1
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 June 30, 2001
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 July 31, 2001: 2,092,801 shares
page 1 of 29 pages
2
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 Statements of Comprehensive Income 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 11
Summary 11
Results of Operations 12
Capital Resources 21
Liquidity 22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
PART II - Other Information
Item 1. Legal Proceedings 25
Item 5. Other Information:
Parent Company Financial Information 25
Item 6. Exhibits & Reports on Form 8-K 25
Signature 29
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.
2
3
Part I. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 (Unaudited) and December 31, 2000
June 30, December 31,
ASSETS 2001 2000
---------------- ----------------
Cash and due from banks $ 2,304,790 2,537,313
Short term investments - 9,307
---------------- ----------------
Total cash and cash equivalents 2,304,790 2,546,620
Securities available for sale, at market 1,921,423 1,944,629
Federal Home Loan Bank Stock 848,400 848,400
Loans held for sale, at the lower of cost or market 1,516,293 267,570
Loans 35,605,545 36,206,544
Allowance for loan losses (602,122) (562,997)
---------------- ----------------
Loans, net 35,003,423 35,643,547
Premises and equipment, net 1,669,508 1,375,757
Investment in Michigan BIDCO Inc. 1,027,035 1,277,384
Investment in Michigan Capital Fund LPI 506,904 556,904
Mortgage servicing rights, net 588,653 582,210
Real estate owned, net 399,426 340,881
Accounts receivable 1,250,605 1,639,962
Accrued interest receivable 255,524 307,600
Prepaid expenses 226,153 168,195
Goodwill, net 125,471 139,412
Other assets 48,530 31,582
---------------- ----------------
TOTAL ASSETS $ 47,692,138 47,670,653
================ ================
-Continued-
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4
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
June 30, 2001 (Unaudited) and December 31, 2000
June 30 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
---------------- -----------------
Liabilities:
Deposits:
Demand - non interest bearing $ 2,999,732 $ 3,062,013
Demand - interest bearing 14,639,185 13,106,221
Savings 334,924 368,928
Time 21,509,453 21,641,561
---------------- -----------------
Total Deposits 39,483,294 38,178,723
Short term borrowings 1,763,672 4,093,954
Long term borrowings 907,588 926,130
Accounts payable 2,205,176 1,474,963
Accrued interest payable 327,098 426,470
Other liabilities 142,106 245,381
---------------- -----------------
Total Liabilities 44,828,934 45,345,621
Minority Interest 362,063 282,750
Stockholders' equity:
Convertible Preferred stock, $0.001 par value; $1,000
liquidation value;
Authorized - 500,000 shares; Issued 1,144 shares in
2001 and 725 shares in 2000 1,144,000 725,000
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 2,202,985 shares in 2001 and
2,142,985 in 2000 22,030 21,430
Additional paid-in-capital 3,914,860 3,817,608
Accumulated deficit (1,792,095) (1,846,627)
Treasury stock - 115,184 shares in 2001 and
2000 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities available
for sale, net (447,124) (334,599)
---------------- -----------------
Total Stockholders' Equity 2,501,141 2,042,282
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,692,138 $ 47,670,653
================ =================
The accompanying notes are an integral part of the consolidated financial
statements.
4
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended June 30, 2001 and 2000
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2001 2000 2001 2000
----------- ----------- ------------- ------------
Interest income:
Interest and fees on loans $ 793,398 $ 764,318 $ 1,630,586 $ 1,484,173
Interest on securities:
U.S. Government agencies 1,933 36,819 89,329 72,096
Other securities 16,392 16,876 33,128 33,751
Interest on federal funds and other 19,038 477 21,516 865
----------- ----------- ------------- ------------
Total interest income 830,761 818,490 1,774,559 1,590,885
----------- ----------- ------------- ------------
Interest expense:
Interest on deposits:
Demand deposits 108,193 158,126 243,648 304,932
Savings deposits 1,693 1,437 3,605 2,878
Time deposits 373,004 234,339 734,627 452,943
Short term borrowings 4,174 54,728 41,812 101,083
Long term borrowings 17,684 32,097 33,867 80,892
----------- ----------- ------------- ------------
Total interest expense 504,748 480,727 1,057,559 942,728
----------- ----------- ------------- ------------
Net interest income 326,013 337,763 717,000 648,157
Provision for loan losses 22,500 65,000 45,000 66,000
----------- ----------- ------------- ------------
Net interest income after
provision for loan losses 303,513 272,763 672,000 582,157
----------- ----------- ------------- ------------
Other income:
Loan origination and other fees 629,694 173,456 1,123,416 305,194
Loan servicing and sub-servicing
fees 751,231 235,092 1,331,269 391,145
Gain on sale of mortgage loans 21,595 12,459 30,860 19,265
Merchant banking/ BIDCO income - 24,928 - 234,739
Insurance and investment fee income 25,916 18,523 49,306 42,077
Deposit service charges and fees 19,162 18,202 35,209 32,787
Net security gains (losses) - - - 3,501
Other 24,430 15,693 38,984 22,031
----------- ----------- ------------- ------------
