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, 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 or other jurisdiction of (I.R.S. Employer incorporation)
Identification No.
959 Maiden Lane, Ann Arbor, Michigan 48105
(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 22 2004: 4,086,548 shares. The aggregate market value of the voting stock
held by non-affiliates of the Registrant based on $2.40 per share, the average
bid and asked price for the Registrant's Common Stock on March 22, 2004, as
reported by NASDAQ, was approximately $2,617,392.
* 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 86 pages
Exhibit index on sequentially numbered page 79
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 banks
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
Banks 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, the most
important of which is a jumbo and subprime loan conduit established by Lehman
Brothers.
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 Banks 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,
a division of the Bank of New York.
Michigan BIDCO. In 1993, Stephen Lange 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 invests in businesses
in Michigan with the objective of fostering job growth and economic development.
University Bancorp currently owns 6.10% of the BIDCO. The Bank also holds
$600,000 of 7.5% cumulative preferred stock
of the BIDCO. Subsequent to year end, the BIDCO preferred stock was sold in
exchange for a note to a company in which Stephen Lange Ranzini is a
shareholder. The note is secured by all assets of the company. The note will be
paid off by December 31, 2004.
Employees
The Company employed 68 full-time equivalents as of March 22, 2004:
University Bank, Ann Arbor 23
Midwest Loan Services 41
University Insurance & Investment 4
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, debit cards and Gold VISA accounts. From time to time
to raise liquidity, the Bank relies on brokers to sell CDs. At December 31,
2003, the Bank had approximately $1.1 million in CDs issued through brokers. The
Bank also offers Sharia compliant profit-sharing deposits for Muslim depositors.
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, 2003 are as follows:
Amount Outstanding(1) % of Total
Commercial, Real Estate & Other $15,943,127 45.64%
Residential Construction 1,270,789 3.64%
Residential Real estate 13,140,378 37.62%
Residential Home equity 4,219,463 12.08%
Consumer 233,217 0.67%
Credit Card 121,612 0.35%
----------- -------
Gross Loans $34,928,586 100.00%
============ =======
(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 Banks 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% to
100% loan to value residential loans and currently has about $2 million of these
loans in its loan portfolio. 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 Bank has
also originated $2.65 million of mortgage alternative loan transactions which
are Sharia-compliant mortgage alternatives for Muslim customers. 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 Banks 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 Banks 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. 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 Banks 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 Banks 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.
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 Banks 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, 2003, the portfolio had a net unrealized loss of $38,795 versus a
net unrealized loss of $81,764 at December 31, 2002, and $167,112 at December
31, 2001.
Information regarding securities where cost exceeded more than 10% of
the Companys stockholders' equity at December 31, 2002 is as follows:
Issuer Coupon Yield Final Maturity Market Value Amortized Cost
FHLBI equity (1) VAR 5.00% None $881,100 $881,100
FNMA CMO 93-205H (2) PO 3.37% 9/25/23 596,514 626,550
GNMA (various) VAR 5.19% 6/20/22 1,040,209 1,048,968
Other VAR - VAR 12,316 12,316
(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 about five years.
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 2003, June 2002 and June 2001, respectively
from the FDIC and National Credit Union Associations annual branch deposit
survey.
Washtenaw County Financial Institution Deposits:
2003 2002 2001
TCF National 14.03% 15.63% 16.16%
National City 12.81% 12.51% 11.93%
Comerica 11.03% 11.08% 11.92%
Bank One 8.79% 8.89% 9.37%
Keybank 6.19% 6.41% 7.23%
Bank of Ann Arbor 6.06% 4.59% 3.94%
Ann Arbor Commerce 5.61% 5.22% 4.87%
University of Michigan CU 5.51% 5.21% 4.23%
Flagstar 4.86% 4.91% 5.06%
Standard Federal 4.19% 4.95% 6.22%
Huron River Area CU 3.54% 3.36% 3.09%
Chelsea State 3.09% 3.09% 3.10%
Citizens 2.54% 2.61% 2.82%
United Bank & Trust 2.53% 2.56% 1.40%
Midwest Financial CU 2.41% 2.24% 2.10%
Republic 2.00% 2.27% 2.03%
Automotive FCU 1.28% 1.31% 1.33%
Bank of Washtenaw 1.13% 1.05% 0.64%
Charter One 0.87% 0.67% 0.71%
University Bank 0.76% 0.89% 0.91%
5 Credit Unions 0.76% 0.75% 0.74%
Total deposits (in billions) $4.89 $4.53 $4.34
Annual Increase 8.01% 4.23% 4.40%
Total deposits in the county increased 8.01% to $4.89 billion from June
2002 to June 2003. Total deposits in the county increased 4.23% to $4.53 billion
from June 2001 to June 2002. In attracting deposits, the Banks 0primary
competitors for deposits are mutual funds, other commercial banks, credit
unions, savings and loans and insurance companies.
The Banks 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 Banks 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 Midwests 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 Banks 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 are 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 Companys 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
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 applications. 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.
Public Company Regulation. As a NASDAQ small-cap listed firm, the Company
is subject to the Sarbanes-Oxley Act, and the extensive regulation imposed by
that act with respect to financial reporting and director independence.
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.
OtherRegulations. University Bank and its subsidiaries are also subject to
various regulations including:
* the Community Reinvestment Act,
* the Federal Truth-in-Lending Act,
* the Home Mortgage Disclosure Act,
* the Gramm-Leach Bliley Privacy Act
* the Patriot Act
* the Check 21 Act
* the Equal Credit Opportunity Act,
* the Fair Credit Reporting Act,
* the Fair Debt Collection Act,
* the Right to Privacy Act,
* the Real Estate Settlement Procedures Act,
* the Bank Secrecy Act,
* the Electronic Funds Transfer Act,
* Federal Reserve regulations,
* State usury laws, and
* 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 Companys
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 Companys 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. In
addition, the Federal Home Loan Banks, including the Federal Home Loan Bank of
Indianapolis, in which University Bank is an investor, pay 20% of their annual
net income to a sinking fund to retire the FICO bonds until they are paid in
full.
Capital Regulations. The FDIC has established the following minimum capital
standards for state-chartered, FDIC-insured non-member banks, like University
Bank:
* 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;
* 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:
* the Equal Credit Opportunity Act,
* the Fair Credit Reporting Act,
* the Truth in Lending Act,
* the Real Estate Settlement Procedures Act, and
* 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:
* the Truth in Savings Act,
* the Expedited Funds Availability Act,
* the Bank Secrecy Act,
* the Electronic Funds Transfer Act and
* the Federal Deposit Insurance Act
* The Patriot Act
* The Check 21 Act
* The Gram-Leach Bliley Privacy 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:
* 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;
* 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;
* 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;
* 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;
* 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:
* 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;
* establishment by Michigan-chartered banks of branches located in other
states, the District of Columbia, or U.S. territories or protectorates; and
* 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 is
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, the Securities & Exchange Commission, and the
Insurance Division of Michigans Office of Financial and Insurance Services.
Item 2. Properties
Properties
The Bank leases a building in Ann Arbor, Michigan that is the Bank's
main office and sole branch location. The lease ends in June 2005. There are
also 5 options to extend for an additional six-months per option. Previously,
the building was owned by the Bank. In June 2003, the Bank sold the building to
Lowertown Development, LLC (Lowertown) for $1,173,833
at a gain of $342,851. Simultaneously, the Bank entered into a 24 month lease
agreement with Lowertown to lease the facility. Lowertown is developing the
neighboring area with a major office, retail and apartment development. The Bank
has an option to purchase 10,000 square feet of office space in this new
development. The gain on the sale of the building is being amortized into to
income over the life of the initial lease term.
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 also owns 1/3 of the Company which owns the site, Tuomy, LLC.
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.
Contractual Obligations
The following table summarizes the existing contractual obligations of the
Company:
Payments Due By Period
Less than 1-3 3-5 More than
Total year years years 5 years
---------- ---------- --------- ------- ---------
Operating leases $297,400 $185,400 $112,000 $0 $0
Certifcates of deposit $9,455,982 $5,347,629 $3,392,458 $295,873 $420,022
Long term borrowings $166,000 $134,000 $32,000 $0 $0
---------- ---------- ---------- -------- ---------
Totals $9,919,382 $5,667,029 $3,536,458 $295,873 $420,022
========== ========== ========== ======== =========
Item 3. - Legal Proceedings
At December 31, 2003 the Company had no outstanding legal proceedings
that would have a material affect on the financial statements.
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, 2002 are listed below:
High Low
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 $3.00 $0.62
Second Quarter 2.25 0.91
Third Quarter 5.73 1.06
Fourth Quarter 3.38 2.22
2004
First Quarter through March 16 $2.80 $2.05
These quotations represent inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions. As of the
March 22, 2004 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 opted, at this time, not 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 2004. We
plan to reevaluate our dividend policy in late 2004.
