19
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, 2003
OR
[] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
-------- ----------
(State of incorporation) (IRS Employer Identification Number)
959 Maiden Lane, Ann Arbor, Michigan 48105
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 741-5858
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value outstanding at July 31, 2003 3,914,548 shares
Page 1 of 27 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 11
Summary 11
Recent Events 12
Results of Operations 12
Capital Resources 18
Liquidity 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
PART II - Other Information
Item 1. Legal Proceedings 22
Item 5. Other Information:
Parent Company Financial Information 22
Item 6. Exhibits & Reports on Form 8-K 22
Signatures 22
Exhibit 1 - Certifications 24
- ------------------------------------------------------------
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
June 30, 2003 (Unaudited) and December 31, 2002
June 30, December 31,
ASSETS 2003 2002
Cash and due from banks $ 1,916,568 $ 2,569,469
Securities available for sale, at market 2,300,372 3,102,838
Federal Home Loan Bank Stock 859,600 848,400
Loans held for sale, at the lower
of cost or market 1,538,171 1,550,995
Loans 32,522,788 33,192,034
Allowance for loan losses (460,165) (408,219)
------------- -------------
Loans, net 32,062,623 32,783,815
Premises and equipment, net 815,013 1,720,902
Investment in Michigan BIDCO Inc. 629,258 629,258
Investment in Michigan Capital Fund LPI 306,244 356,244
Mortgage servicing rights, net 957,379 1,014,939
Real estate owned, net 680,218 853,198
Accounts receivable 48,641 72,786
Accrued interest receivable 104,336 169,811
Prepaid expenses 182,616 214,472
Goodwill, net 103,914 103,914
Other assets 464,534 258,272
TOTAL ASSETS $ 42,969,487 $ 46,249,313
============= =============
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
June 30, 2003 (Unaudited) and December 31, 2002
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------- ------------
Liabilities:
Deposits:
Demand - non interest bearing $ 1,775,007 $ 2,197,567
Demand - interest bearing 22,756,254 21,051,588
Savings 366,231 473,894
Time 12,335,240 18,197,407
------------- ------------
Total Deposits 37,232,732 41,920,456
Short term borrowings 991,000 0
Long term borrowings 232,000 298,000
Accounts payable 290,610 228,062
Accrued interest payable 60,464 97,068
Other liabilities 444,586 189,594
------------- ------------
Total Liabilities 39,251,392 42,733,180
Minority Interest 415,357 360,166
Stockholders' equity:
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,014,732 shares in 2003 and 2002 40,147 40,147
Additional paid-in-capital 5,537,960 5,537,960
Accumulated deficit (1,912,123) (1,999,846)
Treasury stock - 115,184 shares in 2003 and
2002 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities available
for sale, net (22,716) (81,764)
------------- ------------
Total Stockholders' Equity 3,302,738 3,155,967
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 42,969,487 $ 46,249,313
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended June 30, 2003 and 2002
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2003 2002 2003 2002
----------------- -------------- ----------------- ----------------
Interest income:
Interest and fees on loans $ 628,429 $ 659,319 $ 1,259,768 $ 1,404,748
Interest on securities:
U.S. Government agencies 28,047 148,106 63,331 159,418
Other securities 21,267 23,445 44,517 49,011
Interest on federal funds and other 3,168 6,861 8,155 12,100
------------- ------------- ------------- -------------
Total interest income 680,911 837,731 1,375,771 1,625,277
------------- ------------- ------------- -------------
Interest expense:
Interest on deposits:
Demand deposits 97,214 79,131 188,720 146,412
Savings deposits 1,152 1,163 2,433 2,252
Time deposits 115,393 165,878 246,460 373,638
Short term borrowings 1,391 311 1,391 1,352
Long term borrowings 3,294 5,691 6,852 11,559
------------- ------------- ------------- --------------
Total interest expense 218,444 252,174 445,856 535,213
------------- ------------- ------------- --------------
Net interest income 462,467 585,557 929,915 1,090,064
