1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended
December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
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(State or other jurisdiction of (I.R.S. Employer incorporation)
Identification No.
959 Maiden Lane, Ann Arbor, Michigan 48105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 741-5858
--------------
Securities registered pursuant to section 12(b) of the Act: NONE Securities
registered pursuant to section 12(g) of the Act:
Common Stock, par value $.010 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares outstanding of the Registrant's Common Stock as of
March 27 2003: 3,899,548 shares. The aggregate market value of the voting stock
held by non-affiliates of the Registrant based on $0.975 per share, the average
bid and asked price for the Registrant's Common Stock on March 27, 2003, as
reported by NASDAQ, was approximately $976,089.
* For purposes of this calculation shares of the Registrant held by directors
and officers of the Registrant and by other affiliates have been excluded.
Page 1 of 87 pages
Exhibit index on sequentially numbered page 81
PART I.
Item 1. - Business
General
University Bancorp, Inc. The Company is a Delaware corporation which
operates as a bank holding company for its wholly-owned subsidiary, University
Bank. The Company changed its name to `University Bancorp, Inc.' from `Newberry
Bancorp, Inc.' in 1996, in order to better identify itself with the Bank.
University Bank. The Bank is a state chartered community bank. The Bank
was chartered by the state of Michigan in 1908 and began business in 1890. In
1994, we sold the bank's offices in Newberry, Michigan and Sault Ste. Marie,
Michigan. As part of a non-compete agreement with the purchaser of the bank's
offices, we relocated the Bank's main office to the former offices of its
mortgage operation in Sault Ste. Marie, Michigan. In 1995, the Bank changed its
name from `The Newberry State Bank' to `University Bank' to more closely
identify with its current place of business, Ann Arbor, Michigan. Ann Arbor is a
university town, home to the University of Michigan and is the largest city in
Washtenaw County, just west of the Detroit Metropolitan Statistical Area. The
Bank's primary market area is defined as the City of Ann Arbor and surrounding
areas in greater Washtenaw County.
Midwest Loan Services. In 1995, University Bank acquired 80% of the
common stock of Midwest Loan Services. Midwest specializes in the origination,
servicing and subservicing of mortgage loans for various credit unions,
financial institutions and mortgage brokers. Most of their servicing and
subservicing portfolio is comprised of residential mortgage loans sold to Fannie
Mae, Freddie Mac and other private residential mortgage conduits.
University Insurance & Investment Services. In 1996, University Bank
established an insurance and investment products sales agency. This subsidiary
of the Bank, called "University Insurance & Investment Services, Inc." (the
Agency) is based in the Bank's Ann Arbor office. The Agency is licensed by the
State of Michigan to sell insurance as agent for licensed insurance companies. A
d/b/a of the Agency, University Insurance Center, commenced business in 1999,
adding a full service property and casualty insurance agency offering insurance
for homes, autos, apartments and businesses in addition to the original products
which included life and health care insurance, annuities and mutual fund sales.
Employees of the Agency are also licensed to sell investment products such as
annuities and mutual funds, and the President of the Bank, who is also Chairman
of the Agency, also offers broker-dealer investment services including money
management through a clearing arrangement with Equitas America LLC and Pershing.
Michigan BIDCO. In 1993, Stephen Lange Ranzini and Joseph
Louis Ranzini founded a BIDCO, which is a Business and Industrial Development
Company, called Michigan BIDCO, Inc. The BIDCO is licensed by the Michigan
Office of Financial and Insurance Services under the State of Michigan BIDCO
program. Michigan BIDCO (formerly known as Northern Michigan BIDCO) invests in
businesses in Michigan with the objective of fostering job growth and economic
development. As a result of the recent buyout of the Bank's interest in the
BIDCO, University Bancorp currently owns 6.10% of the BIDCO. The Bank also holds
$600,000 of 7.5% cumulative preferred stock of the BIDCO.
Northern Michigan Foundation. In 1995, Michigan BIDCO donated $225,000
to capitalize Northern Michigan Foundation, and in 1996, donated an additional
$75,000 to the Foundation. The Foundation is an IRS-approved 501c(3) non-profit
which is an intermediary lender to rural small businesses under the U.S.
Department of Agriculture's Rural Economic Community Development Division's
Intermediary Re-lending Program. The Foundation borrowed a total of $2 million
from the Intermediary Re-lending Program at 1% interest with a 30-year term
because of a $300,000 donation received from Michigan BIDCO. Pursuant to a
management services agreement with the BIDCO, the BIDCO and the Foundation share
administrative staffs and offices, with the Foundation reimbursing the BIDCO for
these management services.
Employees
The Company employed 68 full-time equivalents as of March 27, 2003:
University Bank, Ann Arbor 26
Midwest Loan Services 40
University Insurance & Investment 2
Properties
The Bank owns a building in Ann Arbor, Michigan that is the Bank's main
office.
The Bank leases a site that includes a registered historic building in
Ann Arbor, at the corner of Washtenaw Avenue and Stadium Boulevard as a ATM
drive-through location, a BIDCO office and an off-site storage facility. The
minimum lease period ends May 2006 with two optional five-year extensions.
The Bank leases an ATM location in Ann Arbor at the corner of State and
Liberty near the University of Michigan Campus. The minimum period of this lease
ends December 2005.
The Bank owns a former loan office in Sault Ste. Marie and such space
is leased to an unrelated third-party. Management is in negotiations to sell
this property.
Midwest Loan Services leases an office in Houghton, Michigan under a
year-to-year lease.
The Company believes that the office facilities are adequate to support
the anticipated level of future expansion of business.
Lines of Business
Deposit Products & Services
University Bank offers traditional retail savings products and
services to its customers. These include demand deposit and NOW interest-bearing
checking accounts, money market deposit accounts, regular savings accounts and
term deposit certificates ranging in maturity from three to
three hundred months. The Bank also offers free access to 24-Hour ATM machines,
telephone banking, internet banking, VISA debit cards and Gold VISA accounts.
The Bank is also a member of MasterCard, but currently is not offering a
MasterCard product. From time to time to raise liquidity, the Bank relies on
brokers to sell CDs. At December 31, 2002, the Bank had approximately $7.9
million in CDs issued through
brokers.
Lending Products
University Bank offers a range of traditional lending products,
including commercial small business loans, residential real estate mortgage
loans, home equity loans, commercial real estate mortgage loans, consumer
installment loans, and land development and construction loans.
Classifications of the loan portfolio as of December 31, 2002 are as follows:
Amount Outstanding(1) % of Total
Commercial, Real Estate & Other $16,550,318 49.86%
Residential Construction 2,113,747 6.37%
Residential Real estate 9,758,403 29.40%
Residential Home equity 4,299,329 12.95%
Consumer 374,825 1.13%
Credit Card 95,412 0.29%
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Gross Loans $33,192,034 100.00%
============ =======
(1) - Excludes loans held for sale.
The Bank's loan portfolio is geographically concentrated in Ann
Arbor and Washtenaw County, Michigan. The ability of individual loan customers
to honor their debts is partially dependent on the local economy. The Ann Arbor
area is primarily dependent on the education, healthcare, services, and
manufacturing (automotive and other) industries.
Most of the Bank's commercial loans are secured by commercial real
estate. Commercial real estate loans have a loan to value ratio typically less
than 80% at the time the loan is originated. In no cases is the loan to value
ratio for commercial real estate loans greater than 85%. The primary risk of
commercial loans is that the area's economy declines and rents decrease while
vacancy increases, thereby decreasing the value of the building. If the
guarantor suffers a financial reverse, the Bank is then exposed to a loss.
Residential loans typically have a loan to value ratio less than
80% at the time the loan is originated, unless the borrower's financial position
is very strong, in which case a loan to value ratio of up to 90% is considered.
To meet the Bank's goals for first time homebuyers, the Bank has originated 97%
loan to value residential loans totaling about $3 million, although real estate
prices in Washtenaw County where these loans were originated have been rising at
10-12% per year for two years in a row, and most of these loans were originated
in 1998 and 1999. Home equity secured residential loans have loan to value
ratios of less than 90% at time of origination in the case of fixed rate
fully-amortizing loans and 80% for home equity lines of credit, with a few
exceptions with higher ratios for borrowers with strong credit. The primary risk
of residential lending is that home prices drop (typically this occurs during
recessions) and borrowers walk away from their home or file for bankruptcy. All
of the Bank's
construction loans, are secured by residential properties with a
loan to value ratio of 80% or less. The Bank controls the risk of construction
lending by performing inspections prior to disbursing interim construction funds
to avoid cost overruns.
The Bank makes very few unsecured loans, typically for borrowers
who are multi-millionaires, but even in these cases, the Bank typically takes
collateral out of an abundance of caution. Most of the Bank's credit card loans
are secured by residential properties. Consumer loans are generally secured by
vehicles (primarily cars or trucks). The primary risk of these loans is that the
value of the car depreciates faster than the loan balance amortizes, and the
borrower loses their job or has a severe medical problem in their family. In
these circumstances, the collateral could be insufficient to repay the loan if
the borrower files for bankruptcy. In addition, if the economy is soft, used
vehicle prices tend to deteriorate creating additional risk of insufficient
collateral in the event of a default.
The Bank makes very few business loans that are not secured by
real estate. Business Lines of Credit are typically made up to a 50% ratio of
inventory and other equipment at current market value, and 70% of current
receivables. Business Manager Loans are also structured as Lines of Credit and
are secured by individual receivables up to 90% of face value individually
purchased with recourse to the borrower and additional insurance to protect the
bank against fraud and bankruptcy of the issuer of the account that is
receivable to the borrower. The primary risk of this type of lending backed by
non-real estate business assets is that if the business suffers a financial
reverse, an unscrupulous borrower can easily dissipate the collateral, causing
the Bank a loss. For this reason, the Bank de-emphasizes this type of lending.
Typically with respect to all personal and residential loans, a
ratio of total debt payments to total income of all borrowers and guarantors
less than 42% is required. With respect to commercial real estate and business
loans, a ratio of income to all debt payments of greater than 1.25x is required.
Therefore, the Bank typically has both income and asset backing to secure its
loans. However, there can always exist valid reasons to have exceptions to each
rule and the Bank's loan committee retains the power to take unusual
circumstances into account when evaluating each loan request versus the Bank's
policies. Loans that are lacking current demonstrated income are classified and
increased reserves are established for those loans. Loans that are lacking both
current demonstrated income and asset backing are allocated even higher reserves
equal to the amount estimated to be realized upon the sale of the collateral
less all estimated costs.
Mortgage Banking
The Bank and Midwest originate internally or via other financial
institutions residential home loans that generally qualify for sale to secondary
market investors under the underwriting criteria of the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association and the
Government National Mortgage Association. Loans purchased or originated
internally are either sold directly to FHLMC, FNMA or GNMA, or are pooled into
mortgage-backed securities and the securities are sold to investors in the
secondary market. With the exception of Midwest Loan Services, the Bank is
currently selling the servicing rights on all mortgages originated that
are sold to the secondary market. Some residential mortgages are held in the
Bank's loan portfolio as an investment.
University Bank became a seller/servicer and began originating Federal
Home Loan Mortgage Corporation (FHLMC) insured mortgages in 1991 and became a
seller/servicer and began originating Federal National Mortgage Association
(FNMA) insured mortgages 1994. The Bank has also been approved as a
seller/servicer of Government National Mortgage Association (GNMA) mortgages for
many years but only began using our license in 1999 to originate and sell these
loans without retaining the servicing rights. Midwest is also licensed with FNMA
and FHLMC.
Mortgage Subservicing
Mortgage servicing firms receive monthly payments from loan customers,
aggregate and account for these payments, and send the funds to mortgage-backed
securities holders, including pension funds and financial institutions. For some
mortgage customers, escrow funds are also accumulated, and funds sent to taxing
authorities and insurance companies as needed. Mortgage servicers also dun
delinquent accounts and foreclose loans, if required. Mortgage servicers receive
a fixed monthly fee for performing this service. When these services are
performed for the Bank, it is called `servicing'. When these services are
performed for other institutions, it is called `subservicing'. The Bank's
80%-owned subsidiary, Midwest Loan Services, specializes in subservicing
residential mortgage loans sold to FNMA and FHLMC and other non-agency private
conduits for the account of credit unions, other financial institutions and
mortgage brokers. Midwest's subservicing activity is regulated by FHLMC and
FNMA.
Investment Securities
The Bank maintains surplus available funds in investments consisting of
short-term money market instruments, U.S. government bonds, U.S. federal agency
obligations, mortgage-backed securities backed by federal agency obligations and
obligations of local units of government. The Bank's President, who is a
licensed Registered Representative, manages these investments, and purchase/sale
decisions are subject to the review and approval of the Asset Liability
Committee of the Bank and the Board of Directors. The securities portfolio
provides a source of liquidity to meet Bank operating needs. At December 31,
2002, the portfolio had a net unrealized loss of $81,997 versus a net unrealized
loss of $167,112 at December 31, 2001, and $335,000 at December 31, 2000.
Information regarding securities where cost exceeded more than 10% of
the Company's stockholders' equity at December 31, 2002 are as follows:
Issuer Coupon Yield Final Maturity Market Value Amortized Cost
------ ------ ----- --------- ------ -----
FHLBI equity (1) VAR 6.75% None $848,400 $848,400
FNMA CMO 93-205H (2) PO 4.15% 9/25/23 1,495,356 1,577,056
GNMA (various) VAR 5.50% 6/20/22 1,552,826 1,553,123
Other VAR - VAR 54,656 54,656
(1) The rate varies quarterly. The Bank is required to maintain the
investment in Federal Home Loan Bank of Indianapolis common stock in
an amount related to the Bank's single family mortgage related assets
and FHLBI advances. Shares can be redeemed or sold at par value to
the FHLBI as required from time to time.
(2) This Principal Only strip has an expected average life of less than
two years. The increase in market value is due to interest rate
fluctuations that have shortened the average life of the instrument.
Accrued net interest income on this zero coupon bond was increased in
2001 and 2002 to reflect the decreased average life. The bond is
rated AAA.
Competition
Community Banking, Ann Arbor
The attraction and retention of deposits depend on the Bank's ability
to provide investment opportunities that satisfy the requirements of investors
with respect to rate of return, liquidity, risk and other factors. The Bank
competes for these deposits by offering personal service and attention, fair and
competitive rates, low fees, and a variety of savings programs including
tax-deferred retirement programs.
The Bank competes for loan originations primarily through the quality
of services provided to the loan customers, competitive interest rates and
reasonable loan fees, rapid and local decision-making and the range of services
offered. Competition in originating loans comes principally from other
commercial banks, credit unions, insurance companies, mortgage banking companies
and savings and loans.
The following table shows market share of deposits for Washtenaw County
by financial institution for June 2002, June 2001 and June 2000, respectively
from the FDIC and National Credit Union Association's annual branch deposit
survey.
Washtenaw County Financial Institution Deposits:
2002 2001 2000
TCF National 15.63% 16.16% 16.19%
National City 12.51% 11.93% 12.53%
Comerica 11.08% 11.92% 11.36%
Bank One 8.89% 9.37% 10.26%
Keybank 6.41% 7.23% 7.82%
Ann Arbor Commerce 5.22% 4.87% 4.83%
University of Michigan CU 5.21% 4.23% 3.82%
Standard Federal 4.95% 6.22% 6.38%
Flagstar 4.91% 5.06% 4.80%
Bank of Ann Arbor 4.59% 3.94% 3.43%
Huron River Area CU 3.36% 3.09% 3.02%
Chelsea State 3.09% 3.10% 3.38%
Citizens 2.61% 2.82% 2.92%
United Bank & Trust 2.56% 1.40% 1.04%
Midwest Financial CU 2.24% 2.10% 2.04%
Republic 2.03% 2.27% 2.22%
Automotive FCU 1.31% 1.33% 1.38%
Bank of Washtenaw 1.05% 0.64% 0.28%
University Bank 0.89% 0.91% 0.89%
Charter One 0.71% 0.67% 0.69%
5 Credit Unions 0.75% 0.74% 0.72%
Total Deposits (in billions) $4.53 $4.34 $4.00
Total deposits in the county increased 4.4% to $4.53 billion from June
2001 to June 2002. Total deposits in the county increased 8.5% to $4.34 billion
from June 2000 to June 2001. In attracting deposits, the Bank's primary
competitors for deposits are mutual funds, other commercial banks, credit
unions, savings and loans and insurance companies.
The Bank's main office is adjacent to the University of Michigan
Hospital complex. The complex employs a total of 7,800 persons. While the Bank
competes with all of these financial institutions for loans and deposits and in
particular the eight financial institutions that have branch offices in the
northeast Ann Arbor market area, the other major competitor in the immediate
local deposit market near the Medical Center complex is Midwest Financial Credit
Union, formerly known as Hospital & Health Services Credit Union. The Bank's
main office was formerly the headquarters of this credit union, which moved its
office to a new office building three miles from the Medical Center Complex.
Banks owned by out-of-state holding companies dominate the Ann Arbor
banking market. In the city of Ann Arbor, the University of Michigan Credit
Union is the largest locally-owned financial institution. The only locally-owned
community financial institutions, excluding University Bank, are University of
Michigan Credit Union, Bank of Ann Arbor, Huron River Area Credit Union, Midwest
Financial Credit Union, Automotive Federal Credit Union and several smaller
credit unions.
Mortgage Banking
The Bank and Midwest's retail mortgage origination operations encounter
competition for the origination of residential real estate loans primarily from
savings institutions, commercial banks, insurance companies and other mortgage
banking firms. Many of these firms have a well-established customer and/or
borrower client base. Some competitors, primarily savings institutions,
insurance companies and commercial banks, have the ability to create unique loan
products from time to time because they are able to hold the loans in their own
portfolio rather than sell into the secondary market. The Bank's ability to hold
mortgage loans in our portfolio helps us to compete more effectively. Most loans
sold into the secondary market, however, go to the same sources, those being
FHLMC, FNMA, and GNMA. Most lenders have access to these secondary market
sources; therefore, competition often becomes more a matter of service and
pricing than that of product. As a mortgage loan originator and a purchaser of
mortgage loans through correspondents, we must be able to compete with respect
to the types of loan products offered by competitors to borrowers and
correspondents, including the price of the loan in terms of origination fees or
fee premium or discount, loan processing costs, interest rates, and the service
provided by our staff. An important element to competing is master purchase
agreements negotiated periodically with FNMA and FHLMC with low and
competitive loan guarantee fees, a wide variety of mortgage programs, and a
variety of flexible underwriting criteria. Our ability to secure these master
purchase agreements is dependent upon the performance from a quality perspective
of loans previously sold to the agencies.
