Financial FREE-For-All.

Black-owned banks are poised to profit from repeal of the Glass-Steagall Act

A BANKER FOR 32 YEARS, WALTER E. GRADY HAS SEEN BIG changes in the industry, from peers giving depositors free toasters to computers allowing consumers to transfer money from one account to another from home.

But Grady, president and chief executive at Seaway National Bank of Chicago (No. 2 on the BE BANKS list) now faces a far more dramatic industry change. As a result of recent banking legislation, he and other executives at black-owned banks must now compete in a newly deregulated environment.

Called the Gramm-Leach-Bliley Act, the reforms, which President Clinton signed into law in November 1999, lifted Depression-era barriers between banks, insurance companies and stock brokerage firms, allowing each to freely expand into the others' businesses (see "More Bank for Your Buck?," May 2000). The new law repealed the Glass-Steagall Act, which had separated the functions of commercial and investment banks since the Great Depression.

The historic overhaul is expected to drastically change the financial landscape for black-owned banks, which now serve millions of individuals and hold billions of dollars in assets and deposits in major cities nationwide.

NEW WAVE OF MERGERS

The removal of laws that blocked banks, investment firms and insurers from entering one another's domain is expected to fuel a new wave of mergers, accelerating the brisk pace of deals seen in the past decade.

For example, from 1995 to 1999, there were 2,236 bank and thrift mergers and acquisitions worth nearly $579 billion, vs. 1,963 such deals worth about $89 billion from 1990 to 1994, according to SNL Securities, a Charlottesville, Virginia-based financial research firm. The deals' values rose significantly in the past four years as larger banks gobbled up each other, setting the stage for more consolidation and a transformation of traditional banks into full-service financial companies.

"This new law will spur numerous new business combinations as financial services companies vie to become one-stop financial providers," says Joe Gladue, an equity analyst at The Chapman Co., a BLACK ENTERPRISE investment bank based in Baltimore. "Most of the attention will fall on the giants in the three industries and mirror the Citicorp-Travelers combination, but there also will be numerous combinations among the smaller players as well."

Black bankers and industry experts expect the law--along with more financial providers going after the same customers, changing demographics and the surge in Internet banking--will prompt them to form alliances with insurance companies and investment banks, expand their offerings and possibly combine operations in some form to survive and become more competitive.

STIFF COMPETITION AHEAD

But black-owned banks better get with the program. Already they're beginning to face stiff challenges from larger institutions taking advantage of the law. For example, in February, E*Trade Group, a Palo Alto, California, online stock-trading service, completed its $1.8 billion stock acquisition of Arlington, Virginia-based Telebank, an Internet-only bank with $2 billion in assets. That deal is the first merger of its type to combine an online broker with an online bank. It also will provide E*Trade with an opportunity to offer one-stop shopping to millions of U.S. consumers electronically. It's these kinds of "new economy" mergers that could pose a threat to the stability of black-owned banks, sources say.

Industry experts and executives also contend that the changing financial scene will soon erase the days when black-owned banks could just rely on offering customers residential mortgages and checking and savings accounts, for years their bread-and-butter businesses. Minority-owned banks have used those products--a focus on personal service and niche marketing primarily targeted to black customers in inner-city neighborhoods--to give them their own identity and a competitive edge over larger, mainstream banks.

Ironically, it's their unique position and cultural elements that will also keep black-owned banks from becoming extinct, and possibly keep them from being acquired by larger banks as mergers among those entities intensify, experts say.

Already, Seaway National Bank, one of the nation's largest black-owned banks, with assets of $279.3 million, 25,000 individual customers and four branches in the Chicago area, is considering expanding into the insurance and brokerage businesses. That means Seaway could eventually offer nonbanking products such as annuities and car insurance as soon as this year.

BBOC: EARLY MERGER MOVER

Meanwhile, Boston Bank of Commerce (BBOC) (No. 15 on the BE BANKS list) intends to grow primarily through acquisitions. In September 1999, it purchased Florida's Peoples National Bank of Commerce, with assets of $40 million, becoming the nation's first black-owned interstate bank. Now known as the Peoples Bank of Commerce, the former Peoples National operates branches in Miami's Liberty City section and in Lauderdale Lakes, a suburb of Fort Lauderdale.