Provision for loan losses 38,500 22,500 144,400 45,000
------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 423,967 563,057 785,515 1,045,064
------------- ------------- ------------- -------------
Other income:
Loan servicing and sub-servicing
fees 232,682 133,066 433,393 391,808
Initial loan set up and other fees 1,068,109 470,929 1,890,194 1,122,985
Gain on sale of mortgage loans 304,808 20,119 488,513 55,003
Insurance and investment fee income 33,490 20,550 81,538 49,813
Deposit service charges and fees 29,314 15,522 57,441 30,733
Other 27,451 21,928 66,751 63,415
------------- ------------- ------------- -------------
Total other income 1,695,854 682,114 3,017,830 1,713,757
------------- ------------- ------------- -------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended June 30, 2003 and 2002
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2003 2002 2003 2002
------------- ------------- ------------- -------------
Other expenses:
Salaries and benefits $ 826,760 $ 692,375 $ 1,612,068 $ 1,415,640
Occupancy, net 89,438 92,338 178,335 182,663
Data processing and equipment
Expense 115,642 106,654 223,868 216,498
Legal and audit expense 40,597 42,001 78,371 79,418
Consulting fees 33,319 41,392 66,757 92,560
Mortgage banking expense 219,198 120,595 388,761 299,860
Servicing rights amortization 451,842 218,670 554,015 268,109
Advertising 33,990 21,822 59,953 38,983
Memberships and training 26,046 26,228 47,164 49,141
Travel and entertainment 33,001 31,539 60,179 48,741
Supplies and postage 58,290 48,508 104,236 97,357
Insurance 24,080 21,566 45,654 41,990
Other operating expenses 153,146 19,405 296,261 187,747
------------- ------------- ------------- ----------------
Total other expenses 2,105,349 1,483,093 3,715,622 3,018,707
------------- ------------- ------------- ----------------
Income (loss) before income taxes 14,472 (237,922) 87,723 (259,886)
------------- ------------- ------------- ----------------
Income tax expense (benefit) - - - -
------------- ------------- ------------- ----------------
Net Income (loss) $ 14,472 $ (237,922) $ 87,723 $ (259,886)
============== ============== ============= ================
Preferred stock dividends -
------------- ------------- ------------- ----------------
Net income (loss) available to $ 14,472 $ (237,922) $ 87,723 $ (259,886)
common shareholders ============== ============== ============= ================
Basic and diluted loss per common
share $ 0.00 $ (0.06) $ 0.02 $ (0.07)
============== ============== ============= ================
Weighted average shares outstanding 3,899,548 3,850,130 3,899,548 3,830,338
============== ============== ============= ================
The accompanying notes are an integral part of the
consolidated financial statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Periods Ended June 30, 2003 and 2002
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2003 2002 2003 2002
------------- ------------- ------------- --------------
Net income (loss) $ 14,472 ($237,922) $ 87,723 ($259,886)
Other comprehensive income(loss):
Unrealized gains (losses) on securities
available for sale 42,134 62,993 59,048 (102,176)
Less: reclassification adjustment
for accumulated (losses)/gains
included in net loss - - - -
------------- ------------- ------------- --------------
Other comprehensive income (loss), before
tax effect 42,134 62,993 59,048 (102,176)
Income tax expense (benefit) - - - -
Other comprehensive income (loss), net
Of tax 42,134 62,993 59,048 (102,176)
------------- ------------- ------------- --------------
Comprehensive income (loss) $ 56,606 ($174,929) $ 146,771 $362,062)
============= ============= ============= ==============
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows For the six month periods ended June 30, 2003 and 2002
2003 2002
-------------- --------------
Cash flow from operating activities:
Net income(loss) $ 87,723 $ (259,886)
Adjustments to reconcile net income (loss) to net cash from Operating Activities:
Depreciation 148,395 146,801
Amortization 604,015 318,109
Provision for loan losses 144,900 45,000
Net (gain) on mortgage loan sales (488,513) (55,003)
Net (accretion) on investment securities (20,897) (159,418)
Met loss on sale of securities 28,599
