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Posted on Mon, Aug 3, 2009 : 5:05 p.m.

Bank of Ann Arbor buoyed to first-half profits by mortgage growth

By Dan Meisler

Losses from nonperforming real estate loans continue to eat away at the bottom lines of local banks, but increased mortgage activity - some of it driven by attempts to take advantage of rules on home appraisals -- has resulted in first-half profits for one local lender.

A nearly fourfold increase in income from mortgage origination helped Arbor Bancorp, the parent company of Bank of Ann Arbor, reach a profit of $1.46 million in the first six months of 2009, up from $1.33 million the year before.

The bank took in $4.55 million through mortgage originations in the period, up from $1.27 million in the first half of 2008.

At the same time, the company put aside $3.24 million as provision for loan losses in anticipation of loans becoming uncollectible, up from $2.12 million in the same period last year.

“We’re pleased but cautious,” said president and CEO Tim Marshall.

Marshall attributed the growth in mortgage business to the competitive advantage of Bank of Ann Arbor and other community banks relating to new rules meant to separate the selection of home appraisers from institutions that profit from mortgage sales.

Under the rules, which went into effect in May, lenders must use independent companies to select from a list of approved appraisers. The goal is to prevent lenders from influencing appraisals, but an unintended consequence has been to bring in appraisers from out of town who may be unfamiliar with the territory. That has led to deals being scuttled because appraisals came in too low, real estate industry experts said.

Bank of Ann Arbor overcame that by putting only local appraisers on the list it gave the appraisal management company it hired.

“As a community bank, we can create some competitive advantage by working strictly off a local appraisal list,” Marshall said.

Low interest rates were another factor in boosting the company’s lending business, he added.

Still, the bank’s gains from mortgage originations were eroded by higher provisions for loan losses. The amount the bank put aside to make up for loans expected to become uncollectible jumped from $2.12 million in the first half of 2008 to $3.24 million in the same period this year.

Marshall said he expects the rate of loan loss provisions to be stable for the rest of the year.

United Bancorp, parent company of United Bank & Trust, saw similar trends in its quarterly report, released in late July. It ended the first half of the year with an operating loss of $5.46 million compared to profits of $3.58 million in the same period last year.

Provisions for loan losses rose in the second quarter to $5.4 million compared to $1.65 million a year ago.

But its noninterest income also rose 25.1 percent for the quarter and 20.4 percent for the year, due partly to “record levels of residential mortgage originations,” according to the company’s earnings press release.