Barred for decades from expanding west across the United States, New York City's big banks have quietly pushed east, building up retail and middle-market operations in their Long Island backyard.

But in recent months, Long Island has become a battleground as money- center banks such as Chemical Banking Corp. and Bank of New York Co. fight it out for market share against outsiders like Boston-based Fleet Financial Group.

Smaller local banks, such as $4 billion-asset North Fork Bancorp, are also scrambling to expand and consolidate their positions.

Bankers and analysts predict that the banks caught in between - those too big to be community banks but too small to be meaningful players - will likely disappear during the next few years.

"Given the lack of growth in the market and the growing concentration, it seems to me you have to be a pretty important player to survive," says Rick Wolff, a managing director at Lehman Brothers Inc.

Adds John Adam Kanas, president and chief executive of North Fork: "There are 30 to 40 banks beyond the biggest players. This is a market that cries out for consolidation."

Money-center banks were barred from entering Suffolk and Nassau counties until 1962. Scores of small banks and thrifts came to dominate the market. But lately big banks have been steadily increasing their market share in the area.

According to the most recent data from the Federal Deposit Insurance Corp., Chemical, Chase, Citicorp, Fleet, and Bank of New York together hold more than 35% of $78.8 billion in deposits in Queens, Nassau, and Suffolk counties, the three main markets on Long Island.

Recent acquisitions have radically revamped rankings among the top players. Citicorp, the No. 2 bank on Long Island in deposits as recently as last year, now ranks fourth. Chemical, the biggest bank in deposits, has dramatically strengthened its position through its merger with Chase, which itself ranked fourth until just six months ago. Meanwhile Fleet will climb to third place from last year's 12th when it completes its acquisition of New Jersey-based National Westminster Bancorp later this year.

The top 10 players alone now hold nearly three-fourths of all deposits. Some 40 far smaller institutions, mainly thrifts with less than 1% market shares, divide up the rest. Many of these, bankers predict, will soon vanish.

"The banking universe on Long Island is still relatively fragmented, and once you get below the top guys you are talking about people with 3% or less market share," said John G. Duffy, executive vice president at Keefe, Bruyette & Woods Inc.

"That's not terribly impressive, and you really have to ask yourself what's going to happen to the guys at the bottom.

Added an investment banker, who declined to be identified, "They've either got to grow their franchises and buy what's for sale, or at some point come to the realization that their franchise isn't worth a whole lot to them strategically," he said.

"When they come to that realization, they'll wake up and say: We should be a seller."

Still, executives at institutions that have been the target of press speculation dismiss rumors they are planning to sell their Long Island networks.

European American Bank's chairman and chief executive Edward Travaglianti, for one, scotches rumors his institution is on the block.

"We think we're in a position to take advantage of the fallout from other banks," Mr. Travaglianti says.

Uniondale-based European American, he points out, has more than doubled its assets to $8.8 billion, from $4.3 billion only three years ago.

"I think that's a pretty clear confirmation that we are planning to extend our franchise." says Mr. Travaglianti.

Similarly, a KeyCorp spokesman said his bank is also looking to expand on Long Island, noting that the bank recently opened a multi-business facility in Melville to develop operations like trust and private banking services. KeyCorp also has a district headquarters in the Suffolk County town of Islandia.

Analysts note that thrifts may also make good targets. Some of these institutions are already merging with one another to reach a size that is becoming of increasing interest to larger institutions.

"I doubt very much big banks would be interested in a half-billion- dollar thrift, but if you showed up with a $5 billion to $10 billion institution, one of the big guys could be very interested," said Mr. Duffy of Keefe, Bruyette.

Money-center bankers say one reason they have increased their activities in Long Island is that the region constitutes a logical extension of their existing New York City retail and middle-market operations.

"Long Island is an integral part of the New York City market," says Kenneth J. Daley, division executive for middle-market banking at Chemical. "This is our meat and potatoes."

Another reason: stagnant economic conditions on Long Island mean there's little opportunity to grow unless you grab market share from someone else.

"The last few years have seen flat growth on Long Island so most of our growth has come through acquisitions, " says Richard Crowley, senior vice president in charge of Long Island and New York City retail banking for Bank of New York.

Since the mid-1980s, acquisitions have increased Bank of New York's branches on Long Island to 116 today, from 37 barely 10 years ago, giving the bank the single largest network there.

Bankers say more acquisitions are likely.

"Obviously we hope to find opportunities in areas where we're not already in," says Mr. Crowley.

Geographic expansion, bankers say, has come alongside an explosion in retail and corporate middle-market products.

"Thirty-five years ago, you offered checking accounts and made loans," recalls Mr. Daley. "Today, you can deliver 50 to 60 different services, many of them electronically."

Bankers also predict slack economic conditions won't last forever. They note that median household income in Nassau and Suffolk is more than $62,000, compared with a U.S. median of $37,000. This means Long Island is a lucrative source of deposits and fertile terrain for marketing investment products.

Small but growing high-tech and service companies that have sprung up in the wake of large-scale shutdowns in the defense and construction industries have set the stage for solid growth in the future.

"The fundamentals of the Long Island economy are one million homes, 1.1 million jobs, three million people; a $50 billion economy equal to 1% of the gross national product," observes Mr. Daley. "This is a very big market place."

"We wouldn't be out buying franchises for the last 12 years if we didn't think we had a future on Long Island," adds Mr. Crowley.

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