Total other income 1,472,028 498,353 2,609,044 1,050,739
----------- ----------- ------------- ------------
-Continued-
5
6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended June 30, 2001 and 2000
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2001 2000 2001 2000
----------- ----------- ------------- ------------
Other expenses:
Salaries and benefits $ 980,336 $ 459,706 $ 1,804,547 $ 927,430
Legal and audit expense 25,356 115,860 68,614 250,631
Occupancy, net 144,087 87,486 248,499 157,857
Data processing and equipment
expense 75,906 77,413 155,096 161,310
Consulting fees 73,155 62,780 146,885 77,487
Advertising 32,711 27,060 52,114 48,322
Supplies and postage 104,201 50,773 205,180 88,092
Servicing rights amortization 51,645 8,909 73,271 58,940
Mortgage banking expense (4,064) 70,973 35,250 93,828
Travel and entertainment 44,344 23,398 65,249 41,043
Insurance 24,267 11,494 46,190 22,934
Other operating expenses 167,714 150,569 298,366 246,346
----------- ----------- ------------- ------------
Total other expenses 1,719,658 1,146,421 3,199,261 2,174,220
----------- ----------- ------------- ------------
Income (loss) before income taxes 55,883 (375,305) 81,783 (541,324)
----------- ----------- ------------- ------------
Income tax expense (benefit) - (4,327) - 5,046
----------- ----------- ------------- ------------
Net Income (loss) $ 55,883 $ (370,978) $ 81,783 $ (546,370)
=========== =========== ============= ============
Preferred stock dividends 16,476 - 27,251 -
----------- ----------- ------------- ------------
Net income (loss) available to
common shareholders $ 39,407 $ (370,978) $ 54,532 $ (546,370)
=========== =========== ============= ===========
Basic and diluted loss per common
share $ 0.02 $ (0.18) $ 0.03 $ (0.27)
=========== =========== ============= ============
Weighted average shares outstanding 2,062,878 2,027,801 2,045,436 2,025,658
=========== =========== ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
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7
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Periods Ended June 30, 2001 and 2000
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2001 2000 2001 2000
--------- ---------- --------- ----------
Net income (loss) $55,883 ($370,978) $81,783 ($546,370)
Other comprehensive loss:
Unrealized losses on securities
available for sale (115,936) (101,889) (112,525) (50,584)
Less: reclassification adjustment
for accumulated losses/(gains)
included in net loss - - - (3,501)
--------- ---------- --------- ----------
Other comprehensive loss, before
tax effect (115,936) (101,889) (112,525) (54,085)
Income tax expense (benefit) - - - -
Other comprehensive loss, net
of tax (115,936) (101,889) (112,525) (54,085)
--------- ---------- --------- ----------
Comprehensive loss ($60,053) ($472,867) ($30,742) ($600,455)
========= ========== ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three month periods ended June 30, 2001 and 2000
(Unaudited)
2001 2000
------------- -------------
Cash flow from operating activities:
Net income (loss) $ 81,783 $ (546,370)
Adjustments to reconcile net income (loss) to net cash from
Operating Activities:
Depreciation 146,302 123,628
Amortization 137,212 157,136
Provision for loan losses 45,000 66,000
Net gain on mortgage loan sales (30,860) (19,265)
Net (accretion) on investment securities (89,285) (57,102)
Net gain on sale of securities available for
sale - (3,501)
Change in:
Investment in Michigan BIDCO, Inc. 250,349 -
Minority interest 79,313 (50,770)
Mortgage servicing rights (79,714) (76,107)
Real estate owned (58,545) 152,456
Accounts receivable 389,357 (313,486)
Accounts payable 730,213 (139,354)
Accrued interest receivable 52,076 (11,158)
Accrued interest payable (99,372) 35,384
Other assets (74,906) (325,130)
Other liabilities (130,759) 357,205
------------- -------------
Net cash provided by (used in) operating activities 1,348,164 (650,434)
------------- -------------
Cash flow from investing activities:
Purchase of securities available for sale - (37,500)
Proceeds from sales of securities available for sale - 103,501
Proceeds from maturities and paydowns of securities
available for sale 199 2,905
Net change in market value of Michigan BIDCO equity
investments - 197,302
Loans granted, net of repayments (622,739) (1,539,844)
Premises and equipment expenditures (440,053) (84,175)
------------- -------------
Net cash provided by (used in) investing activities (1,062,593) (1,357,811)
------------- -------------
-Continued-
8
9
Cash flow used in financing activities:
Net increase in deposits 1,304,571 1,882,600
Net decrease in short term borrowings (2,330,282) (16,689)
Principal payments on long term borrowings (94,822) (135,000)
Issuance of long term borrowings 76,280 60,000
Issuance of preferred stock 419,000 -
Issuance of common stock 97,852 31,250
------------- -------------
Net cash (used in) provided by financing activities (527,401) 1,822,161
------------- -------------
Net change in cash and cash equivalents (241,830) (186,084)
Cash and cash equivalents:
Beginning of period 2,546,620 1,551,320
------------- -------------
End of period $ 2,304,790 $ 1,365,236
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,156,931 $ 907,344
Income taxes - -
The accompanying notes are an integral part of the consolidated financial
statements.
