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, Tri-State Bank of Memphis (No. 15 on the BE BANKS 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.”
Even a volatile equity market and tougher regulations stemming from mutual fund scandals in recent years didn’t deter some firms. Chicago’s Ariel Capital Management L.L.C. (No. 1 on the BE ASSET MANAGERS list) saw its 2004 revenues reach the $105.3 million mark, up from $73.6 million, and its assets under management jumped to $21.4 billion from $16.1 billion. Ariel Capital’s CEO, John W. Rogers Jr., attributed the growth to good investment performance and a stronger brand name recognition. “More and more employees are going to their human resources departments and asking to have the Ariel Mutual Funds added to their 401(k) plan investment options,” Rogers says. To continue to grow, Pamela Anderson, executive director of the National Association of Securities Professionals in Washington, D.C., said that like other firms, these companies will have to be fluid and dynamic. She also says they will have to form strategic alliances in their core markets and look for more global business.
INSURERS RETOOL TO FOSTER GROWTH
To remain vibrant, black-owned insurers are adopting plans to buy other companies, sell products more aggressively to win affluent customers, and exit money-losing businesses. For
For Atlanta Life Financial Group (No. 3 on the BE INSURANCE COMPANIES list), 2004 was a year of transition. CEO Ronald D. Brown says assets in the company’s life insurance business fell 23% to $76.4 million and premium income dropped 15% to $49.2 million, mainly because of adverse mortality rates. But a 16% drop in expenses helped boost profits for Atlanta Life to $200,000; the company suffered an $800,000 profit loss in 2003. Brown says Atlanta Life will focus on building its asset management and group reinsurance units and expand on its recent launch into the pre-need business.
Last year
was a time of reassessment for Golden State Mutual. Teasley, the insurer’s CEO, says profits grew to $500,000 as investment income rose in value, up from a profit loss of $457,000 in 2003. This year, the carrier is launching an aggressive marketing effort to boost the number of policyholders from 80,000 to 90,000 by year’s end and to 200,000 or more by 2010. “We’re raising in the range of $6 million in additional capital this year to do some things we have not done in the past,” says Teasley.
DIVERSIFYING TO GROW
For some institutions, whether a private equity firm or investment bank, the capital markets continue to pose tough challenges as well as opportunities. At Fairview Capital Partners Inc. (No. 1 on the BE PRIVATE EQUITY FIRMS list), the Farmington, Connecticut, firm’s capital under management rose to $1.6 billion in nine funds last year, from $900 million in seven funds in 2003. JoAnn Price, the firm’s president and a managing partner, says two major clients led the growth. The first client, Constitution Liquidating Fund, which has the State of Connecticut Pension Fund as its primary investor, added about $640 million last year. The second client, New York/Fairview Emerging Managers L.P, mainly consists of pension funds for the city of New York and brought in about $60 million. Regarding future growth, Price says, “We’re looking to expand into the international marketplace by either a joint venture opportunity or an acquisition.”
The Williams Capital
Group L.P. (No. 1 on the BE INVESTMENT BANKS list with $122.3 billion in total managed issues) is investing more of its resources into high value-added products. CEO Christopher J. Williams says the firm launched its first-ever private equity fund last year. It hopes to complete the fundraising process by the end of the second quarter. Nearly $150 million has already been raised and Williams says the firm has a team in place that can execute a private equity strategy. “The private equity market offers investors and managers, such as Williams Capital, the opportunity to earn returns that are often well in excess of the returns typically available in the public securities market,” he says.While others look to expansion efforts, analysts say black private equity firms still lag behind when it comes to getting their fair share. Robert L. Greene, president of the National Association of Investment Companies, says the biggest challenge is increasing the number of pension plans deploying capital in the “emerging domestic market.” While minority-owned firms manage less than 2% — or about $6 billion — of the private equity business in the U.S. marketplace at any given time, the total amount deployed in the U.S. is about $300 billion. “The bottom line is, until significantly more capital is invested into the minority marketplace, a number of African American entrepreneurs will face a capital deficit,” Greene says.
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 and 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 on our list engage in activities such 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 rank the firms based on
information provided by Thomson Financial Securities Data, which tracks investment bank transactions, reviews SEC filings, and serves as the industry standard for measuring such activities. An investment bank’s ranking is based on a total of debt, equity, and municipal bond transactions.[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 pension funds of government agencies and corporations, and the endowments of colleges and universities. (Asset managers that 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 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 filed their annual assets under management with the SEC at the time of publication. The rankings of these firms are based on total assets under management for the previous calendar year that have been verified by the SEC.
[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, operating entities, including startup firms, established companies, and private equity firms or private equity partnerships that invest in operating companies. (Private equity firms that specialize in real estate investments are not eligible for inclusion on this year’s list.) These investments are made on behalf of the firm and its individual and institutional investors. A firm’s financial status is measured in terms of total managed capital for the calendar year. Additional information provided to BE includes a firm’s total number of funds as well as its portfolio of companies or private equity partnerships. In addition to receiving surveys from these companies, we consulted regulatory agencies and industry associations.
As indicated, BE 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 the lists.
Financial Services Summaries
Top Banks
| Â | 2004 | 2003 | % Change |
| Number of Employees | 2,015 | 2,065 | -2.42 |
| Assets* | $5,076.958 | $4,714.139 | 7.70 |
| Capital* | 427.021 | 411.644 | 3.74 |
| Deposits* | 4,098.706 | 3,815.498 | 7.42 |
| Loans* | 3,449.778 | 3,134.041 | 10.07 |
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Top Private Equity Firms
| Â | 2004 | 2003 | % Change |
| Number of Employees | 90 | 94 | -4.26 |
| Capital Under Management* | $3,134.000 | $2,959.000 | 5.91 |
| Number of Funds | 29 | 27 | 7.41 |
| Total No. of Portfolio Companies | 272 | 163 | 66.87 |
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Top Asset Management Firms
| Â | 2004 | 2003 | % Change |
| Number of Employees | 371 | 328 | 13.11 |
| Assets Under Management* | $73,331.000 | $59,585.930 | 23.07 |
SOURCE: SECURITIES AND EXCHANGE COMMISSION
Top Investment Banks
| Â | 2004 | 2003 | % Change |
| Number of Employees | 398 | 510 | -21.96 |
| Total Issues** | $547.273 | $677.340 | -19.20 |
**IN BILLIONS OF DOLLARS, TO THE NEAREST MILLION. AS OF DEC. 31.SOURCE: THOMSON FINANCIAL
Top Insurance Companies
| Â | 2004 | 2003 | % Change |
| Number of Employees | 556 | 571 | -2.63 |
| Assets* | $417.007 | $472.503 | -11.75 |
| Statutory Reserves* | 256.271 | 243.970 | 5.04 |
| Insurance in Force* | 30,442.083 | 30,617.990 | -0.57 |
| Premium Income* | 155.137 | 171.537 | -9.56 |
| Net Investment Income* | 16.514 | 20.080 | -17.76 |
*IN MILLIONS OF DOLLARS, TO THE NEAREST THOUSAND. AS OF DEC. 31. PREPARED BY B.E. RESEARCH.
REVIEWED BY THE CERTIFIED PUBLIC ACCOUNTING FIRM EDWARDS & CO.
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