A Community Development Bank Passes

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Rick Cohen

ONE OF THE MOST IMPORTANT stories for the nonprofit sector last week crept by with nary a mention in the press about its connection to nonprofits. ShoreBank, the nation’s preeminent community development bank, finally succumbed to a long spiral of financial troubles. ShoreBank will now be acquired and managed by a new entity, the Urban Partnership Bank, pulled together with investment support from major financial institutions such as Goldman Sachs, Citigroup, and JPMorgan Chase among others.

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This iconic institution, with a current asset value of $2.2 billion, is almost four decades old. ShoreBank’s establishment in 1973 preceded the Home Mortgage Disclosure Act, passed in 1975, and the Community Reinvestment Act, signed by President Jimmy Carter in 1977. The message of the Community Reinvestment Act was that banks had to cease their destructive, neighborhood-destabilizing, discriminatory lending practice known as “redlining.” ShoreBank was out to prove—successfully for most of its existence—that community reinvestment was also good business. For most of ShoreBank’s history, business was good, and after its first few years, it was making profits and expanding.

But community development banks are no less immune to the economic downturn than their commercial peers, especially if they are located in Illinois and invest primarily in the state. One of out seven bank failures in this recession has occurred in Illinois, with ShoreBank’s extensive holdings in Chicago’s South and West Side neighborhoods, making it a strong candidate for failure during the economic downturn. The FDIC’s seizure of ShoreBank and seven others last week brought the list of official bank failures so far in 2010 to 118, compared to 140 in all of 2009 and only 25 in 2008 (these figures don’t count banks that avoided FDIC actions due to last minute acquisitions or mergers).

The ShoreBank Significance

With banks continuing to fail left and right, why single out the ShoreBank failure as an important story for nonprofits? It isn’t because of its community reinvestment track record. Other banks and the creation of an entire field of community development financial institutions (CDFIs) have figured out the importance and business sense of community reinvestment. Though the CDFIs, while healthier than commercial banks and mortgage lenders, have not been able to insulate themselves from underperforming loans and capital constraints caused by the Great Recession.

The story is that ShoreBank had a mission that connected in very direct ways to the nonprofit sector. From its earliest days, it was a supporter with financing and technical assistance to nonprofit community developers through the ShoreBank Neighborhood Institute and City Lands (ShoreBank Development). Based on its track record on the South Side of Chicago, ShoreBank was invited by other cities to create affiliates boosting community economic development in troubled neighborhoods. ShoreBank eventually established affiliates in Cleveland (ShoreBank Enterprise Cleveland) focusing on business development and Detroit (ShoreBank Enterprise Detroit) partnering aggressively with CDCs.

The organization’s sense of service to the nonprofit sector resulted in a number of creative ventures. For example, it created the Capacity Plus Loan program, essentially a linked deposit program for foundations such at the John D. and Catherine T. MacArthur Foundation and the F.B. Heron Foundation whose funds could then be used as guarantees for emergency lines of credit for community development and arts organizations. Its Center for Financial Services Innovation, with significant funding support from the Ford Foundation and the Annie E. Casey Foundation, functions as a think tank for extending services to the unbanked and improving the operations of the financial sector for lower income populations.

Although ShoreBank’s conservative critics link the bank with President Obama, the institution was actually quite close to President Bill Clinton, who as governor of Arkansas, along with the Winthrop Rockefeller Foundation, facilitated its role in helping create the Southern Development Bankcorp. Much like its role in rural Arkansas, ShoreBank created affiliates to address business and community development in Michigan’s Upper Peninsula area, Northern Initiatives, and environmentally linked development in the Pacific Northwest through EcoTrust, the latter eventually joining with ShoreBank to become ShoreBank Pacific. Internationally, ShoreBank has offered consulting services in developing nations around the world, including, helping Muhammad Yunus create the Grameen Bank in the 1980s, supported by a Ford Foundation grant.

Obstacles to Saving ShoreBank

The entities behind the Urban Partnership Bank were earlier involved in putting together a lifeline of capital to rescue ShoreBank as it teetered on the edge of collapse this past spring, at the time considering an investment of $125 million to spur a potential Treasury rescue package of $75 million. Underscoring the bank’s problems, ShoreBank had a “Texas ratio” (comparing problem loans to reserves plus capital) of 306 percent when a ration over 100 percent suggests that a bank might be in danger of failing. The FDIC and the state of Illinois wanted to see ShoreBank reach a leverage ratio of 9 percent and a risk-based capital ratio of 12 percent—ShoreBank was at 1.16 and 3.36 percent as of March 2010.