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10
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See Note 1 of Notes to Financial Statements incorporated by reference
in the Company's 2000 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 2000 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: 2,062,878 and
2,027,801 for the three months ended June 30, 2001 and 2000, respectively;
2,045,436 and 2,025,658 shares for the six months ended June 30, 2001 and 2000,
respectively. Stock options are considered anti-dilutive for 2001 and 2000,
therefore, are not included in earnings per share calculations.
(2) Investment Securities
The Bank's available-for-sale securities portfolio at June 30, 2001 had
a net unrealized loss of approximately $447,000 as compared with a net
unrealized loss of approximately $335,000 at December 31, 2000, a decline of
$112,000.
Securities available for sale at June 30, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- -------
U.S. agency mortgage-backed $ 1,849 $ - $ (378) $ 1,471
U.S. Treasury 519 - (69) 450
------- --- ------ -------
Total $ 2,368 $ - $ (447) $ 1,921
======= === ====== =======
Securities available-for-sale at December 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- -------
U.S. agency mortgage-backed $ 1,774 $ - $ (293) $ 1,481
U.S. Treasury 506 - (42) 464
------- --- ------ -------
Total $ 2,280 $ - $ (335) $ 1,945
======= === ====== =======
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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, 2000, 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
For the three months ended June 30, 2001, the Company had net revenue of
$55,883 compared to a net loss of $370,978 for the three months ended June 30,
2000. Net interest income decreased to $326,013 in the 2001 period from $337,763
in the 2000 period, and other income increased to $1,472,028 the 2001 period
from $498,353 in the 2000 period. Operating expenses increased to $1,719,658 in
the 2001 period from $1,146,241 in the 2000 period. Basic and diluted net income
per share of common in the three months ended June 30, 2001 was $0.02, compared
to a net loss of ($0.18) for the three months ended June 30, 2000.
For the six months ended June 30, 2001, a net income of $81,783 was realized
versus a net loss of $546,370 in the same period in 2000. Net interest income
increased to $717,000 in the 2001 period from $648,157 in the 2000 period. Other
income was $2,609,044 in the 2001 period versus $1,050,739 in the 2000 period.
Operating expenses increased to $3,199,261 in the 2001 period from $2,174,220 in
the 2000 period. Basic and diluted net income per share in the six months ended
June 30, 2001 was $0.03, compared to a net loss of ($0.27) for the six months
ended June 30, 2000.
The Company's return to profitability in 2001 is due to improved
results at Midwest Loan Services and decreased losses at University Bank's
community banking operation. The following table summarizes the pre-tax income
(loss) of each profit center of the Company for the three months ended June 30,
2001 and 2000 (in thousands):
Pre-tax income (loss) summary for the three and six months ended
June 30, 2001
Three Months Six Months
Community Banking $ (280) $ (402)
Midwest Loan Services 397 601
Corporate Office (61) (117)
------ ------
Total $ 56 $ 82
====== ======
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12
Pre-tax income (loss) summary for the three and six months ended June
30,2000:
Three Months Six Months
Community Banking $ (447) $ (677)
Midwest Loan Services 101 86
Merchant Banking (Michigan BIDCO) 8 114
Corporate Office (37) (64)
------ ------
Total $ (375) $ (541)
====== ======
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased to $326,013 for the three months ended
June 30, 2001 from $337,763 for the three months ended June 30, 2000. Net
interest income declined from the year ago period primarily as a result of a
lower interest rate spread because the yield on earning assets decreased more
than the cost of earning liabilities. The yield on interest earning assets
decreased from 9.04% in the 2000 period to 8.36% in the 2001 period. The cost of
interest bearing liabilities decreased from 5.17% in the 2000 period to 5.02% in
the 2000 period. Net interest income as a percentage of total average earning
assets decreased from 3.73% to 3.28%.
Net interest income increased to $717,000 for the six months ended June
30, 2001 from $648,157 for the six months ended June 30, 2000. Net interest
income rose from the year ago period primarily because of higher net earning
assets only partially mitigated by a decline in the net interest rate spread.
The yield on interest earning assets decreased from 8.99% in the 2000 period to
8.74% in the 2001 period. The cost of interest bearing liabilities increased
from 5.18% for the 2000 period to 5.29% for the June 30, 2001. Net interest
income as a percentage of total average earning assets decreased from 3.66% to
3.53%.
Interest income
Interest income increased to $830,761 in the quarter ended June 30,
2001 from $818,490 in the quarter ended June 30, 2000. The average volume of
interest earning assets increased to $39,872,682 in the 2001 period from
$36,311,151 in the 2000 period, an increase of 9.81%. The increased volume of
earning assets was attributable to overall growth in all types of loans. The
overall yield on the loan portfolio increased to 8.99% from 9.35%.
The average volume of investment securities in the three months ended
June 30, 2001 decreased 20.9% over the same period in 2000. The yield on the
securities portfolio decreased from 6.19% in the three month period ended June
30, 2000 to 2.67% in the 2001 period.
Interest income increased to $1,774,559 in the six months ended June
30, 2001 from $1,590,885 in the six months ended June 30, 2000. The average
volume of interest earning assets increased to $40,925,216 in the 2001 period
from $35,686,673 in the 2000 period, an increase of 14.7%. The overall yield on
the loan portfolio decreased to 8.85% from 9.30%.
