BANK MERGER TALKS RESUME.

Byline: Dawn Yoshitake Daily News Staff Writer

First Interstate Bancorp said Monday that it has resumed merger talks with hostile bidder Wells Fargo & Co., handing friendly suitor First Bank System Inc. another major setback in the battle for the Los Angeles-based financial institution.

First Interstate's announcement came as Federal Reserve officials began public hearings in Los Angeles and San Francisco this week over the two competing merger applications. Community groups, government representatives and banking officials are speaking on the effect a merger would have on jobs and banking services, especially in low-income neighborhoods.

First Interstate's reversal followed months of sparring with San Francisco-based Wells Fargo in newspaper ads, court filings and via community supporters. Wells' uninvited offer in October sparked a competing bid from First Bank - which claimed a better long-term strategy despite its lower offer.

"As a company, we are always mindful of our responsibilities to our shareholders, employees, customers and the numerous communities of which we are an integral part," said First Interstate chairman and chief executive William Siart. "It was in that spirit that we initiated the meeting with Wells Fargo."

Wells' bid got a boost Friday when First Bank announced that Securities and Exchange Commission regulators would require a two-year delay in its stock repurchase plan, rather than its anticipated 90 days. That move would likely hurt shareholder value and earnings for a longer period of time, analysts said.

Wells Fargo's offer is now worth $11.27 billion, or $148.50 per share at Monday's close - compared with First Bank's offer of $9.87 billion, or $130 a share.

Said Wells chief executive Paul Hazen after the hearings Monday: "I'm hopeful and excited about the prospect of a First Interstate merger."

Siart, in a letter to those attending the hearing, said talks with Wells are continuing and he hopes to have some news to report shortly. But in the meantime, the merger agrecould walk away with up to $200 million in break-up fees.

Despite First Bank stating it would find other methods to increase shareholder value without the stock buybacks, analysts said few options exist for reworking the deal.

"I don't think they'll raise their offer. It would be highly uncharacteristic," said Carole Berger, a Salomon Bros. analyst. "They are extremely dedicated to increasing shareholder value and if they raise their bid, their stock price would likely go down."

Based on those expectations, Berger said investors bid up First Bank's stock to 50, up 1-1/2 at Monday's close. First Interstate, meanwhile, closed at 143-3/4, up 4-7/8. And Wells Fargo closed at 222-3/4, up 5-1/2.

Institutional investor Douglas Roberts, the Michigan state treasurer whose office holds about a 2.5 percent First Interstate stake and a 3.7 percent First Bank stake, said he is happy with the returns the banks have brought and he does not intend to weigh in his opinions with the banks' management.

"We have done well in both investments," Roberts said. "I don't try to micromanage those companies. They have contacted my staff and my instructions to them are to make the most prudent investment. If we don't like the way the deals are being handled, we'll sell the stock and take the profits."

First Interstate's announcement put a damper on some community groups, politicians and employees who have rallied around the bank, with the hope a First Interstate-First Bank merger would mean fewer job losses since there are no overlapping branch offices in California.

"I judge a bank on its economic services to disadvantaged areas," said Los Angeles Mayor Richard Riordan, who spoke at the hearing. "And all I'm saying to the Federal Reserve is not to let this (Wells) merger go through until you have specifics."

Riordan wanted details on how jobs would be created in the Los Angeles area in a Wells-First Interstate merger, contributions to local charities and loans to stimulate economic development.

Despite opposition from politicians and other organizations, the Greenlining Institute of San Francisco and its coalition of community groups support the Wells Fargo deal.

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Photo (Color) Paul Hazen