25
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
-------- ----------
(State of incorporation) (IRS Employer Identification Number)
959 Maiden Lane, Ann Arbor, Michigan 48105
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 741-5858
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value outstanding at April 30, 2004: 4,090,548 shares
page 1 of 26 pages
FORM 10-Q
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements PAGE
----
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statement of Comprehensive Income (loss) 7
Consolidated Statements of Cash Flows 8
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Summary 12
Results of Operations 13
Capital Resources 17
Liquidity 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
PART II - Other Information
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits & Reports on Form 8-K 21
Signatures 22
Certifications 23
------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals, which are in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
Part I. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2004 (Unaudited) and December 31, 2003
March 31, December 31,
ASSETS 2004 2003
------------------ -----------------
Cash and due from banks $ 1,779,368 $ 2,171,189
Securities available for sale, at market 1,576,974 1,649,169
Federal Home Loan Bank Stock 881,100 881,100
Loans held for sale, at the lower of cost or market 941,800 206,008
Loans 35,632,943 34,928,586
Allowance for loan losses (521,896) (454,118)
------------------ ------------------
Loans, net 35,111,047 34,474,468
Premises and equipment, net 858,000 829,807
Investment in Michigan BIDCO Inc. 29,258 629,258
Investment in Michigan Capital Fund LPI 231,244 256,244
Mortgage servicing rights , net 907,412 1,031,575
Real estate owned, net 809,150 429,500
Accounts receivable 91,274 122,067
Accrued interest receivable 112,403 129,808
Prepaid expenses 219,950 183,143
Goodwill, net 103,914 103,914
Other assets 366,586 451,290
------------------ ------------------
TOTAL ASSETS $ 44,019,480 $ 43,548,540
================== ==================
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
March 31, 2004 (Unaudited) and December 31, 2003
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
------------------ ------------------
Liabilities:
Deposits:
Demand - non interest bearing $ 3,322,998 $ 3,146,688
Demand - interest bearing 23,687,365 25,827,337
Savings 440,332 377,545
Time 10,149,120 9,455,982
------------------ ------------------
Total Deposits 37,599,815 38,807,552
Short term borrowings 1,870,500 0
Long term borrowings 133,000 166,000
Accounts payable 243,148 289,150
Accrued interest payable 47,659 51,613
Other liabilities 300,861 354,273
------------------ ------------------
Total Liabilities 40,194,983 39,668,588
Minority Interest 427,786 445,324
Stockholders' equity:
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued -4,205,732 shares at March 31, 2004
and 4,141,732 shares at December 31, 2003 42,057 41,417
Additional paid-in-capital 5,800,300 5,677,940
Accumulated deficit (2,089,932) (1,905,404)
Treasury stock - 115,184 shares at March 31,
2004 and December 31, 2003 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities available
for sale, net (15,184) (38,795)
------------------ ------------------
Total Stockholders' Equity 3,396,711 3,434,628
------------------ ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 44,019,480 $ 43,548,540
================== ==================
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 2004 and 2003 (Unaudited)
2004 2003
---------------- -----------------
Interest income:
Interest and fees on loans $ 595,410 $ 631,339
Interest and dividends on securities:
U.S. Government agencies 20,447 35,284
Other securities 19,001 23,250
Interest on federal funds and other 183 4,987
---------------- ----------------
Total interest income 635,041 694,860
---------------- ----------------
Interest expense:
Interest on deposits:
Demand deposits 106,102 91,506
Savings deposits 1,174 1,281
Time deposits 74,726 131,067
Short term borrowings 2,758 -
Long term borrowings 1,857 3,558
---------------- ----------------
Total interest expense 186,617 227,412
---------------- ----------------
Net interest income 448,424 467,448
Provision for loan losses 22,500 105,900
---------------- ----------------
Net interest income after
provision for loan losses 425,924 361,548
---------------- ----------------
Other income:
Loan servicing and subservicing fees 333,925 200,711
Initial loan set-up and other fees 382,551 822,085
Gain on sale of mortgage loans 89,352 183,705
Insurance and investment fee income 56,549 48,048
Deposit service charges and fees 25,550 28,127
Other 75,963 39,300
---------------- ----------------
Total other income 963,890 1,321,976
---------------- ----------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
For the Three Month Periods Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
---------------- ----------------
Salaries and benefits $ 724,143 $ 785,308
Occupancy, net 113,263 88,897
Data processing and equipment 124,085 108,226
Legal and audit expense 36,693 37,774
Consultant fees 35,023 33,438
Mortgage banking expense 64,531 169,563
Servicing rights amortization 210,457 102,173
Advertising 30,898 25,963
Memberships and training 25,399 21,118
Travel and entertainment 25,486 27,178
Supplies and postage 45,228 45,946
Insurance 32,351 21,574
Other operating expenses 106,785 143,114
---------------- ----------------
Total other expenses 1,574,342 1,610,272
---------------- ----------------
Income (loss) before income taxes (184,528) 73,252
---------------- ----------------
Income tax expense (benefit) - -
---------------- ----------------
Net income (loss) $ (184,528) $ 73,252
================ ================
Basic and diluted income (loss)
per common share $ (0.05) $ 0.02
================ ================
Weighted average shares outstanding -Basic 4,058,108 3,899,548
================ ================
Weighted average shares outstanding -Diluted 4,136,177 3,900,774
================ ================
See accompanying notes to consolidated financial statements (unaudited).
UNIVERSITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Three Month Periods Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
----------------- ---------------
Net income (loss) $(184,528) $ 73,252
Other comprehensive income (loss):
Unrealized gains/(losses) on securities
available for sale 22,301 16,914
Less: reclassification adjustment
for accumulated (losses)/gains
included in net income (loss) 1,311 -
----------------- ---------------
Other comprehensive income/(loss),
before tax effect 23,612 16,914
Income tax expense (benefit) - -
Other comprehensive income (loss),
net of tax 23,612 16,914
----------------- ---------------
Comprehensive income(loss) $(160,916) $90,166
================= ===============
See accompanying notes to consolidated financial statements (unaudited).
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2004 and 2003
(Unaudited)
2004 2003
------------------- ------------------
Cash flow from operating activities:
Net income (loss) $ (184,528) $ 73,252
Adjustments to reconcile net income (loss) to net cash from Operating Activities:
Depreciation 53,848 73,653
Amortization 235,457 127,173
Provision for loan losses 22,500 105,900
Net loss (gain) on sale of securities (1,311) -
Gain on mortgage loan sales (89,352) (183,705)
Originations of mortgage loans (12,019,905) (37,251,962)
Proceeds from mortgage loans sales 11,373,465 37,711,810
Net accretion on investment securities (12,482) (10,887)
Change in:
Real estate owned - 135,096
Other assets 9,801 (382,149)
Other liabilities (120,906) (10,785)
------------------- ------------------
Net cash (used in) provided by operating activities (733,413) 387,396
------------------- ------------------
Cash flow from investing activities:
Purchase of investment securities (7,388) (92,567)
Proceeds from maturities/paydowns of
investment securites 109,384 491,667
Proceeds from sales of investment securities 7,006 -
Loans granted, net of repayments (438,729) 40,046
Premises and equipment expenditures (82,041) (35,035)
------------------- ------------------
Net cash (used in) provided by investing activities (411,171) 404,111
------------------- ------------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2004 and 2003
(Unaudited)
2004 2003
------------------- ------------------
Cash flow used in financing activities:
Net (decrease) increase in deposits (1,207,737) (1,486,937)
Net (decrease) in short term borrowings 1,870,500 -
Principal payments on long term borrowings (33,000) (33,000)
Issuance of common stock 123,000 -
------------------- ------------------
Net cash provided by(used in) financing activities 752,763 (1,519,937)
------------------- ------------------
(391,821) (728,430)
Net change in cash and cash equivalents Cash and cash equivalents:
Beginning of period 2,171,189 2,569,469
------------------- ------------------
End of period $ 1,779,368$ 1,841,039
=================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 190,571 $ 245,045
Supplemental disclosure of non-cash transactions:
Mortgage loans converted to other real estate owned $ 379,650 $ -
Michigan BIDCO Preferred stock exchanged for a 7.5% promissory note $ 600,000 $ -
See accompanying notes to consolidated financial statements (unaudited).
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
See Note 1 of the Financial Statements incorporated by reference in the
Company's 2003 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's 2003 Annual Report on Form 10-K. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year.
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 4,058,108 and
3,899,548 for the three months ended March 31, 2004 and 2003, respectively.
