Carver vs. OneUnited: in the battle for market share and customers, the nation's two largest black banks seek to grow through acquisition. Which one will ultimately win the fight to be No. 1?

Deborah Wright has been kicking butt and taking numbers--the latest is No. 1. That's the place New York-based Carver Federal Savings Bank currently holds, having earned the top spot on the 2004 BE BANKS list with $529.57 million in assets. CEO Wright has her sights set on making Carver a billion-dollar monolith. Its most recent attempt was the failed takeover bid of Washington, D.C.-based Independence Federal Savings Bank (No. 11 on the 2004 BE BANKS list with $217.06 million in assets), which was expected to increase Carver's assets to $750 million.

In the process of reaching that goal, Carver dethroned Boston-based OneUnited Bank, last year's numero uno and the 2003 BE Financial Company of the Year. OneUnited's assets of $438.56 million made it No. 2 on the 2004 ranking.

CEO Kevin Cohee claims Carver isn't eligible to be champ because it's a publicly traded company. However, the majority of Carver's shares are reportedly held by African Americans, and the Office of Thrift Supervision as well as the National Bankers Association, the trade association for minority- and women-owned banks, both classify Carver as an African American institution.

Cohee worked hard to grab the lead position from Wright a year ago. He earned first place primarily by increasing OneUnited's assets through the acquisition of community banks over the past five years. In fact, over that time period, he made hostile takeover attempts at Carver as part of his "by any means necessary" approach to growth. Can OneUnited overtake Carver again?

It has been one of the longest-running feuds in black banking. For years, Carver and OneUnited have been delivering and parrying blows in their quest for No. 1 status. And the relationship between these two bank CEOs has kept industry watchers on the edges of their seats. Whether Wright and Cohee realize it, admit it, or even care, their competition consistently raises the bar for other African American bankers. "Mr. Cohee has been referred to as a bulldog by some media, but I respect him for his focused vision," says James Young, president and CEO of Citizens Trust Bank (No. 3 on the BE BANKS list with $359.73 million in assets). "What he and Deborah Wright are offering to the business is a new paradigm. It's like waking a sleeping giant."

Young, who is also the chairman-elect of the National Bankers Association, says the actions of the two banks represent a shift in the way small banks are forced to capture market share. In order to compete with mainstream banks, these institutions must build assets, deposits, and loan portfolios through mergers and acquisitions. Cohee's strong-arm tactics, however, have been foreign to the black banking industry, which has been operating under a live-and-let-live philosophy. Competitors rarely worried about hostile takeover threats.

THE ROOTS OF RIVALRY

Carver and OneUnited have been locking horns for more than half a decade. This rivalry was sparked in 1999 when OneUnited--then named Boston Bank of Commerce (BBOC)--was a scrappy institution with $137.82 million in assets and Cohee at the helm with a plan to develop an interstate financial powerhouse. Over the next few years, Cohee would expand his banking empire by acquiring Miami-based Peoples National Bank as well as Family Savings Bank and Founders National Bank, both based in Los Angeles.

Part of Cohee's growth plan was to get in on the lucrative New York market. In March 1999, he and wife Teri Williams shelled out $1.35 million for about 7.4% of Carver's voting shares, making them the institution's largest stockholders at the time. During that period, Carver was hemorrhaging--the bank lost $5 million in one quarter alone--and federal regulators classified the bank as "troubled." The mounting fiscal losses forced Carver's hoard to fire its CEO and begin a search for a new one.

Cohee, who gained a reputation as a turnaround artist for flagging black financial companies, offered himself as a candidate for CEO. He proposed that Carver purchase BBOC at a premium and that he and his wife run the operation. Cohee and Williams already owned two-thirds of BBOC. The board figured that if the couple got hold of a sizable chunk of Carver, they would initiate a complete takeover of the institution. The board chose Wright as CEO instead.

Wright and Cohee both represent a new breed of black professional entrepreneur who has emerged as the leadership of BE 100S companies over the past decade. Both CEOs were trained at Harvard. Both are players with connections from Wall Street to the Beltway. The cool, methodic Wright built her business career on economic development and served as president of the Upper Manhattan Empowerment Zone Development Corp. The ego-driven, strategic Cohee made his bones in corporate finance, cutting deals as an investment banker at Salomon Smith Barney in the 1980s.

Wright's ascension did not stop Cohee's aspirations to merge the two institutions. He launched a proxy fight and initiated a bitter legal battle to try to wrest control of the company away from Wright and Carver's board--twice. (See "Battle Royale" in the blackenterprise.com archives.) After BBOC lost "tens of millions" in pursuit of a merger, according to Cohee, he and Williams settled for board seats. By 2002, they'd sold their shares. Also by that time, Wright had transformed Carver into a profit machine by obtaining investment capital, opening new branches, and attracting more customers.

