Failed New Liberty Bank created opportunity for Bank of Ann Arbor's expansion into Plymouth

The move - among what’s expected to be hundreds of bank closings in the U.S. this year - represents the first local takeover of a troubled bank since the banking crisis began in 2008.

It’s also the first acquisition by the Bank of Ann Arbor, which has grown by adding branches in  Washtenaw County since it was founded in 1996.

Marshall said Bank of Ann Arbor’s strong balance sheet put it into contention to acquire the failed bank and turn it into an expansion opportunity amid the biggest banking crisis in decades.

The acquisition closes a 6-week process during which Bank of Ann Arbor had to be certified by the FDIC to bid on the failed bank.

“You have to be highly rated and financially strong,” Marshall said. “The management team has to have proven that we can make an immediate acquisition and fold it in, and operate it very successfully.”

The transaction, Marshall said, involves BOAA and the FDIC entering into a loss sharing agreement for about $95 million of New Liberty Bank’s $109 million in assets.

According to the FDIC, "Bank of Ann Arbor did not pay the FDIC a premium for the deposits of New Liberty Bank. In addition to assuming all of the deposits of the failed bank, Bank of Ann Arbor agreed to purchase essentially all of the assets."

The deal, Marshall said, “is a financially appealing transaction.”

In turn, he said, “we have to work with the FDIC to work out the current loan problems.”

The loss sharing program means the FDIC will cover 80 percent of losses, leaving BOAA with 20 percent.

New Liberty is located on Ann Arbor Road, between Main Street and Sheldon Road, about 1 mile southwest of downtown Plymouth. It serves customers in Plymouth, Canton, Novi and Livonia, Marshall said.

The move expands the local bank into the larger regional market, continuing the growth arc for Bank of Ann Arbor and extending its footprint into Western Wayne County. Besides its branches and headquarters in Ann Arbor, BOAA also operates an Ypsilanti banking center.

While the national banking industry has been pummeled since 2008 with waves of closings, Bank of Ann Arbor’s balance sheet shows stability when compared to both Michigan and national banking averages and also growth on several key measures since 2008. They include:

• Employees, up 61 to 181
• Total assets, up to $543 million from $489 million
• Non-current loans dropped from 1.3 percent to 1.07 percent

That foundation - which Marshall credits in part to conservative approaches to lending - made BOAA a contender to take over the failed bank, he said.

Failed banks attract three types of potential suitors, Marshall said.

Some banks will seek the acquisition for financial impact, no matter the geography or type of bank. Also in the competitive field are parties - such as private equity firms - that are not banks but seek the charter as an entry into the banking industry.

Bank of America fits the third category, Marshall said: Existing banks that consider the acquisition part of a strategic plan.

“This is a strategic expansion of our footprint,” Marshall said. “It will also be a nice growth opportunity for us.”

The acquisition fulfills a Bank of Ann Arbor strategy to expand into New Liberty’s market. Bank officials had planned on opening a branch in Canton - and had identified a location - but stopped the plans by late 2006 as the economic conditions started to change.

The community’s proximity to Ann Arbor is a factor for the expansion, Marshall said. So are its other connections to the area.

“There’s a lot of commuter traffic to Ann Arbor from people in those nearby communities,” Marshall said.

Federal closings of failed banks is happening this year at twice the rate in 2009, when bank failures were at their highest since 1992.

As of Friday, the year’s total was 70 failed banks, compared to 28 at the same time in 2009.

And industry experts say the total for 2010 could climb to 200. More are possible in 2011 and 2012, according to analysts. More than 700 banks are on watch lists.

The closings come even as other signs point to a national economic turnaround. The biggest factor in the shutdowns, according to analysts, are troubled loans - many of them in the real estate sector - made from 2005-2007 at the height of the credit boom.

That appears to be the circumstance at New Liberty.

“It’s very similar to other banks that have gotten into trouble,” Marshall said.

New Liberty had been under a cease and desist order since summer 2009, when the state’s Office of Financial and Insurance Regulation and the Federal Deposit Insurance Corporation charged it with “unsafe or unsound banking practices and violations of law.”

The bank entered into a consent agreement on June 8. Regulators said the bank had been operating with inadequate capital protection, hazardous lending and lax collection practices, and an inadequate funds management policy.

The same order said that New Liberty management’s policies jeopardized the safety of deposits and the board of directors failed to provide adequate supervision.

While New Liberty was working out its problems, BOAA was growing. It added $52 million in deposits last year as community banks gained favor over national lenders, and it added about 18 employees in the last two years.

The timing to expand into Plymouth was right for the bank, Marshall said.

“There’s a limited number of markets that would be available for this type of transaction that you’d want to get into,” Marshall said. “For us, it was such a natural fit.”