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)
2003 2002 2001 2000 1999
Summary of operations (1)
Interest income $2,732 $3,194 $3,543 $3,315 $3,195
Interest expense 842 1,039 1,805 2,074 1,967
Net interest income 1,890 2,155 1,738 1,241 1,228
Provision for loan losses 189 100 40 111 93
Net interest income after
provision for loan losses 1,701 2,055 1,698 1,130 1,135
Net gain (loss) on securities (54) 70 13 18 (15)
Profit(loss)from investment in Michigan BIDCO
- - (115) 235 917
Gain on the sale of mortgage loans 756 236 67 40 66
Other non-interest income 5,230 4,205 3,990 2,357 1,321
Non-interest expense 7,619 6,291 5,960 4,695 4,116
Income (loss) before tax 14 206 (307) (915) (692)
Income tax expense (benefit) (80) - - - 32
Net income (loss) from
continuing operations 94 206 (307) (915) (724)
Net income (loss) 94 206 (307) (915) (915)
Selected Year End Balances
Total assets 43,549 46,249 45,623 47,671 40,823
Loans, net 34,474 32,784 34,447 35,644 30,580
Loans, held for sale 206 1,551 2,138 268 305
Cash, cash equivalents and
investment securities 4,701 6,521 3,946 5,340 5,919
Deposits 38,808 41,920 40,198 38,179 32,051
Short-term borrowings - - 92 4,094 3,114
Long-term borrowings - 298 1,658 926 2,627
Minority interest 445 360 305 283 506
Stockholders' equity 3,435 3,156 2,737 2,042 1,950
Per Share Data
Common shares, year-end 4,027 3,900 3,753 2,028 2,013
Weighted avg shares, year-end 3,940 3,859 2,278 2,027 1,994
Cash dividends - - - - -
Net income (loss) from
continuing operations - basic and diluted $0.02 $0.05 ($0.13) ($0.45) ($0.36)
Net income (loss)- basic and diluted $0.02 $0.05 ($0.13) ($0.45) ($0.46)
Book value of common shares $0.85 $0.81 $0.73 $0.65 $0.97
Selected Ratios
Net yield on earning assets 4.78% 5.30% 4.37% 3.33% 3.14%
Return on average assets 0.22% 0.47% (0.67%) (2.06%) (1.92%)
Return on average equity 2.80% 7.43% (12.49%) (53.56%) (36.38%)
Average equity to avg. assets 7.75% 6.26% 5.38% 3.84% 5.28%
(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.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosures. On an on-going basis, we evaluate these
estimates, including those related to the allowance for loan losses, servicing
rights, other real estate owned and deferred tax assets. Estimates are based on
historical experience, information received from third parties and on various
other assumptions that are believed to be reasonable under the circumstances,
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is determined based on
management estimates of the amount required for losses inherent in the
portfolio. These estimates are 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 managements judgment, should be
charged-off.
SERVICING RIGHTS - Servicing rights are evaluated quarterly for possible
impairment is evaluated based on the fair value of the rights, using independent
appraisals and grouping of the underlying loans as to type, term and interest
rates. Assumptions as to prepayment speeds and retention rates may change and
thereby impact the valuation. Any impairment of a grouping is reported as a
valuation allowance.
OTHER REAL ESTATE OWNED -- Real estate properties acquired in collection of a
loan are recorded at fair value upon acquisition based on appraisals. Any
reduction to fair value from the carrying value of the related loan at the time
of foreclosure is accounted for as a loan loss. Subsequent reductions in the
value of the real estate owned are charged to earnings when known. Changes in
real estate value in the future may impact the carrying value.
DEFERRED TAX ASSETS Deferred tax assets are recorded based on estimates of
future taxable income and utilization of existing net operating loss
carryforwards. A valuation allowance adjusts deferred tax assets to the net
amount that is more likely than not to be realized. Actual results will impact
the estimates of these deferred tax assets.
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
Bancorps common stock. Investors should carefully consider these prior to
purchasing any shares.
University Bank Has Incurred Significant 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. The Banks 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 from
operations of $1,905,404 at December 31, 2003.
The Companys 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 2,995,968, or 74.41% of the issued and outstanding
shares at March 22, 2004. These individuals are able to exert a significant
measure of control over University Bancorps 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 Banks 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.
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 Banks 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, 2003 Compared to the Years Ended December 31, 2002
and 2001
Summary of Results of Operations
The Companys net income was $94,442 versus $205,598 in 2002 and a net
loss of $306,573 in 2001. Basic and diluted earnings (loss) per share from
continuing operations for 2003, 2002 and 2001 were $0.02, $0.05 and $(0.13),
respectively.
The net income in 2003 includes an income tax benefit of $80,000. This
benefit represents a portion of the net operating loss carry-forward benefit
that Management reasonably expects to utilize in 2004 against future taxable
income. Overall, the Company has a net deferred tax asset of $1,571,790, however
a valuation allowance for deferred tax assets of $1,491,790 has been
established, leaving a net deferred tax asset of $80,000.
Community Banking incurred a pre-tax loss of $301,000 during the
current year as opposed to pre-tax income of $20,000 from the year before. A
drop in the net interest margin and an increase in the provision for loan losses
accounted for the most of this variance. In contrast, pre-tax income at Midwest
Loan Services increased to $426,000 in 2003 from a $281,000 last year. Income at
Midwest Loan Services increased with rapidly increasing mortgage originations
and an 80% increase in mortgage loans sub-serviced.
The operations of the Company showed significant progress in 2002 as
compared to 2001 as a result of an aggressive cost cutting program at the bank
as well as efforts to increase income. 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, 2003, 2002, and 2001 (in
thousands):
Twelve months ended December 31, 2003, 2002 and 2001 Pre-tax Income (Loss)
Summary
2003 2002 2001
Community Banking $(301) $ 20 $(414)
Midwest Loan Services 426 281 237
Merchant Banking (Michigan BIDCO) 0 0 (115)
Corporate Office (111) (95) (15)
------ ------ ------
Total $ 14 $ 206 $(307)
====== ====== ======
Net Interest Income
For 2003, net interest income declined 12.29% year-over-year, falling
to $1.9 million for the year ended December 31, 2003 compared to $2.2 million
the prior year. During 2002 and 2003 short term interest rates remained at
45-year lows while long-term interest rates showed a decline. Net interest
income for 2003 declined from the previous period because the average yield on
earning assets declined at a higher rate than the average yield on interest
bearing deposits. The yield on average earning assets dropped from 7.85% in 2002
to 6.91% in 2003. The cost of interest bearing liabilities decreased from 2.66%
for the 2002 period to 2.21% for the year ended December 31, 2003. The net yield
on interest earning assets decreased from 5.30% to 4.78%. Management is actively
addressing the decline in the net yield and is implementing action to mitigate
and reverse the trend by attracting lower cost deposits. During the fourth
quarter of 2003, net interest income was $483,000, slightly higher than any
quarter during the year and higher than the fourth quarter 2002 net interest
income of $473,000. This positive trend has continued into the first quarter of
2004.
For 2002, 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 $473,000 and $424,000, 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 Banks net interest
margin expanded to 5.30% compared to 4.37% for the previous year.
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
2003
------------------------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
------------------------------------------------------------------
Interest Earning Assets:
Commercial Loans $18,283,474 $1,450,349 7.93%
Real Estate Loans (1) 14,353,880 928,763 6.47%
Installment Loans 2,102,820 175,398 8.34%
------------ ---------- ---------
Total Loans 34,740,174 2,554,510 7.35%
------------ ---------- ---------
Investment Securities 3,789,545 165,571 4.37%
Federal Funds & Bank Deposits 982,244 12,018 1.22%
------------ ---------- ---------
Total Interest Bearing
Assets 39,511,963 2,732,099 6.91%
------------ ---------- ---------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 6,365,212 56,167 0.88%
Savings 409,633 4,634 1.13%
Time 13,658,810 420,932 3.08%
Money Market Accts 17,220,500 344,827 2.00%
Short-term Borrowings 227,063 2,933 1.29%
Long-term Borrowings 232,000 12,144 5.23%
------------ ---------- ---------
Total Interest Bearing
Liabilities 38,113,218 841,637 2.21%
------------ ---------- ---------
Net earning assets, net interest
income, and interest rate spread $ 1,398,745 $1,890,462 4.70%
============ =========== ==========
Net yield on interest-earning assets 4.78%
==========
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
NET INTEREST INCOME
2002
------------------------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
------------------------------------------------------------------
Interest Earning Assets:
Commercial Loans 18,047,370 1,459,892 8.09%
Real Estate Loans (1) 14,104,750 1,049,280 7.44%
Installment Loans 3,237,782 296,532 9.16%
------------ ---------- ---------
Total Loans 35,389,902 2,805,704 7.93%
------------ ---------- ---------
Investment Securities 3,809,545 366,793 9.63%
Federal Funds & Bank Deposits 1,470,693 21,955 1.49%
------------ ---------- ---------
Total Interest Bearing
Assets 40,670,140 3,194,452 7.85%
------------ ---------- ---------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 5,287,117 58,291 1.10%
Savings 423,482 4,825 1.14%
Time 20,029,396 671,929 3.35%
Money Market Accts 12,282,311 271,887 2.21%
Short-term Borrowings 472,079 11,556 2.45%
Long-term Borrowings 572,547 20,675 3.61%
------------ ---------- ---------
Total Interest Bearing
Liabilities 39,066,932 1,039,163 2.66%
------------ ---------- ---------
Net earning assets, net interest
income, and interest rate spread 1,603,208 2,155,289 5.19%
============ =========== ==========
Net yield on interest-earning assets 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%
==========
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
The tables above do not specify the average level of non-interest bearing
demand deposits, which were $1,979,705, $2,432,737, and $2,643,856 for the years
ended December 31, 2003, 2002 and 2001, 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
2003 2002
--------------------------------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
Interest Income:
Commercial Loans $ 18,950 $(28,493) $(9,543)
Real Estate Mortgage Loans 18,245 (138,762) (120,517)
Installment/Consumer Loans (96,551) (24,583) (121,134)
Investment Securities (1,916) (199,306) (201,222)
Federal Funds & Bank Deposits (6,439) (3,498) (9,937)
------------ ---------- ---------
Total Interest Income (67,711) (394,642) (462,353)
------------ ---------- ---------
Interest Bearing Liabilities:
Demand Deposits 10,687 (12,811) (2,124)
Savings Deposits (157) (34) (191)
Time Deposits (199,868) (51,129) (250,997)
Money Market Accounts 100,884 (27,944) 72,940
Short-term Borrowings (4,515) (4,108) (8,623)
Long-term Borrowings (15,446) 6,915 (8,531)
------------ ---------- ---------
Total Interest Expense (108,415) (89,111) (197,526)
------------ ---------- ---------
Net Interest Income $40,704 $ (305,531) $(264,827)
============ =========== ==========
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
Net Interest Income $40,704 $ (305,531) $(264,827)
============ =========== ==========
Loan Portfolio
Information regarding the Bank's loan portfolio as of December 31, 2003
and 2002 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 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 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
$1,117,127 and $679,560 at December 31, 2003 and 2002, respectively. The
provision for loan losses in 2003 was $189,400, compared to $100,000 in 2002 and
$40,000 in 2001. The provision in 2003 was increased
over prior years to due to an increase in non-accrual loans. Loans charged off,
net of recoveries, were $143,501, $270,874 and $23,884 in 2003, 2002 and 2001,
respectively. The decrease in net loans charged off from 2002 to 2003 resulted
primarily to two 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 $454,118,
$408,219 and $579,113 at the end of 2003, 2002 and 2001, respectively. The
following table summarizes the loan loss expense for the Bank for the years
ended December 31, 2003, 2002 and 2001.
