28
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 September 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 October 31, 2003 3,994,550 shares
Page 1 of 28 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
Results of Operations 12
Capital Resources 19
Liquidity 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
PART II - Other Information
Item 1. Legal Proceedings 23
Item 5. Other Information:
Parent Company Financial Information 23
Item 6. Exhibits & Reports on Form 8-K 23
Signatures 24
Exhibit 1 - Certifications 25
- ------------------------------------------------------------
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
September 30, 2003 (Unaudited) and December 31, 2002
September 30, December 31,
2003 2002
------------ -------------
ASSETS
Cash and due from banks $ 3,728,513 $ 2,569,469
Securities available for sale, at market 1,941,725 3,102,838
Federal Home Loan Bank Stock 859,600 848,400
Loans held for sale, at the lower
of cost or market 594,300 1,550,995
Loans 33,585,586 33,192,034
Allowance for loan losses (402,690) (408,219)
------------- -------------
Loans, net 33,185,896 32,783,815
Premises and equipment, net 811,789 1,720,902
Investment in Michigan BIDCO Inc. 600,000 629,258
Investment in Michigan Capital Fund LPI 281,244 356,244
Mortgage servicing rights, net 988,162 1,014,939
Real estate owned, net 886,618 853,198
Accounts receivable 208,396 72,786
Accrued interest receivable 124,148 169,811
Prepaid expenses 223,996 214,472
Goodwill, net 103,914 103,914
Other assets 347,254 258,272
------------ -------------
TOTAL ASSETS $ 44,885,555 $ 46,249,313
============= =============
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
September 30, 2003 (Unaudited) and December 31, 2002
September 30, December 31,
2003 2002
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non interest bearing $ 1,734,079 $ 2,197,567
Demand - interest bearing 26,622,984 21,051,588
Savings 398,240 473,894
Time 11,214,832 18,197,407
------------ -------------
Total Deposits 39,970,135 41,920,456
Long term borrowings 199,000 298,000
Accounts payable 386,246 228,062
Accrued interest payable 52,559 97,068
Other liabilities 76,037 189,594
Deferred gain on sale of fixed asset 258,821 -
------------ -------------
Total Liabilities 40,942,798 42,733,180
Minority Interest 433,172 360,166
Stockholders' equity:
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,109,734 shares in 2003 and
4,014,732 shares in2002 41,097 40,147
Additional paid-in-capital 5,633,260 5,537,960
Accumulated deficit (1,800,435) (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 (23,807) (81,764)
------------ -------------
Total Stockholders' Equity 3,509,585 3,155,967
------------ -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 44,885,555 $ 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 September 30, 2003 and 2002
(Unaudited)
For the Three Month For the Nine Month
Period Ended Period Ended
2003 2002 2003 2002
----------------- -------------- ----------------- ----------------
Interest income:
Interest and fees on loans $ 642,732 $ 740,087 $ 1,902,500 $ 2,144,835
Interest on securities:
U.S. Government agencies 8,178 73,979 71,509 233,397
Other securities 19,004 23,047 63,521 72,058
Interest on federal funds and other 817 2,335 8,972 14,435
----------------- -------------- ----------------- ----------------
Total interest income 670,731 839,448 2,046,502 2,464,725
----------------- -------------- ----------------- ----------------
Interest expense:
Interest on deposits:
Demand deposits 98,850 86,172 287,570 232,584
Savings deposits 1,116 1,195 3,549 3,447
Time deposits 91,812 147,876 338,272 521,514
Short term borrowings 563 8,184 1,954 9,536
Long term borrowings 2,227 4,803 9,079 16,362
----------------- -------------- ---------------- ----------------
Total interest expense 194,568 248,230 640,424 783,443
----------------- -------------- ----------------- ----------------
Net interest income 476,163 591,218 1,406,078 1,681,282
Provision for loan losses 22,500 15,000 166,900 60,000
----------------- -------------- ----------------- ----------------
Net interest income after
provision for loan losses 453,663 576,218 1,239,178 1,621,282
----------------- -------------- ----------------- ----------------
Other income:
Loan servicing and sub-servicing
Fees 280,014 143,033 713,407 534,841
Initial loan set up and other fees 964,637 662,521 2,854,831 1,785,506
