Merger activity in the banking industry picked up speed in the third quarter, led by active dealmaking among smaller institutions.
The combined value of deals unveiled from July through September was $7.94 billion, up from a tepid $4.92 billion during the second quarter.
The summer's stepped-up pace of consolidation was atypical in that it occurred despite anemic bank stock prices in a fretful atmosphere of rising interest rates.
Generally, the industry's merger activity is closely linked to bank stock movements because most deals between banks are paid for wholly or in part with stock.
Indeed, the high-profile superregional banking companies like Banc One Corp. and NationsBank Corp. that have led the consolidation movement mostly took the summer off.
The largest deal of the quarter was the $1.1 billion proposed merger of equals between BB&T. Financial Corp., Wilson, N.C., and Southern National Corp., Lumberton, N.C.
The majority of deals in the quarter, however, occurred at takeover prices ranging from $50 million to $150 million.
With the era of full interstate banking now less than a year away, the managements at many small and medium-size institutions apparently had the future on their minds.
"These banks are bulking up in size with the basic aim of having a seat at the table as the industry shakes out over the next few years," said Edward D. Herlihy, a partner in the New York law firm of Wachtel, Lipton, Rosen & Katz.
Wall Street analysts believe these banks are being driven by two related impulses: improving efficiency for the sake of earnings and at the same time enhancing the value of their franchise for sale to future buyers.
"The biggest thing that matters to a buyer is, what are the earnings that this bank can give me," said Michael K. Diana of Bear, Stearns & Co., New York, a lawyer and bank merger and acquisition strategist.
Norman Jaffe, a banking analyst at Fox-Pitt, Kelton Inc., New York, sees an irresistible trend at work: reducing overcapacity in the industry.
"After peaking in the mid-1970s at 31%, commercial banks control less than 20% of the nation's financial assets, yet there are over 11,000 banks still operating nationwide," he said.
"We believe that this excess capacity will continue to promote consolidation," he said. "In addition, any prospective economic downturn would probably accelerate seller interest, as it did in the early 1990s."
While dealmaking increased in the third quarter from earlier in the year, the average price paid was essentially unchanged from the previous quarter, at 171.8% of the seller's book value.
Acquirers also paid an average of 15.9 times the earnings of the seller. That is well below the peak level of 16.8 times earnings two years ago in the third quarter of 1992, when bank stocks were stronger.
The second-largest deal of the quarter was First Bank System Inc.'s planned $826 million acquisition of Metropolitan Financial Corp., a large thrift in Minneapolis.
The third-largest combination unveiled was the $612 million agreement by Boatmen's Bancshares, St. Louis, to buy Worthen Banking Corp., Little Rock.
In a sizable merger of equals between two thrifts in New York, Dime Bancorp and Anchor Bancorp are combining for $551 million.
When will the large players resume expansion activity in earnest? Next spring, according to most observers.
"I think we'll begin to see more activity from some of the major players as we get a few months into next year," said Anthony J. Polini of Mabon Securities Corp., New York.
"Price expectations [of sellers] are still high, but bank stocks have declined, so we've had fewer than the expected number of sizable transactions," said Mr. Herlihy.
"But as we get toward mid-1995 and the new interstate law gets nearer its effective dates, we will see pressure for dealmaking."
President Clinton signed interstate banking legislation into law on Sept. 29. Next year on that date, banking companies will be able to acquire banks in any other state.
Under the same law, the long-time barriers against interstate branch banking are expected to fall by no later than mid-1997.