First Interstate to Cut Dividend, Post Large Loss : Banking: The 60% payout reduction and $80 million in second-quarter red ink stem from problem loans in Nevada and Oregon.

First Interstate Bancorp, which has been working feverishly to turn itself around and re-establish credibility with investors, disclosed Monday that it will cut its dividend by 60% and lose $80 million in the second quarter, mostly because of bad loans in Oregon and Nevada.

The news, which surprised Wall Street, represented the second major shock from a California bank within a week. Wells Fargo & Co. disclosed last week that its loan problems have increased. First Interstate stock fell $5.25 a share to $26.125, and other California bank stocks dropped as well.

First Interstate’s disclosure comes amid a shake-up in its Nevada bank, which until recently had ridden an economic boom that is quickly slowing with a softening in the state’s construction, gaming and tourism businesses.

The company confirmed that the Nevada unit’s chairman and chief executive, Donald D. Snyder, is resigning Aug. 1. In addition, eight other senior officers quit under pressure, and two more have been reassigned to other jobs.

First Interstate, the nation’s 11th-largest banking company, said the Nevada bank operation would post unspecified losses in the second quarter ended June 30 and the year. It added that it would set aside $32 million in the quarter for potential loan losses.

First Interstate has been warning for some time that problems were sprouting in Nevada. So the bigger surprise was the disclosure of problems in First Interstate’s Oregon operation, long a star in the bank’s system.

The Oregon unit is expected to lose $40 million in the second quarter as a result of a slowdown in commercial real estate and forest products, although First Interstate expects it to post a profit for the year.

Management is recommending to the board of directors a quarterly dividend cut from 75 cents a share to 30 cents starting in the third quarter. Regulators have been pressuring all but the healthiest banks to slash dividends to conserve cash. First Interstate will save about $112 million a year with the lower dividend.

The dividend cut, combined with the second-quarter loss, is a setback for First Interstate’s top two executives, Chief Executive Edward M. Carson and President William E. B. Siart. Carson and Siart began running the bank as a team and rebuilding its capital, or financial cushion, upon the retirement last year of Chief Executive Joseph J. Pinola. At the time they took over, the bank’s credibility among investors had deteriorated considerably because of unexpected loan problems in Texas and Arizona.

“Obviously, they aren’t executing very well,” said John Neff, who heads Wellington Management’s Windsor Fund, one of First Interstate’s largest shareholders with about 4% of its stock. “This is another big glitch. It raises the question that if management can’t optimize the franchise they have, there are other people around willing to pay something for it.”

The projected loss of $80 million compares to earnings of $59.6 million in last year’s second quarter. In comments to analysts and reporters, First Interstate executives further suggested that 1992 will be a soft year.

Bank analysts had been projecting that the Los Angeles banking company will have a modest, albeit lower, profit for the second quarter. The surprise drove the stock down sharply.

Other California bank stocks fell as well: Wells Fargo dropped $3.75 a share to $65.25, Security Pacific fell $1 to $22 and BankAmerica eased 62.5 cents to $35.625.

First Interstate is setting aside an additional $160 million for potential losses on loans. Of that, $50 million is being set aside for unspecified loan problems prompted by uncertainties in such business sectors as California real estate. Chief Financial Officer Thomas P. Marrie said in an interview that the bank has seen some recovery in California real estate since the end of the Persian Gulf War but said the set-asides are being made because the market remains so unpredictable.

Several analysts have speculated for months that First Interstate’s dividend might be cut, just as dividends had been cut at Security Pacific Corp. and at several major New York banks. At a recent analysts conference, First Interstate executives described the dividend as “on the edge.”

Still, the cutting of the dividend is expected to further exacerbate tensions between First Interstate and its large institutional shareholders, who own 68% of the bank’s stock. Relations between First Interstate and some of its investors have been testy the past three years, in part because of management’s steadfast desire to remain independent.

Carson, in a conference call with analysts, addressed the acquisition question by saying that he doesn’t believe that this is the time “to raise the white flag.”