Gain on sale of mortgage loans 180,492 42,607 669,005 97,610
Insurance and investment fee income 45,772 28,888 127,310 78,701
Deposit service charges and fees 28,851 28,555 86,292 59,288
Net security (losses)/gains (27,623) 69,733 (27,623) 69,733
Write down of Michigan BIDCO (29,258) - (29,258) -
Gain on the sale of other real estate
owned 130,771 - 130,771 -
Other 128,242 44,537 194,993 107,952
----------------- -------------- ----------------- ----------------
Total other income 1,701,898 1,019,874 4,719,728 2,733,631
----------------- -------------- ----------------- ----------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended September 30, 2003 and 2002
(Unaudited)
For the Three Month For the Nine Month
Period Ended Period Ended
2003 2002 2003 2002
------------------- ----------------- --------------- -----------------
Other expenses:
Salaries and benefits $ 897,429 $ 695,665 $ 2,509,497 $ 2,111,305
Occupancy, net 128,151 83,473 306,486 266,136
Data processing and equipment
Expense 139,293 107,373 363,161 323,871
Legal and audit expense 45,768 42,652 124,139 122,070
Consulting fees 48,987 43,142 115,744 135,702
Mortgage banking expense 217,021 102,338 605,782 402,198
Servicing rights amortization 210,937 142,589 764,952 410,698
Advertising 39,176 7,216 99,129 46,199
Memberships and training 34,283 20,209 81,447 69,350
Travel and entertainment 22,716 17,693 82,895 66,434
Supplies and postage 70,195 43,103 174,431 140,460
Insurance 24,026 23,507 69,680 65,497
Other operating expenses 246,140 109,779 542,401 297,526
----------------- -------------- ----------------- ----------------
Total other expenses 2,124,122 1,438,739 5,839,744 4,457,446
----------------- -------------- ----------------- ----------------
Income tax benefit (80,249) - (80,249) -
----------------- -------------- ----------------- ----------------
Net Income (loss) $ 111,688 $ 157,353 $ 199,411 $ (102,533)
=================== ============ ================ =================
Net income (loss) available to
common shareholders $ 111,688 $ 157,353 $ 199,411 $ (102,533)
=================== ================= =============== =================
Basic and diluted income(loss) per common $ 0.03 $ 0.09 $ 0.05 $ (0.03)
Share
=================== ================= =============== =================
Weighted average shares outstanding 3,951,994 3,875,538 3,917,222 3,845,570
=================== ================= =============== =================
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 September 30, 2003 and 2002
(Unaudited)
For the Three Month For the Nine Month
Period Ended Period Ended
2003 2002 2003 2002
--------------------------------------------------------------
Net income (loss) $111,688 $157,353 $199,411 ($102,533)
Other comprehensive income(loss):
Unrealized (losses)gains on securities
available for sale 26,532 245,852 85,580 143,676
Less: reclassification adjustment
for accumulated gains(losses)
included in net income (loss) (27,623) 69,733 (27,623) 69,733
--------------------------------------------------------------
Other comprehensive (loss)income, before
tax effect (1,091) 176,119 57,957 73,943
Income tax expense (benefit) - - - -
Other comprehensive (loss)income, net
of tax (1,091) 176,119 57,957 73,943
--------------------------------------------------------------
Comprehensive income(loss) $110,597 $333,472 $257,368 ($28,590)
==============================================================
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2003 and 2002
2003 2002
--------------------- -------------------
Cash flow from operating activities:
Net income(loss) $ 199,411 $ (102,533)
Adjustments to reconcile net income (loss) to net cash from Operating Activities:
Depreciation 233,323 217,617
Amortization 839,952 485,699
Provision for loan losses 166,900 60,000
Net gain on mortgage loan sales (669,005) (97,610)
Gain on sale of fixed assets (154,030) -
Net (accretion) on investment securities (4,734) (233,389)
Net loss(gain)on sale of securities 27,623 (69,733)
Originations of mortgage loans (105,273,623) (41,785,633)
Proceeds from mortgage loan sales 106,899,323 42,343,935
Change in:
Real estate owned (33,420) (522,638)
Other assets (937,953) 253,168
Other liabilities 143,124 (261,576)
--------------------- -------------------
Net cash provided by operating activities 1,436,891 287,307
--------------------- -------------------
Cash flow from investing activities:
