Living the realities of community banking.
Adversity tests character.
In April 1992, many Los Angelenos vented their rage after learning of the acquittal of four white policemen charged with beating motorist Rodney King. Within hours, South Central Los Angeles became a war zone: Stores were looted, cars demolished, businesses torched and many local financial institutions shut down. But not Founders National Bank of Los Angeles (FNBLA), which had been in operation for 17 months.
In fact, Founders (No. 18 on the BE FINANCIALS LIST) seized the opportunity to fulfill its customers needs. The bank expanded its services and stayed open on Sunday for those who needed checks cashed. John P. Kelly Jr., the bank's president and CEO, says Founders did "nothing more than banks have done historically."
Indeed. Customer service, social responsiveness and financial growth are the pillars supporting Founder's success. Its growth has been led by a solid home-grown management team, who balance fiscal prudence, aggressiveness and political savvy. And now Founders is becoming more visible through its efforts to reconstruct South Central's devastated economic life. The result: new branches, more customers--and deposits. Additionally, Founders recently received a sizable equity capital investment from the oil and gasoline giant Atlantic Richfield Co. (ARCO), one of the nation's 100 largest corporations.
Carlton J. Jenkins, the bank's managing director, understands the challenge of rebuilding a community. "First, you must focus on the economic infrastructure. There is not a black-owned hotel or chain of gas stations or cleaners in Los Angeles, partly because there hasn't been a proactive financial institution willing to provide access to capital and credit to make those dreams come to life. Our role is to provide the financial building blocks."
This philosophy is very much in keeping with Founders' mission, which is included in the bank's corporate statement: "to make a difference in the communities it serves by providing, on a personalized basis, quality financial services that are needed by the consumers, small- and medium-sized businesses, and professionals located in our market."
So far, the bank is off to a good start. In 1992, financial results were favorable: Net income was $1.3 million, assets grew 23% to $74 million and return on assets was 1.94%. Through a combination of vision, commitment and experience, this three-branch institution is creating a model for community banking in the 1990s. And that is why Founders National Bank of Los Angeles has been selected as BLACK ENTERPRISE's 1993 Financial Company of the Year.
A Banking Phoenix
Founders National Bank grew out of the collapse of a black-owned savings and loan, Founders Federal Savings & Loan Association. The thrift, with assets of $95 million and $79 million in deposits, failed in 1989. But then the Resolution Trust Corp. (RTC) took it over, eating the worst loans. Despite the problems, the RTC was determined to keep a financial institution in the area by selling the $3 million thrift and its good assets. That's when help arrived to create California's only African-American-owned commercial bank.
Leon T. Garr knows how to build a sound structure. During a five-decade career as a contractor and home builder, the 79-year-old Louisiana native made a small fortune in Los Angeles with his numerous investments in motels, apartment buildings and child care centers. Driven to build a new bank, Garr invested $750,000 in 1990 to purchase Founders. He then tapped his grandson, Carlton Jenkins, a banker with 15 years of experience, to become a partner and manager. The two were joined by a team of outside investors, including Kelly, a former executive director of the National Bankers Association. The association invested an additional $250,000. The final "t" was crossed when the RTC loaned the group $2 million to complete the deal.
An unblemished bank opened for business on Jan. 22, 1991. Two years later, Founders boasts a solid, if undiversified, loan portfolio. Real estate loans make up 80% of Founders' $29 million portfolio and most are on multifamily dwellings, explains Ellis Gordon Jr., senior vice president and chief credit officer.
And all bankers know that lending money builds income. Between 1991 and 1992, Founders increased its total loans by 57%. Nearly $11 million were mortgages secured by residential property. Of that amount, $8.6 million was secured by multifamily properties of five or more units. The remainder was secured by properties of one to four units. During the same one-year period, Founders' commercial and industrial loans grew from $193,000 to $2.99 million. Consumer loans also grew from $860,000 to $1.9 million. Gordon explains: "We are focusing on making more commercial loans. If I had my druthers, I would like to have 45% or 50% commercial loans, 40% real estate and the balance in consumer loans."
Aggressive lending practices does not signal fiscal imprudence, however. The bank's 1992 loan loss provisions--dollars set aside to cover loans that aren't repaid--grew 450% to $355,000 last year. In fact, Veribanc Inc., a Wakefield, Mass.-based research firm that rates the financial condition of the nation's financial institutions, gave Founders a "Green Three-Stars" rating. That means that the bank's capital ratio of 7.36%, which grew from 6.96% in 1991, exceeded the U.S. capital requirements.
Gordon can be justifiably proud of having a creditworthy real estate-based loan portfolio, particularly in California, where banks have written off billions. Founders' small size and relative youth also protect it from such missteps. "We are relatively new in the business, and we don't have any of the real large real estate loans. Our lending limit is $700,000 to $800,000 to one customer," he explains.
Still, Jenkins and Gordon are disappointed that more black companies and celebrities haven't yet banked with Founders. Says Jenkins: "If I look at the BLACK ENTERPRISE 100s companies, I may have five of the companies [as customers]. And I don't have as many visible athletes or entertainers as you might expect participating in the economic empowerment of an African-American community. It certainly isn't a function of them not knowing I'm here. We are probably the most visible black financial institution in the community."
