Presentation Date: Dec.

4, 2023 (12:05 pm-12:50)

I. Viewpoint

Regulators closed down ShoreBank Corporation, the first, biggest, and most well-known
community development bank (CDB) in the country, in August 2010. Given that
ShoreBank had a long and illustrious history of advancing economic development and
offering banking services to marginalized communities, its sudden demise shocked the
social enterprise community. The writers of "Too Good to Fail," a 2011 Stanford Social
Innovation Review essay by James E. Post and Fiona S. Wilson, explore the intricate
elements that led to ShoreBank's demise. They contend that although the Great Recession
was a major factor in aggravating the difficulties lenders experienced when working with
borrowers with low and moderate incomes, other variables were also at play.

ShoreBank's focused loan portfolio, which aimed a sizable percentage of its loans at low-
and moderate-income individuals and enterprises, was one important contributing reason.
This was in line with its social goal, but it also increased its susceptibility to downturns in
the economy. Post and Wilson also draw attention to the part politics played in
ShoreBank's collapse. The politically tense atmosphere in Washington, D.C. may have
contributed to the bank's application being unfairly denied by the Treasury Department
for extra capital.

The authors also highlight ShoreBank's internal governance and risk management
procedures, implying that there might have been room for improvement in certain areas
to help the company weather the financial storm more successfully. Post and Wilson's
analysis offers a sophisticated interpretation of ShoreBank's demise, acknowledging the
interaction of organizational, political, and economic forces. They conclude that
ShoreBank's experience should serve as a lesson to social entrepreneurs, highlighting the
necessity of striking a balance between their social goal and prudent financial
management procedures as well as a clear understanding of the political environment.

II. Problem Statement

ShoreBank had problems with risk management. The bank was left with millions of
dollars worth of insufficient mortgage assets when the financial crisis happened. Many
individuals lost their properties, employment, and savings due to the following Great
Recession.

ShoreBank reported a net loss of $13 million at the end of 2008, up from $6 million in
2007, and a higher loan decline estimation of $42 million vs. a net profit of $4 million in
2007. Following this, state and local FDIC authorities visited ShoreBank, and the parties
visited with FDIC representatives in Washington, D.C. The parties signed an agreement,
also referred to as a "cease and desist" order, which became effective on July 20. The
bank was seeking $50 million to $60 million in July 2009 to $80 million, and by the end
of 2009, they had reached up to $100 million.
III. SWOT Analysis
Strengths- As the country's first, largest, and most well-known community development
bank, ShoreBank was well-known among social investors. Offering financial services to
underserved communities and promoting economic development are two of ShoreBank's
long standing and distinguished accomplishments. The bank's targeted loan portfolio
supported its mission to assist low- and moderate-income people and businesses.

Weaknesses- ShoreBank became more vulnerable to economic downturns as a result of

its overconcentration of loans to people and businesses with low and moderate incomes.
There may have been space for improvement in the internal governance and risk
management protocols.

Opportunities- Engaging in partnerships with governmental or non-profit entities could

have afforded ShoreBank greater adaptability in times of economic recession.
Community development banks have an opportunity since it is assumed that the demand
for financial services from low-income communities will continue to rise.

Threats- ShoreBank's stability is threatened by its sensitivity to economic downturns, as

demonstrated during the Great Recession. The Treasury Department's refusal to grant
further cash suggests that the company is susceptible to political decisions.

IV. Assumptions

1. Partnerships between CDBs, government agencies, nonprofits, and businesses can

enhance community development impact - Shorebank kept its operations
internally for all its activities including for-profit and nonprofit, which helped it
maintain a cohesive organizational structure. However, It can be assumed that if
they were to have partnered with other non-profit or governmental organizations,
it would have given the company a more flexible approach to economic
downturns since they would have collaborated with people who have different
points of view and could potentially be used for such situations.

2. As the economic divide deepens, the demand for financial services specifically
designed for low-income communities and individuals will continue to surge - As
economic disparities widen continuously, the need for community development
banks and other financial services can be assumed to continue to grow. This is
because low-income individuals also continue to face challenges in meeting
traditional financial standards.
V. 2 Alternative Course of Action

1. Alternative Course of Action 1: Diversify Loan Portfolio and Enhance Risk Management
ShoreBank was especially susceptible to the Great Recession's effects on the
economy because of its overconcentration of loans to low- and moderate-income
(LMI) people and companies. ShoreBank might have diversified its loan portfolio by
entering new markets like small enterprises or commercial real estate to lessen this
 risk. The bank would have been more resilient to economic shocks and its overall
exposure to any one sector would have been decreased through this diversification.

Apart from broadening its range of loans, ShoreBank also had the opportunity to
improve its risk control procedures. This might have required tightening loan-to-value
ratios, creating more complex credit underwriting models, and performing more
extensive due investigation on possible borrowers. ShoreBank could have lessened its
exposure to poor loans and shielded itself from losses by fortifying its risk
management system.

2. Alternative Course of Action 2: Seek Additional Capital and Strengthen Governance

The bank suffered a significant setback when ShoreBank was unable to obtain further
funding from the Treasury Department's Capital Purchase Program (CPP). ShoreBank
might have approached government representatives proactively and persuasively
argued for its value to the community to improve its chances of receiving CPP funds.
This might have meant stressing the bank's benefits to low-income areas and its
function in promoting economic growth.

ShoreBank had the option to improve its corporate governance procedures and look
for outside funding. This might have included strengthening the bank's financial
reporting openness, adding more seasoned and independent directors to the board,
and putting stronger conflict-of-interest regulations in place. ShoreBank might have
raised investor and regulatory confidence and improved its prospects of getting
funding by strengthening its governance structure.

VI. Advantages and Disadvantages of each Alternative Course of Action

Alternative Course of Action 1

Advantages- Reducing dependency on a specific industry lowers the chance of financial
loss. This increases the bank's ability to withstand financial shocks. improves the capacity
to identify, assess, and manage any risks.
Disadvantages- Major organizational changes may be necessary to achieve increased
risk management and diversification. The early expenditures of implementing new risk
control processes may cost a company a fortune.

Alternative Course of Action 2

Advantages- The bank's ability to withstand economic downturns and maintain financial
stability is improved by its pursuit of additional capital. Approaching government
representatives proactively may increase the likelihood of obtaining assistance, such as
CPP funding. Regulatory and investor trust can be increased by strengthening
governance.
Disadvantages- The ability to secure further funding is reliant on outside variables and
governmental actions. It might take some time to strengthen governance, and there might
not be any immediate results.

VII. Recommended Course of Action

Alternative Course of Action 1: Diversify Loan Portfolio and Enhance Risk
Management

By diversifying its loan portfolio, the bank can lower the risks of financial losses,
minimize its dependence on a particular sector, and boost its capacity to survive financial
crises. This would also reduce the risk of several borrowers in a certain area failing at the
same time, limiting the risks to any particular borrower. Having improved risk
management would prevent excessive hazards from being accepted, and keeping aware of
financial, operational, and reputational risks is important for tracking and overseeing
bank performance. It would also determine potential dangers, evaluate the impacts of
those risks, and identify which actions the business can take to lessen or eliminate the
risk's consequences. Enhancing risk management could help the bank develop a plan for
dealing with risks and maintaining its finances by recognizing, evaluating, and
controlling potential hazards that might result in losses. Shorebank would now be careful
when lending funds, and imposing strict and clear regulations with risk management
would require the bank to adhere to regulations to deal with any moral hazard issues that
they may encounter.