Originations of mortgage loans (77,817,882) (22,378,580)
Proceeds from mortgage loan sales 78,319,219 23,633,612
Change in:
Real estate owned 172,980 (63,138)
Other assets (592,554) 373,951
Other liabilities (6,724) (358,761)
-------------- ---------------
Net cash (used in) provided by operating activities 579,261 1,382,269
-------------- ----------------
Cash flow from investing activities:
Purchase of investment securities (92,567)
Proceeds from maturities and pay downs of securities
available for sale 892,802 53,333
Net repayments of loans 576,292 1,849,887
Proceeds from sales of investment securities 53,690
Premises and equipment expenditures (73,488) (111,168)
Proceeds from sale of premises 1,173,833
-------------- ----------------
Net cash provided by (used in) investing activities 2,530,562 1,792,052
-------------- ----------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2003 and 2002
2003 2002
-------------- -------------
Cash flow used in financing activities:
Net (decrease) increase in deposits (4,687,724) (118,092)
Net increase (decrease) in short term borrowings 991,000 (91,566)
Principal payments on long term borrowings (66,000) (1,033,000)
Issuance of long term borrowings - 20,000
Issuance of common stock - 80,000
-------------- -------------
Net cash used in financing activities (3,762,724) (1,142,658)
-------------- -------------
(652,901) 2,031,663
Net change in cash and cash equivalents Cash and cash equivalents:
Beginning of period 2,569,469 837,550
-------------- ------------
End of period $ 1,916,568 $ 2,869,213
============== =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 482,460 $ 605,004
See accompanying notes to consolidated financial statements (unaudited).
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See Note 1 of the Financial Statements incorporated by reference in the
Company's 2002 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's 2002 Annual Report on Form 10-K.
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 3,899,548 and
3,850,130 for the three months ended June 30, 2003 and 2002, respectively;
3,899,548 and 3,830,338 shares for the six months ended June 30, 2003 and 2002,
respectively
(2) Investment Securities
The Bank's available-for-sale securities portfolio at June 30, 2003 had
a net unrealized loss of approximately $22,000 as compared with a net unrealized
loss of approximately $82,000 at December 31, 2002.
Securities available for sale at June 30, 2003:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- -----------
U.S. agency mortgage-backed $ 2,322 $ 0 $ (22) $ 2,300
========== =========== ========== ===========
Securities available for sale at December 31, 2002
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. agency mortgage-backed $ 3,185 $ 0 $ (82) $ 3,103
========== ========== ========== ===========
(3) Stock options
At June 30, 2003, the Company has a stock-based employee compensation plan. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
greater than or equal to the market value of the underlying common stock on the
date of grant. As new options granted were only 10,000 and 75,000 during the six
month period ended June 30, 2003 and 2002, the effect on net income (loss) and
earnings (loss) per share if the Corporation had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, as amended by FASB Statement No. 148, to stock-based employee
compensation was less than $.01 in each of the periods presented.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements that 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 that appear as Item 7 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
SUMMARY
For the three months ended June 30, 2003, we had net income of $14,472
compared to a net loss of $237,922 for the three months ended June 30, 2002. In
both periods, our income was negatively impacted by impairment write downs on
the mortgage servicing rights portfolio of our 80%-owned subsidiary, Midwest
Loan Services. However, in 2003 the write down was more than offset by income
generated from the high volume of mortgage refinancing which was stimulated by
45-year low mortgage rates. Community Banking improved its results, with a
profit of $10,000 from a loss of $21,000 in the prior period.
