Valley National Has Talked About Merger, Sources Say

Valley National Corp., Arizona's largest independent bank, has had merger discussions with Wells Fargo & Co. and Norwest Corp., sources with knowledge of the talks said.

The sources could not confirm, however, whether the talks progressed beyond a preliminary stage or whether they are still going on.

All three banks declined to confirm or deny whether any talks have taken place.

Price Increases on Speculation

But in apparent reaction to the merger speculation, the stock of Valley National climbed sharply in recent days. The price briefly changed hands at $30.25 on Friday, a 52-week high, before retreating to $30, up 12.5 cents for the day.

Valley, a $10.7 billion regional bank based in Phoenix, is on the mend after cleaning up its portfolio of sour real estate loans. The bank earned 53 cents a share in the second quarter, versus 10 cents a share a year earlier.

As a result of this improved outlook, the stock was already attracting attention before last week.

"We expect the attractiveness of Valley's franchise to become increasingly evident, as consolidation proceeds elsewhere in the industry and as its own performance improves," noted Salomon Brothers analyst Thomas H. Hanley in a recent report.

Concern on Positioning

While Valley has been reluctant to say whether it would consider a merger, chairman Richard Lehmann is reportedly concerned about the role of a smaller regional bank amidst the mergers of large institutions.

And although Norwest chairman Lloyd P. Johnson was mum with respect to Valley, he said the Minneapolis-based superregional "continues to see opportunities for increased earnings" through acquisitions and geographic diversification.

Though most merger attention has focused on the largest banks, experts predict that merger activity will heat up among strong superregional banks such as Norwest, Banc One Corp., National City Corp., and Comerica Inc. These banks have begun to assemble a diverse geographic mix in the Midwest and Western states.

Hurdles to Any Deal

Banks in this midsized range are examining their options in light of the recent big-bank mergers. These banks - with $1 billion to $20 billion in assets - are too big to be community banks and too small to achieve economies of scale comparable to much larger superregionals and money-center banks.

But several stumbling blocks remain in any merger involving Valley. Trading at around 116% of its book value, Valley is considered an expensive purchase, especially in view of lingering credit problems stemming from the real estate recession in Arizona.

Moreover, Valley's board is said to be interested in keeping the bank independent now that all of Arizona's big financial institutions are now controlled by out-of-state entities.

Still, the company is an attractive partner for an out-of-state bank with a western franchise.

Analysts said potential suitors could feel added pressure to strengthen its southwestern franchise because of the merger of BankAmerica Corp. and Security Pacific Corp., which will create the largest bank in Arizona.

Appeal of Acquisition

For Wells Fargo, the acquisition of Valley would give the San Francisco banking company exposure outside of California, and help build a western franchise. Wells has already expressed its interest in Arizona, bidding on Western Savings and Loan Association.

Norwest, with $37 billion in assets, is the largest banking company in the upper Midwest, with a network of 321 branches stretching across 11 states and three times zones. The bank has made it no secret that it wants to expand its operations in Arizona, in which it has a small presence.

"Norwest is on an expansion program and has identified Arizona as a possible market," said Charles Peabody, a banking analyst at Kidder, Peabody & Co. "There's no question they need to be bigger to justify their presence."

It recently completed the acquisition of Denver-based United Banks of Colorado, a $6 billion asset bank with 40 branches. [Graph Omitted]

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