Ann Arbor, Michigan, April 3, 2020, — University Bancorp, Inc. (OTCQB: UNIB) announced that it had audited net income attributable to University Bancorp, Inc. common stock shareholders in 2019 of $3,616,824, $0.64 per share on average shares outstanding of 5,203,967 for the year, versus 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 2018.
For 2019, the Company had a return on equity attributable to common stock shareholders of 13.2% on initial equity attributable to common stock shareholders of $25,189,720. Return on equity attributable to common stock in 2018 was 9.5% on initial equity of $23,376,660. Shareholders’ equity attributable to University Bancorp, Inc. common stock shareholders at December 31, 2019 was $28,552,142 (excluding minority interest of $ $3,379,504 and excluding $5,000,000 of equity attributable to the 6% Series 5 Preferred Stock, which is convertible at $10 per share), or $5.49 per share, based on common shares outstanding at December 31, 2019 of 5,204,899, up from $4.84 per share at the end of 2018.
President Stephen Lange Ranzini noted, “2019 results continued to be well below trend due to unusual factors and our increased investment in growing our mortgage origination business. The average of the annual return on our shareholders’ equity over the past five years was 21.4%.”
Results in 2019 were restrained by several notable items, which had an overall negative cumulative impact of $1,140,127, before income taxes:
- With the sharp drop in long-term mortgage interest rates during 2019, the valuation of mortgage servicing rights (MSRs) decreased $2,683,602;
- All potential indemnification requests related to a portfolio of mortgage loans sold in the early 2000s was settled for a payment of $190,000;
- The value of the hedged mortgage origination pipeline rose $1,263,475 as the amount of locked loans at year-end 2019 rose over the level at year-end 2018;
- A portfolio of mortgage servicing rights (MSRs) was purchased from a subservicing customer that liquidated, at a discount of approximately $470,000 from fair market value.
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 related to activity 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 2019 and 2018 were negatively impacted by pre-tax losses in the amount of $4,413,792 and $3,531,073, respectively, at Midwest Loan Solutions, our wholesale lending subsidiary, which re-launched its business with new state of the art technology and a sales team and support staff in June 2019.
In addition, results in 2018 and 1Q2019 were also negatively impacted by a decrease in margins on mortgage originations caused by the first industry-wide pricing war since the 2007-2009 financial crisis. This pricing war began to end in December 2018, and after low margins again in April and May 2019, ended in June 2019. The following graph is the best index that we are aware of for the overall industry-wide margins on standard FNMA and FHLMC loans sold in the secondary market. Margins began to rise in mid-February 2020 and have risen to record levels, as the industry is struggling with capacity constraints caused by the surge in applications caused by record low interest rates, and financial and operational dislocations caused by the global pandemic.
In 2019, our residential mortgage origination groups originated $1,332.8 million of mortgages, mostly sold to the secondary market for our own account, of which $697.1 million were originated by our retail origination group, University Lending Group (ULG), $440.3 million were originated by our UIF unit, and the remainder originated by our wholesale origination group. In 2019, 85% of our ULG originations and 82% of our UIF originations financed purchase transactions, and purchase transaction originations increased by 5.0% and 36.5%, 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 41% of its volume from these higher margin programs, a decline from the prior year in which it was 60%. UIF specializes in faith-based lending. UIF’s volume increased as additional states were added to its distribution channels. UIF’s volumes in 2020 are expected to benefit because it was licensed in late December 2019 in the State of New York, the largest single market for faith-based loans nationwide, and as the nationwide rollout of the declining balance mortgage is completed in all states served by our licensed mortgage loan officers.
The bank’s net income in 2018 and 2019 benefited substantially in 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. The recent fall in interest rates will decrease net interest income from this source, however the higher mortgage loan originations we are achieving due to sharply lower interest rates and the higher volume of loans held for sale, will more than offset the fall in interest earned on FHLBI deposits with rates tied to the Fed Funds rate.
Mortgage industry originations have soared, and University Bank is fully participating in that trend. A total of $1.803 billion in mortgage applications were taken by our mortgage operations in 2019. Mortgage origination closings in 2019 were $1.333 billion. Applications taken and mortgages funded in January 2020 were $182.6 million and $96.2 million, respectively. February increased significantly to a new record level of $274 million in applications taken due in part to the sharp drop in mortgage rates during the month, and mortgages funded were $120.2 million. The prior monthly record for mortgage applications was $216 million in August 2019, and the monthly record for mortgages funded was $145.2 million in November 2019. Volumes in March 2020 have increased further:
- Funded volume – $187.5mm (record)
- Funded units – 743 (record)
- Locks – $346mm (record)
- Locked units – 1,320 (record)
- Applications – $391mm (record)
- Applications – 1,465 units (record)
As noted above, this higher volume is being locked at higher margins and there is a shift from a mix of retail and wholesale to more retail, which carries higher margins. University Bank had unaudited net income of $97,093 in January 2020, $401,272 ahead of the originally budgeted amount. Unaudited net income at University Bank in February 2020 was $476,093, $288,011 ahead of the originally budgeted amount despite a $1,000,000 charge against February 2020 pre-tax earnings related to a preliminary accrual of a write-down on the Mortgage Servicing Rights portfolio, which is marked-to-market at each quarter end. While the rise in closings, margins and the locked pipeline through March 31, 2020 will have a substantially positive impact on the 1Q2020 results, the write-down in an amount to be determined, in our mortgage servicing rights (MSRs), could offset the gains in operating results in March, though it would not be a factor in the 2Q2020, a time when the higher earnings from our mortgage originations could flow to the bottom line, if current trends persist.
In early March, because we’ve been unable to slow down the incoming level of mortgage applications from our retail lending channels, we announced that we will exit the wholesale mortgage origination business via our subsidiary Midwest Loan Solutions (MLS) in order to devote increased resources to our retail channels. We have made the tough decision to shift our back-office mortgage origination capacity to fully serve our higher margin retail customers and to discontinue serving our wholesale mortgage origination customers after a transition period. We discontinued accepting new loan registrations from the wholesale channel in mid-March and the wholesale pipeline is closing out and winding down as expected. The wholesale back office team is transitioning to supporting our retail originations. As the wholesale business unit was in start-up mode during 2019 and 2018, we lost $4,413,792 and $3,531,073, respectively pre-tax in this line of business, as well as $335,184 in January 2020 and $285,437 in February 2020, both on an unaudited basis. We will see some cost savings in future periods as we gave severance to the sales team and some members of the leadership and middle management team of the former wholesale unit, and going forward, we will shift this portion of our back office processing, underwriting, funding and closing capacity to mortgage originations with much higher levels of gain on sale.
This extraordinary refinancing boom will end at some point and over the next few months we’ll be building a refinancing recapture unit in support of the bank’s Midwest Loan Services division. Midwest subservices over $25 billion of mortgage loans for over 380 financial institutions, and we’ve been told by major institutional investors who buy mortgage servicing rights, that if we had an in-house refinancing recapture unit, they would bring us substantial new business and growth. Even in times when rates are high, there is a constant level of refinancing activity including cash out refinancing, so we believe that our expanded retail business that includes this new refinancing recapture unit has a long term and exciting future.
We achieved these record volumes in March despite the rise of the coronavirus pandemic, which prompted us to quickly move 90% of our employees to a work from home assignment between the first and third week of March. The employees who still work daily onsite in our facilities perform tasks that are generally ones that we cannot take offsite, don’t have a way to take offsite while retaining good productivity, or don’t have a way to take offsite with a residual risk level that we are comfortable with. Generally, the people working onsite are part of an A Team / B Team structure, so that if an A Team gets sick, they can be sent home, the office deep cleaned and the B Team called in to work onsite, while keeping daily activity up and running. The board of directors approved a one-time total capital expenditure of $400,000 to pay for the additional computers, monitors, printers and scanners that we purchased to enable our employees to work from home, however our IT Team came up with some creative solutions and the total cost ended up at just over $100,000. We have received a copy of a letter issued to all banks by the U.S. Treasury and another from our primary state regulator, the Michigan Department of Insurance and Financial Services which indicates that all banks are considered critical infrastructure and that bank employees should continue to work regardless of any mandatory quarantine orders that effect the general population. This includes lending and lending support personnel such as mortgage loan officers, title companies and appraisers, however it does not include real estate agents.
Michigan and the Ann Arbor Metropolitan Statistical Area saw modest growth in employment in 2019, and the population of Washtenaw County, at about 368,000 residents, actually lost nearly 1,900, its first decline since 2008. Despite this, 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 assume a severely adverse (depressionary) national economic scenario worse than the last depression we experienced, in which we assume 10% unemployment, a 50% drop in the stock market, 8% drop in GNP, a 35% drop in residential real estate prices and a 38% drop in commercial real estate prices and that these prices never recover. Under this scenario we lose just $2.1 million in total loan losses over the entire economic cycle, a fraction of our budgeted annual pre-tax income, and perhaps just a month or two of pre-tax earnings if the current mortgage origination gain on sale margins and the record level of mortgage origination volumes persist for any length of time. This credit risk is moderated by the existing allowance for loan losses of $0.4 million. At $1.7 million, the credit risk under a depressionary economic scenario net of the allowance is just 7% of Tier 1 Capital. Due to the pandemic, the fall in GNP and the rise in unemployment, we plan a book as an additional economic factor a portion of this potential loss effective March 31, 2020 in an amount yet to be determined.
At 12/31/2019, we had the following with respect to delinquent loans (including both delinquent portfolio loans and delinquent loans held for sale):
Delinquent 30 Days, $1,494,848*
Delinquent 31 Days to 89 Days, $392,730
Delinquent Over 90 Days & on Non-Accrual, $774,057+
*One residential mortgage loan for $1,088,704 was delinquent 30 days at 12/31/2019, and was paid in full in March.
+This balance consisted of two residential mortgage loans. In addition, we had $2,090,000 in GNMA pool related residential mortgage loans that have reached 90 days delinquency status.
The allowance for loan losses stands at $390,708 or 0.49% of the amount of portfolio loans, excluding loans held for sale. Substandard assets including loans held for sale rose 169% during 2019 to $1,671,131, 6.9% of Tier 1 Capital at 12/31/2019. There was no other real estate owned at year-end. At March 15, 2020, University Bank had no loans that were delinquent other than residential mortgage loans and had no real estate owned.
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 $28,195,832 or $5.42 at 12/31/2019, up from $24,762,268 or $4.76 at 12/31/2018. 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.
Net income was $1,262,448 for the three months ended December 31, 2019 or $0.24 on average shares outstanding of 5,204,899 for the period, versus a net loss of $454,806 or $0.09 on average shares outstanding of 5,201,406 for the same 2018 period.
Results in 4Q2019 were restrained by the typical seasonal mortgage origination slowdown as well as several notable items, which had an overall negative cumulative impact of $594,511, before income taxes:
- The value of the hedged mortgage origination pipeline fell $894,529 as the amount of locked loans fell over the quarter due to the usual seasonal slowdown;
- With the rise in long-term mortgage interest rates, the valuation of MSRs increased by $300,018.
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 4Q2019 and 4Q2018 were negatively impacted by pre-tax losses in the amount of $937,215 and $1,049,097, respectively at Midwest Loan Solutions, our wholesale lending subsidiary, which re-launched its business with new state of the art technology and a sales team and support staff in June 2019, and is being phased out beginning in mid-March 2020, as described above.
Total Assets as of 12/31/2019 were $361,956,924 versus $383,187,000 at 9/30/2019, $325,631,000 at 6/30/2019, $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 as of 12/31/2019 fell to 8.15% on net average assets of $299.1 million, from 8.55% at 9/30/2019 on net average assets of $269.8 million, 8.39% at 6/30/2019 on net average assets of $232.1 million, 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 12/31/2019 was $23,179,000, at 9/30/2019 was $21,949,000, 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.
Basel 3 Total Risk Weighted Assets at 12/31/2019 were $173,269,000, at 9/30/2019 were $201,602,000, 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.
The Common Equity Tier 1 Risk Weighted Capital Ratio at 12/31/2019 was 13.38%, at 9/30/2019 was 10.89%, 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%.
University Bank ended February 2020 with $382.2 million in assets (average monthly assets were $273.5 million), total shareholders’ equity of $30,113,370, minority interest of $3,408,843, Tier 1 Capital of $29.3 million, a Tier 1 Leverage Capital Ratio of 10.72% and a Tier 1 Risk-Based Capital Ratio of 14.51%. Tier 1 Capital rose 1/1/2020 due to a change in regulation, which positively impacted University Bank. The FDIC finalized on 1/1/2020 the changes 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.
Cash & equity investment securities at the Company, available to meet working capital needs and investment opportunities at University Bank were $4,038,158. The Company has no debt and one class of preferred stock outstanding convertible at $10 per share with a liquidation preference of $5,000,000.
Other key statistics as of 12/31/2019:
- 10-year annual average growth*, 21.7%
- 5-year annual average revenue growth*, 13.8%
- 1-year annual revenue growth*, 23.4%
- 5 Year Average ROE 21.4%
- LLR/NPAs>90 % 82.4%
- Debt to equity ratio, 0%
- Current Ratio,# 45.6x
- Efficiency Ratio, %+ 92.9%
- Loans Held for Sale, $110,977,000
- NPAs >90 days $774,057
- TTM ROA % 1.25%
- TCE/TA % 8.15%
- Total Capital Ratio % 10.99%
- NPAs/Assets % 0.46%
- Texas Ratio % 5.54%
- NIM % 5.12%
- NCOs/Loans % -0.021%
- Trailing 12 Months P-E Ratiox 9.0x
*Using 2019, 2018, 2017, 2016, 2015, 2014 and 2009 revenue which were $69,112,502, $55,988,570, $54,493,179, $50,948,149, $43,644,425, $36,598,052 and $21,814,793, 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 $5.75 per share.
Treasury shares as of 12/31/2019 were zero.
Shareholders and investors are encouraged to refer to the financial information including the investor presentations, 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 $25 billion in financial assets for over 141,000 customers, and our over 490 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 reverse residential mortgage lender 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.
Contact: Stephen Lange Ranzini, President and CEO
Phone: 734-741-5858, Ext. 9226