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HOW A BANK CAN TRANSFORM A NEIGHBOURHOOD

"In deteriorating neighbourhoods, capital flows out of the area; people cease upgrading their homes and landlords fail to maintain their buildings; property values fall; store owners quit investing in their businesses and close or move; and neighbourhood residents lose hope, stop investing effort in education and developing work skills and fall into unemployment" Milton Davis, the chairman of the bank responsible for perhaps the world's best example of what a financial institution can do to rescue a declining neighbourhood, told the US Senate Committee on Banking, Housing and Urban Affairs in February 1993.

"Revitalising such neighbourhoods requires recognition that disinvestment is itself a market phenomenon and, consequently, will only be reversed by fundamentally re-invigorating neighbourhood markets" Davis went on. "Permanent, self-sustaining neighbourhood renewal results from creating an environment where private investors inside and outside the neighbourhood are confident their investments will be reciprocated and rewarded as healthy neighbourhood dynamics are restored."

In the 1940s and 50s, the South Shore district of Chicago was considered one of the pleasantest, most convenient places in the city to live because of its location beside Lake Michigan just south of the central business district. Even as late as 1960, its predominantly middle-class population was almost 100% white. Ten years later, however, many of the whites had moved to the suburbs and South Shore had become 70% black, a remarkable demographic switch in so short a time.

Fearing the neighbourhood would turn into a slum, most of the area's banks moved with its whites and by 1973, only three were left to serve a population of 78,000 living in 25 city blocks. Two of these were badly-run banks on South Shore's periphery which were later closed by the government regulator. The third, the South Shore Bank, had increased its capitalisation in order to gain official permission to open a branch in downtown Chicago and, had the permit been granted, it would almost certainly allowed its South Shore branch to run down. It had already switched its lending activities elsewhere - of the $33m. it had taken from South Shore in deposits, only $120,000 had been returned on loan to customers living in the area. Essentially, Chicago's banks had made a self-fulfilling prophecy - because they expected South Shore to decline under black occupancy, they refused to lend in the area, thus making it certain that the predicted decline would occur.

That it did not was because a miracle happened. South Shore Bank was bought by a company set up by a young, idealistic team of bankers (a phrase which sounds like a contradiction in terms) who had worked together at another Chicago bank, the Hyde Park Bank and Trust. They were led by a 36-year-old, Ronald Grzywinski, a former President of two banks, including the Hyde Park.

"Under pressure from Adlai Stevenson, a former Democratic presidential candidate, the Illinois state treasurer had made a $1m. time deposit in the Hyde Park bank on condition that it was used to make loans to minorities" Grzywinski says. "I was president and part-owner of the bank at the time and the demand for these loans was very high. So, in February 1968, the Hyde Park board approved the establishment of a permanent division to handle this type of business." Milton Davis, Mary Houghton and James Fletcher, all of whom later moved to South Shore, were recruited to work in the division. In 1969, Grzywinski left Hyde Park to become a Fellow at the Adlai Stevenson Institute for International Affairs, and then, in 1971, he began to work full-time on plans which eventually led to the take-over of South Shore in August 1973.

"The first thing that we did was to close the directors' dining room, so that every employee had lunch in the same place. Then we called all the loan officers together and told them that, although we thought that they were very good at their jobs, they must not turn down loan applications from the South Shore area without the express consent of Mary Houghton or myself" Grzywinski says. "The bank was profitable but its previous management just had not understood the changes taking place in the area. For example, the bank closed early each afternoon, preventing working people using it. We went round to all the voluntary organisations in the district such as the PTAs (Parent-Teacher Associations) in order to learn from them."

The immediate effect of the take-over as far as customers were concerned was that mortgages for purchase of good quality single family houses became available for the first time for several years. Previously, every financial institution in the city had 'red-lined' South Shore and refused to finance mortgages there, a practice outlawed two years later under the Home Mortgage Disclosure Act.

"It was four years before we were able to lend for the purchase and rehabilitation of units in multi-occupancy housing blocks, a type of business which other banks had found to be very high risk" Grzywinski says. "The delay was because we didn't have the capital to set up the bank subsidiaries which now take this task on."

