B.E. 100s Grow or Die.

From banks to asset managers, B.E. financial services firms must manage deregulation by finding a competitive advantage

THREATENED BY INCREASED COMPETITION FROM MULTIbillion-dollar financial services powerhouses, Paul Hudson, president and chief executive of Broadway Financial Corp. (No. 11 on the BE BANKS list with assets of $168 million), is excited about his bank's new, aggressive expansion plans. He says the Los Angeles-based institution's recent deal with brokerage giant SalomonSmithBarney will allow Broadway Federal to sell their investment products, use the marketing clout of a nationally recognized franchise to increase its customer base, and generate extra sources of revenue.

Welcome to the world of deregulation. In today's Darwinian environment, Hudson, like other CEOs at black-owned banks, insurance companies, investment banks, and asset management firms, has a great deal at stake. Spurred by industry consolidation--driven by a law that allows banks, brokerages, and insurers to merge and expand into one another's businesses--black-owned financial services providers must adopt a simple, if not easy, rule: grow or die. "It's going to get harder and harder for black-owned financial institutions," Hudson maintains. "There's probably less of a threat of them surviving and more [likelihood] that they will be acquired if they don't grow, particularly if the economy continues to slow."

Though it's only been a year since the Gramm-Leach-Bliley Act passed, the historic overhaul of the nation's banking law is dramatically changing how business is run at the black-owned financial services companies that hold billions of dollars of assets and the deposits of millions of individuals.

Already, black executives point to more challenges as financial monoliths like Citigroup, Charles Schwab & Co., and Metropolitan Life have formed one-stop financial supermarkets as a result of Gramm-Leach-Bliley. The law, also known as the Financial Modernization Act, repealed the Depression-era Glass-Steagall Act, which restricted the merger of banking, investment, and insurance operations. Moreover, companies ranging from State Farm Insurance to discount retailer Wal-Mart Stores Inc. and the Safeway grocery-and-drug chain are now offering banking services at their outlets around the country.

Even though rising interest rates for most of 2000, declining stock prices, and regulatory squabbles slowed the rash of mergers the law was expected to bring, activity has been brisk. For example, last year 508 entities converted to financial holding companies that mostly offered banking services, according to Financial Markets Center, a Philomont, Virginia-based nonprofit institution that tracks financial trends. Combined, those institutions, based on 1999 figures, held $4.76 trillion in assets, about a fifth of the nation's financial assets.

BLACK BANKS FIGHT TO KEEP THEIR TURF

Those expansions--combined with closer Wall Street scrutiny and greater competition from existing powerhouses like Bank One, Merrill Lynch, and Aetna--put even more pressure on minority-owned financial companies to thrive, experts say. This development comes at a time when growth among black-owned financial institutions has been relatively flat.

Banks and thrifts, owned and controlled by African Americans, had assets of $4.74 billion and deposits of $3.89 billion in 2000, according to the Federal Deposit Insurance Corp. That compares with assets of $4.65 billion and deposits of $3.85 billion in 1999.

"It's probably one more straw on the camel's back that makes it harder for black-owned financial companies to compete, but it's tough to figure out exactly what the impact will be," says Joe Gladue, a banking analyst at the Chapman Cos. "But it definitely is putting more pressure on many of those institutions, particularly those already trying to meet margins."

Yet, the deregulated environment is prompting many black-owned financial institutions to expand into new areas--partly as a survival tool--and compete with mainstream entities. In turn, that's expected to bring black-owned companies more customers and the ability to cross sell multiple services, ranging from car insurance and auto leases to mutual funds. That's a significant shift for many entities that have traditionally offered checking and savings accounts and mortgages.

Still, Gladue maintains black-owned companies that are expanding into the services have--and likely will--done so on a smaller scale. For instance, some black-owned banks have structured marketing alliances with larger institutions and other black-owned companies to provide such offerings as brokerage and insurance services. "With the economy slowing, you might not see a lot of this [activity] right away," he says. "It takes a lot of money to [develop] the distribution and critical mass to make this work."

Necessity has also been the mother of acquisition. On that score, one of the nation's most aggressive players has been Boston Bank of Commerce (BBOC). By taking advantage of the new law and trying to create a niche by acquiring peers from coast to coast, BBOC has been transformed into the nation's only black interstate banking institution. BBOC recently agreed to merge with Los Angeles-based Founders National Bank (which had assets of $107 million last year, but is not on this year's BE BANKS list because of the merger), a deal that will make it the nation's fifth-largest black-owned bank pending approval.

