First Interstate Bancorp is on something of a roll these days.

Despite California's deep and lingering economic recession, the Los Angeles-based super-regional surprised Wall Street with better-than-expected improvements in both credit quality and expense control at mid-year. Both have been nagging problems.

Analysts were also impressed by the bank's move to recruit customers by accepting scrip that the state issued in the absence of a budget. First Interstate's two top rivals, Bank-America Corp. and Wells Fargo & Co., have stopped taking the state IOUs.

"It's a smart move," said Campbell K. Chaney, bank analyst at Sutro & Co., San Francisco. "A lot of those customers will probably stay with them. As the No. 3 bank in the state, they played it just right."

First Interstate's share price, along with those of other bank companies, has recently been hurt by worries about the state's business conditions. But the stock is still ahead 27% this year. Wednesday afternoon, it was trading at $38 a share, up 37.5 cents.

Lawrence W. Cohn, an analyst at PaineWebber Inc., recently raised his earnings estimate for the company. The stock "could easily sell into the mid-$50s on its own earnings power," he said. Previously, he had felt that price level was achievable only in a takeover.

"The company in the past has never earned close to its underlying earnings power," said Mr. Cohn, "but new management at First Interstate is pushing the company to higher levels of profitability than it has seen in years."

Mr. Cohn, who rates the stock "attractive," estimated the company's normalized earnings power at $7 a share. He has lifted his 1992 earnings estimate to $3.75 a share, from $3.10, and his 1993 projection to $5, from $4.10.

Also offering a "buy" rating is Salomon Brothers Inc. The company enjoyed "an excellent credit-quality quarter," despite a difficult operating environment, said Salomon analysts John D. Leonard and Diane B. Glossman.

Thomas H. Hanley at First Boston Corp. rates the stock a "hold." His major concern is possible pressure on the bank's net interest margin in coming quarters - not credit quality.

Reasons a Deal Must Wait

He also said the stock clearly carries a premium for a potential merger that he does not anticipate right now. A long-rumored potential transaction with Wells Fargo & Co. has likely been shelved "by other concerns at Wells Fargo," he noted.

Meanwhile, "other potential acquirers also appear to be biding their time, waiting for the upturn in the California economy that will signal a return to higher profitability for First Interstate," Mr. Hanley said.

Some observers have reasoned that Wells may almost have to buy First Interstate, which has $49.5 billion in assets, to project its market position after BankAmerica's acquisition of Security Pacific Corp. last April.

The outsider most prominently mentioned is Norwest Corp., which has a westward expansion strategy.

Analysts think merger speculation can be expected to increase through this year, as the January expiration date nears for First Interste's Class A stock.

Acquiring First Interstate will become $260 million cheaper when conversion of those shares, issued in 1987 for the acquisition of Allied Bancshares of Texas, is no longer required.

WEDNESDAY'S MARKET

Wells Fargo and a few others bucked the trend, but most bank stocks were mixed to lower in price as the stock market had another losing session. Investors continued fretting about the economy's health and direction.

Wells was up $1.50 a share, to $69.75, after news that investor Warren Buffett had raised his stake in the company to 10.75%. Other big gainers were Cincinnati's Fifth Third Bancorp., up $1 a share, to $50.25, and Detroit's Comerica Inc., $1.375, to $60.75.

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