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May 19, 2010
ShoreBank Scrambles to Raise Enough Cash to Avoid FDIC Seizure
    by Robert Kropp

The pioneering community lender, whose practice of providing loans in distressed neighborhoods led to high default rates in the aftermath of the recession, is described as a victim of the financial crisis.


ShoreBank, the esteemed Chicago-based community bank whose dramatic reversal in financial fortune coincided with the collapse of the housing market, has reportedly raised enough private capital to qualify for additional federal assistance and avoid seizure by the Federal Deposit Insurance Corporation (FDIC).

Reports indicated that much of the $125 million raised on behalf of ShoreBank came from such
Troubled Asset Relief Program (TARP) recipients as Goldman Sachs, Citigroup, and Bank of America. GE Capital was also reported to have provided $20 million.

As a result of the infusion of capital, ShoreBank hopes to receive $75 million in federal aid from the US Treasury Department, although receipt of the Treasury funds is not yet certain. Describing ShoreBank and other community banks as “victims, not perpetrators, of the financial meltdown,” Congresswoman Jan Schakowsky of Illinois was instrumental in lining up the potential federal aid.

Founded in 1973, ShoreBank describes its mission as investing in people and their communities to create economic equity and a healthy environment. For years, while the practice of redlining—described in the Encyclopedia of Chicago as “the practice of arbitrarily denying or limiting financial services to specific neighborhoods, generally because its residents are people of color or are poor”—was a common strategy for commercial banks, ShoreBank originated loans to homeowners and small businesses in Chicago’s poorest neighborhoods.

Combining its community loan program with training and other forms of ongoing engagement with its loan recipients, ShoreBank enjoyed remarkable success for many years, reporting loan default rates that were significantly lower than those of commercial banks. As its success grew, ShoreBank expanded into additional markets, opening banks in Detroit, Cleveland, and the Pacific Northwest.

ShoreBank was also instrumental in helping Muhammad Yunus, the 2006 Nobel Peace Prize winner, establish the
Grameen Bank, a Bangladesh-based pioneer in microfinance.

As recently as 2005, ShoreBank could describe its financial picture as exceeding “the financial, community development, and conservation goals that make up its triple-bottom-line commitment.” In 2005, it reported a net income of $8.3 million, originated $370.3 million in new community development loans, and made conservation loans totaling $187.8 million. ShoreBank continued to report positive net income until 2008, when its loan loss provision increased dramatically.

Also in 2008, when the financial crisis led to rapidly escalating rates of foreclosure on mortgage loans, ShoreBank developed its
Rescue Loan program. Finding that the rate of foreclosure on home loans was significantly higher in Chicago neighborhoods with higher ratios of minority residents, the Rescue Loan program offered refinancing, in the form of fixed-rate loans, to thousands of homeowners at the highest risk of default due to predatory loans.

By 2009, however, the economic recession led to double-digit unemployment rates in Chicago, and ShoreBank’s finances suffered dramatically. It reported losses of more than $50 million in 2009, as loan defaults mounted. As a result, the FDIC issued a cease and desist order requiring it to raise the capital as of this week.

Largely disregarding ShoreBank’s storied history of community investment, some observers have suggested that connections in the White House has led to the bank being singled out for rescue. Although the bank itself appears to trumpet a connection on its website—noting that “Hyde Park resident Barack Obama was elected 44th president of the United States” (Ronald Grzywinski, a founder of ShoreBank, is a resident of the Hyde Park section of Chicago as well)—such suggestions have been made in the absence of any supporting evidence, aside from the fact that ShoreBank’s mission aligns with the administration’s policies on community development.

In the aftermath of the fundraising efforts, it has been reported that David Vitale, former vice chairman of Bank One, will succeed Grzywinski as executive chairman.

ShoreBank is a certified
community development financial institution (CDFI), and it and two of its affiliates are members of Opportunity Finance Network (OFN), a network of more than 170 CDFIs. SocialFunds.com spoke with Mark Pinsky, President and CEO of OFN, about ShoreBank’s travails and the outlook for CDFIs in general.

“ShoreBank itself is a member of OFN, as are Enterprise Cascadia in the Pacific Northwest and Northern Initiatives in Michigan’s Upper Peninsula,” Pinsky said. “I would hope that investors and others understand that CDFIs play an important role. I have heard that there have been something like 20 bank failures in the Chicago area since 2009. If you’re the FDIC, I would think that you have a great interest in ShoreBank finding the capital so that you don’t have to seize it.”

“You have to ask about ShoreBank, what is it about 20 bank failures in the Chicago area?” Pinsky continued. “What is it about the macroeconomic forces there, like the impact on loan portfolios of the high unemployment?”

“Our data indicates that CDFIs as a whole are holding up quite well, despite the fact that they work in distressed neighborhoods,” Pinsky added. “It’s more challenging now than it was before, as it is for every financial institution, but the problems that ShoreBank has been struggling with are not indicative of the CDFI industry as a whole. CDFI loan charge-offs in 2009 were lower as a percentage of assets than the charge-offs of FDIC-insured institutions.”

“ShoreBank wanted to stay invested in the community,” Pinsky said. “Having skin in the game is fundamental to responsible credit. The problems for TARP banks were precisely the opposite. They didn’t have skin in the game, and their partners didn’t have skin in the game. Much of what happened to mainstream banks, such as trading in such things as credit default swaps, were outside the realm of community banks.”

 

 
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