Black-owned banks want the big money, but face major obstacles to survive and to grow.

Black-owned banks want the big money, but face major obstacles to survive and to grow By Jim Crogan

Los Angeles, an emerging international financial center with a black community of significant size, does not have a single black-owned bank. There are only four black-owned savings and loans here. None of the nation's 10 largest black-owned banks is even located in California.

Nationally, black-owned financial institutions tend to be small, says a local man who has studied minority-owned bank trends.

"The points here is the term 'black bank' is synonymous with being small," says Thurman smith Jr., senior director for Institutional Placements at George Smith Financial Services in Century City, the real estate banking division of Grubb & Ellis.

"Small banks, specifically black-owned banks, are considered second and third tier among the field of national players," he says. "Go to any of the big business schools and MBA programs, and you will find the people (graduating) there are looking to the big institutions. Big perceived as better and more sophisticated."

Although, the year-end 1986 assets of the top 10 black-owned banks totaled just $901.8 million. Combined, the 10 banks' assets would barely rank them in the top 100 banks in America, explains Smith. Average loans as a percentage of assets is 44 percent compared to an industry average of approximately 53 percent, he adds.

A member of the Los Angeles Urban Bankers, Smith recently spent four months researching and writing a paper on the current status of black-owned banks in America. Entitled, "A Struggle for Survival -- The Case of Black-Owned Banks," the paper underscores the difficulties facing black-owned banks in the broad market-place as well as the black community. As a member of the black business community, Smith has maintained particular interest in this topic.

"The purpose of my paper," says Smith, "was to get the leaders in the black community to take a real hard look at the horizons for black-owned banks, anticipate what problems should be addressed and hopefully address them before they become uncontrollable."

Smith says his research and interviews revealed that black banks face two major obstacles -- a lack of support inside the black community, and a lack of comment on the part of major corporations, either because of size or inconvenience, to do business with black-owned banks.

Moreover, he says, black-owned banks historically have been unable to provide the same levels of financial service as non-black majority-owned banks.

Smith admits it is "unreasonable" to expect the black community to settle for less service simply because a business is black-owned. Nevertheless he says a commitment by the black community to get them will be absolutely "crucial to their long-term viability."

In terms of minority-owned banks, black-owned banks says Smith, are also lagging for behind Latino and Asian banks. Both Latino and Asian banks, he says, enjoy tremendous community support, and they have profited greatly through an influx of flight capital from their home countries.

"For instance, there has been a tremendous amount of flight capital into the Latino banks from Mexico and war-torn Central America," explains Smith, who adds there is no similar flight capital available to black-owned banks.

"In the black community, black American depends on black America," he added. "We have to reach a point where blacks are willing to sacrifice some of the convenience and support black banks because it's the right thing to do."

In addition to the problems of size and sophistication of management, Smith says black banks must overcome a "credibility gap" among peers, and a lack of investor confidence based on the uncertain future facing the banking industry.

"The American Banking Association is predicting there weill be substantial bank closures or mergers in the industry over the next 10 years, and black-owned banks could become prime targets for take-overs," he adds.

Still, Smith says, the primary obstacles faced by black banks remain their size and sophistication. The most visible criticism of black banks remains that they don't have a "presence in the marketplace." While there is a very active market where you can buy and sell loans between institutions, he says, many black-owned banks have not shown the "sophistication or aggressiveness" needed to compete in this marketplace.

"How can you go out and bid for a loan to finance a satellite company or any of the other high-tech or aerospace companies synonymous with Southern California, when you don't know how the heck to judge the success probability of that kind of firm?" asks Smith.

"It's extremely difficult to compete for a business you don't understand," he adds. Currently, he suggests, black-owned banks lack the qualified people to plan sophisticated marketing strategies.

"In long-term viability, black banks will need to develop strong strategic plans to attract both deposits and assets. Plus they will have to bring in and recruit people with the expertise to create intelligent capital investment programs," he says.

As an example, Smith mentions Seaway National of Chicago, the nation's no. 1-ranked black-owned bank with assets of $137 million. Smith characterizes Seaway as a small bank that has deployed its assets poorly, with roughly 60 percent of assets tied up in cash, federal funds or government securities; only 30 percent of Seaway's year-end portfolio was invested in loans.

Typically, says Smith, 45 to 60 percent of a bank's portfolio should be tied up in loans.

According to Smith, Seaway's portfolio suggests its management either has an "unusually conservative investment policy" or "hasn't demonstrated an ability to successfully place its deposits in higher-yielding, intelligently qualified lending opportunities."

PHOTO: Smith