United National Bank's decision to merge with James Madison Ltd. resurrects some provocative but logical questions about the ability of black-controlled banks to survive in a competitive banking environment.

At the same time, the proposed merger, which was announced here last week, has some strong implications for the management of other black-controlled banks as they seek to remain competitive in a new banking environment. Moreover, the pact between UNB and Madison has significance for other majority banks as they contemplate new market strategies.

Indeed, a similar merger agreement between a black-controlled bank in Indianapolis and a larger Indiana bank is being watched closely by segments of the banking community.

UNB, one of two black-controlled banks in the District, announced last week that it has agreed to become part of James Madison Ltd., the holding company for Madison National Bank, Washington's seventh largest.

The merger agreement between the two institutions was only mildly surprising, mainly because of UNB's choice of a merger partner. If there was a surprise in UNB's action, it was the bank's initial announcement in July that it was holding merger discussions with several local banks.

Announcements of merger discussions or agreements have become fairly routine in the recent spate of interstate banking activity involving regional institutions. Few had expected, however, that either of the District's two black-controlled banks would agree to merge with a majority bank any time soon.

From the beginning, minority-controlled banks were organized mainly to serve the banking needs of segments of the population that, for years, either had been poorly served or had been discriminated against by majority banks. Thus, minority-controlled banks have been perceived as specialized institutions that fill a socio-economic role as well as a financial need of communities they serve.

Even though minority banks continue to operate in their traditional market niches, several have begun putting greater emphasis on broadening their customer-base to remain competitive. Nonetheless, minority-controlled banks, especially black-owned banks, have not actively sought to expand via the merger route.

While they haven't yet established a trend, the decisions by UNB and Midwest National Bank of Indianapolis to merge with majority banks are instructive for what they suggest as alternatives to possible growth strategies. To stay competitive, black institutions must upgrade services and provide a wider range of financial products, observed Black Enterprise Magazine.

Keenly aware of that, UNB President Samuel Foggie recently observed that "The financial environment of deregulation and high technology dictates that prudent bankers take the necessary steps to provide and maintain the services [their] customers and the community both desire and deserve."

Even though Midwest National was spurred to seek a "white knight" in the face of a hostile takeover attempt by another institution, its rationale for agreeing to a merger into Irwin Union Corp. of Columbus, Ind., is very similar to that of UNB, according to a Midwestern official.

To be sure, many in the black community aren't quite ready to accept the rationale that results in the merger of a minority bank into a nonminority-controlled institution.

"I guess I have difficulty understanding [a merger] if you aren't the survivor," says John P. Kelly, executive vice president of the National Bankers Association, the industry trade organization that represents more than 100 minority banks in the country. "When you're being acquired, you're not the surviving entity," Kelly continued. "I guess I'd have to reserve judgment until I see what happens."

UNB's decision rests on assurances from Madison that UNB would maintain its identity as a minority bank. Foggie had insisted all along that a merger partner would have to be "committed to providing quality banking services to the minority community as well as to the entire community."

In the absence of such a commitment from other institutions that had expressed interest in acquiring UNB, Foggie turned to Madison. Maintaining UNB's identity "is important because of the role they play in the community and because they have provided good service to their customers," said K. Donald Menefee, Madison's chairman and chief executive officer.

Moreover, Menefee explained, UNB's status as a subsidiary minority bank "enables [UNB] to attract certain types of deposits" from government agencies and the private sector, under the minority deposit program. Those customers, Menefee added, look for well-run minority banks in which to place deposits, which "are a good source of loanable funds to put back in the city."

Whether UNB would still qualify for deposits under the minority deposit program is unclear. Nonetheless, both institutions and the community should benefit from a merger based on practical business decisions.