You might think that coming out of a year when the Dow Jones Industrial Average surged 30% and the Nasdaq Index rocketed up more than 50%, financial services firms could only benefit from a recovering economy. But John W. Rogers Jr., founder, chairman, and CEO of Ariel Capital Management (No. 1 on the BE ASSET MANAGERS list with $16.1 million in assets under management), the nation’s largest African American-owned mutual fund company, says that in spite of the improving economy, a different set of business challenges for black-owned banks, investment banks, assets management firms, insurance companies, and private equity firms has emerged.
According to Rogers, the current business climate tests a financial services firm’s ability to deal with increased competition and the high expectations of profit-driven investors during a time when most corporations are squeezing margins. Between the heightened regulatory burden on financial services companies and greater scrutiny via the newly enacted Sarbanes-Oxley legislation, many smaller firms that may not have the resources to cover the costs of compliance may find themselves spending more time dealing with regulators instead of working to satisfy the demands of existing clients and expanding their current client base. In fact, due to this ferocious environment in which mutual funds scandals and corporate malfeasance have become rampant, BE has become more stringent in its reporting requirements for our financial services list. For instance, all asset management firms must be registered with the SEC and have all assets under management filed with the regulatory agency. As for investment banks, we ranked firms based on the municipal, equity, and bond transactions recorded by Thomson Financial Securities Data. (See eligibility box.)
While Ariel’s revenues rose 30% last year — 17 companies added its mutual funds to their 401(k) plans — Rogers explains that, “[The Sarbanes-Oxley legislation] poses special challenges for the smaller firms,” and predicts, “You might see some acquisitions occur.”
Indeed, shrinking margins have caused more mainstream companies to go after the bread-and-butter customers of black-owned firms, forcing them to accept a stern reality: Keep growing or be acquired. “You will see more consolidation as time goes on,” says Rogers. “Just a year ago, the brokerage firms were going through a lot of change because of the regulatory environment and problems that occurred on Wall Street. Now it’s time for mutual fund companies to go through similar changes.”
BLACK BANKS MUST GROW BY ACQUISITION
Black-owned asset management firms and investment banks were not the only black-owned financial services firms being challenged to change. All financial services firms are being compelled to target different and larger customer bases and find ways to revitalize operations while delicately retaining existing customers. Black-owned banks, in particular, are facing tremendous competition from the latest round of mainstream bank megamergers, such as the $58 billion J.P. Morgan Chase & Co. — Bank One Corp. deal and the Fleet Bank — Bank of America deal, which was estimated to be worth $47 million.
Seeing the writing on the wall, Boston-based OneUnited Bank (No. 2 on the BE BANKS list with $438.6 million in assets) has been executing a merger strategy among black-owned banks since 1998, becoming the first black-owned interstate banking entity in the nation after purchasing Peoples National Bank of Commerce in Miami. OneUnited’s acquisition of Los Angeles-based Family Savings Bank in January 2003 helped boost its fourth-quarter profits to more than $1 million, says Kevin Cohee, OneUnited’s chairman and CEO. Although the bank’s assets fell from $499.7 million to $438.6 million because it sold high-yield securities and went through a financial restructuring, Cohee expects OneUnited to post profits of $6 million in 2004, up from $1.75 million in 2003. Profits are expected to grow as the bank expands the residential mortgage lending services it absorbed from Family Savings to its operations in Boston and Miami.
Cohee predicts that there will be more consolidation of black-owned banks because they “need to have scale to provide the types of products and services necessary to meet customers’ needs in the 21st century.” He specifically cited Internet banking, check imaging, and debit cards as services customers will demand.
Atlanta-based Citizens Trust Bank (No. 3 on the BE BANKS list with $359.7 million in assets) had the same idea as OneUnited when it acquired Citizens Federal Savings Bank of Birmingham in February 2003. Although Jim Young, president and CEO of Citizens Trust, says the bank’s 2003 net income was muted by the recession, the acquisition boosted the institution’s assets from $277.3 million in 2002 to $360 million last year. He claims that the biggest challenge black-owned banks face is growing their customer base. “I don’t mean minority market share,” says Young, “I mean mainstream market share — so you don’t limit the bank’s potential to being the largest minority-owned bank on the minority side of town.”