Analysis of the Allowance for Loan Losses ($ amounts in thousands)
2003 2002 2001
Balance at beginning of the period $ 408 $ 579 $ 563
Charge offs - Domestic:
Commercial loans 227 270 20
Real estate mortgages - - 7
Installment loans 13 17 17
------------------- -------------- ---------------
Subtotal 240 287 44
------------------- -------------- ---------------
Recoveries - Domestic:
Commercial loans 94 13 12
Real estate mortgages - - 2
Installment loans 3 3 6
------------------- -------------- ---------------
Subtotal 97 16 20
------------------- -------------- ---------------
Net charge offs 143 271 24
------------------- -------------- ---------------
Provision for loan losses 189 100 40
------------------- -------------- ---------------
Balance at end of period $ 454 $ 408 $ 579
=================== ============== ===============
Ratio of net charge offs during
period to average loans
outstanding during period 0.42% 0.79% 0.07%
=================== ============== ===============
Analysis of the Allowance for Loan Losses ($ amounts in thousands)
Allocated portion of Percentage of loans in each category to
allowance
at December 31 total loans
2003 2002 2003 2002
Loan category:
Domestic:
Commercial loans $ 350 $ 341 56.06% 56.26%
Real estate mortgages 40 42 35.81% 35.05%
Installment loans 43 19 12.13% 8.69%
Unallocated 21 6 N/A N/A
-------------- --------------- -------------------- ---------------------
$ 454 $ 408 100.0% 100.0%
============== =============== ==================== =====================
At At
December 31, 2003 December 31, 2002
------------------------------ ---------------------------
Total loans (1) $34,928,586 $33,192,034
Reserve for loan losses $ 454,118 $ 408,219
Reserve/Loans % 1.30% 1.23%
(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 Banks 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 $5.9 million in 2003 compared
to $4.4 million in 2002. Income generated in this category is principally from
Midwest Loan Services. During 2003, the mortgage re-financing market was
stimulated by record low long-term interest rates. Midwest and the Bank
significantly increased income from loan origination, loan sub-servicing fee
income, and gain on the sale of mortgage loans originated for sale into the
secondary market. The Banks wholly owned insurance and investment subsidiary,
University Insurance & Investment Services, also enjoyed a record year,
producing $168,577 in fee income compared to $113,870, a 48.0% increase.
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. 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.
Mortgage banking. At December 31, 2003, Midwest Loan Services was
sub-servicing15,033mortgages, an increase of80% from 8,360 mortgages at December
31, 2002. The balance of loans sub-serviced was $2.0 billion at January 1, 2004
as compared with over $1.0 billion at December 31, 2002. Midwest had a highly
successful year attracting some of the nations premier credit unions to its
Members for Life program. Mortgage banking, servicing and origination fees, and
gain on the sale of loans increased to $5,267,418 in 2003 from $4,040,363 in
2002. In 2003, Midwest originated670 mortgage loans, an increase of 31% over
last year. During the year, Midwest increased its credit union partners so that
at year-end 2003 it had credit union partners with a total of 1,585,000 active
members, 20,434,000 potential members and aggregate assets of $11.48 billion.
Mortgage banking, servicing and origination fees increased to $4,040,363 in 2002
from $3,783,721 in 2001. During the year, Midwest grew its mortgages
sub-serviced by 65% from 5,057 to 8,360 and to over $1 billion of mortgages
sub-serviced. 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 was originated by Midwest.
Securities. Proceeds from sales of marketable equity securities included in
proceeds from sales of investment securities was $54,464 for the year ended
December 31, 2003. Gross losses of $26,574 were realized in this period.
Proceeds from sales of available for sale debt securities were $59,879,
$1,034,160 and $541,460 for the years ended December 31, 2003, 2002 and 2001,
respectively, excluding sales associated with the Bank's mortgage banking
operation. There were gross gains of $0, $69,733 and $12,639 on 2003, 2002 and
2001 sales, respectively and a gross loss of $54,011 on 2003 sales. At December
31, 2003 gross unrealized losses in our available-for-sale securities were
$38,795 and gross unrealized gains were $0. At December 31, 2002 gross
unrealized losses in our available-for-sale securities were $81,997 and gross
unrealized gains were $0.
Non-interest expense. Non-interest expenses increased by $1.3 million in
2003 or 20.1% to $7.6 million from $6.3 million in 2002. All but $200,353 of the
increase was due to increased non-interest expenses at Midwest, as Midwests
origination and sub-servicing activity increased. 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 long-term interest
rate environment. Personnel expenses at Community Banking were higher due to
higher commissions paid to mortgage and deposit origination personnel.
Subsequent to year-end 2003, Community Banking made several changes in its
non-interest expenses which are targeted to reduce expenses in 2004 by
approximately $400,000.
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 Midwests 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 Bankings 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. Midwests operations
were expanded in 2002 due to a substantial increase in mortgage sub-servicing
and origination activity. 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
Liquidity. Our total assets at December 31, 2003 amounted to $43.55
million compared to $46.25 million at December 31, 2002. Loans receivable, net
of reserves and including loans held for sale, increased to $34.47 million from
$32.78 million. Cash and cash equivalents including Federal Funds sold on an
overnight basis at the end of 2003 were $2.17 million, while securities were
$1.65 million. At year-end 2003, the Bank had an unused line of credit from the
Federal Home Loan Bank of Indianapolis of $3.0 million, and an unused line of
credit from the Federal Reserve Bank of Chicago of $5.4 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 $12,985 in cash and
equity securities at the end of 2003 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 $166,000 and $298,000 at year-end 2003 and
2002. The note is a fully amortizing loan maturing in early 2005. Subsequent to
year-end, University Bancorp received $120,000 in cash from the exercise of
stock options. Management intends that the cash and securities on hand, the
exercise of stock options and possible sale of stock to be sufficient to cover
the remaining required principal reductions during 2004 and 2005 on University
Bancorp's loan.
