Bank merger activity doubled in the third quarter, fueled by industry concerns about future revenues and assisted by an upturn in stock prices.

Deals during that period totaled $6.6 billion, compared with $3.3 billion in the second quarter and $4.2 billion a year ago, according to data from SNL Securities, Charlottesville, Va.

It was the biggest dealmaking quarter since the third period of 199 1, when BankAmerica Corp. unveiled its merger with Security Pacific Corp. and Chemical Banking Corp. announced its combination with Manufacturers Hanover Corp.

No Slowdown Seen

The pace shows no sign of letting up. The fourth quarter has already featured the largest deal since 1991 - the $3.8 billion combination of Society Corp., Cleveland, with Keycorp, Albany, N.Y.

Prices paid for banks rose significantly in the third quarter.

The average price in the July-September period advanced to 169.5% of the acquired bank's book value per share versus 164% during the second quarter and 147% a year earlier.

"The tendency is to wonder if the high prices will slow down merger activity, but I think it is more likely we will see activity at a fairly high pace over the next year and a half," said Francis X. Suozzo of S.G. Warburg & Co.

Pressure to Expand

He cited several reasons. First, banks are less worried now than in the past that they might buy a loan portfolio "with a black hole in it" due to problem assets.

Second, banks are increasingly to stake out positions in markets from a dwindling supply of takeover candidates. While that drives up prices, it also puts pressure on banks to expedite their expansion plans.

The Keycorp-Society combination only adds to that pressure, he said, by creating "one more huge regional bank with an expressed desire to be an acquirer."

Indeed, Keycorp chief executive officer Victor J. Riley Jr. said he hoped to announce another acquisition before the merger with Society closes in the second quarter of next year.

Keycorp-Society, itself billed as a "merger of equals" transaction, "will certainly stimulate a lot of discussion and probably more deals in the Midwest and Middle Atlantic," Mr. Suozzo said.

J. Richard Fredericks of Montgomery Securities said "competitive preemption" is the chief reason behind acquisitions now, said

He views consolidation among banks "as one big wave that ebbs and flows" rather than a series of waves.

"And it's going to continue because the United States is an overbanked country."

What's Driving Deals

In general, industry watchers say the latest burst of activity is being propelled by several factors.

Foremost is the pressure on banks to generate revenue that will sustain their earnings growth.

For the past three years, banks' earnings and stock prices have primarily been driven by increased efficiency through expense control and falling credit costs.

But these are increasingly seen as secondary factors to the need for new revenues. And with only modest loan growth expected, new earning assets must be purchased through acquisitions.

Stock Price Rebound

Meanwhile, there was a recent revival in stock prices, which are the medium of exchange in most banking mergers. That helps boost acquirers' ability to purchase other banks.

The American Banker index, a weighted average of 225 banking stocks, gained 4.7% during the third quarter, according to SNL Securities, after losing 2.9% in the second quarter.

In contrast, the Dow Jones industrial average rose only 1.1% during the third quarter.

Bank stock prices appeared to gain momentum as the quarter advanced, giving banks added confidence to expand and also helping boost the average price paid for banks being acquired.

The acquisition prices worry some bank watchers, who believe they are becoming uneconomic.

Kay C. Lister of Keefe, Bruyette & Woods Inc. calculated that cost savings exceeding 40% of the acquired bank's non-interest expense base will be needed to overcome initial dilution to the buyers' earnings per share "in at least two cases" among third-quarter deals.

The deals she singled out are the proposed acquisition of Peoples Bancorp of Worcester by Shawmut National Corp. and the planned purchase of San Diego Financial Corp. by First Interstate Bancorp.

Shawmut is paying $180 million in stock for Peoples Bancorp, or 1.75 times its book value, one of the highest prices ever paid for a thrift institution. The deal gives Shawmut the largest retail market share in Worcester, which is the second largest city in New England.

First Interstate is paying $340 million in stock for San Diego Financial Corp., or 2.55 times its book value. The Los Angeles bank has defended the price, noting that it will triple its market share and jump to third place in San Diego's banking market - the state's second largest.

In contrast, Wachovia Corp. needed to purge only 9% of the expense base of South Carolina National Corp. to eliminate initial dilution in that acquisition, announced in June 1991.

And First Bank System Inc. needed to slice Colorado National Corp.'s costs by 18% to neutralize dilution in that deal, announced in November.

The largest deal announced in the third quarter was the $875 million planned purchase of Valley Bancorp, Appleton, Wis., by Marshall & Ilsley Corp., Milwaukee. Valley has assets of $4.4 billion.

The second-largest deal involved a thrift, Chicago's Cragin Financial Corp., which is being bought for $563 million by ABN-Amro Holdings, Amsterdam, which already has a significant banking presence in Chicago.

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