The average volume of investment securities in the six months ended
June 30, 2001 decreased 18.7% over the same period in 2000. The yield on the
securities portfolio increased from 6.15% in the six month period ended June 30,
2000 to 8.75% in the 2001 period.
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13
Interest Expense
Interest expense increased to $504,748 in the three months
ended June 30, 2001 from $480,727 in the 2000 period. The increase was due to a
large increase in interest bearing liabilities, particularly in the category of
brokered and other time deposits. The average volume of interest bearing
liabilities increased 8.1% in the 2001 period versus the 2000 period. The cost
of funds decreased to 5.02% in the 2001 period from 5.17% in the 2000 period.
Interest expense increased 12.2% to $1,057,559 in the six months ended
June 30, 2001 from $942,728 in the 2000 period. The increase was due to a large
increase in interest bearing liabilities as a result of increased brokered time
deposits and other time deposits. These deposits generally pay a higher rate as
compared with other interest bearing deposits. As a result, the overall cost of
funds increased from the prior period. The cost of funds increased to 5.29% in
the 2001 period from 5.18% in the 2000 period. The average volume of interest
bearing liabilities increased 9.7% in the 2001 period versus the 2000 period.
13
14
AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following tables summarize 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 and six months ended June 30,
2001 and 2000.
Three Months Ended June 30, Three Months Ended June 30,
--------------------------------------------- ------------------------------------------
2001 2000
--------------------------------------------- ------------------------------------------
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Loans:
Commercial 15,779,582 365,251 9.28% 12,988,281 331,002 10.22%
Real Estate 14,957,765 316,565 8.49% 14,860,969 317,738 8.58%
Installment/Consumer 4,675,120 111,582 9.57% 4,934,216 115,578 9.40%
Total Loans 35,412,467 793,398 8.99% 32,783,466 764,318 9.35%
Investment Securities 2,753,756 18,325 2.67% 3,479,185 53,695 6.19%
Federal Funds & Bank
Deposits 1,706,459 19,038 4.47% 48,500 477 3.94%
---------- -------- ---------- -------
Total Interest Bearing
Assets 39,872,682 830,761 8.36% 36,311,151 818,490 9.04%
---------- -------- ---------- -------
Interest Bearing
Liabilities:
Deposit Accounts:
Demand 3,354,528 19,574 2.34% 2,907,452 21,046 2.90%
Savings 339,465 1,693 2.00% 290,465 1,437 1.98%
Time 25,534,561 373,004 5.86% 15,388,978 234,340 6.11%
Money Market Accts 10,084,692 88,619 3.52% 13,327,101 137,079 4.13%
Short-term borrowings 222,093 4,174 7.54% 3,604,525 54,728 6.09%
Long-term borrowings 796,134 17,684 8.91% 1,792,429 32,097 7.18%
---------- -------- ---------- -------
Total Interest Bearing
Liabilities 40,331,473 504,748 5.02% 37,310,950 480,727 5.17%
---------- -------- ---------- -------
Net Earning Assets, net interest
income, and interest rate spread (458,791) 326,013 3.34% (999,799) 337,763 3.87%
========== ======== ========== =======
Net yield on interest-earning assets 3.28% 3.73%
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Six Months Ended June 30, Six Months Ended June 30,
---------------------------------------------- ------------------------------------------
2001 2000
---------------------------------------------- ------------------------------------------
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Loans:
Commercial 15,476,696 742,132 9.67% 13,089,733 645,353 9.94%
Real Estate 15,188,745 646,980 8.59% 14,429,305 617,917 8.59%
Installment/Consumer 6,502,402 241,474 7.49% 4,651,027 223,903 9.71%
Total Loans 37,167,843 1,630,586 8.85% 32,170,065 1,484,173 9.30%
Investment Securities 2,821,050 122,456 8.75% 3,470,750 105,847 6.15%
Federal Funds & Bank
Deposits 936,323 21,517 4.63% 45,858 865 3.80%
---------- --------- ---------- ---------
Total Interest Bearing
Assets 40,925,216 1,774,559 8.74% 35,686,673 1,590,885 8.99%
---------- --------- ---------- ---------
Interest Bearing
Liabilities:
Deposit Accounts:
Demand 3,264,353 41,753 2.58% 2,952,898 41,483 2.83%
Savings 362,893 3,605 2.00% 288,500 2,878 2.01%
Time 24,445,378 734,627 6.06% 15,076,851 452,943 6.06%
Money Market Accts 10,029,729 201,895 4.06% 13,051,709 263,449 4.07%
Short-term borrowings 1,364,454 41,812 6.18% 3,383,157 101,083 6.03%
Long-term borrowings 815,938 33,867 8.37% 1,969,508 80,892 8.28%
---------- --------- ---------- ---------
Total Interest Bearing
Liabilities 40,282,745 1,057,559 5.29% 36,722,623 942,728 5.18%
---------- --------- ---------- ---------
Net Earning Assets, net
interest income, and
interest rate spread 642,471 717,000 3.45% (1,035,950) 648,157 3.81%
========== ========= ========== ========= ====
Net yield on interest-earning assets 3.53% 3.66%
(1) Yield is annualized.
