The fight of their lives: B.E. financial services firms were locked in mortal combat with tough competitors and a bruising economy. (B.E. Financial Services Overview).

After taking blows from a sluggish economy and volatile financial markets. Ronald E. Blaylock uses a classic boxing match to sum up the past year. The chief executive of New York-based Blaylock & Partners (No. 1 on the BE INVESTMENT BANKS list with $214.2 billion in senior/co-senior managed issues) describes it as "Ali-Frazier III: The Thrilla in Manila." In other words, it was death-defying, brutal warfare.

While his firm's revenues rose 15% in 2002, profits plummeted 30%. But Blaylock didn't just stand still and take a licking: he invested in new technology and back office systems, added more space, and hired 40 additional employees to build up the firm's sales and equity-research operations. These moves will enable Blaylock & Partners to expand coverage in new areas, such as banking and insurance, media, airlines, technology, and energy--including oil and gas exploration. With greater pressure to identify new sources of revenue, the unpredictable economy fueled Blaylock's expansion plans. "It will allow us to have a much broader capability to service the equity institutional investor, which in turn should help boost revenues as the firm generates more fees from these clients," he says.

As part of the strategy, the firm added an asset management team and plans to launch new equity, fixed-income, and, possibly, mutual fund products geared toward institutional clients later this year. Next up: the pursuit of asset management firms--those with $5 billion to $15 billion under management--as acquisition targets. "It's our desire and intent to have asset management as part of our entire platform," he says. "We like the recurring revenue side of that business."

In today's bearish environment, Blaylock and other CEOs of black-owned financial services entities--banks, insurance companies, investment banks, asset managers, and private equity firms--are battling some of their biggest challenges yet. Positioned against an unsteady economy, conservative cost-cutting clients, and ferocious competition, black-owned financial services firms must develop new business models to prosper or perish. "There's probably more pressure to perform now than in previous years," says Joe Gladue, an equity analyst and director of research at The Chapman Co. in Baltimore. "When the market was booming a few years ago, some of the shortcomings of a company could be overlooked. But the market is tougher, and the economy is weaker, [and] those shortcomings become more noticeable."

In fact, when BE research consulted the Securities and Exchange Commission regarding its transactions, many firms had to make restatements while others were not registered. As a result, this year's rankings of investment banks and asset managers have dropped from 20 to 15. And to better assess the leadership of investment banks, we have ranked them according to their senior-managed issues.

MORE BANKS MERGE TO GAIN MASS

The critical need to boost capital, expand margins, and offer new products and services has forced a number of banks to get hitched. Gladue says three factors have driven this consolidation trend. First, many black-owned banks have been marginally profitable underachievers. Such entities are now merger bait for higher-performing, more aggressive institutions like OneUnited Bank, formerly the Boston Bank of Commerce (No. 1 on the BE BANKS list with assets of $499.7 million) and Atlanta-based Citizens Trust Bank (No. 5, with assets of $277.25 million).

Second, a number of institutions don't have the capital to adequately modernize operations--a major disadvantage in a world in which customers prize quick, qualitative, and convenient service. And finally, the biggest challenge: economic uncertainty. Even with the resolution of "Persian Gulf War II," the economy in 2003, at best, is expected to mirror the tepid performance of 2002. With home mortgage lending being the bread-and-butter of many black-owned banks, Gladue ponders the fate of these institutions if they no longer reap the benefits of a low-interest-rate environment that has fueled a record number of home purchases and mortgage refinancings. His point: What happens if the housing boom proves to be a bursting bubble?

Citizens Trust Bank is one institution that's recovering from a battering by a tough opponent: the economy. CEO James Young says the bank's profits last year came in at $2.5 million, about $300,000 below target. The reason: Citizens Trust has to set aside more money to cover potentially bad loans. Loan loss reserves as a percentage of total loans were 1.47%, up from 1.27% the previous year and much higher than the average ratio of 1.25% for peer institutions.

But Citizens Trust is still positioning itself for future growth, competing with OneUnited for the leadership of minority banking. Last year, it completed the $10 million cash purchase of Birmingham, Alabama-based Citizens Federal Savings Bank--a move that allows Citizens Trust to expand across state lines into Alabama, pick up about 6,000 individual customers, and increase fee income by providing commercial loans to large and small companies in the area. The acquisition is one in a series of transactions Young expects will grow assets to $3 billion over the next five years. "We would have to make more acquisitions or combine with other companies to achieve that goal," he says.