Kevin Cohee, BBOC's chairman and chief executive, says anticipation of Gramm-Leach-Bliley partly triggered his bank's $29.7 million bid a year ago for the stock of New York City's Carver Bancorp, holding company of Carver Federal Savings Bank (No. 1 on the BE BANKS list). Carver is the nation's largest black-owned bank, with assets of $413 million, 50,000 customers and seven branches in the Big Apple. If the bid is successful, the combined entity would have assets, of more than $525 million and count New York, Boston, Miami and Fort Lauderdale as its major markets. An expansion in New York alone would allow BBOC to tap into a market with a population of some 2 million African American consumers. And BBOC hopes to buy another bank or thrift in a major black market where it does not now operate, by this spring.

"We have seen this legislation coming for the past two years, and have been positioning ourselves for the changes," Cohee says. "In today's financial-services environment, particularly for black-owned banks, if you don't remake yourself, you won't survive."

HOSTILE BIDS POSSIBLE

But as this brave new world dawns for African American-owned banks, some fear the old congeniality in the industry could be replaced by an increase in hostile takeovers.

For instance, take the increasingly bitter battle between Carver Bancorp and BBOC. BBOC's takeover attempt has sparked one of the most contentious business disputes in Harlem in years, one that appears to be far from over.

Carver Bancorp won the latest round in late February when it kept two seats on its board of directors that BBOC had tried to win in a shareholders' vote at Carver's annual meeting. BBOC had unsuccessfully nominated Cohee and his wife, Senior Vice President Teri Williams, for the board seats. Instead, Carver Directors David Dinkins, the former mayor of New York City, and David R. Jones, Carver's nonexecutive chairman, retained their seats by a margin of just 30,000 votes (See "Battle Royal," this issue).

The tangle between BBOC and Carver doesn't necessarily mean that future mergers between black-owned banks will be just as contentious.

Chapman's Gladue says that's mainly because most black-owned banks are privately held, making hostile takeovers highly unlikely. And a big percentage of the stock of most publicly traded black-owned banks--like Carver and Broadway Financial Corp.--are owned by directors or top officers, making it tougher for suitors to make bids.

"The Carver-BBOC case is somewhat unique, particularly for black-owned institutions," Gladue says. "This is rare, and I really doubt that we'll see more deals like it."

OFFERING MORE THAN JUST PASSBOOKS

Some black-owned banks have already been successful at offering nontraditional bank products and at entering into alliances with regional institutions. For example, in 1998 Liberty Bank and Trust in New Orleans (No. 11 on the BE BANKS list) began offering mutual funds through Jackson, Shankin & Sonia Investments, a New Orleans brokerage firm. And last fall, Liberty Bank aligned itself with Maryland-based Harbor Bankshares and Alabama-based Tuskegee Bank in a joint venture with Jackson, Shankin & Sonia to sell stocks, mutual funds and annuities through the three banks' branches.

And Gladue predicts that black-owned banks might partner with larger banks looking to gain Community Reinvestment Act credits and deter opposition from fair-lending and community activists who might challenge future acquisitions as they expand geographically.

Donald Davis, chairman at First Independence National Bank of Detroit (No. 12 on the BE BANKS list), with assets of $158.2 million and four branches, says the new law could create many opportunities for black-owned banks to generate additional fees, increase loan production and offer both individual and business customers in black communities new products and services.

"We won't have to close the books on them with one product like a checking or savings account," Davis says. "The entire financial services world is moving that way and I don't see why we won't now."

Davis figures that one of the biggest areas where First Independence can generate fee-based income will be to offer more services to small- and medium-size businesses with annual sales ranging from $500,000 to $20 million, its primary market.

Some industry observers are unsure whether the law will foster more acquisitions among black financial companies, though.

