How to make more by spending less.

• Position: Banking - Industry Overview

After a strong year for banks in 1994, a lot of people predicted that the good times wouldn't last. Rising interest rates were going to squeeze margins, and loan demand would peak.

As for the rising interest rates, "well, that lasted for three months," Interstate/Johnson Lane analyst John Mason says. "Since then, margins have been relatively stable. Loan volume slowed down a little, but it's still in the minimum 5% to 7% to 8% range, which is pretty comfortable for most banks."

With the economy chugging along and interest rates low, Tar Heel banks did just fine in 1995. On June 30, North Carolina ranked eighth among states with $144.6 billion in assets, up 13.7% from December 1994, according to Sheshunoff Information Services. The number of banks dropped from 68 to 62.

Many North Carolina banks posted record third-quarter earnings, including Charlotte-based NationsBank, whose 23% jump to $530 million surprised many analysts. A reduction in the federal deposit-insurance premiums banks have to pay and a refund gave them a little extra boost to the bottom line.

But banks benefited more from their relentless focus on efficiency. Spurred by the success of nonbank competitors - mutual-fund companies, investment banks and the like - Tar Heel banks have updated, automated, terminated and consolidated. For many, their efforts to cut costs started paying off in 1995. They are spending less for every dollar they generate.

"More and more banks are becoming like Wachovia and having efficiency ratios of 50%," Mason says, "instead of the 60% to 65% they had several years ago."

North Carolina banks are in a buying mood. The barriers to national interstate banking fell this fall, and Charlotte-based First Union was ready with its $5.4 billion acquisition of New Jersey-based First Fidelity. The deal, expected to close Jan. 1, increases First Union's assets to $126 billion, extending its franchise up the East Coast from Florida to Connecticut.

First Union paid a handsome premium for First Fidelity. "It will be interesting to see if they can make it back," says Robert Eisenbeis, Wachovia professor of banking at UNC Chapel Hill. "The growth prospects for Pennsylvania and New Jersey are about one-third of what they are in North Carolina." But per capita income and the concentration of midsized businesses is greater in some of First Fidelity's markets. And, First Union argues, the region offers opportunities for fill-in acquisitions that could enable it to reduce...