On Shorebank

Ailing ShoreBank Seeks the Aid of an Ailing State

American Banker | Wednesday, January 27, 2010

By Robert Barba

With dwindling capital and mounting losses, ShoreBank Corp. in Chicago is seeking a bailout from the state of Illinois.

Executives of the $2.5 billion-asset community development bank met with the Illinois Finance Authority and regulators earlier this month to discuss raising as much as $50 million through a bond deal, according to local media reports. ShoreBank executives are playing up its history of community service in trying to secure a lifeline from the state.

Banking experts say such help is conceivable, as ShoreBank's inception stems from the civil rights movement in the 1960s and it has supported struggling Chicago neighborhoods. Yet state assistance could have unintended consequences - especially given Illinois' own troubled fiscal picture.

"It deserves a look, because from a historical standpoint, it is part of the legacy of Martin Luther King Jr.'s Chicago movement and it is the prototype of the impact that a large community development bank can have," said William Michael Cunningham, a social investing adviser and the founder of the minority bank fund MBF LP in Washington. "But if this is approved, every struggling bank in the country is going to go to their state for a handout."

ShoreBank, experts agree, is delivering what the government wants from a community development bank. But the question is whether the government can afford to subsidize that mission.

Experts said community development banks have faced even more difficulty raising capital in recent years than conventional banks, because they are perceived to be riskier. Given this landscape, government assistance for ShoreBank would be viewed as a positive sign by the nation's 60 or so community development banks, said Jeannine Jacokes, chief executive and policy adviser for the Community Development Bankers Association.

"The notion that the government, be it state or federal, would step up to provide additional support to our banks is a good thing. It is important that the low-income communities they serve be a part of the recovery," she said.

ShoreBank's efforts include its Rescue Loan program. Launched in 2007, it has made $40 million in loans to help Chicago families refinance adjustable-rate mortgages into more affordable loans.

Illinois officials did not return phone calls seeking comment. But according to Crain's Chicago Business, the state aid would be tailored to ShoreBank. The report said any state investment would be tied to ShoreBank's ability to raise private capital. The governor also would have to approve the measure.

Brian Berg, a spokesman for ShoreBank, would not comment on talks with the state. He would say only that the company is developing a capital plan but that it would be inappropriate to discuss details until it is completed.

Since July, ShoreBank has been operating under a cease-and-desist order from the Federal Deposit Insurance Corp. and the Illinois Department of Financial and Professional Regulation, which gave it 60 days to develop a capital plan. Regulators have granted the bank some leeway, yet the Federal Reserve Board this month slapped an enforcement action on the holding company requiring more capital, better management oversight, and a ban on dividend payments.

In July, Ronald Grzywinski , ShoreBank's chairman, said in an interview that it was turning to longtime supporters to raise as much as $10 million of capital. It also was seeking to reduce assets.

Continued real estate losses have pushed ShoreBank's capital ratios in the other direction, however. At the end of the third quarter, losses on real estate loans left the bank adequately capitalized, with a total risk-based capital ratio of 9.6%. Mike Heller, the president of the rating firm Veribanc Inc. in Woonsocket, R.I., estimated that ShoreBank would need to raise $77 million to cover its problem loans, which made up 15.11% of total loans at the end of the third quarter. But it would need as much as $200 million to put itself back on solid footing, he said.

"Their losses are trending in the wrong direction," he said. "This institution is not doing very well."

ShoreBank has been denied assistance through the Treasury Department's Troubled Asset Relief Program. "We put in an application and were asked to withdraw it," Grzywinski said in the July interview.

Another issue complicating whether ShoreBank receives aid is the state of Illinois' own precarious financial situation. Watchdog groups have pegged Illinois as headed toward insolvency.

The state could face liability issues by investing directly in a bank, Cunningham said. If ShoreBank were to fail, he said, not only would the state's investment be wiped out, but creditors could turn to the state to settle claims.

"There would have to be some sort of safeguard in place," Cunningham said. "I could see creditors going after the state for repayment, because they were part owners and are therefore responsible."

Bankers to Commission: Screw You

The First Public Hearing of the Financial Crisis Inquiry Commission was held on January 13, 2010 at the Longworth House Office Building in Washington, DC. "The Commission..has been given a mission to examine the causes of the financial crisis and to report findings to the Congress, the President, and the American people."

According to the New York Times, "The heads of Wall Street’s largest banks faced skeptical questions on Wednesday about executive pay and the failures of regulation from the bipartisan commission established to examine the causes of the biggest downturn since the Depression. Tensions flared as commission members retraced the events leading to the near-collapse of the financial system in 2008 and pressed bankers on whether they or their employees had acted unethically."

This is inaccurate. There were no skeptical questions. There was no tension. No one pressed the bankers on anything. They lied at will, without fear of being contradicted. It was as if the bankers were being questioned by their employees.

I know. I was there.

Nothing to see here, people. Move on.