Purchase of investment securities (98,326) (488,705)
Proceeds from maturities and pay downs of securities
available for sale 59,450 1,034,160
Loans granted, net of repayments (568,981) 2,667,712
Proceeds from sales of investment securities 1,235,182 236,929
Premises and equipment expenditures (155,192) (174,477)
Proceeds from sale of premises 1,173,833 -
Net change in Michigan BIDCO equity securities 29,258 -
--------------------- -------------------
Net cash provided by investing activities 1,675,224 3,275,619
--------------------- -------------------
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2003 and 2002
2003 2002
------------------- -------------------
Cash flow used in financing activities:
Net (decrease) increase in deposits (1,950,321) (576,882)
Net increase (decrease) in short term borrowings (91,566)
Principal payments on long term borrowings (99,000) (1,119,000)
Issuance of long term borrowings - 20,000
Issuance of common stock 96,250 128,412
------------------- -------------------
Net cash used in financing activities (1,953,071) (1,639,036)
------------------- -------------------
1,159,044 1,923,890
Net change in cash and cash equivalents Cash and cash equivalents:
Beginning of period 2,569,469 837,550
------------------- -------------------
End of period $ 3,728,513 $ 2,761,440
=================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 684,933 $ 891,155
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: 3,951,994 and
3,899,538 for the three months ended September 30, 2003 and 2002, respectively;
3,917,222 and 3,899,538 shares for the nine months ended September 30, 2003 and
2002, respectively
(2) Investment Securities
The Bank's available-for-sale securities portfolio at September 30,
2003 had a net unrealized loss of approximately $23,000 as compared with a net
unrealized loss of approximately $82,000 at December 31, 2002.
Securities available for sale at September 30, 2003:
(in Thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
U.S. agency mortgage-backed $ 1,966 $ 0 $ (24) $ 1,942
================ ================ ================ ================
Securities available for sale at December 31, 2002
(in Thousands) 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 September 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 54,000 and 75,000 during the
nine month period ended September 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 September 30, 2003, the Company had net
income of $111,688 compared to net income of $157,353 for the three months ended
September 30, 2002.
Net income for the nine months of 2003 was $199,411, versus a net loss
of $102,533 for the same period last year. The net income in 2003 includes an
income tax benefit of $80,249. This benefit represents tax credits that are
expected to be applied to taxable income. Community Banking incurred a pre-tax
loss of $135,000 during the current year's nine months as opposed to pre-tax
income of $19,000 from the year before. A drop in the net interest margin
accounted for the most of this variance. In contrast, pre-tax income at Midwest
Loan Services increased to $365,000 in 2003 from a pre-tax loss of $67,000 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 September 30, 2003 and 2002 (in
thousands):
Pre-tax income (loss) summary for the three and nine months ended September
30, 2003
Three Months Nine Months
Community Banking $ (8) $ (135)
Midwest Loan Services 89 365
Corporate Office (50) (111
---------- ----------
Total $ 31 $ 119
========== ==========
Pre-tax income (loss) summary for the three and nine months ended September
30, 2002
Three Months Nine Months
Community Banking $141 $ 19
Midwest Loan Services 13 (67)
Corporate Office 3 (55)
---------- ----------
Total $ 157 $ (103)
========== ==========
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased to $476,163 for the three months ended
September 30, 2003 from $591,218 for the three months ended September 30, 2002.
The yield on interest earning assets decreased from 8.55% in the 2002 period to
6.93% in the 2003 period. The cost of interest bearing liabilities decreased
from 2.57% in the 2002 period to 2.14% in the 2003 period. Net interest income
as a percentage of total average earning assets decreased from 5.98% to 4.78% in
2003. Management is actively addressing the decline in the net yield and is
implementing action to mitigate and reverse the trend.
