Bank merger activity plunged in the second quarter in reaction to the retreat in bank stocks. .
The peace of industry consolidation slipped 19% when measured by the value of announced deals.
Deals totaled only $3.3 billion, versus $4 billion in the first quarter, according to SNL Securities, Charlottesville, Va.
The tempo slowed a more dramatic 36% when gauged by aggregate assets sold, when tumbled to $26.3 billion from $41 billion in the previous quarter.
The average price paid for acquisitions dropped slightly, to 162.9% of the acquired banks' book value from 164.7% in the first quarter. However, it stayed well ahead of the average price of 139.7% of book value paid a year earlier.
The largest deal unveiled during the quarter was Banc One Corp.'s proposed $707 million acquisition of Firstier Financial Corp., Lincoln, Neb., which has $3 billion of assets.
Stock Drop Blamed
The pall over mergers and acquisitions is widely seen as a consequence of the reversal in bank stocks.
The American Banker index, a weighted average of 225 bank stocks, lost 2.9% during the quarter, according to SNL Securities. Some bank stocks fell more sharply than the index.
Banks finance acquisitions mainly with stock. When share prices fall, investors become concerned about earnings-per-share dilution.
That prompts caution by managers of acquiring banks and can put the brakes on dealmaking when "target banks" think they are not being offered the price they are worth.
"Acquiring managements are sensitive to the market's response to dilutive pricing," said bank analyst Thomas H. Hanley of First Boston Corp.
At the same time, selling managements are concerned about maximizing value received, he added.
But most observers believe the dropoff is only temporary.
"My guess is that we'll see more activity in the second half of the year," said Francis X. Suozzo of S.G. Warburg & Co.
"Acquisition activity will pick up, perhaps substantially," said Mr. Hanley, who expects bank stock prices to rise over the next three to six months. The second quarter stock price pullback "will enable both sides to come to a more realistic assessment of value."
Most observers think the overriding reason that dealmaking will pick up again soon is that banks must continue merging to maintain growth of profits.
With loan growth slow, Mr. Hanley said the banking industry remains under pressure to consolidate "to ensure earnings momentum" by "acquiring assets and origination capability."
A Trend Toward Thrifts
Duplication of facilities and functions in general and overlapping branch networks in particular also provide enormous opportunities "to rationalize costs," he said.
Analysts at Salomon Brothers Inc. agree that many capital-rich banks will look toward acquisitions as a viable alternative to increase profits.
Besides the slowdown in deals, another notable aspect of the second quarter was the number of acquisitions of healthy thrift institutions by banks.
This trend got off to a fast start in the third quarter -- with ABN Amro Bank's announcement 6f plans to buy Cragin Federal Bank for Savings in Chicago and Fifth Third Bancorp's deal to buy Tristate Bancorp in Cincinnati.
First Fidelity Deal
The second-largest deal of the second quarter was the proposed purchase of Peoples Westchester Savings Bank, Hawthorne, N.Y., by First Fidelity Bancorp., Lawrenceville, N.J.
The New Jersey superregional is paying $233 million, half in cash and half in stock, or 1.4 times Peoples' book value. It likely will have to spend some more to boost the thrift's loan loss provision.
Nevertheless, the thrift's stock price fell on the disappointment of some investors, notably arbitragers, that the purchase price was not higher.
Also announcing thrift-buying plans during the quarter were PNC Bank Corp., Pittsburgh; First Alabama Bancshares, Birmingham; Amsouth Bancorp., Birmingham; Huntington Bancshares, Columbus, Ohio; Keycorp, Albany, N.Y., and Bancorp Hawaii, Honolulu.
PNC will pay $166 million in stock, a healthy 163% of book value, for United Federal Bancorp., State College, Pa.
First Alabama won a bidding contest, apparently with Amsouth, to acquire Secor Bank, the state's largest thrift, for $139 million, or 123% of Secor's estimated book value. Amsouth, meanwhile, is buying Midstate Federal Savings, Ocala, Fla.
Huntington unveiled the two most expensive thrift purchases of the quarter. It is buying Railroadmen's Federal Savings and Loan, Indianapolis, for $87 million, or twice the thrift's book value. And it is acquiring First Bancorp Indiana Inc., Lafayette, for $48 million, or 169.5% of book.
"While the prices of these transactions still lag behind bank acquisition pricing, the gap appears to have narrowed," said Thomas J. Maier of Kemper Securities Inc., Chicago.