Our net income for the first half of 2003 was $87,723, versus a net
loss of $259,886 for the same period last year. Community Banking incurred a
loss of $127,000 during the current year's first half as opposed to a loss of
$122,000 from the year before. Compared to the first half of 2002, profits at
the Bank's subsidiary, Midwest Loan Services, increased to $276,000 in 2003 from
a loss of $80,000 last year. Income at Midwest Loan Services increased with
rapidly increasing mortgage originations and mortgage loans sub-serviced.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three months ended June 30, 2003 and 2002 (in
thousands):
Pre-tax income (loss) summary for the three and six months ended June 30, 2003
Three Months Six Months
Community Banking $ 10 $ (127)
Midwest Loan Services 36 276
Corporate Office (31) (61)
------- -------
Total $ 15 $ 88
======= ========
Pre-tax income (loss) summary for the three and six months ended June 30, 2002
Three Months Six Months
Community Banking $ (21) $ (122)
Midwest Loan Services (183) (80)
Corporate Office (34) (58)
------- -------
Total $ (238) $ (260)
======= ========
RECENT EVENTS
Subsequent to June 30, 2003, Community Banking completed the sale of
the Easterday property in Sault Ste. Marie, Michigan, carried on its books as
real estate owned, for a profit of $150,015 versus a carrying cost of $150,000.
In addition, the bank entered into sales contracts covering each of the two
remaining residential properties that made up the balance of the real estate
owned account, with no material net gain or loss from the two sales, which sales
are scheduled to close prior to August 15, 2003.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased to 462,467 for the three months ended
June 30, 2003 from $585,557 for the three months ended June 30, 2002. Net
interest income decline from last year primarily as a result of a lower discount
accretions from a U.S Government agency bond. In 2002, rates dropped and the
duration period for the bond was shortened causing an acceleration of accreted
income. The yield on earning assets decreased from 8.43% to 6.99% while the cost
of earning liabilities declined from 2.58% to 2.30%. Overall, the net interest
income as a percentage of total average earning assets decreased from 5.90% to
4.74%.
Net interest income decreased to $929,915 for the six months ended June
30, 2003 from $1,090,064 for the six months ended June 30, 2002. Net interest
income declined from a year ago primarily as a result of lower bond income as
noted above. The yield on interest earning assets decreased from 8.17% in the
2001 period to 6.97% in the 2003 period. The cost of interest bearing
liabilities decreased from 2.76% for the 2002 period to 2.30% for the period
ended June 30, 2003. Net interest income as a percentage of total average
earning assets decreased from 5.48% to 4.71%.
Interest income
Interest income decreased to $680,911 in the quarter ended June 30,
2003 from $837,731 in the quarter ended June 30, 2002. The decline resulted from
a lower average yield on average earning assets as well as a decline in average
earning assets. The average volume of interest earning assets declined to
$39,095,202 in the 2003 period from $39,840,081 in the 2002 period. The yield on
interest bearing assets declined from 8.43% in 2002 to 6.99% in 2003. The
decrease was due to lower income earned on the securities portfolio. During the
second quarter of 2002, this portfolio yielded a rate of 18.93%. The yield
resulted from accelerated income recognized on a principal-only collateralized
mortgage obligation that began to pay down during the quarter, as a result of
the drop in long-term interest rates. As the interest rates declined, the
expected duration period for this bond was shortened. The decrease in average
expected duration stimulated an accelerated accretion of the bond discount.
During the 2003 period, the yield on the investment securities was 4.98%
Interest income decreased to $1,375,771 in the six months ended June
30, 2003 from $1,625,277 in the six months ended June 30, 2002. This decrease
resulted from a decline in average earning assets and the yield on average
earning assets. The average volume of interest earning assets decreased to
$39,783,764 in the 2003 period from $40,124,970 in the 2002 period. The overall
yield on earning assets declined to 6.97% from 8.17%. The yield on the
investment securities declined to 5.23% in 2003 from 11.46% in 2002 due the
accelerated income on the bond described above.
Interest Expense
Interest expense decreased to $218,444 in the three months ended June 30,
2003 from $252,174 in the 2002 period. The decrease was due to a drop in the
yield in 2003 to 2.30% from 2.58% in 2002, a decline in interest bearing
liabilities and a favorable shift in the mix of deposits. The yield declined as
the interest rate liabilities re-priced in the declining rate environment
throughout 2001. The average volume of interest bearing liabilities decreased to
$38,047,180 in 2003 from $39,263,061 in 2002. During the second quarter of 2003,
lower cost average demand deposits and money market accounts represented 57% of
average interest bearing liabilities as compared with 44% for the same period in
2002.
Interest expense decreased to $445,856 in the six months ended June 30,
2003 from $535,213 in the 2002 period. The decrease was due to a lower yield on
the interest rate liabilities, a decrease in volume, and a favorable shift in
the mix of deposits. The yield dropped to 2.30% in 2003 from 2.76% in 2002. The
volume of interest rate liabilities decreased slightly to $39,027,977 in 2003
from $39,154,375 in 2002. The decrease in volume primarily occurred in time
deposits, particularly brokered deposits, and short-term borrowings. The decline
in these liabilities was offset by a rise in other interest bearing liabilities
and non-interest bearing demand deposits. These liabilities typically have lower
rates than brokered deposits.
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 and six months
ended June 30, 2003 and 2002.
Three Months Ended Three Months Ended
-----------------------------------------------------------------------------------------
June 30, 2003 June 30, 2002
-----------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc / Exp Yield (1) Balance Inc / Exp Yield (1)
Interest Earning Assets:
Commercial Loans $ 18,589,768 $366,056 7.90% $ 18,211,601 $332,133 7.32%
Real Estate Loans 13,259,140 220,402 6.67% 13,011,889 247,085 7.62%
Installment/Consumer Loans 2,307,156 41,971 7.30% 3,374,049 80,101 9.52%
---------------------------------- ----------------------------------
Total Loans 34,156,064 628,429 7.38% 34,597,539 659,319 7.64%
Investment Securities 3,970,355 49,314 4.98% 3,635,201 171,551 18.93%
Fed. Funds & Bank Deposits 968,783 3,168 1.31% 1,607,341 6,861 1.71%
---------------------------------- ----------------------------------
Total Interest Bearing Assets 39,095,202 680,911 6.99% 39,840,081 837,731 8.43%
---------------------------------- ----------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 5,947,844 14,166 0.96% 5,492,435 13,492 0.99%
Savings 404,971 1,152 1.14% 406,250 1,163 1.15%
Time 15,187,310 115,393 3.05% 20,696,436 165,878 3.21%
Money Market 15,813,101 83,048 2.11% 11,970,784 65,639 2.20%
Short-term Borrowings 445,454 1,391 1.25% 72,650 311 1.72%
Long-term Borrowings 248,500 3,294 5.32% 624,506 5,691 3.66%
---------------------------------- ----------------------------------
Total Interest Bearing 38,047,180 218,444 2.30% 39,263,061 252,174 2.58%
Liabilities
---------------------------------- ----------------------------------
Net Earning Assets, net
interest income, and
interest rate spread $ 1,048,022 $462,467 4.69% $577,020 $585,557 5.86%
================================== ==================================
Net Interest Margin 4.74% 5.90%
(1) Yield is annualized.