If industry profits continue to be squeezed by a weakened economy and an increasing number of problem loans, Young says mergers are assured. “A precedent has already been set in the past few years with at least four minority-owned banks engaging in consolidation through acquisitions and mergers,” he says. “For a long time, there were no mergers or acquisitions in this segment of the banking industry. But now that it has been done, I think that other [black-owned] bank presidents and their boards of directors recognize the efficiency of growth through acquisition.”
The payoff for Citizens Trust is large. It has expanded its commercial lending expertise to its Alabama branch where such services were scarce. “We think there’s a legitimate opportunity in Birmingham for growth as a commercial bank and we intend to focus on that,” says Young. Citizens Trust has already developed 30 new commercial lending relationships in Alabama, and it expects to enhance its mortgage lending business as well, according to Young. And the acquisition of Citizens Federal allows his bank to market things such as debit cards, credit cards, online banking, and ATM access to some 5,000 former Citizens Federal customers who didn’t have them before — initiatives that will help boost fee income for Citizens Trust.
Carver Federal Savings Bank (No. 1 on the BE BANKS list with $529.6 million in assets) also caught the acquisition bug in March when it bought Washington, D.C.-based Independence Federal Savings Bank for $32.6 million. The two banks will have combined assets of approximately $750 million.
A BULLISH MARKET HELPS INVESTMENT FIRMS
A stronger stock market has helped black-owned asset management firms and investment banks broaden their business. Holland Capital Management (No. 10 on the BE ASSET MANAGERS list with $1.9 billion in assets under management) grew its assets under management by $560 million last year. CEO and Chief Investment Officer Louis A. Holland says his firm will continue to focus on growing existing business, and he hopes to increase the assets his firm holds in the mid- and small-cap stock fund it launched for institutional clients. “We have a goal of growing [the company’s] assets under management for existing products by $2 billion over the next 18 months.”
The surge in equities hurt some firms like Pittsburgh-based MDL Capital Management (No. 5 on the BE ASSET MANAGERS list with $3.8 billion in assets under management). Since MDL Capital specializes in more conservative bond funds, President and CEO Mark Lay reported that assets under management dropped 20% last year as more investors opted for riskier, higher-yielding securities as the economy seemed to improve.
Lay expects his firm to rebound with the help of a he
dge fund he launched last year, which he expects will grow to $500 million in assets by the end of the year. His goal is to grow it to $1 billion in assets in 2005. Lay says that the economic picture and the tougher regulatory landscape will eventually force some black-owned asset managers and black-owned mutual fund firms to merge. “It makes for a very tough climate for managers to get new assets and develop new products,” says Lay. “The main way to do it is through consolidation.”
PRIVATE EQUITY SEES OPPORTUNITY
A recent study by the Kauffman Foundation titled Minorities and Venture Capital found that investments in minority business enterprises resulted in returns equal to, if not slightly higher than, traditional investments by mainstream venture capitalists. That fact, in addition to the improving environment for business activity, has helped several black-owned private equity firms capitalize on the growing demand for investment capital.
Hartford, Connecticut-based Smith Whiley & Co. (No. 3 on the BE PRIVATE EQUITY list with $243 million in capital under management) had a good fundraising campaign in 2003, pulling in $115 million from institutional investors for its newly launched Pelman II fund. This year the firm is focusing on raising an additional $285 million to close the fund at its target size of $400 million. President and CEO Gwendolyn Smith Iloani says the environment for minority venture capital firms is so good, she expects to launch an additional private equity fund in 2005. She expects deal-flow opportunities to grow because there are so few black-owned firms and because Smith Whiley is user-friendly for black entrepreneurs who have proven their ability to produce higher returns. But even though things have improved, Iloani cautions, “The biggest challenge for black-owned private equity firms is to break the glass ceiling when it comes to getting more institutional investors.”
Fairview Capital Partners (No. 1 on the BE PRIVATE EQUITY list with $900 million in capital under management) co-founder Larry Morse also says that the environment for minority venture capital is improving. In fact, Morse says there are a number of initiatives and manager searches underway by public and corporate pension funds that are intended to increase investment activity with emerging managers. “I think this bodes well for minority-owned firms currently on the playing field with a good performance story to tell,” he says. Last year, Fairview Capital increased its capital assets under management from $850 million to $900 million, thanks to the Florida State Board of Administration committing $50 million to the Fairview Ventures II fund.
