Another Side Of SRI  Nov 4, 2009
By: Financial Advisor Magazine - Wednesday, November 04, 2009

Building portfolios of socially responsible companies is one way to serve clients who want their investments to reflect their values. But ShoreBank offers another way that perhaps isn't thought of as often. Just ask UBS advisor Kathy Leonard.

Leonard, a vice president of investments at UBS Financial Services Inc. in Boulder, Colo., says for some people who want to invest in ways that support their values, a simple, fixed-income alternative is to open a certificate of deposit or checking account at ShoreBank, a national leader in community investing.

"I might say, ‘Let's just shift a little bit of your fixed-income portfolio, 1% at least. We are not adding an investment you don't have, we are shifting to an investment that meets your mission or values criteria,'" says Leonard, who has been involved in SRI for 27 years. "A client is not giving up anything with these investments: They are FDIC insured, at competitive rates and with protection. For many individual investors and organizations, this is a brilliant way to begin introducing social investment into their portfolio."

ShoreBank is well-known for using its deposits and other funding to make loans for homes and small businesses to responsible, but less affluent people who live in the communities that the bank serves. "They were really doing it before anyone else and doing it very well, one of the best in community banking," says Leonard.

From its modest beginnings in 1973 as a Chicago community development bank with $800,000 in start-up money bolstered by a $2.4 million loan, South Shore National Bank has grown into ShoreBank Corp., with more than $2 billion in assets, a $2.6 million profit in 2008, seven locations in the United States plus international business, and a menu of 11 services with an emphasis on sustainability.

Ron Grzywinski, one of bank's four founders and chairman of ShoreBank Corp., says the size and scope of the business have increased, but its philosophy remains rooted in what he calls the "triple bottom line: to build wealth for all in economically integrated communities; to promote environmental health; and to operate profitably.''

In 1973, he and three colleagues formed South Shore Bank to offer credit and financial services to residents in neighborhoods that had been devastated by racial discrimination, the riots of the late 1960s and redlining. The company now runs community development banks in six states. Mary Houghton, corporate president, and the now-deceased Milton Davis and James Fletcher, were the co-founders.

"ShoreBank has done lending to low-income people whose credit scores were not perfect, but we never did predatory lending. We offered 30-year affordable mortgages, for houses that people could afford,'' Grzywinski said.

ShoreBank Corp. has banks and affiliated nonprofit organizations in Chicago, Cleveland, Detroit, Michigan's Upper Peninsula and the Pacific Northwest, as well as advisory and consulting offices around the world. It provides advice and seed money for development in Afghanistan, Bangladesh and Cambodia and produces research on banking the "underbanked' around the world.

At the behest of the Ford Foundation, a major investor in ShoreBank, the bank advised Muhammad Yunus, winner of the 2006 Nobel Peace Prize, in launching Grameen Bank, the Bangladesh microlender for low-income clients.

ShoreBank International raised $62.6 million of debt capital to provide microfinance loans to more than 700,000 borrowers in Tanzania, Uganda and Southern Sudan, and acted as the technical partner and management company for the Belarusian Bank for Small Business, opened in October 2008.

President Bill Clinton, who praised ShoreBank for its lending practices, modeled the Treasury Department's Community Development Financial Institutions Fund after ShoreBank's own experience. The fund provides financial awards and incentives to banks that satisfy criteria in affordable housing and economic development lending.

Major investors in ShoreBank include the Ford Foundation and the Kellogg Foundation, as well as Bank of America. Other sources of money come from shareholders, such as The John D. and Catherine T. MacArthur Foundation, which has provided a $15 million certificate of deposit to help reduce the Midwest bank's risk associated with its Rescue and Foreclosure Prevention Loan program. The bank has been profitable since its second year, and in 2008, it reported a profit of $2.6 million.

With all that, ShoreBank has endured setbacks, most recently when predatory lending led to the subprime mortgage crisis. ShoreBank, which had financed the purchase and renovation of more than 55,000 units of affordable housing in hard-hit communities, watched its investment stripped away as home values plummeted and homes were lost.

On June 5, 2007, Grzywinski wrote Ben S. Bernanke, chairman of the board of governors of the Federal Reserve System, alerting Bernanke that stronger regulation was needed to help community-minded banks and their borrowers survive predatory lending. Several days later, officers of the Chicago Federal Reserve contacted Grzywinski. "We had a good, productive conversation,'' Grzywinski says.

"This is an issue of immense interest to us here at ShoreBank, as the lower-income, primarily African-American communities in which we have been working for more than 30 years are disproportionately at risk from the turmoil in the subprime market,'' he adds.

In his letter, Grzywinski urged the Federal Reserve to use its "regulatory, supervisory and moral authority directly" to correct "insufficient oversight of competitors and ineffective disclosure of the terms of their products.''

ShoreBank didn't wait for legislation to deal with the crisis: In September 2007, it initiated the Rescue and Foreclosure Prevention Loan program. It identified homeowners at highest risk of default due to predatory loans and offered many of them a chance to refinance into fixed mortgages at reasonable rates.

Since then, ShoreBank says, it has kept more than 200 Chicago families in their homes by making more than $32 million in rescue loans. ShoreBank uses money from investors and foundations, such as the $15 million certificate of deposit from the MacArthur Foundation, to pay for the rescue loan program.

On the sustainability front, the company's ShoreBank Pacific, with about $200 million in assets, has a goal of creating a conservation economy in the rainforest of the Pacific Northwest by lending to local companies that use energy efficiently, reduce waste and pollution, and conserve natural resources. In Chicago, borrowers are rated on types of windows and light bulbs used, and a free energy audit is often required before a loan is granted. A free, energy efficient refrigerator is offered in exchange.

In  2007, ShoreBank Corp. began ShoreBankDirect, an online high-yield savings account service (2.15% APY, recently) that has grown "from zero to more than $200 million'' in deposits, says Jean Pogge, the bank's executive vice president of consumer and community banking.  A nationally marketed product, ShoreBankDirect has customers from around the United States.

"ShoreBankDirect is modeled on ING Direct (part of a federally chartered savings bank that is the largest direct bank in the United States). It's been growing very nicely, as have our EcoDeposits,'' Grzywinski said. ING Direct, part of ING Group N.V., is a branchless direct bank with international operations, including in the United States, that offers services over the Internet, or by telephone, ATM or mail.

"We feel they (ShoreBankDirect and EcoDeposits) are getting traction because increasingly in many sectors there is much more social consciousness. There are the returns and the safety, but depositors also know the money is doing something that has a very direct social value. If I had to bet, I'd say this sort of thing will keep getting more and more momentum and be more competitively attractive,'' Grzywinski said.

EcoDeposits are market-rate, fully insured deposit accounts that support the work of ShoreBank Pacific.  In 2009, ShoreBank was awarded $35 million in New Market Tax Credits to spur green development and create green collar jobs. Under the program, taxpayers receive a credit against federal income taxes for making qualified equity investments in low-income communities.

Grzywinski says these communities need one crucial thing to rebound from the economic crisis: jobs. "The key is to get stability and to create jobs for the blue-collar community that we service," he says. "Imagine what would happen if there was a very strong government program to improve residential energy efficiency of older buildings: who would get those jobs? It would be the people in the community where the need is. I saw it happen with the arrival of cable. There were a tremendous number of jobs available for the blue collar community people. I see the same potential with the environmental side.''