Capital. The Companys total stockholders' equity at December 31, 2003
was approximately $3.43 million (or 6.8% of total assets) compared to $3.16
million (or 6.8% of total assets) at December 31, 2002. The Bank's Tier 1
Capital at December 31, 2003 was $3.76 million or 8.7% of the Bank's total
regulatory assets. The risk-adjusted capital ratio of 11.2% 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 Banks
risk-adjusted assets and actual capital percentages:
2003 2002
TIER 1 CAPITAL
Total Equity Capital $3,558 $3,310
Less: Unrealized losses on available-for-Sale (39) (82)
Securities
Plus: Minority Interest 445 360
Less: Other identifiable Intangible Assets 287 206
-------- --------
Total Tier 1 Capital 3,755 3,546
TIER 2 CAPITAL
Allowance for loans & Lease losses 454 408
Less: Excess Allowance 33 -
-------- --------
Total Tier 2 Capital 421 408
-------- --------
Total Tier 1 & Tier 2 Capital $4,176 $3,954
======== =========
CAPITAL RATIOS
-
Tier 1/Total Average Assets 8.69% 7.89%
Tier 1/Total Risk-Weighted Assets 11.17% 9.98%
Tier 1 & 2/Total Risk-Weighted Assets 12.42% 11.13%
-
Recently Issued Accounting Standards
In November 2002, the FASB issued Interpretation No.45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN45), which covers guarantees such as
performance guarantees, standby letters of credit, and direct or indirect
guarantees of the indebtedness of others, but not guarantees of funding. FIN 45
requires a guarantor to recognize, at the commencement of a guarantee, a
liability in the amount equal to the fair value of the obligation undertaken in
issuing the guarantee, and requires disclosure about the maximum potential
payments that might be required, as well as the collateral or other recourse
obtainable. The recognition and measurement provisions of FIN45 were effective
on a prospective basis after December31, 2002, and its adoption by the Company
on January1, 2003 has not had a material impact on the Companys consolidated
financial statements. In January 2003, the FASB issued Interpretation No.46
(FIN46), Consolidation of Variable Interest Entities, which addresses
consolidation by business enterprises of variable interest entities that possess
certain attributes as defined within the interpretation. However, in December
2003, the FASB issued Interpretation No.46(R) (FIN46(R)), which amends FIN46 and
is intended to clarify some of the provisions of FIN46 and to exempt certain
entities from its requirements. FIN46(R) requires the deconsolidation of trust
preferred security subsidiaries. FIN46(R) grants the companies the option to
adopt its provisions as of the end of the first period ending after December31,
2003 or elect to defer until the first period ending after March15, 2004. As of
December31, 2003, the Company has decided to defer the application of FIN46(R)
until March15, 2004. Management believes the adoption of FIN46(R) in the first
quarter of 2004 will not have a material impact on the financial statements. On
April30, 2003, the FASB issued SFASNo.149, Amendment of Statement133 on
Derivative Instruments and Hedging Activities (SFAS149) which is effective for
hedging relationships entered into or modified after June30, 2003. SFAS149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS133. The adoption of this rule
did not have a material impact on the Companys results of operations or
financial condition. On May15, 2003, the FASB issued Statement of Financial
Accounting Standards (SFAS) No.150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS150) and was effective
May31, 2003 for all new and modified financial instruments and otherwise was
effective at the beginning of the first interim period beginning after June15,
2003. SFAS150 changes the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS150 requires
that those instruments be classified as liabilities (or assets in some
circumstances). The adoption of this rule had no impact on the Companys results
of operations or financial condition.
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 Midwests mortgage banking
operations. Rising interest rates also slow Midwest Loan Services' rate of
growth, but increases the duration of its existing mortgages being sub-serviced
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 Banks FNMA CMO
tends to shorten, thus accelerating the income from the accretion of the bonds
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,
2003. 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, 2003 was estimated at ($12.6
million) or (28.96%):
Asset/Liability Position Analysis as of December 31, 2003
(Dollar amounts in Thousands)
Maturing or Repricing in
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 ALL
ASSETS Or Less 1 Year Years Years Years Other Total
Loans - net 8,019 2,472 5,912 13,227 4,388 (454) 33,564
Non-accrual loans - - - - 1,117 1,117
Securities 112 500 - 1,037 - 1,649
Other assets - 729 156 - - 4,163 5,048
Cash and Due from
banks 499 - - - - 1,672 2,171
------------------------------------------------------------------------------------------
Total assets 8,6300 3,701 6,068 13,227 5,425 6,498 43,549
------------------------------------------------------------------------------------------
LIABILITIES
Time deposits 1,664 3,685 3,392 587 129 - 9,457
Demand -interest
bearing 9,731 9,731 6,365 - - - 25,827
Demand - non interest - - - - - 3,147 3,147
Savings - - 377 - - - 377
Long term borrowings 32 100 34 - - - - 166
Other liabilities - - - 1,140 1,140
Stockholders' equity - - - - - 3,435 3,435
------------------------------------------------------------------------------------------
Total liabilities 11,427 13,516 10,168 587 129 7,722 43,549
------------------------------------------------------------------------------------------
Gap (2,797) (9,815) (4,100) 12,640 5,296 (1,224) -
==========================================================================================
Cumulative gap (2,797) (12,612) (16,712) (4,072) 1,224 -
=============================================================================
Gap percentage -6,42% -28.96% -38.38% -9.35% 2.81% 0.00%
============================================================================
The following repricing information is provided for the Banks investment
portfolio, using book values, as of December 31, 2003:
Investment Portfolio Maturities ($ 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 $12 $0 $0 $1,637
Yield 0% 0% 0% 4.83%
The following information illustrates maturities and sensitivities of the
Bank's loan portfolio to changes in interest rates as of December 31, 2003:
Loan Portfolio Maturities by Type ($ amounts in thousands):
Maturity Interval:
Less Than 1 Year to More Than
One Year 5 Years 5 Years Total
Commercial $ 4,702 $ 11,081 $1,552 $ 17,335
Real Estate Mortgage (1) $ 2,222 $11,526 $1,939 $ 15,687
Installment/Consumer $ 233 $ 578 $1,096 $1,907
Total $ 7,157 $ 23,185 $ 4,587 $ 34,929
Maturity Less Maturity
Than More Than One
One Year Year Total
Total Variable Rate Loans $5,336 $ 13,920 $ 19,256
Total Fixed Rate Loans $1,821 $ 13,852 $ 15,673
Total Loans (1) $7,157 $ 27,772 $ 34,929
(1) Excludes loans held for sale of $206 and the allowance for loan losses.
Income Taxes
Income tax expense (benefit) in 2003 was $(80,000) and $0 in 2001 and
2000. The tax benefit in 2003 was recognized since a portion of existing net
operating loss carryforwards are reasonably expected to reduce future 2004
amounts of taxable income. In 2002 and 2001 no tax benefit was realized due to
net taxable losses from operations and uncertainties of future taxable income.
The effective tax (benefit) rate was (34)% for 2003 and 0% for the previous two
years.
At December 31, 2003, the Company had unrecognized deferred tax assets
of $1,491,790 that could be utilized to shelter approximately $4,387,000 of
future taxable income. Realization of income tax benefits in excess of $80,000
are not recorded in the financial statements as realization of these benefits is
dependent upon generating sufficient future taxable revenue. See footnote 13 to
the financial statements for more information.
Item 8. - Financial Statements and Supplementary Data
UNIVERSITY BANCORP, INC.
--------------------
CONSOLIDATED FINANCIAL STATEMENTS
--------------------
DECEMBER 31, 2003, 2002, 2001
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
University Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of University
Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, comprehensive income (loss), stockholders
equity and cash flows for each of the three years ended December 31, 2003. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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, 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, 2003 and 2002, 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 25, 2004
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets
December 31, 2003 and 2002
December 31, December 31,
ASSETS 2003 2002
--------------------- -------------------
Cash and due from banks $ 2,171,189 $ 2,569,469
Securities available for sale, at market 1,649,169 3,102,838
Federal Home Loan Bank Stock 881,100 848,400
Loans held for sale, at the lower of cost or market 206,008 1,550,995
Loans 34,928,586 33,192,034
Allowance for loan losses (454,118) (408,219)
--------------------- -------------------
Loans, net 34,474,468 32,783,815
Premises and equipment, net 829,807 1,720,902
Investment in Michigan BIDCO Inc. 629,258 629,258
Investment in Michigan Capital Fund LPI 256,244 356,244
Mortgage servicing rights , net 1,031,575 1,014,939
Real estate owned, net 429,500 853,198
Accounts receivable 122,067 72,786
Accrued interest receivable 129,808 169,811
Prepaid expenses 183,143 214,472
Goodwill, net 103,914 103,914
Other assets 451,290 258,272
-------------------- -------------------
TOTAL ASSETS $ 43,548,540 $ 46,249,313
===================== ===================
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
December 31, 2003 and 2002
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
--------------------- -------------------
Liabilities:
Deposits:
Demand - non interest bearing $ 3,146,688 $ 2,197,567
Demand - interest bearing 25,827,337 21,051,588
Savings 377,545 473,894
Time 9,455,982 18,197,407
--------------------- -------------------
Total Deposits 38,807,552 41,920,456
Long term borrowings 166,000 298,000
Accounts payable 289,150 228,062
Accrued interest payable 51,613 97,068
Other liabilities 354,273 189,594
--------------------- -------------------
Total Liabilities 39,668,588 42,733,180
Minority Interest 445,324 360,166
Stockholders' equity:
Preferred stock, $0.001 par value;
$1,000 liquidation value;
Authorized - 500,000 shares; - -
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,141,732 shares in 2003 and
4,014,732 shares in 2002 41,417 40,147
Additional paid-in-capital 5,677,940 5,537,960
Accumulated deficit (1,905,404) (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 (38,795) (81,764)
--------------------- -------------------
Total Stockholders' Equity 3,434,628 3,155,967
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,548,540 $ 46,249,313
===================== ===================
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, 2003, 2002 and 2001