15
16
Allowance for Loan Losses
The provision to the allowance for loan loss was $45,000 for the six
months ended June 30, 2001. In the six month period ended June 30,2000, the
provision was $66,000. The Bank went from net charge-offs of $8,735 for the six
month period ended June 30,2000 to net charge-offs of $5,875 for the same period
in 2001. Illustrated below is the activity within the allowance for the six
month period ended June 30, 2001 and 2000, respectively.
2001 2000
---- ----
Balance, January 1 $ 562,997 $ 532,585
Provision for loan losses 45,000 66,000
Loan charge-offs (17,465) (56,536)
Recoveries 11,590 47,801
--------- ---------
Balance, June 30 $ 602,122 $ 589,850
========= ==========
At June 30, 2001 At December 31, 2000
---------------- --------------------
Total loans (1) $35,605,545 $36,206,544
Reserve for loan losses $602,122 $562,997
Reserve/Loans % (1) 1.69% 1.55%
The allowance for loan losses is calculated using the following assumptions:
Bank's Ratio Used
Average Peer Group By Bank in
5 Year Average Loss Allowance
Loss Ratio Ratio Calculation
-------------- ------------- -----------------
Commercial loans, performing (1) 0.61% 0.43% 0.61%
Commercial loans, classified (2) N/A N/A (2)
Commercial loan commitments to lend 0.00% N/A 0.20%
Real estate mortgage, performing 0.22% 0.07% 0.30%
Real estate mortgage, classified (3) N/A N/A (3)
Installment loans to individuals (4) 0.00% 0.74% 1.00%
Home Equity loans, performing (5) 0.00% 0.04% 0.50%
Credit Cards (6) 0.00% 1.83% 2.76%
Overdrafts (7) N/A N/A 15.00%
(1) Performing Loans:
The Bank's actual 5-year average losses were 0.61%, and this is the rate used.
Per the FDIC Quarterly Banking Profile (FDIC Profile) the loss rate for loans in
the central region is .38%. Real estate construction loans are included in
commercial loan balances.
(2) Commercial Classified Loans: The allocation for the classified loans was
determined by a combination of the risk rating and the collateral value. The
loan loss allowance is the greater of the collateral deficiency or the required
loan loss allowance for the risk rating. All loans are rated 1 (highest quality)
to 8 (lowest quality), with performing loans rated 1 to 4. A Special Mention or
Watch List loan (5) requires a minimum of a 5% allocation, a Substandard loan
(6) requires a minimum of a 15% allocation, a Doubtful loan (7) requires a
minimum of a 50% allocation and a Loss loan (8) requires a complete charge off
of the loan.
(3) Classified Residential Mortgages: A specific analysis is used, based on the
Broker Price Opinion value of the home, less a 15% liquidation expense. If the
estimated loss
16
17
is $0, then a 5% (Watch List) allocation ratio is used to account for increased
administration costs and risks associated with the foreclosure process.
(4) Installment loans to individuals: The FDIC Profile loss ratio is 1.39%. All
Installment loans are rated A-D, with A being highest quality and D being lowest
quality. For loans between 32 -120 days delinquent, an allocation can be taken
as follows: "A" & "B" Loans - 2.5%, "C" - 5%, "D" - 15%. The Bank typically
gives a 15% allocation for all installment loans over 32 days delinquent.
However, a specific analysis, based on the FMV of the collateral, less
liquidation costs was used for Secured Installment loans greater than 120 days
past due. See the UB Classified Loan Report for specific allocations.
(5) Home Equity: Term Loans & Lines of Credit: The rate shown above of 0.50% is
for Home Equity Term Loans. The allocation ratio for Home Equity Lines of Credit
is .75% since they carry higher risk since they do not amortize during the life
of the loan.
(6) Credit Cards: The FDIC Profile loss ratio is 4.13%.
(7) Overdrafts: Overdrafts generally carry an unusually high risk of loss as
they are generally unsecured and are rated the same way as non-performing
installment loans with an allocation ratio of 15%.
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. Since the Bank has a
limited experience with its loan portfolio in Ann Arbor, the Bank's historical
loss ratios may be less than future loss ratios.
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18
The following schedule summarizes the Company's non-performing assets
for the periods indicated:
At June 30, 2001 At December 31, 2000
---------------- --------------------
Past due 90 days and over and still accruing (1):
Real estate $353,748 $457,486
Installment 98,767 4,059
Commercial 199,702 158,299
---------- ----------
Subtotal 652,217 619,844
Non-accrual loans (1):
Real estate 334,646 72,375
Installment - -
Commercial - -
---------- ----------
Subtotal 334,646 72,375
Other real estate owned 399,426 340,881
---------- ----------
Total non-performing $1,386,289 $1,033,100
========== ==========
Ratio of non-performing to total loans (1) 3.89% 2.85%
========== ==========
Ratio of loans past due over 90 days and
non-accrual loans to loan loss reserve 164% 123%
========== ==========
(1) Excludes loans held for sale which are valued at fair market value.
