Mergers between community banks hit a record pace in 1994, with more small banks tying their futures to other small banks instead of the large regionals.

And observers predict that, while merger and acquisition activity between community banks will slacken in 1995, it won't decline nearly as much as will overall bank M&A activity.

"The big guys aren't buying as many of the smaller guys," said Reid Nagle, president of SNL Securities in Charlottesville, Va. "It's the small guys who are buying the small guys."

SNL counted 282 mergers between banks of less than $5 billion in assets during 1994, a 19% increase from 1993.

Community bank mergers accounted for more than half of all bank merger transactions in 1994. But while the amount of assets sold between community banks hit $23 billion in 1994 - a 10% increase - that was but one-10th of total banking assets sold.

Not surprisingly, the states with the most community bank mergers were Illinois, Texas, and California. The central states, with unit banking still being flushed out of the system, is where most of the mergers took place in 1994 and will likely take place in 1995.

"We have some of the most arcane banking laws in the country; therefore, we have the most small banks in the country," said Joe Stievens, bank analyst at Stifel, Nicolaus & Co. in Chicago. "With the breakdown of these laws, you'll see more consolidation here than anywhere else in the country."

Texas led the country in community bank mergers, with 34 transactions in 1994. Illinois and California each had 23.

Mr. Nagle said more small banks are seeking other small banks for merger partners because larger banks, their stock prices taking a beating on Wall Street, are finding acquisitions increasingly dilutive.

"Most of the big bank-small bank transactions have become prohibitively expensive for the acquirer," he said. "Community bank transactions more often rely on personalities, circumstances, and events, not just pure economics."

Mr. Stievens predicted that 1995 would be another active year in the Midwest for community bank mergers but not at 1994's pace. "It's hard to say if 1995 will be as active because of stock prices," he said.

Mr. Nagle agreed but predicted that whatever drop there is in the number of community bank mergers will not be nearly as large as that for larger banks.

Only in Texas is merger activity between community banks expected to keep pace with 1994.

"I expect it to accelerate," said Bill Strunk, a bank consultant in Houston. "The same conditions that were driving mergers last year will continue to be the case in 1995 and for the next two or three years. Banks here are too small. They need to grow to absorb their rising costs and expenses."

He said that, stock prices notwithstanding, the interstate branching law will stimulate merger activity in Texas because the state is such a key battleground for the country's biggest banks.

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