During lower interest rate environments, competition for loans is less
intense due to the large number of loans available for origination. As interest
rates rise and the number of loans available for origination diminishes,
competition becomes quite intense and companies with larger investor bases,
flexibility with respect to type of product offered and greater experience in
dealing in these types of markets tend to be the most successful.
The Bank also originates residential loans to be held in portfolio, and
management believes that this product together with the product offerings from
FHLMC, FNMA and GNMA are sufficient for the Bank. The Bank also is licensed as a
HUD Title 1 and Multifamily seller/servicer, but has no plans at this time to
expand utilization of HUD or GNMA programs.
Mortgage Servicing and Subservicing. Servicing competition is somewhat
less intense than the loan origination aspect of mortgage banking. Due to net
worth and management requirements, many mortgage origination companies do not
have the capacity to service loans. Falling interest rates present competitive
challenges for the mortgage servicing operation in that mortgagors are more
likely to refinance existing mortgages. The quality of service and the ability
of the origination operation to compete on price and service is important in
retaining these customers by refinancing them internally, rather than losing the
refinancing transaction to a competitor. Increased refinancing activity as a
result of falling interest rates should decrease profitability of mortgage
servicing by increasing amortization charges on purchased mortgage servicing
rights.
In the subservicing business, Midwest Loan Services competes primarily
with about 30 firms nationwide, including specialized subservicing units of
mortgage banking companies, and specialized firms owned by banks and savings and
loans. Most of these companies have substantially larger financial resources
than Midwest Loan Services, and some of them are also located in rural areas
with low prevailing wages.
Midwest Loan Services is located in Houghton, Michigan in the western
upper peninsula of Michigan. Personnel and occupancy costs are the largest costs
in a mortgage servicing operation, and the prevailing wages and occupancy costs
in the upper peninsula of Michigan are generally lower than the national
average. Midwest Loan Services has developed a unique business extranet website
for its business partners and their retail customers. Through its website at
www.subservice.com, Midwest Loan Services provides the opportunity for all
customers to access their mortgage information 24 hours a day 7 days a week in
an environment which provides seamless access to all information. Business
partners have access to all mortgage data as easily as if it were serviced on
their in-house computer system. Customers can access all information about their
accounts and perform any type of transaction through the internet. As a result
of low personnel costs, its internet technology and the relationships it has
developed in the credit union industry over time, the Company believes that
Midwest Loan Services' mortgage servicing operation has a competitive advantage.
Regulation
Primary Regulators of University Bancorp. The Company is a bank holding
company registered under the Federal Bank Holding Company Act of 1956. The
Federal Reserve Bank of Chicago is the Company's primary regulator and the
Company is subject to regulation, supervision and examination by the Federal
Reserve. The Company is required to file semi-annual reports with the Federal
Reserve and other information as required under the rules of the Board of
Governors of the Federal Reserve System. Additionally, the Federal Reserve Board
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to bar the payment of dividends by banks and bank holding
companies.
Acquisitions. The Company is generally prohibited from engaging in a
non-banking activities since it is a bank holding company. The Company cannot
acquire more than 5% of the shares of another company engaged in non-banking
activities. The Company can only acquire direct or indirect control of more than
5% of the voting shares of a company engaged in a banking related activity with
the prior approval by the Federal Reserve Board to acquire these shares or by
regulatory exemption. The Federal Reserve Board has identified specific banking
related activities in which a bank holding company may engage with notice to the
Federal Reserve. The Federal Reserve considers managerial, capital, and other
financial factors, including the impact on local competition of any proposal and
past performance under the Community Reinvestment Act in acting on acquisition
or merger application. Bank holding companies may acquire other banks located in
any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
Commitments. In connection with obtaining the consent of the Federal
Reserve to a 1989 merger transaction when the Company obtained public listing on
the NASDAQ Small-Cap Market, certain commitments were made to the Federal
Reserve. Management agreed that the Employee Stock Ownership Plan would not
purchase more than 10% of the common stock or 5% of any other class of our
voting shares, without the prior approval of the Federal Reserve. Management
also agreed not to incur additional debt or to have the Bank pay dividends to us
without the prior approval of the Federal Reserve.
Capital Requirements. The Federal Reserve Board imposes certain capital
requirements on the Company under the Federal Bank Holding Company Act,
including a minimum leverage ratio and a minimum ratio of "qualifying" capital
to risk-weighted assets. These requirements are described below under "Capital
Regulations". The Federal Reserve uses capital adequacy guidelines in its
examination and regulation of bank holding companies. If capital falls below
minimum guidelines, a bank holding company may, among other things, be denied
approval to acquire or establish additional banks or non-bank businesses. The
"prompt corrective action" provisions of federal law and regulation authorizes
the Federal Reserve to restrict the payment of dividends to us from an insured
bank which fails to meet specified capital levels.
Source of Strength. In accordance with Federal Reserve Board policy,
the Company is expected to act as a source of financial strength to the Bank and
to commit resources to support the Bank in circumstances in which the Company
may not otherwise wish to do so. Under the Federal Bank Holding Company Act, the
Federal Reserve may require a bank holding company to terminate any activity or
relinquish control of a bank subsidiary if the agency determines that
divestiture may aid the depository institution's financial condition. In
addition, if the Commissioner deems our Bank's capital to be impaired, the
Commissioner may require the Bank to restore its capital by a special assessment
upon us as University Bank's sole stockholder. If the Company were to fail to
pay an assessment, the directors of the Bank would be required, under Michigan
law, to sell the shares of the Bank's stock owned by the Company to the highest
bidder at either a public or private auction and use the proceeds of the sale to
restore the Bank's capital.
Financial Holding Companies. Beginning March 11, 2000, bank holding
companies may apply to become Financial Holding Companies. We have not applied
to become a Financial Holding Company. Financial Holding Companies may engage in
a wider range of non-banking activities than Bank Holding Companies, including
greater authority to engage in securities and insurance activities. The expanded
powers are available to a bank holding company only if the bank holding company
and its bank subsidiaries remain well-capitalized and well-managed. The new law
also imposes various restrictions on transactions between the depository
institution subsidiaries of bank holding companies and their non-bank
affiliates. These restrictions are intended to protect the depository
institutions from the risks of the new non-banking activities permitted to
affiliates.
Primary Regulators of University Bank. The Bank is a Michigan banking
corporation and its deposit accounts are insured by the Bank Insurance Fund
(BIF) of the Federal Deposit Insurance Corporation (FDIC). As a
Michigan-chartered commercial bank, University Bank is subject to the
examination, supervision, reporting and enforcement powers of the Commissioner,
as the chartering authority for Michigan banks, and the FDIC, as administrator
of the BIF. These agencies and the federal and state laws applicable to the Bank
and its operations, extensively regulate various aspects of the banking business
including, among other things, reserves against loans, capital levels relative
to operations, lending activities and practices, collateral for loans,
establishment of branches, mergers, acquisitions and consolidations, payment of
dividends, internal controls, permissible types and amounts of loans,
investments and other activities, interest rates on loans and on deposits, and
the safety and soundness and scope of banking practices. As an insured bank,
University Bank is also required to file quarterly reports and other information
as required with the FDIC.
All subsidiaries of University Bank including Midwest Loan Services and
University Insurance & Investment Services are all also subject to all
regulations applicable to University Bank itself, including regular on-site
examination by both the OFIS and the FDIC.
Other Regulators. As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD
multifamily seller/servicer, University Bank's mortgage banking operation is
subject to regulation and regular on-site examination by FHLMC, FNMA and HUD.
Other Regulations. University Bank and its subsidiaries are also
subject to various regulations including:
o the Community Reinvestment Act,
o the Federal Truth-in-Lending Act,
o the Home Mortgage Disclosure Act,
o the Equal Credit Opportunity Act,
o the Fair Credit Reporting Act,
o the Fair Debt Collection Act,
o the Right to Privacy Act,
o the Real Estate Settlement Procedures Act,
o the Bank Secrecy Act,
o the Electronic Funds Transfer Act,
o Federal Reserve regulations,
o State usury laws, and
o Federal laws concerning interest rates.
Also, University Bank may not engage in any activity not authorized by the
Michigan Banking Code unless it is authorized by the Commissioner of the OFIS as
being closely related to banking.
These laws and regulations are primarily intended to protect depositors
and the deposit insurance fund of the FDIC, not the Bank nor the Company's
stockholders. The following is a summary of certain statutes and regulations
affecting University Bank. The following information is qualified in its
entirety by reference to the particular statutory and regulatory provisions.
Various changes to the Federal Deposit Insurance Act (FDIA) are
currently proposed in Congress. Any change in applicable laws, regulations or
regulatory policies of various governmental regulatory authorities may have a
material effect on the Company's business, operations and prospects. Those
authorities include, but are not limited to, the Board of Governors of the
Federal Reserve System, the FDIC, the Commissioner of the Michigan Office of
Financial and Insurance Services, the Internal Revenue Service, and state taxing
authorities. The Company is unable to predict the nature or extent of the
effects that fiscal or monetary policies, economic controls or new federal or
state legislation may have on future business and earnings.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation. Banks
classified as well-capitalized, as defined by the FDIC, and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized, as defined by the FDIC, and considered to be of substantial
supervisory concern pay the highest premium. A risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act (FDIA) requires the FDIC to establish
assessment rates at levels that will maintain the Deposit Insurance Fund at a
mandated reserve ratio of not less than 1.25% of estimated insured deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted in 1996,
University Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation (FICO). FICO
was created in 1987 to finance the re-capitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (SAIF), which insures the deposits of thrift institutions.
Between January 1, 2000 and the maturity of the outstanding FICO obligations in
2019, BIF members and SAIF members will share the cost of the interest on the
FICO bonds on a pro rata basis. It is estimated that FICO assessments during
this period will be less than 0.025% of deposits.
Capital Regulations. The FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, like
University Bank:
o a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks
with minimum requirements of 4% to 5% for all others;
o and a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8%, at
least one-half of which must be Tier 1 capital.
Tier 1 capital consists principally of stockholders' equity. These capital
requirements are minimum requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
institutions. For example, FDIC regulations provide that higher capital may be
required to take adequate account of, among other things, interest rate risk and
the risks posed by concentrations of credit, nontraditional activities or
securities trading activities.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring the submission of
a capital restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock,
including additional voting stock, or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the
institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
The extent of the regulators' powers depends on whether the institution in
question is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized." An
institution is critically undercapitalized if it has a tangible equity to total
assets ratio that is equal to or less than 2%. An institution is well
capitalized if it has a total risk-based capital ratio of 10% or greater, core
risk-based capital of 6% or greater, and a leverage ratio of 5% or greater, and
the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure. An institution is adequately capitalized
if it has a total risk-based capital ratio of not less than 8%, a core
risk-based capital of not less than 4%, and a leverage ratio of not less than
4%.
These capital guidelines can affect the Bank in several ways. Capital
levels are currently adequate, however, rapid growth, poor loan portfolio
performance, or poor earnings performance, or a combination of these factors,
could change our capital position in a relatively short period of time, making
an additional capital infusion necessary. In general, if the FDIC's assessment
of a Bank's financial and managerial strength changes negatively, the Bank's
cost of FDIC insurance will rise in subsequent semi-annual periods. A financial
institution may also be ordered to restrict its growth, dispose of certain
assets, rescind agreements or contracts, or take other actions as determined by
the ordering agency to be appropriate.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts.
The Bank may not declare or pay a dividend unless the Bank will have a surplus
amounting to at least 20% of its capital after the payment of the dividend. If
the Bank has a surplus less than the amount of its capital, it may not declare
or pay any dividend until an amount equal to at least 10% of net profits for the
preceding one-half year (in the case of quarterly or semi-annual dividends) or
full-year (in the case of annual dividends) has been transferred to surplus. The
Bank may not declare or pay any dividend until the cumulative dividends on any
issued preferred stock have been paid in full.
Federal law generally prohibits the Bank from making any capital
distribution, including payment of a dividend, or paying any management fee to
us if the Bank would thereafter be undercapitalized. The FDIC may prevent the
Bank from paying dividends if the Bank is in default of payment of any
assessment due to the FDIC. In addition, the FDIC may prohibit the payment of
dividends by the Bank, if a payment is determined, by reason of the
financial condition of the Bank, to be an unsafe and unsound banking practice.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act including any extensions of credit to us, investments
in our stock or other securities, and the acceptance of our stock as collateral
for loans. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to our directors
and officers, to our principal stockholders, and to "related interests" of the
directors, officers and principal stockholders. In addition, federal law and
regulations may affect the terms upon which any person becoming one of our
directors or officers or one of our principal stockholders may obtain credit
from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. Federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings.
In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the agencies expect to
require a compliance plan from an institution whose failure to meet one or more
of the standards is of the severity that it could threaten the safe and sound
operation of the institution. Failure to submit an acceptable compliance plan,
or failure to adhere to a compliance plan that has been accepted by the
appropriate regulator, would constitute grounds for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
state usury and regulatory laws, and various federal statutes, including:
o the Equal Credit Opportunity Act,
o the Fair Credit Reporting Act,
o the Truth in Lending Act,
o the Real Estate Settlement Procedures Act, and
o the Home Mortgage Disclosure Act.
Regulations flowing from these laws prohibit discrimination, specify disclosures
to be made to borrowers regarding credit and settlement costs, and regulate the
mortgage loan servicing activities of Midwest Loan Services, including the
maintenance and operation of escrow accounts and the transfer of mortgage loan
servicing.
In receiving deposits, the Bank is subject to extensive regulation
under State and federal law and regulations, including: o the Truth in Savings
Act,
o the Expedited Funds Availability Act,
o the Bank Secrecy Act,
o the Electronic Funds Transfer Act and
o the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant
damages and fines upon the Bank and its directors and officers.
Real Estate Lending Regulations. Federal regulators have adopted
uniform standards for appraisals of loans secured by real estate or made to
finance improvements to real estate. Banks are required to establish and
maintain written internal real estate lending policies consistent with safe and
sound banking practices and appropriate to the size of the institution and the
nature and scope of its operations. The regulations establish maximum loan to
value ratio limitations on real estate loans, which generally are equal to or
greater than the loan to value limitations established under the Bank's lending
policies.
Branching Authority. Michigan banks, including University Bank, have
authority under Michigan law to establish branches anywhere in the State of
Michigan, subject to receipt of all required regulatory approvals, including
approval of the Commissioner and the FDIC. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits that may be
held by the surviving bank and all of its insured depository institution
affiliates. The establishment of de novo interstate branches or the acquisition
of individual branches of a bank in another state, rather than the acquisition
of an out-of-state bank in its entirety, is allowed only if specifically
authorized by state law.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allowed individual states to "opt-out" of interstate branching authority by
enacting appropriate legislation prior to June 1, 1997. Michigan did not opt
out, and now permits both U.S. and non-U.S. banks to establish branch offices in
Michigan. The Michigan Banking Code permits the following in appropriate
circumstances and with the approval of the Commissioner:
o acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings
bank, or savings and loan association located in another state;
o acquisition by a Michigan-chartered bank of all or substantially all
of the assets of an FDIC-insured bank, savings
bank or savings and loan association located in another state;
o consolidation of one or more Michigan-chartered banks and FDIC-insured
banks, savings banks or savings and loan associations located in other
states having laws permitting this consolidation, with the resulting
organization chartered by Michigan;
o establishment by a foreign bank, which has not previously designated
any other state as its home state under the International Banking Act
of 1978, of branches located in Michigan
o establishment or acquisition of branches in Michigan by FDIC-insured
banks located in other states, the District of Columbia or U.S.
territories or protectorates having laws permitting Michigan-chartered
banks to establish branches in these jurisdictions.
Further, the Michigan Banking Code permits the following, upon written notice to
the Commissioner:
o acquisition by a Michigan-chartered bank of one or more branches, not
comprising all or substantially all of the assets, of an FDIC-insured
bank, savings bank or savings and loan association located in another
state, the District of Columbia, or a U.S. territory or protectorate;
o establishment by Michigan-chartered banks of branches located in other
states, the District of Columbia, or U.S.territories or protectorates;
and
o consolidation of one or more Michigan-chartered banks and FDIC-insured
banks, savings banks or savings and loan associations located in other
states, with the resulting organization chartered by one of the other
states.
Primary Regulators for Michigan BIDCO. BIDCO is regulated and
supervised by the Michigan Department of Commerce, Office of Financial and
Insurance Services, Bank & Trust Division. BIDCO is examined annually by the
Bank & Trust Division, and is required to make annual filings of financial
statements, to maintain a license from the Bureau and to operate under strict
rules on transactions with affiliates. Licensing under the terms of the Michigan
BIDCO Act conveys certain exemptions upon BIDCO under Michigan law that are
beneficial to the operations and investment flexibility of the BIDCO. Most
importantly, BIDCO is partially exempt from the state's usury law. As a result,
BIDCO can lend money and take equity participation in the firm it lends to, with
the result that BIDCO's overall combined yield on the investment and loan can
exceed the state's usury limit. The amount of BIDCO's return from the equity
participation or contingent payments is excluded from the calculation to
determine compliance with the state's usury limits.
Primary Regulator of Midwest Loan Services. Midwest is an approved
seller/servicer of single family mortgage loans for FNMA, FHLMC and HUD Title II
(GNMA), and is subject to their rules, regulations and examinations.
Primary Regulator of University Insurance & Investment Services.
University Insurance & Investment Services is licensed by the State of
Michigan's Office of Financial and Insurance Services, Insurance Division as
both a life and health and a property casualty insurance agency, and is subject
to their rules, regulations and examinations. University Insurance & Investment
Services also sells broker-dealer investment products and it and its licensed
employees are subject to the rules, regulations and examinations of the National
Association of Securities Dealers, and the Securities & Exchange Commission.
