The Fourth of July fireworks this year certainly did not mark an explosion of bank mergers.

Dealmaking mostly sputtered along in the first seven months of 1996, though investment bankers and analysts say it is now ready to erupt.

There have been signs of life - Washington Mutual's announcement last week of a deal with American Savings, for example. But activity was much stronger last year, and even in '94.

Excluding Wells Fargo & Co.'s January deal with First Interstate - an agreement that originated as a hostile bid last October - there has been only one announced billion-dollar merger pact this year, against 15 in 1995.

Still, some observers say one big one deal - like the Washington Mutual transaction - could spark a chain reaction.

"A big deal would help," said a hopeful John Duffy, director of corporate finance for Keefe, Bruyette & Woods Inc. "It would create pressures elsewhere."

However, he noted, "what you had last year were some banks viewed as sellers for a number of years just deciding at the same time to sell because buyers finally could pay the price. There are fewer of those kinds of banks left."

Though discussions have been frequent this year, sellers' expectations have clearly overshot what buyers have been willing to pay, investment bankers say.

"We are in a buyer's market," said Donald Delson, director of the financial institutions group at Alex. Brown & Sons Inc.

Middle-market buyers "had been the most aggressive in terms of price," Mr. Delson noted, "because sellers represented strategic as well as financial value."

But now "those middle-market players have been absorbed into larger banks."

In the past, banks like Meridian Bancorp, Midlantic Corp., and First Fidelity Bancorp were active consolidators, making acquisitions to extend market share.

Now the main buyers are Fleet Financial Group, PNC bank Corp., and First Union Corp., Mr. Delson said. And these banks are more likely to make in- market, fill-in acquisitions, justified by cost savings.

Companies under $5 billion in assets generally do not have strategic value to these larger companies, he added. There can be exceptions, but most of the sellers in this size category will have to get used to somewhat lower prices, he said.

Mr. Delson said he sees little evidence that the slowdown in mergers will end this year. The large banks are busy digesting last year's deals, he said; when they are ready to begin acquiring again - probably sometime next year - they'll turn to other large banks.

"Last year there was an extraordinary culmination of factors, " said John C. "Hans" Morris, director of the financial institution group at Smith Barney. This year, he said, large banks will focus on product lines more than bank mergers.

Of course, not everyone agrees. Thomas Hanley of UBS Securities, a bank analyst who for over a decade has been producing a takeover list, predicts there will be a rush of bank mergers around Labor Day.

Names on his current takeover list include Hibernia Corp., Keystone Financial, Union Planters, and Summit Bancorp. - all mid-cap banks.

"The key drivers behind the consolidation wave remain in place," he said. "There are a lot of deals percolating. ... Expect activity to accelerate once again over the next six to nine months, particularly in the South and Midwest regions."

Midsize banks still exist in these areas, unlike the Northeast and West, where they have been largely consolidated out of existence.

Mr. Delson agreed, saying 1996 is like the trough between merger waves.

Mr. Hanley also pointed out that many banks sat out the 1995 merger party, including BankAmerica Corp, SunTrust Banks, and KeyCorp.

However, chief executives of those companies have indicated a preference for avoiding bank mergers. KeyCorp chief executive Robert W. Gillespie has said the Cleveland banking company is more interested in nonbank acquisitions, and BankAmerica's new CEO, David Coulter, is seen as more interested in internal growth.

And there are other factors. Emerging alternative delivery systems - like computer and telephone banking - may have some banks convinced there is no value in buying brick and mortar.

"A lot of banks are listening to the 'virtual bank' theory," said Robert Albertson, bank analyst with Goldman Sachs & Co.

But that argument is just a red herring, an excuse for some bankers not to pursue transactions, argues Christopher Quackenbush, a managing director at Sandler O'Neill & Partners, which has an active bank advisory practice.

"What you are buying is access to a customer base," he said. "Whether you are buying a branch is not relative.

"Most customers are not in an electronic mode today," Mr. Quackenbush noted. "So capture them - and then offer them alternatives down the road."

One trend many observers predict is an increase in merger-of-equals transactions.

With few buyers and sellers able to meet on price, many banks may be willing to do mergers of equals, which are predicated on cost savings and revenue synergy, not a premium for the target's shareholders.

"Anytime you have a feeling that pricing is not as aggressive as it could be, you will see more discussions about merger of equals," Mr. Quackenbush said. "There are certainly a lot of discussions going on."

Keystone and Dauphin Deposit - both of which may now fall below the radar of larger banks - have long been rumored to have talked about merging.

But the jury is out on such pairings. Today's KeyCorp, the result of one, has never delivered the results promised at the time. And there is still concern that Southern National Corp. won't deliver the results expected after its merger with BB&T in 1994.

One area where merger activity may heat up is among the California thrifts, long rumored to be takeover candidates.

Observers are hopeful that Washington Mutual's deal for California's American Savings could jump-start thrift activity in the Golden State. American agreed to be acquired for $1.2 billion plus debt.

Still, it would almost take a miracle for bank and thrift mergers in 1996 to match those of 1995.

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