Despite passage of interstate banking legislation last year, the bank mergers and acquisitions market limped into 1995, hobbled by low bank and thrift stock prices.

And unless there are profound equity price shifts upward, the M&A market for 1995 will not match the fast and frenetic pace of consolidation that marked the first nine months of last year, industry observers said.

Instead, there may be an increase in mergers of equals, and even hostile acquisitions.

While rising competition and shrinking profits continue to create an environment conducive to consolidation, the tools - namely high share prices for acquirers - are not there, investment bankers lamented.

"The volume of deals will be less in 1995 than in 1994, because people see their currencies are unloved," said Gerard L. Smith, director of financial institutions M&A at Salomon Brothers Inc.

"In 1995 a lot of banks are going to be actively involved in buying their own stock and managing their equity account(s) rather than openly acquiring other companies," he added.

Last year, rising profits, high stock prices, and consolidation euphoria combined to make 1994 one of the industry's top M&A years ever.

The activity occurred mostly among regional banks, as money-centers and superregionals generally were content to digest many of their previous years' acquisitions.

Midsize banks gobbled up smaller competitors who either could no longer match the rates and services offered by their larger neighbors, or simply could not refuse the lavish takeout prices.

But in September - ironically just before Congress approved the interstate banking bill - the Federal Reserve Board's constant interest rate hikes took their toll, and equity prices began to decline, dampening M&A fervor.

A series of trading and derivatives losses at major banks further depressed prices, and M&A came to a near standstill as the new year beckoned.

As a result, cash deals will likely predominate early on this year, evidenced by 1995's first deal, First Union Corp. agreeing to pay $531 million in cash for Coral Gables Fedcorp, a $2.5 billion asset Florida thrift.

Companies like Banc One Corp. used to be able to use its powerful stock to gobble up smaller companies, but for the time being consolidation through conglomeration is over, Mr. Smith said.

Instead, there may be an increase in mergers of equals, said William B. Weaver, co-head of financial services M&A at Lehman Brothers. His firm advised both parties in 1994's largest such deal - the $1.8 billion merger between BB&T Financial Corp. and Southern National Corp.

When there is a pressing need to consolidate, but banks' currencies and price/earnings multiples are the same, mergers of equals become realistic options, he said.

Also on the horizon, Mr. Weaver said, could be an increase in hostile activity. Still relatively unheard of within the gentlemanly banking industry, bear hugs and outright hostile deals could become more common this year, he said.

"In this situation with high seller expectations and low stock prices, a hostile takeover would make sense," he said.

"There are a lot more banks taking 4.9% ownership interests in banks they may be interested in," he added.

Mr. Weaver would not specify which banks are taking these stakes, but one clear example is Fleet Financial Group, which drew heavy attention last year for taking such positions in a number of New England banks.

The perspective of regional investment bankers is somewhat different, however.

While the Wall Street pros see little hope of a busy year, the main street view is that community bank M&A will continue at a torrid pace.

"There will be more activity among the community banks as the much larger banks turn their attention elsewhere," said Michael Mayes, director of bank M&A at Advest Inc., which focuses exclusively on New England's community banks.

"The larger banks, because of passage of interstate legislation, will turn to more national opportunities, rather than in-state or even regional," he said.

As a result, he said, the premiums paid for deposits should decline. While larger banks could afford the dilution that came with paying two to 2#1/2 times book value, community banks cannot, Mr. Mayes explained.

Either way, until stock prices increase, sexy, high-priced deals will be few and far between.

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