Community bankers looking for the secret to making shareholders happy might do well to follow Morgan Murphy's example: Run your bank well.

The chairman and chief executive officer of First State Corp. has done only that, and the stock market loves him for it.

The Albany, Ga., banking company had the greatest percentage increase in its stock price last year of any U.S. bank with less than $3.5 billion of assets.

And that performance occurred without stock buybacks, specific merger speculation, external pressure, or one-time gains. In other words, banking as usual.

"Folks like us," Mr. Murphy said with a slight southern drawl; "we're very happy about being liked."

He's also very happy about the stock's performance - and with good reason. An annual American Banker ranking of the greatest increases in stock price among community banks showed the price of the $516 million- asset bank's shares rose 86% during 1996, to $31 at Dec. 31.

That leap is almost 18 percentage points more than the next greatest increase, 68.29% for Summit Bank Corp., Atlanta.

First State's stock also had its most active year since the company went public in 1994, with about 150,000 shares traded last year out of 4.5 million outstanding. It had a 3-for-2 stock split in early July. Another important factor: The two-bank holding company also increased its cash dividend to equal about 25% of 1995 per share earnings. The dividend has risen 740% since 1991.

But generally in the past couple of years, long-term price increases in community bank stocks have been driven by overall merger activity and speculation as much as a bank's improving performance, said Frank J. Barkocy, senior vice president at Josephthal Lyons & Ross in New York.

That's because the prices paid in recent transactions have been soaring through the roof, in many cases well above the past benchmark of two times book value. For example, First Capital Bancorp, Monroe, La., sold out last year to Deposit Guaranty Corp., Jackson, Miss., for 3.8 times book value, the biggest premium to book value for a community bank last year.

And such prices convince many community bankers, and investors, that their institutions can command big premiums, too.

In addition, a bank issue is affected by factors specific to a company, such as the value of the franchise, the local market, the scarcity of other takeover candidates, the age of management, and the perceived willingness of management to consider a sale.

"There's probably pretty much a common thread throughout" the community banks whose stock prices rose sharply, Mr. Barkocy said. "You're getting part of your appreciation because the value of your franchise is increasing, and you are probably getting some benefit from the overall consolidation that's taking place in the industry."

By comparison, price surges in larger banks' stocks have been more affected in recent years by stock buybacks, said Richard X. Bove, bank analyst at Raymond James & Associates, Tampa.

Also, banking stocks in general benefited last year from the overall boom in the stock market. In the last year, the Dow Jones industrial average has been jumping from milestone to milestone.

And the banking industry has been lifted with all the rest. The mean of the top 25 community bank stock price increases was 52.13% and for all publicly traded community banks, 21.95%.

By contrast, big bank stocks increased an average of 27.91% and for all publicly traded bank stocks, 26.12%.

Banks also won renewed interest from investors due to continued record earnings and significant gains in Congress that will help the industry. In particular, the resolution of the thrift insurance fund crisis lifted a cloud that had hung over both the bank and thrift industries for several years.

Finally, shareholder activism and heightened consolidation in the industry lifted many, if not most, community bank stocks on pure speculation that mergers would continue and would target smaller banks.

In fact, many banks on the top 25 list have been on analysts' takeover lists for some time, Mr. Barkocy said, though few if any had specific rumors attached to them during the year.

Only one of the top 10, Anaheim, Calif.-based SC Bancorp, experienced significant shareholder activism.

The others focused more on boosting earnings and expanding their franchises through small acquisitions or branch openings.

First State is certainly typical of the top banks. It reported its fifth straight year of record earnings in 1996, with $7.6 million of profits. Return on assets and equity were 1.63% and 16.72%, respectively, and asset quality remained high, with less than 1% of loans past due.

First State's ratio of loans to deposits was 71% last year, and it leveraged capital through its purchase in July of two First Union Corp. branches, with $82 million of deposits.

"The better you perform," said First State chief financial officer Robert E. Lee, "the more you're looked at. That certainly contributes."

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