20
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
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
-------- ----------
(State of incorporation) (IRS Employer Identification Number)
959 Maiden Lane, Ann Arbor, Michigan 48105
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 741-5858
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value outstanding at April 30, 2003: 3,899,548 shares
page 1 of 26 pages
FORM 10-Q
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements PAGE
----
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statement of Comprehensive Income (loss) 7
Consolidated Statements of Cash Flows 8
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Summary 12
Results of Operations 13
Capital Resources 17
Liquidity 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
PART II - Other Information
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits & Reports on Form 8-K 21
Signatures 22
Certifications 23
------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals, which are in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
Part I. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002
March 31, December 31,
ASSETS 2003 2002
Cash and due from banks $ 1,841,039 $ 2,569,469
Securities available for sale, at market 2,731,539 3,102,838
Federal Home Loan Bank Stock 848,400 848,400
Loans held for sale, at the lower of cost or
Market 1,274,852 1,550,995
Loans 33,036,881 33,192,034
Allowance for loan losses (399,012) (408,219)
----------- -----------
Loans, net 32,637,869 32,783,815
Premises and equipment, net 1,682,284 1,720,902
Investment in Michigan BIDCO Inc. 629,258 629,258
Investment in Michigan Capital Fund LPI 331,244 356,244
Mortgage servicing rights , net 1,165,866 1,014,939
Real estate owned, net 718,102 853,198
Accounts receivable 131,322 72,786
Accrued interest receivable 121,786 169,811
Prepaid expenses 189,007 214,472
Goodwill, net 103,914 103,914
Other assets 402,275 258,272
----------- -----------
TOTAL ASSETS $ 44,808,757 $ 46,249,313
=========== ===========
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
March 31, 2003 (Unaudited) and December 31, 2002
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------- -------------
Liabilities:
Deposits:
Demand - non interest bearing $ 1,390,887 $ 2,197,567
Demand - interest bearing 22,429,122 21,051,588
Savings 443,113 473,894
Time 16,170,397 18,197,407
----------- -----------
Total Deposits 40,433,519 41,920,456
Long term borrowings 265,000 298,000
Accounts payable 365,936 228,062
Accrued interest payable 79,435 97,068
Other liabilities 22,042 189,594
----------- -----------
Total Liabilities 41,165,932 42,733,180
Minority Interest 396,692 360,166
Stockholders' equity:
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,014,732 shares in 2003 and
3,947,732 shares in 2002 40,147 40,147
Additional paid-in-capital 5,537,960 5,537,960
Accumulated deficit (1,926,594) (1,999,846)
Treasury stock - 115,184 shares in
2003 and 2002 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities available
for sale, net (64,850) (81,764)
----------- -----------
Total Stockholders' Equity 3,246,133 3,155,967
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 44,808,757 $ 46,249,313
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
---------------- -----------------
Interest income:
Interest and fees on loans $ 631,339 $ 745,429
Interest and dividends on securities:
U.S. Government agencies 35,284 11,312
Other securities 23,250 25,566
Interest on federal funds and other 4,987 5,239
---------------- -----------------
Total interest income 694,860 787,546
---------------- -----------------
Interest expense:
Interest on deposits:
Demand deposits 91,506 67,281
Savings deposits 1,281 1,089
Time deposits 131,067 207,760
Short term borrowings - 1,041
Long term borrowings 3,558 5,868
---------------- -----------------
Total interest expense 227,412 283,039
--------------- -----------------
Net interest income 467,448 504,507
Provision for loan losses 105,900 22,500
---------------- -----------------
Net interest income after
provision for loan losses 361,548 482,007
---------------- -----------------
Other income:
Loan servicing and subservicing fees 200,711 258,742
Initial loan set-up and other fees 822,085 652,056
Gain on sale of mortgage loans 183,705 34,884
Insurance and investment fee income 48,048 29,263
Deposit service charges and fees 28,127 15,211
Other 39,300 41,487
---------------- -----------------
Total other income 1,321,976 1,031,643
---------------- -----------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
For the Three Month Periods Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
---------------- -----------------
Salaries and benefits $ 785,308 $ 723,265
Occupancy, net 88,897 90,325
Data processing and equipment 108,226 109,844
Legal and audit expense 37,774 37,417
Consultant fees 33,438 51,168
Mortgage banking expense 169,563 179,265
Servicing rights amortization 102,173 49,439
Goodwill amortization - -
Advertising 25,963 17,161
Memberships and training 21,118 22,913
Travel and entertainment 27,178 17,202
Supplies and postage 45,946 48,849
Insurance 21,574 20,424
Other operating expenses 143,114 168,342
---------------- -----------------
Total other expenses 1,610,272 1,535,614
---------------- -----------------
Income (loss) before income taxes 73,252 (21,964)
---------------- -----------------
Income tax expense (benefit) - -
---------------- -----------------
Net income (loss) $ 73,252 $ (21,964)
================ =================
Basic and diluted income (loss)
per common share $ 0.02 $ (0.01)
================ =================
Weighted average shares outstanding 3,899,548 3,810,326
================ =================
See accompanying notes to consolidated financial statements (unaudited).
UNIVERSITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Three Month Periods Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
-------------- -------------
Net income (loss) $ 73,252 ($21,964)
Other comprehensive income (loss):
Unrealized gains/(losses) on securities
available for sale 16,914 (165,169)
Less: reclassification adjustment
for accumulated (losses)/gains
included in net income (loss) - -
------------- -------------
Other comprehensive income/(loss),
before tax effect 16,914 (165,169)
Income tax expense (benefit) - -
------------- -------------
Other comprehensive income (loss),
net of tax 16,914 (165,169)
------------ ------------
Comprehensive income(loss) $90,166 ($187,133)
============ =============
See accompanying notes to consolidated financial statements (unaudited).
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2003 and 2002
2003 2002
------------ ------------
Cash flow from operating activities:
Net income (loss) $ 73,252 $ (21,964)
Adjustments to reconcile net income (loss)
to net cash from Operating Activities:
Depreciation 73,653 72,908
Amortization 127,173 (92,650)
Provision for loan losses 105,900 22,500
Gain on mortgage loan sales (183,705) (34,884)
Originations of mortgage loans (37,251,962) (13,775,807)
Proceeds from mortgage loans sales 37,711,810 14,999,962
Net accretion on investment securities (10,887) (11,312)
Change in:
Real estate owned 135,096 (63,138)
Other assets (382,149) 179,634
Other liabilities (10,785) (25,237)
------------- ------------
Net cash provided by operating activities 387,396 1,250,012
------------- ------------
Cash flow from investing activities:
Purchase of investment securities (92,567)
Proceeds from maturities/paydowns of
investment securites 491,667 47
Loans granted, net of repayments 40,046 (380,050)
Premises and equipment expenditures (35,035) (87,138)
------------- ------------
Net cash provided by (used in)
investing activities 404,111 (467,141)
------------- ------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2003 and 2002
2003 2002
-------------- -------------
Cash flow used in financing activities:
Net (decrease) increase in deposits (1,486,937) 751,896
Net (decrease) in short term borrowings - (91,566)
Principal payments on long term borrowings (33,000) (1,033,000)
Issuance of common stock - 80,000
------------- ------------
Net cash used in financing activities (1,519,937) (292,670)
------------- ------------
Net change in cash and cash equivalents (728,430) 490,201
Cash and cash equivalents:
Beginning of period 2,569,469 837,550
------------- ------------
End of period $ 1,841,039 $ 1,327,751
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 245,045 $ 604,843
See accompanying notes to consolidated financial statements (unaudited).
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See Note 1 of the Financial Statements incorporated by reference in the
Company's 2002 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's 2002 Annual Report on Form 10-K. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year.
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 3,899,548 and
3,810,326 for the three months ended March 31, 2003 and 2002, respectively.
(2) Investment Securities
The Bank's available-for-sale securities portfolio at March 31, 2003
had a net unrealized loss of approximately $64,000 as compared with a net
unrealized loss of approximately $82,000 at December 31, 2002.