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19
In July 2001, the Bank's loan portfolio has a level of loan
delinquencies slightly less than the level at December 31, 2000. Loan
originations during the first quarter of 2001 were modest and the size of the
portfolio actually decreased as management directed lending personnel to focus
on reducing delinquencies during the quarter and act proactively in light of a
possible recession. If the current economic slowdown becomes a recession, loan
delinquencies would likely increase, negatively impacting net interest income.
By focusing on administration rather than origination, lower loan originations
in the first quarter of 2001 reduced potential net interest income in future
periods.
Other real estate owned at June 30, 2001 and December 31, 2000 includes
a commercial development site in Sault Ste. Marie, Michigan, which based on a
recent appraisal, management believes has a fair market value more than its
carrying cost of $266,079 at June 30, 2001. The Bank executed an agreement to
sell the property to a commercial developer who is planning a major development
on the site. The purchase price will be determined by averaging two new
appraisals.
Economic conditions in the Bank's primary market area in Ann Arbor were
strong during the period. Management believes that the current allowance for
loan losses is adequate to absorb losses inherent in the loan portfolio,
although the ultimate adequacy of the allowance is dependent upon future
economic factors beyond the Company's control. A downturn in the general
nationwide economy will tend to aggravate, for example, the problems of local
loan customers currently facing some difficulties, and could decrease
residential home prices. A general nationwide business expansion could
conversely tend to diminish the severity of any such difficulties.
Non-Interest Income
Total non-interest income increased 195% to $1,472,028 for the three
months ended June 30, 2001 from $498,353 for the three months ended June
30,2000. The significant increase was primarily due to loan servicing and
sub-servicing fees and other loan set-up fees resulting from the increased
servicing and sub-servicing portfolios at Midwest Loan Services.
Total non-interest income increased 148% to $2,609,044 for the six months
ended June 30, 2001 from $1,050,739 for the six months ended June 30, 2000. The
increase was principally a result of increases in loan origination and loan
sub-servicing fee income primarily as a result of an increase in volume at
Midwest Loan Services. Midwest Loan Services posted pre-tax income of $600,847
for the six months ended June 30, 2001. During the second quarter, Midwest's
largest customer, the mortgage division of one of the top five mortgage firms on
Wall Street, decided to significantly scale back the amount of business it was
providing to Midwest. As of July 1, 2001, 18,500 loans or 95% of the mortgages
sub-serviced by Midwest for this customer had been transferred to other
sub-servicers including a subsidiary of this Wall Street firm. As of July 1,
2001, Midwest was sub-servicing approximately 5,600 loans, including 1,000 for
this customer.
Midwest has been increasing its emphasis on mortgage loan originations
through its credit union customers. In the first quarter of 2001, Midwest
originated an average of 26 loans per month. This has increased to an average of
74 loans per month, including 98 loans originated in June. Management of Midwest
expects to be able to replace a substantial portion of the monthly revenue lost
from the decreased business from the Wall Street firm with fee income from
mortgage originations from its credit union focused Members for Life mortgage
origination program. The Wall Street firm generated an average of $154,000 in
revenue per month for Midwest in the first quarter of 2001, and an average
$209,000 in revenue per month for Midwest in the second quarter of 2001.
Midwest's revenues and profits are likely to be lower in the third and possibly
fourth quarters of
19
20
2001 than in the first half of 2001 as this transition towards higher mortgage
origination volume continues.
At June 30, 2001, the Bank and Midwest owned the rights to service
mortgages for Freddie Mac, Fannie Mae and other institutions, most of which was
owned by Midwest Loan Services, and the remainder by the Bank. The carrying
value of these servicing rights was $588,653 at June 30, 2001. Based on recent
comparable sales and indications of market value from industry brokers,
management believes that the current market value of the Bank's portfolio of
mortgage servicing rights approximates cost. Market interest rate conditions can
quickly affect the value of mortgage servicing rights in a positive or negative
fashion, as long-term interest rates rise and fall. The amortization of these
rights is based upon the level of principal paydowns received from respective
mortgage loan customers of Midwest and the Bank.
Michigan BIDCO. In May 2000, the BIDCO converted or redeemed all
outstanding bonds into common stock of Michigan BIDCO, thus diluting the
Company's ownership to 28.8%. The BIDCO has agreed to repurchase the shares held
by University Bank, but is awaiting regulatory approval to do so. Management of
the Bank and BIDCO have already approved the transaction.
Non-Interest Expense
Non-interest expense increased to $1,719,658 in the three months ended
June 30, 2001 from $1,146,421 for the three months ended June 30, 2000. The
increase was primarily the result of increased operational expenses, principally
personnel costs, at Midwest Loan Services due to the increased sub-servicing
volume. The increased expenses at Midwest more than offset cost control efforts
in other areas at the Bank.
Non-interest expense increased to $3,199,261 in the six months ended
June 30, 2001 from $2,174,220 for the six months ended June 30, 2000. The
increase was primarily the result of increased operational expenses at Midwest
Loan Services, which more than offset cost control efforts in other areas at the
Bank.
Non-interest operating expense for the parent company increased to
$54,525 for the three month 2001 period from $21,115 for the 2000 period. The
increase was primarily the result of increased compensation due to the parent
company issuing common shares to a key executive as a hiring bonus.
