Planning magazine — April 1993

The Bank With a Heart

A 20-year effort has made Chicago's South Shore Bank a national model of community development banking.

By Sylvia Lewis

People tend to use glowing terms when they're describing Chicago's South Shore Bank. Some call it a pioneer. Some say it's a savior. Still others call it a social experiment — not a bank in the conventional sense but an academic version of a bank where social theories take precedence over financial results.

One of the four people who took control of the bank in 1973 and is now its chairman calls this peculiar institution "a handyman." A community development bank, Milton Davis told a U.S. Senate committee in February, is "intimately familiar with particular local problems" and has a toolbox full of gadgets to help fix them. Credit is one of those tools, but only one. Persistence is equally important, he and his colleagues insist.

Over the past two decades, they have applied those principles to South Shore, a two-square-mile, predominantly black neighborhood (pop. 61,500) located nine miles south of the Loop. In 1970, the neighborhood was a question mark. Its racial mix had switched from mostly white to mostly black in the preceding decade, and local retailers and institutions had begun to disinvest. The area's one remaining bank, then called South Shore National Bank, asked the federal government for permission to leave the neighborhood and move downtown.

Instead, control of the bank shifted to a civic-minded management group — all of them experienced bankers — that has stuck together for 20 years, concocting revitalization strategies that eventually attracted the attention of policy experts nationwide. In 1972, the group formed a state-chartered holding company now called the Shorebank Corporation, which bought South Shore Bank and set up a development company (City Lands), a consulting firm (Shorebank Advisory Services), a job training and family support service (The Neighborhood Institute), and a small business lender (The Neighborhood Fund). Overall, the corporation has 250 employees.

Shorebank has grown from $40 million in assets in 1973 to $204 million in 1992. At the end of 1991, it had $188 million in deposits, and $142 million in loans outstanding. Through the efforts of the bank, City Lands, and The Neighborhood Institute, Shorebank has helped renovate 12,500 housing units in five Chicago neighborhoods. In the South Shore neighborhood alone, it has helped rehab more than 7,700 apartments, almost 30 percent of all the area's rental units.

The bank's managers are convinced that their methods can be copied because they've done it themselves — in other Chicago neighborhoods, elsewhere in the U.S., and in Poland. President Bill Clinton has said that he wants to create 100 community development banks modeled after South Shore. Shorebank officials caution, however, that they can't parachute into 100 cities and create clones of South Shore Bank. In fact, they're not convinced that banks are the only antidote for disinvestment. The message is: Watch what we do, but adapt our ideas to your own circumstances.

Doing good

"Shorebank starts where the conventional market stops," says Joan Shapiro, a senior vice-president of both the holding company and the bank. "We have a double standard. We have to achieve both development and profit results in all our work." In
this context, "development" is a code word for "doing good" — a notion that probably gives most bankers the willies.

Some observers argue that, in fact, Shorebank couldn't be profitable without its social focus. "A successful development effort did not necessarily mean the long-run sacrifice of profitability," writes Richard Taub in Community Capitalism, a history of Shorebank through 1986. "Part of the bank's development ideology includes the belief that as the community becomes more prosperous, so does the bank."

Taub, a University of Chicago professor of public policy, points out that although Shorebank's predecessor had lost $40 million in deposits in the 1960s, that situation didn't deter the group that took over in 1972. Instead of relying on a shrinking resource, it built new resources — and rebuilt the neighborhood at the same time.

Shorebank has three secrets, Taub says today. First, it has stuck to the notion that a bank "can be an engine for growth." Second, it takes a holistic approach to its community (each of its five companies has a complementary function). And it is aggressive in seeking outside money, whether from the federal government or from foundations, or corporations, or individuals.

Joan Shapiro makes a final, crucial point. Shorebank picks its fights, she says. It can't save the unsalvageable.

Testing ground

South Shore is the laboratory where Shorebank's theories are tested first. Here's how some of the strategies have worked:

• Theory: Fix up the housing, and the commercial areas will follow suit. Results: It hasn't worked out that way. The residential streets right around the bank look healthy, but most of the nearby shopping streets don't.