Securities available for sale at March 31, 2003(in thousands):
Gross Gross
Amortized Realized Unrealized Fair
Cost Losses Losses Value
----------- ----------- ----------- -----------
Stocks and other securities $ 93 $ (11) $ 0 $ 82
----------- ----------- ----------- -----------
U.S. agency mortgage-backed 2,714 0 (64) 2,650
---------- ----------- ----------- -----------
Total $2,807 $ (11) $ (64) $ 2,732
========== =========== ========== ===========
Securities available for sale at December 31, 2002
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ---------- -----------
U.S. agency mortgage-backed $ 3,185 $ 0 $ (82) $ 3,103
========== =========== ========== ==========
(3) Stock options
At March 31, 2003, the Company has a stock-based employee compensation
plan. 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 common stock on the
date of grant. As new options granted were only 10,000 and 0 during the quarters
ended March 31, 2003 and 2002, the effect on net income (loss) and earnings
(loss) per share if the Corporation had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
as amended by FASB Statement No. 148, to stock-based employee compensation was
less than $.01 in each of the periods presented.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains certain forward-looking statements which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
merchant banking, mortgage banking and investment activities, and the nature and
adequacy of allowances for loan losses. The Company can give no assurance that
the expectations reflected in forward-looking statements will prove correct.
Various factors could cause results to differ materially from the Company's
expectations. Among these factors are those referred to in the introduction to
the Company's Management Discussion and Analysis of Financial Condition and
Results of Operations which appear as Item 7 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
SUMMARY
Net income (loss) for the Company for the first quarter of 2003 was
$73,252, versus ($21,964) for the same period last year. Community Banking
incurred a loss of $137,000 during the current year's first quarter as opposed
to a loss of $101,000 from the year before. Compared to the first quarter of
2002, profits at the Bank's subsidiary, Midwest Loan Services, increased 133% in
the first quarter of 2003 to $240,000 from $103,000 last year. Income at
Community Bank was negatively impacted by an extra $83,000 loan loss allowance
and the reversal of $25,000 of income related to some real estate mortgages
placed on non-accrual. Income at Midwest Loan Services increased with rapidly
increasing mortgage originations and mortgage loans subserviced.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three months ended March 31, 2003 and 2002 (in
thousands):
2003 2002
---- ----
Community Banking $ (137) $ (101)
Midwest Loan Services 240 103
Corporate Office (30) (24)
------- -------
Total $ 73 $ (22)
======= =======
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased 7.3% to $467,448 for the three months
ended March 31, 2003 from $504,507 for the three months ended March 31, 2002.
Net interest income declined primarily because of a lower earning asset base and
lower rates on those assets. The net interest spread decreased from 4.96% in the
2002 to 4.75% in 2003.
Interest income
Interest income decreased 11.8% to $694,860 in the quarter ended March
31, 2003 from $787,546 in the quarter ended March 31, 2002. An increase in
non-accrual loans and other real estate owned was a major component in the
decline. Additionally, the rate environment was lower in the first quarter of
2003 than in the same period in 2002. The overall yield on Total Interest
Bearing Assets was 7.03% in 2003 as compared to 7.89% in the same period in
2002. The average volume of interest earning assets decreased by $390,722 to
$40,086,558 in the 2003 period from $40,477,280 in the 2002 period.
Interest Expense
Interest expense decreased 19.7% to $227,412 in the three months ended
March 31, 2003 from $283,036 in the 2002 period. The decrease was due to
principally to a shift from higher cost Time Deposits to lower cost Money Market
Accounts. Over the last year, management of the Bank has aggressively pursued
building its core deposit base and reducing its dependence on brokered funds. At
March 31, 2003 the Bank had $5.9 million in brokered time deposits as compared
to $9.9 million at March 31, 2002. The cost of funds decreased to 2.28% in the
2003 period from 2.94% in the 2002 period.
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following table summarizes monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated yield
or cost and the net return on earning assets for the three months ended March
31, 2003 and 2002.
