Ann Arbor, Michigan, April 15, 2019,– University Bancorp, Inc. (OTCQB: UNIB) announced that it had audited net income attributable to University Bancorp, Inc. common stock shareholders in 2018 of $2,230,166, $0.43 per share on average shares outstanding of 5,201,995 for the year, versus audited net income attributable to common stockholders of $5,124,358, $0.99 per share on average shares outstanding of 5,184,735 for 2017.
For 2018, the Company had a return on equity attributable to common stock shareholders of 9.5% on initial equity of $23,376,660. Return on equity in 2017 was 28.3% on initial equity of $18,075,835. Shareholders’ equity at year-end 2018 was $33,369,657 (including minority interest of $3,179,937) reflecting the issuance in December 2018 of $5 million of 6% Series 5 Convertible Preferred Stock. The Preferred Stock was issued for $4.75 million, or 95% of face value, and is convertible into common stock at $10 per share.
We currently project budgeted annual net income in 2019 of at least $6,400,000 or $1.23 per share, which would be a 25% return on equity. Improved 2019 results are predicated on a 15% rise in loans subserviced at Midwest Loan Services, due to recently won contracts and customer commitments to a new product offering of home equity lines of credit subservicing rolling out this quarter, a return to profitability at Midwest Loan Solutions (Solutions) and University Lending Group (ULG), and profits from three transactions in March 2019, as discussed below.
President Stephen Lange Ranzini noted, “2018 results were well below trend due to unusual factors and our increased investment in the mortgage origination business. Our five year annual average return on shareholders’ equity was 19.9%.”
Shareholders’ equity attributable to University Bancorp, Inc. common stock shareholders was $25,189,720 or $4.84 per share, based on shares outstanding at December 31, 2018 of 5,202,899, up from $4.49 per share at the end of 2017.
Results in 2018 were restrained by several notable items, which had an overall negative cumulative impact of $703,457, before income taxes:
- The value of the hedged mortgage origination pipeline fell $427,167 as the amount of locked loans at year-end 2018 dropped over the level at year-end 2017;
- Implementation costs related to the adoption of a new mortgage loan origination system in the amount of $121,250 were charged against income;
- Legal fees at UIF of $143,000 were incurred due to the results of an appeal related to litigation that is now completed;
- Legal fees at Midwest Loan Services of $440,000 were incurred by settling two litigations at an early stage;
- With the rise in long-term mortgage interest rates during 2018, the valuation
of mortgage servicing rights (MSRs) increased $427,960.
Results in 2018 were negatively impacted by pre-tax losses in the amount of $3,531,073 at Solutions, our wholesale lending subsidiary, which is in the process of re-launching its business with new state of the art technology and a sales team and support staff. The technology integration project is expected to be completed May 1, 2019. The newly hired team at Solutions historically has generated for prior employers in excess of $9 billion of annual originations. Its budget for 2019 is to originate $638,000,000 in loans at a gross margin of 0.52%, for pre-tax loss of $422,350, while reaching profitability in 3Q2019. In 2020 we anticipate this division will have net income of over $1,400,000, or a greater than 25% return on capital employed, from over $900 million in annual originations at a gross margin of 0.52%.
In addition, results in 2018 were also negatively impacted by pre-tax losses in the amount of $2,009,066 at ULG, our retail lending subsidiary, after being charged $2,108,632 in interest expense by University Bank, an amount that is eliminated in consolidation. Beginning in 4Q2017, margins on mortgage originations have been negatively impacted by the first industry-wide pricing war since the 2007-2009 financial crisis. This pricing war continued into the 1Q2019. Its budget for 2019 is to originate $501,000,000 in loans, for pre-tax profit before interest expense of $2,480,101, and pre-tax profit of $277,908, after $2,202,193 in interest expense paid to University Bank, which is eliminated in consolidation. The 2019 budget assumes no improvement in margins from current levels, and does not take into account the addition of over $100 million of annual production and related profitability from the deal we recently implemented with Huron Valley Financial, which made us the largest first mortgage lender with local offices in Washtenaw County and recent recruitment successes in North Carolina and South Carolina, which should also add a material amount of additional annual originations.
Results in 2017 were restrained by several notable items, which had an overall negative cumulative impact of $1,592,326, before income taxes:
- With the fall in long-term mortgage interest rates during the first eight months of 2017, the valuation of mortgage servicing rights (MSRs) decreased $828,031;
- The value of the hedged mortgage origination pipeline fell $699,760 as the amount of locked loans at year-end 2017 dropped over the level at year-end 2016;
- Implementation costs related to the adoption of a new mortgage loan origination system in the amount of $392,500 were charged against income;
- Legal fees at UIF of $203,346 were incurred due to the results of the appeal related to the litigation with Guidance Residential;
- A litigation was settled at an early stage for $75,000;
- A $606,311 gain (net of all related expenses) on the $1.2 million sale by Ann Arbor Insurance Centre (AAIC) of its former 4,852 ft2 headquarters and related 1.331 acres of land. AAIC relocated in December into a building we purchased two doors down the street which is now also being used to support the bank’s back office operations. The building, purchased for $2,370,000 or $99 per ft2, is a modern three story office building in Ann Arbor, near the Ann Arbor freeway ring with 24,000 ft2 of office space.
