Black Bankers Undaunted by the Freedom Fiasco
The failure last year of Freedom National Bank of New York, one of the largest banks controlled by members of a racial minority, did not augur well for black investors then struggling to open banks in Los Angeles and Philadelphia.
Freedom National was a symbol of 1960s aspirations for black enterprise and economic empowerment.
Its seizure by regulators, who cited prolonged mismanagement and capital deficiency, led some analysts to question the viability of black-owned banks in economically troubled communities.
Undaunted, Founders National Bank of Los Angeles managed to open in January. The first black-owned commercial bank in the region in 20 years, Founders immediately gained $78 million in deposits - within $10 million of Freedom's size at its demise - by acquiring a failed thrift from the Resolution Trust Corp.
And in Philadelphia, the organizers of United Bank, with a state charter and an oversubscribed initial capital offering of $5.6 million, are preparing for a September opening. United will be the first black-controlled bank in Philadelphia since the 1950s.
Now for the Real Test
The investor groups on each coast overcame various obstacles to raise sufficient capital and - in the Los Angeles case - open their doors. Now it is up to their managements to prove that they have staying power in an economy that has cowed much larger, longer-established institutions.
Bruce Gamble, executive director of the Washington-based National Bankers Association, which represents minority-controlled banks, contends that the financial and competitive pressures on them and on mainstream institutions are identical.
"I would suggest there is a lack of empirical studies to draw any conclusions about pressures common to black-owned banks," Mr. Gamble said in response to assertions that minority banks tend to have poorer loan yields and asset quality.
But he added that community characteristics can work against them - many are based in low-income areas that suffer disproportionately from recessions and high rates of business failure and of crime.
Such conditions make lending extremely risky. Also, the scarcity of high-quality borrowers and the volatility of the deposit base in many minority communities raises the cost of servicing accounts.
A Stable Community
But even amid recession and in the wake of Freedom National's downfall, the black banking community appears relatively stable.
The National Bankers Association counts 36 banks owned by blacks, including the Los Angeles and Philadelphia entries. A 37th is being organized and aims to open in the fall year in Jackson, Miss.
The largest member of the club is Seaway National Bank of Chicago, with $174 million in assets at yearend 1990. The 34 in business at yearend had combined assets of $1.91 billion.
As a rule, the black banks face asset-quality problems and below-average returns on assets, said William Michael Cunningham, a registered investment adivser based in Washington.
According to Mr. Cunningham's most recent calculations, the black banks' average $55 million in assets.
Equity averages a strong 6.65% of total assets and 14.35% of risk-adjusted assets.
But the banks' median return on assets was only 0.27%, and return on equity 3.25%.
"Not only does the public view all black banks nationwide as having the same problems, but investors maintain the same view," Mr. Gamble said.
"Recent experience with the FDIC's response [in the Freedom failure] regrettably demonstrates that there is much more comfort for investors and depositors at large nonminority banks - even those that are failing."
Still, it wasn't just the black community that rallied round to help United Bank of Philadelphia surpass its capital-subscription goal of $5 million. The local banking community also pitched in.
Emma C. Chappell, United's chairman and chief executive, had been vice president of Continental Bank in Philadelphia.
Focus on Management
In setting out to beat the odds, the leaders of Founders National Bank in Los Angeles have made management quality a priority.
"Right now we're going through the transitional period of building the structure of the bank and making the conversion from a savings and loan," said John P. Kelly, president and chief executive officer. "It is a period to make sure we have everything in order."
Mr. Kelly, 50, has been recruiting people from a variety of backgrounds including banking, real estate, and consulting. He was president and chief executive officer of Midwest National Bank, Indianapolis, for 10 years and president of the National Bankers Association in Washington for seven.
The nucleus of Founders National is the former Founders Federal Savings and Loan Association.
The new national bank submitted the winning bid the Resolution Trust Corp. for the failed thrift's deposits.
Leon T. Garr, 78, a local businessman and chairman of the Founders board, said he is fulfilling a lifelong desire to bring personal banking services to the Los Angeles minority community.
He saw a message in the fact that the Founders Federal deposits were acquired over the holiday weekend honoring Martin Luther King Jr.
In addition to its headquaters, in Los Angeles, Founders has two branch locations, in Compton and Gardena.
Mr. Kelly said the management and board are committed to operating profitably and with a heavy emphasis on safety and soundness, to protect depositors' funds.
The bank's managing director is Carlton Jenkins, 36, also a career banker.
"Founders is a sound business bank, and we have a good management team in place," he said. "We like our location, and I'm pleased with the direction we are going.
"The management have been going out in the community, establishing contacts with the mayor and other people in the area. There will be more time to concentrate on our market once the conversion is completed."
Recruiting Is a Problem
Mr. Gamble of the National Bankers Association acknowledged that recruiting - particularly MBAs - can be a challenge, given the minority institutions' location and size.
But he said the disadvantages are offset by the opportunity for personal growth at a smaller, community-based institution that affords "experience in many areas of the bank."
The trade association has a corporate advisory group aimed at encouraging corporations to utilize the services of minority banks. Most of the members are Fortune 500 corporations.
The group also keeps National Bankers Association members abreast of corporate banking and cash management developments and needs.
"These banks have established a niche in communities underserved by the mainstream banking industry and have become critical to the growth and development of these communities," Mr. Gamble said.
"Just as the closing of a minority bank often signals the decline of the neighborhood," healthy minority-owned banks can fuel the business and economic revitalization of communities in need.
To this end, the trade group successfully lobbied Congress to include in the comprehensive banking reform proposal a provision that offers Community Reinvestment Act credit to non-minority banks for capital investment, loan participations, and other joint ventures with banks owned by minority people and women.
PHOTO : OPENING DOORS: Leaders of the new Founders National Bank in Los Angeles, from left, are Carlton Jenkins, managing director; Leon T. Garr, chairman; and John P. Kelly Jr., president and CEO.