Six Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------------------------------------
2003 2002
------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc (Exp) Yield (1) Balance Inc (Exp) Yield (1)
Interest Earning Assets:
Loans:
Commercial $18,792,771 $724,043 7.77% $17,968,833 $705,720 7.92%
Real Estate 13,201,950 438,339 6.70% 13,560,871 534,047 7.94%
Installment/Consumer 2,243,975 97,386 8.75% 3,469,293 164,981 9.59%
---------------------------------- -----------------------------------
Total Loans 34,238,696 1,259,768 7.42% 34,998,997 1,404,748 8.09%
Investment Securities 4,157,432 107,848 5.23% 3,668,229 208,429 11.46%
Federal Funds & Bank
Deposits 1,387,636 8,155 1.19% 1,457,744 12,100 1.67%
---------------------------------- -----------------------------------
Total Interest Bearing Assets 39,783,764 1,375,771 6.97% 40,124,970 1,625,277 8.17%
---------------------------------- -----------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 6,251,254 26,060 0.84% 4,658,966 24,856 1.08%
Savings 432,052 2,433 1.14% 397,921 2,252 1.14%
Time 16,336,457 246,460 3.04% 21,876,814 373,638 3.44%
Money Market 15,512,628 162,660 2.11% 11,418,098 121,556 2.15%
Short-term borrowings 230,586 1,391 1.22% 169,683 1,352 1.61%
Long-term borrowings 265,000 6,852 5.21% 632,893 11,559 3.68%
---------------------------------- -----------------------------------
Total Interest Bearing
Liabilities 39,027,977 445,856 2.30% 39,154,375 535,213 2.76%
---------------------------------- -----------------------------------
Net Earning Assets, net interest
income, and interest rate
spread $ 755,787 $929,915 4.67% $ 970,595 $1,090,064 5.41%
================================== ===================================
Net yield on interest-earning assets 4.71% 5.48%
(1) Yield is annualized.
Allowance for Loan Losses
The provision to the allowance for loan losses was $144,400 for the
six-month period ended June 30, 2003 and $45,000 for the same period in 2002.
The provision was increased to reflect higher delinquencies in the loan
portfolio and related charge offs. Net charge-offs totaled $92,454 for the
six-month period ended June 30, 2003 as compared to $54,466 for the same period
in 2002. Illustrated below is the activity within the allowance for the
six-month period ended June 30 2003 and 2002, respectively.
2003 2002
---- ----
Balance, January 1 $ 408,219 $ 579,113
Provision for loan losses 144,400 45,000
Loan charge-offs (129,969) (59,581)
Recoveries 37,515 5,115
----------- ------------
Balance, June 30 $ 460,165 $ 569,647
=========== ============
At June 30, 2003 At December 31, 2002
Total loans (1) $32,522,788 $33,192,034
Reserve for loan losses $460,165 $ 408,219
Reserve/Loans % (1) 1.41% 1.23%
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor, Michigan and the future performance of these loans is dependent upon the
performance of this relatively limited geographical area.
The following schedule summarizes the Company's non-performing assets:
At June 30, 2003 At December 31, 2002
---------------- --------------------
Past due 90 days and over and still accruing (1):
Real estate $ - $ -
Installment - -
Commercial - -
-------------- -------------
Subtotal - -
Nonaccrual loans (1):
Real estate (including
commercial real estate) 1,105,553 102,713
Installment 0 67,546
Commercial 307,507 509,301
-------------- -------------
Subtotal 1,413,060 679,560
-------------- -------------
Other real estate owned 680,218 853,198
-------------- -------------
Total non-performing assets $2,093,273 $1,532,758
============== =============
At June 30, 2003 At December 31, 2002
---------------- --------------------
Ratio of non-performing assets to total
loans (1) 6.44% 4.62%
=============== =============
Ratio of loans past due
over 90 days and nonaccrual
loans to loan loss reserve 307% 166%
=============== ==============
(1) Excludes loans held for sale which are valued at the lower of cost or fair
market value.
Other real estate owned at June 30, 2003 and December 31, 2002 includes
a commercial development site in Sault Ste. Marie, Michigan. The property is
being carried at a value of $150,000. Subsequent to June 30, 2003, Community
Banking sold the property for $300,000. At June 30, 2003, the remaining balance
of $530,218 consists of two single-family houses, both of which are under a
contract of sale to close by August 15, 2003.
Non-accrual loans at June 30, 2003 include two large real estate
secured loan relationships in the amount of $870,708 that are in process of
foreclosure. Management believes that Community Banking is adequately secured
with regard to all of the delinquent real estate loans on non-accrual at June
30, 2003.
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 to $1,695,854 for the three months
ended June 30, 2003 from $682,114 for the three months ended June 30,2002. The
increase was primarily due to higher mortgage loan origination activity. In
2003, the rates on mortgages were historically low and this spurred an increase
in the re-financing market. Management at the Bank and Midwest aggressively
pursued this activity and was able to increase income from initial loan set up
and other fess and gain on the sale of mortgage loans.
