Banking on diversification: from investment banks to insurers, B.E. financial services companies are discovering that they must diversify to achieve the competitive edge. (B.E. Financial Services Overview).

Over the last few months, Christopher J. Williams has been accumulating a great deal of frequent flier miles. Dealing with events ranging from recession to terrorist attacks, the CEO of The Williams Capital Group (No. 1 on the BE INVESTMENT BANKS list with $196.2 billion in total issues) and his staff have been hitting the road more than ever to provide personalized service to clients and to calm jittery institutional and individual investors. At the same time, Williams tends to customer needs, leveraging relationships for future deals and making diversification maneuvers such as the recent launch of an asset management unit expected to contribute as much as 30% of the firm's future revenues. "All these events have raised investor concern, created credit quality problems, and caused fewer companies to come to market for financing," Williams says. "When things are in turmoil like this, we try harder to better serve clients and extract a diminishing pool of new business opportunities."

In today's volatile environment, Williams and other CEOs of black-owned financial service concerns--such as investment banks, insurance companies, banks, asset managers, and private equity firms--are facing their toughest challenge yet. Prodded by an unpredictable economy, demanding customers, and rapacious competition, black-owned financial services firms have been forced to diversify operations not only for growth but also for survival. "Business is not failing into people's laps like it was in the late 1990s when things like interest rates were low, the economy brisk, and the stock market strong," says Joe Gladue, an equity analyst and director of market research at The Chapman Co. (No. 8 on the BE INVESTMENT BANKS list with $16.7 billion in total issues). "It's much harder to make profits nowadays than before, and many of these companies are being forced to go after new business or develop alternative ways to generate a new stream of income."

EXPANDING THE CUSTOMER BASE

All is not gloom and doom though. There are great opportunities for many black-owned firms beginning to take advantage of the Financial Modernization Act. That law allows financial service providers to commingle their businesses for the first time, build new customer relationships, and fend off mainstream financial giants like Citigroup and State Farm Insurance and discount retailers such as Wal-Mart stores. It is fitting that BE has unveiled a new list in this bold, new environment--a ranking of the top private equity firms, companies that invest in the next generation of entrepreneurs.

Now African American firms compete with each other as well as mainstream entities trying to tap into a more affluent, sophisticated black consumer market. "You can no longer compete if you don't offer people the products, services, and conveniences they're looking for, particularly with more competition going after the same market," Gladue says.

Still, black-owned banks were able to grow assets and deposits last year fueled, in part, by changes in market conditions. For instance, the Federal Reserve cut the federal funds rate--what banks charge each other for overnight loans--from 6.5% in January 2000 to 1.75% today, the lowest in more than 40 years. That move helped lower borrowing costs for millions of consumers on such items as automobiles and home equity loans.

Although the rate cuts also reduced returns on financial products, many banks were able to increase deposits as more consumers opted for the lower-yielding returns on savings accounts rather than risk losing money in an unstable stock market. In fact, the FDIC found that nearly 50 banks and thrifts owned and controlled by African Americans had assets of about $5.2 billion and deposits of $4.2 billion in 2001, compared with assets of about $4.9 billion and deposits of $3.7 billion in 2000. Asserts Gladue, "The stock market turmoil helped some banks--particularly black-owned and small community banks--gain deposits, even though people got hit with lower returns."

BLACK BANKS MAKE BOLD MOVES

The mandate to boost margins also forced many black-owned institutions to look for new ways to expand profits. Unlike larger majority-owned institutions, many black banks don't have a wide array of fee-based income sources. As a result, they must increase services, broaden their market reach, and make acquisitions to grow.

The nation's largest financial institution on the BE BANKS list, Carver Bancorp, parent company of the Harlem, New York-based Carver Federal Savings Bank, is doing just that. CEO Deborah Wright says the company plans to open more branches, add freestanding ATMs, offer new financial products and services to build account relationships, and collect new fee-based income. The institution, which had $449.5 million in assets last year, recently opened a branch in south central Harlem, the first such act in more than 11 years. It will give Carver access to another 28,000 potential customers and scores of small businesses. Also, the branch will benefit from a $50 million deposit authorized by New York State Comptroller H. Carl McCall, reducing its break-even period by three years. "There's a lot of opportunity there that will take some time to develop," says Wright, "but this gives us great potential to add customers and attract new business."

What's next? Wright plans to grow the bank's distribution network, now five branches and 11 ATMs, to 20 neighborhoods. Moreover, she seeks to retain existing customers through free online banking services--an option favored by 18% of depositors in a recent survey. Another part of her digital plan calls for a fee-based "e-commerce mart" that will link customers to 60 major retailers.

For Atlanta-based Citizens Trust Bank (No. 3 on the BE BANKS list with $292.4 million in assets), acquisitions could be the key to future growth. CEO James Young is shopping for other black-owned banks with assets between $20 million and $100 million, including two in Alabama. Seeking to complete a "friendly" acquisition by year's end, he has amassed a hefty war chest to target institutions in cities such as Chattanooga, Tennessee, and Little Rock, Arkansas. His goal is to buy banks or branches from other financial entities that will enable Citizens to become a $1 billion monolith.

Boston Bank of Commerce (No. 6 on the BE BANKS list with $261.7 million in assets) is another institution that seeks to surpass the $1 billion asset mark. In fact, the nation's first African American interstate bank recently made a bid for Los Angeles-based Family Savings Bank (No. 9 on the BE BANKS list with $196.6 million in assets). In recent years, BBOC has acquired Founders Bank, another Los Angeles-based institution, co-owned by basketball superstar-cum-entrepreneur Earvin "Magic" Johnson, pop star Janet Jackson, recording executive Jheryl Busby, and Miami-based Peoples National Bank. If successful in this latest conquest, the combined entity would give BBOC assets of $450 million, making it a contender for the nation's largest black-owned bank.

But completing the deal will be no easy feat. CEO Kevin Cohee's team is competing against three major bidders for Family Savings, including FBOP Corp., an Oak Park, Illinois-based holding firm with assets of $8.4 billion. "In L.A., we're offering a cash price in the eight digits for Family Savings," Cohee says. "Our focus for the remainder of 2002 will be to make that happen. But if we're not successful, we'll move on and look at another large, black-owned bank in another major city."

Cohee continues to stick to his script: gobble up underperforming firms, including black-owned asset management firms, insurers, and brokerages in major cities with large black populations, and transform the entities into profitable institutions. The three banks under his holding company had combined profits in 2001 of $2.4 million, up from $1.6 million in 2000. Says Cohee: "We want to be a black-owned and controlled entity that has the financial resources, products, and services that can serve and support the communities we do business in. We have the management team, technology, know-how, and, now, capital in place to do that."

MANAGING ASSETS IN TURBULENT TIMES

Last year was not kind to a number of asset managers. Durham, North Carolina-based NCM Capital Management (No. 4 on the BE ASSET MANAGERS list) had a staggering 17.7% drop in assets under management, from $6.027 billion in 2000 to $4.961 billion in 2001, and Utendahl Capital Management (No. 5 on the BE ASSET MANAGERS list) slid 12.2%, from $4.1 billion in 2000 to $3.6 billion in 2001.

Despite recession, terrorism, and war, some firms shined. Ariel Capital Management, which this year took the top spot among such firms, realized phenomenal growth--a whopping 51.4% expansion in assets under management, from $5.165 billion in 2000 to $7.819 billion in 2001. (See "Financial Company of the Year" in this issue.)

Another firm that discovered the right recipe for success was Alexandria, Virginia-based Hughes Capital (No. 16 on the BE ASSET MANAGERS list). Its assets under management grew to $1.003 billion last year, up from $845 million in 2000. President and Chief Investment Officer Frankie Hughes achieved the 18.7% growth rate by sticking to her knitting: fixed-income investing. In fact, $66 million of her firm's gains came from its current portfolio, while the remainder was a result of new institutional investors that fled the risky equity markets for the safety of bonds.

After the collapse of the energy trading behemoth, Enron, in which Hughes Capital had a small position, Hughes quickly contacted clients to inform them of the impact on their portfolios. She maintains, "Keeping a close relationship with clients in this unstable environment allowed us to retain customers and pick up future business."

Hughes Capital is currently branching out to reap new sources of income. It is currently working with South African entities that want to invest in the U.S. bond market. Such ventures could help Hughes Capital garner as much as 10% to 15% of its revenues from international markets.

GROWTH THROUGH DIVERSIFICATION

Black-owned life insurers have to fight on two major fronts: battling one another for market share in a consolidating and maturing industry, and competing with banks that have expanded into their territories. Atlanta Life Financial Group (No. 3 on the BE INSURANCE COMPANIES list with $98.7 million in assets) provides a model to respond to these twin challenges.

Although Atlanta Life receives almost 100% of its revenues from insurance policies, CEO Charles H. Cornelius has developed a plan to change that equation. Last year he launched Atlanta Life Insurance Company Investment Advisors (ALICIA), an asset management arm. "Market research showed us that to grow we needed to diversify, particularly, offer new services to institutional clients that are already involved with our insurance business," Cornelius says. "The asset management business is the first piece of that for us."

Cornelius wants ALICIA to comprise as much as 40% of the company's total revenues by charging institutional clients fees to manage their assets. In order for ALICIA to become a significant player, Cornelius estimates it will need to reach at least $10 billion in assets under management--a position no other black asset manager has been listed as achieving.

Another insurer seeking to benefit from the Financial Modernization Act is Los Angeles-based Golden State Mutual Life Insurance Co. (No. 2 on the BE INSURANCE COMPANIES list with $128.1 million in assets). Due to the Fed's action and the Sept. 11 attacks, the insurer's investment income last year from bonds and commercial mortgages dropped from $7.88 million in 2000 to $7.36 million in 2001. "[Those events] left us scrambling to get money reinvested or face larger reductions in investment income," says CEO Larkin Teasley.

Teasley, however, is optimistic about his bold plans to restructure Golden State. By late September, he plans to form two holding companies--Golden State Mutual Holding Co. and GSMF Financial Corp.--enabling the firm to sell mutual funds and variable-rate annuities to its core clients. Teasley estimates that the expansion could eventually account for 20% to 25% of Golden State's revenues. "We need other sources of fee income and this will allow us to accomplish that," he says.

CUSTOMER IS KING

These days, financial service firms, whether a bank or venture firm, must stick close to the customer. In fact, two investment banks--Rice Financial Products (No. 10 on the BE INVESTMENT BASKS list with $12.1 billion in total issues) and May Davis Group (No. 13 on the BE INVESTMENT BANKS list with $5.9 billion in total issues)--had their offices obliterated in the World Trade Center attacks and were handling clients' accounts within a day or two.

Christopher Williams maintains that last year's tragedy and financial scandals stifled transactions across all business lines, including a reduction in the issuance of corporate bonds and fewer public offerings. The events forced his firm--and others--to become more cost conscious and client obsessed. While Williams Capital seeks to reduce operating costs by 15% this year through cheaper flights and trading town cars for yellow cabs, it has also placed a greater emphasis on retaining existing clients than chasing new deals. "[This environment has] forced us to call on established clients more than ever before," he says.

But the firm has managed to break new ground over the last year, handling more debt underwriting for corporate clients and serving as co-manager on the $3 billion Prudential IPO--the third-largest public offering in 2001. It was the first black investment firm to land such a transaction.

Williams' example is one that most black CEOs have heeded wisely. From diversification to top-notch client services, CEOs cannot afford to leave even a minute detail unattended. It can mean the difference between the elevation or extinction of their firms.

Financial Services Summaries (2000-2001)

TOP 25 BANKS                     2000           2001       %CHANGE

Number of Employees                2,078          2,055      -1.11%
Assets *                      $4,093.379     $4,336.936       5.95
Capital *                        329.961        349.753       6.00
Deposits *                     3,326.175      3,556.638       6.93
Loans *                        2,547.275      2,562.043       0.58

TOP 10 INSURANCE COMPANIES       2000           2001       %CHANGE

Number of Employees                1,361          1,066     -21.68%
Assets *                        $654.072       $559.372     -14.48
Statutory Reserves *             429.664        322.761     -24.88
Insurance in Force *          23,624.122     31,327.435      32.61
Premium Income *                 160.029        180.645      12.88
Net Investment Income *           35.648         31.684     -11.12

TOP 15 INVESTMENT BANKS          2000           2001       %CHANGE

Number of Employees                  491            540       9.98%
Total Issues ([dagger])         $394.379       $664.417      68.47%

TOP 20 ASSET MANAGERS            2000           2001       %CHANGE

Number of Employees                  340            340       0.00%
Assets Under Management *    $43,285.031    $49,251.924      13.79

* IN MILLIONS OF DOLLARS, TO THE NEAREST THOUSAND. AS OF DEC, 31 2001.

([dagger]) In BILLIONS OF DOLLARS, TO THE NEAREST MILLION,
AS OF DEC. 31, 2001

PREPARED BY B.E. RESEARCH.