Ann Arbor, Michigan, September 3, 2019, — University Bancorp, Inc. (OTCQB: UNIB) announced that it had an unaudited net income attributable to University Bancorp, Inc. common stock shareholders in 2Q2019 of $622,269, $0.12 per share on average shares outstanding of 5,202,899 for the second quarter. Net income for the quarter was adversely impacted by a decrease in the valuation of mortgage servicing rights (MSRs) due to declining interest rates and by the cost of starting our residential mortgage correspondent origination business unit (AMS). For 2Q2018 unaudited net income was $889,261, $0.17 per share on average shares outstanding of 5,200,899. For the 12 months ended June 30, 2019, net income was $602,499, $0.116 per share on average shares outstanding of 5,202,406 for the period. For the second quarter of 2019 minority expense of $9,643 was incurred related to the minority investor which owns 20% of our UIF subsidiary.
Shareholders’ equity attributable to University Bancorp, Inc. common stock shareholders was $25,315,086 or $4.87 per common share, based on 5,202,899 common shares outstanding at June 30, 2019.
Management believes that revenue and net income for the third and fourth quarters of 2019 will improve compared to the second quarter of 2019 and be favorably impacted by:
- High current volumes of mortgage loan originations, applications, submissions and locked loans;
- Increased volumes following the recent re-launch of AMS; and
- The scheduled launch of our warehouse lending business in late September, and the roll-out of other new mortgage products.
Future net income may be negatively affected by additional write-downs on the value of MSRs that management anticipates as result of interest rate declines in the third quarter of 2019.
President Stephen Lange Ranzini noted, “We continue to invest in building our business and these substantial investments and other unusual factors restrained our profitability in the second quarter. Based on current business activity, we anticipate improving profits for the rest of 2019, as we begin to benefit from our investments.”
During the second quarter we made significant progress with several key initiatives that had a short term cost but which we believe will have a positive impact on future results:
- The new AMS client facing software went live at the end of May and the pipeline of loans at AMS is rising rapidly, and was $93 million at the end of August. Closings at AMS are also rising rapidly and were $26.6 million in August, with applications of $61.7mm.
- Midwest Loan Services on boarded 6,400 subserviced mortgages from a top 10 bank in Michigan and on boarded its first home equity line of credit subserviced mortgages. It now subservices over 131,000 mortgages with a balance of $23.5 billion, up 9.8% year to date. Our subservicing unit has approximately 0.25% market share of the $9.4 trillion in mortgage balances in the U.S.
- We successfully integrated and retained 52 employees from Huron Valley Financial (HVF), including 26 retail residential loan officers, 26 support staff and the reverse mortgage team. Our reverse mortgage team completed its test cases and obtained delegated underwriter status with FHA for reverse mortgage originations.
- We launched the faith based declining balance mortgage product in Michigan at the beginning of June and plan to roll this product out in additional states over the next year.
- Substantial progress was made on several other new product and sales channel roll-outs.
Results in 2Q2019 were positively affected by a seasonal factor and an unusual gain, which were more than offset by two unusual expenses, which had an overall negative cumulative impact of $(1,614,460), before tax:
- The fair market value of the hedged mortgage origination pipeline (FMV) rose $829,136 as the amount of locked loans rose over the seasonally low level at the end of 1Q2019 and the AMS division began to grow its pipeline;
- All potential indemnification requests related to a portfolio of mortgage loans sold in the early 2000s was settled for $28,000 less than the reserve we had established in 1Q2019.
- With the fall in long term mortgage interest rates during the quarter the valuation of our MSRs decreased $(1,230,002);
- Start-up expenses related to the American Mortgage Solutions division (AMS) were $(1,241,594).
Results in 2Q2018 were negatively affected by four large non-recurring expenses not offset by any unusual gains, which had an overall negative cumulative impact of $(933,085), before tax:
- The value of the hedged mortgage origination pipeline fell $(455,606) as the amount of locked loans fell over the level held as of 3/31/2018. This was partly due to a benefit of the new Encompass Loan Origination System we put into place during the first quarter, which has decreased the length of time from origination to closing of our mortgage loans being originated;
- Two Midwest Loan Services lawsuits were settled out of court for a total of $(260,000);
- Obtaining the final ruling on an appeal related to the Guidance Residential litigation resulted in total legal costs of $(143,000). This litigation is now ended and the time for any further appeals has lapsed;
- With the fall in long term mortgage interest rates the valuation of mortgage servicing rights (MSRs) decreased $(74,479).
Mortgage origination volumes rose 8.5% in the first half of 2019 (1H2019), with strong volumes at UIF (up 32.7%) and AMS (up 104.4% from a very low base), where overall margins are lower, only partially offset by a 5.8% decline at ULG, which is more focused on FHA and VA lending, where margins are higher. A slowness in our mortgage business continued through the end of 1Q2019, April results were slightly ahead of April 2018, and our mortgage businesses accelerated in May and our mortgage closings then had three monthly records. Closings during a month exceeded $100 million for the first time ever in May with $104.7 million, followed by a new record in June of $120.6 million, in July we had $120.1 million and in August we closed $136.0 million.
In 1H2019, our residential mortgage origination groups originated $465.4 million of mortgages, of which $273.8 million were originated by our retail origination group, University Lending Group, LLC (ULG), $169.8 million were originated by our UIF unit, and $21.8 million by our wholesale correspondent origination group (AMS). Home purchase transactions originated during 1H2019 fell 9.1% at ULG and rose 34.0% at UIF over the 1H2018 level and 91.3% of our retail originations at ULG and 90.8% of our UIF originations in 1H2019 financed home purchase transactions.
For 1H2019, the Company had an annualized return on equity attributable to common stock shareholders of -0.5% on initial equity of $25,189,720. Return on equity over the trailing twelve months was 2.4% on initial equity of $24,889,216.
Total Assets as of 6/30/2019 were $325,631,000 versus $266,905,000 at 3/31/2019, $247,024,330 at 12/31/2018, $255,647,000 at 3/31/2018 and $245,885,002 at 12/31/2017.
The Tier 1 Leverage Capital Ratio fell to 8.39% on net average assets of $232.1 million, from 9.43% at 3/31/2019 on net average assets of $191.9 million, 9.41% at 12/31/2018 on net average assets of $199.8 million, 10.27% at 3/31/2018 on net average assets of $179.4 million and 10.60% at 12/31/2017 on net average assets of $190.0 million.
Basel 3 Common Equity Tier 1 Capital at 6/30/2019 was $18,292,000, at 3/31/2019 was $17,100,000, at 12/31/2018 was $17,789,000, at 3/31/2018 was $17,465,000, and at 12/31/2017 was $19,352,000. The FDIC recently finalized a revision to the Basel 3 Capital Rules that changes the capital charges for carrying MSRs and which allows the inclusion of some minority interest in Tier 1 Capital. When this rule becomes effective on 4/1/2020, the Bank’s Tier 1 Capital is projected to rise by $3 million.
Basel 3 Total Risk Weighted Assets at 6/30/2019 were $171,567,000, at 3/31/2019 were $128,001,000, at 12/31/2018 were $114,021,000, at 3/31/2018 were $139,284,000, and at 12/31/2017 were $159,683,000. With recent changes negotiated with loan correspondents, risk weighted assets will moderate by year-end despite the increased level of mortgage originations.
The Common Equity Tier 1 Risk Weighted Capital Ratio at 6/30/2019 was 10.66%, at 3/31/2019 was 13.36%, at 12/31/2018 was 15.60%, at 3/31/2018 was 12.54%, and at 12/31/2017 was 12.12%.
Cash & marketable securities at the Company, available to meet working capital needs and investment opportunities at University Bank were $5,802,922. The Company has no debt and a class of convertible preferred stock outstanding with a liquidation preference of $5,000,000.
Liquidity remains excellent. Midwest Loan Services controls an average balance of $322.2 million of mortgage escrow deposits under long term contracts, and we manage an average of over $150 million of deposits in an off-balance sheet sweep arrangement through a series of deposit accounts at the Federal Home Loan Bank of Indianapolis on which we earn interest just under the Fed Funds rate.
Michigan and the Ann Arbor MSA continue to increase employment and as a result, the performance of our portfolio loans and our overall asset quality continues to be excellent. Including one residential foreclosed other real estate owned property carried at $70,586 at quarter-end, substandard assets rose during 2Q2019 to $1,074,189, 5.52% of Tier 1 Capital at 6/30/2019. The allowance for loan losses stands at $670,567 or 0.84% of the amount of portfolio loans, excluding the loans held for sale.
Treasury shares as of 6/30/2019 were zero.
Other key statistics as of 6/30/2019:
- 5-year annual average revenue growth*, 8.2%
- 1H2019 vs. 1H2018 revenue growth*, 3.9%
- 5 Year Average ROE 19.3%
- LLR/NPAs>90 % 135.3%
- Debt to equity ratio, 0%
- Current Ratio,# 65.6x
- Efficiency Ratio, %+ 98.9%
- Total Assets, $325,631,000
- Loans Held for Sale, before Reserves, $99,742,534
- NPAs >90 days $425,197
- TTM ROA % 0.24%
- TCE/TA % 8.42%
- Total Capital Ratio % 13.14%
- NPAs/Assets % 0.33%
- Texas Ratio % 3.82%
- NIM % 4.42%
- NCOs/Loans % 0.0051%
- Trailing 12 Months P-E Ratiox 67.4x
*Using Trailing 12 month 1H2019 sales which were $29,958,200, 1H2018 sales which were $28,845,521, 2018 sales which were $55,988,570 and 2013 sales which were $38,856,573.
#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 $7.80 per share.
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 $24,923,205 or $4.79 per share at 6/30/2019. Please note that we view the current market values of our insurance agency and Midwest Loan Services as substantially in excess of their carrying value including this goodwill. In June, management uploaded an updated version of its valuation model to the corporate investor relations web page, which investors may use to customize their own views of the values of the business units owned by the Company.
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 owns 100% of University Bank which, together with its Michigan-based subsidiaries, holds and manages a total of over $24 billion in financial assets for over 136,000 customers, and our over 470 employees make us the 5th largest bank based in Michigan. 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. Founded in 1890, University Bank® is the 15th oldest bank headquartered in Michigan. 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 and warehouse 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, mortgage origination levels and margins, valuations, 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. We undertake no obligation to update any information or forward-looking statement. ###