Maxine Ransom Von Phul believes Founders is there for South Central Los Angeles. As president of Winmax Construction Corp. and past chairperson of the Black Business Association of Los Angeles, Von Phul holds both personal and professional accounts at the bank. She says, "I think that they [Founders] are doing everything they can with their capital base. You have to have deposits to make loans."
William Michael Cunningham agrees. His Washington, D.C.-based company, Creative Investment Research, monitors and evaluates minority- and women-owned financial institutions. While acknowledging that Founders may not have the wherewithal to make $2 million and $3 million loans yet, he says, "I have a problem with the BE 100s companies not stepping up to the plate."
Founders' management can't wait for these companies to decide. Until then, it will continue to focus on small- and medium-size businesses, and there are no plans for an all-out effort to court large corporations. Of course, that doesn't stop Gordon from having lunch with music magnate Berry Gordy Jr., just to chat.
And it's not as if Founders is having trouble attracting customers. Cunningham says several churches have deposited nearly $1.5 million in the bank and encourage their parishioners in South Central to open accounts.
Firmly In Control
Founders' most valuable asset is clearly its management team. CEO and President Kelly is "Mr. Inside," while Jenkins, the bank's managing director, is "Mr. Outside." The low-key Kelly spent nine years as president of Midwest National Bank in Indianapolis and is still a partner in a legislative and governmental affairs consulting firm. He oversees the bank's planning and financial decisions and maintains solid relations with state and federal banking authorities.
Meanwhile, Jenkins is the public face of Founders. Born in Los Angeles, the Dartmouth College graduate was the chief operating officer of the $75 million Pasadena, Calif.-based United Mercantile Bank and Trust Co. before joining Founders. He manages the marketing and administration and owns 10% of the bank's stock.
Jenkins also has local clout. A board member of the Community Reinvestment Institute and chairman of the Financial Institutions Subcommittee of Rebuild L.A., he is also on the Mayor's South Central Los Angeles Economic Development Council. Recently, these credentials helped open and close two deals worth millions to the bank.
The most unusual is a $1 million investment by ARCO. The corporation receives nonvoting preferred stock and will match dollar for dollar new capital investment by other corporations made this year. In addition, ARCO may, at its option, reinvest dividends in Founders, which could provide up to another $2 million in capital for the bank if the dollar-for-dollar investment challenge is met. In all, Founders could realize more than $4 million from ARCO's investment.
At the time of the announcement, Jenkins said, "ARCO's investment signals an end to the myth that the inner city represents an inordinate and unacceptable level of financial risk that has kept corporate American from investing."
Last December, ARCO's Senior Vice President and Treasurer Camron Cooper echoed the assessment. "We see this as a sound business decision. ARCO evaluated the overall financial integrity of the bank, the expertise of its management and its success potential relative to the communities it serves and we serve," she said.
This delighted community leaders. "ARCO's investment is significant," says Bernard Kinsey, chief operating officer of Rebuild L.A. Danny Bakewell, president of the Brotherhood Crusade and the Black United Fund adds, "I think it is too long in coming but welcome now that it's here. It seems to me, though, there ought to be more." There is. Because of ARCO's matching challenge, Jenkins says that three or four other major corporations are looking at similar arrangements. This is a signal of permanence never before displayed by white-owned corporations.
The ARCO deal is attractive but another one extends Founders' reach. Although the terms of the agreement were not disclosed, Bank of America has agreed to sell two of its South Central branches to Founders. The national bank is also buying $1 million of Founders preferred nonvoting stock. Both deals are expected to be completed, pending regulatory approvals by this July. At the deal's announcement, Bank of America's Group Executive Vice President Liam McGee, who manages the bank's California branches, said, "We have great respect for the group that owns and manages Founders. They are very focused on their market, and we believe the community is better served by having a variety of competitors."
What's is Founders' future? For one thing, Jenkins is concerned that President Clinton's proposal to create 100 new community development banks will harm banks like his (see BE FINANCIALS overview, this issue). The plan's goal is to spend $850 million during the next five years, creating 100 banks to invest in distressed neighborhoods.
This burns Jenkins, who says, "I take exception to any plan that is not inclusive of banks like mine. If you can isolate $850 million, why not divide it among the existing institutions? You would provide sustenance and allow them to continue doing a job they're already doing."
"Maintenance of adequate capital levels is a problem confronting minority-owned financial institutions nationwide," says Jenkins, who notes that the number of African-American-owned banks is shrinking rapidly. "None of the traditional sources of equity capital, such as investment bankers, high-net-worth investors, pensions funds and mutual funds have ever seriously focused their time, money or energy on the minority banking community." Corporate America has only recently embraced the minority banking community by using certain banks for deposits and involvement in lines of credit, he adds.
Founders' officials aren't waiting for any handouts, though. Jenkins projects the bank will gain $100 million to $150 million in assets by 1998, and establish branches in all the significant sections of Los Angeles and in other markets nationwide.
Maybe. So the struggle continues. And given the Founders' team record, there is no reason to take such talk lightly.