By Diane Eastabrook

February 14, 2011

SUSIE GHARIB: Eighteen American banks have failed so far this year and all were small, community banks. Local banks are the lifeblood of inner city neighborhoods and small towns, but many have been pummeled in the recession because of bad real estate loans. In Chicago, a new community bank is rising from the ashes of a failed one. Diane Eastabrook reports.

DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chicago’s gritty south side is an area few large banks serve. But some of Wall Street’s heaviest hitters, including Wells Fargo (NYSE: WFC) and JPMorgan Chase, are behind Urban Partnership Bank. The bank opened last summer after big lenders put up roughly $145 million in capital for the assets and deposits of the failed Shore Bank. Shore Bank was a Chicago institution for more than 30 years. Urban partnership’s leaders, William Farrow and David Vitale, call the new bank a win-win for the community and the big banks.

DAVID VITALE, CHAIRMAN, URBAN PARTNERSHIP BANK: The customers we serve will get served by somebody and you don’t want to go back to the ’70s or ’80s when it took the government to force that to happen. But they would certainly have gotten encouragement to have to come in and serve these communities one way or another.

EASTABROOK: In the past couple of years, more than 300 U.S. banks have failed, collapsing under the weight of bad commercial and residential real estate loans. Most, like Shore Bank, were community banks with assets under $10 billion. About half of the loan portfolio Urban Partnership assumed is still at risk. So Farrow says the bank is focused on restructuring those loans and counseling customers.

WILLIAM FARROW, CEO, URBAN PARTNERSHIP BANK: We’ve actually have had customers come in while we’re trying to do this and say, look, you’re the best resource that we have to understand how we make money, to review my business plan, understand my balance sheet as a bank.

EASTABROOK: Urban Partnership wants to take a different course than its predecessor, relying less on real estate loans and more on business loans. It also wants to market basic banking services to locals. Since inner city neighborhoods are notoriously underserved by lenders, many residents don’t have checking or savings accounts. Geoff Smith is a senior vice president at Woodstock Institute, a Chicago nonprofit that studies fair lending. He thinks those services are critical to the survival of distressed communities, but he admits providing them isn’t easy.

GEOFF SMITH, SENIOR V.P., WOODSTOCK INSTITUTE: Just because they open up shop, that all the problems are solved. I think it’s going to require patience and persistence to get the job done. But this is the kind of institution that needs to be there to make it happen.

EASTABROOK: Urban Partnership thinks its strategy can bring stability, new business and jobs to a community in need. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.

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