Number
47
The Shorebank Corp.
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The former President of the United States, Bill Clinton, and a former employee of a Chicago utility may seem unlikely patrons of the same bank, but the connection isn’t so surprising when the institution is Shorebank. A holding company that oversees economic development projects in the Windy City and around the world, Shorebank originated a socially responsible financial concept that an Arkansas governor-turned-president helped bring to the rural portions of his state. It also introduced liberalized lending policies that allowed a retired electric company worker to restore dilapidated apartments throughout his South Shore neighborhood—turning them into livable dwellings while turning himself into a wealthy man.
Founded by four social activists in Illinois who joined forces in the late 1960s, Shorebank was seen from the start as a vehicle for enacting the kind of grassroots change that government and non-profit agencies either did not or could not instigate. Its community development model—based on a movement that began in the 1950s to provide investment capital, often accompanied by technical assistance in underdeveloped areas—was initially aimed at the once prosperous South Shore neighborhood. Designed to stem the capital and population drains that commenced in earnest during the Eisenhower years, it started with a neighborhood bank committed to reinvesting all of its resources in its community. Despite widespread skepticism and formidable obstacles, the program and the institution prospered.
By 1986, Shorebank’s impressive accomplishments led to expansion of another Chicago neighborhood, then to Arkansas with the support of Gov. Bill Clinton and the Winthrop Rockefeller Foundation. Similar efforts in rural areas from Cleveland to Kenya were initiated in the years that followed. It has now lent over $700 million to individuals and businesses in the communities it serves, helping restore more than 17,000 housing units and incalculable dreams. It has also turned a profit in its banking operations every year since 1975, proving that its unique dual mission—social activism through profitable banking practices—can create a win-win business plan that makes a difference.
At the time Chicago hosted the Democratic National Convention, four acquaintances who were deeply immersed in social and civil rights activities met regularly near the University of Chicago. Ronald Grzywinski was a businessman who switched to banking (where he pioneered the community development approached later adopted by Shorebank). Mary Houghton held a master’s degree from the Johns Hopkins School of Advanced International Studies, and was a program officer for the nonprofit Johnson Foundation. James Fletcher was a former grade school teacher, veteran of the war on poverty, and assistant director of the Federal Community Action Program. Milton Davis was chairman of the local chapter of the Congress on Racial Equality, and a Graduate School of Business faculty member at the university adjacent to the quartet’s main hangout.
All in their thirties, the two white and two African-American friends had come to believe that traditional nonprofit and government efforts were incapable of handling complex urban problems. They also had grown to suspect that speeches on convention floors would not solve the problems decimating neighborhoods across their city and around their nation. And while none particularly relished the idea of being a “banker,” all eagerly bought into the exciting concept advanced by Grzywinski that proposed social reform through banking. South Shore—a once-comfortable bedroom community that had fallen on hard times—became their target. They went about immediately on buying the South Shore National Bank.
The four raised the $3.2 million needed to buy the institution largely through a loan guaranteed by Grzywinski and his wife, and took it over in the summer of 1973. Almost immediately, they encountered major problems. The existing bank had been sold because it was unable to operate profitably in the declining neighborhood. And the neighborhood was declining, at least in part, because every bank and savings and loan in town had deemed it a bad risk and redlined it, refusing to lend money for home mortgages or business development. The new team proposed changing that by turning the bank around and reinvesting all resultant funds solely in South Shore. Few others initially accepted their contention that a failing bank in an economically depressed neighborhood could profitably finance a radically new social experiment. But the four believed it could. And they set about proving the skeptics wrong.
When South Shore changed hands deposits were low, having fallen from a peak of $80 million to about $42 million in little more than a decade. Facing other problems, such as a poorly maintained building, the foursome decided to put their bank on firm financial footing before proceeding with affiliate activities. The bank would be like a real estate development company, a minority investment firm, and a notfor-profit neighborhood advocate. To boost deposits and begin raising capital, they started talking about their hopes and goals with local civic groups. They also immediately made the bank and its services more attractive to neighbors. They liberalized loan policies for South Shore residents and those planning to buy a home or open a business in the community.