But Kevin Cohee, BBOC's chairman and chief executive, says his expansion plans have just begun. His goal is to make BBOC a $3 billion financial holding company within five years. He plans to get there by acquiring at least eight other black-owned banks and operating in as many as 15 markets that are heavily populated by African Americans. These include Detroit, Philadelphia, Atlanta, and Chicago. BBOC already has a major presence in Boston, Miami, and, now, Los Angeles.

As Cohee expands the institution geographically, he seeks to increase product offerings. Eventually, he envisions BBOC becoming a one-stop financial services provider that offers banking, investment, and insurance services. To achieve this end, he will zero in on black insurers, asset management firms, and brokerages as merger and acquisition targets. "We want to be the Citigroup of inner-city neighborhoods," he asserts. "We have the management and culture to do it."

However, Cohee proved unsuccessful in taking over Carver Bancorp, the parent company of Harlem-based Carver Federal Savings Bank (No. 1 on the BE BANKS list with $421.5 million in assets), and claims BBOC lost "tens of millions" trying to pursue a merger. After a bitter legal battle, Cohee and his wife, Teri Williams, were able to gain seats on the Carver board. BBOC also owns about 170,700 shares of Carver's common stock. (See "Battle Royal," June 2000).

One of the publicly traded institutions on the BE BANKS list, Carver, has been under investor pressure to improve its performance. The company had a net loss of $115,000, or 5 cents a share for the nine months ending December 31, 2000, down from a profit of $1.6 million, or 72 cents a share, for the same period a year ago. The bank actually would have had a pretax loss of $823,000, excluding gains from selling deposits at two branches. A year-to-date loss of $1.3 million to cover the cost of problem consumer loans dragged down Carver's profits, although net interest income grew 7.7% to $765,000.

At the same time, Carver CEO Deborah Wright says, more financial services companies are expanding into its territory. Now, she's restructuring Carver's operations. Her turnaround plans include selling a third branch, opening a new one in Harlem, adding freestanding ATM locations, creating an enhanced phone-banking operation, and beefing up marketing to sell products like money market funds. But Wright will need more new products to generate revenue. She estimates that the best small banks--those with assets of $1 billion or less--reap about 0.69% in fee income. Quips Wright: "We'd love to be there, but we've obviously got a long way to go."

At Paul Hudson's Broadway Federal, the bank is expanding to compete with larger rivals in the Los Angeles market. New products could soon include Visa debit cards, online banking, overdraft lines of credit, and investment products. In fact, the institution has teamed up with the Automobile Club of Southern California to sell that group's travel and insurance products at one of its branches, giving it access to another 12,000 potential customers.

Hudson doesn't rule out acquisitions or mergers with other blackowned financial institutions--especially those in urban niche markets where African American customers want personalized service. However, another barrier to making such moves may be Broadway Federal's shareholders. Trading on the Nasdaq exchange, Broadway Federal's stock has a low price-to-book value ($9 vs. $15 book). Hudson's puzzled by its undervalued status, given the bank's profitability and improved asset quality. Broadway Federal earned $677,000, or 74 cents a share, last year, up from $358,000, or 35 cents, in 1999. The stock rose 58% last year in one of the most volatile stock markets in more than a decade. Hudson suspects the reason for its low valuation has to do with the following factors: fewer assets than most publicly traded financial institutions, fewer outstanding shares, lack of coverage from financial analysts, and the bank's focus on black and Latino markets. "It's something that has always bothered me because the fundamentals are there," he says.

BLACK INSURERS SEEK TO EXPAND

Black-owned banks are not the only minority-owned financial services companies being forced to expand. Black-owned life insurers, already competing with one another in a consolidating and maturing industry as well as with more financial services companies because of Gramm-Leach-Bliley, are looking for ways to revitalize their operations.

Atlanta Life Insurance Co. (No. 2 on the BE INSURANCE COMPANIES list with assets of $194 million) offers an example of what insurers are doing. CEO Charles Cornelius says the institution is trying to expand its product mix. Such a move is vital since total premiums grew to nearly $40 million in 2000 while premium volume for individuals shrank about 14% to $12 million. To add new fee income sources and keep individual customers, the company is considering offering investment products. Cornelius says: "We have a unique market niche, but we need to grow, particularly with banks and brokerages expanding the way they are."

One bank horning in on the business of Atlanta Life and its brethren is New Orleans-based Liberty Bank and Trust Co. (No. 9 on the BE BANKS list with $184.5 million in assets).

The entity has invested approximately $200,000 to launch Liberty Insurance Inc., the products of which include car, workers' compensation, flood, and business insurance. Alden J. McDonald Jr., the bank's president and chief executive officer, expects the new insurance arm will generate about $5 million in premiums in two to three years. He also says Liberty Bank is among four banks involved with a new leasing company that did about $120 million in volume last year with Ford Motor Co. and recently signed General Motors as a client.

But McDonald, who, three years ago, launched a mutual fund with a black investment firm, Edgar Lomax Co., is becoming more deeply involved in asset management and investment banking as well. Liberty is considering offering brokerage and financial and bond underwriting services.

INVESTMENT FIRMS DEAL WITH VOLATILITY

But such bold moves will open black financial institutions to the volatility of the stock market and equity and fixed-income underwriting. Just ask those who run black-owned asset-management firms and investment banks. Although black mutual funds performed better than the average domestic fund, especially in the tumultuous last quarter of 2000, some equity funds took major hits.

Chicago-based Ariel Capital Management (No. 3 on the BE ASSET MANAGERS list) fared considerably better. Its two equity funds, Ariel and Ariel Appreciation, produced impressive annual total returns of 28.77% and 18.82%, respectively.

That's not to say it hasn't faced major business challenges. Deregulation in the financial services arena has added even more competition for Ariel, which, like other black asset managers, is dominated by much larger rivals with deeper pockets. The firm, which has $5.2 billion in assets under management, must compete against the likes of Boston-based Fidelity Group with customer assets of $15 trillion.

Christopher J. Williams, president and chief executive at Williams Capital Group L.P. (No. 2 on the BE INVESTMENT BANKS list) says his firm has grown market share but also has had to increase its capabilities in trading, sales, and research to remain competitive as the industry evolves. As banks more aggressively pursue investment banking business with corporate clients, Williams is feeling the heat. "Without the capacity to lend, it is difficult for small firms to compete," he says.

But the firm has stayed competitive in landing deals. It's total issues for 2000 were $71.7 billion, and it expects to be a co-manager this year of an estimated $5 billion initial public offering for Verizon Wireless Inc., the nation's largest wireless phone company.

To bolster its competitive strength, a 15% stake of Williams Capital was sold to HypoVereinsbank, the sixth largest bank in the world. The move has helped Williams Capital build up its stock and bond trading in Europe, where the firm established a beachhead three years ago. The Williams CapitalHypoVereinsbank deal continued the trend of minority firms partnering with larger financial services firms for strategic purposes.

For Utendahl Capital Partners L.P. (No. 3 on the BE INVESTMENT BANKS list with $63.2 billion total issues), a diversified product mix has helped the company land deals despite more competition. President and CEO John Utendahl says the investment bank has participated in more than $25 billion in corporate bond deals in January and February, including contracts for Goldman Sachs, J.P. Morgan Chase, AT&T Wireless, Ford Motor Credit, and American Express Credit. In addition, he says the firm recently acquired a Florida asset management company with assets of more than $1 billion, which will complement Utendahl Capital Management L.P. (No. 5 on the BE ASSET MANAGERS list with $4.1 billion under management). Such deals will be part of his operation's long-term strategy.

For black financial services firms, the key to survival will be just how well they manage and leverage their assets.

Financial Services Summaries

2001 TOP 25 BANKS                    1999         2000   % CHANGE

NUMBER OF EMPLOYEES                 2,049        2,078     1.42%
ASSETS(*)                      $4,022.637   $4,093.379     1.76
CAPITAL(*)                        306.611       329.96     7.62
DEPOSITS(*)                     3,207.492    3,326.175     0.87
LOANS(*)                        2,344.385    2,547.275     8.65

2001 TOP 10 INSURANCE
COMPANIES                            1999         2000   % CHANGE

NUMBER OF EMPLOYEES                 1,493        1,361    -8.84%
ASSETS(*)                        $622.650     $654.072     5.05
STATUTORY RESERVES(*)             438.468      429.664    -2.01
INSURANCE IN FORCE(*)          20,706.458    23,624.12    14.09
PREMIUM INCOME(*)                 131.648      160.029    21.56
NET INVESTMENT INCOME(*)           35.723       35.648    -0.21

2001 TOP 15 INVESTMENT BANKS         1999         2001   % CHANGE

NUMBER OF EMPLOYEES                   473          491     3.81%
TOTAL ISSUES(**)                 $257.157     $394.379    53.36%

(*) In millions of dollars, to the nearest thousand.
As of December 31, 2000. Prepared by B.E. Research Reviewed by
Mitchell & Titus LLP

(**) In billions of dollars, to the nearest million.