According to Malcolm Bush of the Woodstock Institute in Chicago which studies community financial institutions, once the bank felt able to lend on apartment blocks it concentrated on several close together in a part of South Shore where their renovation would be most obvious in order to try to change the inhabitants' perception of the area. By the end of 1993, the bank had financed the renovation of more than 9,000 flats, over a third of the total number in the entire district. Indeed, Grzywinski attributes the bank's success with this type of lending to the scale on which it was done, saying other banks have failed with it elsewhere because they have not lent enough to make a difference to public attitudes in the areas where their renovations have taken place.

The way South Shore typically operates today is that its real estate subsidiary, City Lands Corporation, will initiate a large scale housing rehabilitation for which it can generally obtain government subsidies. This enables dozens of local, entrepreneurial real estate borrowers to carry out smaller-scale rehabilitations in the same area, knowing that each investment they make reinforces every other investment's viability. Grzywinski admits that other banks have criticised South Shore for the risk it is taking by concentrating all its lending in the same geographical area. "We did sell some of our loan portfolio to Equitable and to Metropolitan Life [both large life assurance companies] just to prove we could be liquid if we needed to be, so that's a non-issue now. Our proudest achievement is that other banks are now investing in the area, demonstrating that the market has begun to work again."

South Shore writes off only about a twentieth of its property loans annually as a result of sticking to areas it knows, helping its borrowers with advice and steering them to properties to rehabilitate which suit their skills and financial resources. Leroy Jones, a plumber, and his wife Josephine say that they learned to renovate property successfully as a result of meeting other landlords at fortnightly breakfasts sponsored by the bank. Today, they own five buildings, all mortgaged by South Shore, which keeps close tabs on them. Their first building was financed by another bank. "You know, I don't think that they ever came by " Mrs. Jones says. "Mr. Bringley [the vice president responsible for their loans] is always saying 'I drove past your building. I see you put another tree up.'"

Grzywinski says it was eight or nine years after the take-over before even the bank was sure that the techniques it was using would work predictably. It returned to profit in 1983 and has not made a loss since. In 1992, its net profit was $2.2m. on assets of $229.1m., of which $161m. was loaned out. Loan losses were 0.4%, a figure many banks would envy. All told, it pumped $41m. into its area of Chicago during the year, most of it deposited by savers outside its service area attracted by the work the bank was doing. "We've got depositors in every American state and in seventeen foreign countries" Milton Davis told BBC Radio 4's The Financial World Tonight in 1993.

Unsurprisingly, this level of investment has not cured South Shore's social problems, although it has certainly alleviated them. "South Shore was a middle class community before the whites moved out and it is still middle class" Malcolm Bush says. Grzywinski agrees: "The demographics have changed surprisingly little. 17-20% of the population are below the poverty line and 50% can be regarded as high income. The mass of working people would earn between $15,000 and $25,000. We have people on welfare, of course, and a lot of single female heads of households. Crime has gotten worse recently, largely because we've too few entry-level jobs for single young men, but I think it's less of a problem than in other black neighbourhoods in the city. Crack cocaine and the ridiculous attitude we have in this country to guns don't help." Milton Davis told the BBC: "The missing building block is jobs. We need help on this one."

Four years after South Shore was taken over, Congress passed the Community Reinvestment Act, which encourages banks to re-invest deposits received from their service areas by ranking their performance in this direction. Any bank with a below-average record of re-investment finds it difficult to get permission from the regulators to merge with another bank or to relocate its premises. As a result, banks are increasingly trying to move in South Shore's direction and are re-opening in places they deserted 25 years before. "I heard a banker from Milwaukee complaining last week that he'd offered loans in a low-income area but very few borrowers had taken them up" Grzywinski told me. "My attitude is that he just wasn't trying hard enough. You can't start doing our sort of business by printing a brochure and taking TV time. It's more complicated than that." Malcolm Bush comments: "South Shore have found that they need to be very close to their customers and to know their area street by street."

At present, there are only three other 'community development' banks like South Shore in the US, although President Clinton called it 'the most important bank in America' during his 1992 election campaign and said that he wanted to see a hundred more of them set up. This was not just campaign rhetoric because during Clinton's term as Governor of Arkansas, South Shore set up the Southern Development Bancorporation at his request. Grzywinski is chairman of the board. Southern works in the small towns in the south of the state where it sees its mission as 'to channel financial and informational services to local entrepreneurs so that residents can build thriving, diversified economies independent of large, distant corporations'. Besides Southern, the two other development banks are the Community Capital Bank in Brooklyn, New York, and the Self-Help Credit Union in North Carolina.

