Chicago Bank Created To Serve Poor (Yeah Righ) Relies Heavily On Overdraft Fees

(CHIICAGO) When Chicago-based ShoreBank imploded under the weight of bad loans in August 2010, a who’s who of Wall Street banks and other major institutions rallied to start a new lender that could continue the mission of the South Side stalwart whose fans included President Bill Clinton.

Five years later, Urban Partnership Bank is losing money, shrinking in size, and showing a heavier-than-normal reliance on overdraft fees, which consumer advocates frequently criticize for gouging depositors who overdraw their checking accounts.

Consider:

•In a review of nearly 30 local banks’ regulatory filings in the first quarter, Urban was the second-smallest bank on the list but, in raw dollars generated by consumer overdraft fees, it ranked 16th, according to figures provided to the Tribune last month by industry consulting firm Loan Workout Advisers. Also, the banks that generated more overdraft fees than Urban were significantly larger.

•Consumer overdraft fees made up 53 percent of Urban’s non-interest income. Among the 29 banks reviewed, the next highest in the first quarter was Olympia Fields-based BankFinancial, at 24 percent. Non-interest income is a category of earnings that includes various fees as well as money made from the sale of loans and real estate.

•Urban ranked fourth, in a four-way tie, in the proportion of overdraft fees to consumer deposits, at 5 basis points. It was more than double BMO Harris Bank’s 2 basis points. One hundred basis points equal 1 percentage point.

“I am very surprised to see such high levels of consumer overdraft fees at Urban Partnership, as the bank’s reason for being is to carry on its predecessor’s mission of providing affordable banking services to underserved Chicago communities,” said Justin Barr, Loan Workout managing principal.

In response to the findings, Urban’s chief banking officer, Darrell Hubbard, said it doesn’t offer the kinds of products and services that generate non-interest income for many other banks.

“The fact that overdraft fees are a meaningful percentage of the bank’s non-interest income is reflective of the absence of more typical non-interest income revenue streams,” Hubbard said in an email statement last week.

He also pointed out that it serves a mostly low- and middle-income customer base.

“Our customers typically maintain lower deposit balances than one would find in most other banks,” Hubbard said. “As a result, it is not surprising that the bank’s customers might overdraft their accounts, on average, more frequently than customers of most other banks.”

Take $1.2 billion-asset Old Plank Trail Community Bank. The New Lenox-based institution generated $139,000 in overdraft fees in the quarter, compared with $118,000 at $739 million-asset Urban.

A more striking comparison is against Northern Trust and PrivateBank. They have assets of $107 billion and $16 billion, respectively, yet each haul in only slightly more in overdraft fees than Urban.

To be sure, Urban’s non-interest income is volatile. A regulatory report filed July 30 for the first half shows its overdraft fees as a percent of non-interest income dropping to less than 6 percent — although that was largely due to a spurt in non-interest income from a $5.8 million reimbursement from the Federal Deposit Insurance Corp. for expenses related to bad loans assumed from ShoreBank.

By taking over failed ShoreBank, the FDIC and Urban agreed to share losses on loans of the defunct bank. Loss-sharing on commercial loans expires soon, according to the agreement with the FDIC.

Urban has lost $11 million through the first half of the year and has lost money each year since its 2010 founding. Its assets, consisting mostly of loans, are half of what they were initially. Employee levels are down by about a third. It has closed or sold branches.

“Resolving the loans and assets of the failed ShoreBank is complex and expensive,” Hubbard said. “The acquired ShoreBank portfolio had almost 7,000 loans that were originated over multiple decades.”

He said Urban is “making progress” and is “committed to resolving the loans we can in ways that do not do further damage to communities.”

He said, for example, that it has restructured about 50 loans to churches and other faith-based borrowers. The bank has occasionally sued such borrowers in recent years, according to Cook County records.

The typical bank generates a relatively small percentage of its non-interest income — the part of the bottom line that also includes annuity-sales commissions, and gains on loan and real estate sales — on consumer overdraft fees. Banks with assets of at least $1 billion saw consumer overdraft fees and charges account for 7.6 percent, by median, of non-interest income in the first quarter, according to industry data gatherer SNL Financial. It also found that the median proportion of overdraft fees to average consumer deposits was about 5 basis points; in Loan Workout’s review, the median was 2 basis points.

Banks with assets of at least $1 billion were required to begin reporting that data this year. Despite its relatively small size, Urban still reported the number in its latest filings with the Federal Financial Institutions Examination Council.

Banks say allowing overdrafts can help consumers cover up occasional mistakes or temporary funds shortfalls. Beginning in 2010, banks were required to get a customer’s approval to process everyday debit and ATM card transactions that exceeded the account balance. In the past, banks often covered overdrafts but socked the account holder with a fee.

A Pew report last year found that many consumers are still confused and disapprove of bank overdraft practices and the rules governing them. Despite federal requirements that consumers must agree to debit card overdraft coverage before fees are charged or services are provided, Pew’s survey found that more than half of those who incurred a debit card overdraft penalty fee didn’t believe they opted in to the service.

Urban’s Hubbard said the bank doesn’t assess an overdraft fee on debit card transactions, though it will usually charge them to depositors who write checks that bounce. Its overdraft fee is $35, and it caps its overdraft fee at no more than four a day. It hasn’t increased the fee since 2012.

He said Urban is trying to migrate more of its customers to electronic banking, which typically makes it easier for people to stay on top of their finances.

Hubbard said Urban has originated $275 million in new loans, funding more than 100 projects.

Former President Clinton believed so much in the mission of predecessor ShoreBank that he tried to galvanize other institutions, including Goldman Sachs, to support the bank and help it survive.

Michael Iannaccone, senior adviser for investment bank Tangent Capital Partners and a consultant to community banks, is also troubled by Urban’s reliance on overdraft fees.

“It was granted a new banking charter at the height of the Great Recession to buy the failed ShoreBank and given significant protection by the FDIC against future losses on bad loans and foreclosed real estate,” Iannaccone said. “Arguably, it should be held to a higher standard than any other bank in Chicago relative to providing affordable banking services to its customers.”