2003 2002 2001
----------------- ---------------- -------------------
Interest income:
Interest and fees on loans $ 2,554,510 $ 2,805,704 $ 3,254,088
Interest on securities:
U.S. Government and agencies 81,269 270,127 202,357
Other securities 84,302 96,666 63,080
Other interest income 12,018 21,955 23,572
------------------ ---------------- ------------------
Total interest income 2,732,099 3,194,452 3,543,097
------------------ ---------------- ------------------
Interest expense:
Interest on deposits:
Demand deposits 400,994 330,178 401,385
Savings deposits 4,634 4,825 6,034
Time certificates of deposit 420,932 671,929 1,257,631
Short term borrowings 2,933 11,556 87,304
Long term borrowings 12,144 20,675 52,503
------------------ ---------------- ------------------
Total interest expense 841,637 1,039,163 1,804,857
------------------ ---------------- ------------------
Net interest income 1,890,462 2,155,289 1,738,240
Provision for loan losses 189,400 100,000 40,000
------------------ ---------------- ------------------
Net interest income after
provision for loan losses 1,701,062 2,055,289 1,698,240
------------------ ---------------- ------------------
Other income:
Loan servicing and subservicing fees 3,382,955 3,090,838 2,145,619
Initial loan set-up and other fees 1,128,293 713,427 1,570,900
Gain on sale of mortgage loans 756,170 236,098 67,202
Merchant banking/ BIDCO income (114,551)
Insurance and investment fee income 168,577 113,870 97,489
Deposit service charges and fees 110,608 92,955 86,135
Net security gains (losses) (54,011) 69,733 12,639
Gain on the sale and leaseback of
premises 217,053 - -
Other 222,847 124,098 89,977
------------------ ---------------- ------------------
Total other income 5,932,492 4,441,019 3,955,410
------------------ ---------------- ------------------
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations (continued)
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------------ ---------------- ------------------
Other expenses:
Salaries and benefits $ 3,358,060 $ 2,929,540 $ 3,250,713
Occupancy, net 422,767 349,186 464,183
Data processing and equipment 487,701 433,239 286,200
Legal and audit expense 202,865 173,139 127,212
Consulting fees 173,132 181,545 231,795
Mortgage banking expense 710,907 579,040 132,832
Servicing rights amortization 871,175 529,048 325,091
Advertising 142,996 92,944 111,862
Memberships and training 118,581 103,095 64,609
Travel and entertainment 121,631 91,330 104,189
Supplies and postage 244,615 199,338 333,682
Insurance 89,532 87,662 84,772
Other operating expenses 675,150 541,604 443,083
Total other expenses 7,619,112 6,290,710 5,960,223
------------------ ---------------- ------------------
Income (loss) before income taxes 14,442 205,598 (306,573)
Income tax benefit (80,000) 0 0
------------------ ---------------- ------------------
Net income (loss) $ 94,442 $ 205,598 $ (306,573)
Preferred stock dividends 0 0 52,244
------------------ ---------------- ------------------
Net income (loss) available to common $ 94,442 $ 205,598 $ (358,817)
shareholders
Basic and diluted income (loss) per common share $ 0.02 $ 0.05 $ (0.13)
================== ================ ==================
Weighted average shares outstanding -Basic 3,940,433 3,859,433 2,278,364
Weighted average shares outstanding -Diluted 4,074,415 4,058,342 2,278,364
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, 2003, 2002 and 2001
2003 2002 2001
-------------- -------------- --------------
Net income (loss) $94,442 $205,598 ($306,573)
Other comprehensive income (loss):
Unrealized gains on
securities available for sale (11,042) 155,081 180,126
Less: reclassification
adjustment for accumulated
Gains (losses) included in net
Income (loss) (54,011) 69,733 12,639
-------------- --------------- ---------------
42,969 85,348 167,487
-------------- --------------- ----------------
Comprehensive income (loss) $137,411 $290,946 ($139,086)
============== =============== ================
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, 2003, 2002, and 2001
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 January 1, 2001 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
------------------------------------------------------------------------------------------------
December 31, 2001 - $ - 3,867,732 $ 38,677 (115,184) $(340,530) $ 5,411,018
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
------------------------------------------------------------------------------------------------
Issuance of common stock at 127,000 1,270 139,980
weighted average price of $1.11 per
share, net of expenses of $0
Unrealized gain on securities
available for sale, net of tax
------------------------------------------------------------------------------------------------
December 31, 2003 - $ - 4,141,732 $ 41,417 (115,184) $(340,530) $ 5,677,940
================================================================================================
UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2003, 2002, and 2001
Accumulated
Retained Other Total
Earnings Comprehensive Stockholders'
------------------------------------------------------
Balance January 1, 2001 $(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
------------------------------------------------------
Issuance of common stock at weighted 141,250
average price of $1.11 per share,
net of expenses of $0
Unrealized gain on securities
available for sale, net of tax 42,969 42,969
Net income 94,442 94,442
December 31, 2003 $(1,905,404) $ (38,795) $3,434,628
======================================================
-----------------------------------------------------------------------------------------------------------------------------------
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, 2003, 2002 and 2001
2003 2002 2001
------------------ ------------------ -------------------
Cash flow provided by (used in) operating activities:
Net income (loss) $ 94,442 $ 205,598 $ (306,573)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 305,740 195,070 268,529
Amortization 971,175 629,048 441,729
Provision for loan loss 189,400 100,000 40,000
Gain on sale of mortgages (756,170) (236,098) (67,202)
Gain on the sale and leaseback of premises (217,053) - -
Accretion on securities (15,836) (259,463) (202,277)
Originations of mortgage loans (129,039,261) (70,457,559) (44,869,505)
Proceeds from mortgage loan sales 131,140,418 71,280,448 43,066,491
Net loss (gain) on sale of securities 54,011 (69,733) (12,639)
Net change in:
Real estate owned 423,698 (653,198) 140,881
Other assets (1,091,478) (318,115) 508,431
Other liabilities 265,470 (64,580) (1,490,094)
------------------- ------------------ -------------------
Net cash provided by (used in) operating activities 2,324,556 351,418 (2,482,229)
------------------- ------------------ -------------------
Cash flow provided by (used in) investing activities:
Purchase of investment securities (98,533) (2,139,503) (474,780)
Proceeds from sales of investment
securities 59,879 1,034,160 541,460
Proceeds from maturities/pay downs of
investment securities 1,497,117 651,486 249
Net change in Michigan BIDCO equity
investments 0 0 648,126
Loans granted, net of repayments (1,880,053) 1,563,096 1,156,636
Proceeds from sale of premises 1,033,464
Premises and equipment expenditures (231,056) (128,954) (679,790)
------------------- ------------------ -------------------
Net cash provided by investing activities 380,818 980,285 1,191,901
------------------- ------------------ -------------------
UNIVERSITY BANCORP, INC.
Consolidated Statements of Cash Flows
For the years ended December 30, 2003, 2002 and 2001
2003 2002 2001
------------------ ------------------ ---------------
Cash flow provided by (used in) financing activities:
Change in deposits (3,112,904) 1,722,875 2,018,857
Change in short term borrowings 0 (91,566) (4,002,388)
Issuance of long term borrowings 0 0 1,000,000
Issuance of equity conversion notes 0 0 212,904
Principal payments on long term borrowings (132,000) (1,359,506) (268,624)
Payment of preferred dividends 0 0 (52,244)
Issuance of common stock 141,250 128,413 152,657
------------------ ----------------- -----------------
Net cash provided by (used in) financing
activities (3,103,654) 400,216 (418,742)
------------------ ----------------- -----------------
Net change in cash and cash
equivalents (398,280) 1,731,919 (1,709,070)
Cash and cash equivalents:
Beginning of year 2,569,469 837,550 2,546,620
------------------ ----------------- -----------------
End of year $ 2,171,189 $ 2,569,469 $ 837,550
Supplemental disclosure of cash flow information:
Cash paid for interest $ 887,092 $ 1,119,502 $ 2,053,920
Supplemental disclosure of non-cash transactions:
Preferred stock converted to common stock 1,458,000
Equity conversion notes converted to
preferred stock $ 212,904
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). Michigan BIDCO (BIDCO) is accounted for using the equity method. 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 Banks 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 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. Loan servicing and subservicing fees are contractually
based and are recognized monthly as earned over the life of the loans.
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 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
managements 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 loans 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, 2003:
B
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, 2003, 2002 and 2001.
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 2003, 2002 and 2001.
Stock options
At December 31, 2003, 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,
2003 2002 2001
Net income (loss), as reported $94,442 $205,578 $(306,573)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax 5,000 6,000 72,000
--------- -------- ----------
Pro forma net income (loss) $89,442 $199,578 $(378,573)
========= ======== ==========
Basic and Diluted Earnings (loss)
per share:
As reported $0.02 $0.05 $(0.13)
Pro forma $0.02 $0.05 $(0.16)
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 $1,483,994 and $1,689,153 at December 31, 2003 and 2002, respectively.
Earnings (loss) per share Basic earnings per share are computed by dividing net
income (loss) available to common shareholders by the weighted average common
shares outstanding. Diluted earnings per share reflect the potential dilution
that would occur if dilutive securities were exercised or converted into common
stock. The following table presents a reconciliation of the weighted average
common shares outstanding for the earnings per share calculation for the years
ended December 31:
2003 2002 2001
Shares Per Share
Weighted average shares outstanding 3,940,433 3,859,433 2,278,364
Net dilutive effect of stock options 133,982 198,909 -
--------- --------- ---------
Diluted average shares outstanding 4,074,415 4,058,342 2,278,364
========= ========= ==========
30
1. Summary of significant accounting policies (continued)
Comprehensive Income (Loss):
Comprehensive income (loss) includes both the net loss and the change in
unrealized gains and losses on securities available for sale.
