First Interstate to Report Loss : Banking: The firm says $174 million of red ink from its Arizona unit’s shaky real estate

First Interstate Bancorp said Friday that it will report a $16-million quarterly loss next week because of continuing problems in Arizona, further evidence that lenders there face growing troubles stemming from the state’s severe real estate recession.

The third-quarter loss for the Los Angeles banking company comes in the wake of pressure by the U.S. comptroller of the currency on First Interstate to boost reserves against its problem loans in Arizona. Regulators reviewed First Interstate’s Arizona unit in September and October, the bank said.

First Interstate said its Arizona unit will show a $174-million loss when its results are released on Wednesday. First Interstate said the Arizona unit is taking a huge, $350-million provision for loan losses in the quarter stemming from problems with real estate construction loans and commercial mortgage loans.

Losses for the parent company will only be $16 million because the Arizona losses are offset by profits at healthy units, especially First Interstate’s banks in California, Washington, Oregon and Nevada. In the third quarter of last year, First Interstate Bancorp posted a $214-million loss, largely because of provisions for loan losses in Texas. Next week’s earnings report is expected to show improvement in the Texas operation.

First Interstate’s announcement is a clear sign that economic problems in Arizona are continuing with few signs of letting up, leading some to dub the state “the next Texas.”

Just three years ago, Arizona was booming. Now the state is suffering through a severe real estate recession, brought on largely by overbuilding and a slowdown in the number of people moving into the state.

Late Wednesday, Valley National Corp., Arizona’s biggest financial institution, posted a $72.2-million loss. Other banks, including Security Pacific Corp., Chase Manhattan Corp., Citicorp and Great American also reported varying degrees of problems with their real estate loans in Arizona.

For all banks in Arizona, non-performing loans--those that are 90 days past due or those in which banks are not earning interest--total $1.5 billion, up 28% since the first of the year, according to Sheshunoff Information Services, a banking research firm in Austin, Tex. The bulk of the non-performing loans are those related to real estate, which have soared 37% to $1.2 billion since the start of the year.

More important, the non-performing loans in Arizona total 7.7% of all outstanding loans made by banks in the state, according to Sheshunoff, the highest percentage of any state in the nation and more than twice the percentage for both the nation and for California. Arizona’s non-performing real estate loans total 14% of all real estate loans there, also the highest percentage of any state.

Non-performing loans at First Interstate’s Arizona bank totaled $335 million at the end of the quarter. The bank’s non-performing assets, which also includes foreclosed property, totaled $416 million.

In an interview, First Interstate Chief Executive Joseph J. Pinola acknowledged that regulators wanted the bank to provide a bigger cushion to protect against losses from its Arizona loans. Banking executives say regulators are putting increasing pressure on banks to set aside money for problem loans as a result of the nation’s massive thrift bailout, which demonstrated the need for larger cushions against real estate losses.

Pinola said he believes that Arizona’s economic problems are much different from those of Texas and Oklahoma, which were hit hard by both overbuilding and a severe recession in the oil industry.

John F. Kooken, vice chairman and chief financial officer of Security Pacific Corp., parent of Security Pacific National Bank, said there has been some improvement in real estate sales in Arizona in recent weeks, but added that it is difficult to tell if the state’s economy is improving.

“There continue to be bad problems, and it’s not 100% clear how fast it will change,” Kooken said.

Dan Williams, a securities analyst for Sutro & Co. in San Francisco, said that although First Interstate’s problems in Arizona are well known, the size of the loss there was unexpectedly high.

First Interstate’s stock hardly reacted to the news, closing at $57.625, down 25 cents, in composite trading on the New York Stock Exchange.

BANK PROBLEMS IN ARIZONA

Bank problems in Arizona reported this month:

First Interstate Bancorp, Los Angeles: Arizona unit’s losses in third quarter will total $174 million, representing a $16-million loss for parent company.

Security Pacific Corp., Los Angeles: Net credit losses for the third quarter rose 33%, to $109 million, largely because of Arizona problems.

Chase Manhattan Corp., New York: Takes $85-million after-tax charge, related to Arizona problems.

Valley National Corp., Phoenix: State’s largest financial institution posts third-quarter loss of $72 million.