In June 2003, Community Banking completed the sale of its headquarters
to a development group that intends to construct a $125 million mixed-use
community in the Lowertown area of Ann Arbor. Community Banking is leasing its
headquarters until its new building is constructed. Community Banking realized a
gain of $343,000 on the sale, which gain is being deferred over the next two
years, the estimated term of the lease. Under the terms of the deal, Community
Banking will purchase 10,000 ft2 in the new complex for $200,000 less than the
lower of fair market value or cost, capped to a purchase price of $1,800,000
based on a cost or fair market value of $2,000,000. The new headquarters, which
is in a better, more visible location in the same general neighborhood of its
existing headquarters, is anticipated to be ready for occupancy in December
2004.
Total non-interest income increased to $3,017,830 for the six months ended
June 30, 2003 from $1,713,757 for the six months ended June 30, 2002. The
increase was principally a result of increases in loan origination, loan
sub-servicing fee income, and gain on the sale of mortgage loans at Midwest Loan
Services.
At June 30, 2003, Midwest was subservicing 12,632 mortgages, an
increase of 51% from 8,372 mortgages at December 31, 2002. During the first half
of 2003, Midwest originated 519 mortgages, an increase of 93% from mortgages
originated in the first half of 2002.
Subsequent to June 30, 2003, long-term interest rates rose
substantially. This rise would tend to increase the value of mortgage servicing
rights and decrease current mortgage loan origination activity.
Non-Interest Expense
Non-interest expense increased to $2,105,349 in the three months ended
June 30, 2003 from $1,483,093 for the three months ended June 30, 2002. The
increase was due principally to increases in costs related to high mortgage
origination activity. Salaries and benefits, mortgage banking expense,
amortization of servicing rights and other operating expenses increased in
relationship to activity spurred by a low mortgage rate environment. Servicing
rights amortization increased to $451,842 during the three-month period ended
June 30, 2003 from $218,670 in the same period in 2002. The increase results
from an impairment write down and higher amortizations impacted by a high level
of loan principal pay offs due to loan refinancing activity.
At June 30 2003, 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, which is an 80%-owned subsidiary of the Bank. The value of
mortgages serviced for these institutions was approximately $96 million. The
carrying value of these servicing rights was $957,379 at June 30, 2003. Based on
recent comparable sales and indications of fair value from industry brokers,
management believes that the current fair value of the mortgage servicing rights
portfolio approximates carrying value. 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.
Non-interest expense increased to $3,715,621 in the six months ended
June 30, 2003 from $3,018,707 for the six months ended June 30, 2002. The
increase was primarily the result of increased operating expenses at Midwest
Loan Services resulting from high mortgage origination activity.
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, 2003, the Bank was
considered "well-capitalized".
June 30, 2003
TIER 1 CAPITAL (in $000s)
Total Equity Capital $3,519
Less: Unrealized losses on available-for-Sale
Securities (22)
Plus: Minority Interest 415
Less: Other identifiable Intangible Assets 200
Total Tier 1 Capital 3,756
TIER 2 CAPITAL
Allowance for loans & Lease losses 414
Less: Excess Allowance -
Total Tier 2 Capital 414
Total Tier 1 & Tier 2 Capital $4,170
CAPITAL RATIOS
Tier 1/Total Average Assets of $43,747 8.59%
Tier 1/Total Risk-Weighted Assets of $33,058 11.36%
Tier 1 & 2/Total Risk-Weighted Assets of $33,058 12.61%
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, 2003, the Bank had cash and cash equivalents of $1,916,568. The Bank's
lines of credit include the following:
o $3.5 million from the Federal Home Loan Bank of Indianapolis secured
by investment securities and residential mortgage
loans,
o $5.2 million from the Federal Reserve Bank of Chicago secured by
commercial loans, and
o $775,000 unsecured line of credit from Great Lakes Bankers Bank.
