When a neighborhood starts to deteriorate, local banks often are among the first to flee. They assume that many loans no longer will be repaid and that new financial risks outweigh any assurance of profits.
But the experience of a South Chicago bank stands as a sharp challenge to these assumptions. When the character of the neighborhood around it changed, the bank stayed and undertook an investment program to revitalize the area.
Actually, the original owners of what is now the South Shore Bank of Chicago wanted to leave and take their bank with them in 1972. The racial composition of their neighborhood, eight miles south of Chicago, had undergone a dramatic shift from white to black. The bank's assets dropped to half the total of four years earlier, and bank officials approved only two mortgages in the area in the entire year.
But after public hearings in which community leaders charged that the bank had failed to serve them well, federal regulators ruled that the bank must stay.
Then, four enterprising young bankers decided to buy the bank as an experiment in community revitalization. They had plenty of experience in making sound, promptly repaid loans to minorities in the inner city and in working with community organizations as volunteers. They had witnessed the difficulty community organizations had in getting loans for projects to stem blight and improve neighborhoods. Determined to disprove the theory that making loans in deteriorating neighborhoods was like throwing money away, they saw their prime task as rebuilding community confidence.
"The conventional wisdom was that the risk was extraordinary," recalls chairman of the board Ron Grzywinski. "But we all made a commitment to work with residents, using the collective talent, credit resources, and energy available to us, to try to turn the neighborhood around."
The new owners considered a commercial bank the ideal core institution for neighborhood redevelopment both because of its assets and traditionally trustworthy reputation. But they saw as a distinct drawback a bank's usual passive role in a community -- responding only to requests rather than initiating.
Building on a 1970 Federal Reserve Board ruling that investment in community revitalization is a legitimate activity for a bank holding company, the new owners formed such an organization to act aggressively in community development. That holding company now includes a real estate arm, a corporation that invests in minority-owned small businesses, and a nonprofit affiliate group called the Neighborhood Institute which depends on outside grants to provide job training and placement help as well as housing aid for local residents.
Progress over the last seven years, by anyone's measure, has been remarkable. The predominantly black neighborhood surrounding the South Shore Bank is integrated and stable. Purchase and rehabilitation of major chunks of local housing and commercial buildings have succeeded in stopping much of the one rapidly spreading blight. And the bank itself, which has no loans outstanding that are more than 30 days delinquent, does turn a profit. Its losses on real estate loans are considerably less than the national average for banks.
"The risks are very easily managed, but it does cost more money to do neighborhood development," notes Mr. Grzywinski. He says that despite South Shore property appreciation, the average loan made by his bank is smaller and more costly to extend than the average loan by a suburban bank.
Even so, the largest drain on bank earings is the large number of depositors who keep low balances in their accounts, according to the bank's board chairman. But the bank views that expense as a necessary part of rebuilding community self-confidence, and it has no intention of tightening the rules.
While the South Shore Bank no longer stands alone as a bank trying to revitalize the community around it -- hundreds of banks are making the effort with varying success -- it does stand alone, by most accounts, as the first bank to make community reinvestment its prime mission.