Chemical Banking Corp. plans to sell its southern and central New Jersey system as a single, $3.5 billion asset bank, rather than auctioning the branches and assets piecemeal, market sources said.

The preliminary bids, which Chemical has already received, are well in excess of $550 million, compared to a tangible book value of about $250 million, the sources said.

"We've been told, if the bid is not at least $500 million, don't even bother," said an investment banker advising one of the bidders.

Due diligence reviews are expected during the next month, with a final decision from Chemical on the buyer likely in mid-February, the investment banker said.

Chemical had no comment.

With bank stock prices so low, the deal would almost certainly be for cash, which would limit potential buyers to only larger banks.

Names mentioned as bidders include First Fidelity Bancorp., CoreStates Financial Corp. and Mellon Bank Corp.

Interest is very high for the branches, the investment banker added.

Last month, Chemical, as part of a $440 million restructuring program, announced that it would sell its southern and central New Jersey branch system. The bank is retaining its northern New Jersey operations, which are adjacent to its New York City headquarters.

The money center bank entered the southern half of the state in 1986 with the $650 million purchase of Horizon Bancorp. But the bank was never able to attain the asset mass necessary to make the investment pay off.

Indeed, Chemical Bank New Jersey still carries a great deal of goodwill on its books from the Horizon purchase, which exceeded 2.5 times book value.

Goodwill is an intangible asset representing the difference between book value and the price that is amortized after a merger.

As a result, the purchase had a catch-22. While it established Chemical in southern New Jersey, the high premium engendered goodwill that hindered further purchases.

When Chemical first announced the sale in December, there was speculation it would sell the branches in clusters or even individually.

The bank never announced how many or which branches would be sold, but said the sale would constitute 60% of Chemical Bank New Jersey's assets and deposits.

Market sources say the new bank will have more than 80 of the bank's 140 New Jersey branches. Chemical already has two charters in the state, so there is no need to file with regulators to create the new bank, sources said.

The northern bank will likely be incorporated into Chemical's New York bank once interstate banking becomes law.

One bank that is not considered a candidate to buy the new, southern New Jersey bank is Meridian Bancorp, which recently terminated a merger understanding with United Counties Bancorp.

Meridian was criticized early in that agreement for paying a high premium, and the market thinking is the bank does not want to risk similar criticism again.

Midlantic Corp.'s purchase last week of Old York Bancorp., which is located in Meridian's backyard, signals that Meridian may be gunshy about acquisitions, an investment banker said.

Summit Bancorp. and Midlantic, once considered potential bidders for some of the branches, are no longer in the running because of the high price.

Summit had frequently been mentioned as a buyer of some of the branches. The bank broke off a merger agreement with Bankers Corp. last year that would have given Summit a significant presence in central New Jersey.

PNC Bank Corp., despite its market proximity to southern New Jersey, is also considered unlikely to bid. The Pittsburgh bank has been hit with large and embarrassing securities losses, and is downsizing its own branch system 30%.

Also out of the running, a source said, is National Westminster Bancorp, Jersey City, which made two large buys in New Jersey last year.

The British-owned bank said late last year it would be interested in only some of Chemical's branches. Because the branches are being sold as one bank, the strategy apparently takes it out of the bidding.

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