SHOREBANK INTERNATINAL LTD

Need Analysis of Shorebank Internatinal Ltd

Analysis of Shorebank Internatinal Ltd

This paper will be analyzing the issues of ShoreBank and will be providing recommendations to resolve their issues. Reports indicated that much of the $125 million raised on behalf of ShoreBank came from such Troubled Asset Relief Program (TARP) recipients as Goldman Sachs, Citigroup, and Bank of America. GE Capital was also reported to have provided $20 million. As a result of the infusion of capital, ShoreBank hopes to receive $75 million in federal aid from the US Treasury Department, although receipt of the Treasury funds is not yet certain. Describing ShoreBank and other community banks as “victims, not perpetrators, of the financial meltdown,” Congresswoman Jan Schakowsky of Illinois was instrumental in lining up the potential federal aid. Founded in 1973, ShoreBank describes its mission as investing in people and their communities to create economic equity and a healthy environment. For years, while the practice of redlining—described in the Encyclopedia of Chicago as “the practice of arbitrarily denying or limiting financial services to specific neighborhoods, generally because its residents are people of color or are poor”—was a common strategy for commercial banks, ShoreBank originated loans to homeowners and small businesses in Chicago's poorest neighborhoods. Combining its community loan program with training and other forms of ongoing engagement with its loan recipients, ShoreBank enjoyed remarkable success for many years, reporting loan default rates that were significantly lower than those of commercial banks. As its success grew, ShoreBank expanded into additional markets, opening banks in Detroit, Cleveland, and the Pacific Northwest.

ShoreBank was also instrumental in helping Muhammad Yunus, the 2006 Nobel Peace Prize winner, establish the Grameen Bank, a Bangladesh-based pioneer in microfinance. As recently as 2005, ShoreBank could describe its financial picture as exceeding “the financial, community development, and conservation goals that make up its triple-bottom-line commitment.” In 2005, it reported a net income of $8.3 million, originated $370.3 million in new community development loans, and made conservation loans totaling $187.8 million. ShoreBank continued to report positive net income until 2008, when its loan loss provision increased dramatically. Also in 2008, when the financial crisis led to rapidly escalating rates of foreclosure on mortgage loans, ShoreBank developed its Rescue Loan program. Finding that the rate of foreclosure on home loans was significantly higher in Chicago neighborhoods with higher ratios of minority residents, the Rescue Loan program offered refinancing, in the form of fixed-rate loans, to thousands of homeowners at the highest risk of default due to predatory loans. For commercial banks and other primary market housing finance providers, the current economic and investment environment represents particular challenges both for launching new products and maintaining portfolio performance and profitability. Financial institutions globally are facing portfolio performance issues due to the general economic downturn and prior aggressive lending practices. The growth of housing finance markets over the past several years has masked sloppy underwriting and overly ambitious lending among many financial institutions. Despite these challenges, this period represents an opportunity for lenders ...