In the race to bulk up in mutual funds, a number of banks with midsize fund businesses are having trouble keeping up.

Banks managing $1 billion to $10 billion of mutual funds saw their fund assets increase by an average of just 4.4% in the first three months of this year-far below the 8.3% for banks managing more than $10 billion, according to data provided to American Banker by Lipper Analytical Services.

Unless they can pick up the pace, many of the midsize players may have trouble competing with the big fund managers, which are thought to enjoy significant economies of scale.

"Strategically, some of them may ultimately conclude that mutual funds are not a critical product for them," said David B. Master, a managing director of the Optima Group, a consulting firm in Fairfield, Conn.

The divergent growth trends of big and midsize players are evident in American Banker's quarterly survey of banks that manage mutual funds. (See tables starting on page 10.)

On average, assets in bank-managed funds rose 6.46% in the first quarter, and 22.73% since March 1998, according to Lipper.

To stay in the game, some midsize banks are broadening their distribution networks. First Tennessee National Corp., for example, is exploring the sale of its funds outside the bank, said C. Douglas Kelso, manager of product development for the company's proprietary fund family.

In addition, the bank has more than doubled the number of bankers licensed to sell mutual funds, and has added full-service brokers as well.

"We're having to crawl a little bit before we walk," Mr. Kelso said.

First Tennessee's mutual funds grew by just 3.49% in the first quarter, to $1.9 billion. By contrast, Citigroup-the leader among bank fund managers-posted a 6.28% gain for the quarter, to $133.1 billion.

Commerce Bancshares of Kansas City, Mo., is also increasing its distribution outside the bank.

In late February the Commerce Funds began selling through Charles Schwab & Co. and Waterhouse Securities, said Larry E. Franklin, administrative director of the Commerce Funds. The funds grew 2.61% during the first quarter.

To be sure, even some of the giants posted only modest growth for the period. Mellon Bank Corp., the No. 2 player among banks, saw its mutual funds under management rise by just 2.52%, to $112.5 billion. No. 3-ranked First Union Corp. increased only slightly faster-by 3.23%, to $70.6 billion.

Observers said there is no firm rule on the amount of assets needed to be profitable. And a bank's assessment of profitability can be influenced by revenue from other areas, such as trust and 401(k) administration.

"If they have scale somewhere else, banks can afford to have mutual fund complexes that are smaller," said Bob Rubin, a partner in the investment management group of PricewaterhouseCoopers' Boston office.

Nonetheless, if a bank is stuck at about $500 million of assets under management, "it's probably not a profitable enterprise," said Burton Greenwald, a Philadelphia-based mutual fund consultant.

Though poor growth over one quarter need not be a crisis, lackluster growth over a year should raise a red flag to management, he said.

Banks should consider whether they have the proper funds to satisfy the market's appetite and whether their marketing efforts are falling short, Mr. Greenwald said.

Among the middle-tier banks with strong asset growth are Zions Bancorp. of Salt Lake City; Mercantile Bankshares of Baltimore; Compass Bancshares of Birmingham, Ala.; and Summit Bancorp. of Princeton, N.J.

Those whose performance has lagged include M&T Bank Corp. of Buffalo; Trustmark Corp. of Jackson, Miss.; BB&T Corp. of Winston-Salem, N.C.; and Amcore Financial Inc. of Rockford, Ill.

Executives at midsize bank-managed mutual funds that have outperformed the average said distribution and performance are both crucial.

"If you have the greatest performance but no distribution, you're not going to sell any funds, and if you have great distribution, but your performance stinks, nobody's going to want your funds," said Richard Mansfield, who manages proprietary funds at Summit Bancorp. of Princeton, N.J.

Some executives at bank-managed funds said growth can be deceiving if a large portion of assets are in money market funds.

"You might get a lot of money come into a money market fund for a short period of time and leave," said Eugene Purcell 3d, a senior vice president of BB&T Corp.'s mutual funds.

"I'd rather have it for a short period of time than not have it at all," he said.

BB&T Funds, which have $1.8 billion of assets under management, lost 1.04% in the first quarter, and gained 7.15% over the year.

Volatility of money market funds contributed to slow overall growth for the funds of UMB Financial Corp. of Kansas City, Mo., said William C. Tempel, an executive vice president in the trust department.

Assets of the UMB Scout Funds grew 1.47% during the first quarter, and 4.10% during the year. About 72% of the $1.6 billion of assets under management are in money market funds.

On the flip said, assets in equity and bond funds have been mostly solid over the past two years. "We candidly don't look at the short term very carefully," Mr. Tempel said.

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