Item 3. - Legal Proceedings
We are not currently involved in any material pending legal disputes.
Item 4. - Submission of Matters to a Vote of Security Holders
Not applicable.
PART II.
Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock and Dividend Information
Our common stock trades on the NASDAQ Small-Cap Market under the symbol
UNIB. The high and low sales prices of our common stock as quoted by NASDAQ, for
each quarter since January 1, 2001 are listed below:
High Low
2001
First Quarter $2.50 $0.50
Second Quarter 2.13 1.50
Third Quarter 2.95 1.70
Fourth Quarter 2.50 0.83
2002
First Quarter $1.40 $0.55
Second Quarter 1.10 0.66
Third Quarter 1.08 0.71
Fourth Quarter 1.15 0.56
2003
First Quarter (to date) $1.49 $0.62
These quotations represent inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions. As of the
March 28, 2003 we had approximately 360 stockholders including approximately 200
beneficial owners of shares held by brokerage firms or other institutions.
Our shareholders authorized a 1 for 2 reverse stock split in November 2002,
however, management has not yet opted to implement the reverse stock split. No
cash dividends have been paid on our common stock. We do not currently
anticipate declaring or paying dividends in the first three quarters of 2003. We
plan to reevaluate our dividend policy prior to year-end 2003.
Certain Sales of Equity Securities
Not applicable.
Item 6. - Selected Financial Data
University Bancorp, Inc.
Selected Consolidated Financial and Other Data
(Dollars in Thousands Except Per Share Data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Summary of operations (1)
Interest income $3,194 $3,543 $3,315 $3,195 $3,544
Interest expense 1,039 1,805 2,074 1,967 2,359
Net interest income 2,155 1,738 1,241 1,228 1,185
Provision for loan losses 100 40 111 93 110
Net interest income after
provision for loan losses 2,055 1,698 1,130 1,135 1,075
Net gain (loss) on securities 70 13 18 (15) 98
Profit(loss)from investment in Michigan BIDCO
- (115) 235 917 128
Other non-interest income 4,441 4,057 2,397 1,387 1,903
Non-interest expense 6,291 5,960 4,695 4,116 4,204
Income (loss) before tax 206 (307) (915) (692) (1,000)
Income tax expense (benefit) - - - 32 (199)
Net income (loss) from
continuing operations 206 (307) (915) (724) (801)
Net income (loss) 206 (307) (915) (915) (198)
Selected Year End Balances
Total assets 46,249 45,623 47,671 40,823 54,536
Loans, net 32,784 34,447 35,644 30,580 23,193
Loans, held for sale 1,551 2,138 268 305 11,863
Cash, cash equivalents and
investment securities 6,521 3,946 5,340 5,919 13,040
Deposits 41,920 40,198 38,179 32,051 43,220
Short-term borrowings - 92 4,094 3,114 277
Long-term borrowings 298 1,658 926 2,627 1,196
Minority interest 360 305 283 506 205
Stockholders' equity 3,156 2,737 2,042 1,950 3,083
Per Share Data
Common shares, year-end 3,900 3,753 2,028 2,013 1,989
Weighted avg shares, year-end 3,859 2,278 2,027 1,994 1,991
Cash dividends - - - - -
Net income (loss) from
continuing operations $0.05 ($0.13) ($0.45) ($0.36) ($0.40)
Net income (loss) $0.05 ($0.13) ($0.45) ($0.46) ($0.10)
Book value of common shares $0.81 $0.73 $0.65 $0.97 $1.55
Selected Ratios
Net yield on earning assets 5.30% 4.37% 3.33% 3.14% 2.86%
Return on average assets 0.47% (0.67%) (2.06%) (1.92%) (0.35%)
Return on average equity 7.43% (12.49%) (53.56%) (36.38%) (6.22%)
Average equity to avg. assets 6.26% 5.38% 3.84% 5.28% 5.79%
(1) Excludes results from discontinued operations.
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of the following discussion and analysis is to assist the
reader in understanding and evaluating the changes in financial position and
results of operations over the past several years. Investors should refer to the
consolidated financial statements, the related notes thereto, and statistical
information presented elsewhere in this report when reading this section of the
report.
The cautionary statements described below are for the purpose of
qualifying for the "safe harbor" provisions of Section 21E of the Securities
Exchange Act of 1934.
RISK FACTORS
Our business involves a high degree of risk. You should carefully
consider the risks and uncertainties described below and the other information
in this report before deciding whether to invest in shares of our common stock.
If any of the following risks actually occur, our business, financial condition
and results of operations could be materially adversely affected. This could
cause the trading price of our common stock to decline, with the loss of all or
part of an investment in our common stock.
Described below, are the material risks of investing in University
Bancorp's common stock. Investors should carefully consider these prior to
purchasing any shares.
If We Are Delisted From The NASDAQ Small-Cap Market the Marketability of Our
Shares Could Decrease
NASDAQ has informed management that the Company's common stock would be
de-listed from the NASDAQ Small Cap Market if the bid price of the Company's
common stock does not trade for at least $1.00 per share for ten consecutive
trading days prior to September 2, 2003. If the Company's common stock is
de-listed from NASDAQ, the shares will be less marketable in the future and
there will be a smaller potential pool of investors for the stock. This would
significantly limit the ability of shareholders deciding to sell their shares to
do so. If the Company is de-listed, the management of University Bancorp could
opt to list its common stock on the NASDAQ Bulletin Board.
You May Not Be Able To Sell Your Shares Upon Demand
Although the Company's common stock is currently listed for trading on the
NASDAQ Small-Cap Market, the trading market for University Bancorp historically
has been less active than the average trading market for companies listed on the
exchange. In addition, the share price of University Bancorp has been volatile
and has ranged from $0.56 to $1.49 in the past 12 months. Factors such as the
limited number of shares outstanding held by the public, a limited history of
earnings and the absence of dividends in the near future mean that there might
not be an active and liquid market for the Company's common stock. Even if an
active market develops, there can be no assurance that a market will continue.
Purchasers of the Company's common stock should carefully consider the
potentially illiquid and long-term nature of their investment in the shares.
The Company's Stock Is Controlled By Insiders Of The Company, Which May Not
Provide You With The Best Possible Return On Your Investment
Insiders hold a majority of the shares outstanding of the Company. The
Ranzini Group (Mr. Stephen Lange Ranzini, Dr. Joseph Lange Ranzini, Mr. Paul
Lange Ranzini, Orpheus Capital, L.P. and the Ranzini Family Trust dated
12/20/89) beneficially owns 2,842,250, or 72.89% of the issued and outstanding
shares at March 31, 2003. These individuals are able to exert a significant
measure of control over University Bancorp's affairs and policies. This control
could be used, for example, to help prevent an acquisition of University
Bancorp, precluding shareholders from possibly realizing any possible premium
that may be offered for the common stock by a potential acquirer.
Your Ownership Of The Company May Be Further Diluted If The Bank Requires
Additional Capital
There can be no assurance that the Bank will not need additional capital in
the future to support the Bank's growth or to counter operating losses. Funds
necessary to meet the Bank's working capital needs and to finance its expansion
might not be available. If additional equity securities are needed to finance
future expansion, such sale could result in significant dilution to the existing
shareholders.
University Bank Has Incurred Significant Start-up Losses And May Never Achieve
Sustained Profitability
University Bank's operations were relocated to Ann Arbor in 1996.
University Bank has a history of losses and prior to 2002 incurred substantial
operating losses. Shareholders are subject to the risks inherent in starting a
new business. The Bank's future profitability is not assured. Management of the
Bank believes that as the size of loan portfolio and retail deposits increase
that the Bank should become more profitable, but there is no assurance that
expenses will not rise at a faster rate than expected as the Bank grows. There
is no assurance that University Bank will grow to a size that will enable it to
sustain profitability. University Bancorp had an accumulated deficit of
$1,999,846 at December 31, 2002.
The Small Size Of University Bank Limits Its Ability To Compete With Larger
Financial Institutions
University Bank faces strong competition for deposits, loans and other
financial services from numerous Michigan and out-of-state banks, thrifts,
credit unions and other financial institutions. Some of the financial
institutions with which University Bank competes with are not subject to the
same degree of regulation as University Bank is. Many of these financial
institutions aggressively compete for business in the Ann Arbor area. Most of
the Bank's competitors have been in business for many years, have established
customer bases, have numerous branches, have substantially higher lending
limits, and offer certain services that we do not provide. The dominant
competitors in the Ann Arbor area are TCF National Bank, National City Bank,
Comerica Bank, Bank One and Key Bank. There can be no assurance that University
Bank will be able to compete effectively with these competitors unless it can
continue to grow its operations.
The Year Ended December 31, 2002 Compared to the Years Ended December 31, 2001
and 2000
Summary of Results of Operations
The Company's net income from operations was $205,598 versus a net loss
of $306,573 in 2001 and $914,647 in 2000. Earnings (loss) per share from
continuing operations for 2002, 2001 and 2000 were $0.05, $(0.13) and $(0.45),
respectively.
The Operations of the Company again showed significant progress in 2002 as
compared to 2001. Net income increased 167.06% over the 2001 results. Fourth
quarter 2002 net income established a new record of $308,130 or $0.08 per share
compared to a loss of ($183,906) or ($0.06) per share for the comparable quarter
in 2001. Return on average shareholders' equity was 7.43% for the year ended
December 31, 2002 compared to a negative 12.49% for the year ended December 31,
2001. Return on average assets for the same comparable years were 0.47% and
(0.67%), respectively. The following table summarizes the pre-tax income (loss)
of each profit center of the Company for the years ended December 31, 2002 and
2001 (in thousands):
Twelve months ended December 31, 2002 and 2001 Pre-tax Income (Loss) Summary
2002 2001
---- ----
Community Banking $ 20 $(414)
Midwest Loan Services 281 237
Merchant Banking (Michigan BIDCO) 0 (115)
Corporate Office (95) (15)
----- -----
Total $ 206 $(307)
===== =====
Company operating results were also greatly improved in 2001 from 2000.
The net loss was reduced by $608,074 to $306,573 in 2001 from $914,647 in 2000.
The Company benefited from the declining interest rates in 2001 and increased
its net interest margin by $497,242 over the previous year. Other income rose by
$1,305,081. The operations of Midwest Loan Services contributed significantly to
this category as their loan servicing and mortgage origination activity exceeded
the prior year. The increase in income was offset partially by an increase in
the Company's non-interest expenses. Non-interest expenses increased by
$1,265,249 from 2000. Increased salary and benefits at Midwest accounted of the
majority of the rise in other expense. Midwest hired additional personnel in
2001 to manage the higher levels of loan servicing and origination.
Twelve months ended December 31, 2001 and 2000 Pre-tax Income (Loss) Summary:
2001 2000
---- ----
Community Banking $(414) $(1,314)
Midwest Loan Services 237 436
Merchant Banking (Michigan BIDCO) (115) 235
Corporate Office (15) (272)
------ -----
Total $(307) $(915)
====== ======
Barring four sizeable non-recurring items, both University Bancorp and the
Bank would have made a profit for the entire 2001 year. Those non-recurring
items were:
Midwest Servicing Rights Valuation $224,175 (Bank)
Foreclosed Real Estate Valuation $ 66,829 (Bank)
Non-cash Stock Compensation $ 31,200 (Bank)
BIDCO Loss $114,551 (Bancorp)
The following non-recurring items negatively impacted the Bank's result:
1) Midwest Servicing Rights Valuation. The Bank's Midwest Loan Services
subsidiary took a writedown on its servicing rights of $224,175 because long
term rates temporarily dipped to 40-year lows immediately following the
terrorist attacks in September (once written down the servicing rights cannot be
written up under Generally Accepted Accounting Principles even though long term
rates did subsequently rise). The write-down reduced Midwest's basis in
servicing rights to $489,770 from $713,935. The risk in the remaining rights is
effectively offset by a principal-only mortgage-backed security investment that
increased income during 2001 by $120,385;
2) Foreclosed Real Estate Valuation. In early 2001, management engaged an
experienced real estate company to develop an other real estate owned site
carried on the Bank's books. During 2001, the Bank wrote-down its investment in
this property to $200,000, incurring a $66,829 loss. Substantially all approvals
for the proposed development have been received and the Bank anticipates closing
on the sale of the property at the contracted price of $300,015.
3) Stock Compensation Expense. The Bank expensed $31,200 in non-cash
compensation expense related to an incentive we provided as a hiring bonus to a
new executive officer in 2001.
The total of these non-recurring items is $322,194. Without these
items, the Bank's income would have been $136,876 in 2001.
4) BIDCO Loss. In addition, the bank holding company took a
write-down on its investment in Michigan BIDCO of $114,551 to $29,152 as a
result of several factors including the writedown of one investment, and
research and development expense related to two e-payment patents that were
applied for during the year. The Bank's investment in the BIDCO is now $600,000
in 7.5% cumulative preferred stock. A capital restructuring of the BIDCO reduced
the Bank's investment in the BIDCO during 2001 by $600,227.
Net Interest Income
Net interest income improved 23.99% year-over-year, rising to $2.2
million for the year ended December 31, 2002 compared to $1.7 million the prior
year. For the fourth quarters ended December 31, 2002 and 2001, net interest
income was $474,007 and $424,324, respectively, an improvement of 11.71%. While
Community Banking experienced a decline in interest on loans during the record
low interest rate environment of the past year, it enjoyed a 38.18% increase in
interest on securities and a 42.42% savings in interest expense. Expanding the
base of core deposits also allowed us to realize a 76.95% reduction in interest
expense on other borrowings. The average yield on interest rate liabilities
declined 41% to 2.66% in 2002 from 4.54% in 2001. The average yield on interest
bearing assets decreased to 7.85% from 8.91% in 2001. The spread between the
average yield on rate sensitive assets and liabilities rose from 4.37% in 2001
to 5.19% in 2002. Additionally, the net interest income was positively affected
in 2002 by higher volume of earning assets. Total interest bearing assets
increased by $0.91 million to $40.67 million in 2002 from $39.76 million in
2001. For the year ended December 31, 2002, the Bank's net interest margin
expanded to 5.30% compared to 4.37% for the previous year.
Net interest income increased $.50 million to $1.74 million in
2001 from $1.24 million in 2000. The increase resulted from an increase in the
net interest rate spread, plus an increase in earning assets. Net interest
income increased primarily due to a lower rate environment in 2001 as compared
to 2000. In 2001, the Federal Reserve Bank lowered the short-term
interest rate numerous times in an attempt to stimulate the United States
economy. The Company's positioning of rate sensitive assets and liabilities was
structured to benefit from a drop in interest rates. The average yield on
interest rate liabilities declined 18% from 5.55% in 2000 to 4.54% in 2001. In
contrast, the average yield on interest bearing assets increased slightly from
8.90% to 8.91% in 2001. The spread between the average yield on rate sensitive
assets and liabilities rose to 4.37% in 2001 from 3.35% in 2000. Additionally,
the net interest income was positively affected in 2001 by higher volume of
earning assets. Total interest bearing assets increased by $2.51 million to
$39.76 million in 2001 from $37.25 million in 2000.
The following tables present for the average balances, the interest
earned or paid, and the weighted average yield for the period indicated:
NET INTEREST INCOME
At ---------------------------------------------------
31-Dec-02 2002
------------------------------------------------------------------
Average Average Interest Average
Yield Balance Inc(Exp) Yield
------------------------------------------------------------------
------------------------------------------------------------------
Interest Earning Assets:
Commercial Loans 6.98% 18,047,370 1,459,892 8.09%
Real Estate Loans (1) 6.84% 14,104,750 1,049,280 7.44%
Installment Loans 8.24% 3,237,782 296,532 9.16%
------------------------------------------------------------------
------------------------------------------------------------------
Total Loans 7.06% 35,389,902 2,805,704 7.93%
------------------------------------------------------------------
------------------------------------------------------------------
Investment Securities 4.90% 3,809,545 366,793 9.63%
Federal Funds & Bank Deposits 0.79% 1,470,693 21,955 1.49%
------------------------------------------------------------------
------------------------------------------------------------------
Total Interest Bearing
Assets 6.60% 40,670,140 3,194,452 7.85%
------------------------------------------------------------------
------------------------------------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 1.38% 5,287,117 58,291 1.10%
Savings 1.16% 423,482 4,825 1.14%
Time 3.21% 20,029,396 671,929 3.35%
Money Market Accts 2.33% 12,282,311 271,887 2.21%
Short-term Borrowings 2.95% 472,079 11,556 2.45%
Long-term Borrowings 5.25% 572,547 20,675 3.61%
------------------------------------------------------------------
------------------------------------------------------------------
Total Interest Bearing
Liabilities 2.59% 39,066,932 1,039,163 2.66%
------------------------------------------------------------------
------------------------------------------------------------------
Net earning assets, net interest
income, and interest rate spread 4.01% 1,603,208 2,155,289 5.19%
==================================================================
==================================================================
Net yield on interest-earning assets 4.05% 5.30%
================ ==============
1. Actual yields; not adjusted to take into account tax-equivalent yields.
NET INTEREST INCOME
---------------------------------------------------
2001
---------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
---------------------------------------------------
---------------------------------------------------
Interest Earning Assets:
Commercial Loans 16,111,575 1,495,597 9.28%
Real Estate Loans (1) 15,545,774 1,289,550 8.30%
Installment Loans 4,635,651 468,940 10.12%
---------------------------------------------------
---------------------------------------------------
Total Loans 36,293,000 3,254,087 8.97%
---------------------------------------------------
---------------------------------------------------
Investment Securities 2,929,515 265,437 9.06%
Federal Funds & Bank Deposits 538,676 23,573 4.38%
---------------------------------------------------
---------------------------------------------------
Total Interest Bearing
Assets 39,761,191 3,543,097 8.91%
---------------------------------------------------
---------------------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 3,346,502 70,293 2.10%
Savings 349,364 6,034 1.73%
Time 23,172,173 1,257,631 5.43%
Money Market Accts 10,273,959 331,092 3.22%
Short-term Borrowings 1,931,660 87,304 4.52%
Long-term Borrowings 699,398 52,503 7.51%
---------------------------------------------------
---------------------------------------------------
Total Interest Bearing
Liabilities 39,773,056 1,804,857 4.54%
---------------------------------------------------
---------------------------------------------------
Net earning assets, net interest
income, and interest rate spread (11,865) 1,738,240 4.37%
===================================================
===================================================
Net yield on interest-earning assets 4.37%
==============
2. Actual yields; not adjusted to take into account tax-equivalent yields.
NET INTEREST INCOME
---------------------------------------------------
2000
---------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
---------------------------------------------------
---------------------------------------------------
Interest Earning Assets:
Commercial Loans 13,524,876 1,339,022 9.90%
Real Estate Loans (1) 14,769,498 1,288,810 8.73%
Installment Loans 4,726,444 481,837 10.19%
---------------------------------------------------
---------------------------------------------------
Total Loans 33,020,818 3,109,669 9.42%
---------------------------------------------------
---------------------------------------------------
Investment Securities (2) 4,172,915 203,862 4.89%
Federal Funds & Bank Deposits 59,305 1,914 3.23%
---------------------------------------------------
---------------------------------------------------
Total Interest Bearing
Assets 37,253,038 3,315,445 8.90%
---------------------------------------------------
---------------------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 2,838,835 80,160 2.82%
Savings 325,536 6,542 2.01%
Time 16,940,251 1,082,828 6.39%
Money Market Accts 12,210,290 535,561 4.39%
Short-term Borrowings 3,589,958 241,782 6.73%
Long-term Borrowings 1,457,221 127,574 8.75%
---------------------------------------------------
---------------------------------------------------
Total Interest Bearing
Liabilities 37,362,091 2,074,447 5.55%
---------------------------------------------------
---------------------------------------------------
Net earning assets, net interest
income, and interest rate spread (109,053) 1,240,998 3.35%
===================================================
===================================================
Net yield on interest-earning
assets 3.33%
==============
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
(2) The convertible bonds at Michigan BIDCO were converted on May 31,2000,
resulting in the deconsolidation of BIDCO related interest earning assets
and interest bearing liabilities.
The table above does not specify the average level of non-interest
bearing demand deposits, which were $2,432,737, $2,643,856, and $2,827,298 for
the years ended December 31, 2002, 2001 and 2000, respectively.
The following table presents information regarding fluctuations in
our interest income and interest expense for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate); and (2) changes in rate (changes in rate multiplied by
old volume); with the rate/volume variance allocated to changes in rate:
RATE VOLUME TABLE
--------------------------------------------------------------------
2002 - 2001
--------------------------------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
Interest Income:
Commercial Loans $168,534 $(204,239) $ (35,705)
Real Estate Mortgage Loans (113,699) (126,571) (240,270)
Installment/Consumer Loans (131,221) (41,187) (172,408)
Investment Securities 83,870 17,486 101,356
Federal Funds & Bank Deposits 21,324 (22,942) (1,618)
------------------------------------------------------------------
Total Interest Income 28,808 (377,453) (348,645)
------------------------------------------------------------------
------------------------------------------------------------------
Interest Bearing Liabilities:
Demand Deposits 30,117 (42,119) (12,002)
Savings Deposits 1,113 (2,322) (1,209)
Time Deposits (153,498) (432,204) (585,702)
Money Market Accounts 56,933 (116,138) (59,205)
Short-term Borrowings (47,147) (28,601) (75,748)
Long-term Borrowings (8,243) (23,585) (31,828)
------------------------------------------------------------------
Total Interest Expense (120,725) (644,969) (765,694)
------------------------------------------------------------------
Net Interest Income $149,533 $267,516 $ 417,049
====================================================================
RATE VOLUME TABLE
--------------------------------------------------------------------
2001 - 2000
--------------------------------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
Interest Income:
Commercial Loans $ 244,047 $ (87,471) $ 156,576
Real Estate Mortgage Loans 66,014 (65,274) 740
Installment/Consumer Loans (9,205) (3,692) (12,897)
Investment Securities (74,166) 135,741 61,575
Federal Funds & Bank Deposits 20,745 913 21,658
------------------------------------------------------------------
Total Interest Income 247,345 (19,783) 227,652
------------------------------------------------------------------
------------------------------------------------------------------
Interest Bearing Liabilities:
Demand Deposits 12,825 (22,692) (9,867)
Savings Deposits 456 (964) (508)
Time Deposits 355,717 (180,914) 174,803
Money Market Accounts (76,501) (127,968) (204,469)
Short-term Borrowings (90,228) (64,250) (154,478)
Long-term Borrowings (58,923) (16,148) (75,071)
------------------------------------------------------------------
Total Interest Expense 143,346 (412,936) (269,590)
------------------------------------------------------------------
Net Interest Income $ 104,089 $ 393,153 $ 497,242
====================================================================
Information regarding the Bank's loan portfolio as of December 31, 2002
and 2001 is set forth under Note 5 to University Bancorp's consolidated
financial statements included with this report.
Provision for Loan Losses
The Bank charges to operations a provision for possible loan losses
which is intended to create an allowance for future loan losses inherent in the
Bank's portfolio. Each year's provision reflects management's analysis of the
amount necessary to maintain the allowance for possible loan losses at a level
adequate to absorb anticipated losses. In its evaluation, management considers
factors like historical loan loss experience, specifically identified problem
loans, composition and growth of the loan portfolio, current and projected
economic conditions, and other pertinent factors. A loan is charged-off by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
Non-performing loans are defined as loans which have been placed on
non-accrual status and loans over 90 days past due as to principal or interest
and still in an accrual status. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued. See Note 5 of
the Consolidated Financial Statements for additional information regarding
impaired and past due loans. Non-performing loans amounted to $679,560 and
$1,265,276 at December 31, 2002 and 2001, respectively.
During 2002, management noted a decrease in delinquencies primarily due to a
more aggressive collection
effort.
The provision for loan losses in 2002 was $100,000, an increase of
$60,000 from the 2001 level, which in turn was in down from the 2000 level of
$111,000. Loans charged off, net of recoveries, were $270,894, $23,884 and
$80,588 in 2002, 2001 and 2000, respectively. The increase in net loans charged
off from 2001 to 2002 resulted primarily to 2 loans charged off in late 2002
that relate to long standing problem loan relationships that were specifically
reserved, but not charged off, in prior year periods. The allowance for possible
loan losses totaled $408,219, $579,113 and $562,997 at the end of 2002, 2001 and
2000, respectively. The following table summarizes the loan loss expense for the
Bank for the years ended December 31, 2002, 2001 and 2000.
Analysis of the Allowance for Loan Losses ($ amounts in thousands)
2002 2001 2000
---- ---- ----
Balance at beginning of the period $ 579 $ 563 $ 533
Chargeoffs - Domestic:
Commercial loans 270 20 135
Real estate mortgage - 7 9
Installment loans 17 17 1
------------- -------------- ---------------
Subtotal 287 44 145
------------- -------------- ---------------
Recoveries - Domestic:
Commercial loans 13 12 27
Real estate mortgage - 2 21
Installment loans 3 6 16
------------- -------------- ---------------
Subtotal 16 20 64
------------- -------------- ---------------
Net chargeoffs 271 24 81
------------- -------------- ---------------
Provision for loan losses 100 40 111
------------- -------------- ---------------
Balance at end of period $ 408 $ 579 $ 563
============= ============== ===============
Ratio of net chargeoffs during
period to average loans
outstanding during period 0.79% 0.07% 0.24%
============= ============== ===============
Analysis of the Allowance for Loan Losses ($ amounts in thousands)
Allocated portion of
allowance Percentage of loans in each
at December 31 category to total loans
-------------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Loan category:
Domestic:
Commercial loans $ 341 $ 337 56.26% 50.9%
Real estate mortgages 42 78 35.05% 38.2%
Installment loans 19 135 8.69% 10.9%
Unallocated 6 29 N/A N/A
-------- ------- ------- -------
$ 408 $ 579 100.0% 100.0%
========= ======= ======= ========
At At
December 31, 2002 December 31, 2001
---------------------- -----------------------
Total loans (1) $33,192,034 $35,026,024
Reserve for loan losses $ 408,219 $ 579,113
Reserve/Loans % 1.23% 1.65%
(1) Excludes loans held for sale.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor and the future performance of these loans is dependent upon the
performance of relatively limited geographical areas. As a result of the ongoing
business depression, the Bank's future loss ratios may exceed historical loss
ratios.
Management believes that the allowance for loan losses is adequate to
absorb losses inherent in the loan portfolio, although the ultimate adequacy of
the allowance for loan losses is dependent upon future economic factors beyond
our control. A downturn in the general nationwide economy will tend to
aggravate, for example, the problems of local loan customers currently facing
some difficulties. A general nationwide business expansion could result in fewer
loan customers being unable to repay their loans.
Non-Interest Income and Non-Interest Expense
Non-interest income. Non-interest income was $4.4 million in 2002
compared to $4.0 million in 2001. Activity throughout the year was brisk at
Midwest Loan Services. The Bank's wholly owned insurance and investment
subsidiary, University Insurance & Investment Services, also enjoyed a record
year, producing $113,870 in fee income compared to $97,489 for the year ended
December 31, 2001, a 16.8% increase. Money under fee management in the brokerage
side of the agency increased to over $5 million during the year.
Non-interest income increased to $3.96 in 2001 from $2.65 in 2000, an
increase of 49.2%. The increase in 2001 was mainly the result of increased
revenues from Midwest Loan Services' loan subservicing and set-up fees, which
more than offset a decline in income from merchant banking (BIDCO) income,
because the BIDCO's results were deconsolidated after May 1, 2000.
Mortgage banking. Mortgage banking, servicing and origination fees
increased to $4,040,363 in 2002 from $3,783,721 in 2001. Midwest had a highly
successful year attracting some of the nation's premier credit unions to its
"Members for Life" program. During the year, Midwest grew its mortgages
subserviced by 66% from 5,057 to 8,372 and to over $1 billion of mortgages
subserviced. During the year, Midwest increased its credit union partners so
that at year-end 2002 it had credit union partners with a total of 1,421,380
active members, 8,574,813 potential members and aggregate assets of $9.61
billion. In 2002, Midwest originated 1,769 mortgage loans, an increase of 88%.
Growth was consistent in each month throughout the year. In the fourth quarter
of 2002, a new record of 664 mortgages were originated by Midwest.
Mortgage banking, servicing and origination fees increased from $2,183,209
in 2000 to $3,783,721 in 2001. The increase in mortgage banking fee income was
the result of an increase in the number of loans subserviced at Midwest Loan
Services. The increases in mortgage banking fee income for 2001 was the result
of an increase in the number of loans subserviced at Midwest Loan Services.
During 2000, Midwest Loan Services increased its mortgage subservicing contracts
by 280% (from $0.5 billion to $1.9 billion) as a result of a new business
relationship with one of the top five mortgage banking firms on Wall Street.
During the first half of 2001, Midwest reached a peak of $2.7 billion in 1-4
family residential loan servicing. In the third quarter of the year, the loan
servicing volume was significantly cut back as Midwest's largest customer
decided to significantly scale back the amount of business it was providing to
Midwest. As of July 1, 2001, 18,500 loans or
95% of the mortgages sub-serviced by Midwest for this customer had been
transferred to other sub-servicers including a subsidiary of this firm with the
rest transferred the following month. During 2001 Midwest increased its emphasis
on mortgage loan originations through its credit union customers. Much of the
increase in loan set up and other fees resulted from fee income from mortgage
originations generated from member of credit unions. In 2001, Midwest originated
939 mortgage loans. Growth was consistent in each month throughout the year. In
January 2001 12 mortgage loans were originated and 135 were originated in
December 2001, an 1,125% increase.
Merchant banking. Michigan BIDCO invests in businesses in Michigan with
the objective of capital gains while fostering job growth and economic
development. As of December 31, 2002, the BIDCO had made thirty investments
since its inception in 1993, amounting to a total of $17,108,680 at original
cost, before repayments or participations sold. At December 31, 2002, Michigan
BIDCO had total assets of $1,464,091 versus $1,125,561 at December 31, 2001 and
$3,429,226 at December 31, 2000.
Michigan BIDCO's financial results were consolidated into the results of
University Bancorp until May 31, 2000. At that date the outstanding Michigan
BIDCO bonds were converted into common stock and thus diluted University
Bancorp's equity ownership down to 28.8% from 80.1%. As a result, the BIDCO is
no longer consolidated in the financial statements of University Bancorp and the
investment is now accounted for under the equity method of accounting. As a
result of the repurchase of the BIDCO's shares held by University Bank in 2001,
the Company's equity share of BIDCO at December 31, 2001 is 6.10%. Income (loss)
realized from the investment in the BIDCO of was $0, $(114,551) and $234,740 in
2002, 2001 and 2000, respectively.
Securities. Proceeds from sales of marketable equity securities included
in proceeds from sales of investment securities was $98,625 for the year ended
December 31, 2000. Gross gains of $20,625 was realized in this period.
Proceeds from sales of available for sale debt securities were
$1,034,160, $541,460 and $1,123,594 for the years ended December 31, 2002, 2001
and 2000, respectively, excluding sales associated with the Bank's mortgage
banking operation. There were gross gains of $69,733, $12,639 and $625 on 2002,
2001 and 2000 sales, respectively and a gross loss of $2,839 on 2000 sales.
At December 31, 2002 gross unrealized losses in our available-for-sale
securities were $81,764 and gross unrealized gains were $0. At December 31, 2001
gross unrealized losses in our available-for-sale securities were $167,112 and
gross unrealized gains were $0.
Non-interest expense. Non-interest expenses increased 5.54% to $6.3 million
in 2002 from $6.0 million in 2001. Non-interest expenses during the fourth
quarter 2002 increased as Midwest's mortgage origination function expanded.
During the 4th quarter Midwest reached a new level of 664 mortgages originated
and succeeded in retaining over 80% of all refinanced mortgages in its servicing
rights portfolio that paid-off. Non-interest expense for the quarter ended
December 31, 2002 was $1.8 million compared to $1.3 million for the fourth
quarter in the prior year. Year-end employee performance bonuses increased the
fourth quarter 2002 non-operating expenses as well. The increase was primarily
the result of increased operational expenses at
Midwest Loan Services, and an increase in state small business tax and the
start-up of the Business Manager product at Community Banking, which more than
offset cost control efforts in other areas at Community Banking. During the year
Community Banking's non-interest expenses increased by $97,189 or 3.6% to
$2,773,262 from $2,676,073, and all of the increase was caused by the two
categories mentioned above. Midwest's operations were expanded in 2002 due to a
substantial increase in mortgage sub-servicing and origination activity. As the
volume expanded Midwest increased its workforce to perform the required tasks.
Other servicing and sub-servicing related expenses, such as occupancy, supplies
and postage increased also. Non-interest expense was also impacted by an
increase in the amortization of the mortgage servicing rights due to the low
interest rate environment after September 2001.
Non-interest expense increased to $5,960,223 in 2001 from $4,694,974 in
2000. The increase was primarily the result of increased operational expenses at
Midwest Loan Services, which more than offset cost control efforts in other
areas at the Bank. During the year the retail bank division's non-interest
expenses increased by just $31,226 to $2,676,073 from $2,644,847. Midwest's
operations were expanded in 2001 due to a substantial increase in mortgage
sub-servicing and origination activity. As the volume expanded Midwest increased
its workforce to perform the required tasks. Other servicing and sub-servicing
related expenses, such as occupancy, supplies and postage increased also. At the
Bank level, a concerted effort was made to reduce its non-interest expenses.
Notable improvements were made in the legal and audit expense category.
Non-interest expense was also impacted by an increase in the amortization of the
mortgage servicing rights due to the low interest rate environment after
September 2001.
Liquidity and Capital Resources
Our total assets at December 31, 2002 amounted to $46.25 million
compared to $45.62 million at December 31, 2001. Loans receivable, net of
reserves and including loans held for sale, decreased by $2.25 million to $34.33
million from $36.58 million. Cash and cash equivalents including Federal Funds
sold on an overnight basis at the end of 2002 increased by $1.73 million from
the prior year, while securities increased by $0.84 million. At year-end 2002,
the Bank had an unused line of credit from the Federal Home Loan Bank of
Indianapolis of $3.5 million, and an unused line of credit from the Federal
Reserve Bank of Chicago of $4.9 million.
University Bank, as an FDIC-insured bank, is subject to certain
regulations that require the maintenance of minimum liquidity levels of cash and
eligible investments. The Bank has historically exceeded this minimum as a
result of its investments in federal funds sold, U.S. government and U.S. agency
securities and cash. In addition, University Bancorp had $212,273 in cash and
equity securities at the end of 2002 to meet cash needs, primarily operating
expenses and interest and principal reductions on the University Bancorp's note
payable. The balance of the loan was $298,000 and $430,000 at year-end 2002 and
2001. The note is a fully amortizing loan maturing in early 2005. Management
intends that the cash and securities on hand and possible dividends from the
Bank to the University Bancorp to be sufficient to cover the required principal
reductions during 2003 on University Bancorp's loan.
During 2001, University Bancorp raised working capital by issuing
equity conversion notes, which bear interest at prime rate although all payment
of interest is deferred until conversion into common stock or
redemption. Notes are redeemable only through the proceeds of a future sale of
common stock or preferred stock. The various equity conversion notes that were
issued were converted into common stock in November 2001 as part of our rights
offering of common stock, which raised $1,659,749 through the sale of 1,659,749
shares, less offering expenses. The equity conversion notes were sold to our
President, former Chairman and members of their family.
The Company's total stockholders' equity at December 31, 2002 was
approximately $3.16 million (or 6.8% of total assets) compared to $2.74 million
(or 6.0% of total assets) at December 31, 2001. The Bank's Tier 1 Capital at
December 31, 2002 was $3.54 million or 7.9% of the Bank's total regulatory
assets. The risk-adjusted capital ratio of 9.9% exceeded the minimum regulatory
risk-based capital requirement of 8% of the risk-adjusted assets for the Bank.
