ShoreBank May Face Closure After Failing to Win Federal Funds

ShoreBank Corp., the unprofitable Chicago lender to low-income communities, may be forced out of business after failing to win $75 million of federal bailout funds, three people with direct knowledge of the matter said.

ShoreBank raised more than $145 million in May from General Electric Co. and banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. That money was contingent on more federal funding that is now unlikely to be released, the people said, speaking anonymously because the matter is private.

“It looks like they are just out of options,” said Gerard Cassidy, a bank analyst at RBC Capital Markets in Portland, Maine. “Without a lot of private equity, their hands may be tied and the only option might be putting it in receivership.”

The community bank, with assets of about $2.2 billion, is under a March order from the Federal Deposit Insurance Corp. to boost capital within 60 days. Tier 1 capital shrank to $4.1 million at the end of June from $26.3 million as of March 31 and $43.5 million at the end of last year, according to the FDIC.

The money raised in May was placed in an escrow account and is scheduled to be returned to investors tomorrow unless the government agrees to provide money or some other remedy can be found for the bank, according to a person who helped arrange the investments. ShoreBank, based on Chicago’s South Side, was founded in 1973 and specializes in lending in low-income communities including Chicago, Detroit and Cleveland.

Bachus Assertions

The lender has been looking to take advantage of a special Treasury Department program using funds from the 2008 federal bailout that gives capital injections to Community Development Financial Institutions. Such firms operate in urban and rural areas marked by poverty and often not served by traditional banks.

Government officials wouldn’t comment on whether ShoreBank has applied for the program or say if it has been rejected. “We do not publicly comment on any specific institution or applicant,” Treasury spokesman Mark Paustenbach said in a statement. ShoreBank hasn’t received funds through the Troubled Asset Relief Program.

FDIC spokesman Andrew Gray declined to comment. David Vitale, interim executive chairman of ShoreBank, didn’t return an e-mail seeking comment. Brian Berg, a bank spokesman, declined to comment.

Representative Spencer Bachus, the ranking Republican on the House Financial Services Committee, said in May that firms that had banded together in an attempt to save ShoreBank were making the investments to gain favor with President Barack Obama’s administration. Robert Weissbourd, former executive vice president for ShoreBank’s Chicago operations, was on Obama’s transition team.

‘Proud of It’

The White House denies that it’s had any role in the rescue. Administration officials haven’t met with ShoreBank about its efforts to raise capital and haven’t asked lenders to provide financial assistance, according to White House spokeswoman Amy Brundage.

Investors in the bank held a conference call Aug. 2 to discuss the rescue effort and agreed to keep seeking bailout funds, one of the people briefed on the matter said. The investors said such help was a slim possibility, and they discussed whether to start a new lender using the ShoreBank brand, the person said.

“People ought to be proud of what the bank has done; I’m proud of it,” said Eugene Ludwig, Comptroller of the Currency from 1993 to 1998 and a former ShoreBank director who led the effort to raise private capital and agreed to invest some of his own money. “It would be a genuine shame if it’s not kept open.”

According to a June 22 letter from Herbert Allison, the Treasury’s assistant secretary for financial stability, to four Chicago area congressmen, the Treasury would approve the capital infusion only if there were “a positive funding recommendation” from ShoreBank’s regulators.

ShoreBank posted a $119 million loss in 2009 and a $39.6 million loss in the first half of this year, according to FDIC figures. It had a net loss of $9.3 million in 2008.

To contact the reporters on this story: James Sterngold in New York at jsterngold2@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.