• Theory: Renovate the worst buildings in the neighborhood, and local people will borrow money to rehab smaller, more manageable properties. Results: Of the 7,700 housing units that have been rehabbed in South Shore in the past two decades, about 1,400 have been done by City Lands or The Neighborhood Institute. The rest were rehabbed by individual building owners who borrowed from South Shore Bank to get the job done.

"The theory is that if we do the biggest, nastiest buildings in the most prominent locations, it will stabilize the neighborhood to the point that private owners and mom-and-pop rehabbers can justify doing the smaller buildings," says Lynn Railsback, a vice-president of City Lands.

• Theory: Create jobs, and people will have enough money to pay the rent for these newly rehabbed apartments. Results: Shorebank has helped create several hundred new jobs in South Shore since 1990. But the net income of neighborhood residents had actually declined slightly in the previous decade. Median household income was $15,923 in 1980 and $15,909 in 1990 (in 1982 dollars), according to a recent Shorebank report on social indicators. Poverty rates rose from 23 to 27 percent in the same period.

The Neighborhood Institute is helping to make people employable as well as employed, says Linda Greene, its executive vice-president. Besides housing rehab, TNI does training, job placement, and job creation. It has opened three incubator buildings in South Shore with about 50 businesses, and it has placed about 200 local residents in jobs at a major supermarket that opened in 1990 in Jeffery Plaza, a neighborhood shopping strip developed by City Lands and partners.

"If there's one thing that Shorebank has learned over the years," says Greene, "it's that we can put up all these pretty buildings, but if we don't deal with the human component, it means virtually nothing."

This approach leads in some surprising directions. In South Shore, TNI has created a program to help fathers become better parents, and it is organizing an anticrime campaign. In Chicago's Austin neighborhood — where Shorebank set up shop in 1986 — City Lands recently opened a library with 4,000 books and tutors for local schoolchildren.

Equal partners

Shorebank may have brought a lot to South Shore, but local experts say the neighborhood also brought a lot to Shorebank. "The neighborhood would be nowhere near as desirable or as rebuilt as it is now had South Shore Bank not been taken over by its current ownership," says Alderman Lawrence Bloom, who represents South Shore and vicinity in the Chicago City Council. He notes, though, that South Shore's assets include a lakefront location, extensive public parks, excellent public transportation, and a country club that was converted to a cultural center operated by the Chicago Park District. "The neighborhood has some pizzazz," Bloom says.

And, he adds, it has "good housing stock, built solidly." In the Jackson Park Highlands, a single-family enclave at the northern end of South Shore, houses now sell for up to $400,000, according to local brokers. The Highlands has been home to such celebrities as the Rev. Jesse Jackson and musician Ramsey Lewis.

Overall, however, South Shore is a neighborhood of pre-World War II bungalows and numerous apartment buildings, ranging from six-flats to lakefront high rises. The problem buildings, the ones that are often vacant and abandoned, tend to be the ubiquitous three-story courtyard structures, with 18 to 30 units. They're the buildings that, in Lynn Railsback's words, "no one else in their right mind [besides Shorebank] would do."

City Lands's first major project, called Parkways, involved 446 units in 20 low-rise buildings covering 12 square blocks at the neighborhood's northern edge, in an area called Parkside. In the 1970s, the Parkways buildings were rapidly deteriorating, and some were abandoned. Acting as developer in conjunction with Rescorp — a development consortium established by local savings and loans associations — and with a subsidiary of the First National Bank of Chicago, City Lands helped find $27 million to undertake what Shorebank considered a make-or-break effort. The funding sources included federal Section 8 subsidies, city subsidies, the sale of limited partnerships, and — most importantly — state bond financing.

When completed in 1983, Parkways "ultimately transformed the entire area," writes Richard Taub. "With its views of Jackson Park, a creative use of public space for malls, and banners hanging from the lampposts to announce a new neighborhood, Parkside no longer hinted that it was South Shore's sorriest section." City Lands is still part owner of the project, and Rescorp manages it.

