WASHINGTON -- Increased competition and a surprisingly large offer enticed directors of Washington, D.C.-based Home Federal Savings Bank to sell to First Union Corp.

The $232 million-asset thrift entered into an agreement with the $72 billion-asset Charlotte, N.C.-based company last week in a deal worth an estimated $25 million, or about 1.80 times book value.

"We though this was a pretty significant price," said Elwyn G. Raiden Jr., Home Federal's president and chief executive. "This was clearly a superior transaction for the stockholders. When those kinds of offers come down the pike, you've got to react to them."

One Independent Left

Home Federal's stock closed at $19.75 last Thursday, up from $12.125 the previous Friday, the final business day before the announcement was made. The deal, which is expected to close in the fourth quarter.

Like many other small banks and thrifts, Home Federal's management decided that it either had to sell or grow because of stiff competition.

"Operating in the city is pretty fierce," Mr. Raiden said. "You have to have a broader brush in the marketplace than we have had."

Industry observers were startled by the acquisition. Home Federal operates just six branches in the city, with $204 million in deposits, and it hasn't been a flashy performer. Last year, the thrift earned $2 million, compared with a $101,000 loss in 1992. For the first three months of the year, Home earned $207,446.

The acquisition paled in size to First Union's February 1993 deal with First American Metro Corp., which had $4.6 billion in assets.

"I thought this didn't make much sense,' said Arnold Danielson, a banking consultant based in Rockville, Md. "It didn't seem worth their time."

Even Mr. Raiden was caught off guard by the offer.

"I was kind of surprised that they had an interest," he said.

One Washington banker, who requested anonymity, maintained that the acquisition was a political move to mend fences with local officials and show them that First Union is committed to the city.

Fired Employees Sue

Last year, First Union bickered with the district's city council, saying it didn't need the local government's approval to acquire First American. Several weeks ago, First Union was sued by more than 100 former First American employees who were fired after the acquisition. The former employees, many of whom are black, said they are victims of discrimination.

A First Union spokesman said the decision to acquire Home Federal wasn't to mend fences.

"It's a business decision," he said.

Hugh C. Long, First Union's capital-area president, said the company made the acquisition because Washington and the surrounding suburbs are promising.

"We want to do whatever it takes to be more significant in the Washington metro market," Mr. Long said. "We do value the market so much. The economy is improving. We would not rule out the possibility of future acquisitions" in the area.

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