Although he was thwarted in his prior takeover attempts, Cohee still has not lost his appetite for Carver and hasn't ruled out the possibility of making a future run at the bank In the meantime, he and Wright are trying to expand their respective empires.

THE INDEPENDENCE DEAL UNRAVELS

In order to grow Carver and keep its leadership position, Wright knew she had to acquire another institution. Last year she discovered the perfect opportunity: Independence Federal. It offered strategic benefits, such as low-cost branch growth, as well as entree into one of the fastest growing and most affluent African American consumer markets.

Carver joined a number of other bidders including RLJ Companies, the holding company of BET founder Bob Johnson, and Morton Bender, a white investor who owns Rockville, Maryland-based Colombo Bancshares, a bank holding company. By March 2004, Wright had trumped all other bidders by offering the highest price, paying a premium of 1.51 times Independence Federal's book value and agreeing to pay the bank's shareholders $21 per share in cash for each share of common stock they held. Total cost: $32.6 million.

But it appears that Carver and Independence Federal will not get hitched after all. At press time, the Office of Thrift Supervision (OTS) had denied Carver's application to acquire the institution because of federal regulators' concerns about the financial strength of the combined institution. In an Oct. 18 news release, Carver officials reportedly stated that "The OTS noted that Independence Federal's total assets and profitability have declined and that [the thrift] has recently experienced significant losses." According to the OTS, Independence Federal lost $1.2 million in the first six months of 2004.

A month prior to the decision, the nuptials seemed shaky. In a September statement, Carver said "the financial condition of Independence Federal has seriously declined since the announcement of our merger agreement in March, and Independence Federal has failed to keep us informed of significant developments." Independence Federal countered by stating that Carver "was in material breach of its merger agreement" because it was "no longer willing to pay" Independence Federal stockholders $21 a share. And Independence Federal was Not going to renegotiate the deal.

The Carver-Independence Federal transaction was fraught with problems. Independence Federal's legal battles were largely responsible for it racking up huge losses. It accumulated at least $3 million in expenses fighting Bender, one of its largest shareholders and the leading opponent of the merger when it was announced in March. During the bidding process, Bender reportedly said he wanted to merge Independence Federal with Colombo Bank to create a regional powerhouse. (In that arrangement, Independence would have no longer been black-controlled.)

Independence Federal's failure to gain shareholder approval can be viewed as one of the reasons the deal began to break down. As part of the overall buy-and-sell process, publicly traded institutions have to get approval from shareholders before a purchase can be considered by regulators. Under the bylaws of Independence Federal, a shareholder meeting must be held and the holders of two-thirds of its outstanding shares must vote yes on such a proposal. That meeting never got a chance to be called.

And to make matters worse, Bender, who held some 20% of Independence Federal's shares, was in a buying frenzy trying to obtain more in order to halt the merger. Independence Federal filed a lawsuit against Bender, stating that he was in violation of securities regulations. According to court documents, the bank's board of directors instituted a shareholders rights plan, which was basically a "poison pill that would effectively dilute [Bender's] position if [he purchased] a single additional share." Independence Federal's shareholders rights plan enables investors to buy up to, but not more than, 20% of its common stock without board consent. This is not the first time Bender and the board of Independence Federal have been at odds; he sued the bank unsuccessfully in December 2003. Bender was attempting to remove most of the board members via a special shareholders meeting.

Cohee maintains that Wright offered too much for Independence Federal in the first place and says he purposely stayed away from the bidding because "We saw the people who were involved ... and thought it would end up being a waste of time. [We thought] somebody would make a mistake and that's what happened," he says, referring to Wright and her team. "It was a good example of what can go wrong when you do deals [without the proper] expertise. You would never fix a price on an asset that's deteriorating in value."

But experts had a different opinion as to why Cohee decided not to engage in the bidding process. "OneUnited is a little thin in the capital ratios [department] to [have been involved in] a deal of this size right now," says John W. McCune, a research director at SNL Financial. OneUnited's total assets fell $61 million between the end of 2002 and the end of 2003. And while the institution's capital rose from $24 million in 2002 to $28 million in 2003, $28 million is still $4 million less than what Carver was going to pay for Independence Federal. "The problem Kevin has is money," says William Michael Cunningham, CEO of Creative Investment Research Inc., publisher of the Minority Bank Monitor. "His bank is still chugging along but that whole Los Angeles area fell off the radar screen after the Rodney King riots. Kevin didn't want to lose out on Independence Federal. Money was the turning point for him."