Although no project as large as this one has been done in South Shore since then, Parkways set a pattern for City Lands: Find bad buildings in key locations and squeeze money out of every possible source to undertake total rehabilitation. Then keep control, as owner and sometimes as property manager.

City Lands has rehabbed 816 units in South Shore (158 of them in partnership with The Neighborhood Institute) and manages 226 of them. It is working on another 115 units. Most of the more recent units have been financed with the help of federal low-income tax credits, says Lynn Railsback.

Mom and Pop

If the work of City Lands can be thought of as heroic surgery, South Shore Bank's housing loans are more like a regimen of
diet and exercise. Both are hard work, but one involves a doctor while the other is do-it-yourself.

The bank makes $18 to $20 million a year in real estate loans in South Shore and three nearby neighborhoods; it has financed 250 owners and 400 to 500 buildings there in the last decade, according to bank vice-president James Bringley. About 50 of the borrowers have become full-time housing rehabbers.

The bank typically lends a buyer 80 percent of the purchase price or assessed value of a building and 100 percent of the rehab costs. Rehab is part of the deal, says Bringley; if a building is in perfect condition, he sends a borrower elsewhere.

Janet Oliver is one of Bringley's happy customers. After retirement in the mid-1980s, she and her husband, Zedie Hill, began to rehab buildings in and around South Shore. They now own six buildings with a total of 36 units, all of them financed through South Shore Bank. 'The bank was receptive to us, and that was so different from other lenders," says Oliver. "Also, other lenders required yards and yards of paperwork and were so restrictive in what they required us to do."

At first, Oliver called her block "the slum." The six-unit building she and her family and tenants now share was abandoned and gutted, she says; only a pack of dogs lived there. Three other buildings on the block were in the same shape. But the price was right. Oliver says she and her husband bought the building for $35,000 and borrowed another $42,500 for rehab. It was sweat equity, not cash, that made the numbers work. If Oliver and Hill had paid union wages, rehab costs would have been much higher.

Jim Bringley says Oliver and Hill are typical South Shore Bank borrowers — a mature couple that buys modest buildings and spends less than market rate to fix them up. "For a real estate deal to work here," Bringley says, "the fit has to be good; the financing, the condition of the building, and the people all have to match."

Bringley says he won't lend to a rookie rehabber who wants to renovate a large building. Nor does he look for professionals like doctors or lawyers who intend to hire someone else to do their rehab for them. On the other hand, he will lend to a creditworthy borrower even if the borrower's income is below the banking industry's standards. "Even in this small market, you can't reduce lending to a formula," he says. "It's fine-tuned and handcrafted. ... What's important is that we'll do loans that others won't."

Working the numbers

South Shore Bank works hard to make sure its loans don't go sour. It brags about having a loan-loss ratio lower than that of other banks with similar assets — in 1992, around four-tenths of one percent of total dollars loaned. To keep losses to a minimum, Bringley says, he finds new borrowers to take over troubled properties.

Unlike most banks, South Shore Bank makes more real estate loans than commercial loans. At the end of 1992, the bank had $86.3 million in real estate loans outstanding, more than half its total loan dollars. Real estate loans "are the most profitable thing the bank does, and they have the most development impact," Bringley says.

As every borrower knows, banks make a profit on the spread between the interest paid on deposits and the interest charged on loans. Banks that slurp up deposits from a community but refuse to make loans there are guilty of redlining. What South Shore Bank does is greenlining. It draws deposits from outside its community in order to make loans within it. In 1992, the Federal Deposit Insurance Corporation rated the bank's efforts at meeting its obligations under the Community Reinvestment Act as "outstanding."

To attract deposits from outside its lending area, South Shore has created a special "development deposit." Interest rates are the same as for local depositors. So it appears, says Jean Pogge, the bank's vice-president for development deposits, that outsiders choose South Shore "because they really want a social return." By the end of 1991, the bank had $188 million in deposits, with 56 percent of that amount coming from outside the neighborhood, including 17 foreign countries.