Segment Reporting
The Companys 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 2002 and 2001 consolidated financial statements and notes
have been reclassified to conform to the 2003 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.
At December 31, 2003 and 2002, University Bancorp currently owns 6.10% of the
BIDCO. The Bank also holds $600,000 of 7.5% cumulative preferred stock of the
BIDCO. On March 24, 2003, the Bank exchanged its preferred stock in BIDCO for a
note from a company in which Stephen Lange Ranzini, the Banks President, is a
shareholder. The note is collateralized by all assets of the company.The note
bears interest at 7.5% and is due not later than December 31, 2004.
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 $1.94 billion, $1.06
billion and $576 million as of December 31, 2003, 2002 and 2001 respectively.
Custodial escrow balances maintained in connection with these respective loans
was $26.8 million, $23.4 million, and $18.4 million, at December 31, 2003, 2002
and 2001 respectively. The following summarizes the operations of Midwest for
the years ended December 31:
3. Secondary Market Operations (continued)
2003 2002 2001
Loan servicing and subservicing fees $2,865,708 $2,677,966 $ 1,574,615
Loan set-up and other fees 1,128,293 713,427 1,665,664
Interest income 42,940 45,922 229,625
Gain on sale of loans 756,170 236,098 60,655
---------- ----------- ------------
Total income 4,793,111 3,673,413 3,530,559
Salaries and benefits 1,646,483 1,348,884 1,706,795
Amortization expense 865,977 522,081 312,232
Interest expense 3,798 2,520 2,389
Other operating expenses 1,851,073 1,365,091 1,148,891
---------- ----------- ------------
Total expenses 4,367,331 3,238,576 3,170,307
---------- ----------- ------------
Pretax income of Midwest $ 425,780 $ 434,837 $ 360,252
========== ========== ============
University Bank and Midwest sell conforming residential mortgage loans to the
secondary market. These loans are owned by other institutions and are not
included in the Companys consolidated balance sheets. Such mortgage loans have
been sold predominately without recourse or with limited recourse. The unpaid
principal balance of these loans was $112.3 million, $87.0 million and $67.5
million at December 31, 2003, 2002 and 2001 respectively.
Following is an analysis of the change the Companys mortgage servicing rights:
2
2003 2002 2001
Balance, January 1 $1,014,939 $606,537 $582,210
Additions - originated 887,811 937,450 349,348
Amortization expense (871,175) (529,048) (325,021)
------------- ----------- ------------
Balance, December 31 $ 1,031,575 $1,014,939 $606,537
============= ============ ============
Included in the amortization expense is a valuation allowance for the years
ended December 31, 2003, 2002 and 2001 of $448,000, $49,000 and $224,000
respectively.
4. Securities available for sale
T December 31, 2003
Amortized Gross Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed $1,675,648 $ - $(38,795) $1,636,853
Stocks 12,316 - - 12,316
$1,687,964 - $(38,795) $1,649,169
December 31, 2002
Amortized Gross Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed $3,184,835 $ - $(81,997) $3,102,838
At December 31, 2003 and 2002, the fair value of securities pledged to secure
certain borrowings were $1,636,723 and $3,048,182, respectively. Unrealized
losses at December 31, 2003 have existed for longer than twelve months.
Thisdecline is consideredtemporaryas thevalues of the mortgage-backed securities
fluctuate based on changes in current interest rates and prepayment
assumptionsrelated to the underlying mortgages.
Sales of available for sale securities:
Sales of available for sale securities: 2003 2002 2001
Proceeds $59,879 $1,034,160 $541,460
Realized gains - 69,733 12,639
Realized losses 54,011 - -
The scheduled maturity date of the securities available for sale at December 31,
2003 is:
Amortized Fair
Cost Value
2003 $ 12,446 $ 12,446
2004-2007 0 0
2008-2012 1,048,968 1,040,209
After 2012 626,550 596,514
---------- ----------
$1,687,964 $1,649,169
========== ==========
5. Loans
Major classifications of loans are as follows as of December 31:
2003 2002
Commercial $ 15,943,127 $ 16,550,325
Real estate -mortgage 15,687,265 11,633,060
Real estate -construction 1,270,789 2,113,747
Installment 1,905,793 2,799,490
Credit cards 121,612 95,412
----------- ------------
Gross Loans 34,928,586 33,192,034
Allowance for loan losses (454,118) (408,219)
------------ -------------
Net Loans $ 34,474,468 $ 32,783,815
============ =============
Changes in the allowance for loan losses were as follows:
2003 2002 2001
Balance, beginning of year $ 408,219 $ 579,113 $ 562,997
Provision charged to operations 189,400 100,000 40,000
Recoveries 97,008 16,570 20,058
Charge-offs (240,509) (287,464) (43,942)
--------- --------- ---------
Balance, end of year $ 454,118 $ 408,219 $ 579,113
========= ========= ==========
There are no past due loans over 90 days and still accruing interest at December
31, 2003 and 2002. Non-accrual loans at December 31 are summarized as follows:
5. Loans (continued)
2003 2002
Non accrual loans:
Real estate - mortgage and construction loans $ 907,599 $ 102,713
Installment loans 5,128 67,546
Commercial loans 204,400 509,301
---------- ---------
$ 1,117,127 $ 679,560
=========== =========
Information regarding impaired loans for the years ended December 31, is as
follows:
Impaired loans: 2003 2002 2001
Loans with no allowance allocated $ 0 $ 0 $ 0
Loans with allowance allocated $1,117,127 $679,560 $770,024
Amount of allowance for loan
losses allocated $ 291,754 $177,069 $ 76,501
Impaired loans:
Average balance during the year $ 946,261 $ 531,823 $770,714
Interest Income recognized $ 6,248 $ 8,412 $ 8,454
thereon
Cash-basis interest income recognized $ 6,248 $ 8,412 $ 8,454
6. Premises and equipment
Classifications at December 31 are summarized as follows:
2003 2002
Land $ 32,811 $ 132,931
Buildings and improvements 234,984 1,157,624
Furniture,fixtures,equipment and 2,327,279 2,108,391
software
2,595,074 3,398,946
Less: accumulated depreciation 1,765,267) 1,678,044)
----------- -----------
Net premises and equipment $ 829,807 $ 1,720,902
=========== ===========
In June 2003 the Bank sold its Maiden Lane office to Lowertown Development LLC
for $1,173,833. The Bank is leasing the office for a term of 24 months, until
completion of the new Lowertown development. A gain on the sale of $342,851 over
book value is being recognized over the same 24 month period. The Bank has an
option to purchase 10, 100 square feet and move into the new Lowertown
development upon completion.
Depreciation expense amounted to $305,741, $290,516 and $268,529 for the years
ended December 31, 2003, 2002 and 2001, respectively.
The Bank began leasing its Maiden Lane building in June 2003. The seven month
rent totaled $62,265. The Bank leases an ATM drive-thru location in Ann Arbor
for approximately $25,000 per year and one off-site ATM location for $9,000 per
year. Midwest leases its office space for approximately $38,000 per year in
Houghton, Michigan. Total rental 6. Premises and equipment (continued)
expense for all operating leases was $144,778, $55,861 and $50,995 in 2003, 2002
and 2001. 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.
7. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more were
$2,632,451 and $2,784,947 at December 31, 2003 and 2002 respectively.
At December 31, 2003, stated maturities of time deposits were:
2004 $5,347,629
2005 2,856,658
2006 535,800
2007 152,075
2008 143,798
Thereafter 420,022
-----------
$9,455,982
===========
The Bank had issued through brokers $1,101,000 and $7,890,000 of time deposits
as of December 31, 2003 and 2002, 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 $1,550,233 and $1,131,416 from directors, officers and
their affiliates as of December 31, 2003 and 2002, respectively.
8. Stock options
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, 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
Granted - 2003 ($0.10) Fair Value) 54,000 $1.85
Exercised - 2003 (36,000) 1.33
Forfeited - 2003 (26,500) 1.26
--------------
Outstanding at December 31, 2003 271,409 1.60
==============
At December 31, 2003:
Number of options immediately exercisable 133,982
Weighted average exercise price of immediately
exercisable options $1.47
Range of exercise price of options outstanding $0.75 - $2.47
Weighted-average remaining life of options outstanding 3.53 years
The following summarizes assumptions used to value stock options.
2003 2002 2001
Risk-free interest rate 4.00% 4.13% 5.43%
Expected option life 5.0 years 5.0 years 2.6 years
Expected stock price
volatility 22.5% 21.2% 21.6%
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 shares of the Companys stock at December 31,
2003 and 2002, all of which were fully allocated at December 31, 2003. 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 $199,000, and $53,000 at December 31,
2002 and 2002, 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, 2003 and
2002, total common stockholders' equity of Midwest was $2,226,820 and $1,800,830
resulting in a $445,324 and $360,166 minority interest reflected on the
Company's consolidated balance sheet, respectively. The results of Midwest's
operations for 2003, 2002 and 2001 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 Banks 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:
2
2003 2002
Unused lines of credit $ 3,762,000 $ 2,094,000
Commitments to fund loans $ 2,562,000 $ 3,748,000
Foreign exchange future $ 75,000 -
------------ -----------
Total $ 6,399,000 $ 5,842,000
=========== ============
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 BIDCOs operations, including
investment activity and estimation of the fair value of its equity investments.