Net interest income decreased to $1,406,078 for the nine months ended
September 30, 2003 from $1,681,282 for the nine months ended September 30, 2002.
Net interest income for the nine months in 2003 decline from the previous period
because the average yield on earning assets decline at a higher rate than the
average yield on interest bearing deposits. The yield on average earning assets
dropped from 8.36% in 2002 to 6.93% in 2003. The cost of interest bearing
liabilities decreased from 2.70% for the 2002 period to 2.25% for the nine
months ended September 30, 2003. The net yield on interest earning assets
decreased from 5.70% to 4.76%.
Interest income
Interest income decreased to $670,731 in the quarter ended September
30, 2002 from $839,448 in the quarter ended September 30, 2002. The average
volume of interest earning assets decreased slightly to $38,838,345 in the 2003
period from $38,950,638 in the 2002 period. The yield on interest bearing assets
declined from 8.55% in 2002 to 6.93% in 2003. The decrease was due to a general
decline in the yield of interest bearing assets which responded to the declining
rate environment. Additionally, in third quarter of 2002 the securities
portfolio yielded 11.11% as compared with 3.03% in the same period in 2003. In
2002, the high yield resulted from accelerated income recognized on a
collateralized mortgage obligation. As interest rates declined, the expected
duration period for this bond was shortened. The reduction in the expected
duration period stimulated an accelerated accretion of the bond discount. As
expected, the shorter duration period resulted in a rapid paydown of the
principal balance of the mortgage obligation in 2003. The lower yield in 2003
results from a more stable expected duration period and is more comparable to
the yields reported in periods prior to the major reduction in the expected life
of the bond.
Interest income decreased to $2,046,502 in the nine months ended
September 30, 2003 from $2,464,725 in the nine months ended September 30, 2002.
The average volume of interest earning assets increased slightly to $39,472,132
in the 2003 period from $39,434,253 in the 2002 period. The overall yield on
interest bearing assets decreased to 6.93% from 8.36%, in response to a
declining interest rate during 2002 and 2003.
Interest Expense
Interest expense decreased to $194,568 in the three months ended
September 30, 2003 from $248,230 in the 2002 period. The decrease was due to a
drop in the yield in 2003 to 2.14% from 2.57% in 2002. The yield declined as the
interest rate liabilities re-priced in the declining rate environment occurring
in 2002 and 2003. Additionally, the lower interest
expense was due to lower interest bearing liabilities. The average volume of
interest bearing liabilities decreased to $36,391,376 in 2003 from $38,251,051
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. During the third quarter of 2003, lower
cost average demand deposits and money market accounts represented 65% of
average interest bearing liabilities as compared with 48% for the same period
in 2002.
Interest expense decreased to $640,424 in the nine months ended
September 30, 2003 from $783,443 in the 2002 period. The decrease was due to a
lower yield on the interest rate liabilities and by a decrease in the volume of
interest bearing liabilities. The yield dropped to 2.25% in 2003 from 2.70% in
2002. As rates dropped in 2002 and 2003, the liabilities re-priced at lower
rates. The volume of interest rate liabilities decreased to $38,139,634 in 2003
from $38,844,397 in 2002.
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 nine
months ended September 30, 2003 and 2002.
Three Months Ended Three Months Ended
-----------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
-----------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc / Exp Yield (1) Balance Inc / Exp Yield (1)
Interest Earning Assets:
Commercial Loans $17,767,173 $360,362 8.14% $18,035,906 $392,959 8.64%
Real Estate Loans 15,073,193 241,836 6.44% 13,695,408 277,441 8.04%
Installment/Consumer Loans 1,873,423 40,534 8.68% 3,190,144 69,687 8.67%
---------------------------------- ----------------------------------
Total Loans 34,713,789 642,732 7.43% 34,921,458 740,087 8.41%
Investment Securities 3,600,717 27,182 3.03% 3,464,893 97,026 11.11%
Fed. Funds & Bank Deposits 523,839 817 0.63% 564,287 2,335 1.64%
---------------------------------- ----------------------------------
Total Interest Bearing Assets 38,838,345 670,731 6.93% 38,950,638 839,448 8.55%
---------------------------------- ----------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 6,645,560 15,775 0.95% 5,985,391 16,175 1.07%
Savings 387,111 1,116 1.16% 418,736 1,195 1.13%
Time 11,670,506 91,812 3.16% 17,458,042 147,876 3.36%
Money Market 17,123,064 83,075 1.95% 12,306,332 69,997 2.26%
Short-term Borrowings 349,635 563 0.65% 1,507,185 8,184 2.15%
Long-term Borrowings 215,500 2,227 4.14% 575,365 4,803 3.31%
---------------------------------- ----------------------------------
Total Interest Bearing 36,391,376 194,568 2.14% 38,251,051 248,230 2.57%
Liabilities
---------------------------------- ----------------------------------
Net Earning Assets, net
interest income, and
interest rate spread $2,446,969 $476,163 4.78% $699,587 $591,218 5.98%
================================== ==================================
Net Interest Margin 4.92% 6.02%
(1) Yield is annualized.
