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August 24, 2010
ShoreBank Closed by Federal Regulators
    by Robert Kropp

The Chicago-based community banking pioneer is replaced by the Urban Partnership Bank, which plans to continue the mission of its predecessor.


On Friday, ShoreBank, the Chicago-based community bank that since 1973 has been a pioneer in the Community Development Financial Institution (CDFI) industry, was seized by the Federal Deposit Insurance Corporation (FDIC). ShoreBank's assets were subsequently acquired by a group of investors, including a number of commercial banks that received US Department of Treasury funds under the Troubled Asset Relief Program (TARP). ShoreBank's 15 branches, located in Chicago, Detroit, and Cleveland, reopened yesterday under the name of the Urban Partnership Bank.

Investors in the new CDFI include American Express, Bank of America, Citigroup, the Ford Foundation, GE Capital Equity Investments, Goldman Sachs, Harris Bank, the John D. and Catherine T. MacArthur Foundation, JPMorgan Chase, Key Community Development, Morgan Stanley, Northern Trust, PNC Investment, State Farm Mutual Automobile, and Wells Fargo.

ShoreBank's problems have been well-known throughout the CDFI industry and elsewhere for at least a year. However, as recently as May, it appeared that the bank had raised enough private capital to qualify for $75 million in additional federal assistance and avoid seizure.

As some critics claimed that ShoreBank's receipt of federal aid would amount to preferential treatment by the Obama administration—ShoreBank itself had trumpeted on its website the 2008 election of the President, noting that he was a Hyde Park resident, as was Ronald Grzywinski, a founder of ShoreBank—the aid never materialized, leading to Friday's seizure.

According to Brian Berg, who served as Vice President of Marketing with ShoreBank, "The management team was pursuing several scenarios by which to continue to serve the community." The Treasury Department declined to provide the hoped-for aid, Berg said, without providing an explanation for its decision.

ShoreBank was the 15th Illinois bank to fail this year. Over 100 banks have been seized by federal and state regulators nationally this year alone. In fact, on Friday, when ShoreBank was seized, seven other banks were seized as well.

Asked about the causes of ShoreBank's failure, Berg said, "The tsunami of declining home values, record foreclosures, and unemployment makes it difficult to repay any loan. The communities that the bank has served have been disproportionately impacted by the economic recession. The unemployment rate in minority communities is twice that of other communities, at least 20% in the communities served by ShoreBank."

On the other hand, Mark Pinsky, President and CEO of
Opportunity Finance Network (OFN), said, "What happened to ShoreBank is atypical. I don't think it's a function of their serving low wealth people at all. Economic conditions are tough, but the seizure has more to do with broader factors."

In a May conversation with SocialFunds.com, Pinsky wondered, "What is it about 20 bank failures in the Chicago area? What is it about the macroeconomic forces there, like the impact on loan portfolios of the high unemployment?"

"Even in Chicago, the
Community Investment Corporation, which does a lot of the multifamily housing similar to what ShoreBank was doing, is doing very well," Pinsky noted after the seizure. "Economic conditions are challenging for them, but they're working through it."

"Overall, the CDFI industry is incredibly healthy," Pinsky continued. "The expertise we bring into distressed markets is serving us well."

Whatever the primary reasons for ShoreBank's demise, it is a fact that the bank's finances have suffered dramatically in recent years. While the bank had been profitable for many years before the recession, it reported losses of more than $50 million in 2009, as loan defaults mounted; since 2001, ShoreBank has filed more than 325 foreclosure lawsuits in Cook County, Illinois, and more than 30 in 2010 alone.

As of June 30, ShoreBank held about $5 million in foreclosed real estate, and $335 million in seriously delinquent loans.

If a bright spot can be found in the closing of a community banking legend such as ShoreBank, both Berg and Pinsky said, it is that the new Urban Partnership Bank plans to continue the mission of its predecessor.

"Socially responsible individuals, philanthropic organizations, and financial institutions from Chicago and across the country committed to providing quality financial services to make a difference in people's lives, by helping them restore their economic vitality," are the investors in the new bank, according to Berg. "The Urban Partnership team is committed to continuing the services of ShoreBank."

And Pinsky said, "The Urban Partnership Bank has the chance to come back with a lot of support. They're going to have to adjust some of their strategies, and I'm confident that they will."

The Chairman of the Urban Partnership Bank is David Vitale, formerly the president of First National Bank of Chicago and former head of the Chicago school system. In a statement, Vitale said, "Urban Partnership Bank will provide access to financial services and support to distressed neighborhoods in order to help transform distressed neighborhoods into strong, stable communities. The private investment in this new financial institution demonstrates commitment to restoring the economic vitality of our communities."

"The good thing is that the situation has been resolved in a positive way," Pinsky said. "The new institution is going to be a CDFI, and the CDFI industry wants to see this new bank and its new owners succeed."


 

 
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