Three Months Ended Three Months Ended
------------------------------------------- ---------------------------------------
March 31, 2003 March 31, 2002
------------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Commercial Loans $ 18,998,030 $ 357,987 7.64% $ 17,642,067 $ 373,587 8.59%
Real Estate Loans 12,465,046 217,937 7.09% 14,198,972 286,962 8.20%
Installment/Consumer Loans 2,500,759 55,415 8.99% 3,661,557 84,880 9.40%
-------------- ---------- -------------- ----------
Total Loans 33,963,835 631,339 7.54% 35,502,596 745,429 8.52%
Investment Securities 4,346,189 58,534 5.46% 3,701,285 36,878 4.04%
Federal Funds & Bank Deposits 1,776,534 4,987 1.14% 1,273,399 5,239 1.67%
-------------- ---------- -------------- ----------
Total Interest Bearing Assets 40,086,558 694,860 7.03% 40,477,280 787,546 7.89%
-------------- ---------- -------------- ----------
Interest Bearing Liabilities:
Demand Deposits 6,558,035 11,894 0.74% 3,816,237 11,364 1.21%
Savings Deposits 459,433 1,281 1.13% 376,318 1,089 1.17%
Time Deposits 17,498,374 131,067 3.04% 23,070,304 207,760 3.65%
Money Market Accts 15,208,816 79,612 2.12% 10,847,090 55,917 2.09%
Short-term Borrowings 472,079 0 0.00% 334,722 1,041 1.26%
Long-term Borrowings 281,500 3,558 5.13% 662,786 5,868 3.59%
-------------- ---------- -------------- ----------
Total Interest Bearing Liabilities 40,478,237 227,412 2.28% 39,107,457 283,039 2.94%
-------------- ---------- -------------- ----------
Net Earning Assets, net interest
income, and interest rate spread $(391,679) $ 467,448 4.75% $1,369,823 $ 504,507 4.96%
============== ========== ============== ==========
Net Interest Margin 4.73% 5.05%
(1) Yield is annualized.
Allowance for Loan Losses
The provision to the allowance for loan losses was $105,900 for the
quarters ended March 31, 2003 and $22,500 for the same period ended in 2002. Net
charge-offs totaled $115,107 for the three month period ended March 31, 2003 as
compared to $1,820 for the same period in 2002. In 2003, management charged off
two non-performing commercial loans with impaired collateral. Illustrated below
is the activity within the allowance for the quarter ended March 31 2003 and
2002, respectively.
2003 2002
---- ----
Balance, January 1 $ 408,219 $ 579,113
Provision for loan losses 105,900 22,500
Loan charge-offs (117,342) (4,168)
Recoveries 2,235 2,348
---------- ----------
Balance, March 31 $ 399,012 $ 599,793
========== ==========
At March 31, 2003 At December 31, 2002
----------------- --------------------
Total loans (1) $33,036,881 $33,192,034
Reserve for loan losses $ 399,012 $ 408,219
Reserve/Loans % (1) 1.21% 1.23%
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor, Michigan and the future performance of these loans is dependent upon the
performance of a relatively limited geographical area.
The following schedule summarizes the Company's non-performing assets:
At March 31, 2003 At December 31, 2002
----------------- --------------------
Past due 90 days and over and still accruing (1):
Real estate $ - $ -
Installment - -
Commercial - -
- -
----------- -----------
Subtotal - -
Nonaccrual loans (1):
Real estate 550,778 102,713
Installment 12,716 67,546
Commercial 218,000 509,301
----------- -----------
Subtotal 781,494 679,560
----------- -----------
Other real estate owned 718,102 853,198
----------- -----------
Total nonperforming assets $1,499,596 $1,532,758
=========== ===========
At March 31, 2003 At December 31, 2002
----------------- --------------------
Ratio of non-performing assets
to total loans (1) 4.54% 4.62%
========= =========
Ratio of loans past due over
90 days and non-accrual loans
to loan loss reserve 196% 166%
========= =========
(1) Excludes loans held for sale which are valued at fair market value.
Other real estate owned at March 31, 2003 and December 31, 2002
includes a commercial development site in Sault Ste. Marie, Michigan. The
property is being carried at a value of $150,000. The Bank has a sales contract
with a commercial developer who is planning a major development on the site.