The program formed to fund this lending effort, Development Deposits, ultimately turned the entire enterprise around. By allowing individual savers and pension-fund managers alike to open competitively structured accounts through Shorebank that would be used exclusively for development projects in South Shore, it created a socially responsible investment tool that appealed to conscientious moneymanagers everywhere. Once the program began in 1974, accounts were opened from all 50 states and some two dozen countries. Before long, the portfolio represented more than half the corporation’s entire fiscal base.
As managed by Shorebank Senior Vice President Joan Shapiro, the reverse redlining program it funded—which turned on its head the conventional banking practice of investing local deposits in distant projects—surprised skeptics as it quickly proved a winner. The retired electric company worker, and hundreds of other “housing entrepreneurs” who helped their community while boosting their own standards of living, paid their loans back at astoundingly high rates that underscored the confidence Shorebank had placed in them and the community. It also allowed the founders to capitalize the non-bank subsidiaries in 1978 that they had long envisioned, finally getting their entire program off the ground.
Over the next few years, Shorebank and these new affiliates embarked upon their unique community revitalization effort from several interrelated directions. The development subsidiary “City Lands,” for instance, built housing, managed property, and developed commerical sites. The nonprofit Neighborhood Institute ran small-business incubators, while training and placing job applicants. The Neighborhood Fund made equity investments in minority-owned companies. A fourth unit, Shorebank Advisory Services, was eventually added to counsel outside groups on issues like economic development and affordable housing.
That final piece of the puzzle also helped the founding team respond to increasing requests that they expand their now widely lauded concept into other geographic areas. The first such move came in 1986 when Shorebank opened a variation in Austin, Chicago’s largest neighborhood. A year later, Grzywinski, Houghton, Fletcher, and Davis formed a second bank holding company to help “accelerate the pace of economic activity” in 32 rural Arkansas counties.
Over the next decade, Shorebank expanded into Michigan’s Upper Peninsula, Washington state, Detroit, and Cleveland, while advising other institutions on ways to set up similar programs in a variety of different settings. Perhaps its most challenging undertakings came overseas, where it established operations in developing nations such as Pakistan, Kenya, and Bangladesh. It also helped shape credit programs in Finland, Poland, and several former Soviet republics. Back in the United States, the holding company responded by growing to more than 300 employees, hiring those who came to Shorebank for its social mission, as well as those who lived in the area and simply needed a decent job. Its dual mission proved beneficial to all of them: Successfully refurbishing its target areas while consistently turning the kind of profit that satisfies banking regulators and investors, the corporation was regularly named a top place to work.
Shorebank doubled in size in 1995 following a merger with Indecorp, another Chicago bank holding company whose assets included two commercial banks. At the turn of the century, its total deposits approached $750 million and total assets neared $1 billion. By most conventional measures—and a few unconventional ones—it had accomplished everything that Grzywinski, Houghton, Fletcher, and Davis set out to.
Still, there were problems, even in its target areas, that Shorebank found itself unable to address. And so, in the summer of 2000, it hooked up with the nation’s preeminent socially responsible investment firm to create another revolutionary financial vehicle for community development. As formulated by Domini Social Investments, which manages the respected $1.9 billion Domini Social Equity Fund, a newly created bond mutual fund will now invest at least 10 percent of its assets in mortgages and small-business loans exclusively for those in economically depressed neighborhoods. Funds in this market niche traditionally use “negative” screens to avoid stocks with ties to tobacco, firearms and other industries found objectionable by its investors. This new fund is the first to also employ a “positive” screen, which identifies worthwhile community development projects and then invests proceeds directly in them.
Naturally, Domini decided to administer the fund with the help of Shorebank— the field’s oldest, largest, and most successful banking-based community development institution.