According to Morse, commitments to all venture capitalists and private equity funds are up modestly, and disbursements by such firms into new deals have also experienced an upward trend over the last half of 2003. “After a period of drought, with very little in the way of distributions from venture capitalists and private equity funds flowing
to their institutional investors, we can see appreciable improvement,” says Morse. Perhaps the biggest, or most significant, hurdle to expanding the presence of black-owned private equity firms going forward is creating credible new entrants. Says Morse, “Those who believe that they [want to enter the business] have to decide for themselves whether or not they’re prepared to test the waters.”INSURERS SEEK NEW CUSTOMERS
Facing stiff competition from larger, mainstream rivals with deeper pockets, black-owned insurance companies were forced to scramble for ways to expand. North Carolina Mutual Life Insurance Co. (No. 1 on the BE INSURANCE COMPANIES list with $175.7 million in assets) is refocusing its operations to meet the changing buying patterns of African Americans. President and CEO James H. Speed Jr. says that last year, the firm spent $500,000 to bring in a new sales force to sell group life insurance to corporations and to sell products directly to individuals through employee benefit plans. Speed believes this approach will help North Carolina Mutual generate up to $10 million in new premiums annually. The company has also launched several new products to help grow premiums.
North Carolina Mutual’s gross premiums grew from $110 million to $139 million, but Speed’s decision to relinquish its student accident business to another insurer earlier this year, at a cost of $55 million, brought the firm’s premiums down to $84 million. Speed’s decision to leave that segment of the business positions the firm for even more growth going forward. Speed’s goal is to grow North Carolina Mutual’s premiums to $200 million by the end of the year. He is currently pursuing an acquisition strategy that he hopes will make the firm one of the nation’s top 150 life insurers by 2006.
To expand into different markets, the Atlanta Life Financial Group (No. 3 on the BE INSURANCE COMPANIES list with $99.7 million in assets) is relying on its 2-year-old asset management business, Atlanta Life Investment Advisors (formerly ALIC Investment Advisors), which, at the time of this writing, had $58 million in assets under management. From 2002 to 2003, the insurer’s total income increased by $8.3 million or 13%.
Newly appointed president and CEO Ronald D. Brown says that Atlanta Life’s outlook for 2004 is positive, and the firm plans to continue its strategy of targeting institutional investors, endowments and foundations, and cross-selling among its existing clients.
Edward Irons, chairman of the board of the Herndon Foundation, the majority stockholder of Atlanta Life, says, “[Ron] brings the appropriate experience, judgment, and leadership skills to lead ALFG through this period of change.”
FINANCIAL SERVICES ELIGIBILITY
[B.E. Banks]
These are commercial banks or savings and loans that are classified by the Federal Reserve as black institutions and have been fully operational for the previous calendar year. An institution’s financial status is measured in terms of total assets, capital, deposits, and loans, including mortgage-backed securities for the calendar year. In compiling our list of the leading 25 institutions, we received surveys from black-owned institutions and consulted the Federal Reserve, state banking commissions, and industry associations.
[B.E. Insurance Companies]
A life insurance company must be at least 51% black-owned and have been fully operational for the previous calendar year. An institution’s financial status is measured in terms of total assets, life insurance in force, premium income, annuity income, net investment income, statutory reserves, and surplus. The top five insurance companies on our list sell individual and/or group life insurance policies. (No institution that is strictly in the business of selling property and casualty insurance has been included.) In compiling the list, we received surveys from these institutions, consulted the rating services, state regulatory agencies, and industry associations.
[B.E. Investment Banks]
An investment bank must be at least 51% black-owned and have been fully operational for the previous calendar year. The top 10 investment banks compiled on our list engage in such activities as underwriting, initial public offerings (IPOs), mergers and acquisitions (M&A), retail brokerage, institutional research and sales, and financial advisory services. A firm’s financial status is measured in terms of total dollar amount of issues derived from the underwriting of municipal and corporate bonds and equities for the calendar year. In addition to receiving surveys from these companies, we consulted Thomson Financial Securities data, which tracks investment bank transactions, reviews SEC filings, and serves as the industry standard for measuring such activities.
[B.E. Asset Managers]
An asset management firm must be at least 51% black-owned and have been fully operational for the previous
calendar year. The top 15 firms on our list include those that invest financial assets for individuals and institutions such as the pension funds of government agencies and corporations, and the endowments of colleges and universities. (Asset managers who specialize in real estate and other types of investment vehicles or operate hedge funds are not eligible for inclusion on this year’s list.) A firm’s financial status is measured in terms of total dollar amount of managed assets derived from equities, fixed-income and tax-exempt investments, and cash for the calendar year. In addition to receiving surveys from these companies, we consulted the federal and state regulatory agencies and industry associations. All firms on our list must be registered with the Securities and Exchange Commission (SEC) and have made an annual filing of their assets under management with the SEC at the time of publication.