The bank has a knack for relying on the kindness of strangers. Since 1986, it has even persuaded some of its depositors to donate a part or all of their earned interest to a "rehab investment fund for housing." At the end of 1991, the fund had $7.7 million in deposits; it used $327,000 in interest to subsidize interest-free loans to needy local rehabbers.

Another source of income is the sale of Shorebank shares, which are not tradable. Stockholders — who own $17 million in equity in the corporation — include 37 corporations, various foundations, churches, and individuals. Among them, according to Joan Shapiro, are Amoco and Standard Oil; the Ford, Mott, Joyce, and Mac Arthur foundations; and the United Church of Christ and Episcopal Church of the United States.

Shopworn

Foundations have been a steady source of support. Some years ago, the MacArthur Foundation gave The Neighborhood Institute a $1.5 million, low-interest loan that launched TNI on major rehab projects. And last year, TNI received a grant from the National Endowment for the Arts to set up a neighborhood design center — a project now under study.

The idea for a design center grew from a 1990 plan by the Chicago architecture firm of Perkins & Will for a mile-long stretch of 71st Street, South Shore's major commercial street, which runs past the bank. The street is divided by the Metra commuter railroad, making driving difficult, and some of the storefronts bordering the tracks are empty. On Stony Island Avenue, at the corridor's western edge, stands an empty car dealership that the bank foreclosed on and, having cleaned up some toxic waste on the site, is now trying to sell for $ 1 million.

The Perkins & Will plan noted other problems: inadequate sewer capacity, broken pavement, outmoded street lighting. It also identified development opportunities and offered design guidelines for the entire street. TNI's strategy, says Linda Greene, is to start by clustering similar uses like the two "Artist Row" incubator buildings it has opened in the last couple of years. One Artist Row houses 22 businesses, with artists' studios above and ground-level stores that specialize in African-American crafts. Tenants began moving into Two Artist Row in December.

A big change came to 71st Street with the opening of Jeffery Plaza in May 1990. This $11 million, nine-acre strip mall, with 113,000 square feet of leasable space and 452 parking slots, is located at the southeast corner of 71st Street and Jeffery Boulevard, kitty-corner from Shorebank. The mall is anchored by a Dominick's supermarket, and all the smaller stores around it are currently leased.

Shorebank says this is the biggest commercial development to hit South Shore since World War II. By most measures, it is a success story — a fully leased commercial strip with national chain stores located in a minority, inner-city neighborhood. It's also a story of struggle. City Lands and its partners needed seven years to get the project up and running.

Gregory Ptucha worked for City Lands during that time and was one of Jeffery Plaza's key organizers; he is now a senior adviser at Shorebank Advisory Services, the corporation's consulting subsidiary. In the recounting, he makes the development of Jeffery Plaza sound like a Harvard Business School case study.

The project began in 1984, when City Lands joined with two other private developers to secure funding, most of which came from Aetna Life and Casualty Company. By 1990, the city had gone through several rounds of applications for a federal urban development action grant — funding it never received — and it had relocated dozens of property owners, vacated an alley and part of a street, cleared the land, and changed the zoning to a planned development area.

None of this was easy, Ptucha says, because the community was divided over the project. Some local people accused City Lands of engineering a land grab.

Meanwhile, City Lands and its development partners were looking for tenants to lease the stores that would eventually get built. As it happens, finding an anchor was relatively easy, Ptucha says, partly because the developers could provide good data on the purchasing power of local residents. Finding tenants for the smaller stores was tougher.

"We went through a very elaborate process of trying to develop a merchandising mix," Ptucha says. Priority was given to black proprietors, but the developers also wanted a mix of chain stores and local businesses, and they didn't want to steal an existing store from elsewhere in the neighborhood. Instead, they wanted local businesses to open a branch in Jeffery Plaza.