(2) Investment Securities
The Bank's available-for-sale securities portfolio at March 31, 2004
had a net unrealized loss of approximately $16,000 as compared with a net
unrealized loss of approximately $39,000 at December 31, 2003.
Securities available for sale at March 31, 2004(in thousands):
Gross Gross
Amortized Realized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
Stocks and other securities $ 13 $ 11 $ (1) $ 23
---------------- ---------------- ---------------- ----------------
U.S. agency mortgage-backed 1,580 - (26) 1,554
---------------- ---------------- ---------------- ----------------
Total $1,593 $ 11 $ (27) $ 1,577
================ ================ ================ ================
Securities available for sale at December 31, 2003
Gross Gross
Amortized Realized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
Stocks and other securities $ 12 $ - $ - $ 12
---------------- ---------------- ---------------- ----------------
U.S. agency mortgage-backed 1,676 - (39) 1,637
---------------- ---------------- ---------------- ----------------
Total $1,688 $ - $ (39) $ 1,649
================ ================ ================ ================
(3) Stock options
At March 31, 2004, the Company has a stock-based employee compensation plan. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
greater than or equal to the market value of the underlying common stock on the
date of grant. As new options granted were only 48,000 and 10,000 during the
quarters ended March 31, 2004 and 2003, the effect on net income (loss) and
earnings (loss) per share if the Corporation had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, as amended by FASB Statement No. 148, to stock-based employee
compensation was less than $.01 in each of the periods presented.
(4) Michigan BIDCO
At December 31, 2003 University Bancorp owned 6.10% of the BIDCO. The Bank also
held $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 Bank's 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
merchant banking, mortgage banking and investment activities, and the nature and
adequacy of allowances for loan losses. The Company can give no assurance that
the expectations reflected in forward-looking statements will prove correct.
Various factors could cause results to differ materially from the Company's
expectations. Among these factors are those referred to in the introduction to
the Company's Management Discussion and Analysis of Financial Condition and
Results of Operations which appear as Item 7 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
SUMMARY
Net (loss) income for the Company for the first quarter of 2004 was
$(184,528), versus $73,252 for the same period last year. Community Banking
incurred a loss of $53,000 during the current year's first quarter of 2004 a
decrease from a loss of $137,000 in the prior year. The reduced loss is
attributed to aggressive action to reduce expenses, particular in the salary and
benefits category, partially offset by $39,000 of expenses to liquidate
foreclosed real estate. Midwest Loan Services, the Bank's subsidiary, incurred a
loss of $115,000 for the three month period March 31, 2004 as opposed to a
profit of $137,000 in the same period in 2003. The income from loan origination
was down due to lower mortgage re-financing activity. Additionally, management
recorded an impairment in the mortgage servicing rights of $156,000 due to a
temporary drop in the mortgage rates during March 2004. Subsequent to March the
mortgage rates rose.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three months ended March 31, 2004 and 2003 (in
thousands):
2004 2003
---- ----
Community Banking $ (53) $ (137)
Midwest Loan Services (115) 240
Corporate Office (17) (30)
-------- --------
Total $ (185) $ 73
======== ========
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased 4.1% to $448,426 for the three months
ended March 31, 2004 from $467,448 for the three months ended March 31, 2003.
Net interest income declined primarily because of a lower earning asset base and
lower rates on those assets. The net interest spread decreased from 4.75% in
2003 to 4.65% in 2004.
Interest income
Interest income decreased 8.6% to $635,041 in the quarter ended March
31, 2004 from $694,860 in the quarter ended March 31, 2003. An increase in
non-accrual loans and other real estate owned was a major component in the
decline. The overall yield on total interest bearing assets was 6.46% in 2004 as
compared to 7.03% in the same period in 2003. The average volume of interest
earning assets decreased by $675,255 to $39,411,303 in the 2004 period from
$40,086,558 in the 2003 period.
Interest Expense
Interest expense decreased 17.9% to $186,617 in the three months ended
March 31, 2004 from $227,412 in the 2003 period. The decrease was principally
due to a shift from higher cost Time Deposits to lower cost Money Market
Accounts. Over the last year, management of the Bank has aggressively pursued
building its core deposit base and reducing its dependence on brokered funds. At
March 31, 2004 the Bank had $1.1 million in brokered time deposits as compared
to $5.9 million at March 31, 2003. The cost of funds decreased to 1.82% in the
2004 period from 2.28% in the 2003 period.
