Conventional wisdom holds that midsize banks - those with $2 billion to $20 billion in assets - are doomed to extinction because they lack the economies of scale to compete with superregionals.

But don't tell that to the six midsize banks in North Carolina, which have actually gained deposit market share while competing in the shadow of three of the Southeast's strongest banks: Nationsbank Corp., First Union Corp. and Wachovia Corp.

The bigger banks have been so focused on building that they tend to take their eye off the markets where they already have a good presence," said Susan Leadem, an analyst with the Robinson-Humphrey Co. in Atlanta.

"The result," said Ms. Leadem, "is that niche players in niche markets, like the North Carolina midsize banks, are able to come through with pretty good responsiveness and products and, as a result, are holding their own."

|An Important Uniqueness'

Even before the three megabanks went regional. Tarheel State banks were competing head to head because of the state's century-long tradition of statewide branching.

"There is an important uniqueness about the midsize banks in North Carolina and that is: we've been competing against these larger banks forever," said John A. Allison 4th, chairman and CEO of BB&T Financial Corp. of Wilson, N.C." I think it may be more difficult for banks that aren't used to competing with the kinds of organizations that we're competing against."

Statewide branching did put North Carolina in the forefront of industry consolidation. In the first quarter, the "big three" banks controlled 57.3% of total bank deposits in the state, a result of in-state acquisitions accomplished during the 1960s, '70s, and early '80s.

But that's down from 62.5% in 1988, according to data compiled by Ferguson & Co., suggesting that the megabanks have stagnated since locking in their market share in the mid-1980s.

Second Tier's Share Growing

Meanwhile, the Tarheel State's six so-called second tier banks increased their share of deposits to 32.3% from 23.8% during the period. Much of that growth clearly came at the expense of the state's rapidly shrinking thrift industry. BB&T, the most aggressive acquirer, has announced 18 S&L deals since 1989, which will add nearly $4 billion in assets.

Thrift deposits in North Carolina fell to $9.2 billion in the first quarter of this year from $19.9 billion in 1990, according to Irving, Tex.-based Ferguson.

Community banks provide another means of expansion. Centura Banks Inc. of Rocky Mount, with $3.2 billion in assets, established a foothold in Charlotte earlier this week with an agreement to buy First Charlotte Financial Corp., which has $168 million in assets.

Do-It-Yourself Project

The midsize banks also insist they're building market share on their own, with some of it taken from the big three, although this cannot yet be independently quantified.

"We hear from our field people all the time that we're taking business from the big three," said Hal Johnson, director of strategic planning at Southern National Corp., Lumberton, which has $5.2 billion in assets. "As they get larger, they lose focus on what I would call the bottom of their business: the small-business retail market."

BB&T's studies indicate that its deposit share - after restating for acquisitions - grew 50% between 1980 and 1992. Deposits at Central Carolina Bank and Trust Co. in Durham went to $2 billion from $1.4 billion over the last five years, with negligible help from acquisitions.

"We're not only holding customers, but we're gaining customers," said Ernest Roessler, president and CEO of CCB Financial Corp., Central Carolina's holding company, which has $2.8 billion in assets.

The big three should benefit from more varied product lines and technological economies of scale vis-a-vis their smaller competitors. But managers of midsize banks say they can provide enough products and services to satisfy their smaller pool of customers. And they claim that personal service beats technological advantage.

"Clearly, there's some end where the economies of scale in technology are way offset by service quality differentials," said BB&T'S Mr. Allison. "And I think there's a logical reason for that, which is that the profitable market segments in banking are still mostly small business, middle market and retail, which are still fairly personal businesses."

Smaller-Is-Better Philosophy

Midsize bankers champion a smaller-is-better philosophy.

"There's no question in anybody's mind that a smaller organization should be able to operate quicker and hopefully provide a more personal level of service," said L. Glenn Orr Jr., Southern National's chairman and chief executive.

But the industry trend toward greater diversification of financial services and competition from nonbanks may provide midsize banks with more of a challenge. Mr. Allison believes that economies of scale in banking are to be found less in technology than in peripheral businesses, such as mutual funds, annuities, and trust services.

"All of those businesses have fairly substantial break-even points," Mr. Allison said. "There are some economies to getting those peripheral businesses up to profitability. I'm fairly clear that could be a major issue for organizations under $1 billion in assets."

Meanwhile, two of the midsize banks have sought new markets outside North Carolina. Both BB&T and Southern National have ventured into South Carolina. BB&T's presence is quite small - $480 million of assets - but Southern National's pending deal for a $2 billion-asset Greenville thrift would lift it from 12th to third in South Carolina market share.

For Southern National, the move south makes sense because its headquarters in Lumberton are only 20 miles from the South Carolina border. Mr. Orr said the bank has no intention of venturing into other states.

At BB&T, Mr. Allison has not ruled out the possibility of further incursions into South Carolina, as well as into Virginia south of the Washington area.

Holding Their Own

For now, North Carolina's six midsize banks are holding their own in terms of overall profitability. Their average return on assets was 1.09% last year, compared with 1.04% for the big three, according to Ferguson & Co. Their average return on equity was 15.76%, compared with the big three's 17.89%.

The attractiveness of North Carolina's midsize banks to out-of-state acquirers is an oft-debated question among stock analysts and other industry observers. Their profitability makes them desirable, but none of the six midsize banks offers a franchise large enough to compete effectively with the big three.

BB&T, the largest of the six with $7.9 billion of assets, has 8% of the state's bank deposits. CCB, the smallest, has only 3%.

With the big three controlling 60% of the market, that leaves the rest of us fighting over what remains," said Mr. Orr at Southern National. "I don't see outside folks coming into North Carolina in droves. There are easier places to compete or make money in the banking business than North Carolina."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.