Things didn't quite turn out that way, Ptucha says, because some local businesses did relocate to Jeffery Plaza, with the result that some older buildings were left with vacancies. And although the mall is full and store turnover has been low in the last three years, he sees room for improvement: better security and maintenance, for example.

The second goal

Shorebank says it has been profitable every year since 1975. It's fair to ask how profitable. According to a local business magazine that ranks the 363 banks in the six-county Chicago metropolitan area, the answer is, "modestly." Judged by return on assets, South Shore Bank was in the bottom quartile at the end of 1991.

Planning asked a banker who recovers the assets of failed savings and loans for the Resolution Trust Corporation to analyze Shorebank's 1991 annual report — the latest year for which audited figures are available. She raised an eyebrow at the numbers: net income down by 41 percent from 1990, loan losses up from $565,000 to $955,000. Her conclusion: "Shorebank is spread too thin. It's trying to be everything to everybody."

Expansion is part of the bank's game plan. Joan Shapiro explains that Shorebank decided in 1986 to open a branch office outside South Shore, partly because the corporation wanted to prove that its methods could be transferred. After studying other Chicago neighborhoods, it settled on Austin, located on the city's west side, 15 miles from South Shore.

The two neighborhoods have a lot in common: similar demographics coupled with solid housing stock — and disinvestment. A factor in Austin's favor, Shapiro says, is its long-standing, active neighborhood organizations.

The timing was lucky, says Susan McCann, a senior vice-president of City Lands. In 1987, a year after South Shore Bank opened a lending office in Austin, City Lands was able to buy several large buildings in the neighborhood through a tax sale. It has since rehabbed about 500 apartments and manages over 600 units there (some of them on behalf of The Neighborhood Institute).

Through a three-year-old, city-funded program called New Homes for Chicago, both City Lands and TNI have become single-family developers as well. City Lands is building 40 new houses in Austin, and TNI 29 houses in South Shore. The properties will be sold for $100,000 to $ 110,000 to buyers whose income is up to 80 percent of the regional median. Buyers will pay $80,000 to $90,000, with the city making up the difference through a second mortgage.

According to Marina Carrott, Chicago's Commissioner of Housing, the city is spending $2.25 million a year on the New Homes program. Eleven developers have received approval to build houses in eight different city neighborhoods, Carrott says, and the Shorebank developers "are exemplary examples of everything we hoped New Homes for Chicago would accomplish."

At this point, City Lands has built and sold 25 houses in Austin, McCann says. Although the project has been fun, she adds, it hasn't been profitable. "We always knew we were doing it for the development impact and not for the financial impact on our bottom line," McCann says. "Our board decided it's a good thing to do for the community and it's a good learning experience."

Going national

Shorebank is involved in a variety of far-flung projects. Its consulting subsidiary, Shorebank Advisory Services, is offering advice on development efforts in a dozen spots around the U.S., including Cleveland, Milwaukee, the Mississippi delta, and Portland, Oregon, according to Robert Weissbourd, a managing director of the advisory group.

In another outreach effort, Shorebank in 1988 helped set up the Southern Development Bancorporation, based in Arkadelphia, Arkansas. Its double mission is the same as Shorebank's, except that the Arkansas institution is focusing on jobs, not housing, and it is targeting a 32-county area instead of individual neighborhoods. Before she went to Washington, Hillary Rodham Clinton was a member of the board of SDB.

Within the past five years, Shorebank has also helped recapitalize the Douglass Bank, a black-owned bank in Kansas City,
Kansas, and it has set up small business support programs in the Upper Peninsula of Michigan and in Poland.

Now Shorebank is seeking its next opportunity for expansion — but that step may be modest, and it may take place close to home. Having written the book on community development banking for an entire nation, the corporation has decided to stick to what it knows best. "We have affirmed a core focus for Shorebank on Midwest minority community investment," says Joan Shapiro. "That is who we are and that is what we will continue to be."

Sylvia Lewis is Planning's editor and publisher.