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