A veteran New England financial analyst is wary of a price bubble in shares of the region's thrift institutions, which have recently hit sky-high levels on takeover speculation.

"The price increases have been indiscriminate. It's as if the market expects deals to be announced next week," said John D. Rooney Jr. of Legg Mason Wood Walker Inc., who works in the firm's New Haven, Conn., office.

Stock prices of some thrifts in Connecticut and Massachusetts are 100% above their lows following huge gains in May and early June.

"A lot of stocks that were selling at 60% of book are suddenly now at 90%, or 110%, or above," said Mr. Rooney. He expects some of the stocks to lose altitude once the reality of a stillweak regional economy sinks in with would-be acquirers and investors.

DS Bancorp, Derby, Conn., for instance, is 127% above its 52-week low with the help of a 12.7% gain in May. It currently sells at about 125% of its book value per share.

Lexington Savings Bank, Lexington, Mass., is 106% beyond its year-low and selling around 110% of book value. Its share price advanced 12.3% during May.

Prices Double in Connecticut

Similarly, Dime Financial Corp., Wallingford, Conn., is 105% above its lowest price and Shelton Bancorp Inc., Shelton, Conn., is 102% over its low.

"The market seems to assume that a savings bank, if reasonably run, has a takeover value of 175% to 195% of book value," Mr. Rooney said. "And even if it's not in reasonable good shape, they figure it's still worth 170% of book.

But realities about revenues may eventually prompt lower acquisition prices than the market seems to anticipate, said the analyst, who began his career in the late 1950's following utilities and banks for Charles W. Scranton & Co.

"I look at some of this and say, 'What the devil are you buying? How much do you pay for first mortgages?'" Mr. Rooney said.

Superregional banking companies, both in New England and from elsewhere in the Northeast, are acquiring thrifts because they are still reasonably priced in comparison to commercial banks.

The thrift price gains were sparked in part by Shawmut National Corp.'s acquisition of Northeast Federal Corp., Hartford, Conn. for 170% of its book value, and Citizens Financial Corp.'s acquisition of Quincy Savings Bank, Mass., at 190% of book value.

Spillover into New York

Because Northeast has branches in New York State, thrifts there have also gotten takeover premiums in their stock prices. Poughkeepsie Savings Bank is up 150% from its low, Progressive Bank Inc., Pawling, is up 69%, and Albank Financial Corp., Albany, is up 41%.

The major banks are buying because such deals allow them to grow by purchasing earning assets of others at a time when lending growth in the region, the source of most assets, is still modest by historical standards.

But Mr. Rooney is skeptical about whether thrifts, at these prices, can be big providers of earnings to the buyers.

"A savings bank has a tough time making 8% to 9% on equity," he noted. Commercial banks may be able to earn 15% on equity, by for thrift such returns are "not happening, and in fact never happened," he said.

"If you pretend these things don't make any difference, fine for now, but if you start figuring how much you can ultimately earn on the investment, the picture is different.

"You have to believe these acquirers can close enough branches and cut enough people to make the deals pay off," he said, "and I question whether they can go keep on doing that."

Indeed, Mr. Rooney thinks a reassessment of prices being paid by buyers could already be under way, with more attention to what he calls "the process of discovering revenues realities."

That is occurring because the stock market increasingly demands evidence from major banks, who are acquirers, that they will be able to generate revenues and earnings consistently in a tougher environment than the one during the past three years.

"We've been through some very good times over the past three years" for banks, he said. "But from here on it gets a lot tougher.

"In New England, banks face a problem of generating revenues in a region whose economy is mature and unlikely to grow at a fast clip in the foreseeable future," he said.

The region continues to lose good-paying jobs and excess commercial real estate remains on the market, he said.

If the economy stays slow, the banks will "at some point have to start raising prices, raising fees," he said. To The Moon June 23 52-week close lowDS Bancorp $31.75 $14.00Derby, Conn. +127%Dime Financial 10.25 5.00Wallingford, Conn. +105%Family Bancorp 23.50 13.00Haverhill, Mass. +81%Lexington Savings 18.50 9.00Lexington, Mass. +106%Shelton Bancorp 20.25 10.00Shelton, Conn. +102%Source: Reuters

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