Anglo Irish Bank and First Active will this morning confirm to the Stock Exchange that they are in merger negotiations. The negotiations, about which there has been speculation for some months, are well advanced and a deal could be concluded in the coming weeks.

Most of the financial details are said to have been finalised, with discussions now largely focusing on the structure of a new management team and board of directors. The talks are understood to have faltered recently due to dissatisfaction at First Active about the number of boardroom positions being made available to the former building society.

Anglo Irish Bank is roughly twice the size of First Active and, as such, it will have a greater representation at management and board level. Anglo chief executive Mr Sean Fitzpatrick is expected to assume the role of chief executive of the merged entity.

First Active's board and management have been criticised for lacking the skills and vision to drive the business forward since it became a public company. Some of its current board members seem likely to be dropped from the new board.

Three of the directors - chairman and acting chief executive Mr John Callaghan, Lamont chief executive Mr Richard Miliken and Prof Noel Whelan - come up for re-election at First Active's annual general meeting tomorrow. Their re-election is being opposed by a group of disgruntled shareholders in a campaign orchestrated by the Today FM presenter, Mr Eamon Dunphy.

As First Active is protected under legislation from being taken over until 2003, it will have to make a bid for Anglo Irish Bank. The bid would be structured as a share swap, with First Active expected to offer just over two of its shares for every one Anglo Irish Bank share. The exact number of shares to be bid will depend on the share price of each company when the deal is completed.

Together, the two banks would have a market capitalisation of around €1 billion (£788 million), with exposure to the residential mortgage and small and medium-sized business markets. News of a link-up with Anglo will be welcomed by First Active's shareholders as the shares continue to trade well below flotation price. However, analysts remain sceptical about what the merger will deliver for Anglo.

Anglo Irish Bank is a highly successful company with a well-regarded management team which has shied away from retail banking and has expressed no interest in running an extensive branch network. Its entry into the mortgage market through First Active comes at a time when competition is intense and profit margins are under pressure.

First Active has recently been restructured to improve its competitive position. It has recently completed a wide-ranging cost-cutting programme, which included 175 job losses and the closure of 25 of its 76 branches, although its cost base is still considered too high. Further rationalisation of that business would have to be undertaken if the cost-to-income ratio of the two banks is to be aligned.

First Active has also signalled its plans to switch out of less profitable areas of business, such as the provision of current accounts and credit cards, and has been reviewing whether it can afford to maintain ordinary demand deposit accounts in a low interest rate environment.

Confirmation of the merger talks should help to defuse some of the tension at First Active's a.g.m tomorrow, although shareholders will have to wait for some time yet before the full details of the deal are revealed.