Most start-up banks are having little trouble raising money these days, but some banks targeting African-Americans are proving to be tough sells.
In recent weeks plans for two start-ups aimed at African-Americans were halted after organizers failed to meet deadlines for raising capital - even after regulators granted them multiple extensions. A third that had hoped to open in a Latino and African-American neighborhood of New York is seeking an extension for raising capital and has delayed opening until at least January.
Dan Hudson, a consultant to start-up banks, said that the banks have struggled to attract investors because their business plans are too narrow. That was especially the case with BankBlackwell, an Internet-only bank targeting African-American households with annual income of $40,000 or more, according to Mr. Hudson, the president and chief executive of the consulting firm Bankmark.
Another consultant said investors might be wary of banks catering to African-Americans because such banks, though very important to their communities, generally do not perform as well financially as mainstream banks.
Not all upstart banks aimed at African-Americans are struggling to attract capital. Robert L. Johnson, the founder of Black Entertainment Television, recently acquired Metro Bank in Orlando, renamed it Urban Trust Bank, and plans to use his significant resources to build the tiny $8 million-asset bank into a national black-owned banking powerhouse.
It should also be noted that some of the three-dozen or so African-American-focused banks, such as Harbor Bank in Baltimore, are quite profitable and have provided solid returns to investors, said William Michael Cunningham, CEO of Creative Investment Research Inc., a Minneapolis consulting firm that focuses on minority banking.
Still, banking is a fiercely competitive business, and Mr. Cunningham said investors may not necessarily believe there is much demand for more African-American banks - especially when many mainstream banks also are increasingly targeting black customers.
Investors also know that past performance can be a good indicator of future results.
Using data from June of last year, Mr. Cunningham said the average return on assets for African-American-owned banks and thrifts in the second quarter of that year was 0.25%, versus an average of 1.35% for all banks and thrifts. The average return on equity for black-owned banks and thrifts was 3.62%, compared with the national average of 12.74%.
"That explains why these banks are having a hard time raising money," he said. "If you are an investor and you are looking at investing in a black financial institution - bank or thrift - you are going to know the number" for their return on assets. "Why would I invest in a black institution that has an average return on assets of 0.25% when Hispanic banks have an ROA of 1.28% and Asian banks have … [an ROA] of 1.13%, which are closer to average banking sector as a whole?"
The Office of Thrift Supervision approved BankBlackwell's charter application in February 2005 and extended the Boston start-up's deadline for coming up with the $16.5 million it needed to get up and running four times. The last deadline passed July 28.
James "Jim" Mundy, the lead organizer who would have been the bank's president, said it missed its capital-raising target because its lead investor could not sell bonds in time to meet the deadline and therefore did not have the cash in hand. He said the OTS would not give the organizers another extension, but he did not rule out re-applying for a charter.
Illinois regulators gave First Covenant Community Bank in Forest Park five extensions, but it still could not raise the $8 million it said it needed. The would-be bank was closely associated with the Living Word Christian Center - First Covenant's organizers were also church leaders, and shares were offered to church members.
John Sorenson Jr., who would have been that bank's president and CEO, said organizers are no longer seeking a bank charter. He refused further comment.
CheckSpring Bank in the Bronx initially was scheduled to open last quarter in a predominantly Hispanic and African-American neighborhood, but it failed to raise the $13.4 million it was seeking in time.
New York state regulators gave it an extension, to July 7, but organizers missed that deadline as well. Charlie Wilcox, CEO of the start-up's holding company, CheckSpring Community Corp., said that the organizers have to re-apply for a charter and have set a goal of opening in the first quarter.
Mr. Wilcox said his group struggled to raise capital because investors did not fully understand the business plan, which is to offer check-cashing services to build relationships with the unbanked and underbanked and turn them into bank customers.
"I just think we need more time to explain our offering in the market," he said.
Mr. Hudson said that he is familiar with all three organizing groups, and that he believes all were too narrowly focused. In his opinion, BankBlackwell needed a brick-and-mortar operation to go along with its Internet offerings.
"The Internet is never going to replace the individual," he said. "We want to talk to someone and believe they care about our situation. The Internet is a tool of convenience."
To date the most successful Internet-only banks have been those with ties to larger banking and financial services companies. Perhaps the most notable failure among Internet-only banks was G&L Bank, which targeted gays and lesbians. It opened in 1999 and was liquidated two years later after losing an average of $280,000 a month.
Most new community banks do not have problems finding capital, and several that have worked with Mr. Hudson prove it. This year he has helped raise $83 million for four start-ups, all of which reached their capital-raising goals in less than two months. American Banker recently calculated that private equity firms have as much as $500 million they are looking to invest in start-up or young community banks.
"There is more capital out there than I can count looking for any kind of home," Mr. Hudson said.
Willard "Chuck" Lewis, CEO of an Atlanta start-up, One Georgia Bank, said that the key to attracting investors is having "a clearly defined business purpose."
"This is a free-market society," he said. "If it's an idea whose time has come, then it will be supported."
Mr. Lewis was the chief operating officer at an African-American-owned bank, Citizens Trust Bank, before leaving to help organize One Georgia Bank. His new bank has an ethnically diverse board and advisory board, and it targets customers - primarily business owners - from all different ethnic backgrounds.
The business plan went over well with investors. One Georgia Bank opened in May with nearly $24 million of capital - the most ever for a Georgia state-chartered bank.
Mr. Cunningham said that there is a future for African-American start-ups, like BankBlackwell, but that organizers need to package their banks differently and better explain the untapped markets that exist.
For example, he praised Mr. Johnson's bank, which wants to specialize in offering student loans and subprime credit cards, marketing through both the Internet and brick-and-mortar branches.
The first place most bank organizers go to raise money is the community in which it plans to operate, but for some black-owned banks, that is not always the best option, Mr. Cunningham said.
"Part of the issue is the communities they are trying to access have fewer capital resources - not enough to support this type of effort," he said.
