Turf War.

As megabanks make a grab for market share, black institutions hold their ground via joint ventures and new financial products

BLACK-OWNED FINANCIAL INSTITUTIONS are going on the offensive. Instead of waiting for monolithic megabanks ro invade their territory, these banks have developed an arsenal of innovative strategies, ranging from developing investment vehicles to bolstering their infrastructure to pursuing corporate accounts and high-net-worth individuals. The recent activity of New Orleans-based Liberty Bank and Trust Co). (No. 8 on the BE BANKS list with $178 million in assets and $1.55 million in deposits) is indicative of this new trend: last year, the institution unveiled a homegrown mutual fund and a move into the insurance business. Despite the challenges, black-owned institutions continue to grow. Assets for BE BANKS rose from $3.57 billion in 1997 to $3.92 billion in 1998, an increase of 9.85%, while deposits grew from $2.98 billion in 1997 to $3.14 billion in 1998, an increase of' 5.32%. In the banking industry, the name of the game is convergence cross--selling an array of financial products under one roof. It has been driven primarily by money-center institutions that have formed even larger financial behemoths. To increase market share, institutions like Citigroup (formed from the 1998 marriage of Citicorp and Travelers Group Inc.) and Bank of America (the product of the union of NationsBank Corp. and BankAmerica Corp.) have bombarded consumers with ads, product offerings and promotions. Moreover, new competitors, from Wall Street firms to "subprime" mortgage lenders, have appeared on the scene and aggressively wooed borrowers with promises of higher returns and better deals.

"Competition is particularly challenging these days," says Fritz Elmendorf, vice president of communications at the Consumer Bankers Association in Arlington, Virginia. "Under the Community Reinvestment Act (CRA), many large banks are actively moving into areas that once were the domain of minority banks. Customers are able to shop for the best terms, and minority banks are increasingly feeling threatened."

Fortunately, the national economy remains strong and small banks in general are faring well. Ignacio Urrabazo Jr., CEO of IBC-Commerce Bank in Laredo, Texas, and chairman of the National Bankers Association, a Washington, D.C.-based trade group of minority- and women-owned banks, reports that member banks have enjoyed solid improvements in return on assets and return on equity in recent years. "Only a few members reported losses, while most benefited from the strong national economy," he says.

STAYING COMPETITIVE

Indeed, an informal phone survey by BLACK ENTERPRISE found that many black bank's are sharpening their competitive edge by expanding into new areas, like large institutions, yet retaining the "personal touch" of community banks. For instance, Liberty Bank and Trust continues to press ahead with its audacious plan to offer a variety of financial services. Last July, it launched a mutual fund, the Liberty Freedom Fund, that was targeted at, among other prospective investors, individual customers as well as the Association's member banks. What made the product introduction unique is that it represented a rare example of an African American bank teaming up with a black money management firm. Liberty serves as the manager while Edgar Lomax Co. in Springfield, Virginia, is the subadvisor, picking the stocks in the fund's portfolio.

With $4 million in assets, the fund is a bit below projections. "We introduced our fund at the worst possible time--right before the big stock market slump last July and August," concedes President Alden J. McDonald Jr. "What's more, many money managers have a policy that they won't buy a fund without a three-year record."

But Liberty has seen encouraging signs: the trust department of one large local bank placed the fund on the list of selections for the 401(k) plans that it administers. If Liberty continues to get such support, McDonald envisions the creation of a family of funds.

Liberty is also making the move into insurance. It recently gained approval from regulators to operate an insurance firm and sell life, auto and commercial policies. Currently, McDonald is looking to enter the business through an acquisition or strategic partnership. At the same time, he continues to target banking acquisitions, even looking outside of Liberty's traditional geographic area.

FILLING THE GAPS

Baltimore-based Harbor Bank of Maryland (No. 7 on the BE BANKS list with $184.7 million in assets and $167.5 million in deposits) is another institution that has moved beyond tradition. Through its subsidiary, Harbor Financial Services, the bank has thrown its hat into the institutional finance arena. "We now manage money for the state, the city and for other jurisdictions, such as counties," says Chairman and CEO Joseph Haskins Jr.

Through a strategic alliance with Portland, Maine-based UNUM Life Insurance Co. of America, the world's leading provider of disability insurance products, Harbor has found a way to provide its customers with new insurance products. For example, the critical illness and accident policy that the bank recently introduced will enable customers to receive $10,000 to $100,000 in benefits if the policyholder suffers from such conditions as cancer, a stroke or a heart attack. Besides the insurance proceeds, the policy will provide access to medical advice from leading specialists. The deal has made Harbor the first African American bank to offer such a service.

Besides its foray into financial services, Harbor recently opened a suburban branch. "This isn't our usual market," says Haskins. "It's ethnically mixed, with a middle-income population. By expanding into a new area, we're serving notice that we want to be considered a significant financial entity throughout the metropolitan area."

He adds, "There have been a number of mergers and acquisitions among Baltimore banks, which have resulted in some closings of local branches. We've moved aggressively to fill the gaps."

Newark, New Jersey-based City National Bank of New Jersey (No. 10 on the BE BANKS list with $165 million in assets and $18.2 million in deposits) has also grown beyond its geographic boundaries. "We opened a branch in Paterson, another city in northern New Jersey, last year," says President and CEO Louis E. Prezeau. "So far, it has met and even exceeded expectations. We plan to keep growing, either by starting new branches as we did in Paterson, or via acquisitions."

But Prezeau hasn't overlooked developing opportunities within the city that the bank has served for 25 years. "We have an excellent relationship with the city of Newark," he says. "We recently added a new system that enables customers to pay bills to the city, such as water bills and traffic violations, with their credit cards. This has been a very popular program for us, with outstanding growth potential."

Prezeau insists he doesn't spend a great deal of time worrying about inroads from larger banks. "They do compete for some of our CRA customers, offering loans to solid companies that we might serve, but that's a relatively small part of our business," he maintains. "Our core customer base includes local churches and not-for-profit organizations."

THE POWER OF CELEBRITY

Across the country, in Los Angeles, Founders National Bank of Los Angeles (No. 19 on the BE BANKS list with $104.5 million in assets and $94.6 million in deposits) is getting ready to serve a much different slice of the African American market as the key to its expansion plans. In 1998, control of the institution shifted to a celebrity trio consisting of basketball star-cum-entrepreneur Magic Johnson, superstar singer Janet Jackson and Jheryl Busby, the entertainment executive who served as the president of Motown Records. Under the banner JJB Limited Partnership, the three paid a total of nearly $2.5 million for a 60% stake.

The new owners, especially Johnson and Jackson, will raise the profile of the institution. They have agreed to support Founders with public appearances and personal endorsements. As a result, the bank will now pursue African American customers connected with the entertainment and sports industries.

"We plan to get our house in order before we invite guests to visit," says Founders President and CEO Carlton J. Jenkins. "Therefore, we have been spending our time working on our computer systems, our physical plant and our services. With the types of people we'll be aiming for, we'll only have one opportunity to. live up to their expectations. We'll have to be perfect."

Besides the entertainment industry, Founders will seek accounts from BE 100s companies as well as Fortune 500 corporations. In fact, the bank raised $4.3 million in corporate investments and counts Arco Oil Co., Bank of America, Citibank, Shell Oil and State Farm Insurance Co. among its preferred shareholders. "We plan to offer [our new customers] everything," says Jenkins, "from mutual funds to contract negotiation, from venture capital investments to artists' representation. Already, we've begun to move into entertainment lending, a new area for us."

At the same time, "We have to protect our base while expanding into new markets," Jenkins asserts. "Our top priorities will remain small business, auto and consumer personal loans."

THE CHALLENGES OF GROWTH

If there's a cautionary note in this symphony of growth, it's sounded by Carver Bancorp in New York, the largest BE BANK in 1998. With a $5 million loss in the third quarter of 1998--he result of problem loans--and a sagging stock price, Carver recently fired Thomas Clark, the forme? banking regulator who served as its president and CEO for four years. "The major reason for the loss was a venture into a new business--consumer lending," says Chairman David R. Jones. "Our expertise has been in home mortgages. We're likely to begin by emphasizing our strengths."

For now, four of Carver's board members are spending a day or two a week at the bank to stabilize operations. "Our capital ratios have not been impaired," says Jones. "We are not in a turnaround situation." And the recent announcement of Deborah C. Wright, a former investment banker, as the institution's new chief will mean that part of Carver's focus will be placing more dollars in developing inner--city communities--namely Harlem.

But such talk hasn't kept the wolves at bay. Boston Bank of Commerce (No. 18 on the BE BANKS list with $10514 million in assets and $77.1 million in deposits) recently made overtures to acquire the institution. The offer was turned down by the bank's board as not being in the shareholders' best interests.

DEALING WITH THE Y2K BUG

All banks are wrestling with the Y2K bug, the threat that computers will go haywire when the calendar flips over from 1999 to 2000. "Community banks will be ready for Y2K," asserts Judith Knight, director of the Center for Community Development at the American Bankers Association. "They've been taking preparations very seriously. The big problem now seems to be dealing with customers' perceptions." Efforts to cope with the Y2K problem haven't kept black banks from keeping up with technology. Many have developed Websites to provide information to the public; others are preparing for the introduction of online banking.

As black banks make their operations more nimble and efficient, Urrabazo of the National Bankers Association believes that minority-owned institutions need not be overly concerned with competition from large banks. "They may be a bit cheaper on some products and services, but we're quicker," he says. "We react to changes in the marketplace more rapidly, and we can approve a transaction while a large bank is waiting to hear from its regional headquarters."

BE BANKS CEOs believe their institutions will continue to thrive, even in today's competitive climate, by fostering relationships and inspiring loyalty. "Community banks can be successful," says City National's Prezeau. "The key is to fill a niche that's otherwise not being served and to offer customers a personal touch. We offer everything a major bank can offer, but we do it with more heart."

1999 TOP 25 BANKS SUMMARY

                                                PERCENT
BLACK-OWNED BANKS           1997         1998   CHANGE

NUMBER OF EMPLOYEES        2,030        2,062     1.58%

ASSETS(*)             $3,572.372   $3,924.341    $9.95%

CAPITAL(*)              $304.684     $315.118    $3.42%

DEPOSITS(*)           $2,981.158   $3,139.805    $5.32%

LOANS(*)              $2,158.828   $2,181.732    $1.06%

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

Prepared by B.E. Research. Reviewed by Mitchell & Titus L.L.P.3