Fitting record earnings into skintight margins.

• Position: Banking

With interest rates falling, bad debt rising and the bottom dropping out of the stock market, most North Carolina banks spent last year protecting their bottom lines through careful control of expenses and business practices. As a result, they posted record earnings when most industries were trying to pull themselves out of the hole they had tumbled into during the recession.

The swift fall in interest rates that began in 2001 put banks in a squeeze between their cost of money and what they could earn from loans. Banks cycled through the interest-rate crunch quicker than expected. most equalizing their money costs in about six months. But the real boost came from the real-estate refinancing boom, which was sparked by the drop in mortgage rates. Banks cleaned up on fees generated by homeowners rushing to lower their monthly payments. "The refi boom has helped push some of the earnings up, particularly for community banks," says Harry Davis, economist for the North Carolina Bankers Association and a professor of finance at Appalachian State University.

The relative health of the state's banks has provided new opportunities. For community banks, that means merging as they try to bulk up to compete with larger banks. The big banks have their own expansion goals in mind.

In the case of Charlotte-based powerhouses Bank of America and Wachovia, the nation's second- and fourth-largest banks in assets, there is a chance to leap to the head of the list, knocking off the two New York banks in first and third place. No. 1 Citigroup has been sucked into the Enron scandal as the lead banker and financial adviser for the failed Houston energy company, and it is involved in other high-profile corporate meltdowns. BofA, which also did business with Enron, has been singed by the scandal, but its potential exposure is a fraction of what Citigroup faces. It could give BofA an opening to snatch consumer, commercial and international business from Citigroup.

Wachovia, meanwhile, suddenly finds itself with an opportunity to expand its investment business, a priority for several years. No. 3 J.P. Morgan Chase tried to position itself as the leading bank! investment house, but it has been stung by bad deals in telecommunications and hefty trading losses. J.P. Morgan's earnings were falling in 2002, while earnings at more conservative banks were rising. As a result, its stock price slipped so much that people started talking about it as a takeover target.

Wachovia...