On March 24, 2003, the Bank exchanged its preferred stock in BIDCO for a note
from a company in which Stephen Lange Ranzini, the Banks President, is a
shareholder. The note is collateralized by all assets of the company.The note
bears interest at 7.5% and is due not later than December 31, 2004.
12. Related party transactions (continued)
The Bank had loans of $280,690 and $950,513 to related officers and directors at
December 31, 2003 and 2002, respectively. There were no related party loans that
were originated during 2003 that were outstanding at year end. During 2003, a
construction line of credit issued in 2002 was terminated. Available lines of
credit to related parties at the December 31, 2003 and 2002, totaled $156,373
and $229,487, respectively. Related party loans were made in the normal course
of business and were performing pursuant to terms at December 31, 2003.
13. Income taxes
The Company has recorded an $80,000 tax benefit in 2003 as a deferred tax asset
at December 31, 2003 which represents a portion of the existing net operating
loss carryforward that is expected to be utilized to offset future taxable
income. At December 31, 2002 and 2001 no income tax expense or benefit was
recorded due to uncertainties as to the future benefits of the net operating
losses.
The net deferred tax asset at December 31, 2003 and 2002 is comprised of the
following:
2003 2002
Allowance for loan losses $ 276,579 $ 212,183
Net operating loss carry-forward 487,663 677,617
Tax credit carryforward 989,123 866,436
Donation carryforward 46,819 43,667
Other 143,276 15,617
--------- ----------
Deferred tax assets 1,943,460 1,815,521
--------- ----------
Servicing rights (339,009) (353,350)
Depreciation (32,661)
Deferred tax liabilities (371,670) (353,350)
---------- ----------
Net deferred tax asset 1,571,790 1,462,171
Valuation allowance for
deferred tax assets (1,491,790) (1,462,171)
----------- -----------
Net deferred tax asset $ 80,000 $ 0
=========== ===========
The Company has net operating loss carryforwards of approximately $1,434,302
which expire beginning in 2012; and general business credit carryforwards of
approximately $989,123 which expire beginning in 2011.
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 had a line of credit available from the
Federal Home Loan Bank (the FHLB) in the amount of $3.0 million and $3.5 million
at December 31, 2003 and 2002, respectively. At December 31, 2003, borrowings
were secured by the pledge of specific mortgage loans held for investment with
unpaid principal balances of $5.4 million and available-for-sale securities with
a balance of $1.6 million.
The Bank had a line of credit available from the Federal Reserve Bank of Chicago
(the FRB) in the amount of $5.4 million. There were no amounts outstanding on
this line from the FRB at December 31, 2003 and 2002. Borrowings are secured by
the pledge of specific commercial loans held for investment with unpaid
principal balances of $8.1 million. The following information provides a summary
of short-term borrowings for the years indicated:
2003 2002
Amount outstanding at the end of
the year and interest rate $ 0.00 $ 0.00
Maximum amount of borrowing outstanding
at any month end during the year $991,000 $2,881,000
Average amount outstanding during the
year and weighted average rate $227,063 1.29% $472,079 2.09%
15. Long Term Borrowings
The Company had a note payable to North Country Bank & Trust (NCB&T) secured by
the stock of the Bank with a balance of $166,000 and $298,000 at December 31,
2003 and 2002, respectively. The note has a maturity date of February 15, 2005.
Interest is payable quarterly at the prime rate (4.00% at December 31, 2003) of
NCB&T plus 1.00 percent. Principal payments required are as follows:
2004 $132,000
2005 $ 34,000
---------
Total $166,000
=========
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.
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 16.
Regulatory matters (continued)
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, 2003, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent guidelines from the FDIC categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. At December 31, 2002 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.
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, 2003:
Total capital (to risk weighted
assets) $4,176,000 12.4 % $2,689,000 8.0 % $3,362,000 10.0 %
Tier I capital (to risk weighted
assets) 3,755,000 11.2 % 1,345,000 4.0 % 2,017,000 6.0 %
Tier I capital (to average assets) 3,755,000 8.7 % 1,728,000 4.0 % 2,160,000 5.0 %
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
weighted assets) 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 %
The Bank presently has a written understanding with its regulators that the Bank
will maintain the ratio of Tier 1 capital to average assets at 7% or more.
17. Managements Plan Regarding Continuing Operations
At December 31, 2003, University Bancorp had an accumulated deficit of
$1,905,404 and recurring losses from operations for 3 of the past 5 years.
University Bancorps operations are intended to continue in the future.
Management has reviewed operating results, prepared projections of possible
future results, performed other analyses of its operations to reduce operating
costs and entered new product lines of business. 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, improving the synergy
between its subsidiary operations, and eliminating inefficient or redundant
costs at the Bank level. Both the Bank and Midwest Loan Services are projected
to have profits in 2004, 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
includes commitments to extend credit and the fair value of letters of credit
are considered immaterial.
18. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments were
as follows:
December 31, 2003
Carrying Fair
Financial Assets Amount Value
Cash and short term investments $ 2,171,000 $ 2,171,000
Securities available for sale 1,649,000 1,649,000
Federal Home Loan Bank stock 881,100 881,100
Loans held for sale 206,000 206,000
Loans 34,929,000 36,084,000
Mortgage servicing rights 1,032,000 1,032,000
Accrued interest receivable 130,000 130,000
Financial Liabilities
Deposits 38,808,000 39,048,000
Long term borrowings 166,000 166,000
Accrued interest payable 52,000 52,000
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 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
19. Segment Reporting
The Companys operations include three primary segments: retail banking, mortgage
banking, and merchant banking. Through its banking subsidiarys 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 (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)
19. Segment Reporting (continued)
The Companys 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.
Information about reportable segments for the year ended December 31, 2003
follows:
Retail Mortgage
Banking Banking Totals
Interest income $2,689,157 $42,942 $2,732,099
Gain on the sale of mortgage loans 0 756,170 756,170
Other non-interest income 1,182,413 3,993,999 5,176,322
Interest expense 836,734 4,903 841,637
Provision for loan losses 189,400 0 189,400
Salaries and benefits 1,711,577 1,646,483 3,358,060
Occupancy 245,931 176,836 422,767
Other operating expense 1,524,729 2,313,466 3,838,285
(Loss) income before tax expense (636,801) 651,423 14,622
Income tax (benefit) expense (145,643) 225,643 (80,000)
Segment (loss) profit $(331,158) $425,780 $94,622
Segment assets $40,667,106 $2,356,200 $43,023,306
Capital expenditures $108,309 $136,326 $244,635
Depreciation $153,744 $151,997 $305,741
Amortization $5,198 $865,977 $871,175
19. Segment Reporting (continued)
I 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
Gain on the sale of mortgage loans 0 236,098 236,098
Other non-interest income 813,528 3,391,393 4,204,921
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
Other operating expense 1,246,494 1,755,051 3,001,545
(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, 2002 follows:
Retail Mortgage Merchant
Banking Banking Banking Totals
Interest income $3,313,473 $229,624 $3,543,097
Gain on the sale of mortgage loans 0 67,202 0 67,202
Other non-interest income 769,026 3,233,733 (114,551) 3,888,208
Interest expense 1,804,856 0 0 1,804,856
Provision for loan losses 40,000 0 0 40,000
Salaries and benefits 1,543,918 1,706,795 0 3,250,713
Occupancy 336,109 128,074 0 464,183
Other operating expense 877,007 1,368,322 0 2,245,329
(Loss) income before tax expense (552,275) 360,253 (114,551) (306,573)
Income tax (benefit) expense (122,830) 122,830 0 0
Segment (loss) profit $(429,445) $237,423 $(114,551) $(306,573)
Segment assets $43,955,154 $1,667,577 0 $45,622,731
Capital expenditures $288,753 $391,037 0 $679,790
Depreciation $159,332 $109,197 0 $268,529
Amortization $129,497 $312,233 0 $441,730
20. Quarterly Financial Data -Unaudited
The following tables represent summarized data for each of the quarters
in 2003 and 2002 (in thousands, except loss per share data).
