly Great Britain and Australia.

Kooken said more than half the increase in non-performing loans--those 90 days or more past due or on which collection is in doubt--are real estate-related, including some in weak East Coast markets. He said the Arizona market, although far from healthy, appears to be improving.

The disclosures sent Security Pacific’s stock tumbling $2.50 a share to $24.50 on the New York Stock Exchange. The stock of another Los Angeles-based banking firm, First Interstate Bancorp, fell $2.75 a share to $30.125 on traders’ speculation that its dividend would be cut next.

A First Interstate spokesman, however, said the bank has strengthened its balance sheet significantly the past year and “our objective is to earn and pay our dividend.”

Major problems at Security Pacific began to surface in the second half of last year and culminated in a $357.6-million loss in the fourth quarter. The loss stemmed from the disbanding of its investment banking-style operation and the setting aside of money for potential loan losses. Last year, its non-performing loans and leases jumped to $2.07 billion from $1.64 billion in 1989.

Kooken said Security Pacific has also received fewer mortgage, home equity and business loan applications in the first quarter as a result of the soft economy and uncertainty caused by the Persian Gulf War. He said applications have surged in the two weeks since the war’s end.

Despite the first-quarter increase in problem loans, Security Pacific said its non-performing loans should peak in the first half of this year. It also forecast an economic recovery in the second half.

In another measure to boost capital, Security Pacific disclosed an “enhanced dividend reinvestment plan” under which shareholders using their dividend payments to buy the bank’s shares would receive a 3% discount on the stock price.