ShoreBank had been seeking a solution called “open-bank assistance” whereby the FDIC provides loans and investments to keep the bank open because the institution delivers an essential function in the financial system and its collapse would be disruptive. In the wake of charges against Congresswoman Maxine Waters’ effort to secure assistance for a collection of minority-owned banks, including one in which her husband held significant ownership shares, ShoreBank’s Chicago roots made its potential future a source of political controversy, evidenced by reactions to its collapse.

On the right, conservative commentators such as Michelle Malkin linked its Windy City location to Chicago’s Democratic Party apparatus and thereby to Chicagoan Barack Obama, sensing nefarious plots afoot. The presence of the nation’s large TARP-subsidized banks and Wall Street investment houses—plus long-suspected liberal foundations like the Ford Foundation and the John D. and Catherine T. MacArthur Foundation—among the investors in the Urban Partnership Bank added to the critique, now that the conservative press has pivoted the Obama Administration into the position of being the administration of big finance and its Republican opponents the protectors of the little guy.

Of course, the left had its own critique. A Chicago leader of the Rev. Al Sharpton’s National Action Network's Measuring The Movemen:t National 12 Month Action Plan issued his own congratulatory message, calling the bank’s collapse “a victory and a new window of opportunity for grassroots poor people,” because the takeover by the Urban Partnership Bank could be “a new opportunity to establish the kind of rapport and community reinvestment partnership that they never could with the former ShoreBank leadership and management.”

Charting a Path for Nonprofits and the Nation

ShoreBank routinely scored “outstanding” CRA compliance scores compared to the almost automatic “satisfactory” rankings banks can rack up almost by rote. They weren’t the only ones to rank as “outstanding”, but ShoreBank long set the nation’s CRA standard. But the significance of ShoreBank wasn’t CRA, although it was there before the legislation and before all of the bankers who now say that of course they believed in community reinvestment all the time.

ShoreBank started an industry of community development banks. CDBs are a type of community development financial institution, but they are distinctive in that, as Ron Grzywinski and the other co-founders of ShoreBank envisioned in the early 1970s, they are FDIC-insured commercial banks that focus on low- and moderate-income neighborhoods with a primary mission of promoting community development. Other CDBs (sometimes called CDFI banks, but not all CDFIs, most of which are nonprofits, are CDBs) include minority banks such as Carver Federal Savings in New York and City National Bank in Newark, the Sunrise Community Banks in Minnesota, and Denver’s Native American Bank formed by 20 Native American tribes and Alaskan native corporations.

ShoreBank’s distinctiveness was its service to the nonprofit sector as a development partner to CDC’s in Chicago and Detroit. It also acted as a linked deposit investment vehicle for foundations and as a socially responsible depository for nonprofits interested in getting a return on their fund balances through alternatives to conventional banks or mutual funds. What’s more ShoreBank was a nonprofit advocate promoting social progress in urban and rural neighborhoods. TIAA-CREF’s $22 million investment in ShoreBank certificates of deposit exemplified ShoreBank’s role as a preferred socially responsible depository for nonprofits.

In a way, ShoreBank defies the “too big to fail” movement that saved some of the nation’s most egregious banks from their own subprime and speculative excesses. The nonprofit sector has a significant psychological investment in the continuation and health of ShoreBank’s mission, due to its function as the nonprofit sector’s bank. The foundation sector has some substantial investments riding on ShoreBank. MacArthur put $16 million into ShoreBank in Illinois in 2008 and 2009, Ford over $5 million, and Heron over $1 million. Ford has almost $21 million invested in ShoreBank Enterprise Detroit between 2006 and 2008, and Knight almost $4 million during that same time period. Since 2003, the Cleveland Foundation has given ShoreBank’s Cleveland operation almost $7 million, the George Gund Foundation gave over $2 million, and the Ford Foundation $1 million. These are economic development investments of critical importance in America’s poorest neighborhoods, desperately needed during this recession in places like Chicago, Cleveland, and Detroit. By virtue of their stake in the new bank, MacArthur and Ford are putting their money behind the continuation of ShoreBank’s mission.

The management team that is taking over ShoreBank seems to be comprised significantly of people with ShoreBank experience, so the mission doesn’t look like it is in danger of changing. To fix ShoreBank’s finances, it will take more than the $367 million that it will cost the FDIC insurance fund for the seizure and sale, though supposedly that total is a quarter billion less than the FDIC would have had to spend if there had been a full liquidation. The new bank says that it will keep the 15 branches of the bank open, including units in Cleveland and Detroit, though ShoreBank Pacific was quickly sold, pending regulatory approvals, to OneCalifornia Bank, another community development bank.

Fixing the ShoreBank Model

Will the investment in this new version of ShoreBank be worth the effort if the institution’s core finances aren’t repaired? It might be that ShoreBank’s fundamental problem was that it, unlike the big commercial lenders, actually lived its mission. For example, in 2007, when most banks were taking a dive to avoid fixing their adjustable rate portfolios, ShoreBank created the Rescue Loan Program [PDF] that put $40 million into refinancing adjustable rate loans for Chicago families. ShoreBank suffered from significant losses in its Detroit portfolio and, consistent with its Rescue Loan Program values, proved reluctant to foreclose on troubled properties—and troubled borrowers—there and in its Chicago mortgage investments. ShoreBank ran a Faith-Based Banking Center to help congregations finance building renovations and capitalize service programs , it embraced innovation and explored green lending and energy financing, and it created an investment vehicle, ShoreCap International, to invest in microfinance institutions around the world.

One longtime advisor suggested that ShoreBank suffered from an “overly zealous commitment to its original mission.” In a world, sometimes a sector which is all to ready to toss mission to the curb in favor of demonstrating free market profitability, ShoreBank dove into solving seemingly intractable domestic and international community finance challenges. Maybe in a recession, with major investments in two cities whose housing markets were virtually destroyed by the subprime implement, ShoreBank found itself stretched beyond the limits of its capitalization. Helping ShoreBank back to health seems to be far more attractive and socially useful than putting billions of TARP money into big banks, Wall Street investment houses, and AIG where the prime beneficiaries seem to have been the highly paid executives, not the poor communities in urban and rural areas that still starve for access to bank capital.

  • Eric Nee

    Rick- Thanks for taking the time to write such an insightful analysis of Shorebank’s demise. For many years, Shorebank stood out for its innovative work. But as you said, it was not immune to the economic downturn, and in some ways was even more exposed because of its lending practices. It is important that we learn from these failures. – Eric Nee, managing editor, Stanford Social Innovation Review

  • Victoria Stein

    Rick Cohen’s piece hits all the right notes and aptly articulates why Shorebank was such an important model for the community development sector – except in one respect. The article fails to mention the many hundreds, no thousands, (including myself) who were inspired by Shorebank, its founders and its promise. Let’s not forgot what we learned from this institution both in terms of its success and its challenges.

  • rick cohen

    Dear Victoria and Eric: Thanks for your kind comments. Victoria, I understand your point. I knew Ron Grzywinski and Mary Houghton, two of the founders of ShoreBank, not well, but they were inspiring, not self-promotional or egotistical at all, but committed, knowledgeable, pragmatic. I also knew some staff at ShoreBank over the years, always top notch. Eric, your comment makes me think about what other lessons we should learn, especially given your comment about ShoreBank’s exposure due to its lending practices. I was a senior officer working for one of the national community development intermediaries some years ago, and I remember vividly a presentation we made to a very large foundation about our incredibly low loss rate on our predevelopment loans to CDCs. Our pitch, if I recall correctly, was that our low losses were evidence of our incredibly good underwriting. The funder’s reaction was that the low losses indicated that we weren’t taking the kind of lending risks that they thought we should–and that they thought they were funding us to do. So we should examine the lessons of ShoreBank’s lending practices (especially given that most CDFIs with similar lending portfolios aren’t following ShoreBank’s path out of business) versus the impact of ShoreBank’s other program initiatives. I’m sure the new group that has acquired ShoreBank is doing the same kind of analysis. Hopefully, NPQ will keep an eye on their learning process so that we can report back to our readers on their findings and the changes they decide to make in the ShoreBank business model.

    Rick Cohen