[B.E. Private Equity Firms]
A private equity firm must be at least 51% black-owned and have been fully operational for the previous calendar year. The leading 10 firms on our list include those that manage funds making equity investments in, and/or providing financing for, established and start-up companies. These investments are made on behalf of the firm and their individual and institutional investors. A firm’s financial status is measured in terms of total capital under management for the calendar year. Additional information provided to BE includes a firm’s total number of funds as well as its portfolio companies. In addition to receiving surveys from these companies, we consulted regulatory agencies and industry associations.
As indicated, BLACK ENTERPRISE consulted industry analysts and other sources to verify the information contained in the lists. Companies that may have previously appeared on the BE 100S but have been excluded this year are either no longer black-owned or their financial status has dropped below the minimum threshold to make any of the lists.
The BE 100S are available on disk in both Windows and Mac formats. The TopList Software provides mailing addresses and phone numbers for the companies, as well as information on black organizations. For more information on TopList, contact B.E. Unlimited at 212-886-9576.
FINANCIAL SERVICES SUMMARIES
| Top 25 Banks | 2003 | 2002 | % Change |
| Number of Employees | 2,065 | 2,051 | 0.68% |
| Assets* | $4,714.139 | $4,526.238 | 4.15% |
| Capital* | 411.644 | 378.437 | 8.77% |
| Deposits* | 3,815.498 | 3,633.301 | 5.01% |
| Loans* | 3,134.041 | 2,712.690 | 15.53% |
| Top 10 Private Equity Firms | 2003 | 2002 | % Change |
| Number of Employees | 94 | 87 | 8.05% |
| Capital Under Management* | 2,959.00 | 2,934.50 | 0.83% |
| Number of Funds | 27 | 26 | 3.85% |
| Total No. of Portfolio Companies | 163 | 176 | -7.39% |
| Top 15 Asset Management Firms | 2003 | 2002 | % Change |
| Number of Employees | 328 | 306 | 7.19% |
| Assets Under Management* | $59.6 | $43.7 | 36.24% |
| Top 10 Investment Banks‡ | 2003 |
| Number of Employees | 510 |
| Total Issues†| 677.340 |
*IN MILLIONS OF DOLLARS, TO THE NEAREST THOUSAND. AS OF DEC. 31, 2003. †IN BILLIONS OF DOLLARS TO THE NEAREST MILLION. AS DEC. 31, 2003. ‡Used Thomson financial securities data as a measurement. PREPARED BY B.E. RESEARCH.
B.E. INSURANCE COMPANIES
|
This Year |
Last Year |
Company/ |
Chief |
Year |
Staff |
ASSETS* |
STATUTORY |
INSURANCE |
PREMIUM |
NET |
| 1 | 1 | North Carolina Mutual Life Insurance Company Durham, NC |
James H. Speed Jr. | 1898 |
147 |
175.665 |
89.885 |
14,241.411 |
84.285 |
8.100 |
| 2 | 2 | Golden State Mutual Life Insurance Company Los Angeles, CA |
Larkin Teasley | 1925 |
200 |
121.000 |
73.150 |
2,884.000 |
19.000 |
6.800 |
| 3 | 3 | Atlanta Life Financial Group Atlanta, GA |
Ronald D. Brown | 1905 | valign=”middle”>
28 |
99.736 |
16.874 |
12,079.301 |
57.775 |
2.495 |
| 4 | 4 | Booker T. Washington Insurance Company Birmingham, AL |
Walter Howlett Jr. | 1931 |
111 |
57.769 |
51.589 |
1,340.566 |
9.197 |
2.540 |
| 5 | 5 | Protective Industrial Insurance Company Birmingham, AL |
James C. Harrison | 1923 |
85 |
18.333 |
12.472 |
72.712 |
1.280 |
0.145 |
*IN MILLIONS OF DOLLARS, TO THE NEAREST THOUSAND. AS OF DEC. 31, 2003. †IN BILLIONS OF DOLLARS TO THE NEAREST MILLION. AS DEC. 31, 2003