Nine Months Ended Nine Months Ended
September 30, September 30,
2003 2002
------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc (Exp) Yield (1) Balance Inc (Exp) Yield (1)
Interest Earning Assets:
Loans:
Commercial $18,447,150 $1,084,405 7.86% $17,991,436 $1,098,679 8.16%
Real Estate 13,839,520 680,175 6.57% 13,646,202 811,488 7.95%
Installment/Consumer 2,119,100 137,920 8.70% 3,375,221 234,668 9.30%
---------------------------------- -----------------------------------
Total Loans 34,405,770 1,902,500 7.39% 35,012,859 2,144,835 8.19%
Investment Securities 3,969,823 135,030 4.55% 3,201,903 305,455 12.75%
Federal Funds & Bank
Deposits 1,096,539 8,972 1.09% 1,219,491 14,435 1.58%
---------------------------------- -----------------------------------
Total Interest Bearing 39,472,132 2,046,502 6.93% 39,434,253 2,464,725 8.36%
Assets
---------------------------------- -----------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 6,384,134 41,835 0.88% 5,105,967 41,031 1.07%
Savings 416,907 3,549 1.14% 404,937 3,447 1.14%
Time 14,764,049 338,272 3.06% 20,387,702 521,514 3.42%
Money Market 16,055,339 245,735 2.05% 11,717,429 191,553 2.19%
Short-term borrowings 270,705 1,954 0.97% 620,416 9,536 2.06%
Long-term borrowings 248,500 9,079 4.88% 607,946 16,362 3.60%
---------------------------------- -----------------------------------
Total Interest Bearing
Liabilities 38,139,634 640,424 2.25% 38,844,397 783,443 2.70%
---------------------------------- -----------------------------------
Net Earning Assets, net interest
income, and interest rate
spread $1,332,498 $1,406,078 4.69% $589,856 $1,681,282 5.66%
================================== ===================================
Net yield on interest-earning assets 4.76% 5.70%
(1) Yield is annualized.
New Loan Product
University Bank has initiated an innovative mortgage alternative loan
transaction (MALT(TM)1) origination program to provide persons of the Muslim
faith as an alternative to home mortgages to allow homeowners to be compliant
with Muslim Law (Sharia'a). Current conventional mortgage products are
prohibited by the tenets of the Muslim faith, which forbid the receipt or
payment of interest. After six months of preparation, this program originated
its first MALT(TM) in July and to date has originated six MALT(TM)s for a total
balance of $1.04 million, with an additional 11 MALT(TM)s approved and pending
closing. Management's near term goal is to originate 70 MALT(TM)s under the
program for a total balance of $12.0 million. If this goal is achieved, the
recurring income of the Community Banking division will rise an estimated
$480,000 per year, excluding any potential credit losses, with associated
expenses of just $5,000 per year, excluding upfront costs of MALT(TM)
origination. MALT(TM) origination costs are covered by origination fees paid by
the MALT(TM) customers. If the shape of the interest rate curve, which is
currently steep, flattens, the profitability of the product could be lower.
