ILWACO, Wash. - Shorebank Corp. of Chicago broke new ground a generation ago rebuilding inner-city neighborhoods. The privately held company gained a national reputation for transforming a failing bank into a profitable one with $850 million of assets, and for its commitment to communities that traditional banks tend to ignore.

The company focused mainly on urban areas until three years ago, when it opened Shorebank Pacific in this small town and and created a model for blending environmental activism, small-business investment, and community banking in rural areas.

The subsidiary is winning recognition too. Next month Domini Social Investments, a Boston-based mutual fund manager and one of Shorebank's largest depositors, will begin marketing Shorebank Pacific's money market accounts nationally.

"Supporting small business in rural areas and small towns was every bit as important as in urban areas," says Shorebank Corp. president Mary Houghton, who started the subsidiary and is its chairwoman. "That these businesses are environmentally friendly was important too."

David Williams, Shorebank Pacific's president and chief executive since February, plans to expand the $18 million-asset bank's reach by opening three loan offices in Washington, including one each in Seattle and Olympia and a fourth on the Oregon coast within the next few years. It already has a loan office in Portland, Ore.

"We need to establish more loan offices to be more diverse geographically," says Mr. Williams, who grew up in Portland. He aims to increase assets to $250 million in five years.

Such ambitious goals may be tough to realize. Many nonprofits devote themselves to being a last resort for meeting community needs, but few banks commit themselves to developing poorer neighborhoods and small businesses outside the mainstream the way Shorebank Corp. does. There are perhaps only a dozen or so throughout the country that follow its model, and they are generally small banks struggling to make a profit.

Shorebank Pacific is taking on an even greater challenge going into virtually new territory - and proving just how hard it is to make it there.

The subsidiary lost over a half a million dollars last year and has been beset with problems. Staff turnover has been high, and finding qualified bankers to work in a town of 850 souls and out of headquarters in a trailer on the Columbia River has been difficult. Mr. Williams, 55, a former loan officer and physics teacher, had never run a bank before and was hired after a 14-month search.

Lending is essentially the bank's only business, and its one loan office has been without any loan officers since April 1999, so Mr. Williams has had to spend much of his time there. And time to make good is running out: Federal Deposit Insurance Corp. has told the bank that it must be profitable by 2003 (six years after opening for business).

"There's just a lot of pitfalls along the way," says Don Ham, a managing partner in Lincoln, Neb., office of Grant Thornton, a consulting firm.

Still, the parent company has been down this road before. It started out with just $40 million of assets and within two years was making money.

By 1978, Shorebank had added venture capital, real estate, and not-for-profit divisions. Eight years later it took its community redevelopment formula to Detroit, Cleveland, and Marquette, Mich. In 1995 it doubled in size to just over $600 million of assets with the acquisition of Indecorp, a Chicago bank holding company that owned two South Side commercial banks. In all, Shorebank had seven branches in the city.

Shorebank has grown substantially since its opening and has managed to be profitable. It earned $112,000 in 1997, the year Shorebank Pacific opened in July as a partnership between with EcoTrust, a Portland nonprofit business development group focusing on enviro-friendly ventures.

Shorebank Pacific provided a much-needed infusion to finance businesses in a region that has long depended on Old Economy industries like fishing and logging. The bank was capitalized at $7 million, which, according to John Owens, director of strategic services in Atlanta for RSM McGladrey, a consulting firm, is more than most banks its size have.

Finding the right customers came next.

A year ago the bank lent $560,000 to Dave Nugent, an organic dairy farmer in Curtis, Wash. Six months later Nugent Dairy began turning a profit in a region where traditional dairies often fail. It expects to earn at least $100,000 this year, on sales of about $1.4 million.

"I had approached a couple of other banks first, but they weren't receptive to loaning to a dairy, and they didn't understand organic at all," Mr. Nugent says. "Shorebank Pacific though, is trying to be Earth-friendly, so we fit in their program."

Shorebank Pacific lent Art DeMuro, owner of Portland-based Venerable Properties, which redevelops environmentally contaminated properties, more than just money and understanding. The bank's employees include a botanist who advised him on endangered species when he borrowed $900,000 to clean up a building site for homes along the Columbia.

"I've never worked with a bank that had a scientist on staff, someone who had such front-line expertise," Mr. DeMuro says.

Still, Shorebank Pacific has its shortcomings. It doesn't offer checking or cash management services, and customers cannot make deposits.

"I feel the bank could be more valuable to us if it offered a more complete range of services," says Scott Olmstead, a co-owner of Hoquiam, Wash.-based Paneltech International, which makes coatings for plywood and got a $350,000 loan from the bank.

Providing other services, though, is difficult without branch banking, and Shorebank Pacific has no plans to open branches. Mr. Williams recognizes the handicaps and is considering offering other banking services through automated teller machine networks, or possibly through an affiliation with another bank.

But he says he sees no barriers to reaching his goals with the business he is in now. Nor does Ms. Houghton.

"We've seen it done - Bank of the Northwest really did get to $250 million in five years, going after profitable small businesses in their marketplace," she says.

Some observers question Shorebank's strategy.

"From a marketing perspective, they have an appeal to a limited segment," Mr. Owens says. "They have a very focused niche, and they don't want to attract additional depositors by opening branches, so it's going to be difficult for them to become a larger bank."

But Steve Schueth, a director of the trade group Social Investment Forum, says the bank may find all the depositors it needs through the "socially responsible" investment sector, which he estimates at more than $2 trillion.

"It's the fastest-growing investment market in the country," Mr. Schueth says.

Domini Social Investments is part of that market. David Wieder, a managing principal at Domini, says: "Shorebank Pacific's environmental work is very important to us and to our shareholders. We are looking forward to having an alliance with them."

Catherine Brown, Shorebank Pacific's chief operating officer, says the bank should have no trouble building its loan portfolio.

"It's catching on - people really like us," she says. "We spend a lot of time with our customers, working with them to develop their business.

"People think we may be really radical, but we're actually kind of an old-fashioned bank. It's that personal service."

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