There is no assurance that a sale of the property will be consummated. A $24,000
single family lot is also under contract to sale. At March 31, 2003, the
remaining balance of $544,102 consists of single-family houses. The Bank is
anticipating about $40,000 in loan recoveries on prior charge-offs in the near
future.
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
Total non-interest income increased 28.1% to $1,321,976 for the three
months ended March 31, 2003 from $1,031,643 for the three months ended March 31,
2002. The increase was primarily due to higher mortgage loan origination
activity. In 2003, the rates on mortgages were historically low and this spurred
an increase in the re-financing market. Management at the Bank and Midwest
aggressively pursued this activity and was able to increase income from initial
loan set up and other fess and gain on the sale of mortgage loans.
At March 31, 2003, the Bank and Midwest owned the rights to service
mortgages for Fannie Mae, Freddie Mac and other institutions, most of which was
owned by Midwest, an 80% owned subsidiary of the Bank. The balance of mortgages
serviced for these institutions was approximately $88 million. The carrying
value of these servicing rights was $1,165,866 at March 31, 2003. Based on
recent comparable sales and indications of market value from industry brokers,
management believes that the current market value of the mortgage servicing
rights portfolio approximates cost. Market interest rate conditions can quickly
affect the value of mortgage servicing rights in a positive or negative fashion,
as long-term interest rates rise and fall. The amortization of these rights is
based upon the level of principal pay downs received and expected prepayments of
the mortgage loans.
At March 31, 2003, Midwest was subservicing 9,769 mortgages, an increase of
16.9% from 8,372 mortgages at December 31, 2002. During the first quarter of
2003, Midwest originated 619 mortgages, an increase of 32.8% from mortgages in
first quarter of 2002.
Non-Interest Expense
Non-interest expense increased 4.9% to $1,610,271 in the three months
ended March 31, 2003 from $1,535,614 for the three months ended March 31, 2002.
The increase was due principally to salaries and benefits and the amortization
of servicing rights. Servicing rights amortization increased to $102,173 during
the three month period ended March 31, 2003 from $49,439 in the same period in
2002. The increase results from a higher volume of servicing rights and due to
higher amortizations impacted by the high level of loan principal pay offs due
to loan refinancing activity. Midwest was able to refinance 80% of the loans
that paid off during the first quarter of 2003, which is substantially better
than typical industry experience.
Income Taxes
Income tax expense (benefit) was $0 in 2003 and 2002. The effective tax
rate was 0% for both three month periods ended March 31 due to existence of loss
carryforwards resulting from prior years net operating losses. Future tax
benefits have not been recognized as their realization is not considered more
likely than not.
Capital Resources
The table below sets forth the Bank's risk based assets, capital ratios
and risk-based capital ratios of the Bank. At March 31, 2003, the Bank was
considered "well-capitalized".
March 31, 2003
TIER 1 CAPITAL (in $000s)
Total Equity Capital $3,431
Less: Unrealized losses on available-for-Sale
Securities (65)
Plus: Minority Interest 397
Less: Other identifiable Intangible Assets 221
Total Tier 1 Capital 3,672
TIER 2 CAPITAL
Allowance for loans & Lease losses 399
Less: Excess Allowance -
Total Tier 2 Capital 399
Total Tier 1 & Tier 2 Capital $4,071
CAPITAL RATIOS
Tier 1/Total Average Assets of $45,387 8.09%
Tier 1/Total Risk-Weighted Assets of $34,190 10.74%
Tier 1 & 2/Total Risk-Weighted Assets of $34,190 11.90%
Liquidity
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, borrowings from
correspondent lenders secured by securities, residential mortgage loans and/or
commercial loans. In addition, the Bank invests in overnight federal funds. At
March 31, 2003, the Bank had cash and cash equivalents of $1,841,039. The Bank
has a line of credit for $3.5 million from the Federal Home Loan Bank of
Indianapolis secured by investment securities and residential mortgage loans and
a line of credit for $4.9 million from the Federal Reserve Bank of Chicago
secured by commercial loans. In order to bolster liquidity from time to time,
the Bank also sells brokered time deposits. At March 31, 2003, the Bank had
$5,926,000 of these deposits outstanding.
