Norman Williams, CEO of Illinois Service Federal Savings and Loan on Chicago's South Side, stands outside the institution his father helped establish in 1934.
Norman Williams, CEO of Illinois Service Federal Savings and Loan on Chicago's South Side, stands outside the institution his father helped establish in 1934. - 
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Just three years ago, Chicago had four black-owned banks. Now there are two, and regulators have told one of them — Illinois Service Federal Savings and Loan— to raise more capital or risk a shutdown. The decline is part of a national trend. Unlike the more-segregated days when these banks were founded, African-American customers can now take their business elsewhere.

However, black-owned banks provide a link to a proud history— and, research says, they may do something a lot more important.

At its height, in the 1920s, '30s and '40s, the South Side’s Bronzeville neighborhood was Chicago’s version of Harlem.

“Bronzeville used to be known as the Black Metropolis,” says chef and entrepreneur Clifford Rome at his new restaurant, Peach’s, across the street from Illinois Service.

“You had all these pioneers who put their businesses on the South Side of Chicago. So you could go to the butcher, the baker, the candlestick-maker, right?” he says. “You had these great banks, you had all these entertainers.”

For example, pianist Earl Hines — who started playing in Bronzeville with Louis Armstrong in the 1920s —  spent the '30s playing national broadcasts from 39th Street. By the middle of that decade, a local teenager named Nat Cole — later nicknamed “King” — started getting some notice.

“Having all that meant you didn’t have to go anywhere else,” Rome says.

Nor did Bronzeville residents have the opportunity to go anywhere else. Segregation was in full force, and white-owned banks did not cross the color line to make loans.

That’s where Illinois Service Federal came in. As the bank’s CEO, Norman Williams, tells the story: “We were started in 1934 by 13 African-American men with $7,000.”

One of those 13 founders was his father.

“The bank grew very slowly,” Williams says. “Its mission was simply to provide home loans and help people open savings accounts.”

Today, with around $110 million in assets, the bank still has deeply loyal customers— like Clifford Rome. In addition to Peach’s, he runs a catering business, an art gallery and another restaurant on King Drive — and Rome says he has kept multiple accounts with Illinois Service for years.

He recalls his first visit to the bank. “Once I walked in the doors, it’s like a throwback,” he says, laughing. The bank’s current headquarters looked ultra-modern when it was built almost 50 years ago. “But it has this unique quality. It feels community.”

Rome says he banks with Illinois Service for the same reason he uses the dry cleaner next door and the bakery down the street: to support neighborhood institutions.

“You need a community bank — you do,” he says. “Even if that community bank doesn’t have the bandwidth to do everything larger banks do. It’s here.”

However, the financial crisis and the recession hit banks like Illinois Service especially hard. African-Americans, like Norman Williams’s borrowers, were more likely than others to lose their jobs. And miss mortgage payments.

“People didn’t abandon their home — they just got behind,” he says. “Good, decent people, but…” thanks in part to new banking regulations, their problems became Illinois Service’s problems. And that’s why regulators have the bank in their sights.

John Taylor, who runs the Community Reinvestment Coalition, sees community banks like Illinois Service disappearing all over the country.

“That’s really the challenge,” he says. “Disappearing with them is the personal commitment of boards of directors to make sure that those communities, those neighborhoods, prosper."

Taylor believes the issue here is not losing black banks but losing community banks. “The local is more key than the race of the bank president,” he says.

However, research shows that race plays a role too.

For a study published last year in a journal from Oxford University Press, a team of researchers from Rutgers, Brigham Young and Utah State universities sent “mystery shoppers” into about 80 banks. They posed as small business owners looking for a loan. They all had the same story and the same outfit — and were even selected to be equally tall and good looking — but some were black, some were white and some were Latino.

As one of the researchers, Rutgers business professor Jerome Williams, puts it: “We found significant differences.”

The study found bank officers asked tougher questions of minority applicants. For instance, they wanted to see more years of financial records.

The mystery shoppers also used hidden cameras.  According to the study, everybody who saw the tapes agreed: bank officers were just nicer to white applicants.

With white applicants, Williams says, “There was a lot of bantering, interaction, jokes — being very, very friendly.”

With the black and Latino mystery shoppers, not so much.

It led to a simple conclusion. For black and Latino entrepreneurs looking for a bank loan, “The playing field is not level,” Williams says. “There’s already a mark against you in terms of your background in applying for a loan.”

In that context, banks like Illinois Service seem even more important.

CEO Norman Williams says he is looking for community-minded investors, and thinks he’ll make it. “But it’s certainly something that does keep me up at night,” he says. “I do think how much good we could do, how much work needs to be done on the South Side of Chicago.”

Right now, he needs about $7 million in new capital to keep Illinois Service doing that work.

Follow Dan Weissmann at @danweissmann