De La Salle - College of Saint Benilde

School of Management and Information Technology

Finals Case Study:

Too Good to Fail Case Study

BUSSFIN

Section: OTO001

Submitted by:

Deyto, Christian Josh Gregor

Tan, Gerard Edward

Turla, Janella Mae

 I. Viewpoint

The point of view is from professors of management, James and Fiona. One of the
professors, James, is a member of the Business Policy & Law Department. He and Fiona
studied about the ShoreBank, one of USA’s leading social enterprises. A receiver was
appointed for ShoreBank by the Illinois Department of Financial & Professional Regulation on
August 20, 2010. The decision to close was not a complete surprise. It had been reported for
months that the bank was in trouble and that a rescue might be in order. A progressive social
enterprise has been brought to a bitter end with its closure. After 37 years in business,
ShoreBank Corporation became the nation's largest certified Community Development Financial
Institution (CDFI). It had a significant social impact, investing more than $4.1 billion in missions
and financing more than 59,000 affordable housing units. During 2008, ShoreBank's assets
totaled more than $2.4 billion and its net income exceeded $4.2 million. Hundreds of
progressive banks looked to it as a model. Overseeing social and economic development
projects in over 60 countries, the company also partnered with Muhammad Yunus to fund
Grameen Bank and administer microloans to the poor.

II. Problem Statement

The Financial Meltdown slowed the continued growth of ShoreBank.

The Financial Meltdown in Chicago caused by the social enterprise achievements at ShoreBank
coincided with the financial crisis of 2008. The bank's risk management and capital
requirements were the hardest hit. Lending money, especially to people with lower incomes who
were disproportionately affected by the economic crash, was a top priority for the management
team. As part of the 2008 Rescue Loan Program, it offered refinancing assistance to customers
who had been victimized by subprime lenders. Losses on loans increased as the financial crisis
deepened, but only slightly. As of the end of 2008, ShoreBank's loan loss estimate had risen to
$42 million (up from $6 million in 2007) and it had recorded a net loss of $13 million (down from
$4 million in 2007). ShoreBank's deteriorating financial condition was addressed by the FDIC
and the Illinois Department of Financial and Professional Regulation in 2009. A "cease and
desist" order was formalized on July 20 after state and regional FDIC officials visited ShoreBank
in April. Lending rates were lowered and new capital was required.

In the first quarter of 2009, ShoreBank began issuing common stock to private investors. As the
bank's financial situation deteriorated in 2009, its capital requirements were reassessed. This
figure was revised to $80 million in July 2009 and to $100 million by the end of the year.
ShoreBank had raised enough money from 53 investors however private capital was not
enough in the nation’s banking environment. Representatives from the Office of the Comptroller
of the Currency, Federal Reserve Board, and Office of Thrift Supervision voted against the
FDIC's recommendation.
This result to Shorebank’s growth problems. They continued to expand their bank in another
neighborhood of Chicago. ShoreBank also helped raise the capital and managed the bank for a
number of years until Southern Development Bancorporation’s board took over. Not long after
the Arkansas project, ShoreBank initiated a program in Michigan, and then in Cleveland and
later in Detroit. They also partnered with Ecotrust to address environmental issues and also
started other nonprofits and profits to expand their social mission. Their continued growth
brought problems, an extremely busy travel schedule and a management structure that required
close supervision were two of ShoreBank's biggest problems. In addition, they had trouble
finding future leaders who were both highly skilled in banking and committed to social values.
Because the banks were in deteriorating neighborhoods, ShoreBank's Cleveland and Detroit
branches never grew as large as Chicago's South Shore, according to Taub.

As a result, the Treasury Department was not notified of the application for further review. The
bank would have been severely undercapitalized if CDCI funds had not been available.
ShoreBank's fate was sealed; it would have to close.

III. SWOT Analysis

STRENGTHS
- Nation’s first and leading community bank
- It has a huge social impact
- It had inspired a national movement of community development financial institutions,
shaped federal community investment legislation, and served as a role model for dozens
of progressive banks.
- ShoreBank innovated at every turn—economically, socially, and organizationally.

WEAKNESSES
- ShoreBank had difficulty hiring future leaders who had top banking skills and a
commitment to social values.
- ShoreBank’s Cleveland and Detroit banks were never as robust as the original Chicago
bank
- Too little capital in the face of an unexpectedly deep recession.

OPPORTUNITY
- The company had influence abroad, overseeing social and economic development
projects in more than 60 countries
- ShoreBank had “friends in high places”

THREATS
- Financial Crisis
- Loan loss
 - Federal government was not concerned about smaller banks or banks that were socially
beneficial.

IV. Assumptions
- ShoreBank’s credit and risk management processes were not sufficient to withstand the
full force of the financial meltdown.
- Shorebank had inspired a national movement of community development financial
institutions, shaped federal community investment legislation, and served as a role
model for dozens of progressive banks.
- Shorebank’s rapid expansion caused problems, such as difficulty hiring leaders with top
banking skills and commitments to social values, a management structure that required
much required direct supervision due to their heavy travel, and the Cleveland and Detroit
branches of ShoreBank were never as robust as the Chicago branch.

V. 2 Alternative Courses of Actions

1. Alternative 1

It was stated that ShoreBank continued expanding and that they have been facing a
financial crisis. An alternative course would be to stop expanding for a while and focus on the
repayments of the debts.

2. Alternative 2

ShoreBank is influenced by people from 60 countries and has "friends in high places."
They can take advantage of these advantages by supervising social and economic development
projects. They can use this as an alternative to assist their bank in getting the bank back up and
running and reopening.

VI. Advantages vs Disadvantages of Alternative Course of Action

Alternative 1:
Advantages:
● It would help in avoiding making debt an unpayable burden.
● The bank will be easier to manage and they will be able to control their debts and
will prevent it from closing.
Disadvantages
● Stopping the expansion of the bank would mean gaining less expertise or less
level of profit
Alternative 2:
Advantages:
● As stated above, this can assist ShoreBank in getting the bank back up running
and reopening.
 ● These connections can assist the bank with their financial needs as well as
promote them in order to attract clients.
Disadvantages:
● These “favours” can lead to debt that can also affect their financial needs.

VII. Recommended Course of Action

The group has decided that the advantage 2 is the best course of action. As previously
stated, these can easily assist ShoreBank in getting the bank backup running and reopening in
a timely manner. These connections will bring the bank several clients while not causing a
financial problem.