A HANDFUL OF DEALS

Gladue believes that some black-owned financial service companies will merge, but that there will not be a massive number of deals. He says that's because there are a limited number of major cities with two or more black-owned banks, or a bank and insurance company. But Gladue says there are two wild cards that could fuel a few deals. Most of the banks that have been acquired were sold out of necessity, not because the owners wanted to sell. He says BBOC's acquisition of the financially troubled Florida bank is a good example.

Gladue says one black-owned bank that could be a likely takeover candidate is the United Bank of Philadelphia (No. 14 on the BE BANKS list), now under an enforcement agreement with that city's Federal Reserve Bank to improve its operations and capital ratios. He says the inability of United Bank of Philadelphia to meet those demands could force it to sell out.

But Dr. Emma Chappell, chairman and chief executive of the United Bank of Philadelphia, says the community bank isn't for sale. Moreover, the bank is making changes to remain independent and meet regulators' demands.

"We have no intention at all to sell," Chappell says. "We're taking steps to make sure we can produce the type of revenues and profits we'll need to continue our growth and meet shareholders' needs."

She says the black-owned institution is taking action to reduce expenses, increase profits and revenues and is implementing a succession plan to ensure it has the leadership to sustain its growth and longevity.

Chappell says that those changes include consolidating its eight-branch network in mostly inner-city neighborhoods to five to cut costs. She says the company is also trying to offer new products, such as car insurance and life insurance, by early next year. She says that move would allow the bank to expand its product mix and provide it with a new stream of fee income. Chappell also says United Bank of Philadelphia is expanding credit card lending to existing and new customers and that it has grown to nearly $150 million in assets with eight branches and 35 ATM locations.

COMMUNITY SERVICE NICHE IS KEY

But not all bankers agree the law will in itself bring more deals among black-owned banks. Rather, the unique niche they serve will keep them independent.

Lester Johnson, chief operating officer at the Harbor Bank of Maryland in Baltimore (No. 8 on the BE BANKS list), says most black-owned banks are probably not vulnerable to being acquired by larger banks because of their small asset size, branches in predominantly black neighborhoods, small market share and, in some cases, level of profits.

"As community banks, black banks have always been more familiar with their customer base and generally able to provide better service," says Johnson. "In that regard, the bank reform bill shouldn't have a significant impact."

Whatever the results, most black bankers agree the law will forever change how minority-owned banks do business, if by nothing else than forcing them to reexamine their operations and cope with the industry's latest transformation.

B.E. BANKS

2000 TOP 25 BANKS SUMMARY

BLACK-OWNED BANKS           1998         1999   PERCENT CHANGE

NUMBER OF EMPLOYEES        2,062        2,049       -0.63%
ASSETS(*)             $3,924.341   $4,022.637        2.50%
CAPITAL(*)              $315.118     $306.611       -2.70%
DEPOSITS(*)           $3,139.805   $3,297.492        5.02%
LOANS(*)              $2,181.732   $2,344.385        7.46%

(*) In millions of dollars, to the nearest thousand. Prepared by B.E. Research. Reviewed by Mitchell & Titus L.L.P.

B.E. 100s POWERHOUSES OF THE NEW ECONOMY

THIS   LAST
YEAR   YEAR   COMPANY                    LOCATION

 1       1    CARVER FEDERAL             New York,
              SAVINGS BANK               New York

 2       5    SEAWAY NATIONAL BANK       Chicago,
              OF CHICAGO                 Illinois

 3       3    INDUSTRIAL BANK N.A.       Washington,
                                         D.C.

 4       4    INDEPENDENCE FEDERAL       Washington,
              SAVINGS BANK               D.C.

