A wave of "merger mania" is sweeping Washington-area bank stocks to all-time highs and creating a new yardstick for measuring the purchase price of banks interested in being acquired.
With investors frantically speculating on which institutions will be next to merge, the shares of regional banks have climbed to heights that have amazed veteran bank stock traders and analysts.
"Bank stocks have been the hottest trading event in Washington," said Patrick C. Ryan, chief trader for Johnston Lemon & Co. "They've been unbelievable," said Eliot H. Benson, research director at Ferris & Co. "These stocks are generating tremendous interest."
Since Jan. 4, the stock prices of 17 banks in this region have soared an average of 61.1 percent. Much of the action has come in the last three months.
The shares of three banks that are being acquired -- D.C. National Bancorp, NS&T Bankshares and Union Trust Bancorp -- have risen an average of 96.5 percent. A fourth merger, involving First Maryland Bancorp, may be in the offing.
The wild stock market action has spilled over to smaller banks that are thought of as potential acquisition targets. Two District banks, James Madison Ltd. and Security National, have zoomed upward in the last two weeks. James Madison shares are up from $51 to $57. Security National's have increased from $35 to $50.
In the rush to buy bank stocks, Ryan said, investors' normal interest in earnings and dividends was being "tossed aside" in favor of a single question: What is the bank's book value?
In the three recent Washington-area merger agreements, stockholders at banks being acquired agreed to be bought out for more than twice each bank's book value per share.
The sale prices of the three banks, said Ryan, "have taken almost every bank stock to a minimum of one-and-a-half times book value."
Investors "are suggesting they are willing to pay that price" in the belief that "someone will buy it back for more than two times book," he said.
Book value per share represents a bank's net assets minus the value of preferred stock, divided by the number of common shares. Typical book values range from $14.26 a share for First Virginia Banks to $60.52 a share for Citizens Bancorp in Maryland.
With a double book value as the new yardstick, investors have been busy bidding up the stock price of any bank that seems to be a possible merger candidate. "Every one of the banks in Washington is being talked about and looked at," Ryan said.
Banks not involved in mergers but selling close to twice their book value are Central Fidelity Banks of Virginia; and Suburban Bancorp, Citizens Bancorp and Equitable Bancorporation of Maryland.
Since January, big gainers on the D.C. bank list are American Security and Riggs National Bank. American Security is up from $17 to $32.50, a boost of 91.2 percent. Riggs, which was at $33.25, rose to $59, a gain of 77.4 percent.
In Maryland, Suburban Bancorp stock, which was selling for $43 in January, closed Friday at $68, a 58.1 percent gain. Citizens Bancorp is up from $73.50 to $105, a gain of 42.9 percent. In Virginia, Central Fidelity has seen its stock move from $19.17, adjusted for a stock split, to $30.88, up 61.1 percent. Dominion Banks moved from $25.75 to $36.13, a rise of 40.3 percent.
The pattern of banks selling for more than double their book value was set in these three announced mergers:
*United Virginia Bankshares plans to buy a controlling interest in NS&T Bank in the District at $86.98 a share. This represents about 2.5 times NS&T book value. NS&T stock, which sold at about $49 when the merger was announced, closed Friday at $76 a share.
*Sovran Financial Corp., Virginia's largest bank, agreed to merge with D.C. National Bancorp at nearly 2.9 times the book value of D.C. National. Stock of D.C. National, selling at $29 a share before the announcement, quickly jumped to $55 and closed Friday at $55 a share.
*Bank of Virginia announced it would acquire Union Trust Bancorp of Baltimore for about $120 a share, or the equivalent of 2.2 times book value. Union Trust stock, selling at $86.50 a week ago, moved up $16 on Tuesday, the day of the announcement. It closed Friday at $104.75.
*First Maryland Bancorp, which announced last week that it was considering a possible merger and was reportedly talking with United Virginia Bankshares, saw its stock rise to $65, an increase of 105.5 percent over its January price of $31.63. The stock closed only a week ago at $49.75.
Gilbert W. Keech Jr., bank analyst at Johnston, Lemon & Co., said each successive merger tends to "give greater verification" to the pattern of selling at more than twice book value.
"It does create a bit of a floor," he said. But he cautioned that the circumstances at each bank had to be viewed separately and noted that not all banks are interested in mergers.
The door was opened to regional interstate banking by the passage of reciprocal banking laws in Maryland and Virginia. A similar law is pending in the District. The U.S. Supreme Court recently upheld the concept of regional interstate banking.
Bank stocks also have been propelled upward by lower interest rates and an improved business climate that have led to higher profits for banks.
"What you're seeing," said Lew Sosnowik, bank trader at Lang & Co., in Washington, "is the demise of the small bank and the medium-sized bank."
In its place, he said, "you're seeing a perfect marriage" -- large banks trying to cross state lines and willing to pay large premiums to acquire existing banks and local banks that decide to sell when they find they can get top dollar for their stock.
Sosnowik said the current stock prices represented a "complete reversal" from the way banks used to trade at a discount from book value, especially during the era of high interest rates. Sosnowik said he saw a direct connection between the prices paid in the mergers and what investors were willing to pay for other bank stocks.
The pattern will continue, he said: "It's inevitable and it's going to accelerate." Most local banks are well run, well managed and have "one major attraction -- no foreign loans," he said. "You can bet your bottom dollar someone will make them an offer."
Bank traders who handle small banks trading over the counter may be put out of business eventually, said Sosnowik.
Mergers will cut down on the number of bank stocks being traded. For instance, Union Trust Bancorp will disappear from the over-the-counter rolls when it is absorbed by Bank of Virginia, which is traded on the New York Stock Exchange.