"The most important characteristic these institutions share is a mission to work towards the economic development of a community and its residents" says Kate Tholin, Malcolm Bush's colleague at the Woodstock Institute. "They target a specific geographical area, use credit as a tool for revitalisation and empowerment, provide technical assistance and education on financial matters, and work in partnership with other community organisations and professional lenders."

Could the South Shore model be used outside the US? Many people are dubious, pointing out that it took twenty years for South Shore to establish its credibility and that around 10m. would be needed in share capital before any new bank could operate on a similar scale. Any smaller level of lending in a target area might be inadequate to change perceptions about it and thus fail to get others to invest as well.

Grzywinski prefers not to talk about why South Shore was the United States' only community development bank for over fifteen years and why he and his colleagues were the only bankers to respond so wholeheartedly to a pressing social need. "Answering questions about why we did it could take a lifetime. For myself, I think you could say that it was a combination of boredom - I'd had two very senior jobs in banking at a very young age and earned a lot of money very quickly - and my feeling that I needed to make myself the opportunity to apply my talents to something I really cared about. I wanted a challenge in a job I knew I could do well."

2002 Update on South Shore Bank by Caroline Whyte

South Shore Bank changed its name to Shorebank in late 2000 to reflect a broadening of its focus. Shorebank institutions have now been established in Cleveland, Detroit and the Pacific Northwest region of the US. These affiliates have together invested over $1.4 billion in inner city and rural neighbourhoods across the US. J.B. Miller writes in Marketplace magazine (August 2001) that "while the bank did acquire two banks in 1995, most of the growth has been as a result of articulating a vision and meeting the needs of a community that too many people had given up on". Losses have remained relatively low, at 1.33%, and the net income in 2001 was $10.1 million.

In 2001 the bank decided that it should concentrate on three major lines of business: lending for multifamily rehabilitation projects as described above, small-business lending and lending to churches. The churches are primarily in African-American neighbourhoods and provide important social services such as elder care and day care, so these "faith-based" loans fit in well with the bank's ethical guidelines.

Paradoxically, the bank considers the establishment of other, competing banks in an area where it operates to be a sign of success, because this indicates that the area is now considered "credit-worthy" enough for mainstream financial institutions to want to invest in it. The bank has actually moved away from offering auto loans and credit cards, because it considers this part of the market to be well covered by its competitors. It is concentrating more on single-family mortgages, offering reasonable rates in order to drive away predatory lenders, and bank officials have been pleased recently to notice other banks moving in to some of its target areas and offering rival mortgages.

Shorebank keeps track of loans it makes that have a "significant ecological benefit" in terms of energy conservation. The 2001 Annual Report states that "conservation loans include business loans that promote energy conservation, significantly reduce future environmental impact, or assist in the removal of contaminants already present in the environment, or loans to businesses that derive a significant percent of their sales from 'green' markets." The report considers 197 loans from 2001 to fall into this category, making a total of $42 million (over three times more than the previous year).

ShoreBank Pacific, which is based in the Pacific North-West, has a particularly environmental focus. Loan customers are all located in the bioregion of the Pacific Rainforest - from San Francisco up to the Canadian border. The bank's website states that "we lend money from our program to businesses and non-profits that are committed to improving their environmental footprint. While many of our loan customers are environmentally related organizations, we loan to all who are serious about developing a sustainable economy and community." The bank works in partnership with Ecotrust, a nonprofit organisation "dedicated to supporting the emergence of a conservation economy along North America's rain forest coast" (quote from Ecotrust website). Loans are targeted to help customers in improving "energy efficiency, materials use, embedded energy, infrastructure access, and access to capital due to geographical location."

ShoreBank, 7054 S Jeffery Boulevard, Chicago, IL 60649. Tel. 773-288-1000.

Malcolm Bush, President, The Woodstock Institute, 407 S. Dearborn, Suite 550, Chicago IL 60605. Tel. 312-427-8070, E-mail woodstock@woodstockinst.org

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