 5       2    HIGHLAND COMMUNITY         Chicago,
              BANK                       Illinois

 6       6    CITIZENS TRUST BANK        Atlanta,
                                         Georgia

 7       9    FAMILY SAVINGS BANK        Los Angeles,
                                         California

 8       7    THE HARBOR BANK            Baltimore,
              OF MARYLAND                Maryland

 9      10    CITY NATIONAL BANK         Newark,
              OF NEW JERSEY              New Jersey

10      12    BROADWAY FEDERAL           Los Angeles,
              BANK F.S.B.                California

11       8    LIBERTY BANK               New Orleans,
              & TRUST CO.                Louisiana

12      13    FIRST INDEPENDENCE         Detroit,
              NATIONAL BANK              Michigan

13      11    MECHANICS                  Durham,
              AND FARMERS BANK           North Carolina

14      14    UNITED BANK                Philadelphia,
              OF PHILADELPHIA            Pennsylvania

15      18    BOSTON BANK                Boston,
              OF COMMERCE                Massachusetts

16      15    ILLINOIS SERVICE FEDERAL   Chicago,
              S&L ASSOCIATION            Illinois

17      17    TRI-STATE BANK             Memphis,
              OF MEMPHIS                 Tennessee

18      16    CONSOLIDATED BANK          Richmond,
              & TRUST CO.                Virginia

19      19    FOUNDERS NATIONAL          Los Angeles,
              BANK OF LOS ANGELES        California

20      21    DRYADES SAVINGS BANK       New Orleans,
              F.S.B.                     Louisiana

21      20    CITIZENS FEDERAL           Birmingham,
              SAVINGS BANK               Alabama

22      22    DOUGLASS NATIONAL          Kansas City,
              BANK                       Missouri

23      23    FIRST TUSKEGEE BANK        Tuskegee,
                                         Alabama

24      24    MUTUAL COMMUNITY           Durham,
              SAVINGS BANK INC. SSB      North Carolina

25      --    CAPITOL CITY BANCH         Atlanta,
              SHARES INC.                Georgia

                                                      YEAR
COMPANY                    CHIEF EXECUTIVE           STARTED

CARVER FEDERAL             Deborah C. Wright          1949
SAVINGS BANK

SEAWAY NATIONAL BANK       Walter E. Grady            1965
OF CHICAGO

INDUSTRIAL BANK N.A.       B. Doyle Mitchell Jr.      1934

INDEPENDENCE FEDERAL       Donna Fitzgerald Shuler    1968
SAVINGS BANK

HIGHLAND COMMUNITY         George Barr                1970
BANK

CITIZENS TRUST BANK        James E. Young             1921

FAMILY SAVINGS BANK        Wayne-Kent A. Bradshaw     1948

THE HARBOR BANK            Joseph Haskins Jr.         1982
OF MARYLAND

CITY NATIONAL BANK         Louis E. Prezeau           1973
OF NEW JERSEY

BROADWAY FEDERAL           Paul C. Hudson             1947
BANK F.S.B.

LIBERTY BANK               Alden J. McDonald Jr.      1972
& TRUST CO.

FIRST INDEPENDENCE         Donald Davis               1970
NATIONAL BANK

MECHANICS                  Julia W. Taylor            1907
AND FARMERS BANK

UNITED BANK                Dr. Emma C. Chappell       1992
OF PHILADELPHIA

BOSTON BANK                Kevin Cohee                1982
OF COMMERCE

ILLINOIS SERVICE FEDERAL   Thelma J. Smith            1934
S&L ASSOCIATION

TRI-STATE BANK             Jesse H. Turner Jr.        1946
OF MEMPHIS

CONSOLIDATED BANK          Vernard W. Henley          1903
& TRUST CO.

FOUNDERS NATIONAL          John P. Kelly Jr.          1991
BANK OF LOS ANGELES

DRYADES SAVINGS BANK       Virgil Robinson Jr.        1994
F.S.B.

CITIZENS FEDERAL           Bunny Stokes Jr.           1956
SAVINGS BANK

DOUGLASS NATIONAL          Ronald Wiley               1983
BANK

FIRST TUSKEGEE BANK        James W. Wright            1894

MUTUAL COMMUNITY           George K. Quick            1921
SAVINGS BANK INC. SSB

CAPITOL CITY BANCH         George G. Andrews          1994
SHARES INC.

COMPANY                    STAFF   ASSETS(*)   CAPITAL(*)

CARVER FEDERAL              120     413.000      33.000
SAVINGS BANK

SEAWAY NATIONAL BANK        187     279.324      23.913
OF CHICAGO

INDUSTRIAL BANK N.A.        157     264.817      17.688

INDEPENDENCE FEDERAL         77     260.327      22.562
SAVINGS BANK

HIGHLAND COMMUNITY          110     252.056      17.130
BANK

CITIZENS TRUST BANK         142     214.393      17.991

FAMILY SAVINGS BANK          75     180.300       9.900

THE HARBOR BANK              83     177.618      11.346
OF MARYLAND

CITY NATIONAL BANK           70     171.624      10.328
OF NEW JERSEY

BROADWAY FEDERAL             55     166.340      13.831
BANK F.S.B.

LIBERTY BANK                150     161.733      11.298
& TRUST CO.

FIRST INDEPENDENCE           50     158.224       7.182
NATIONAL BANK

MECHANICS                    90     157.744      16.299
AND FARMERS BANK

UNITED BANK                 100     137.822       9.365
OF PHILADELPHIA

BOSTON BANK                  52     137.746       9.434
OF COMMERCE

ILLINOIS SERVICE FEDERAL     34     114.664      12.345
S&L ASSOCIATION

TRI-STATE BANK               75     111.618      11.831
OF MEMPHIS

CONSOLIDATED BANK            94     106.295       7.490
& TRUST CO.

FOUNDERS NATIONAL            81     105.853       7.259
BANK OF LOS ANGELES

DRYADES SAVINGS BANK         82      95.937       5.886
F.S.B.

CITIZENS FEDERAL             32      91.900       7.632
SAVINGS BANK

DOUGLASS NATIONAL            27      72.166       3.969
BANK

FIRST TUSKEGEE BANK          37      67.000       4.645

MUTUAL COMMUNITY             29      66.136       7.987
SAVINGS BANK INC. SSB

CAPITOL CITY BANCH           40      58.000       6.300
SHARES INC.

COMPANY                    DEPOSITS(*)   LOANS(*)

CARVER FEDERAL               277.000      256.000
SAVINGS BANK

SEAWAY NATIONAL BANK         235.467      126.816
OF CHICAGO

INDUSTRIAL BANK N.A.         212.799      107.270

INDEPENDENCE FEDERAL         205.460      208.110
SAVINGS BANK

HIGHLAND COMMUNITY           228.798      134.542
BANK

CITIZENS TRUST BANK          183.684      133.657

FAMILY SAVINGS BANK          129.800      143.100

THE HARBOR BANK              165.541      102.501
OF MARYLAND

CITY NATIONAL BANK           139.896       82.851
OF NEW JERSEY

BROADWAY FEDERAL             133.984      142.539
BANK F.S.B.

LIBERTY BANK                 139.309      111.411
& TRUST CO.

FIRST INDEPENDENCE           117.639       44.618
NATIONAL BANK

MECHANICS                    129.529      109.594
AND FARMERS BANK

UNITED BANK                  125.052       60.958
OF PHILADELPHIA

BOSTON BANK                  109.698       45.038
OF COMMERCE

ILLINOIS SERVICE FEDERAL      88.074       27.275
S&L ASSOCIATION

TRI-STATE BANK                98.755       62.614
OF MEMPHIS

CONSOLIDATED BANK             97.476       49.983
& TRUST CO.

FOUNDERS NATIONAL             97.247       79.208
BANK OF LOS ANGELES

DRYADES SAVINGS BANK          83.939       77.221
F.S.B.

CITIZENS FEDERAL              71.893       73.261
SAVINGS BANK

DOUGLASS NATIONAL             66.545       38.821
BANK

FIRST TUSKEGEE BANK           59.000       46.100

MUTUAL COMMUNITY              50.030       47.897
SAVINGS BANK INC. SSB

CAPITOL CITY BANCH            50.877       33.000
SHARES INC.

(*) In millions of dollars, to the nearest thousand. Ranked by total assets as of December 31, 1999. Prepared by B.E. Research. Reviewed by Mitchell & Titus L.L.P.