Shorebank Corp. faces myriad challenges in its pending acquisition of the nation's largest black-owned bank - not the least of which is its own flagging performance.

The $305 million-asset Shorebank and its South Shore Bank of Chicago have been cited by President Clinton as a model for community development lending. The institution is closely watched for its innovative techniques in bringing capital to blighted urban areas.

But Shorebank is suffering from the same troubles as other community banks. Its pending acquisition of Chicago-based Indecorp Inc. and its two inner-city banks is part of a strategy to create better efficiency and, hopefully, better profits.

"I think this is a good step for us," said James Fletcher, South Shore Bank's chief executive officer. "From a strict profitability standpoint, it's gaining a deposit base in the same general marketplace we serve."

Last year, Shorebank reported a $580,000 net loss, its first since 1983. The company cited losses from start-up operations in Cleveland and Michigan, as well as from gang and drug problems that led to lost income at several subsidized low-income properties in Chicago.

Although South Shore Bank earned just over $2 million in 1994, analyst William Michael Cunningham is concerned about surging loan loss ratios at the bank and will watch how the company retools its underwriting guidelines. Mr. Cunningham is president of Creative Investment Research, a Washington, D.C., firm that follows minority and community development financial institutions.

Net loan losses were 0.80% of the bank's more than $185 million in outstanding loans at yearend, compared to 0.16% in its peer group.

At yearend, the bank's nonperforming loans were 3.28% of all loans, according to Sheshunoff Information Services.

The bank already has worked out some of the aforementioned problems in its multifamily real estate portfolio, Mr. Fletcher said.

Its unlikely that the Indecorp banks, with a loan-to-deposit ratio of 32%, would aggravate Shorebank's loan loss problems, Mr. Cunningham said.

Nonetheless, the merger poses several challenges. First, Shorebank reportedly needs to raise about $20 million in capital for the $30 million deal. Although the company has not disclosed the terms, Mr. Fletcher called those figures "in the ballpark."

Shorebank's existing institutional investors - including some of the country's largest banks - likely will have to provide much of that capital, the company and observers said.

The acquisition, expected to occur by yearend, would double South Shore's $274 million of assets.

"We needed to be larger to carry out our mission," Mr. Fletcher said. "This gives us an opportunity to do it in a market we're already in and understand."

But the size burst "is going to offer some management challenges," in merging the different cultures, Mr. Fletcher said.

Shorebank must contain costs from the merger and faces staffing dilemmas, because minority banks tend to have more employees than other banks, Mr. Cunningham said.

South Shore Bank's yearend efficiency ratio was a relatively high 67.5%.

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