Banks find rocketing demand for tax-free municipal funds.

Banks in the mutual fund business have caught municipal bond fever.

Catering to consumers' growing appetite for tax-exempt investment options, banks have nearly doubled their municipal bond fund offerings in little more than a year.

The number of the tax-exempt funds managed by banks stood at 125 on March 31, up from 71 at the end of 1991, according to Lipper Analytical Services. Assets grew from $4.9 billion to $8.3 billion in that period. The numbers do not include tax-exempt money market funds.

Coming On-Line Fast

Though municipal bond funds are still but a sliver of banks' proprietary fund business -- banks managed 1,017 mutual funds with $181 billion in assets as of March 31 -- new tax-exempt offerings are coming online fast.

"Banks that don't already have tax-frees are adding them to round out their offerings," said David Nadig, senior consultant at Cerulli Associates, Boston. "It's a natural way to go for many of them."

Just this week, First Union Corp. announced that it is adding a Florida Municipal Bond Fund to its proprietary fund family.

The Charlotte, N.C.-based bank already has tax-exempt funds for Georgia, Virginia, and North Carolina.

Avi Nachmany, a partner in Strategic Insight, a New York consulting firm, says banks are playing to their strengths by managing municipal funds.

"Banks may not be perceived as great managers of small-capitalization or international funds," Mr. Nachmany said. But people assume that banks, with their knowledge of local markets, could do a good job managing municipal funds in their home states.

NationsBank Corp. has certainly adopted that attitude. For its sheer range of offerings, the Charlotte, N.C.-based company is the leader in the bank pal bond fund field.

Has 3 National Funds

Its NationsFund family of mutual funds includes three national municipal funds and 22 single-state funds in eight states: Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Texas, and Virginia.

Assets in the 25 NationsFunds grew to $697.2 million on May 31, up from $503.5 million on Dec. 31, 1992, according to Lipper.

The single biggest tax-free fund offered by a bank, the Lipper data showed, is the Hawaiian Tax-Free Trust, managed by Hawaiian Trust Co., Honolulu. It had $615.5 million in assets as of May 31. It is also one of the oldest bank-related municipal funds, having been started in 1985.

Customer demand is the driving force behind the surge in bank municipal bond funds.

Crestar Bank, based in Richmond, launched a Virginia tax-exempt fund early this year. "Through focus groups with customers, we determined a tax free was the next fund we needed to open," said John M. Mears, vice president of Crestar's mutual fund division.

Other banks that have launched tax-exempt bond funds so far this year include Bank of New York Co., Central Carolina Bank and Trust Co., PNC Bank Corp., and Wells Fargo & Co.

Riggs National Bank in Washington is considering adding single-state and national tax-exempt funds to its Rimco Monument fund family.

"As we're seeing greater concern emerging over taxes, we're seeing greater demand for tax exempt opportunities," said Deanna Belli, senior vice president and director of trust marketing.

A decisive factor for Riggs and many other banks may be the outcome of HR 13, a pending tax bill that would make it easier for banks to convert common trust assets into mutual funds, including tax-exempts.

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