Non-interest operating expense for the parent company increased to
$83,299 for the six month period June 30, 2001 from $29,058 for the same period
in 2000. The increase was primarily due to amortization and higher consulting
costs for accounting services and compensation cost.
Internet Banking. The Bank has developed an internet banking product
and is currently completing compliance testing to make the product available to
customers by the end of the third quarter of 2001.
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21
Capital Resources
The table below sets forth the Bank's risk based assets, capital ratios
and risk-based capital ratios of the Bank. At June 30, 2001, the Bank was
considered "well-capitalized".
Allocation by Risk Weight Category
Items not
Balance Sheet Asset Categories Subject to
Total Assets Weighting 0% 20% 50% 100%
------------ --------- -- --- --- ----
Cash and Balances due from
Depository Institutions 2,305 - 341 1,964 - -
Available-for-sale
Securities 1,921 (447) 519 1,849 - -
Loan Held for Sale 1,516 - - 1,445 71
Loans 35,606 - 163 - 12,982 22,461
Allowance for loan losses (602) (602) - - - -
All Other Assets 6,412 59 - 848 - 5,505
-------------------------------------------------------------------------------
Total Assets 47,158 (990) 1,023 4,661 14,427 28,037
===============================================================================
TOTAL AVERAGE ASSETS
Average Total Assets for Leverage Capital Purposes 47,878
Other identifiable Intangible Assets (59)
------
Total Average Assets 47,819
======
35,862
Total Average Risk-Based Assets
TIER 1 CAPITAL
Total Equity Capital 2,880
Unrealized losses on available-for-Sale Securities 447
Minority Interest 362
Other identifiable Intangible Assets (59)
------
Total Tier 1 Capital 3,630
TIER 2 CAPITAL
Allowance for loans & Lease losses 602
Less: Excess Allowance (152)
------
Total Tier 2 Capital 450
------
Total Tier 1 & Tier 2 Capital 4,080
CAPITAL RATIOS
Tier 1/Total Average Assets 7.59%
Tier 1/Total Risk-Weighted Assets 10.12%
Tier 1 & 2/Total Risk-Weighted Assets 11.38%
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22
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
June 30, 2001, the Bank had cash and cash equivalents of $2,304,790. The Bank
has a $6,500,000 line of credit secured by investment securities and residential
mortgage loans and a $2,300,000 line of credit secured by commercial loans. In
order to bolster liquidity from time to time, the Bank also sells brokered time
deposits. At June 30, 2001, the Bank had $10.5 million of these deposits
outstanding.
Parent Company Liquidity. In an effort to maintain the Bank's Tier 1
capital to assets ratio above 7% and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during 2001 or 2002. Management intends to raise additional capital
through a stock rights offering anticipated to take place during 2001. This
capital is needed for the Company's operating expenses and for the expected
principal reductions on the Company's long-term borrowings. These borrowings
totaled $907,588 and $926,130 at June 30, 2001 and at December 31, 2000,
respectively. Long-term borrowings at June 30, 2001 also include $184,082 of
equity conversion notes of the Company which are redeemable by the Company only
in the context of an offering of additional shares of common stock, have no set
maturity date and have interest payments deferred until maturity.
The Company also has authorized 500,000 shares of preferred stock with
a liquidation value of $1,000. 725 shares or $725,000 was issued in November
2000 to help boost capital levels, and another 300 shares or $300,000 was issued
in March 2001 and contributed to University Bank. During April and May of 2001,
119 shares of preferred stock were issued. These shares are 6% cumulative,
non-voting, and convertible into common stock of the Company. It is anticipated
that these shares will be redeemed with proceeds from the expected stock rights
offering scheduled for 2001.
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.
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23
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 sub-servicing contracts.
The Bank performs a static gap analysis that 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 June 30, 2001. The table is based upon various assumptions of management that
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 June 30, 2001 was estimated to be
($18,829,000) or -39.93%.
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24
UNIVERSITY BANK
Asset/Liability Position Analysis as of June 30, 2001
(Dollar amount in Thousand's)
Maturing or Re-pricing in
91 Days
3 Mos to 1 - 3 3 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years Years Other Total
------ ------- ------- ----- ----- ------ ----- -----
Fed Funds - - - - - - -
Loans - Net 8,825 3,445 12,690 6,188 5,639 (602) 36,185
Non-Accrual Loans - - - - - 335 335
Securities - - - - 2,770 - 2,770
Other Assets - 883 - - - 4,680 5,563
Cash and Due from Banks 73 - - - - 2,232 2,305
-------------------------------------------------------------------------------------------
TOTAL ASSETS 8,898 4,328 12,690 6,188 8,409 6,645 47,158
-------------------------------------------------------------------------------------------
LIABILITIES
-----------
CD's under $100,000 8,330 6,623 1,285 407 - - 16,645
CD's over $100,000 2,374 2,176 203 112 - 4,865
MMDA 5,327 5,326 - - - - 10,653
NOW - - 3,986 - - - 3,986
Demand and Escrow - - - - 3,001 3,001
Savings - - 335 - - - 335
Other Borrowings 1,764 135 92 - - - 1,991
Other Liabilities - - - 2,802 2,802
Equity - - - - - 2,880 2,880
-------------------------------------------------------------------------------------------
TOTAL LIABILITIES 17,795 14,260 5,901 407 112 8,683 47,158
-------------------------------------------------------------------------------------------
GAP (8,897) (9,932) 6,789 5,781 8,297 (2,038) -
===========================================================================================
CUMULATIVE
GAP (8,897) (18,829) (12,040) (6,259) 2,038 -
==============================================================================
GAP
PERCENTAGE -18.87% -39.93% -25.53% -13.27% 4.32% 0.00%
==============================================================================
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25
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
Parent Company Financial Information
Certain financial information with respect to University Bancorp, Inc.
is presented on pages 26, 27 and 28.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
25
26
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Balance Sheets
June 30, 2001 and December 31, 2000
(Unaudited)
June 30, December 31,
2001 2000
-------------- --------------
ASSETS
Cash and cash equivalents $ - $ 15,860
Securities available for sale 233 233
Investment in University Bank 2,879,578 2,493,426
Investment in Michigan BIDCO 143,809 77,157
Goodwill, net 125,471 139,412
Receivable from University Bank 286,195 149,572
Prepaid expenses 70,499 57,602
Other assets 1,000 1,000
-------------- ---------------
Total Assets $ 3,506,785 $ 2,934,262
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 496,000 $ 562,000
Equity conversion notes payable 184,082 -
Accounts payable 282,391 318,601
Accrued interest payable 14,987 11,379
Other liabilities 28,184 -
-------------- ---------------
Total Liabilities 1,005,644 891,980
Stockholders Equity 2,501,141 2,042,282
-------------- ---------------
Total Liabilities and Stockholders Equity $ 3,506,785 $ 2,934,262
============== ===============
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27
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Statements of Operations
For the Periods Ended June 30, 2001 and 2000
(Unaudited)
For The Three Month For The SIX Month
Period Ended Period Ended
2001 2000 2001 2000
--------- ----------- ----------- ----------
Income:
Dividends from subsidiary $ - $ - $ - $ -
Interest & dividends on
investments 1 26 273 161
Income from Michigan BIDCO - (578) - 3,760
Gain (loss) on sale of
securities - - - -
--------- ----------- ----------- ----------
Total Income 1 (552) 273 3,921
Expense:
Interest 17,684 15,736 33,867 39,268
Compensation 31,200 31,200
Goodwill amortization 6,970 - 13,941 -
Public listing 9,571 9,295 13,765 12,696
Legal, audit & consulting 5,689 10,552 22,728 14,801
Other miscellaneous 1,095 1,268 1,665 1,561
--------- ----------- ----------- ----------
Total Expense 72,209 36,851 117,166 68,326
Income (loss(benefit) before
federal income taxes and
equity in undistributed
net income (loss) of subsidiaries (72,208) (37,403) (116,893) (64,405)
Federal income taxes (benefit) - - - -
--------- ----------- ----------- ----------
Income (loss) before equity in
undistributed net income of subsidiaries (72,208) (37,403) (116,893) (64,405)
Equity in undistributed net income (loss)
of subsidiaries. 128,091 (333,575) 198,676 (481,965)
--------- ----------- ----------- ----------
Net income (loss) $ 55,883 $ (370,978) $ 81,783 $ (546,370)
--------- ----------- ----------- ----------
Preferred stock dividends 16,476 - 27,251 -
--------- ----------- ----------- ----------
$ 39,407 $ (370,978) $ 54,532 $ (546,370)
========= =========== =========== ==========
Basic and diluted income (loss)
per common share $ 0.02 $ (0.18) $ 0.03 $ (0.27)
========= =========== =========== ==========
27
28
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Statement of Cash Flows
For the Six Month Periods Ended June 30, 2001 and 2000
2001 2000
------------ ------------
Cash flow from operating activities:
Net income (loss) $ 81,783 $ (546,370)
Reconciliation of net income (loss) to net cash used
in operating activities:
Amortization 13,942 -
Decrease/(Increase) in other assets (12,900) (4,866)
Increase(Decrease) in other liabilities (144,194) 9,028
Decrease(Increase) investment in Michigan BIDCO (66,652) (3,760)
Decrease(Increase) investment in University Bank (86,148) 481,965
------------ ------------
Net cash (used in) operating activities (214,169) (64,003)
------------ ------------
Cash flow from investing activities:
Contributions of capital to University Bank (300,000) -
Purchase of securities available for sale - (37,500)
Proceeds from sale of securities available for sale - -
------------ ------------
Net cash provided by (used in) investing
activities (300,000) (37,500)
------------ ------------
Cash flow from financing activities:
Principal payment on notes payable (94,822) (66,000)
Issuance of equity conversion notes 76,280 121,000
Proceeds from sale of preferred stock 419,000 -
Proceeds from sale of common stock 97,851 31,250
------------ ------------
Net cash provided by financing activities 498,309 86,250
------------ -------------
Net change in cash and cash equivalents (15,860) (15,253)
Cash and cash equivalents at beginning of period 15,860 15,834
------------ ------------
Cash and cash equivalents at end of period $ - $ 581
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for Interest $ 14,076 $ 15,834
28
29
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: August 14, 2001 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President
29