In addition, net income in 2017 benefited from the December 22, 2017 change in federal income tax law pursuant to the Tax Cuts and Jobs Act, reducing the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate. Because of the reduction in the U.S. corporate income tax rate, we re-measured our ending net deferred tax assets and liabilities at December 31, 2017, which dropped from $5,286,511 to $3,265,510, resulting in an income tax benefit of $2,021,001. As a result the Company recorded an overall income tax benefit for 2017 of $573,453.
Our 2019 budget forecast includes our estimated results in the 1Q2019 plus our original budget for the final three quarters of 2019, adjusted for all known major changes. The forecast assumes no change in mortgage interest rates from current levels. It also takes into account the added profitability from the deal we recently closed with Huron Valley Financial. Additionally we were able to execute opportunistic acquisitions of a pool of FNMA MSRs and a $6.8 million portfolio of home equity loans, both subserviced by Midwest Loan Services, at attractive valuations. We expect these to be immediately accretive to 2019 earnings and this highlights the strategic value of our servicing business.
In 2018, our residential mortgage origination groups originated $847.4 million of mortgages, mostly sold to the secondary market for our own account, of which $547.8 million were originated by our retail origination group, ULG, $269.9 million were originated by our UIF unit, and the remainder originated by our credit union and community bank origination group. In 2018, 95% of our ULG originations and 91% of our UIF originations financed purchase transactions, and purchase transaction originations increased by 4.1% and 16.5%, respectively. Purchase transaction originations have risen consistently for the past five years as both ULG and UIF place trained lenders into additional markets nationwide.
ULG specializes in FHA, VA, renovation and construction to permanent lending, deriving about 60% of its volume from these higher margin programs, and UIF specializes in faith-based lending.
The bank’s net income has benefited substantially by progressively higher amounts from increases in the Fed Funds interest rate over the past two years, since our mortgage subservicing business manages over $100 million of off-balance sheet escrow deposit accounts from which we earn all interest income and which are invested in overnight interest earning deposits at the Federal Home Loan Bank of Indianapolis.
Michigan and the Ann Arbor Metropolitan Statistical Area continue to increase employment and as a result, the performance of our portfolio loans and our overall asset quality continues to perform well, and we are experiencing low loan delinquencies.
University Bank continues to use an outside vendor to perform Stress Testing analysis and these tests have determined that under a severely adverse (depressionary) national economic scenario worse than the depression we just experienced, assuming an 8.9% drop in GDP, an unemployment rate over 10%, a 29.9% decline in housing prices, and 40.1% decline in commercial real estate prices from current levels, University Bank would sustain loan losses of just $1.6 million over two years. This credit risk is moderated by the existing allowance for loan losses of $0.4 million. At $1.2 million, the credit risk under a depressionary economic scenario net of the allowance is just 6% of Tier 1 Capital.
We had five loans delinquent 30 days or more at 12/31/2018. The allowance for loan losses stands at $322,673 or 0.58% of the amount of portfolio loans, excluding loans held for sale. Substandard assets fell 42.5% during 4Q2018 to $621,312, 3.3% of Tier 1 Capital at 12/31/2018, including $70,586 of other real estate owned at year-end.
Excluding goodwill & other intangibles related to the acquisition of Midwest Loan Services and Ann Arbor Insurance Center, net tangible shareholders’ equity attributable to University Bancorp, Inc. common stock shareholders was $24,762,268 or $4.76 at 12/31/2018, up from $4.40 per share at 12/31/2017. Please note that we do not see this latter statistic as particularly useful or meaningful, as our assessment of the value of Midwest Loan Services and Ann Arbor Insurance Centre is far above book value plus the related goodwill and intangibles.
A net loss of $454,806 was incurred for the three months ended December 31, 2018 or $0.09 on average shares outstanding of 5,201,406 for the period, versus net income of $2,471,277 or $0.475 on average shares outstanding of 5,200,899 for the same 2017 period.
Results in 4Q2018 were restrained by the typical seasonal mortgage origination slowdown as well as several notable items, which had an overall negative cumulative impact of $1,117,688, before income taxes:
- With the rise in long-term mortgage interest rates, the valuation of MSRs decreased by $284,101.
- The value of the hedged mortgage origination pipeline fell $653,587 as the amount of locked loans fell over the quarter due to a more than usual seasonal slowdown;
- Legal fees at Midwest Loan Service of $180,000 were incurred by settling a litigation at an early stage;
Unusual gains: None.
Results in 4Q2017 were restrained by the typical seasonal slowdown as well as several notable items, which had an overall negative cumulative impact of $550,506, before income taxes:
1. The value of the hedged mortgage origination pipeline fell $838,431 as the amount
of locked loans fell over the quarter due to a more than usual seasonal slowdown;
- Implementation costs related to the adoption of a new mortgage Loan Origination System in the amount of $121,250 were charged against income;
- Legal fees at UIF of $203,346 were incurred due to the results of the appeal related to the litigation with Guidance Residential;
- A $606,311 gain (net of all related expenses) on the $1.2 million sale by AAIC of of its former 4,852 ft2 headquarters and related 1.331 acres of land;
- With the rise in long-term mortgage interest rates, the valuation of mortgage servicing rights (MSRs) increased $6,210.
With the decline in the bank’s average assets due to seasonally decreased mortgage originations, the Tier 1 Leverage Capital Ratio rose to 9.41% at 12/31/2018 on net average assets of $199.8 million from 8.33% at 9/30/2018 on net average assets of $231.1 million, 10.60% at 12/31/2017 on net average assets of $190.0 million, and 8.64% at 12/31/2016 on net average assets of $183.3 million.
With the rise in mortgage servicing rights offsetting net income, Basel 3 Common Equity Tier 1 Capital at 12/31/2018 fell to $17,789,000, at 9/30/2018 was $18,252,000, at 12/31/2017 was $19,352,000, and at 12/31/2016 was $14,215,000.
Basel 3 Total Risk Weighted Assets at 12/31/2018 were $114,021,000, at 9/30/2018 were $118,670,000, at 12/31/2017 were $159,683,000, and at 12/31/2016 were $96,908,000.
The CET1 Risk Weighted Capital Ratio at 12/31/2018 was 15.60%, at 9/30/2018 was 15.38%, at 12/31/2017 was 12.12%, and at 12/31/2016 was 14.67%.
Total Assets as of 12/31/2018 were $247,024,330, versus $265,660,000 at 9/30/2018, $245,885,002 at 12/31/2017 and $190,940,176 at 12/31/2016.
Other key statistics as of 12/31/2018:
- 5-year annual average revenue growth*, 8.8%
- 1-year annual revenue growth*, 2.7%
- 5 Year Average ROE 19.9%
- LLR/NPAs>90 % 69.7%
- Debt to equity ratio, 0%
- Current Ratio,# 66.1x
- Efficiency Ratio, %+ 94.8%
- Loans Held for Sale, $56,996,744
- NPAs >90 days $484,088
- TTM ROA % 0.96%
- TCE/TA % 9.90%
- Total Capital Ratio % 13.74%
- NPAs/Assets % 0.25%
- Texas Ratio % 2.52%
- NIM % 3.88%
- NCOs/Loans % -0.323%
- Trailing 12 Months P-E Ratiox 19.8x
*Using 2018, 2017, 2016, 2015, 2014 and 2013 revenue which were $55,988,570, $54,493,179, $50,948,149, $43,644,425, $36,598,052 and $38,856,573, respectively.
#Parent company only current assets divided by 12 month projected cash expenses.
+Calculated as: (non-interest expense/(net interest income + non-interest income))
xBased on last sale of $8.50 per share.
Treasury shares as of 12/31/2018 were zero.
Shareholders and investors are encouraged to refer to the financial information including the audited financial statements, strategic plan and prior press releases, available on our investor relations web page at: http://www.university-bank.com/bancorp/.
Ann Arbor-based University Bancorp, Inc. owns 100% of University Bank which, together with its Michigan-based subsidiaries, holds and manages a total of over $22 billion in financial assets for over 127,000 customers, and our 440 employees make us the 5th largest bank based in Michigan. Founded in 1890, University Bank® is an FDIC-insured, locally owned and managed community bank, and meets the financial needs of its community through its creative and innovative services. We are proud to have been selected as the “Community Bankers of the Year” by American Banker magazine and as the recipient of the American Bankers Association’s Community Bank Award. University Bank is a Member FDIC. The members of University Bank’s corporate family, ranked by their size of revenues are:
- University Lending Group, a retail residential mortgage originator based in Clinton Township, MI;
- Midwest Loan Services, a residential mortgage subservicer based in Houghton, MI;
- UIF, a faith-based banking firm based in Southfield, MI;
- Community Banking, based in Ann Arbor, MI, which provides traditional community banking services in the Ann Arbor area;
- Midwest Loan Solutions, a residential mortgage correspondent lender based in Southfield, MI;
- Ann Arbor Insurance Centre, an independent insurance agency based in Ann Arbor.
CAUTIONARY STATEMENT: This press release contains certain forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements concerning future growth in assets, pre-tax income and net income, budgeted income levels, the sustainability of past results, and other expectations and/or goals. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, economic, competitive, governmental and technological factors affecting our operations, markets, products, services, interest rates and fees for services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.