One top performer was City National Bank of New Jersey (No. 8 on the BE BANKS list with $215 million in assets). The Newark-based institution realized a 2002 profit growth of 31.7% over 2001. City National's CEO, Louis E. Prezeau, maintains that the bank enjoyed a renaissance along with the city's new economic development and was able to offset the slowing economy by boosting construction lending, as well as making more loans to area churches.

City National also found growth through partnerships. For instance, it benefited from its 20% stake in Minority Alliance Capital, a joint venture with New Orleans-based Liberty Bank & Trust Co. (No. 7 on the BE BANKS list with $226.13 million in assets), First Independence National Bank of Detroit (No. 12 on the BE BANKS list with $165 million in assets), and GE Capital. Minority Alliance Capital offers equipment lease financing and advisory services to major companies. Prezeau says City National will keep expanding, opening a new branch this summer in West Harlem, New York. His goal: 12 branches in New Jersey and New York with assets of $300 million by 2005. "The bank is well positioned and capitalized," he says. "We have aggressive growth plans to expand our branch network."

At New Orleans-based Dryades Savings Bank (No. 14 on the BE BANKS list with $123.35 million in assets), CEO Virgil Robinson Jr. spent the last year getting the institution into shape. By slashing expenses, boosting fee income, and increasing higher mortgage lending, it posted a $300,000 profit last year, compared to a $44,000 loss in 2001.

And Dryades seems like it's just getting warmed up. The institution recently sold two unprofitable branches in New Orleans, which could help boost after-tax operating profits to $680,000 in 2003. Moreover, it will expand mortgage lending throughout Louisiana and Mississippi in an attempt to grow its mortgage loan origination to $300 million by 2005, up from $42 million last year. But Robinson admits such maneuvers in today's business climate will not be easy: "In a booming economy, black-owned banks already have tough challenges. They're multiplied when you have a tougher economy."

MANAGING ASSETS IN A BEAR MARKET

For many black-owned asset managers, 2002 was one of the most turbulent times they can recall. Durham, North Carolina-based NCM Capital Management Group Inc. (No. 8 on the BE ASSET MANAGERS list) saw its asset under management drop a staggering 57%, from $4.96 billion in 2001 to $2.13 billion in 2002. The reason for NCM's decline? It lost two key subadvisory relationships--one with The Dreyfus Corp. and another with The Calvert Group. "I guess if I had a mutual fund company, and the market performed the way it did, I'd cut some subadvisory relationships and reduce my fees as well," says CEO Maceo Sloan, who witnessed heavyweights such as Fidelity and Alliance Capital trimming staffs by as much as 40%. "I've been doing this for over 30 years, and I've never seen it this bad."

NCM wasn't alone. Top firms such as Baltimore-based Brown Capital Management Inc. (No. 5 on the BE ASSET MANAGERS list) saw its assets under management plunge 25%, from $5.6 billion in 2001 to $4.2 billion in 2002, while Cleveland-based Goode Investment Management's (No. 12 on the BE ASSET MANAGERS list) fell 11.43%, from $1.4 billion in 2001 to $1.24 billion in 2002.

Despite the recession, war fears, and a bearish equity market, some firms had a bullish year. Chicago-based Ariel Capital Management Inc., the BE ASSET MANAGERS' reigning champ, reaped big gains by applying its "slow and steady wins the race" approach. The firm's 2002 revenues grew to $56.7 million, up from $34.3 million in 2001, as assets under management rose to a whopping $10.3 billion from $7.8 billion.

Ariel Capital's CEO, John W. Rogers Jr., attributed his firm's substantial growth largely to three consistent years of strong performance and beefing up sponsorship and marketing efforts. "It appears that with this volatile market, many investors liked our steady and conservative approach to asset management," he asserts.

INSURERS DIVERSIFY NEW REVENUE SOURCES

To remain viable contenders in a maturing and consolidating industry, many black-owned life insurers managed to retain individual and institutional clients as they sought new revenue sources. For instance, North Carolina Mutual Life Insurance Co. (No. 1 on the BE INSURANCE COMPANIES list with $212.37 million in total assets) shifted its focus to the institutional side of its business. CEO Bert Collins says the insurer added about 200 new group accounts, bringing the total to about 800. The Durham, North Carolina-based carrier also added about $17 million in revenue from its group dental plan business, with about $13 million coming from its coverage of state employees. Premium income last year totaled roughly $100 million, up from $70 million in 2001. "We decided to shift more to group insurance because we can grow it faster than selling individual life insurance, just from the sheer size of deals we can get from employers," Collins says. His goal: Expand North Carolina's revenues to $200 million by 2006, making it one of the nation's 150 largest life insurers. It now ranks 450th.