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following table summarizes monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated yield
or cost and the net return on earning assets for the three months ended March
31, 2004 and 2002.
Three Months Ended Three Months Ended
------------------------------------------- ---------------------------------------
March 31, 2004 March 31, 2003
------------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Commercial Loans $ 16,962,760 292,288 6.91% $ 18,998,030 $ 357,987 7.64%
Real Estate Loans 17,369,982 262,589 6.06% 12,465,046 217,937 7.09%
Installment/Consumer Loans 1,900,793 40,533 8.55% 2,500,759 55,415 8.99%
-------------------------------- ------------------------------
Total Loans 36,233,535 595,410 6.59% 33,963,835 631,339 7.54%
Investment Securities 3,027,939 39,448 5.23% 4,346,189 58,534 5.46%
Federal Funds & Bank Deposits 149,829 183 0.49% 1,776,534 4,987 1.14%
-------------------------------- ------------------------------
Total Interest Bearing Assets 39,411,303 635,041 6.46% 40,086,558 694,860 7.03%
-------------------------------- ------------------------------
Interest Bearing Liabilities:
Demand Deposits 6,501,858 14,298 0.88% 6,558,035 11,894 0.74%
Savings Deposits 402,200 1,174 1.17% 459,433 1,281 1.13%
Time Deposits 13,658,810 74,726 2.19% 17,498,374 131,067 3.04%
Money Market Accts 19,600,250 91,804 1.88% 15,208,816 79,612 2.12%
Short-term Borrowings 828,349 2,758 1.34% 472,079 0 0.00%
Long-term Borrowings 149,500 1,857 4.98% 281,500 3,558 5.13%
-------------------------------- ------------------------------
Total Interest Bearing Liabilities 41,140,967 186,617 1.82% 40,478,237 227,412 2.28%
-------------------------------- ------------------------------
Net Earning Assets, net interest
income, and interest rate spread $ (1,729,664) $ 448,426 4.65% $(391,679) $ 467,448 4.75%
================================ ==============================
Net Interest Margin 4.57% 4.73%
(1) Yield is annualized.
Allowance for Loan Losses
The provision to the allowance for loan losses was $22,500 for the
quarters ended March 31, 2004 and $105,900 for the same period ended in 2003.
Net charge-offs totaled ($45,278) for the three month period ended March 31,
2004 as compared to $115,107 for the same period in 2003. Illustrated below is
the activity within the allowance for the quarter ended March 31 2004 and 2003,
respectively.
2004 2003
---- ----
Balance, January 1 $ 454,118 $ 408,219
Provision for loan losses 22,500 105,900
Loan charge-offs - (117,342)
Recoveries 45,278 2,235
---------- -----------
Balance, March 31 $ 521,896 $ 399,012
========== ===========
At March 31, 2004 At December 31, 2003
----------------- --------------------
Total loans (1) $35,632,943 $34,928,586
Reserve for loan losses $ 521,896 $ 454,118
Reserve/Loans % (1) 1.46% 1.30%
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor, Michigan and the future performance of these loans is dependent upon the
performance of a relatively limited geographical area.
The following schedule summarizes the Company's non-performing assets:
At March 31, 2004 At December 31, 2003
----------------- --------------------
Past due 90 days and over and still accruing (1):
Real estate $ - $ -
Installment - -
Commercial - -
------------ ------------
Subtotal - -
Nonaccrual loans (1):
Real estate 163,903 111,020
Installment - 5,128
Commercial 950,605 1,000,979
------------ ------------
Subtotal 1,114,508 1,117,127
------------ ------------
Other real estate owned 809,150 429,500
------------ ------------
Total nonperforming assets $1,923,658 $1,546,627
============ ==============
At March 31, 2004 At December 31, 2003
----------------- --------------------
Ratio of non-performing
assets to total loans (1) 5.40% 4.43%
============ ==============
Ratio of loans past due
over 90 days and non-accrual
loans to loan loss reserve 214% 246%
============ ==============
(1) Excludes loans held for sale which are valued at fair market value.