Bancorp Liquidity. In an effort to maintain the Bank's Tier 1 capital
to assets ratio above at current levels and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during the first half of 2003, though a dividend may begin in the second
half of the year.
At March 31, 2003, $265,000 in debt was outstanding as compared to
$397,000 at March 31, 2002. Long-term borrowings at March 31, 2002 also includes
$227,506 of a note payable to another financial institution with respect to a
low-income housing partnership investment by University Insurance and Investment
Services. This obligation was paid in full by the end of 2002. At March 31,
2003, Bancorp had $84,129 in cash and investments on hand to meet its working
capital needs.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
Item 3. 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. Such 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 re-pricing 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 re-pricing
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 such rights by lowering
required amortization rates on the rights. Rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the retail mortgage banking operations of the Bank and Midwest Loan
Services. Rising interest rates also slow Midwest Loan Services' rate of growth,
but increases the duration of its existing subservicing contracts.
The Bank performs a static gap analysis which has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on the following page details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at March 31, 2003. The table is based upon various assumptions of management
which may not necessarily reflect future experience. As a result, certain assets
and liabilities indicated in the table as maturing or re-pricing within a stated
period may, in fact, mature or re-price in other periods or at different
volumes. The one-year static gap position at March 31, 2003 was estimated to be
($13,044,000) or -29.11%.
In addition, management prepares an estimate of sensitivity to immediate
changes in short term interest rates. At March 31, 2003, the following impact
was estimated on net interest margin in the 12 months following an immediate
movement of interest rates:
Effect on Net
Rate Change Interest Margin
-1.00% 3.51%
+1.00% -3.06%
+3.00% -9.17%
Asset/Liability Position Analysis as of March 31, 2003
(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 $ 9,476 $ 2,896 $ 2,211 $14,835 $ 4,113 $ (399) $33,132
Non-accrual loans - - - - 781 781
Securities 340 569 226 - 1,597 - 2,732
Other assets - 600 - - - 5,723 6,323
Cash and Due from
banks 1,103 - - - - 738 1,841
---------------------------------------------------------------------------------------------
Total assets 10,9190 4,065 2,437 14,835 5,710 6,843 44,809
---------------------------------------------------------------------------------------------
LIABILITIES
-----------
Time deposits 7,350 5,006 2,740 674 401 - 16,171
Demand -interest
bearing 7,770 7,770 6,889 - - - 22,429
Demand - non interest - -- - - 1,391 1,391
Savings - - 443 - - - 443
Long term borrowings 33 99 133- - - 265
Other liabilities - - - 864 864
Stockholders' equity - - - - - 3,246 3,246
---------------------------------------------------------------------------------------------
Total liabilities 15,153 12,875 10,205 674 401 5,501 $44,809
---------------------------------------------------------------------------------------------
Gap (4,234) (8,810) (7,768) 14,161 5,309 1,342
--------------------------------------------------------------------------------
Cumulative gap $(4,234) $(13,044) $(20,812) $(6,651) $(1,342) $ 0
================================================================================
Gap percentage -9.45% -29.11% -46.45% -14.84% -2.99% 0.00%
=================================================================================
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties
are subject.
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements 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.
Date: May 14, 2003 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
/s/ Nicholas K. Fortson
-------------------------
Nicholas K. Fortson
Chief Financial Officer
10-Q 302 CERTIFICATION
I, Stephen Lange Ranzini certify that:
1) I have reviewed this quarterly report on Form 10-Q of University Bancorp,
Inc.;
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 14, 2003 /s/Stephen Lange Ranzini
----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
10-Q 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
7) I have reviewed this quarterly report on Form 10-Q of University Bancorp,
Inc.;
8) Based on my knowledge, this quarterly 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 quarterly report;
9) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
10) 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
11) 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
12) The registrant's other certifying officers and I have indicated in this
quarterly 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: May 14, 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 quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on May 13, 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: May 14, 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 quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on May 13, 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: May 14, 2003
By: /s/ Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer