ShoreBank shut down by FDIC

An exterior view of ShoreBank at 3401 S. King Drive on the South Side, May 18, 2010. (Chris Walker/Chicago Tribune)

ShoreBank, which billed itself as the nation’s first and leading community development and environmental lender, failed Friday and was acquired by a consortium of big banks, insurers, philanthropic groups and civic-minded individuals.

ShoreBank is the 15th Illinois lender to fail this year, and the 114th to be seized by regulators nationally.

Its failure is expected to cost the Federal Deposit Insurance Corp. $367.7 million. The FDIC is funded by the banking industry.

But even though remnants of ShoreBank are being acquired by a sympathetic investor group that for months has been willing to help the institution, the bank’s failure raises questions about whether its business model is flawed and, going forward, must change in its markets of Chicago, Cleveland and Detroit. ShoreBank has pointed out that it was profitable for decades before the current recession.

“When I sat in the regulatory meetings briefly with ShoreBank early this year, even the state banking commissioner said ‘There’s no doubt if we had to save ShoreBank, or if the regulators hold off, its near-term business model has to change because it’s a little out there in terms of mortgages,’” Bill Brandt, chairman of the Illinois Finance Authority, a government financing body that looked at ways to help ShoreBank, recalled recently.

He has said ShoreBank’s failure could devastate already down-on-their-luck neighborhoods.

“The FDIC will try to sugarcoat it and say, ‘We’re not, like we did with Park National Bank, acting irresponsibly and cavalierly to the needs of this community,’” Brandt said. “The truth of the matter is when they seize it, what was and is ShoreBank will be forever lost to that community.”

For about a year, ShoreBank, which has 15 branches, has been under pressure to raise capital. Last spring, several big financial institutions, philanthropic groups, insurance companies and civic-minded individuals pledged about $150 million to undercapitalized ShoreBank, which then hoped to be eligible for about $75 million in government aid.

But bailout money from the U.S. Treasury’s Troubled Asset Relief Program wasn’t forthcoming as ShoreBank’s finances continued to deteriorate, and as critics complained about the prospects that a relatively small bank was getting preferential treatment by Washington insiders for a possible taxpayer-funded program.

Now that $2.17 billion-asset ShoreBank is history, the new bank, called Urban Partnership Bank, has many of the same big institutions as investors and has named former First Chicago executive Bill Farrow as the chief executive and president of the institution. It will assume all the deposits.

He had joined ShoreBank a few months ago as president and chief operating officer, along with two other First Chicago executives, David Vitale, who became executive chairman, and Eileen Kennedy, recently named chief financial officer.

A ShoreBank spokesman said the team wasn’t available for interviews on Friday.

Loans on ShoreBank’s books had already fallen from nearly $1.5 billion as of March 31, 2009, to about $1.3 billion as regulators restricted ShoreBank’s lending and the bank tried to conserve capital.

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

Starting in 2001, ShoreBank has filed more than 325 foreclosure lawsuits in Cook County, according to Kaneville-based Record Information Services, which compiles real estate data. About two-thirds have been one- to four-family single-family residences, followed by apartment buildings and commercial properties. Many of its foreclosures have occurred in such communities as Englewood, Roseland, South Shore, North Lawndale, South Chicago and West Englewood.

ShoreBank has filed more than 30 Cook County foreclosure cases so far in 2010, and, if the pace continues, will surpass those filed in 2009 and 2008.

“The number of foreclosures that occurred and continue to occur in these neighborhoods was a symptom of our desire to have full homeownership without any sanity attached to it,” Record Chief Executive Jeff Metcalf said.

From its beginning in 1973, the mission of South Shore Bank, later ShoreBank, was to revitalize declining, mostly black Chicago neighborhoods. Redlining and other discriminatory practices had taken a toll on communities such as South Shore, and the bank set out to prove that reinvestment could help revitalize communities.

Urban Partnership Bank will pay the FDIC a premium of 0.50 percent to assume all of the deposits of ShoreBank. In addition to assuming all of the deposits of the failed bank, Urban Partnership Bank agreed to purchase essentially all of the assets except for the marketable securities and fixed assets.

The FDIC and Urban Partnership Bank entered into a loss-share transaction on $1.41 billion of ShoreBank’s assets. Urban Partnership Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector.