Wells Fargo merger chances dim as Security Pacific woes increase.

Wells Fargo merger chances dim as Security Pacific woes increase

A merger between California banking giants Security Pacific Corp. and Wells Fargo & Co. is less likely to occur because of Security Pacific's announcement last week that it would slash dividends by 40 percent and that problem loans would increase, analysts said.

"I don't expect anything imminent," said Oppenheimer & Co. analyst Cheryl Swaim. "Historically banks making acquisitions of banks with credit problems have tended to get into trouble by underestimating their problems."

Swaim said, however, in the long term she and other analysts believe that such a merger would make a lot of sense by allowing both banks to cut their overhead.

Meanwhile, insider trading at downtown Los Angeles-based Security Pacific has ground to a sudden halt after running hot late last year, shortly before the merger talks with San Francisco-based Wells Fargo. The insider trading, according to one source, has prompted an internal investigation at the bank.

The banking giants' chief executives held merger talks late last year. In January, sources said the talks were dropped and no new discussions were contemplated.

In late February, however, both companies' stocks rose dramatically after rumors surfaced that they were negotiating again.

Security Pacific last week said it had no comment on whether talks have been resumed, but several investment bankers claimed that was the case.

Wells Fargo officials, as before, refused to confirm or deny the reports.

Many on Wall Street enthusiastically backed the merger, claiming that Wells Fargo would slash duplicate Security Pacific operations and save $1 billion to $1.5 billion.

Rumors of the merger are sweeping downtown Los Angeles, where brokers are speculating how the merger might affect the glutted downtown office market.

"There's a lot of trying to decide what space might become available," said Jon Torgeson, senior vice president of Coldwell Banker Commercial Real Estate Services.

Security Pacific occupies 1.3 million square feet in seven buildings downtown; Wells Fargo has 260,000 square feet in a building across the street from Security Pacific's headquarters.

"In all probability if there isn't a pressing need for economies of scale early in mergers, you will see a gradual working down of space requirements, which will not lead to an overburdening of the market," Torgeson said. "But if the agenda is urgent, that could have a chilling effect (on the downtown real estate market.)"

Security Pacific announced last week it expects an increase in nonperforming loans of $350 million to $450 million in the first quarter, leading many analysts to lower their earnings estimates for the company.

In recent months the holding company has sold $200 million of perpetual preferred stock, placed $250 million of subordinated debentures and securitized and sold more than $1.3 billion of consumer assets.

Credit rating agency Standard & Poor's affirmed Security Pacific's ratings last week but lowered its outlook on the bank to "negative" from "stable."