A Tree Grows In Chicago

How South Shore Bank revived an inner-city neighborhood

 

The odds for the success of Southern Development Bancorporation are long. But 15 years ago, South Shore Bank's odds were even longer.

When Ronald Grzywinski first looked at the South Shore area of Chicago, it was an inner-city neighborhood headed for the bottom. "There were no loans being made," says James Lowell, community-affairs program manager for the Federal Reserve System.

Grzywinski owned a bank nearby, where with the help of Mary Houghton and two black activists, Milton Davis and James Fletcher, he ran a successful program lending to black entrepreneurs. But he was drawn to the broader task of revitalizing black communities.

After two years of preparation, Grzywinski and a group of investors bought South Shore Bank. He envisioned small-business lending as the heart of the bank's strategy -- especially to merchants on 71st Street, the area's main shopping strip. Between 1974 and 1980, the bank loaned $6.7 million and provided intensive support to small businesses. Except for loans to McDonald's franchises, the results were dismal. Most of the businesses failed, and by 1980, 71st Street looked worse than it had in 1973.

Throughout the 1970s, South Shore Bank limped along, its profits in the bottom 25% of U.S. banks. As they groped for a strategy, the bank's managers decided that the key to stabilizing the neighborhood was rehabilitating its abandoned apartment buildings, which became targets for arson and drug deals.

In the worst areas, South Shore Bank brought in developers to do subsidized rehabilitation projects -- one involving 20 buildings. The bank also began lending to people who wanted to renovate buildings themselves. At the time, banks were not offering mortgages for the apartment buildings in Chicago's poor, black, neighborhoods. Slowly, South Shore Bank began lending on the neighborhood's decaying buildings -- but only to those who agreed to rehabilitate their property and put money in escrow for maintenance. Because the bank made loans only in South Shore, each new loan reinforced the previous ones.

So far the bank has made more than $35 million in mortgage and rehab loans on more than 200 buildings -- nearly one-fourth of all apartment buildings in South Shore. The impact has been dramatic. One sees elegant courtyard buildings that would fit well into the tonier north-side neighborhoods.

Mortgage lending on apartment buildings has been extremely profitable. With little competition, the bank can charge interest rates that are two points higher than those offered on single-family houses. More important, the mortgage and rehab lending has nurtured a group of entrepreneurs. They have learned the trade, taught themselves Spanish to communicate with their crews, and invested in the neighborhood's primary resource, its housing stock. And they have kicked off a development process that needs no government subsidies.

The recession years of the early '80s were not easy for the bank. Profits fell perilously close to zero. Beneath the short-term problems, however, the bank's loan portfolio was growing sounder. It had dumped its small-business lending and found a stable profit center in housing. As the economic recovery took hold in 1984, Grzywinksi could finally see the bank getting strong legs -- a full decade after he had begun.

The management team decided that the next priorities had to be job creation in South Shore and replication of the model elsewhere. In addition to the Arkansas venture, they have opened a branch in another black Chicago neighborhood. Most of the job-creation efforts have focused on The Neighborhood Institute (TNI), a nonprofit corporation affiliated with South Shore Bank. In 1986 it launched a program to help women enter business. TNI also mapped out an experiment modeled on the Grameen Bank in Bangladesh (see main story) and a small-business incubator. Meanwhile, another affiliate hopes to break ground soon on a 71st Street shopping center.