The following table provides detailed information about the Bank's risk-adjusted
assets and actual capital percentages:
TIER 1 CAPITAL 2002 2001
Total Equity Capital $3,310 $2,924
Less: Unrealized losses on available-for-Sale
Securities (82) (167)
Plus: Minority Interest 360 305
Less: Other identifiable Intangible Assets 206 125
------- ------
Total Tier 1 Capital 3,546 3,271
TIER 2 CAPITAL
Allowance for loans & Lease losses 408 579
Less: Excess Allowance - 130
Total Tier 2 Capital 408 449
------ ------
Total Tier 1 & Tier 2 Capital $3,954 $3,720
====== ======
CAPITAL RATIOS
Tier 1/Total Average Assets 7.89% 7.13%
Tier 1/Total Risk-Weighted Assets 9.98% 9.14%
Tier 1 & 2/Total Risk-Weighted Assets 11.13% 10.38%
.
ITEM 7A. MARKET RISK
Impact of Inflation
The primary impact of inflation on our operations is reflected in
increased operating costs. Since our assets and liabilities are primarily
monetary in nature, changes in interest rates have a more significant impact on
our performance than the general effects of inflation. However, to the extent
that inflation affects interest rates, it also affects our net income.
Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. This difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will
result in generally lower earnings as long-term assets are repricing upward
slower than short-term liabilities. However during a declining rate environment,
the opposite effect on earnings is true, with earnings rising due to long-term
assets repricing downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on these rights by lowering
required amortization rates on the rights and decreasing the opportunity for
customers to refinance those loans. Rising interest rates tend to decrease new
mortgage origination activity, negatively impacting current income from the
Bank's retail mortgage banking operations and Midwest's mortgage banking
operations. Rising interest rates also slow Midwest Loan Services' rate of
growth, but increases the duration of its existing mortgages being subserviced
under contract.
The Bank's securities portfolio is designed to offset a portion of the
market value risk associated with the servicing rights. During period of
declining interest rates, the estimated duration period for the Bank's FNMA CMO
tends to shorten, thus accelerating the income from the accretion of the bond's
discount. This income mitigates the rapid amortization of the servicing rights.
In a rising rate environment, the accretion of income on the bond tends to
lessen.
The table on the following page details our interest sensitivity gap
between interest-earning assets and interest bearing liabilities at December 31,
2002. Certain items in the table are based upon various assumptions that may not
necessarily reflect future experience, and therefore, certain assets and
liabilities may in fact mature or re-price differently from what is illustrated.
The one-year static gap position at December 31, 2002 was estimated at ($14.9
million) or (32.17%):
Asset/Liability Position Analysis as of December 31, 2002
(Dollar amounts in Thousands)
Maturing or Repricing in
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 ALL
ASSETS Or Less 1 Year Years Years Years Other Total
------ ------- ------ ----- ----- ----- ----- -----
Loans - net 8,268 3,237 3,666 14,634 4,258 (408) 33,655
Non-accrual loans - - - - - 680 680
Securities 240 676 615 - 1,572 - 3,103
Other assets - 600 - - - 5,642 6,242
Cash and Due from
banks 1,312 - - - - 1,257 2,569
------------------------------------------------------------------------------------------
Total assets 9,820 4,513 4,281 14,634 5,830 7,171 46,249
------------------------------------------------------------------------------------------
LIABILITIES
-----------
Time deposits 6,126 7,927 3,060 689 395 - 18,197
Demand -interest
bearing 7,512 7,512 6,028 - - - 21,052
Demand - non interest - - - - - 2,198 2,198
Savings - - 474 - - - 474
Long term borrowings 33 99 166 - - - 298
Other liabilities - - - 874 874
Stockholders' equity - - - - - 3,156 3,156
------------------------------------------------------------------------------------------
Total liabilities 13,671 15,538 9,728 689 395 6,228 46,249
------------------------------------------------------------------------------------------
Gap (3,851) (11,025) (5,447) 13,945 5,435 943 -
==========================================================================================
Cumulative gap (3,851) (14,876) (20,323) (6,378) (943) -
=============================================================================
Gap percentage -8.33% -32.17% -43.94% -13.79% -2.04% 0.00%
============================================================================
The following repricing information is provided for the Bank's investment
portfolio, using book values, as of December 31, 2002:
Investment Portfolio Maturities ($ amounts in thousands) and Yield by Type:
Maturity or Repricing Interval:
Less Than 1 Year to 5 Years to More Than
One Year 5 Years 10 Years 10 Years
-------- ------- -------- --------
Government Agencies:
Amount $54 $0 $0 $3,048
Yield 0% 0% 0% 4.83%
Additional information regarding the Bank's investments is set forth under Note
4 to the consolidated financial statements.
The following information illustrates maturities and sensitivities of the
Bank's loan portfolio to changes in interest rates as of December 31, 2002:
Loan Portfolio Maturities by Type ($ amounts in thousands):
Maturity Interval:
Less Than 1 Year to More Than
One Year 5 Years 5 Years Total
-------- ------- ------- -----
Commercial $ 5,763 $ 11,113 $1,883 $ 18,759
Real Estate Mortgage (1) $ 2,070 $ 7,960 $1,603 $ 11,633
Installment/Consumer $ 679 $ 831 $1,290 $2,800
----- ----- ------ ------
Total $ 8,512 $ 19,904 $ 4,776 $ 33,192
======= ======== ======= ========
Maturity Less Maturity
Than More Than One
One Year Year Total
Total Variable Rate Loans $6,268 $ 9,847 $ 16,115
Total Fixed Rate Loans $2,244 $ 14,833 $ 17,077
------ -------- --------
Total Loans (1) $8,512 $ 24,680 $ 33,192
====== ======== ========
(1) Excludes loans held for sale of $1,551 and the allowance for loan losses.
Income Taxes
Income tax expense (benefit) in 2002, 2001 and 2000 was $0. The
effective tax (benefit) rate was 0% for all three years. No tax benefit was
realized in these years due to loss carryforwards resulting from net losses from
operations.
In 1996, the Bank, through a subsidiary, purchased a $1,000,000
interest in a partnership investment in Michigan Capital Fund for Housing
Limited Partnership I, a Michigan limited partnership, which invested in federal
low-income housing tax credits. The initial investment consisted of a $50,000
equity purchase and the execution by the subsidiary of a $950,000 promissory
note held by this Partnership. Additional capital contributions were made over
time to reduce the balance of the note, which was paid in full in late 2002. The
purchase of the tax credits increased the deferred federal income tax assets in
2002, 2001 and 2000 and is expected to decrease the amount of federal income
taxes we would otherwise pay annually through 2005.
At December 31, 2002, the Company had available federal income tax loss
carryforwards that could be utilized to shelter approximately $2,500,000 future
taxable income. Realization of income tax benefits not recorded in the financial
statements is dependent upon generating sufficient future taxable revenue. See
footnote 13 to the financial statements
Legal Proceedings
At December 31, 2002 the Company had no outstanding legal proceedings
that would have a material affect on the financial statements.
UNIVERSITY BANCORP, INC.
--------------------
CONSOLIDATED FINANCIAL STATEMENTS
--------------------
DECEMBER 31, 2002, 2001, 2000
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
University Bancorp, Inc.
We have audited the accompanying consolidated statement of financial condition
of University Bancorp, Inc. and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the three years ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 2000 financial statements
of Midwest Loan Services, Inc. an 80 percent owned subsidiary, which statements
reflect total assets and revenues constituting 5 percent and 33 percent,
respectively of the related consolidated totals for the year ended December 31,
2000. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Midwest Loan Services, Inc. for 2000, is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of University Bancorp,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
GRANT THORNTON LLP
Southfield, Michigan
March 21, 2003
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets
December 31, 2002 and 2001
December 31, December 31,
ASSETS 2002 2001
--------------- --------------
Cash and due from banks $ 2,569,469 $ 837,550
Securities available for sale, at market 3,102,838 2,260,103
Federal Home Loan Bank Stock 848,400 848,400
Loans held for sale, at the lower of cost or market 1,550,995 2,137,786
Loans 33,192,034 35,026,024
Allowance for loan losses (408,219) (579,113)
------------- --------------
Loans, net 32,783,815 34,446,911
Premises and equipment, net 1,720,902 1,787,018
Investment in Michigan BIDCO Inc. 629,258 629,258
Investment in Michigan Capital Fund LPI 356,244 456,244
Mortgage servicing rights , net 1,014,939 606,537
Real estate owned, net 853,198 200,000
Accounts receivable 72,786 862,848
Accrued interest receivable 169,811 229,417
Prepaid expenses 214,472 191,700
Goodwill, net 103,914 63,914
Other assets 258,272 65,045
------------- -------------
TOTAL ASSETS $ 46,249,313 $ 45,622,731
============= =============
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
December 31, 2002 and 2001
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
------------- --------------
Liabilities:
Deposits:
Demand - non interest bearing $ 2,197,567 $ 2,390,750
Demand - interest bearing 21,051,588 13,701,011
Savings 473,894 340,341
Time 18,197,407 23,765,478
------------- -------------
Total Deposits 41,920,456 40,197,580
Short term borrowings 91,566
Long term borrowings 298,000 1,657,506
Accounts payable 228,062 339,536
Accrued interest payable 97,068 177,407
Other liabilities 189,594 117,398
------------- -------------
Total Liabilities 42,733,180 42,580,993
Minority Interest 360,166 305,129
Stockholders' equity:
Preferred stock, $0.001 par value;
$1,000 liquidation value;
Authorized - 500,000 shares;
Issued 725 shares in 2001
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,014,732 shares in 2002 and
3,867,732 shares in 2001 40,147 38,677
Additional paid-in-capital 5,537,960 5,411,018
Accumulated deficit (1,999,846) (2,205,444)
Treasury stock - 115,184 shares in 2002
and 2001 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities
available for sale, net (81,764) (167,112)
------------- -------------
Total Stockholders' Equity 3,155,967 2,736,609
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,249,313 $ 45,622,731
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2001, 2000 and 1999
2002 2001 2000
------------------ ---------------- ------------------
Interest income:
Interest and fees on loans $ 2,805,704 $ 3,254,088 $ 3,109,669
Interest on securities:
U.S. Government and agencies 270,127 202,357 129,786
Other securities 96,666 63,080 74,076
Other interest income 21,955 23,572 1,914
------------- ------------- -------------
Total interest income 3,194,452 3,543,097 3,315,445
------------- ------------- -------------
Interest expense:
Interest on deposits:
Demand deposits 330,178 401,385 615,721
Savings deposits 4,825 6,034 6,542
Time certificates of deposit 671,929 1,257,631 1,082,828
Short term borrowings 11,556 87,304 241,782
Long term borrowings 20,675 52,503 127,574
------------- ------------- -------------
Total interest expense 1,039,163 1,804,857 2,074,447
------------- ------------- -------------
Net interest income 2,155,289 1,738,240 1,240,998
Provision for loan losses 100,000 40,000 111,000
------------- ------------- -------------
Net interest income after
provision for loan losses 2,055,289 1,698,240 1,129,998
------------- ------------- -------------
Other income:
Loan servicing and subservicing fees 3,090,838 2,145,619 1,073,673
Initial loan set-up and other fees 713,427 1,570,900 1,069,778
Gain on sale of mortgage loans 236,098 67,202 39,758
Merchant banking/ BIDCO income (114,551) 234,740
Insurance & investment fee income 113,870 97,489 71,529
Deposit service charges and fees 92,955 86,135 61,538
Net security gains (losses) 69,733 12,639 17,786
Other 124,098 89,977 81,527
------------- ------------- -------------
Total other income 4,441,019 3,955,410 2,650,329
------------- ------------- -------------
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations (continued)
For the Years Ended December 31, 2002 2001 and 2000
2002 2001 2000
------------------ ---------------- ------------------
Other expenses:
Salaries and benefits $ 2,929,540 $ 3,250,713 $ 1,928,060
Occupancy, net 349,186 464,183 320,089
Data processing and equipment 433,239 286,200 336,016
Legal and audit expense 173,139 127,212 408,430
Consulting fees 181,545 231,795 206,313
Mortgage banking expense 579,040 132,832 150,403
Servicing rights amortization 529,048 325,091 171,129
Goodwill amortization 15,978 139,412
Advertising 92,944 111,862 103,177
Memberships and training 103,095 64,609 98,237
Travel and entertainment 91,330 104,189 59,565
Supplies and postage 199,338 333,682 195,449
Insurance 87,662 84,772 104,335
Other operating expenses 541,604 427,105 474,359
------------- ------------- ------------------
Total other expenses 6,290,710 5,960,223 4,694,974
------------- ------------- ------------------
Income (loss) before income taxes 205,598 (306,573) (914,647)
Income tax expense (benefit) 0 0 0
------------- ------------- ------------------
Net income (loss) $ 205,598 $ (306,573) $ (914,647)
============= ============= ==================
Preferred stock dividends 52,244 3,933
------------- ------------- ----- -------------
Net income (loss) available to common $ 205,598 $ (358,817) $ (918,580)
shareholders
============= ============= ==================
Basic and diluted income (loss) per common share $ 0.05 $ (0.13) $ (0.45)
============= ============= ==================
Weighted average shares outstanding 3,859,433 2,278,364 2,026,735
============= ============= ==================
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ ---------------- ------------------
Net income (loss) $205,598 ($306,573) ($914,647)
Other comprehensive income (loss):
Unrealized gains on
securities available for sale 155,081 180,126 268,085
Less: reclassification
adjustment for accumulated
gains included in net
loss 69,733 12,639 17,786
------------------ ---------------- ------------------
Other comprehensive income 85,348 167,487 250,299
------------------ ---------------- ------------------
------------------ ---------------- ------------------
Comprehensive income (loss) $290,946 ($139,086) ($664,348)
================== ================ ==================
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2002, 2001, and 2000
Preferred Stock $.001 Common Stock $.01 Treasury Stock
Par Value Par Value
------------------------------------------------------------------------------- Additional
Number of Par Number of Par Number of Paid In
Shares Value Shares Value Shares Cost Capital
------ ----- ------ ----- ------ ---- -------
Balance December 31, 1999 0 0 2,127,985 $ 21,280 (115,184) $(340,530) $3,786,508
Issuance of common stock at
weighted average price of $2.08 per
share - - 15,000 150 - - 31,100
Issuance of preferred stock at - - - - -
price of $1,000 per share 725 $ 725,000
Unrealized gain on securities - - - - -
available for sale, net of tax - -
Net loss - - - - - - -
-----------------------------------------------------------------------------------------------
Balance December 31, 2000 725 $ 725,000 2,142,985 $ 21,430 (115,184) $(340,530) $3,817,608
Issuance of preferred stock 733 733,000 - - - - -
Conversion of preferred stock to
common stock (1,458) (1,458,000) 1,458,000 14,580 - - 1,443,420
Issuance of common stock at
weighted average price of $1.00 per
share, net of expenses of $114,090 266,747 2,667 149,990
Payment of preferred dividend
Unrealized gain on securities
available for sale, net of tax
Net loss
38,677
-----------------------------------------------------------------------------------------------
Issuance of common stock at 147,000 1,470 126,942
weighted average price of $1.00 per
share, net of expenses of $18,587
Unrealized gain on securities
available for sale, net of tax
Net loss
-----------------------------------------------------------------------------------------------
December 31, 2002 - $ - 4,014,732 $ 40,147 (115,184) $(340,530) $ 5,537,960
===============================================================================================
UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2002, 2001, and 2000
Accumulated
Retained Other Total
Earnings Comprehensive Stockholders'
(Deficit) Loss Equity
--------- -------------- ----------------
Balance December 31, 1999 $ (931,980) $(584,898) $ 1,950,380
Issuance of common stock at weighted - -
average price of $2.08 per share 31,250
Issuance of preferred stock at price
of $1,000 per share - - 725,000
Unrealized gain on securities -
available for sale, net of tax 250,299 250,299
Net loss
(914,647) - (914,647)
------------------------------------------------------
Balance December 31, 2000 $(1,846,627) $(334,599) $2,042,282
Issuance of preferred stock - - 733,000
Conversion of preferred stock to
common stock - - -
Issuance of common stock at weighted
average price of $1.00 per share,
net of expenses of $114,090 152,657
Payment of preferred dividend $(52,244) (52,244)
Unrealized gain on securities
available for sale, net of tax $167,487 167,487
Net loss (306,573) (306,573)
------------------------------------------------------
Balance December 31, 2001 $(2,205,444) $(167,112) $ 2,736,609
Issuance of common stock at weighted
average price of $1.00 per share,
net of expenses of $18,587 128,413
Unrealized gain on securities
available for sale, net of tax 85,348 85,348
Net income 205,598 205,598
------------------------------------------------------
December 31, 2002 $(1,999,846) $ (81,764) $ 3,155,967
======================================================
---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC.
Consolidated Statements of Cash Flows
For the years ended December 30, 2002, 2001 and 2000
2002 2001 2000
------------------ ----------------- -----------------
Cash flow provided by (used in) operating activities:
Net income (loss) $ 205,598 $ (306,573) $ (914,647)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation 195,070 268,529 252,726
Amortization 629,048 441,729 410,541
Provision for loan loss 100,000 40,000 111,000
Gain on sale of mortgages (236,098) (67,202) (39,758)
Accretion on securities (259,463) (202,277) (98,341)
Originations of mortgage loans (70,457,559) (44,869,505) (6,525,261)
Proceeds from mortgage loan sales 71,280,448 43,066,491 6,602,498
Net (gain) on sale of securities (69,733) (12,639) (17,786)
Net change in:
Real estate owned (653,198) 140,881 330,590
Other assets (318,115) 508,431 (2,055,016)
Other liabilities (64,580) (1,490,094) 2,073,567
-------------- -------------- -------------
Net cash provided by (used in) operating activities 351,418 (2,482,229) 130,113
-------------- -------------- -------------
Cash flow provided by (used in) investing activities:
Purchase of investment securities (2,139,503) (474,780) (78,000)
Proceeds from sales of investment
Securities 1,034,160 541,460 1,222,219
Proceeds from maturities/paydowns of
investment securites 651,486 249 3,993
Net change in Michigan BIDCO equity
Investments 0 648,126 197,302
Loans granted, net of repayments 1,563,096 1,156,636 (5,615,966)
Premises and equipment expenditures, net (128,954) (679,790) (273,997)
-------------- -------------- --------------
Net cash provided by (used in) investing activities 980,285 1,191,901 (4,544,449)
-------------- -------------- --------------
Cash flow provided by (used in) financing activities:
Change in deposits 1,722,876 2,018,857 4,381,278
Change in short term borrowings (91,566) (4,002,388) 980,094
Issuance of long term borrowings 0 1,000,000 0
Issuance of equity conversion notes 0 212,904 231,000
Principal payments on long term borrowings (1,359,506) (268,624) (403,986)
Payment of preferred dividends 0 (52,244)
Issuance of preferred stock 0 520,096 190,000
Issuance of common stock 128,412 152,657 31,250
-------------- -------------- --------------
Net cash provided by (used in) financing
activities 400,216 (418,742) 5,409,636
-------------- -------------- --------------
Net change in cash and cash
equivalents 1,731,919 (1,709,070) 995,300
Cash and cash equivalents:
Beginning of year 837,550 2,546,620 1,551,320
-------------- -------------- --------------
End of year $ 2,569,469 $ 837,550 $ 2,546,620
============== ============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,119,502 $ 2,053,920 $ 1,888,083
Supplemental disclosure of non-cash transactions:
BIDCO conversion of bonds to common stock
Preferred stock converted to common stock $ 1,458,000
Equity conversion notes converted to
preferred stock $ 212,904 $ 535,000
De-consolidation of Michigan BIDCO, Inc.:
Cash (deposits at University Bank) $ (1,746,466)
Equity investments of Michigan BIDCO, Inc. (595,663)
Loans (518,567)
Premises & equipment (50,724)
Real estate owned (12,313)
Other assets (70,857)
Long-term borrowings 993,000
Other Liabilities 724,206
Investment in Michigan BIDCO,Inc. 1,277,384
The accompanying notes are an integral part of the consolidated financial
statements.
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements of University Bancorp, Inc. (the
Company) include the operations of its wholly-owned subsidiary,
University Bank (the Bank), the Bank's wholly-owned subsidiary,
University Insurance & Investment Services, Inc. (Agency) and an 80%
owned subsidiary, Midwest Loan Services, Inc. (Midwest). In 1999, the
consolidated financial statements also include an 80% owned subsidiary,
Michigan BIDCO (BIDCO). Due to the reduction in the Company's ownership
percentage, this entity is accounted for using the equity method at
December 31, 2001 and 2000. The accounts are maintained on an accrual
basis in accordance with generally accepted accounting principles and
predominant practices within the banking and mortgage banking
industries. All significant intercompany balances and transactions have
been eliminated in preparing the consolidated financial statements.
The Company is a bank holding company. University Bank, which is located
in Michigan, is a full service community bank, which offers all
customary banking services, including the acceptance of checking,
savings and time deposits. The Bank also makes commercial, real estate,
personal, home improvement, automotive and other installment, credit
card and consumer loans, and provides fee based services such as annuity
and mutual fund sales, stock brokerage and money management, life
insurance, property casualty insurance and foreign currency exchange.
The Bank's customer base is primarily located in the Ann Arbor, Michigan
area. The Bank established its main office in Ann Arbor in February
1996, by relocating from the eastern Upper Peninsula of Michigan.
University Bank's loan portfolio is concentrated in Ann Arbor and
Washtenaw County, Michigan. While the loan portfolio is diversified, the
customers' ability to honor their debts is partially dependent on the
local economy. The Ann Arbor area is primarily dependent on the
education, healthcare, services, and manufacturing (automotive and
other) industries. Most real estate loans are secured by residential or
commercial real estate and business assets secure most business loans.
Generally, installment loans are secured by various items of personal
property.
University Insurance and Investments Services (Agency) is engaged in the
sale of insurance products including life, health, property and
casualty, and investment products including annuities, mutual funds,
stock brokerage and money management. The Agency is located in the
Bank's Ann Arbor main office. The Agency also has a limited partnership
investment in low-income housing tax credits through Michigan Capital
Fund for Housing Limited Partnership I with financing assistance from
the General Partner, Michigan Capital Fund for Housing.
Midwest Loan Services (Midwest) is engaged in the business of servicing
and subservicing residential mortgage loans. Midwest
1. Summary of significant accounting policies (continued)
began operations in 1992 and was acquired by University Bank in
December, 1995. Midwest is based in Houghton, Michigan, and also
originates mortgage loans for itself and other financial institutions,
including the Bank (See Note 3).
Use of Estimates in Preparing Financial Statements:
--------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions based upon available information. These estimates and
assumptions affect the reported amounts and disclosures. Actual results
could differ from those estimates.
The significant estimates incorporated into these consolidated financial
statements which are more susceptible to change in the near term include
the value of mortgage servicing rights, the allowance for loan losses,
the identification and valuation of impaired loans, the equity interest
in the fair value and the change in the fair value of investments made
by the BIDCO, the fair value of financial instruments, and the valuation
of deferred tax assets.
Cash flow reporting
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents is defined to include the cash on hand, non-interest bearing
deposits in other institutions, federal funds sold and other investments
with a maturity of three months or less when purchased. Net cash flows
are reported for customer loan and deposit transactions and interest
bearing deposits with other banks.
Securities
Securities are classified as available for sale when they might be sold
before maturity. Securities available for sale are carried at fair
value, with unrealized holding gains and losses reported in other
comprehensive income or loss. Realized gains are based on specific
identification of amortized cost. Securities are written down to fair
value when a decline in fair value is not temporary. Interest income
includes amortization of purchase premium or discount. Other securities
such as Federal Home Loan Bank stock are carried at cost.
Loans
Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on
such loans are reported as principal reductions, unless all interest and
principal payments in arrears are paid in full.
1. Summary of significant accounting policies (continued)
Mortgage banking activities
Mortgage banking activities includes retail and servicing operations.
Mortgage loans held for sale are valued at the lower of cost or market as
determined by bid prices for loans in the secondary market. The loans are
sold without recourse, except in the event that documentation errors are
made during the origination process.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable
credit losses, increased by the provision for loan losses and recoveries
and decreased by charge-offs. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in
the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's
judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage, consumer, and credit
card loans, and on an individual loan basis for other loans. If a loan
is impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using
the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or when
it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line
method for bank premises and the accelerated method for equipment and
land improvements over their estimated useful lives. The Company uses
the following useful lives as of December 31, 2002:
Buildings and building improvements 39 years
Land and leasehold improvements 15 years
Furniture, fixtures, and equipment 3-7 years
Software 2-5 years
Other real estate owned
Real estate properties acquired in collection of a loan are recorded at
fair value upon acquisition. Any reduction to fair value from the
carrying value of the related loan is accounted for as a loan loss.
1. Summary of significant accounting policies (continued)
After acquisition, a valuation allowance reduces the reported amount to
the lower of the initial amount or fair value less costs to sell.
Expenses, gains and losses on disposition, and changes in the valuation
allowance are reported in other expenses.
Servicing rights
Servicing rights represent both purchased rights and the allocated value
of servicing rights retained on loans originated and sold. Servicing
rights are expensed in proportion to, and over the period of, estimated
net servicing revenues. Impairment is evaluated based on the fair value
of the rights, using grouping of the underlying loans as to type, term
and interest rates. Any impairment of a grouping is reported as a
valuation allowance.
Income taxes
Income tax expense/benefit is the sum of the current year estimated tax
obligation or refund per the income tax return, and the change in the
estimated future tax effects of temporary differences and carryforwards.
Deferred tax assets or liabilities are computed by applying enacted
income tax rates to the expected reversals of temporary differences
between financial reporting and income tax reporting, and by considering
carryforwards for operating losses and tax credits. A valuation
allowance adjusts deferred tax assets to the net amount that is more
likely than not to be realized.
Retirement plan
The Bank has a 401-k Plan that allows an employee to contribute up to
15% of salary pre-tax, to the allowable limit prescribed by the Internal
Revenue Service. Management has discretion to make matching
contributions to the Plan. However, the Bank made no matching
contributions for the years ended December 31, 2002, 2001 and 2000.
Employees Stock Ownership Plan (ESOP)
The Company has a noncontributory ESOP covering all full-time employees
who have met certain service requirements. The employees' share in the
Company's contribution is based on their current compensation as a
percentage of the total employee compensation. As shares are contributed
to the plan they are allocated to employees and compensation expense is
recorded at the shares' fair value. The Company made no contribution in
2002 and 2001.
Stock options
At December 31, 2002, the Company has a stock-based employee compensation
plan, which is described more fully in Note 8. The Company accounts for
those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise
price greater than or equal to the market value of the underlying
1. Summary of significant accounting policies (continued)
common stock on the date of grant. The following table illustrates the
effect on net income (loss) and earnings (loss) per share if the company
had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Years Ended December 31,
2002 2001 2000
---- ---- ----
Net income (loss), as reported $205,578 $(306,573) $(914,647)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of tax 6,000 72,000 48,603
--------- --------- ---------
Pro forma net income (loss) $199,578 $(378,573) $(963,250)
========= ========= =========
Basic and Diluted Earnings (loss) per
share:
As reported $0.05 $(0.13) $(0.45)
Pro forma $0.05 $(0.16) $(0.46)
Dividend restriction
Banking regulations require the maintenance of certain capital levels and
may limit the amount of dividends that may be paid by the bank to the
holding company or by the holding company to shareholders. In addition,
the Bank cannot pay a dividend until it has net retained earnings or
unless it receives a waiver from the State of Michigan banking
regulators. The accumulated deficit of the Bank was $1,689,153 and
1,989,826 at December 31, 2002 and 2001, respectively.
Earnings (loss) per share
Basic earnings (loss) per share is net income (loss) of the Company
(after the dividend requirement for preferred stock) divided by the
weighted average common shares outstanding for the year. Diluted earnings
per share includes the effect of any additional dilutive stock options
which were not significant in 2002. Stock options outstanding in 2001 and
2000 were considered anti-dilutive and are not included in loss per share
calculations. As a result, both basic and diluted earnings per share
available to common are equal to net earning (loss) divided by weighted
average common shares outstanding.
Comprehensive Income (Loss):
Comprehensive income (loss) includes both the net loss and the change in
unrealized gains and losses on securities available for sale.
1.Summary of significant accounting policies (continued)
Segment Reporting
The Company's segments are determined by the products and services
offered, primarily distinguished between banking and mortgage banking
operations. Loans, investments, and deposits provide the revenues in the
banking operation, and servicing fees, underwriting fees and loan sales
provide the revenues in mortgage banking. All operations are domestic.
Reclassification
Certain items in the 2001 and 2000 consolidated financial statements and
notes have been reclassified to conform to the 2002 presentation.
2. Michigan BIDCO, Inc.
BIDCO was incorporated for the purpose of providing financing to small
businesses located in Michigan for the purpose of creating business and
industrial development in the State of Michigan. BIDCO is licensed under
the Michigan BIDCO Act, and is regulated by the Michigan Office of
Financial and Insurance Services, Bank and Trust Division. The President
of the Company serves as Chairman and President of BIDCO.
Upon formation, Michigan BIDCO received a $3 million loan from the State
of Michigan (Michigan Strategic Fund or MSF). The BIDCO was able to turn
this loan into a grant by making investments which the increased or
retained the number of jobs and annual sales volume of each investee
company. The financial statements of BIDCO are stated using the
prescribed accounting practices of investment companies.
On May 31, 2000, BIDCO converted its outstanding convertible bonds into
common stock (a few convertible bonds were also redeemed at that time).
With the conversion of these convertible bonds, the Company's
consolidated ownership in BIDCO dropped from 80.1% to 28.8%. Subsequent
to May 31, 2000, the BIDCO has been excluded from the Company's
consolidated financial results and the Company's investment in BIDCO was
being accounted for using the equity method of accounting. At December
31, 2000, the Company owned 31.5% of BIDCO (of which 27.1% was held by
the Bank and 4.4% by the Company). At December 31, 2001, the Bank's
shares in the BIDCO were redeemed by the BIDCO in exchange for cash of
$153,417 and preferred stock with a liquidation preference of $600,000.
The preferred stock accrues 7.5% annual dividends, and it can be retired
at par value by the Bank, as cash is available. The company retains a
6.1% ownership of BIDCO's common stock at December 31, 2002 which is held
as an investment at cost. Total common shareholders' equity of BIDCO was
$673,000 and $478,000 at December 31, 2002 and 2001, respectively.
3. Secondary Market Operations
Midwest Loan Services provides servicing and subservicing of real estate
mortgage loans for University Bank and several other financial
institutions. The unpaid principal balance of these loans was
approximately $1.06 billion, $576 million and $2.2 billion as of
December 31, 2002, 2001 and 2000 respectively. Custodial escrow balances
maintained in connection with these respective loans was $23.4 million,
$18.4 million, and $38.5 million, at December 31, 2002, 2001 and 2000
respectively. The following summarizes the operations of Midwest for the
years ended December 31:
3. Secondary Market Operations (continued)
2002 2001 2000
---- ---- ----
Loan servicing and subservicing fees $ 2,677,966 $ 1,574,615 $ 1,073,673
Loan set-up and other fees 713,427 1,665,664 597,308
Interest income 45,922 229,625 415,630
Gain on sale of loans 236,098 60,655 29,249
--------- --------- ---------
Total income 3,673,413 3,530,559 2,115,860
Salaries and benefits 1,348,884 1,706,795 773,569
Amortization expense 522,081 312,232 153,170
Interest expense 2,520 2,389 7,661
Other operating expenses 1,365,091 1,148,891 581,602
--------- --------- ---------
Total expenses 3,238,576 3,170,307 1,516,002
--------- --------- ---------
Pretax income of Midwest $ 434,837 $ 360,252 $ 599,858
========= ========= =========
University Bank sells conforming residential mortgage loans to the
secondary market. These loans are owned by other institutions and are
not included in the Company's consolidated balance sheets. Such mortgage
loans have been sold predominately without recourse or with limited
recourse. The unpaid principal balance of these loans was $1.8 million,
$2.3 million and $3.6 million at December 31, 2002, 2001 and 2000
respectively.
Following is an analysis of the change the Company's mortgage servicing
rights:
2002 2001 2000
---- ---- ----
Balance, January 1 $606,537 $582,210 $ 704,164
Additions - originated 937,450 349,348 49,175
Amortization expense (529,048) (325,021) (171,129)
------------ ----------- ------------
Balance, December 31 $1,014,939 $606,537 $582,210
============ =========== ============
Included in the amortization expense is a valuation allowance for the
years ended December 31, 2002, 2001 and 2000 of $49,326, $224,175 and
$62,519, respectively.
4. Securities available for sale
The following is a summary of the amortized cost, gross unrealized gains,
gross unrealized losses and fair value of securities available for sale
at December 31, 2002 and 2001:
December 31, 2002
Amortized Gross Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed $3,184,835 $ - $(81,997) $3,102,838
========== ======== ========== ===========
December 31, 2001
Amortized Gross Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed $1,948,376 $ - $(111,373) $1,837,003
U.S. Treasury 478,839 - (55,739) 423,100
---------- ------- --------- ----------
Total $2,427,215 $ - $(167,112) $2,260,103
========== ======= ========== ==========
At December 31, 2002 and 2001, the fair value of securities pledged to
secure certain borrowings were $3,048,182 and $2,260,103, respectively.
Sales of available for sale securities: 2002 2001 2000
---- ---- ----
Proceeds $1,034,160 $541,460 $1,222,219
Realized gains 69,733 12,639 24,126
Realized losses - - 6,340
The scheduled maturity date of the securities available for sale at
December 31, 2002 is:
Amortized Fair
Cost Value
2002 $ 53,833 $ 53,833
2003-2006 _ _
2007-2011 - -
After 2011 3,131,002 3,049,005
---------- ----------
$3,184,835 $3,102,838
========== ==========
5. Loans
Major classifications of loans are as follows as of December 31:
2002 2001
---- ----
Commercial $ 16,550,325 $ 15,088,956
Real estate - mortgage 11,633,060 13,377,240
Real estate -construction 2,113,747 2,683,594
Installment 2,799,490 3,795,288
Credit cards 95,412 80,946
------------ ------------
Gross Loans 33,192,034 35,026,024
Allowance for loan losses (408,219) (579,113)
------------ ------------
Net Loans $ 32,783,815 $ 34,446,911
============ ============
Changes in the allowance for loan losses were as follows:
2002 2001 2000
---- ---- ----
Balance, beginning of year $ 579,113 $ 562,997 $ 532,585
Provision charged to operations 100,000 40,000 111,000
Recoveries 16,570 20,058 63,708
Charge-offs (287,464) (43,942) (144,296)
--------- -------- ---------
Balance, end of year $ 408,219 $ 579,113 $ 562,997
========= ======== =========
Past due and non-accrual loans at December 31 are summarized as follows:
2002 2001
---- ----
Past due loans:
90 days and more and still accruing:
Real estate $ - $ 276,654
Installment loans - 24,194
Commercial loans - 194,404
------- -------
$ - $ 495,252
======= =======
Non accrual loans:
Real estate - mortgage and
construction loans $ 102,713 $ 770,024
Installment loans 67,546 -
Commercial loans 509,301 -
-------- --------
$ 679,560 $ 770,024
======== ========
Information regarding impaired loans for the years ended December 31, is
as follows:
Impaired loans: 2002 2001 2000
-------------- ---- ---- ----
Loans with no allowance allocated $ - $ - $ -
Loans with allowance allocated $ 679,560 $ 770,024 $ 72,375
Amount of allowance for loan
losses allocated $ 177,069 $ 76,501 $ 10,774
Impaired loans:
Average balance during the year $ 531,823 $ 770,714 $ 72,199
Interest Income recognized thereon $ 8,412 $ 8,454 $ 5,017
Cash-basis interest income recognized $ 8,412 $ 8,454 $ -
6. Premises and equipment
Classifications at December 31 are summarized as follows:
2002 2001 2000
---- ---- ----
Land $ 132,931 $ 132,931 $ 132,931
Buildings and improvements 1,157,624 1,134,555 1,030,120
Furniture, fixtures, equipment
and software 2,108,391 2,195,652 1,613,445
Construction in process - - 6,852
---------- --------- -----------
3,398,946 3,463,138 2,783,348
Less: accumulated depreciation (1,678,044) (1,676,120) (1,407,591)
----------- ----------- -----------
Net premises and equipment $ 1,720,902 $ 1,787,018 $ 1,375,757
=========== ============ ============
Depreciation expense amounted to $290,516, $268,529 and $252,726 for the
years ended December 31, 2002, 2001 and 2000, respectively.