For Birmingham, Alabama-based Booker T. Washington Insurance Co. (No. 4 on the BE INSURANCE COMPANIES list with $54.86 million in assets), 2002 was a year of transition. The company's CEO, Walter Howlett Jr., launched an aggressive five-year plan to boost assets to about $100 million. First, the company hired a new marketing officer to help increase sales. Then, it expanded into Brownsville, Tennessee, through the acquisition of Golden Circle Life Insurance Co., picking up another $8.5 million in assets and 15,000 policyholders.

Booker T. had a 5% gain in premium income--the first increase in five years--but it also experienced profit losses for two consecutive years, the loss in 2002 was 2% greater than 2001. To spur future growth, Howlett will continue to embrace a philosophy of staying focused on the basics. "A lot of insurers have expanded into investment products like mutual funds," he says, "but those margins can be very thin unless you have huge volume."

RAISING CAPITAL IN A BRUTAL MARKET

One of the trickiest arenas has been the equity and bond markets. For several institutions, whether an investment bank or a private equity firm, those markets posed myriad challenges--and some surprising opportunities--last year. For example, one perennial, M.R. Beal & Co. (No. 5 on the BE INVESTMENT BANKS list with $2.65 billion in senior/co-senior managed issues) was one of the firms that felt the impact of the economy's hard canvas-kissing blows. On the other hand, despite market conditions and the recession, The Williams Capital Group (No. 2 on the BE INVESTMENT BANKS list with $78.54 billion in senior/co-senior managed issues) realized a 20% firmwide revenue growth with a 55% rise in equity business, while its fixed-income unit rose 45%.

Christopher Williams, the company's CEO, says the firm used the additional cash flow to add two salespeople to its equity unit and three more on the fixed-income side, allowing the firm to be more flexible. It also launched a money market mutual fund, for corporations and municipalities, to provide greater stability and liquidity. He expects the product will add about $1 million in revenues this year, and grow to $500 million in assets under management by year's end. Williams Capital is seeking out other alternative investments, including making acquisitions in money management. The move is part of Williams' goal to develop "a more diverse and larger revenue stream."

Two other investment banks also demonstrated their winning formulas in 2002. Loop Capital Markets (No. 3 on the BE INVESTMENT BANKS list with $5.44 billion in senior/co-senior managed issues) weathered last year's turbulent financial climate. James Reynolds Jr., Loop Capital's CEO, says the firm was rewarded for building clients' trust and solid performance since its inception in late 1997. He recruited top-drawer salespeople, which enabled the firm to increase its penetration into the corporate and municipal bond sectors. This year, the firm will build its corporate finance and equity-trading unit. It has already added three employees and is seeking to add another seven.

Siebert Brandford Shank & Co. (No. 4 on the BE INVESTMENT BANKS list with $4.3 billion in senior/co-senior managed issues) was able to grow its business last year benefiting from several major municipal bond transactions, including the underwriting of water and sewer projects for Detroit and Dallas.

For CEOs managing private equity firms, 2002 was challenging on several fronts. For one, getting capital from skittish investors proved a tough sell. Also, when it came to firms reviewing potential investments, the weak economy made it difficult for venture capitalists to get a true measure of a company's fundamentals and underlying business performance, while sellers became hesitant because they weren't sure what the valuations were. "This overhang certainly makes it tougher to get deals done, in terms of everybody agreeing [on] the right valuation," says Willie Woods, managing director of New York-based ICV Capital Partners (No. 8 on the BE PRIVATE EQUITY list with $130.5 million of capital under management).

Woods also believes, however, that the unpredictable business climate creates opportunities. For instance, companies that would normally sell for a multiple of six to seven times cash flow might now only sell for five to six times cash flow. "If you can get a deal done, it is likely to be on better terms today than it would have been historically," he maintains.

That's why ICV had a good year despite the recession. It invested more than $30 million in ventures such as AAMP of America, a Clearwater, Florida-based provider of car-audio accessories, and Chung's Foods Inc., a Houston-based Asian foods company.

ICV would like to grow annual revenues 10% by completing complementary acquisitions. For instance, Woods believes that AAMP could strengthen its franchise by purchasing a manufacturer that develops similar products and generates annual revenues between $5 million and $15 million. Also, the expansion plan for Chung's involves an investment of roughly $25 million to pursue other businesses that could enable it to snare a larger slice of the $100 million egg roll market.

Other firms also grew despite the tight market. At Fairview Capital Partners Inc., two major clients--New York State Common Retirement Fund and the New York State Teachers' Retirement Fund--helped boost the Farmington, Connecticut, firm's capital under management to $850 million from $650 million.

As a result, the firm propelled to the No. 1 spot on the BE PRIVATE EQUITY list, supplanting Stamford, Connecticut, TSG Capital Group L.L.C., which now holds the No. 2 position with $740 million in capital under management.

Hartford, Connecticut-based Smith Whiley & Co. raised more than $80 million of the $400 million required for a third fund--a private equity and mezzanine debt fund--from institutional investors in 12 months. As a result, that firm's capital under management grew to $213 million up from $130 million last year--an increase of 63.8%--catapulting it to the No. 4 slot on the list.

The outlook for 2003 doesn't look much better. But with toned operations and steely-eyed determination, these BE Financial Services firms will be ready for round two. Ding!

Financial Services Summaries 2001-2002

Top 25 Banks                                2002         2001  % Change

Number of Employees                        2,051        2,055     -0.19
Assets *                              $4,526.238   $4,336.936      4.36
Capital *                                378.437      349.753      8.20
Deposits *                             3,633.301    3,556.638      2.16
Loans *                                2,712.690    2,562.043      5.88
                                                            3
Top 10 Insurance Companies                  2002         2001  % Change

Number of Employees                          925        1,066    -13.23
Assets *                                $552.231     $559.372     -1.28
Statutory Reserves *                     327.654      322.761      1.52
Insurance in Force *                  30,077.131   31,327.435     -3.99
Premium Income *                         205.799      180.645     13.92
Net Investment Income *                   24.991       31.684    -21.12

Top 10 Private Equity Firms                 2002         2001  % Change

Number of Employees                           87           84      3.57
Capital Under Management *            $2,934.500   $2,461.000     19.24
Number of Funds                               26           24      8.33
Total Number of Portfolio Companies          176          148     18.92

Top 15 Asset Management Firms               2002         2001  % Change

Number of Employees                          306          298      2.68
Assets Under Management *            $43,735.398  $45,589.850     -4.07

Top 10 Investment Banks                     2002         2001  % Change

Number of Employees                          502          429     17.02
Total Issues ([dagger])                 $863.950     $638.525     35.30

* IN MILLIONS OF DOLLARS, TO NEAREST THOUSAND.

([dagger]) IN BILLIONS OF DOLLARS, TO THE NEAREST MILLION.

AS OF DEC. 31, 2002. PREPARED BY B.E. RESEARCH. REVIEWED BY THE
CERTIFIED PUBLIC ACCOUNTING FIRM EDWARDS & COMPANY.

Tracking B.E. Investment Firms

With a greater emphasis on the accounting practices of financial services firms, the BE research and editorial teams--with the assistance of Barge Consulting L.L.C.--conducted additional due diligence on the BE financial services firms. We consulted the Securities and Exchange Commission (SEC)to get an accurate accounting of the filed assets under management from our asset management firms--those that make investments in equities and fixed-income vehicles for institutional and individual investors.

Consequently, our research team received a slew of restatements. In some cases, firms were dropped from our list because they were not registered with the SEC--a criterion for making our list (see eligibility box in "Reinvention Through Innovation," this issue). As a result of this increased scrutiny, many companies that appeared on previous lists did not make this year's ranking. Therefore, the number of companies on our asset managers list dropped from 20 to 15.

To show the true leadership of investment banks, which provide underwriting services for institutions and government agencies and engage in transactions involving equity, bond, and asset-backed securities, we ranked firms by senior/co-senior managed issues. Those that did not provide full disclosure of transactions or could not break down their underwriting participation were also excluded from our list. This thorough examination resulted in the elimination of a number of previously listed firms, dropping the count from 15 to 10.