Pre-merger stock volatility at community banks suggests that trading on inside information may be widespread, despite a rise in enforcement actions.

An American Banker survey of 20 recent mergers involving banks and thrifts with less than $3 billion of assets revealed questionable trading patterns in the stock of 12 of the target institutions.

In all 12 cases, the stock price of the selling bank jumped by at least 10% or traded several times more heavily than average in the days before the deal was made public.

Several of those banks reached confirmed that the National Association of Securities Dealers, which operates and regulates Nasdaq, had launched a formal inquiry into their puzzling stock activity.

"I'm interested in running a bank, not a stock market," said Harvey Porter, chief executive of Regent Bancshares in Philadelphia. "I didn't follow it, and at the time didn't know anything about it."

Mr. Porter was referring to Regent's stock jumping by $1.50 to $9 just three weeks before the bank announced last Aug. 31 that it would be sold to Carnegie Bancorp. On one day, 13,300 shares were traded, almost 13 times the stock's daily average in 1995. Until July 31, the stock had only briefly gone above $6 in 1995 and had dipped as low as $5.75.

Thomas Gray, president of Princeton, N.J.-based Carnegie, confirmed that the NASD had contacted the banks about the stock movement. The stocks of most community banks trade on Nasdaq.

He said the association inquired about the high volume and asked which individuals were inside the loop on the pending deal. He said he has not heard anything since.

In the two weeks before Conestoga Bancorp of Roslyn, N.Y., announced last November that it would sell to Brooklyn-based Dime Savings Bank of Williamsburgh, its stock jumped by 8% to $19, and, more alarmingly, 141,500 shares - nearly triple its average daily volume last year - traded in one day.

"As far as insider trading, I don't think we had any," said John W. Boyle, chief executive of Conestoga. "We try to make it very clear to our officers and directors as to when they can trade and when they can't." Mr. Boyle acknowledged, however, that the NASD "probably did call us, yes."

Moxham Bank Corp. of Johnstown, Pa., also confirmed that the NASD was conducting an inquiry. The bank's stock jumped by more than $8 to $32.50 just before it announced last November it was being acquired by BT Financial Corp., also of Johnstown. In one day its stock traded more than 26 times its daily average.

NASD officials and bankers stressed that there are often explanations for questionable stock movements - other than insiders or others with nonpublic information illegally looking for a quick profit. Savvy investors, the fact that a stock is thinly traded, and lucky speculation could move prices significantly in the days leading up to a merger announcement.

For example, Execufirst Bancorp had a one-day volume of 18,000 shares nine days before it announced it was selling to Philadelphia rival Republic Bancorp. Even though that amount was well above Execufirst's daily average, its chief financial officer said such large blocks of the bank's stock are traded now and then.

"Our stock is so thinly traded that it's hard to establish what is normal," said the executive, George Rapp. "The only thing that's normal is that it doesn't trade very much." The NASD has not contacted the bank, he said.

Of the other institutions that appeared to have unusual stock activity before they announced they were selling, Safety Fund Corp. of Fitchburg, Mass., First Harrisburg Bancor in Pennsylvania, and West Jersey Bancshares of Fairfield, N.J. had various explanations for their stocks' movement and said they had not been contacted by regulators, and officials at five others could not be reached for comment. They are: Charter Bancshares, Houston; First Citizens BancStock, Morgan City, La.; Bell Bancorp, Chicago; Bank of New Hampshire Corp., Manchester; and First Washington Bancorp, Herndon, Va.

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