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Posted on Thu, Nov 5, 2009 : 5:49 a.m.

Mortgages help but development loans hurt Bank of Ann Arbor, United Bank & Trust

By Dan Meisler

Revenue from mortgage origination is helping offset the continuing drag on earnings from poor quality real estate development loans for the county's top two community banks, according to quarterly reports.

Bank of Ann Arbor, the top community bank by deposit market share according to the Federal Insurance Deposit Corp., earned $1.86 million in the nine months ending Sept. 30, compared to $2.22 million in the same period a year ago.

Over the first two quarters, the bank had net profits of $1.46 million.

United Bancorp, the Tecumseh-based parent of United Bank & Trust, saw a net loss of $2.89 million in the third quarter, and $8.35 million over the entire year.

Both banks reported increased provision for loan losses connected to real estate development loans that are not performing, with increased revenues from mortgages mitigating some of that loss.

In an interview, Tim Marshall, president and CEO of Arbor Bancorp, parent company of Bank of Ann Arbor, said a combination of low interest rates, relatively affordable foreclosure sales and the federal first-time homebuyer tax credit was driving the increased mortgage activity.

"The interest rate environment is probably the most critical variable," he said.

The bank put aside $5.24 million as provision for loan losses over the first nine months of this year, compared to $3.23 million through the first three quarters of 2008. Marshall said that while some homebuilders have been able to adjust to the recession by building and selling lower cost homes, real estate construction loans have been hit by falling appraisals.

In his written message to shareholders, Marshall wrote: "The market conditions and ongoing economic struggles facing Michigan continue to present challenges, particularly in the area of lower appraised values for residential and commercial real estate."

On the other hand, he said, "Bank of Ann Arbor has less exposure in some of the riskier loan segments."

Income from mortgage origination for the bank increased from $1.61 million in the first three quarters of 2008 to $6.78 million in the same period this year. The bank has total assets of $521.25 million as of Sept. 30, compared to $471.15 at the same time last year.

United Bancorp also saw an increase in revenue from mortgage origination from $2.14 million through the first nine months of 2008 to $5.16 million in the same period this year.

"I'm pretty sure we're the No. 1 lender in Washtenaw," said Bob Chapman, president and CEO of the company. "It's been really good ... we have our own back office and service our loans, and we have local appraisers."

Chapman said 60 percent of the mortgages the bank originated in the last quarter were purchases as opposed to refinances.

The bank's allowance for loan losses increased from $14.33 million in September 2008 to $26 million at the end of the third quarter this year. When asked whether the bank had grown too quickly in the years before the recession, Chapman said the real estate development loans the bank made were appropriate at the time.

"When we made the loans, they were good. We never anticipated the sudden and dramatic downturn and the impact it's had," he said. "Until the economy begins to turn around, it's going to continue to be a challenge, but not at the level we've had."

Chapman predicted the allowances for loan losses would start falling at the beginning of 2010.

He emphasized that the bank's core business is strong, with increases in both total assets and deposits. United Bancorp had total assets of $909.85 million after three quarters this year, compared to $815.35 million in the same period last year, and deposits of $783.7 million this year vs. $686.55 million last year.

According to FDIC statistics, Bank of Ann Arbor had a 7.04 percent share of the market in terms of deposits in Washtenaw County as of June 30, compared to a 5.20 percent share for United Bank & Trust. Michigan Commerce Bank, a bank that combined nine banks across Michigan in April, including Ann Arbor Commerce Bank, had a 5.69 percent market share.

Freelance reporter Dan Meisler can be reached at