Other real estate owned increased from 429,500 at December 31,
2003 to $809,150 at March 31, 2004 as the sesult of foreclosure on four single
family homes. Subsequent to March 21, 2004, substantial progress was made in
resolving non-performing assets, including real estate owned. As of May 10,
2004, three of the four houses in other real estate owned were sold and the
remaining home is under a contract to sell within 30 days. Management is
expecting to add additional properties to the other real estate owned category
from the non-accrual loan category in the second quarter of 2004. Certain of
these properties are in the redemption period. It is management's intent to
liquidate these properties for fair value as quickly as possible if the loans
are not paid in full in the next 60 days.
Management believes that the allowance for loan losses is adequate to
absorb losses inherent in the loan portfolio, although the ultimate adequacy of
the allowance for loan losses is dependent upon future economic factors beyond
our control. A downturn in the general nationwide economy will tend to
aggravate, for example, the problems of local loan customers currently facing
some difficulties. A general nationwide business expansion could result in fewer
loan customers being unable to repay their loans.
Non-Interest Income
Total non-interest income decreased 27.1% to $963,890 for the three
months ended March 31, 2004 from $1,321,976 for the three months ended March 31,
2003. The decrease was primarily due to lower mortgage loan origination
activity. In 2004, the rates on mortgages rose from historically low environment
in 2003 and this resulted in a decrease in the re-financing market.
At March 31, 2004, the Bank and Midwest owned the rights to
service mortgages for Fannie Mae, Freddie Mac and other institutions, most of
which was owned by Midwest, an 80% owned subsidiary of the Bank. The balance of
mortgages serviced for these institutions was approximately $112 million. The
carrying value of these servicing rights was $907,412 at March 31, 2003. Market
interest rate conditions can quickly affect the value of mortgage servicing
rights in a positive or negative fashion, as long-term interest rates rise and
fall. The amortization of these rights is based upon the level of principal pay
downs received and expected prepayments of the mortgage loans.
At March 31, 2004, Midwest was subservicing 16,295 mortgages, an
increase of 8.40% from 15,033 mortgages at December 31, 2003.
Non-Interest Expense
Non-interest expense decreased 2.2% to $1,574,342 in the three months
ended March 31, 2004 from $1,610,272 for the three months ended March 31, 2003.
The decrease was due principally to lower salaries and benefits and mortgage
banking expenses. In general, these expenses declined due to a slow down in the
mortgage re-financing market. The reduction in these categories were offset to a
large degree by an increase in the amortization of servicing rights. Servicing
rights amortization increased due to a $156,000 impairment charge. This charge
resulted from a valuation lower than carrying cost. During March 2004, the
mortgage rates dipped for a short period of time. This drop significantly
impacted the valuation.
Income Taxes
Income tax expense (benefit) was $0 in 2004 and 2003. The effective tax
rate was 0% for both three month periods ended March 31 due to existence of loss
carryforwards resulting from prior years net operating losses. Future tax
benefits have not been recognized as their realization is not considered more
likely than not.
Capital Resources
The table below sets forth the Bank's risk based assets, capital ratios
and risk-based capital ratios of the Bank. At March 31, 2004, the Bank was
considered "well-capitalized".
March 31, 2004
TIER 1 CAPITAL (in $000s)
Total Equity Capital $3,397
Less: Unrealized losses on available-for-Sale
Securities (15)
Plus: Minority Interest 428
Less: Other identifiable Intangible Assets 195
-------
Total Tier 1 Capital 3,619
TIER 2 CAPITAL
Allowance for loans & Lease losses 522
Less: Excess Allowance 69
Total Tier 2 Capital 453
Total Tier 1 & Tier 2 Capital $4,072
========
CAPITAL RATIOS
Tier 1/Total Average Assets of $43,920 8.24%
Tier 1/Total Risk-Weighted Assets of $34,342 10.54%
Tier 1 & 2/Total Risk-Weighted Assets of $34,324 11.86%
Liquidity
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, borrowings from
correspondent lenders secured by securities, residential mortgage loans and/or
commercial loans. In addition, the Bank invests in overnight federal funds. At
March 31, 2004, the Bank had cash and cash equivalents of $1,779,368. The Bank
has a line of credit for $4.0 million from the Federal Home Loan Bank of
Indianapolis secured by investment securities and residential mortgage loans and
a line of credit for $5.9 million from the Federal Reserve Bank of Chicago
secured by commercial loans. In order to bolster liquidity from time to time,
the Bank also sells brokered time deposits. At March 31, 2004, the Bank had $1.1
million of these deposits outstanding.
Bancorp Liquidity. In an effort to maintain the Bank's Tier 1 capital
to assets ratio above current levels and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during the first half of 2004, though a dividend may begin in the second
half of the year.
At March 31, 2004, $133,000 in debt was outstanding as compared to
$265,000 at March 31, 2003. At March 31, 2004, Bancorp had $87,531 in cash and
investments on hand to meet its working capital needs. Subsequent to March 31,
2004, Bancorp exchange its shares in Michigan BIDCO carried at cost of $29,258
for shares of another firm with an estimated value of $54,000. The cash on hand
plus cash from the exercise of in-the-money stock options and the ultimate
proceeds from the sale of these shares should be sufficient to fully amortize
the remaining debt.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are re-pricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets re-pricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on such rights by lowering
required amortization rates on the rights. Rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the retail mortgage banking operations of the Bank and Midwest Loan
Services. Rising interest rates also slow Midwest Loan Services' rate of growth,
but increases the duration of its existing subservicing contracts.
The Bank performs a static gap analysis which has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on the following page details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at March 31, 2004. The table is based upon various assumptions of management
which may not necessarily reflect future experience. As a result, certain assets
and liabilities indicated in the table as maturing or re-pricing within a stated
period may, in fact, mature or re-price in other periods or at different
volumes. The one-year static gap position at March 31, 2004 was estimated to be
($13,937,000) or -31.66%.
In addition, management prepares an estimate of sensitivity to
immediate changes in short term interest rates. At March 31, 2004, the following
impact was estimated on net interest margin in the 12 months following an
immediate movement of interest rates:
Effect on Net
Rate Change Interest Margin
-1.00% 2.23%
+1.00% -1.80%
+3.00% -5.39%
Asset/Liability Position Analysis as of March 31, 2004
(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 $ 7,948 $ 3,384 $ 5,540 $14,591 $ 3,999 $ (522) $34,940
Non-accrual loans - - - - - 1,114 1,114
Securities 200 500 - - 877 - 1,577
Other assets - - - - - 4,609 4,609
Cash and Due from
Banks 57 - - - - 1,722 1,779
---------------------------------------------------------------------------------------------
Total assets 8,205 3,884 5,540 14,591 4,876 6,923 44,019
---------------------------------------------------------------------------------------------
LIABILITIES
-----------
Time deposits 1,763 3,222 4,429 311 424 - 10,149
Demand -interest
Bearing 9,519 9,518 6,799 - - - 25,837
Demand - non interest - - - - 1,175 1,175
Savings - - 440 - - - 440
Borrowings 1,904 100 - - - 2,004
Other liabilities - - - 1,018 1,018
Stockholders' equity - - - - - 3,397 3,397
---------------------------------------------------------------------------------------------
Total liabilities 13,186 12,840 11,668 311 424 5,590 $44,019
---------------------------------------------------------------------------------------------
Gap (4,981) (8,956) (6,128) 14,280 4,452 1,333
---------------------------------------------------------------------------------------------
Cumulative gap $(4,981) $(13,937) $(20,065) $(5,785) $(1,333) $ 0
=============================================================================================
Gap percentage -11.32% -31.66% -45.58% -13.14% -3.03% 0.00%
=============================================================================================
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties
are subject.
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: May 14, 2004 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
/s/ Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer
10-Q 302 CERTIFICATION
I, Stephen Lange Ranzini certify that:
1) I have reviewed this quarterly report on Form 10-Q of University Bancorp,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2004 /s/Stephen Lange Ranzini
----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
10-Q 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
1) I have reviewed this quarterly report on Form 10-Q of University Bancorp,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2004 /s/Nicholas K. Fortson
----------------------
Nicholas K. Fortson
Chief Financial Officer
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on May 13, 2003, hereof (the "Report"), the
undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
University Bancorp, Inc
Date: May 14, 2004 By: /s/ Stephen Lange Ranzini
---------------- --------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on May 13, 2003, hereof (the "Report"), the
undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
University Bancorp, Inc
Date: May 14, 2004
By: /s/ Nicholas K. Fortson
--------------------------
Nicholas K. Fortson
Chief Financial Officer