In order to bolster liquidity from time to time, the Bank also sells brokered
time deposits. At June 30, 2003, the Bank had $2.1 million of these deposits
outstanding.
Bancorp Liquidity. In an effort to increase the Bank's Tier 1 capital
to assets ratio through retained earnings, management does not expect that the
Bank will pay dividends to the Company during the balance of 2003. Management
intends to increase Bancorp's working capital through the exercise of maturing
stock options, and the issuance of additional shares of common stock.
At June 30, 2003, $232,000 was payable to another financial institution
as compared to $397,000 at June 30, 2002. Long-term borrowings at June 30, 2002
also includes $227,506 of a note payable to another financial institution with
respect to a low-income housing partnership investment by University Insurance
and Investment Services. This obligation was paid in full by the end of 2002. At
June 30, 2003, Bancorp had $10,000 in cash and investments on hand to meet its
working capital needs.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on 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 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, 2003. 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, 2003 was estimated to be
($12,124,000) or -28.22%.
In addition, management prepares an estimate of sensitivity to immediate changes
in short term interest rates. At June 30, 2003, the following impact was
estimated on net interest margin in the 12 months following an immediate
movement of interest rates:
Effect on Net
Rate Change Interest Margin
(% Change) ($ Change)
-1.00% 3.22% $56,000
+1.00% -2.77% ($48,000)
+3.00% -8.30% ($145,000)
A negative 3% change in short-term interest rates is not possible, because the
current Fed Funds target rate is set at 1%.
UNIVERSITY BANK
Asset/Liability Position Analysis as of June 30, 2003
(Dollar amounts in thousand's)
Maturing or Repricing in
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years Years Other Total
- ------ ------- ------ ----- ----- ----- ----- -----
Loans - Net $8,719 $2,893 $3,160 $12,378 $5,498 ($460) $32,188
Non-Accrual Loans - - - - 1,413 1,413
Securities 460 1,215 - - 625 - 2,300
Other Assets - 600 - - - 4,551 5,151
Cash and Due from Banks 47 - - - - 1,870 1,917
-----------------------------------------------------------------------------------------
TOTAL ASSETS 9,226 4,708 3,160 12,378 6,123 7,374 42,969
-----------------------------------------------------------------------------------------
LIABILITIES
- -----------
Time deposits 3,435 4,916 2,908 501 575 - 12,335
Demand -interest bearing 8,292 8,292 6,172 - - - 22,756
Demand - non interest - - - - 1,775 1,775
Savings - - 366 - - - 366
Long term borrowings 1,024 99 100 - - - 1,223
Other Liabilities - - - - - 1,211 1,211
Equity - - - - - 3,303 3,303
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,751 13,307 9,546 501 575 6,289 42,969
-----------------------------------------------------------------------------------------
Gap (3,525) (8,599) (6,386) 11,877 5,548 1,085 -
=========================================================================================
Cumulative gap ($3,525) ($12,124) ($18,510) ($6,633) ($1,085) -
================================================================================
Gap percentage -8.20% -28.22% -43.08% -15.44% -2.53% 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
Parent Company Financial Information
Certain financial information with respect to University Bancorp, Inc.
is presented on pages 21, 22, and 23.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
1. Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
(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: August 9, 2003 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President
Date: August 9, 2003 /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: August 9, 2003 /s/Stephen Lange Ranzini
----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
10-Q 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
7) I have reviewed this quarterly report on Form 10-Q of University Bancorp,
Inc.;
8) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
9) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
10) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
11) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
12) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 9, 2003 /s/Nicholas K. Fortson
----------------------
Nicholas K. Fortson
Chief Financial Officer
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended June 30, 2003 as filed with the
Securities and Exchange Commission on August 9, 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: August 9, 2003
By: /s/ Stephen Lange Ranzini
--------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended June 30, 2003 as filed with the
Securities and Exchange Commission on August 9, 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: August 9, 2003
By: /s/ Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer