Shoring up ShoreBank: Can the South Side’s socially conscious bank weather the recession?

Has ShoreBank changed the world? The original socially minded bank has changed lives, helped revitalize the South Shore neighborhood in which it was started, and rewritten the game of financial services. But the exaggerated impact of the financial crisis on the low- and moderate-income neighborhoods it serves proves its mission remains an apt one. Founded in 1973 as a new kind of bank, ShoreBank showed that financial institutions that were invested in community development could make a real profit while making their clients’ welfare its top priority. In the past few rough months, it has continued to innovate, adapting to suit the needs of communities that are hardest hit by the recession. But the bank itself looks forward to an uncertain future.

ShoreBank was founded to meet the financial needs of low-income communities that were widely discriminated against by commercial banks. Redlining, the practice of denying loans and bank services to entire neighborhoods, was legal at the time, and ShoreBank’s founders, Ron Grzywinski, Mary Houghton, Milton Davis, and James Fletcher, recognized that access to financial services could help rejuvenate ailing neighborhoods like South Shore on Chicago’s South Side. They purchased the failing South Shore Bank and by 1975 had done something unheard of: their socially conscious bank had begun to turn a profit, and has continued to do so.

ShoreBank’s Senior Vice President of Nonprofit and Foundation Banking Clare Golla and Vice President of Corporate Communications Brian Berg stress that “our mission is our competitive advantage.” Rather than aiming to make money in spite of its mission, the bank achieved success precisely by filling a market need for an institution that takes its customers into constant consideration. It measures its success with what it calls a triple bottom line. “We equally measure our performance based on our financial performance as well as our community development impact and our environmental impact,” says Berg. “Our triple bottom line is our strategic advantage that distinguishes us from other institutions.” Jackie Leavy, a volunteer for the Coalition to Save Community Banking, stresses that the way community banks, when well run, do business is not just good for communities–it’s good for everyone, especially the bank’s shareholders. “ShoreBank,” she says, “understands that working with its communities on economic empowerment, financial literacy, and community rebuilding will, in the long run, mean more business for the bank–that if a community continues to be mired in poverty or in a mortgage foreclosure crisis with a depressed housing market, that this is bad for everyone.

ShoreBank draws customers with its promise of mission-based banking and its personal approach with its customers. Lacking the big marketing budget of large commercial banks, it is forced to build a community tied together by close relationships between customers and partnering institutions. It tries to grant credit to those who can afford it, even if they don’t have the financial records to back it up. “We have a really strong partnership with our customers,” says Golla. “We know them really well and they have no problem giving us feedback.” It’s an approach that builds loyalty and creates powerful word-of-mouth support. Their outreach programs not only introduce financial literacy to low-income neighborhoods, but also bring in customers.

ShoreBank’s approach to the businesses, faith-based organizations, and nonprofits that it services is based on similar principles. “We believe in collaboration,” says Golla, “which involves partnering with foundations, nonprofits, banks, and government agencies. It’s a much larger dynamic in a web of collaboration.” The loyalty of the bank’s customers allow it to bridge connections and create unlikely scenarios for small companies and nonprofits. ShoreBank recently started the Capacity Plus Loan program to help altruistic organizations like the MacArthur, Heron, and Polk Foundations lend to nonprofits that service communities in need. These foundations deposit funds at ShoreBank that are then guaranteed as emergency lines of credit for affordable housing and arts and culture organizations. The Hyde Park-based Neighborhood Writing Alliance is part of the program, which has allowed it to continue offering services during a time when many nonprofits are cutting back. At the same time, the South Side’s hard-hit communities are finding a greater need for services like those of the NWA, which holds free writing workshops that give individuals in underprivileged Chicago communities the opportunity to express themselves and discuss important issues. Carrie Spitler, its executive director, says, “We’re definitely finding a bigger demand in the past year and a half…I think people are in their neighborhoods more often and looking for a place to connect rather than staying at home and feeling that whole sense of isolation.” She adds, “We’ve been really lucky, knowing that the luck has come from hard work and planning…I know that if something comes up tomorrow and I don’t have the cash to cover it, [our financial support] is there.”

In the new millennium, ShoreBank faced new competition from brokers offering predatory adjustable-rate mortgages, a particular problem in its target neighborhoods. “In the mid-2000s,” says Golla, “more of these non-bank lenders and mortgage brokerages started popping up. By 2007, none of the top five lenders in our priority communities were banks. They were these irresponsible institutions with no regulatory procedures.” Berg stresses that ShoreBank had always stayed out of the market for adjustable rate mortgages. “We would rather say no and lose that business because it’s the right thing to do,” he says. Indeed, Grzywinski recognized early on that the boom in sub-prime adjustable rate mortgages represented a looming threat to the nation’s financial health, writing a cautionary letter to Ben Bernanke in 2007. In the same year, ShoreBank created one of the first Rescue Loan programs to help victims of predatory loans refinance their mortgages and save their homes.

Although, as Berg points out, those predatory lenders are “virtually gone” and “the market has corrected itself,” vulnerable communities and the nonprofit and community development institutions that service them have been hit hard. A ShoreBank press release cites “soaring unemployment, a significant drop in property values, a huge wave of foreclosures, and a lack of credit” as forces that have sapped its communities of its economic lifeblood. “With Chicago reporting an unemployment rate of about 10%,” the press release says, “the actual unemployment rate of Chicago’s African Americans is much greater–in the 20 to 25% range, according to the Economic Policy Institute.” Golla points out that “a lot of people are saying that in many of the neighborhoods that ShoreBank works it’s more akin to a depression than a recession.”

And despite its prudent business strategy and unprecedented record of fiscal accomplishment, ShoreBank has not escaped the blow of the financial meltdown. Midway through 2009, the Federal Deposit Insurance Corporation’s regulators ordered ShoreBank to raise capital in order to continue operating safely. In spite of its attempts to reinvigorate its equity, it continued to be pummeled by the tough climate of its markets and was forced to ask the State of Illinois for a bailout in last month. While no state government has yet interceded to save a financial institution, the scenario is quite possible for a unique bank that has been championed by both Bill Clinton and Barack Obama. The United States Treasury Department just announced a new program to stabilize community development financial organizations with $1 billion in federal funding as part of its Troubled Asset Relief Program.

While Berg and Golla were unable to comment on their company’s situation, Thomas Fitzgibbon, the recently retired CEO of MB Financial, has been following ShoreBank’s new challenges and sees mixed prospects for its future. “The bank has really been battered pretty heavily by the downturn in the commercial real estate market and the housing market,” he says, meaning that “the disaster scenario” would be its sale or liquidation by the FDIC–the recent fate of several other Chicago banks, including the West Side community development bank Park National. Many believe that, between government backing and donor support, ShoreBank will be able to weather the storm.

But Fitzgibbon wonders whether ShoreBank’s social mission might be somewhat compromised by the concerns of the government and new investors. “The fresh capital that came in would most likely come with the requirement that the management be restructured and that the bank itself take a new approach to its banking and perhaps its mission,” he says. “The likelihood is that it would continue to do something along the lines of its mission but would have a more conservative approach with its credit management.”

Berg and Golla, however, stress that its social mission is “in its DNA.” Though it’s in a period of transition and faces unsure economic times, they are certain that ShoreBank’s social mission will always be central to its identity. “Everybody here believes that banks do good while doing well,” Berg says. Golla adds, “I haven’t seen anyone as dedicated as the people at ShoreBank are right now to keeping our customers afloat. We put so much sweat equity, and real equity, into it that there’s just no question about the mission.”

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