At the end of 2003, Carver had $56 million in capital, and the fact that it's publicly traded gave it an advantage. "One can do a mix of stock and cash to finance a deal if a company is public. [A private company] generally has to pay cash," explains McCune. Citizens Trust's Young agrees, "If I decide to buy a bank, I can offer them stock. I will be able to liquidate the stock if I have to. This is the value of being publicly traded."

Cohee refutes such statements. "We have access to as much capital as we need," he says. "We can buy anybody we want to buy, anytime we want to buy them. We have no problem trying to access capital."

THE PUSH FOR GROWTH

While it may appear to be tit for tat, the moves of Cohee and Wright are not mere vanity plays. Both need to grow their institutions to a size that will give them the economies of scale to tackle the current banking environment. For instance, mortgages continue to be a target growth area for most black-owned banks, but with limited resources, an institution loses its competitive advantage.

Major banks, such as JP Morgan Chase, Wachovia, or Banco Popular, employ hundreds of loan officers who approve billions of dollars in loans every year, and you can find a branch of many major banks on almost every block of a major city. Carver only has four loan officers who wrote about $82 million in mortgages in fiscal 2004 and purchased another $94 million worth of loans from other financial institutions during the same period. OneUnited, on the other hand, controls banks in three different states but only manages a total of 10 branches. It boasted about $158 million in originated mortgages in 2003.

OneUnited and Carver want to play on the big boys' turf. "We need more customized products, such as loans for people with less than perfect credit, [and] the ability to contribute more to nonprofits and churches," says Wright. As a small business, Carver has a much smaller contributions budget, which makes it more difficult to compete with big banks where charitable contributions are concerned.

Carver recently opened two new branches and has plans to start construction on another branch in Harlem, New York, this winter. The bank is also building more ATM centers to reach new customers. But these young, progressive African American men and women are expensive to reach. Wright estimates that it costs about $1.5 million to build a branch. "You need $30 million in deposits to break even on a branch, so you must be careful not to do it for vanity purposes," she warns. If it had acquired Independence Federal, Carver would have added five branches in Washington, D.C., to its existing eight branches in New York. "We are the largest (black bank) and we are just getting to that point to move the needle."

Wright must contend with the failed acquisition of Independence Federal as well as the loss of a major shareholder and boardroom ally. In June, the Provender Opportunities Fund L.P., a private equity fund, sold its 60,000 shares of Carver stock to Keefe, Bruyette & Woods Inc., a New York-based investment bank and brokerage firm. Provender Capital Group CEO Frederick O. Terrell is also chairman of Carver's board. He says his firm's sale of its Carver stock didn't have anything to do with bad investments. "After four years, we simply sought to create a successful liquidity event on behalf of our limited partners who are investors in our fund," says Terrell. "I remain very actively committed to the bank as chairman, and continue to own shares personally in the company."

Provender purchased its shares in 2000, which made it Carver's largest shareholder at the time. It gave Wright the muscle she needed to ward off Cohee who was the largest shareholder until Provender came on hoard.

THE NEXT BATTLEGROUND

Cohee says he didn't feel any pressure from the attempted Carver-Independence Federal alliance. But that doesn't mean the two institutions won't be competing for the next big deal.

Cunningham of Creative Investment Research says logical targets for Carver and OneUnited to pursue at this time would be banks along the Eastern Seaboard. Carver is now in New York City. OneUnited has a presence in Boston, Florida, and Southern California. Wright says Carver is focused on the inner-city target market, particularly those in the African American community. "We like the kind of market that has good real estate and incomes of consumers in the low to upper middle class," she says. But Cunningham maintains that Carver and OneUnited must broaden their scopes if they want to make it to the upper echelon of megabanks. "Unless they start looking to buy small, nonminority banks, [they'll just be] crabs in a barrel, fighting each other over limited institutions," he asserts. "But if they change focus and go after nonminority banks, that would be helpful."

The most advantageous marriage, however, could very well be a merger between Carver and OneUnited. The new entity would have total assets exceeding $1 billion, a coast-to-coast network of branches, and the resources to gobble up smaller institutions. Just because there's a bit of tension between the two CEOs doesn't mean the deal isn't possible. Says Citizens Trust's Young: "Everything is for sale. If the price is right and the sum of the whole is worth more than the parts, a deal is always possible." Cohee concedes, "I wouldn't touch [Carver] right now, but there's no telling what the future holds." Until such a deal can be struck the battle rages on.