Based on product market research, there are a total of 66,000 families in
Southeastern Michigan that are prospects for this product. In addition, we are
in negotiations with a major multinational bank that wishes to purchase
MALT(TM)s in blocks of $5 million. For every $10 million in MALT(TM)s originated
by the Community Banking division of the Bank under this arrangement, management
anticipates that the recurring income of the Community Banking division would
increase by $75,000 to $100,000 per year. There is no assurance that this
arrangement or the Lehman Brothers deal will be consummated.
Allowance for Loan Losses
The provision to the allowance for loan losses was $166,900 for the
nine-month period ended September 30, 2003 and $60,000 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 $172,430 for the
nine-month period ended September 30, 2003 as compared to $50,154 for the same
period in 2002. Illustrated below is the activity within the allowance for the
nine-month period ended September 30 2003 and 2002, respectively.
2003 2002
---- ----
Balance, January 1 $ 408,219 $ 579,113
Provision for loan losses 166,900 60,000
Loan charge-offs (237,810) (59,581)
Recoveries 65,380 9,427
----------- -----------
Balance, September 30 $ 402,690 $ 588,959
=========== ============
At September 30, 2003 At December 31, 2002
--------------------- --------------------
Total loans (1) $33,585,586 $33,192,034
Reserve for loan losses $402,690 $ 408,219
Reserve/Loans % (1) 1.20% 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 September 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) 542,007 102,713
Installment - 67,546
Commercial 207,801 509,301
----------- -----------
Subtotal 749,808 679,560
----------- -----------
Other real estate owned 886,618 853,198
----------- -----------
Total non-performing assets $1,636,426 $1,532,758
============ ============
At September 30, 2003 At December 31, 2002
--------------------- --------------------
Ratio of non-performing assets to total
loans (1) 4.87% 4.62%
============ ============
Ratio of loans past due over 90 days and
nonaccrual loans to loan loss reserve 186% 166%
============ ============
(1) Excludes loans held for sale which are valued at the lower of cost or fair
market value.
At September 30, 2003, the entire balance of other real estate owner
consists of residential real estate.
Non-accrual loans at September 30, 2003 include real estate secured
loan relationships in the amount of $542,007 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 September 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 $1,701,898 for the three months
ended September 30, 2003 from $1,019,874 for the three months ended September
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 fees 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 $120 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 $4,719,728 for the nine months
ended September 30, 2003 from $2,733,631 for the nine months ended September 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. The low mortgage rates generated significant activity in the
mortgage re-financing category. Income generated from this activity was
significantly higher than in the third quarter of 2002.
At September 30, 2003, Midwest was subservicing 13,896 mortgages, an
increase of 66 % from 8,372 mortgages at December 31, 2002. During the nine
month period of 2003, Midwest originated 719 mortgages, an increase of 177 %
from mortgages originated in the nine month period of 2002. Management
anticipates ending this year with twice the mortgages subserviced as at the
beginning of the year. The balance of loans subserviced is expected to be over
$2 billion.
Near the end of the third quarter, long-term interest rates rose. This
rise would tend to increase the value of mortgage servicing rights and decrease
current mortgage loan origination activity.
Midwest Loan Services is in final negotiations with Lehman Brothers to
expand its mortgage origination capabilities for credit unions to include jumbo
and non-standard mortgage loans. This would allow Midwest to offer a complete
range of mortgage products on a private label basis serviced in the name of the
credit union for the life of the loan to its customers. Midwest believes that
this would be the first total solution of this type in the credit union
industry. Lehman Brothers predicts that this program will generate $8 million in
revenue to Midwest over the next five years on a total portfolio of $11 billion
in subservicing.
Non-Interest Expense
Non-interest expense increased to $2,124,122 in the three months ended
September 30, 2003 from $1,438,739 for the three months ended September 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.
Non-interest expense increased to $5,839,744 in the nine months ended
September 30, 2003 from $4,457,446 for the nine months ended September 30, 2002.
The increase was primarily the result of increased operating expenses at Midwest
Loan Services resulting from high mortgage origination activity.
At September 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 $107 million. The
carrying value of these servicing rights was $988,162 at September 30, 2003.
Based on recent comparable sales and indications of fair value from an industry
broker, 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. Amortization expense
for the nine months ended September 30,2003 was $764,952 as compared with
$410,698 in the same period in 2002.