The Bank leases an ATM drive-thru location in Ann Arbor for
approximately $25,000 per year and two off-site ATM locations for $9,000
per year. Midwest leases its office space for approximately $38,000 per
year in Houghton, Michigan. Total rental expense for all operating
leases was $55,861, $50,995, and $61,892 in 2002, 2001 and 2000. As of
December 31, 2002, the Company had no minimum rental commitments under
non-cancelable operating leases.
Prior to 2002, the Bank leased part of its main office in Ann Arbor to
the University of Michigan. Under this lease agreement (which expired in
September 2001), the Bank was reimbursed for 40.4% of its occupancy
expense.
The Bank remains contingently liable in the event that the purchaser of
one of its branch locations in Sault Ste. Marie does not meet its future
obligations to the lessor. As of December 31, 2002, management believes
that the purchaser was in compliance with these lease terms. The annual
base rent for such branch is currently $32,000, and the future minimum
rent due is $26,000.
7. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more
were $2,784,947 and $5,499,041 at December 31, 2002 and 2001
respectively.
At December 31, 2002, stated maturities of time deposits were:
2003 $14,052,701
2004 1,984,612
2005 1,075,123
2006 447,016
2007 242,549
Thereafter 395,406
-----------------
$18,197,407
7. Time deposits (continued)
The Bank had issued through brokers $7,890,000 and $10,656,000 of time
deposits as of December 31, 2002 and 2001, respectively. These time
deposits have maturities ranging from one to five months and are
included in the table above. These deposits are issued in denominations
of less than $100,000.
The Bank had deposits of $1,131,416 and $896,793 from directors,
officers and their affiliates as of December 31, 2002 and 2001,
respectively.
8. Stock options
In 1993, the Board of Directors approved the grant of options to
purchase 60,000 shares of common stock to the non-executive directors.
The exercise price of options granted was set at $1.08 per share, which
was equivalent to the then current bid price per share as reported by
NASDAQ. The options are immediately exercisable and expire July 19,
2003. Under this initial grant, options to purchase 30,000 shares remain
outstanding as of December 31, 2002. In 1995, the Company adopted a
stock option and stock award plan (the 1995 Stock Plan), which provides
for the grant of incentive stock options, as defined in Section 422(b)
of the Internal Revenue Code of 1986, as amended, as well as the grant
of non-qualified stock options and other stock awards. The plan provides
for the grant to officers, directors and key employees of the Company,
and independent contractors providing services to the Company, of
options to purchase and other awards of common stock. The exercise price
of options granted under the plan shall be determined by the Board of
Directors, or a compensation committee thereof. Options shall expire on
the date specified by the Board of Directors or such committee, but not
more than 10 years from the date of grant (or five years from the date
of grant for incentive stock options if the grantee owned 10% of the
Company's voting stock at the date of grant). Unless amended, the 1995
Stock Plan will terminate on November 15, 2005.
8. Stock options (continued)
The following table summarizes the activity relating to options to
purchase the Company's common stock:
Number of Weighted Average
Options Exercise price
Outstanding at December 31, 1999 151,065 $1.64
---------
Granted - 2000 ($0.65 Fair Value) 74,594 1.08
Exercised - 2000 (15,000) 1.08
Forfeited - 2000 (45,750) 2.11
---------
Outstanding at December 31, 2000 164,909 1.30
----------
Granted - 2001 ($0.72 Fair Value) 100,000 2.00
Exercised - 2001 (5,000) 0.75
Forfeited - 2001 (8,000) 1.00
----------
Outstanding at December 31, 2001 251,909 1.60
Forfeited - 2002 (47,000) 1.61
Granted - 2002 ($0.08 Fair Value) 75,000 1.00
----------
Outstanding at December 31, 2002 279,909 $1.44
2002
At December 31, 2002:
Number of options immediately exercisable 198,909
Weighted average exercise price of immediately
exercisable options $1.21
Range of exercise price of options outstanding $0.75 - $2.00
Weighted-average remaining life of options outstanding 4.21 years
The following summarizes assumptions used to value stock options.
2002 2001 2000
---- ---- ----
Risk-free interest rate 4.13% 5.43% 5.37%
Expected option life 5.0 years 2.6 years 3.6 years
Expected stock price
volatility 21.2% 21.6% 24.6%
Expected dividends $0 $0 $0
9. Employee stock ownership plan (ESOP)
The employees' allocation of ESOP assets is based on their current
compensation, after 1 year of service and upon reaching the age of 21.
The annual contribution to the ESOP is at the discretion of the Board of
Directors. Assets of the plan are comprised entirely of 77,018 and
91,462 shares of the Company's stock at December 31, 2002 and 2001,
respectively, all of which were fully allocated at December 31, 2002.
Upon retirement from the plan, participants can receive distributions of
their allocated shares of the Company's stock. The assets of the ESOP
are held in trust and were valued at approximately $53,000, and $101,000
at December 31, 2002 and 2001, respectively.
10. Minority Interest
The Bank owns an 80% interest in the common stock of Midwest Loan
Services, with the remaining 20% owned by the President of Midwest. At
December 31, 2002 and 2001, total common stockholders' equity of Midwest
was $1,800,830 and $1,525,644 resulting in a $360,166 and $305,129
minority interest reflected on the Company's consolidated balance sheet,
respectively. The results of Midwest's operations for 2002, 2001 and
2000 are included in the Company's consolidated statement of operations.
11. Commitments and contingencies
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to buy, sell
and fund loans, letters of credit and unused lines of credit. The Bank's
exposure to credit loss in the event of non-performance is equal to or
less than the contractual amount of these instruments. The Bank follows
the same credit policy to make such commitments as that followed by
loans recorded in the consolidated financial statements. The following
is a summary of commitments as of December 31:
2002 2001
---- ----
Unused lines of credit $ 2,094,000 $ 2,808,000
Commitments to fund loans $ 3,748,000 $ 3,085,000
----------- -----------
Total $ 5,842,000 $ 5,893,000
=========== ===========
12. Related party transactions
The Company's President also serves as President and Chairman of
Michigan BIDCO. As such, the President is actively involved in the
BIDCO's operations, including investment activity and estimation of the
fair value of its equity investments.
In July 2000, the Company's former Chairman, now deceased, purchased
equity securities from the Company for $58,125, resulting in a gain to
the Company of $20,625.
During 2001, the Company issued $733,000 of preferred stock, of which
$212,904 was originated from the conversion of equity conversion notes.
The preferred shares were issued to the Company's former Chairman, the
Chairman's wife, the President and related family trusts. In November
12. Related party transactions (continued)
2001, the preferred shares of $1,458,000 were converted to common stock
pursuant to the stock rights offering agreement. In November 2000, the
Company issued $725,000 of preferred stock of which $535,000 was
originated from the conversion of equity conversion notes. The preferred
shares were issued to the Company's former Chairman and his wife, the
President and related family trusts
The Bank had loans of $950,513 and $15,830 to related officers and
directors at December 31, 2002 and 2001, respectively. During 2002, the
Bank originated a construction line of credit for $800,000 and a
mortgage note of $269,000. Available lines of credit to related parties
at the December 31, 2002 and 2001, totaled $229,487 and $95,170,
respectively. These loans were made in the normal course of business and
are considered to be performing at December 31, 2002.
13. Income taxes
The Company has recorded no income tax expense in each of the three
years ended December 31, 2002 due to the existence of net operating loss
carryforwards and a valuation allowance equal to 100% of the net
deferred tax assets at December 31, 2002 and 2001.
The net deferred tax asset at December 31, 2002 and 2001 is comprised of
the following:
2002 2001
---- ----
Allowance for loan losses $ 212,183 $ 178,183
Net operating loss carry-forward 677,617 582,669
Tax credit carryforward 866,436 743,749
Donation carryforward 43,667 76,666
Other 15,617 44,816
--------- ---------
Deferred tax assets 1,815,521 1,626,083
--------- ---------
Servicing rights (353,350) (206,223)
Deferred tax liabilities (353,350) (206,223)
--------- ---------
Net deferred tax asset 1,462,171 1,419,861
Valuation allowance for
deferred tax assets (1,462,171) (1,419,861)
----------- -----------
Net deferred tax asset $ - $ -
=========== ============
The Company has net operating loss carryforwards of approximately
$1,986,000 which expire beginning in 2012; and general business credit
carryforwards of approximately $866,000 which expire beginning in 2011.
In addition, the Company has an alternative minimum tax (AMT) credit
carryforward of approximately $115,000. Under current tax regulations,
the AMT credit can be carried forward indefinitely. Management has
established an allowance against deferred tax assets that are not
considered realizable at December 31, 2002 and 2001.
13. Income taxes (continued)
Financial statement tax expense amounts differ from the amounts computed
by applying the statutory federal tax rate of 34% to pretax income
because of operating losses and valuation allowances recorded to reduce
deferred tax assets as noted above.
14. Short Term Borrowings
The Bank has a line of credit available from the Federal Home Loan Bank
(the FHLB) in the amount of $3.5 million and $5 million at December 31,
2002 and 2001, respectively. At December 31, 2002, borrowings are
secured by the pledge of specific mortgage loans held for investment
with unpaid principal balances of $4.8 million and available-for-sale
securities with a balance of $3.0 million.
The Bank has a line of credit available from the Federal Reserve Bank of
Chicago (the FRB) in the amount of $4.9 million. There were no amounts
outstanding on this line from the FRB at December 31, 2002 and 2001.
Borrowings are secured by the pledge of specific commercial loans held
for investment with unpaid principal balances of $7.9 million. The
following information provides a summary of short-term borrowings for
the years indicated:
2002 2001
Amount outstanding at the end of the
year and interest rate None $ 91,566 2.95%
Maximum amount of borrowing outstanding
at any month end during the year $2,881,000 $3,505,607
Average amount outstanding during the
year and weighted average
interest rate $ 472,079 2.09% $1,931,660 4.52%
15. Long Term Borrowings
The Company has a note payable to North Country Bank & Trust (NCB&T)
secured by the stock of the Bank with a balance of $298,000 and $430,000
at December 31, 2002 and 2001, respectively. The note has a maturity
date of February 15, 2005. Interest is payable quarterly at the prime
rate (4.25%) of NCB&T plus 1.00 percent. Principal payments required are
as follows:
2003 $132,000
2004 $132,000
2005 $ 34,000
--------
Total $298,000
========
Dividends by the Bank to the holding company in excess of the prior
year's annual net income are not permitted without prior permission from
NCB&T under the terms of the Company's credit facility.
University Insurance and Investment Services Inc. has an obligation of
$0 and $227,506 at December 31, 2002 and 2001, respectively, payable to
the Michigan Capital Fund for Housing Nonprofit Housing Corporation in
connection with its investment in a low-income housing limited
partnership.
15. Long Term Borrowings (continued)
In December 2001, the Federal Home Loan Bank advanced the Company a
$1,000,000, two year fixed rate bullet loan. The loan carried an
interest rate of 3.62%. In early 2002, the note was paid off.
University Bancorp issued equity conversion notes in the amount of
$212,904 during 2001. The notes were redeemed from the proceeds of the
sale of convertible preferred stock. No conversion notes were issued by
the Company as of December 31, 2002 and 2001.
16. Regulatory matters
University Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by regulators
about components, risk weightings, and other factors.
The Bank is also subject to prompt corrective action capital requirement
regulations set forth by the FDIC. The FDIC requires the Bank to maintain
a minimum of total capital and Tier 1 capital (as defined) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average total assets (as defined). Management believes, as of December
31, 2002, that the Bank meets all capital adequacy requirements to which
it is subject.
As of December 31, 2002, the most recent guidelines from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. At December 31, 2001 the Bank was
classified as "well capitalized." To be categorized as "well
capitalized," the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Bank's category.
16. Regulatory matters (continued)
To Be Adequately To Be Well
Capitalized Capitalized
Under Prompt Under Prompt
Corrective Action Corrective Action
Actual Provisions Provisions
---------------- -------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2002:
Total capital (to risk weighted assets) $3,954,000 11.1 % $2,841,000 8.0 % $3,552,000 10.0 %
Tier I capital (to risk weightedassets) 3,546,000 9.9 % 1,421,000 4.0 % 2,131,000 6.0 %
Tier I capital (to average assets) 3,546,000 7.9 % 1,797,000 4.0 % 2,247,000 5.0 %
As of December 31, 2001:
Total capital (to risk weighted assets) $3,720,000 10.4 % $2,870,000 8.0 % $3,575,000 10.0 %
Tier I capital (to risk weighted
assets) 3,271,000 9.1 % 1,431,000 4.0 % 2,147,000 6.0 %
Tier I capital (to average assets) 3,271,000 7.1 % 1,834,000 4.0 % 2,292,000 5.0 %
The Bank presently has an agreement with its regulators that the Bank
will maintain the ratio of Tier 1 capital to average assets at 7% or
more.
17. Management's Plan Regarding Continuing Operations
At December 31, 2002, University Bancorp had an accumulated deficit of
$1,999,846 and recurring losses from operations for 4 of the past 5
years. Future operations of University Bancorp are intended to continue.
Management has reviewed operating results, prepared projections of
possible future results, performed other analyses of its operations to
reduce operating costs and divested certain of its unprofitable
subsidiaries. Management of the Company has implemented a plan to
improve core earnings by adding low-cost deposits, adjusting fees,
growing the loan portfolio of the Bank, and eliminating inefficient or
redundant costs at the Bank level. Both the Bank and Midwest Loan
Services are projected to have profits in 2003, however, the Company's
continued existence is dependent upon its ability to maintain profitable
operations and retain adequate capital levels.
18. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair values
for financial instruments. The carrying amount is considered to estimate
fair value for cash and short-term instruments, demand deposits,
short-term borrowings, accrued interest, and variable rate loans or
deposits that reprice frequently and fully. Securities fair values are
based on quoted market prices or, if no quotes are available, on the
rate and term of the security and on information about the issuer. For
fixed rate loans or deposits and for variable rate loan or deposits with
infrequent repricing or repricing limits, the fair value is estimated by
the discounted cash flow analysis using current market rates for the
estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses of underlying collateral
values, where applicable. Fair value of loans held for sale is based on
market estimates. Fair value of mortgage servicing rights is estimated
using discounted cash flows based on current market interest rates net
of estimated costs of servicing loans. Fair value of mortgage
subservicing rights is based on a multiple of servicing contract
revenue. The fair value of debt is based on currently available rates
for similar financing. The fair value of off-balance sheet items is
based on the fees or cost that would normally be charged to enter into
or terminate such agreements. Fair value of unrecognized financial
instruments include commitments to extend credit and the fair value of
letters of credit are considered immaterial.
The carrying amounts and fair values of the Company's financial
instruments were as follows:
December 31, 2002
Carrying Fair
Financial Assets Amount Value
---------------- ------ -----
Cash and short term investments $ 2,569,000 $ 2,569,000
Securities available for sale 3,103,000 3,103,000
Federal Home Loan Bank stock 848,000 848,000
Loans held for sale 1,551,000 1,551,000
Loans, net 32,784,000 34,860,000
Mortgage servicing rights 1,015,000 1,015,000
Accrued interest receivable 170,000 170,000
Financial Liabilities
Deposits 41,920,000 42,102,000
Long term borrowings 298,000 298,000
Accrued interest payable 97,000 97,000
18. Fair Value of Financial Instruments (continued)
December 31, 2001
Carrying Fair
Financial Assets Amount Value
Cash and short term investments $ 838,000 $ 838,000
Securities available for sale 2,260,000 2,260,000
Federal Home Loan Bank stock 848,000 848,000
Loans held for sale 2,138,000 2,138,000
Loans, net 34,447,000 36,549,000
Mortgage servicing rights 607,000 607,000
Accrued interest receivable 863,000 863,000
Financial Liabilities
Deposits 40,198,000 40,855,000
Short term borrowings 92,000 92,000
Long term borrowings 1,658,000 1,658,000
Accrued interest payable 177,000 177,000
19. Segment Reporting
The Company's operations include three primary segments: retail banking,
mortgage banking, and merchant banking. Through its banking subsidiary's
branch in Ann Arbor, the Company provides traditional community banking
services such as accepting deposits, making loans, and providing cash
management services to individuals and local businesses. Mortgage
banking activities includes servicing of residential mortgage loans for
others and discontinued operations have been excluded for 1999 (See Note
2). Merchant banking is conducted entirely through Michigan BIDCO, which
makes loans to growing businesses. As additional consideration for the
loans it makes, BIDCO typically receives equity or options in each
business. (See Note 3)
The Company's three reportable segments are strategic business units
that are separately managed as they offer different products and
services and have different marketing strategies. In addition, both the
merchant banking segment and mortgage banking segment service a
different customer base from that of the retail banking segment.
The segment financial information provided below has been derived from
the internal profitability reporting system used by management to
monitor and manage the financial performance of the Company. The
accounting policies of the three segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates segment performance based on profit or loss before income
taxes, not including nonrecurring gains and losses. Certain indirect
expenses have been allocated based on actual volume measurements and
other criteria, as appropriate. The Company accounts for transactions
between segments at current market prices. Segment profit is measured
before allocation of corporate overhead and income tax expense.
19. Segment Reporting (continued)
Information about reportable segments for the year ended December 31,
2002 follows:
Retail Mortgage
Banking Banking Totals
Interest income $3,148,530 $45,922 $3,194,452
Other non-interest income 813,528 3,627,491 4,441,019
Interest expense 1,036,643 2,520 1,039,163
Provision for loan losses 110,000 (11,000) 100,000
Salaries and benefits 1,580,656 1,348,884 2,929,540
Occupancy 185,859 163,327 349,186
Data processing 390,770 42,469 433,239
Legal and audit 127,749 45,390 173,139
Advertising 69,274 23,670 92,944
Other operating expense 658,701 1,643,522 2,302,223
(Loss) income before tax expense (229,239) 434,837 205,598
Income tax (benefit) expense (153,665) 153,665 0
Segment (loss) profit $(75,574) $281,172 $205,598
Segment assets $44,078,661 $2,170,652 $46,249,313
Capital expenditures $22,255 $106,699 $128,954
Depreciation $75,831 $119,239 $195,070
Amortization $106,967 $522,081 $629,048
Information about reportable segments for the year ended December 31,
2001 follows:
Retail Mortgage Merchant
Banking Banking Banking Totals
Interest income $3,313,473 $229,624 $3,543,097
Other non-interest income 769,026 3,300,935 (114,551) 3,955,410
Interest expense 1,804,856 0 1,804,856
Provision for loan losses 40,000 0 40,000
Salaries and benefits 1,543,918 1,706,795 3,250,713
Occupancy 336,109 128,074 464,183
Data processing 247,338 38,862 286,200
Legal and audit 102,028 25,184 127,212
Advertising 85,006 26,856 111,862
Other operating expense 442,635 1,277,420 1,720,055
(Loss) income before tax expense (552,275) 360,253 (114,551) (306,573)
Income tax (benefit) expense (122,830) 122,830 0
Segment (loss) profit $(429,445) $237,423 $(114,551) $(306,573)
Segment assets $43,955,154 $1,667,577 $45,622,731
Capital expenditures $288,753 $391,037 $679,790
Depreciation $159,332 $109,197 $268,529
Amortization $129,497 $312,233 $441,730
20. Segment Reporting (continued)
Information about reportable segments for the year ended December 31, 2000
follows:
Retail Mortgage Merchant
Banking Banking Banking Totals
Interest income $3,229,954 $21,977 $63,514 $3,315,445
Other non-interest income 474,721 1,940,712 234,896 2,650,329
Interest expense 2,025,162 7,661 41,624 2,074,447
Provision for loan losses 111,000 0 0 111,000
Salaries and benefits 1,065,556 773,569 88,935 1,928,060
Occupancy 231,873 82,403 5,813 320,089
Data processing 276,937 55,438 3,641 336,016
Legal and audit 368,267 23,758 16,405 408,430
Advertising 59,903 42,252 1,022 103,177
Other operating expense 1,098,755 473,558 26,889 1,599,202
(Loss) income before tax expense (1,532,778) 504,050 114,081 (914,647)
Income tax (benefit) expense (204,523) 165,485 39,038 0
Segment (loss) profit (1,328,255) $338,565 $75,043 $(914,647)
Segment assets $45,271,725 $2,398,928 $0 $47,670,653
Capital expenditures $168,214 $105,783 $0 $273,997
Depreciation $123,826 $82,935 $6,553 $213,314
Amortization $17,959 $153,170 $0 $171,129
21. Quarterly Financial Data -Unaudited
The following tables represent summarized data for each of the quarters
in 2002 and 2001 (in thousands, except loss per share data).
2002
-------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31 June 30 September 30 December 31
-------------------------------------------------------------------------
Interest income $ 788 $ 838 $ 839 $ 729
Interest expense 283 252 248 256
-------------------------------------------------------------------------
Net interest income 505 586 591 473
Provision for losses 23 23 15 39
-------------------------------------------------------------------------
Net interest income after
Provision for losses 482 563 576 434
Loan set-up and other fees 652 471 663 1,305
Loan servicing and subservicing fees 259 133 143 178
Gain on sale of loans 35 20 43 138
Merchant banking/BIDCO - - - -
Other non-interest income 86 58 171 86
Non-interest expense
1,536 1,483 1,439 1,832
-------------------------------------------------------------------------
Income tax expense - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net (loss) earnings available to common $ (22) $ (238) $ 157 $ 309
shareholders
=========================================================================
Basic and diluted (loss) earnings per share $ (0.01) $ (0.06) $0.04 $0.08
=========================================================================
Weighted average shares outstanding 3,810,326 3,850,130 3,875,538 3,899,548
========================================================================
21.Quarterly Financial Data -Unaudited (continued)
2001
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended December 31
-----
March 31 June 30 September 30
-------------------------------------------------------------------------
Interest income $ 944 $ 831 $ 1,015 $ 753
Interest expense 553 505 418 329
-------------------------------------------------------------------------
Net interest income 391 326 597 424
Provision for losses 22 22 22 (26)
-------------------------------------------------------------------------
Net interest income after
Provision for losses 369 304 575 450
Loan set-up and other fees 494 630 199 248
Loan servicing and subservicing fees 580 751 358 457
Gain on sale of loans 9 22 19 17
Merchant banking/BIDCO - - - (115)
Other non-interest income 54 69 64 99
Non-interest expense
1,480 1,720 1,418 1,342
-------------------------------------------------------------------------
Income tax expense - - - -
-------------------------------------------------------------------------
Earnings (loss) from continuing operations 26 (204) (185)
56
Preferred stock requirements 11 16 18 7
-------------------------------------------------------------------------
Net earnings (loss) available to common
shareholders $ 15 $ 40 $ (222) $ (192)
=========================================================================
Basic and diluted earnings (loss) per share $ 0.01 $ 0.02 $ (0.11) $ (0.06)
=========================================================================
Weighted average shares outstanding 2,027,801 2,062,878 2,092,312 2,922,676
=========================================================================
22. Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145. SFAS No.
145 requires that gains and losses from extinguishments of debt be
classified as extraordinary items only if they meet the criteria
defined in APB Opinion No. 30 which are that the extent or transaction
is both unusual in nature and infrequent in occurrence. Events
considered unusual should have a high degree of abnormality and be
clearly unrelated to the Company's normal operations and infrequency is
defined as not expected to recur in the foreseeable future. It is not
expected that provisions of SFAS No. 145 will have a material impact on
the financial position or results of operations of the Company.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which is effective for
exit or disposal activities that are initiated after December 31, 2002.
This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or
22. Recent Accounting Pronouncements (continued)
disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan. The
Company is currently evaluating the effects of adopting this statement
and cannot predict whether or not its provisions will have a material
impact on its financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN
45),"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which
addresses the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. FIN
45 requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, this is the obligation to
stand ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the fair
value of the guarantee at inception. The recognition of the liability
is required even if it is not probable that payments will be required
under the guarantee or if the guarantee was issued with a premium
payment or as part of a transaction with multiple events. The initial
recognition and measurement provisions are effective for all guarantees
within the scope of FIN 45 issued or modified after December 31, 2002.
The impact of adoption is not expected to have a significant impact on
the Company's financial reporting.
23. Parent Company Only Condensed Financial Information
Condensed Balance Sheet
December 31, December 31,
2002 2001
--------------- --------------
ASSETS
Cash and cash equivalents $ 212,273 $ 96,045
Securities available for sale 233 233
Investment in University Bank 3,309,617 2,923,596
Investment in Michigan BIDCO 29,258 29,258
Receivable from University Bank - 286,196
Other assets 3,362 3,107
------------ -------------
Total Assets $ 3,554,743 $ 3,338,435
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 298,000$ 430,000
Accounts payable 98,805 168,631
Accrued interest payable 1,972 3,196
------------ -------------
Total Liabilities 398,777 601,827
Stockholders' Equity 3,155,966 2,736,609
------------ -------------
Total Liabilities and Stockholders' Equity $ 3,554,743 $ 3,338,435
============ =============
23 Parent Company Only Condensed Financial Information (continued)
Condensed Statements of Income
2002 2001 2000
---------------- ----------------- ----------------
INCOME:
Interest and dividends on investments $ 328 $ 407 $ 4,072
Net security gains - - 20,625
Other income _ (114,551) 4,047
---------------- ----------------- ----------------
Total Income 328 (114,144) 28,744
EXPENSES:
Interest 20,675 52,503 89,883
Amortization of goodwill - (139,412) 139,412
Salaries and benefits - - -
Public listing 38,202 45,902 33,920
Professional fees 33,513 43,330 31,765
Other miscellaneous 3,014 4,788 5,913
---------------- ----------------- ----------------
Total Expense 95,404 7,111 300,893
Loss before federal income taxes
and equity in undistributed
net loss of subsidiaries (95,076) (121,255) (272,149)
Federal income taxes - - -
---------------- ----------------- ----------------
Loss before equity in undistributed
net income (loss) of subsidiaries (95,076) (121,255) (272,149)
Equity in undistributed net income (loss)
of subsidiaries 300,674 (185,318) (642,498)
Net income (loss) $ 205,598 $ (306,573) $ (914,647)
================ ================= ================
23. Parent Company Only Condensed Financial Information (continued)
Condensed Statements of Cash Flows
For Year Ended
2002 2001 2000
-------------- ---------------- ------------------
Cash flow provided by (used in) investing activities:
Net Income (Loss) $ 205,598 $ (306,573) $ (914,647)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of goodwill - 139,412 139,412
Gain on sale of investments - - (20,625)
Decrease/(increase) in receivable from affiliate 286,196 (136,624) -
(Increase)/decrease in other assets (256) 55,495 (55,018)
(Decrease)/increase in other liabilities (71,050) (158,153) 59,180
(Increase)/decrease investment in subsidiaries (300,673) 185,317 642,577
Decrease/(increase) investment in Michigan BIDCO - 114,551 (3,760)
-------------- ---------------- ------------------
Net cash provided by (used in) operating activities 119,815 (106,575) (152,881)
-------------- ---------------- ------------------
Cash flow from investing activities:
Purchase of available for sale securities (66,652) (78,000)
Proceeds from sale of available for sale securities - - 98,625
-------------- ---------------- ------------------
Net cash (used in) provided by investing activities (66,652) 20,625
-------------- ---------------- ------------------
Cash flow from financing activities:
Principal payment on notes payable (132,000) (132,000) (132,000)
Issuance of equity conversion bonds - 184,082 231,000
Conversion of equity conversion bonds - (184,082) -
Issuance of preferred stock - 733,000 2,032
Conversion of preferred stock - (1,458,000) -
Payment of preferred dividend - (52,244)
Issuance of common stock 128,413 1,162,656 31,250
-------------- ---------------- ------------------
Net cash (used in) provided by financing activities (3,587) 253,412 132,282
-------------- ---------------- ------------------
Net change in cash and cash equivalents 116,228 80,185 26
Cash and cash equivalents:
Beginning of year 96,045 15,860 15,834
-------------- ---------------- ------------------
End of year $ 212,273 $ 96,045 $ 15,860
============== ================ ==================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 21,899 $ 60,686 $ 103,504
Item 8. - Financial Statements and Supplementary Data
The financial statements provided pursuant to this item are listed
under Item 14(a) below and appear beginning on page 44.
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
PART III.
Item 10. - Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement for its 2003 Annual
Meeting (the "Proxy Statement") to be under the captions:
Election of Directors
Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance
Item 11. - Executive Compensation
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement to be under the
captions:
Executive Compensation
Compensation Plans
Item 12. - Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Security Ownership of Certain Beneficial Owners and
Management
Item 13. - Certain Relationships and Related Transactions
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Certain Relationships and Related Transactions
PART IV.
Item 14. - Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) Index of Financial Statements:
The following statements are filed as part of this Report:
Audited consolidated balance sheets as of December 31, 2002
and December 31, 2001, and consolidated statements of
operations, comprehensive income (loss), stockholders' equity
and cash flows for the years ended December 31, 2002, 2001,
and 2000 of the Company.
(b) Reports on Form 8-K:
None
(c) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
3.1.1 Certificate of Amendment, dated June 10, 1998, of the
Company's Certificate of Incorporation (incorporated by
reference to Exhibit 3.1.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
3.2 Composite By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1989).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997
issued to North Country Bank & Trust (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated
by reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
*
10.2.1 Amendment to the ESOP, effective as of December 31, 1991
(incorporated by reference to Exhibit 10.2.A to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991). *
10.3 University Bank 401(k) Profit Sharing Plan, adopted August
1, 1996, effective as of January 1, 1996 (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996). *
10.4 Letter regarding grant of options to outside directors,
dated as of July 20, 1993 (incorporated by reference to
Exhibit 10.6 to the
Company's Annual Report on Form 10-K
for year ended December 31,1993).*
10.5 1995 Stock Plan of the Company (incorporated by reference
to Exhibit A to the definitive Proxy Statement of the
Company for 1996 Annual Meeting of Stockholders). *
10.5.1 Form of Stock Option Agreement related to the 1995 Stock
Plan (incorporated by reference to Exhibit 10.7.1 to the
Annual Report on Form 10-K for the year ended December 31,
1995). *
10.6 Letter, dated December 1, 1989, from Federal Reserve Bank
of Minneapolis (incorporated by reference to
Exhibit 10.9).
10.7 Lease Agreement (the "Cascade Lease Agreement") between RG
Properties, Inc., as agent for Sault Associates, a
Michigan Limited Partnership, and University Bank, dated
September 30, 1992 (incorporated by reference to exhibit
10.9 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.7.1 First Amendment to the Cascade Lease Agreement, dated
January 5, 1993 (incorporated by reference
exhibit 10.9.1).
10.8 Federal Income Tax Allocation Agreement Between Newberry
State Bank and Newberry Holding Inc. dated March 21, 1992
(incorporated by reference to Exhibit 10.11).
10.8.1 Federal Income Tax Allocation Agreement Between Newberry
Holding Inc. and University Bancorp, Inc. dated May 21,
1991 (incorporated by reference to Exhibit 10.11.1).
21 Subsidiaries of Registrant: List of subsidiaries filed
herewith.
23.1 Reports of Independent Auditors, Richard C. Woodbury, P.C.,
dated March 8, 2001 regarding Midwest Loan Services, Inc.
* Denotes a management compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIVERSITY BANCORP, INC.
By: /s/Stephen Lange Ranzini
Stephen Lange Ranzini,
President and Chief Executive Officer
Date: April 8, 2003
By: /s/Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer
Date: April 8, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Stephen Lange Ranzini Director, President and
Stephen Lange Ranzini Chief Executive Officer April 8, 2003
/s/Robert Goldthorpe Director, Chairman April 8, 2003
--------------------
Robert Goldthorpe
/s/Gary Baker Director April 8, 2003
-------------
Gary Baker
/s/Michael Talley Director April 8, 2003
-----------------
Michael Talley
/s/Dr. Joseph L. Ranzini Director April 8, 2003
------------------------
Dr. Joseph Lange Ranzini
/s/Paul Lange Ranzini Director April 8, 2003
---------------------
Paul Lange Ranzini
Index of Exhibits
Sequentially
Exhibit Number and Description Numbered Page
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the June 30, 1996 10-Q").
3.1.1 Certificate of Amendment, dated June 10, 1998, of the Company's
Certificate of Incorporation (incorporated by reference to Exhibit
3.1.1 to the June 30, 1998 10-Q").
3.2 Composite By-laws of the Company (incorporated by reference to Exhibit
3.2 to the 1989 10-K).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997 issued to
North Country Bank & Trust (incorporated by reference to Exhibit 10.1
to the 1997 10-K"))
10.2 University Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"), as
amended November 27, 1990 (incorporated by reference to Exhibit 10.2 to
the 1990 10-K).
10.2.1 Amendment to the ESOP, effective as of December 31, 1991 (incorporated
by reference to Exhibit 10.2.A to the 1991 10-K).
10.3 University Bank 401(k) Profit Sharing Plan, adopted August 1, 1996,
effective as of January 1, 1996 (incorporated by reference to Exhibit
10.3 to the 1996 10-K).
10.4 Letter regarding grant of options to outside directors, dated as of
July 20, 1993 (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 (the "1993 10-K")).
10.5 1995 Stock Plan of the Company (incorporated by reference to Exhibit A
to the definitive Proxy Statement of the Company for the 1996 Annual
Meeting of Stockholders (the "1996 Proxy).
10.5.1 Form of Stock Option Agreement related to the 1995 Stock Plan
(incorporated by reference to Exhibit 10.7.1 to the the 1995 10-K).
10.6 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989
10-K).
10.7 Lease Agreement (the "Cascade Lease Agreement")
between RG Properties, Inc., as agent for Sault
Associates, a Michigan Limited Partnership, and
University Bank, dated September 30, 1992
(incorporated by reference to exhibit 10.9 to the
1992 10-K).
10.7.1 First Amendment to the Cascade Lease Agreement, dated January 5, 1993
(incorporated by reference exhibit 10.9.1 to the 1992 10-K).
10.8 Federal Income Tax Allocation Agreement Between
Newberry State Bank and Newberry Holding Inc. dated
March 21, 1992 (incorporated by reference to
Exhibit 10.11 to the 1991 10-K).
10.8.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc.
dated May 21, 1991 (incorporated by reference to
Exhibit 10.11.1 to the 1991 10-K).
21 Subsidiaries of Registrant. 83
23 Report of Independent Auditors, Richard C. Woodbury, P.C. 87
Exhibit 21. Subsidiaries of Registrant.
University Bank, a Michigan state chartered bank
University Insurance & Investment Services, Inc., a Michigan Corporation
(100% owned by Bank)
Midwest Loan Services, Inc., a Michigan Corporation
(80% owned by University Bank)
FORM 10-K 302 CERTIFICATION
I, Stephen Ranzini certify that:
1) I have reviewed this annual report on Form 10-K of University Bancorp,
Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
2) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
3) The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 8,2003 /s/Stephen Lange Ranzini
---------------- ----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
FORM 10-K 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
1) I have reviewed this annual report on Form 10-K of University Bancorp,
Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 8,2003 /s/Nicholas K. Fortson
---------------- ----------------------
Nicholas K. Fortson
Chief Financial Officer
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of University Bancorp, Inc. (the
"Registrant") on Form 10-K for the period ended December 31, 2002 as filed with
the Securities and Exchange Commission on April 8, 2003, hereof (the "Report"),
the undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
University Bancorp, Inc
Date: April 8,2003 By: /s/ Stephen Lange Ranzini
Stephen Lange Ranzini
President and Chief Executive Officer
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of University Bancorp, Inc. (the
"Registrant") on Form 10-K for the period ended December 31, 2002 as filed with
the Securities and Exchange Commission on April 8, 2003, hereof (the "Report"),
the undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
University Bancorp, Inc
Date: April 8, 2003 By: /s/ Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer