The heat is on: B.E. banks overview.

Faced with competition by mega-banks, black-owned banks are fighting to retain their customers and their capital base

Black-owned financial institutions forged full steam ahead in 1997, in the battle-ready stance they adopted two years ago. It was then that many in the industry began deploying new tactics, blending traditional and innovative approaches to increase their asset base and enter new markets. Some acquired new branches, took to loan syndication, or put more emphasis on mortgage and small business lending. Others, meanwhile, focused on new services and products, such as check cashing telephone banking, credit cards and mutual funds.

As the consolidation of the mega-banks continued rapidly in 1997, some black banks decided to join forces as well. The merger of Southern Bank in Lithonia, Georgia, and Citizens Trust Bank of Atlanta created the sixth largest black-owned financial institution in the country, with combined assets of $185.4 million. The merged bank now has a higher legal lending limit due to its larger capital base, and as a result can handle larger loans.

"The strength of large multinational banks is that they can offer a variety of products and services, they have a greater number of branches and ATMs, and they have added telephone and PC banking to their networks," says Fritz Elmendorf, vice president of communications at Consumer Bankers Association in Arlington, Virginia. "Big banks have seen cost savings as a result," he adds, "but the consumer has paid the price for all this in the form of higher transaction fees."

Elmendorf says that small community banks have done a better job at personal customer service. Still, these institutions face several new challenges when it comes to maintaining a competitive edge. For starters, they must adapt their computer networks to handle the upcoming turn of the century. Meaning, when the year 2000 rolls around, a bank's computer system will have to recognize that number as the year 2000. Some computers were designed to recognize only two digits. So, if you input 98, your system will recognize it as 1998.

The problems could be considerable, say experts. "This is something that will actually impact every industry across the board," says Deborah ScottEnsley, chairperson of the National Bankers Association, the Washington, D.C.-based trade group of minority- and women-owned banks. "It sounds very simple on the surface, but a lot of money is going to be spent reevaluating and revamping computer systems. Over the next two years, every financial institution will undergo `Computer 2000' examination by federal banking regulators."

As black-owned banks rush to comply with federal regulations, they must also find an economically feasible way to ride the wave of technology that has ushered in banking by phone and computer, adds Scott-Ensley, who is also president and CEO of Citizens Savings Bank and Trust Co. in Nashville, Tennessee, with $35.4 million in assets.

"At the same time, black banks have to continue to grow their branches and make sure they can provide some of the same products and services as the big banks," says Baunita Greer, president of Cromwell. Miller and Greer Inc., a New York securities brokerage firm. "There is still such a thing as economies of scale." The smallest of the black banks will have to grow to a certain size in terms of assets and capital base to open new branches and grant more loans.

Moreover, black-owned financial institutions may find themselves competing for black dollars. Majority financial institutions, with the aid of outside marketing and community development groups, are beginning to take notice of the $425 billion income of the African American market.

Last year, a $50 million partnership was established between Chase Manhattan Mortgage Corp., the Los Angeles Urban League and Operation Hope, a local community-based organization dedicated to urban economic empowerment. Chase will grant the home loans, the Urban League will supply loan candidates and Operation Hope will provide the training and education necessary to make the initiative work. The partnership is a direct result of the merger between Chase Manhattan and Chemical Bank in 1996, and a means of satisfying Community Reinvestment Act requirements.

Another sign that majority firms are taking notice is the scheduled debut this summer of Clout, a quarterly personal finance magazine. Designed as a direct mail campaign, will be used by banks to reach, on a geographically exclusive basis, current and prospective African American customers with an annual household income of $50,000 or above. The publication is put out by white-owned McMurry Publishing Inc. in Phoenix, and will feature articles about prominent African American personalities and businesses in addition to customized information from various banks about their products and services. Some 20 financial institutions have expressed an interest in the custom publishing initiative, including Bank of America and Citibank, N.A.

Are majority banks looking for ways to appease Community Reinvestment Act rules or do they truly see African Americans as a viable market? Whichever side you come down on, It seems there is still a need for big banks and black banks to do a better job of marketing to African Americans.

A BANNER YEAR FOR BANKING

The list of marriages between superregional banks has been growing rapidly, with 599 commercial banks being absorbed in 1997 alone. Among the recent multibillion-dollar mergers were First Union's $16.6 billion deal with Core-States, Citicorp's and Traveler's Group Inc.'s $70 billion-plus merger, and NationsBank Corp.'s $60 billion deal with Bank America Corp. The merger of black-owned Southern Bank and Citizens Trust Bank is a strong indication that African American financial institutions are also looking at the benefits of size.

Across the board, assets for black-owned banks in 1997 topped $3.57 billion, up from 53.30 billion in 1996. Total deposits in 1997 were $2.98 billion, compared with $2.79 billion the previous year. Total loans for 1997 equaled $2.16 billion, from $2.10 billion in 1996. Total capital for 1997 equaled $305 million vs. $271 million in 1996.

Overall, commercial banks and savings institutions earned record profits in 1997, according to the Washington, D.C.-based Federal Deposit Insurance Corp. to For all of 1997, 9,143 FDIC-insured banks posted net income of $59.2 billion, up $6.9 billion from 1996. The FDIC attributes increased earnings to a strong growth in commercial and construction loans and other interest earning assets as well as increased revenues from trust business and bank fees. Profits for 1,779 insured savings institutions were $8.8 billion, up $1.8 billion from 1996. Bank assets increased by 9.5% (or $436.6 billion), the largest percentage gain since 1980, totaling $5.01 trillion in 1997.

WHERE EVERYBODY KNOWS YOUR NAME ...

Even as merger fever continues, the financial industry is looking more and more toward indirect banking and automated services to save on costs. The move has of en literally shut customers out of the bank. It's a phenomenon, however, that bodes well for smaller banks, which can boost market share through personalized service. In fact, small banks with assets under $1 billion are growing at their fastest pace since the recession of the early 1990s, according to Kathleen Murphy, director of the American Bankers Association's Community Bankers Council in Washington, D.C.

"Many customers still like the personal touch of going in and being able to talk to the bank president or senior officers," explains Emma Chappell, president and CEO of United Bank of Philadelphia (No. 15 on the BE BANKS list), which has grown to $108.9 million in assets, six branches and an 80% loan-to-deposit ratio. "I know many of my customers by name, because I attend the same church that they do or their children attend school with the children of the people on my staff."

African Americans in particular like what's called relationship banking, says Sylvesta L. Jennings, chairman and CEO of First State Bank in Danville, Virginia, with $38.3 million in assets in 1997 and loans accounting for 79% of total deposits. "Up until a year ago, you could come and see me directly to make a loan of almost any size, whether it was to buy an automobile, home or start a small business," says Jennings. "I now deal mostly with the larger loans. But my entire staff from the top down is committed to finding ways to make a loan rather than ways not to make it."

LEVERAGING COMMUNITY AND CORPORATE LENDING

Over the last two years, black-owned financial institutions have shown that they're better able to aggressively market and issue nonconforming loans (those made with special allowances) and conforming loans (those made to credit-worthy borrowers that can be purchased in the secondary market). Many of them, including federal savings banks, have benefited greatly from certification by Fannie Mae and Freddie Mac to grant loans.

The nation's largest African American-owned bank, Carver Bancorp Inc., has boosted its mortgage lending to about 55% of its total $416 million in assets. The New York-based bank expanded its overall loan portfolio from $240 million in 1996 to $244.9 million in 1997. Also in 1997, Carver made several large loan purchases about $100 million--from institutions such as Chase Manhattan Bank and Countrywide Home Loans. Although these purchases have made up the largest part of Carver's loan growth, the bank has become more aggressive in its origination of loans.

United Bank of Philadelphia is also increasing its mortgage lending in low-and medium-income areas through community development loans. The bank, which has been certified as a Community Development Financial Institution (CDFI) by the U.S. Treasury Department, recently financed the construction of 10 homes in an area that was once an abandoned lot. "Once the homes are built, we will provide the mortgages for the residents living in them," says Chappell. United also secured $500,000 from the Treasury Department. The University of Pennsylvania gave the bank a matching grant to provide training in first-time home buying, home repairs and entrepreneurship. Ultimately, United plans to provide venture capital for small business owners.

Black-owned banks are also doing a better job at increasing revenues by offering investment products. In 1996, Baltimore-based Harbor Bank of Maryland (No. 10 on the BE BANKS list) established a subsidiary, Harbor Financial Services, which sells stocks, bonds, mutual funds and life insurance annuities, and prepares formal financial plans for its customers.

"We have been getting a lot of inquiries this year, because Roth IRAs have captured the attention of a lot of people in the community," says Joseph Haskins Jr., Harbor president and CEO. "So, customers have been coming to us to set up different retirement accounts."

Over the last couple of years, Harbor, which has $135.9 million in assets, has faced stiff competition from big banks moving into Baltimore and Prince George's County. But Haskins is undaunted. "If you provide quality products and service, you can compete with almost any institution. We have been very careful in defining our market."

For instance, Haskins explains, Harbor specializes in lending to those firms with $500,000 to $25 million in gross sales. Harbor has done its fair share of commercial and Small Business Administration-guaranteed loans, which range in size from $100,000 to $1.2 million. With a total loan portfolio of $77.6 million, the bank's commercial lending increased from $23 million in 1996 to $26 million in 1997.

Several banks, like City National Bank of New Jersey (No. 9 on the BE BANKS list), are branching outside of their geographic boundaries. The Newark-based bank, with $138.9 million in assets and a $56.9 million loan portfolio, recently added its fifth location and gained a foothold in New York by acquiring Carver Bancorp's Roosevelt, Long Island, branch, which had $10.3 million in assets. City National President and CEO Louis Prezeau emphasizes the need for large minority-owned banks, which must grow either by merging with ocher banks or by making acquisitions where possible.

"My goal is to open or acquire two branches a year. Of course, the problem is raising sufficient capital to do more acquisitions. We are looking for creative ways to raise money, including offering nonvoting stock in the bank." Later this year, City National will open a branch in Paterson, New Jersey, where a predominately Latino and African American population has a strong small business environment.

To boost their capital base, many of the minority-owned banks are intensely participating in consortiums and syndication lending, in part thanks to an initiative by the National Bankers Association. Since banks are limited to lending no more than 15% of their capital base, loan syndication plays a significant role in black banks' ability to grant large loans.

Last October, Gateway National Bank, in St. Louis, was appointed the lead loan syndicator of a consortium of 38 minority-owned banks to extend a revolving $73 million line of credit to Wal-Mart Stores Inc., in Bentonville, Arizona, allowing the $104.8 billion retail giant to finance such things as expansions and store improvements.

Still, many black-owned banks argue they are better serving their customers by increasing their access to credit. "We have taken some steps to increase our market share and improve on our capital base through retained earnings," says First State's Jennings. "Even though we are a very small bank, we have managed to steadily increase our loan portfolio. Although our past-due rates are higher than most, when it comes to charge-offs, we are the envy of the industry. We work hard to collect the loans that we make. We work with our customers to help them pay us back." By year-end, Jennings hopes to expand the bank's branch network by merging with a nearby minority-owned savings and loan, with $8 million in total assets.

Black-owned financial institutions must continue to increase their streams of revenues and the availability of credit to minority communities while providing a broader range of products and services. Those that acquire branches or merge with each other to develop a regional presence should fare well against the behemoths of the banking industry.

"Smaller banks can compete with the big banks. Granted, each bank will have to find its own niche and aggressively go after that niche," says Citizens' ScottEnsley. "We can't be all things to everybody. For Citizens, one of our primary focuses is granting church loans and increasing deposits among church members. There will always be a place for minority-owned institutions. We were created to serve the underserved and are committed to doing a good job in our communities."

1998 TOP 25 BANKS SUMMARY

                                                PERCENT
BLACK-OWNED BANKS        1996          1997     CHANGE

NUMBER OF EMPLOYEES        1,941        2,030    4.59%
ASSETS(*)             $3,296,405   $3,572,372    8.37%
CAPITAL(*)              $271,329     $304,684   12.29%
DEPOSITS(*)           $2,794,481   $2,981,158    6.68%
LOANS(*)              $2,103,249   $2,158,828    2.64%

(*) In million of dollars, to the nearest thousand.

Prepared by B.E. Research. Reviewed by Mitchell & Titus L.L.P.