Capital Resources
The table below sets forth the Bank's risk based assets, capital ratios
and risk-based capital ratios of the Bank. At September 30, 2003, the Bank was
considered "well-capitalized".
The table below sets forth the Bank's risk based assets, capital ratios
and risk-based capital ratios of the Bank. At September 30, 2003, the Bank
was considered "well-capitalized".
September 30, 2003
(in $000s)
TIER 1 CAPITAL
Total Equity Capital $3,679
Less: Unrealized losses on available-for-Sale
Securities (23)
Plus: Minority Interest 433
Less: Other identifiable Intangible Assets 283
Total Tier 1 Capital 3,852
TIER 2 CAPITAL
Allowance for loans & Lease losses 403
Less: Excess Allowance -
Total Tier 2 Capital 403
Total Tier 1 & Tier 2 Capital $4,255
CAPITAL RATIOS
Tier 1/Total Average Assets of $43,747 9.19%
Tier 1/Total Risk-Weighted Assets of $33,058 11.31%
Tier 1 & 2/Total Risk-Weighted Assets of $33,058 12.49%
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
September 30, 2003, the Bank had cash and cash equivalents of $3,728,513. The
Bank's lines of credit include the following:
o $3.0 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 September 30, 2003, the Bank had $1.5 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 September 30, 2003, $199,000 was payable to another financial
institution as compared to $331,000 at September 30, 2002. Long-term borrowings
at September 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 September 30, 2003, Bancorp had $9,000 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 September 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 September 30, 2003 was estimated to
be ($9,625,000) or -21.44%.
In addition, management prepares an estimate of sensitivity to immediate changes
in short term interest rates. At September 30, 2003, the following impact was
estimated on net interest margin in the 12 months following an immediate
movement of interest rates:
Effect on Net
Rate Change Interest Margin
(% Change) ($ Change)
-1.00% 0.98% $18,000
+1.00% -0.30% ($11,000)
+3.00% -0.90% ($32,000)
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 September 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 $9,083 $3,847 $4,889 $11,761 $3,259 ($403) $32,436
Non-Accrual Loans - - - - 750 750
Securities 381 1,000 - - 561 - 1,942
Other Assets - 600 - - - 5,429 6,029
Cash and Due from Banks 2,542 - - - - 1,187 3,729
-------------------------------------------------------------------------------------------
TOTAL ASSETS 12,006 5,447 4,889 11,761 3,820 6,963 44,886
-------------------------------------------------------------------------------------------
LIABILITIES
- -----------
Time deposits 4,339 2,920 2,956 586 414 - 11,215
Demand -interest bearing 9,810 9,810 7,003 - - - 26,623
Demand - non interest - - - - 1,734 1,734
Savings - - 398 - - - 398
Long term borrowings 32 167 - - - 199
Other Liabilities - - - - - 1,207 1,207
Equity - - - - - 3,510 3,510
-------------------------------------------------------------------------------------------
TOTAL LIABILITIES 14,181 12,897 10,357 586 414 6,451 44,886
-------------------------------------------------------------------------------------------
Gap (2,175) (7,450) (5,468) 11,175 3,406 512 -
===========================================================================================
Cumulative gap ($2,175) ($9,625) ($15,093) ($3,918) ($512) -
================================================================================
Gap percentage -4.85% -21.44% -33.63% -8.73% -1.14% 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 page 19
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: November 14, 2003 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President
Date: November 14, 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: November 14, 2003 /s/Stephen Lange Ranzini
----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
10-Q 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
7) I have reviewed this quarterly report on Form 10-Q of University Bancorp,
Inc.;
8) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
9) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
10) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
11) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
12) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2003 /s/Nicholas K. Fortson
----------------------
Nicholas K. Fortson
Chief Financial Officer
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended September 30, 2003 as filed with
the Securities and Exchange Commission on November 14, 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: November 14, 2003 By: /s/ Stephen Lange Ranzini
--------------------- --------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended September 30, 2003 as filed with
the Securities and Exchange Commission on November 14, 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: November 14, 2003 By: /s/ Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer