Holding their ground: to win today's turf wars, BE financial services firms must develop new products and find strategic partners

Black Enterprise, June, 2005 by Jeffrey McKinney

SQUEEZED BY INCREASED COMPETITION and the crucial need to grow customer base, increase capital, and offer 21st-century products and services, black-owned financial services companies are being prompted to become more creative and modernize operations.

Throughout his 40 years in the insurance business, CEO Larkin Teasley has never seen competition so fierce for his company and his peers. His company, Los Angeles-based Golden State Mutual Life Insurance Co. (No. 2 on the BE INSURANCE COMPANIES list with $112.8 million in assets), celebrates its 80th anniversary this year. Teasley says the biggest challenges over the next few years for black-owned insurers are to grow capital, add customers, and protect existing ones from behemoths such as Allstate Corp. and American General Life Insurance Co. "If they are not able to do that within five years, they may very well have some serious problems," Teasley says.

In today's transient business climate, Teasley and other CEOs of black-owned financial services entities--such as banks, private equity firms, asset managers, insurance companies, and investment banks--are dealing with some of their most daunting challenges yet. "Black-owned financial services companies will continue to face aggressive competition from mainline companies that have not previously targeted African Americans and Hispanics as a specific customer base," says Buddy Howard, a banking analyst and president of Equity Research Services Inc. in Raleigh, North Carolina. With competition invading its core market, black-owned financial services companies are being forced to diversify not only to grow but also to survive.

BANKING ON NEW PRODUCTS

In addition to fighting against mainstream banks that are gaining ground through multibillion-dollar mergers, black-owned banks are looking at new ways to market to their clientele. Jim Young, chairman of the National Bankers Association in Washington, D.C., said that most black-owned banks had a profitable year in 2004. "I think they did admirably well given the markets they serve and the competition they faced," he says. However, TriState Bank of Memphis (No. 15 on the BE BNAKS list with $113 million in assets) is one entity that found 2004 to be a bearish climate. CEO Jesse H. Turner Jr. says the completion of a new arena for the NBA's Memphis Grizzlies caused assets to fall by 20% when the local sports authority withdrew funds to pay the arena's builder. Tri-State's profits dipped 18% to $679,000 because of the $28 million drop in assets, higher expenses, and lower-yielding assets. Its lending was flat because of the weak economy, particularly in the black community, and it had fewer consumer loan and church mortgage loan requests. "While the recovery in America remains sluggish, there is no recovery in black America. While the bank can do better if it can capture business from other banks, generally it can do no better than the community," Turner says.

But the news was not all bad. At Atlanta-based Capitol City Bank & Trust Co. (No. 11 on the BE BANKS list with $189 million in assets), CEO George C. Andrews says the firm experienced a significant rise in loans to black businesses, and churches in particular, which boosted 2004 profits to more than $2 million. To sustain business, the bank plans to sell some of its stock to raise $3 million to $5 million in capital. "A major problem with African American- or minority-owned banks, throughout the country, is finding a source of capital to facilitate expanding," he says. "My plan is to raise more capital so that we can continue growing."

Some black-owned banks might realize that it's much easier to grow by acquiring a $100 million-asset bank than just trying to grow on their own, Young says. "They'll see it as a faster way to grow, something that will allow them to grow more loans."

MANAGING ASSETS IN A LESS BEARISH MARKET

For some black-owned asset managers, 2004 was a more bullish market than they've seen in recent years. Atlanta-based EARNEST Partners (No. 2 on the BE ASSET MANAGERS list) saw its assets under management rise a whopping 70%, from $8.2 billion in 2003 to nearly $14 billion in 2004. CEO Paul Viera says strong investment results from its portfolio of funds were key drivers of the growth. "Because we've had consistently strong investment performances over time, that helped us attract new institutional and mutual fund clients that brought in $1 billion last year." The firm's investment portfolios, which include small- and mid-cap funds, rose some 25% in 2004.

Top firms like Boston-based Rhumbline Advisers (No. 3 on the BE ASSET MANAGERS list) watched its assets under management grow nearly $3 billion last year, from $7.4 billion in 2003 to about $10.3 billion in 2004, while Seattle's Pugh Capital Management Inc. (No. 15 on the BE ASSET MANAGERS list) had its assets under management grow by $219 million last year, up 32.5% from 2003. "We have just under $900 million in assets under management," says CEO Mary Pugh. "A benchmark for us would be to hit $1 billion. We hope to hit it this year."