2003
-------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31 June 30 September 30 December 31
-------------------------------------------------------------------------
Interest income $ 695 $ 681 $ 671 $ 685
Interest expense 227 218 195 202
-------------------------------------------------------------------------
Net interest income 468 463 476 483
Provision for losses 106 39 22 22
-------------------------------------------------------------------------
Net interest income after
Provision for losses 362 424 454 461
Loan set-up and other fees 822 1,068 965 528
Loan servicing and subservicing fees 201 232 280 415
Gain on sale of loans 184 305 180 87
Other non-interest income 115 90 277 183
Non-interest expense 1,611 2,105 2,124 1,779
-------------------------------------------------------------------------
Income before tax benefit 73 14 32 (105)
-------------------------------------------------------------------------
Income tax benefit - - (80) -
-------------------------------------------------------------------------
Net (loss) earnings available to common $ 73 $ 14 $ 112 $ (105)
shareholders
=========================================================================
Basic and diluted (loss) earnings per share $ 0.02 $ 0.00 $0.03 $(0.03)
=========================================================================
Weighted average shares outstanding 3,899,548 3,899,548 3,951,944 4,009,309
========================================================================
20. Quarterly Financial Data -Unaudited (continued)
2002
-------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended December 31
March 31 June 30 September 30
-------------------------------------------------------------------------
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
Other non-interest income 86 58 171 86
Non-interest expense 1,536 1,483 1,439 1,832
-------------------------------------------------------------------------
Income before tax benefit (22) (238) 157 309
-------------------------------------------------------------------------
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. Parent Company Only Condensed Financial Information
Condensed Balance Sheet
December 31, December 31,
2003 2002
------------------ ---------------------
ASSETS
Cash and cash equivalents $ 669 $ 212,273
Securities available for sale 12,316 233
Investment in University Bank 3,557,977 3,309,617
Investment in Michigan BIDCO 29,258 29,258
Receivable from University Bank - -
Other assets 3,768 3,362
------------ ------------
Total Assets $ 3,603,988 $ 3,554,743
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 166,000 $ 298,000
Accounts payable 2,000 98,805
Accrued interest payable 1,361 1,972
------------ ------------
Total Liabilities 169,361 398,777
Stockholders' Equity 3,434,627 3,155,966
------------ ------------
Total Liabilities and
Stockholders' Equity $ 3,603,988 $ 3,554,743
=========== =============
21 Parent Company Only Condensed Financial Information (continued)
Condensed Statements of Income
2003 2002 2001
---------- ----------- ---------
INCOME:
Interest and dividends on investments $ 339 $ 328 $ 407
Net security losses (26,574) -
Other income (114,551)
---------- ----------- ---------
Total (loss)income (26,235) 328 (114,144)
EXPENSES:
Interest 12,144 20,675 52,503
Amortization of goodwill (139,412)
Public listing 43,088 38,202 45,902
Professional fees 24,000 33,513 43,330
Other miscellaneous 5,250 3,014 4,788
---------- ----------- ---------
Total Expense 84,482 95,404 7,111
Loss before federal income taxes
and equity in undistributed
net loss of subsidiaries (110,717) (95,076) (121,255)
Federal income taxes
---------- ----------- ---------
Loss before equity in undistributed
net loss of subsidiaries (110,717) (95,076) (121,255)
Equity in undistributed net income (loss)
of subsidiaries 205,159 300,674 (185,318)
---------- ----------- ---------
Net income (loss) $ 94,442 $205,598 $(306,573)
=========== ============ ===========
-
21. Parent Company Only Condensed Financial Information (continued)
Condensed Statements of Cash Flows
For Year Ended
2003 2002 2001
-------------- ---------------- ------------------
Cash flow provided by (used in) investing activities:
Net Income (Loss) $ 94,442 $ 205,598 $ (306,573)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of goodwill - - 139,412
Gain on sale of investments 27,783 - -
Decrease/(increase) in receivable from affiliate - 286,196 (136,624)
(Increase)/decrease in other assets (407) (256) 55,495
Decrease in other liabilities (97,414) (71,050) (158,153)
(Increase)/decrease investment in subsidiaries (205,159) (300,673) 185,317
Decrease in investment in Michigan BIDCO - - 114,551
-------------- ---------------- ------------------
Net cash (used in) provided by operating activities (180,755) 119,815 (106,575)
-------------- ---------------- ------------------
Cash flow from investing activities:
Purchase of available for sale securities (98,563) (66,652)
Proceeds from sale of available for sale securities 58,464
-------------- ---------------- ------------------
Net cash used in investing activities (40,099) (66,652)
-------------- ---------------- ------------------
Cash flow from financing activities:
Principal payment on notes payable (132,000) (132,000) (132,000)
Issuance of equity conversion bonds - - 184,082
Conversion of equity conversion bonds - - (184,082)
Issuance of preferred stock - - 733,000
Conversion of preferred stock - - (1,458,000)
Payment of preferred dividend - - (52,244)
Issuance of common stock 141,250 128,413 1,162,656
-------------- ---------------- ------------------
Net cash provided by (used in) financing activities 9,250 (3,587) 253,412
-------------- ---------------- ------------------
Net change in cash and cash equivalents (211,604) 116,228 80,185
Cash and cash equivalents:
Beginning of year 212,273 96,045 15,860
-------------- ---------------- ------------------
End of year $ 669 $ 212,273 $ 96,045
============== ================ ==================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 12,755 $ 60,686 $ 60,686
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
ITEM 9A. - Controls and Procedures.
(a)Evaluation of Disclosure Controls and Procedures. The companys
Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the companys disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this Report,
have concluded that as of the end of the period covered by this
Report the companys disclosure controls and procedures were
adequate and effective to ensure that material information
relating to the company would be made known to them by others
within the company, particularly during the period in which this
Form 10-K Annual Report was being prepared.
(b)Changes in Internal Controls. There were no significant changes in
the companys internal controls over financial reporting during
the fiscal year ended December 31, 2003, that have materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
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:
51
Security Ownership of Certain Beneficial Owners and
Management
Equity Compensation Plan Information
The University Bancorp, Inc. 1995 Stock Option Plan authorizes stock options for
issuance to employees, consultants and directors in exchange for services. The
following table sets forth certain information regarding the above referenced
equity compensation plan as of December 31, 2003.
Equity Compensation Plan Information
(a) (b) (c)
Number of Number of
securities to be securities remaining
issued upon exercise Weighted-average available for future
Plan Category of outstanding exercise price of ssuance under equity
ptions, warrants and outstanding options, compensation plans
rights (1) warrants and rights (excluding securities
reflected in column
(a))
Equity compensation
plans approved by
security holders 271,409 $1.60 48,026
Equity compensation
plans not approved
by security holders 0 NA 0
Total 271,409 $1.60 48,026
(1) University Bancorp has not granted rights or warrents applicable to this
chart.
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
ITEM 14: Principal Accountant Fees and Services.
Information relating to principal accountant fees and services is contained on
page 20, under the caption Independent Public Accountants in the University
Bancorp, Inc. definitive Proxy Statement dated April 30, 2003, relating to the
2003 Annual Meeting of Stockholders and the information within that section is
incorporated by reference.
PART IV.
Item 15. - 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, 2003 and December 31,
2002, and consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for the years ended December 31, 2003, 2002,
and 2001 of the Company.
(b) Reports on Form 8-K:
None
(c) Form S-8 relating to the University Bancorp, Inc. 1995 Stock Option
Plan
(d) 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 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). *
10.4.1 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). *
10.5 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9).
10.6 Federal Income Tax Allocation Agreement Between Newberry State Bank
and Newberry Holding Inc. dated March 21, 1992 (incorporated by reference to
Exhibit 10.11).
10.6.1 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.
23.2 Consent of Grant Thornton, LLP, Certified Public Accountants
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certificate of the Chief Executive Officer and of University Bancorp,
Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.1 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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: March 29, 2004
By: /s/Nicholas K. Fortson
Chief Financial Officer
Date: March 29, 2004
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, March 29, 2004
Stephen Lange Ranzini
/s/Robert Goldthorpe Director, Chairman March 29, 2004
Robert Goldthorpe
/s/Gary Baker Director March 29, 2004
Gary Baker
/s/Michael Talley Director March 29, 2004
Michael Talley
/s/Dr. Joseph L. Ranzini Director March 29, 2004
Dr. Joseph Lange Ranzini
/s/Paul Lange Ranzini Director March 29, 2004
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 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).
10.4.1 Form of Stock Option Agreement related to the 1995 Stock Plan
(incorporated by reference to Exhibit 10.7.1 to the 1995 10-K).
10.5 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989
10-K).
10.6 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).
10.6.1 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. 82
23.3 Consent of Grant Thornton, LLP, Certified Public Accountants
31.3 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.4 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.2 Certificate of the Chief Executive Officer and of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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)
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report
dated March 25, 2004 accompanying the consolidated financial statements
incorporated by reference in the annual report of University Bancorp, Inc. on
Form 10-K for the year ended December 31, 2003. We hereby consent to the
incorporation by reference of said report in the Registration Statement of
University Bancorp, Inc. on Form S-8 (File No. 333- 109930 ) effective October
23, 2003.
/S/ GRANT THORNTON LLP
Southfield, Michigan
March 26, 2004
Exhibit 31.1
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
registrants 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 registrants 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 registrants other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants 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 registrants ability to record, process,
summarize and report financial data and have identified for the registrants
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 registrants internal controls; and
6. The registrants 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: March 29,2004 /s/Stephen Lange Ranzini
Stephen Lange Ranzini
President and Chief Executive Officer
Exhibit 31.2
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
registrants 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 registrants 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 registrants other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants 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 registrants ability to record, process,
summarize and report financial data and have identified for the registrants
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 registrants internal controls; and
6) The registrants 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: March 29,2004 /s/Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer
Exhibit 32.1
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 March 29, 2004, 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: March 29, 2004
By:/s/ Stephen Lange Ranzini
Stephen Lange Ranzini
President and Chief Executive Officer
Exhibit 32.2
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 March 29, 2004, 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: March 29, 2004
By: /s/ Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer