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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended
December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
- ------------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer incorporation)
Identification No.
959 Maiden Lane, Ann Arbor, Michigan 48105
- ------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 741-5858
--------------
Securities registered pursuant to section 12(b) of the Act: NONE Securities
registered pursuant to section 12(g) of the Act:
Common Stock, par value $.010 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ___ No _X___
The number of shares outstanding of the Registrant's Common Stock as of
March 7 2005: 4,143,878 shares. The aggregate market value of the voting stock
held by non-affiliates of the Registrant based on $1.46 per share, the closing
price for the Registrant's Common Stock on June 30, 2004, as reported by NASDAQ,
was approximately $1,681,311.
* For purposes of this calculation shares of the Registrant held by directors
and officers of the Registrant and by other affiliates have been excluded.
Page 1 of 86 pages
Exhibit index on sequentially numbered page 77
PART I.
Item 1. - Business
General
University Bancorp, Inc. The Company is a Delaware corporation which
operates as a bank holding company for its wholly-owned subsidiary, University
Bank. The Company changed its name to `University Bancorp, Inc.' from `Newberry
Bancorp, Inc.' in 1996, in order to better identify itself with the Bank.
University Bank. The Bank is a state chartered community bank. The Bank
began business in 1890 and was chartered by the state of Michigan in 1908. In
1994, we sold the bank's offices in Newberry, Michigan and Sault Ste. Marie,
Michigan. In 1995 we relocated the Bank's main office to Ann Arbor, Michigan
and, changed the Bank's name from `The Newberry State Bank' to `University
Bank'to more closely identify with its current place of business. Ann Arbor is a
university town, home to the University of Michigan and is the largest city in
Washtenaw County, just west of the Detroit Metropolitan Statistical Area. The
Bank's primary market area is defined as the City of Ann Arbor and surrounding
areas in greater Washtenaw County.
Midwest Loan Services. In 1995, University Bank acquired 80% of the common
stock of Midwest Loan Services ("Midwest"). Midwest specializes in the
origination, servicing and subservicing of mortgage loans for various credit
unions, financial institutions and mortgage brokers. Most of their servicing and
subservicing portfolio is comprised of residential mortgage loans sold to Fannie
Mae, Freddie Mac and other private residential mortgage conduits, the most
important of which is a jumbo and subprime loan conduit established by Lehman
Brothers.
University Insurance & Investment Services. In 1996, University Bank
established an insurance and investment products sales agency. This subsidiary
of the Bank, called "University Insurance & Investment Services, Inc." (the
Agency) is based in the Bank's Ann Arbor office. The Agency is licensed by the
State of Michigan to sell insurance as agent for licensed insurance companies. A
d/b/a of the Agency, University Insurance Center, commenced business in 1999,
adding a full service property and casualty insurance agency offering insurance
for homes, autos, apartments and businesses in addition to the original products
which included life and health care insurance, annuities and mutual fund sales.
Employees of the Agency are also licensed to sell investment products such as
annuities and mutual funds, and the President of the Bank, who is also Chairman
of the Agency, also offers broker-dealer investment services including money
management through a clearing arrangement with Equitas America LLC and Pershing,
a division of the Bank of New York.
Employees
The Company employed 63 full-time equivalents as of March 3, 2005:
University Bank, Ann Arbor 24
Midwest Loan Services 35
University Insurance & Investment 4
Lines of Business
Deposit Products & Services
University Bank offers traditional retail savings products and services to
its customers. These include demand deposit and NOW interest-bearing checking
accounts, money market deposit accounts, regular savings accounts and term
deposit certificates ranging in maturity from three to three hundred months. The
Bank also offers Sharia'a compliant profit-sharing deposits for Muslim
depositors. The Bank also offers free access to 24-Hour ATM machines, telephone
banking, internet banking, debit cards, online bill payment, Western Union(TM)
money transfer services and Gold VISA accounts. From time to time to raise
liquidity, the Bank relies on brokers to sell CDs. At December 31, 2004, the
Bank had approximately $3.7 million in CDs issued through brokers.
Lending Products
University Bank offers a range of traditional lending products,
including commercial small business loans, residential real estate mortgage
loans, home equity loans, commercial real estate mortgage loans, consumer
installment loans, and land development and construction loans. The Bank also
offers Sharia'a compliant mortgage alternative loan transactions (MALTs) for
Muslim customers.
Classifications of the loan portfolio as of December 31, 2004 are as follows:
Amount
Outstanding(1) % of Total
Commercial, Real Estate & Other $15,079,343 35.07%
Residential Construction 1,238,530 2.88%
Residential Real estate 20,761,659 48.28%
Residential Home equity 5,542,571 12.89%
Consumer 173,363 0.40%
Credit Card 204,334 0.48%
------------ ---------
Gross Loans $42,999,800 100.00%
============ =========
(1) - Excludes loans held for sale.
The Bank's loan portfolio is geographically concentrated in Ann Arbor and
Washtenaw County, Michigan. The ability of individual loan customers
to honor their debts is partially dependent on the local economy. The Ann Arbor
area is primarily dependent on the education, healthcare, services and
manufacturing (automotive and other) industries.
Most of the Bank's commercial loans are secured by commercial real estate.
Commercial real estate loans have a loan to value ratio typically less than 80%
at the time the loan is originated. In no cases is the loan to value ratio for
commercial real estate loans greater than 85%. The primary risk of commercial
loans is that the area's economy declines and rents decrease while vacancy
increases, thereby decreasing the value of the building. If the guarantor
suffers a financial reverse, the Bank is then exposed to a loss.
Residential loans typically have a loan to value ratio less than 80% at the
time the loan is originated, unless the borrower's financial position is very
strong, in which case a loan to value ratio of up to 90% or private mortgage
insurance is considered. To meet the Bank's goals for first time homebuyers, the
Bank has originated 97% to 100% loan to value residential loans and currently
has about $2 million of these loans in its loan
portfolio. Home equity secured residential loans have loan to value ratios of
less than 90% at time of origination in the case of fixed rate fully-amortizing
loans and 80% for home equity lines of credit, with a few exceptions with higher
ratios for borrowers with strong credit. As of December 31, 2004, the Bank had
also originated $8.46 million of mortgage alternative loan transactions which
are Sharia'a-compliant mortgage alternatives for Muslim customers. The primary
risk of residential lending is that home prices drop (typically this occurs
during recessions) and borrowers walk away from their home or file for
bankruptcy. All of the Bank's construction loans are secured by residential
properties with a loan to value ratio of 80% or less. The Bank controls the risk
of construction lending by performing inspections prior to disbursing interim
construction funds to avoid cost overruns.
The Bank makes few unsecured loans, typically for borrowers who
have a high net worth, but even in these cases; the Bank usually takes
collateral out of an abundance of caution. Most of the Bank's credit card loans
are secured by residential properties. Consumer loans are generally secured by
vehicles (primarily cars or trucks). The primary risk of these loans is that the
value of the car depreciates faster than the loan balance amortizes, and the
borrower loses their job or has a severe medical problem in their family. In
these circumstances, the collateral could be insufficient to repay the loan if
the borrower files for bankruptcy. In addition, if the economy is soft, used
vehicle prices tend to deteriorate creating additional risk of insufficient
collateral in the event of a default.
The Bank makes very few business loans that are not secured by real estate.
Business Lines of Credit are typically made up to a 50% ratio of inventory and
other equipment at current market value, and 70% of current receivables.
Business Manager Loans are also structured as Lines of Credit and are secured by
individual receivables up to 90% of face value individually purchased with
recourse to the borrower and additional insurance to protect the bank against
fraud and bankruptcy of the issuer of the account that is receivable to the
borrower. The primary risk of this type of lending backed by non-real estate
business assets is that if the business suffers a financial reverse, an
unscrupulous borrower can easily dissipate the collateral, causing the Bank a
loss. For this reason, the Bank de-emphasizes this type of lending.
Typically with respect to all personal and residential loans, a ratio of
total debt payments to total income of all borrowers and guarantors less than
42% is required. With respect to commercial real estate and business loans, a
ratio of income to all debt payments of greater than 1.25x is required.
Therefore, the Bank typically has both income and asset backing to secure its
loans. However, there can always be valid reasons to have exceptions to each
rule. The Bank's loan committee retains the power to take unusual circumstances
into account when evaluating each loan request versus the Bank's policies. Loans
that are lacking current demonstrated income are classified and increased
reserves are established for those loans. Loans that are lacking both current
demonstrated income and asset backing are allocated even higher reserves equal
to the amount estimated to be realized upon the sale of the collateral less all
estimated costs.
Mortgage Banking
The Bank and Midwest originate internally or via other financial
institutions residential home loans that generally qualify for sale to secondary
market investors under the underwriting criteria of the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association and the
Government National Mortgage Association. Loans purchased or originated
internally are either sold directly to FHLMC, FNMA or GNMA, or are pooled into
mortgage-backed securities and the securities are sold to investors in the
secondary market. With the exception of Midwest, the Bank is currently selling
the servicing rights on all mortgages originated that are sold to the secondary
market. Some residential mortgages are held in the Bank's loan portfolio as an
investment.
University Bank became a seller/servicer and began originating Federal Home
Loan Mortgage Corporation (FHLMC) insured mortgages in 1991 and became a
seller/servicer and began originating Federal National Mortgage Association
(FNMA) insured mortgages 1994. The Bank has also been approved as a
seller/servicer of Government National Mortgage Association (GNMA) mortgages for
many years but only began using its license in 1999 to originate and sell these
loans without retaining the servicing rights. Midwest is also licensed with FNMA
and FHLMC.
Mortgage Servicing and Subservicing
Mortgage servicing firms receive monthly payments from loan customers,
aggregate and account for these payments, and send the funds to mortgage-backed
securities holders, including pension funds and financial institutions. For some
mortgage customers, escrow funds are also accumulated, and funds sent to taxing
authorities and insurance companies as needed. Mortgage servicers also dun
delinquent accounts and foreclose loans, if required. Mortgage servicers receive
a fixed monthly fee for performing this service. When these services are
performed for the Bank, it is called `servicing'. When these services are
performed for other institutions, it is called `subservicing'. The Bank's
80%-owned subsidiary, Midwest, specializes in subservicing residential mortgage
loans sold to FNMA and FHLMC and other non-agency private conduits for the
account of credit unions, other financial institutions and mortgage brokers.
Investment Securities
The Bank maintains surplus available funds in investments consisting of
short-term money market instruments, U.S. government bonds, U.S. federal agency
obligations and mortgage-backed securities backed by federal agency obligations.
The Bank's President, who is a licensed Registered Representative, manages these
investments. All purchase/sale decisions are subject to the review and prior
approval of the Asset Liability Committee of the Bank and the Board of
Directors. The securities portfolio provides a source of liquidity to meet
Bank's operating needs. At December 31, 2004, the portfolio had a net unrealized
loss of $51,356 versus a net unrealized loss of $38,795 at December 31, 2003,
and $81,997 at December 31, 2002.
Information regarding securities where cost exceeded more than 10% of the
Company's stockholders' equity at December 31, 2004 is as follows:
Issuer Coupon Yield Final Maturity Market Value Amortized Cost
- ------ ------ ----- --------- ------ -----
FHLBI equity (1) VAR 4.34% None $921,700 $921,700
FNMA CMO 93-205H (2) PO 3.02% 9/25/23 384,504 411,725
GNMA (various) VAR 5.87% 6/20/22 722,103 746,239
(1) The rate varies quarterly. The Bank is required to maintain the
investment in Federal Home Loan Bank of Indianapolis common stock in
an amount related to the Bank's single family mortgage related assets
and FHLBI advances. Shares can be redeemed or sold at par value to
the FHLBI upon five year prior notice.
(2) This Principal Only strip has an expected average life of about five
years. The bond is rated AAA.
Competition
Community Banking, Ann Arbor
The attraction and retention of deposits depend on the Bank's ability
to provide investment opportunities that satisfy the requirements of investors
with respect to rate of return, liquidity, risk and other factors. The Bank
competes for these deposits by offering personal service and attention, fair and
competitive rates, low fees, and a variety of savings programs including
tax-deferred retirement programs.
The Bank competes for loan originations primarily through the quality
of services provided to the loan customers, competitive interest rates and
reasonable loan fees, rapid and local decision-making and the range of services
offered. Competition in originating loans comes principally from other
commercial banks, credit unions, insurance companies, mortgage banking companies
and savings and loans.
The following table shows market share of deposits for Washtenaw County by
financial institution for June 2004, June 2003 and June 2002, respectively from
the FDIC and National Credit Union Association's annual branch deposit survey.
2004 2003 2002
National City 13.28% 12.81% 12.51%
TCF National 12.19% 14.03% 15.63%
Comerica 11.47% 11.03% 11.08%
Bank One 9.80% 8.79% 8.89%
Bank of Ann Arbor 7.21% 6.06% 4.59%
Keybank 6.16% 6.19% 6.41%
University of Michigan CU 5.92% 5.51% 5.21%
Standard Federal 5.85% 4.19% 4.95%
Ann Arbor Commerce 5.62% 5.61% 5.22%
Flagstar 5.51% 4.86% 4.91%
Huron River Area CU 3.57% 3.54% 3.36%
Chelsea State 3.27% 3.09% 3.09%
United Bank & Trust 2.84% 2.53% 2.56%
Midwest Financial CU 2.70% 2.41% 2.24%
Citizens 2.52% 2.54% 2.61%
Republic 2.11% 2.00% 2.03%
Bank of Washtenaw 1.26% 1.13% 1.05%
Automotive FCU 1.22% 1.28% 1.31%
Charter One 0.84% 0.87% 0.71%
University Bank 0.83% 0.76% 0.89%
Ypsilanti Area FCU 0.41% 0.42% 0.39%
Eastern Michigan University CU 0.27% 0.27% 0.24%
Guaranty Bank 0.17% 0.01% 0.06%
Milan FCU 0.04% 0.03% 0.03%
Ann Arbor Postal FCU 0.02% 0.03% 0.03%
Total deposits (in billions) $5.14 $4.89 $4.53
Annual Increase 5.12% 7.95% 4.23%
Total deposits in the county increased 5.07% to $5.14 billion from June
2003 to June 2004. Total deposits in the county increased 8.01% to $4.89 billion
from June 2002 to June 2003. In attracting deposits, the Bank's primary
competitors for deposits are mutual funds, other commercial banks, credit
unions, savings and loans and insurance companies.
The Bank's main office is adjacent to the University of Michigan
Hospital complex. The complex employs a total of 7,800 persons. While the Bank
competes with all of these financial institutions for loans and deposits and in
particular the eight financial institutions that have branch offices in the
northeast Ann Arbor market area, the major competitor in the immediate local
deposit market is Midwest Financial Credit Union, formerly known as Hospital &
Health Services Credit Union. The Bank's main office was formerly the
headquarters of this credit union, which moved its office to a new office
building three miles from the Medical Center Complex.
Banks owned by out-of-state holding companies dominate the Ann Arbor
banking market. The University of Michigan Credit Union is the largest
locally-owned financial institution. The only locally-owned community financial
institutions, excluding University Bank, are University of Michigan Credit
Union, Bank of Ann Arbor, Huron River Area Credit Union, Midwest Financial
Credit Union, Automotive Federal Credit Union and several smaller credit unions.
Mortgage Banking
The Bank and Midwest's retail mortgage origination operations encounter
competition for the origination of residential real estate loans primarily from
savings institutions, commercial banks, insurance companies and other mortgage
banking firms. Many of these firms have a well-established customer and/or
borrower client base. Some competitors, primarily savings institutions,
insurance companies and commercial banks, have the ability to create unique loan
products from time to time because they are able to hold the loans in their own
portfolio rather than sell into the secondary market. The Bank's ability to hold
mortgage loans in its portfolio helps it to compete more effectively. Most loans
sold into the secondary market, however, go to the same sources, those being
FHLMC, FNMA, and GNMA. Most lenders have access to these secondary market
sources; therefore, competition often becomes more a matter of service and
pricing than that of product. As a mortgage loan originator and a purchaser of
mortgage loans through correspondents, Midwest and the Bank must be able to
compete with respect to the types of loan products offered by competitors to
borrowers and correspondents, including the price of the loan in terms of
origination fees or fee premium or discount, loan processing costs, interest
rates, and the service provided by our staff. An important element to competing
is master purchase agreements negotiated periodically with FNMA and FHLMC with
low and competitive loan guarantee fees, a wide variety of mortgage programs,
and a variety of flexible underwriting criteria. Our ability to secure these
master purchase agreements is dependent upon the performance from a quality
perspective of loans previously sold to the agencies.
During lower interest rate environments, competition for loans is less
intense due to the large number of loans available for origination. As interest
rates rise and the number of loans available for origination diminishes,
competition becomes quite intense and companies with larger investor bases,
flexibility with respect to type of product offered and
greater experience in dealing in these types of markets tend to be the most
successful.
The Bank also originates residential loans to be held in portfolio, and
management believes that this product together with the product offerings from
FHLMC, FNMA and GNMA are sufficient for the Bank to meet its customers' needs.
The Bank also is licensed as a HUD Title 1 and Multi-family seller/servicer, but
has no plans at this time to expand utilization of HUD or GNMA programs.
Mortgage Servicing and Subservicing. Servicing competition is somewhat
less intense than the loan origination aspect of mortgage banking. Due to net
worth and management requirements, many mortgage origination companies do not
have the capacity to service loans. Falling interest rates present competitive
challenges for the mortgage servicing operation in that mortgagors are more
likely to refinance existing mortgages. The quality of service and the ability
of the origination operation to compete on price and service are important in
retaining these customers by refinancing them internally, rather than losing the
refinancing transaction to a competitor. Increased refinancing activity as a
result of falling interest rates decreases profitability of mortgage servicing
by increasing amortization charges on purchased mortgage servicing rights.
In the subservicing business, Midwest competes primarily with about 30
firms nationwide, including specialized subservicing units of mortgage banking
companies, and specialized firms owned by banks and savings and loans. Most of
these companies have substantially larger financial resources than Midwest, and
some of them are also located in rural areas with low prevailing wages.
Midwest is located in Houghton, Michigan in the western upper peninsula
of Michigan. Personnel and occupancy costs are the largest costs in a mortgage
servicing operation. However, the prevailing wages and occupancy costs in the
upper peninsula of Michigan are generally lower than the national average.
Midwest has developed a unique business extranet website for its business
partners and their retail customers. Through its website at www.subservice.com,
Midwest provides the opportunity for all customers to access their mortgage
information 24 hours a day 7 days a week in an environment which provides
seamless access to all information. Business partners have access to all
mortgage data as easily as if it were serviced on their in-house computer
system. Customers can access all information about their accounts and perform
any type of transaction through the internet. As a result of low personnel
costs, its internet technology and the relationships it has developed in the
credit union industry over time, the Company believes that Midwest' mortgage
servicing operation has a competitive advantage.
Regulation
Primary Regulators of University Bancorp. The Company is a bank holding
company registered under the Federal Bank Holding Company Act of 1956. The
Federal Reserve Bank of Chicago is the Company's primary regulator and the
Company is subject to regulation, supervision and examination by the Federal
Reserve. The Company is required to file semi-annual reports with the Federal
Reserve and other information as required under the rules of the Board of
Governors of the Federal Reserve System. Additionally, the Federal Reserve Board
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and
regulations. Among these powers is the ability to bar the payment of dividends
by banks and bank holding companies.
Acquisitions. The Company is generally prohibited from engaging in
non-banking activities since it is a bank holding company. The Company cannot
acquire more than 5% of the shares of another company engaged in non-banking
activities. The Company can only acquire direct or indirect control of more than
5% of the voting shares of a company engaged in a banking related activity with
the prior approval by the Federal Reserve Board to acquire these shares or by
regulatory exemption. The Federal Reserve Board has identified specific banking
related activities in which a bank holding company may engage with notice to the
Federal Reserve. The Federal Reserve considers managerial, capital and other
financial factors, including the impact on local competition of any proposal and
past performance under the Community Reinvestment Act in acting on acquisition
or merger applications. Bank holding companies may acquire other banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
Commitments. In connection with obtaining the consent of the Federal
Reserve to a 1989 merger transaction when the Company obtained public listing on
the NASDAQ Small-Cap Market, certain commitments were made to the Federal
Reserve. Management agreed that the Employee Stock Ownership Plan would not
purchase more than 10% of the common stock or 5% of any other class of our
voting shares, without the prior approval of the Federal Reserve. Management
also agreed not to incur additional debt or to have the Bank pay dividends to us
without the prior approval of the Federal Reserve.
Capital Requirements. The Federal Reserve Board imposes certain capital
requirements on the Company under the Federal Bank Holding Company Act,
including a minimum leverage ratio and a minimum ratio of "qualifying" capital
to risk-weighted assets. These requirements are described below under "Capital
Regulations". The Federal Reserve uses capital adequacy guidelines in its
examination and regulation of bank holding companies. If capital falls below
minimum guidelines, a bank holding company may, among other things, be denied
approval to acquire or establish additional banks or non-bank businesses. The
"prompt corrective action" provisions of federal law and regulation authorizes
the Federal Reserve to restrict the payment of dividends to us from an insured
bank which fails to meet specified capital levels.
Source of Strength. In accordance with Federal Reserve Board policy,
the Company is expected to act as a source of financial strength to the Bank and
to commit resources to support the Bank in circumstances in which the Company
may not otherwise wish to do so. Under the Federal Bank Holding Company Act, the
Federal Reserve may require a bank holding company to terminate any activity or
relinquish control of a bank subsidiary if the agency determines that
divestiture may aid the depository institution's financial condition. In
addition, if the Commissioner deems our Bank's capital to be impaired, the
Commissioner may require the Bank to restore its capital by a special assessment
upon us as University Bank's sole stockholder. If the Company were to fail to
pay an assessment, the directors of the Bank would be required, under Michigan
law, to sell the shares of the Bank's stock owned by the Company to the highest
bidder at either a public or private auction and use the proceeds of the sale to
restore the Bank's capital.
Financial Holding Companies. Beginning March 11, 2000, bank holding
companies may apply to become Financial Holding Companies. We have not applied
to become a Financial Holding Company. Financial Holding Companies may engage in
a wider range of non-banking activities than Bank Holding Companies, including
greater authority to engage in securities and insurance activities. The expanded
powers are available to a bank holding company only if the bank holding company
and its bank subsidiaries remain well-capitalized and well-managed. The new law
also imposes various restrictions on transactions between the depository
institution subsidiaries of bank holding companies and their non-bank
affiliates. These restrictions are intended to protect the depository
institutions from the risks of the new non-banking activities permitted to
affiliates.
Public Company Regulation. Our common stock is registered with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). We are therefore subject to the information, proxy solicitation, insider
trading and other restrictions and requirements of the SEC under the Exchange
Act. The Sarbanes-Oxley Act of 2002 provides for numerous changes to the
reporting, accounting, corporate governance and business practices of companies
as well as financial and other professionals who have involvement with the U.S.
public markets.
The Sarbanes-Oxley Act was enacted in 2002. This Act is not a banking
law, but applies to all public companies, including the Corporation.
Sarbanes-Oxley is designed to restore investor confidence. Sarbanes-Oxley adopts
new standards of corporate governance and imposes new requirements on the board
and management of public companies. The chief executive officer and chief
financial officer of a public company must now certify the financial statements
of the company. New definitions of "independent directors" have been adopted,
and new responsibilities and duties have been established for the audit and
other committees of the board. In addition, the reporting requirements for
insider stock transactions have been revised, requiring most transactions to be
reported within two business days.
Section 404 of the Sarbanes-Oxley Act. requires a company to include in
its annual reports a report by management on the company's internal control over
financial reporting and an accompanying auditor's report. The Commission
extended the original Section 404 compliance dates for all issuers in February
2004. Under the latest extension, the Company must re-measure its market
capitalization as of June 30, 2005 to determine if it will be classified as an
accelerated filer. The Company does not expect to be an accelerated filer and,
therefore, must begin to comply with the internal control over financial
reporting requirements for its first fiscal year ending on or after July 15,
2006. This is a one-year extension from the previously established July 15,
2005, compliance date for non-accelerated filers and foreign private issuers.
While complying with Sarbanes-Oxley will result in increased costs to
the Corporation, the additional costs are not expected to have a material effect
on the Corporation
Primary Regulators of University Bank. The Bank is a Michigan banking
corporation and its deposit accounts are insured by the Bank Insurance Fund
(BIF) of the Federal Deposit Insurance Corporation (FDIC). As a
Michigan-chartered commercial bank, University Bank is subject to the
examination, supervision, reporting and enforcement powers of the Commissioner,
as the chartering authority for Michigan banks, and the FDIC, as administrator
of the BIF. These agencies and the federal and state laws applicable to the Bank
and its operations, extensively regulate various aspects of the banking business
including, among other things, reserves against loans, capital
levels relative to operations, lending activities and practices, collateral for
loans, establishment of branches, mergers, acquisitions and consolidations,
payment of dividends, internal controls, permissible types and amounts of loans,
investments and other activities, interest rates on loans and on deposits, and
the safety and soundness and scope of banking practices. As an insured bank,
University Bank is also required to file quarterly reports and other information
as required with the FDIC.
All subsidiaries of University Bank including Midwest and University
Insurance & Investment Services are all also subject to all regulations
applicable to University Bank itself, including regular on-site examination by
both the OFIS and the FDIC.
Other Regulators. As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD
multifamily seller/servicer, University Bank's mortgage banking operation is
subject to regulation and regular on-site examination by FHLMC, FNMA and HUD.
Other Regulations. University Bank and its subsidiaries are also
subject to various regulations including:
o the Community Reinvestment Act,
o the Federal Truth-in-Lending Act,
o the Home Mortgage Disclosure Act,
o the Gramm-Leach Bliley Privacy Act
o the Patriot Act
o the Check 21 Act
o the Equal Credit Opportunity Act,
o the Fair Credit Reporting Act,
o the Fair Debt Collection Act,
o the Right to Privacy Act,
o the Real Estate Settlement Procedures Act,
o the Bank Secrecy Act,
o the Electronic Funds Transfer Act,
o Federal Reserve regulations,
o State usury laws, and
o Federal laws concerning interest rates.
Also, University Bank may not engage in any activity not authorized by the
Michigan Banking Code unless it is authorized by the Commissioner of the OFIS as
being closely related to banking.
These laws and regulations are primarily intended to protect depositors
and the deposit insurance fund of the FDIC, not the Bank or the Company's
stockholders. The following is a summary of certain statutes and regulations
affecting University Bank. The following information is qualified in its
entirety by reference to the particular statutory and regulatory provisions.
Various changes to the Federal Deposit Insurance Act (FDIA) are
currently proposed in Congress. Any change in applicable laws, regulations or
regulatory policies of various governmental regulatory authorities may have a
material effect on the Company's business, operations and prospects. Those
authorities include, but are not limited to, the Board of Governors of the
Federal Reserve System, the FDIC, the Commissioner of the Michigan Office of
Financial and Insurance Services, the Internal Revenue Service, and state taxing
authorities. The Company is unable to predict the nature or extent of
the effects that fiscal or monetary policies, economic controls or new federal
or state legislation may have on future business and earnings.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation. Banks
classified as well-capitalized, as defined by the FDIC, and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized, as defined by the FDIC, and considered to be of substantial
supervisory concern pay the highest premium. A risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act (FDIA) requires the FDIC to establish
assessment rates at levels that will maintain the Deposit Insurance Fund at a
mandated reserve ratio of not less than 1.25% of estimated insured deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted in 1996,
University Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation (FICO). FICO
was created in 1987 to finance the re-capitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (SAIF), which insures the deposits of thrift institutions.
Between January 1, 2000 and the maturity of the outstanding FICO obligations in
2019, BIF members and SAIF members will share the cost of the interest on the
FICO bonds on a pro rata basis. It is estimated that FICO assessments during
this period will be less than 0.025% of deposits. In addition, the Federal Home
Loan Banks, including the Federal Home Loan Bank of Indianapolis, in which
University Bank is an investor, pay 20% of their annual net income to a sinking
fund to retire the FICO bonds until they are paid in full.
Capital Regulations. The FDIC has established the following minimum capital
standards for state-chartered, FDIC-insured non-member banks, like University
Bank:
o a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks
with minimum requirements of 4% to 5% for all others;
o and a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8%, at
least one-half of which must be Tier 1 capital.
Tier 1 capital consists principally of stockholders' equity. These capital
requirements are minimum requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
institutions. For example, FDIC regulations provide that higher capital may be
required to take adequate account of, among other things, interest rate risk and
the risks posed by concentrations of credit, nontraditional activities or
securities trading activities.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring the submission of
a capital restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock,
including additional voting stock, or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
The extent of the regulators' powers depends on whether the institution in
question is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized." An
institution is critically undercapitalized if it has a tangible equity to total
assets ratio that is equal to or less than 2%. An institution is well
capitalized if it has a total risk-based capital ratio of 10% or greater, core
risk-based capital of 6% or greater, and a leverage ratio of 5% or greater, and
the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure. An institution is adequately capitalized
if it has a total risk-based capital ratio of not less than 8%, a core
risk-based capital of not less than 4%, and a leverage ratio of not less than
4%.
These capital guidelines can affect the Bank in several ways. Capital
levels are currently adequate, however, rapid growth, poor loan portfolio
performance, or poor earnings performance, or a combination of these factors,
could change our capital position in a relatively short period of time, making
an additional capital infusion necessary. In general, if the FDIC's assessment
of a Bank's financial and managerial strength changes negatively, the Bank's
cost of FDIC insurance will rise in subsequent semi-annual periods. A financial
institution may also be ordered to restrict its growth, dispose of certain
assets, rescind agreements or contracts, or take other actions as determined by
the ordering agency to be appropriate.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts.
The Bank may not declare or pay a dividend unless the Bank will have
a surplus amounting to at least 20% of its capital after the payment of the
dividend. If the Bank has a surplus less than the amount of its capital, it may
not declare or pay any dividend until an amount equal to at least 10% of net
profits for the
preceding one-half year (in the case of quarterly or semi-annual dividends) or
full-year (in the case of annual dividends) has been transferred to surplus. The
Bank may not declare or pay any dividend until the cumulative dividends on any
issued preferred stock have been paid in full.
Federal law generally prohibits the Bank from making any capital
distribution, including payment of a dividend, or paying any management fee to
us if the Bank would thereafter be undercapitalized. The FDIC may prevent the
Bank from paying dividends if the Bank is in default of payment of any
assessment due to the FDIC. In addition, the FDIC may prohibit the payment of
dividends by the Bank, if a payment is determined, by reason of the financial
condition of the Bank, to be an unsafe and unsound banking practice. The Company
has an agreement with the Federal Reserve Bank of Chicago that requires us to
seek permission before paying any cash dividends. The Bank can pay dividends to
the Company with the permission of the Commissioner of OFIS provided that the
Bank has audited net income for the prior year and provided that the Bank's
cumulative earnings deficit is erased through retained earnings. The deficit
currently is $1,978,688.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act including any extensions of credit to us, investments
in our stock or other securities, and the acceptance of our stock as collateral
for loans. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to our directors
and officers, to our principal stockholders, and to "related interests" of the
directors, officers and principal stockholders. In addition, federal law and
regulations may affect the terms upon which any person becoming one of our
directors or officers or one of our principal stockholders may obtain credit
from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. Federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings.
In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the agencies expect to
require a compliance plan from an institution whose failure to meet one or more
of the standards is of the severity that it could threaten the safe and sound
operation of the institution. Failure to submit an acceptable compliance plan,
or failure to adhere to a compliance plan that has been accepted by the
appropriate regulator, would constitute grounds for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
state usury and regulatory laws, and various federal statutes, including:
o the Equal Credit Opportunity Act,
o the Fair Credit Reporting Act,
o the Truth in Lending Act,
o the Real Estate Settlement Procedures Act, and
o the Home Mortgage Disclosure Act.
Regulations flowing from these laws prohibit discrimination, specify disclosures
to be made to borrowers regarding credit and settlement costs, and regulate the
mortgage loan servicing activities of Midwest, including the maintenance and
operation of escrow accounts and the transfer of mortgage loan servicing.
In receiving deposits, the Bank is subject to extensive regulation
under State and federal law and regulations, including: o the Truth in Savings
Act,
o the Expedited Funds Availability Act,
o the Bank Secrecy Act,
o the Electronic Funds Transfer Act and
o the Federal Deposit Insurance Act
o the Patriot Act
o the Check 21 Act
o the Gram-Leach Bliley Privacy Act.
Violation of these laws could result in the imposition of significant
damages and fines upon the Bank and its directors and officers.
Real Estate Lending Regulations. Federal regulators have adopted
uniform standards for appraisals of loans secured by real estate or made to
finance improvements to real estate. Banks are required to establish and
maintain written internal real estate lending policies consistent with safe and
sound banking practices and appropriate to the size of the institution and the
nature and scope of its operations. The regulations establish maximum loan to
value ratio limitations on real estate loans, which generally are equal to or
greater than the loan to value limitations established under the Bank's lending
policies.
Branching Authority. Michigan banks, including University Bank, have
authority under Michigan law to establish branches anywhere in the State of
Michigan, subject to receipt of all required regulatory approvals, including
approval of the Commissioner and the FDIC. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits that may be
held by the surviving bank and all of its insured depository institution
affiliates. The establishment of de novo interstate branches or the acquisition
of individual branches of a bank in another state, rather
than the acquisition of an out-of-state bank in its entirety, is allowed only if
specifically authorized by state law.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allowed individual states to "opt-out" of interstate branching authority by
enacting appropriate legislation prior to June 1, 1997. Michigan did not opt
out, and now permits both U.S. and non-U.S. banks to establish branch offices in
Michigan. The Michigan Banking Code permits the following in appropriate
circumstances and with the approval of the Commissioner:
o acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings
bank, or savings and loan association located in another state;
o acquisition by a Michigan-chartered bank of all or substantially all
of the assets of an FDIC-insured bank, savings
bank or savings and loan association located in another state;
o consolidation of one or more Michigan-chartered banks and FDIC-insured
banks, savings banks or savings and loan associations located in other
states having laws permitting this consolidation, with the resulting
organization chartered by Michigan;
o establishment by a foreign bank, which has not previously designated
any other state as its home state under the International Banking Act
of 1978, of branches located in Michigan;
o establishment or acquisition of branches in Michigan by FDIC-insured
banks located in other states, the District of Columbia or U.S.
territories or protectorates having laws permitting Michigan-chartered
banks to establish branches in these jurisdictions.
Further, the Michigan Banking Code permits the following, upon written notice to
the Commissioner:
o acquisition by a Michigan-chartered bank of one or more branches, not
comprising all or substantially all of the assets, of an FDIC-insured
bank, savings bank or savings and loan association located in another
state, the District of Columbia, or a U.S. territory or protectorate;
o establishment by Michigan-chartered banks of branches located in
other states, the District of Columbia, or U.S. territories or
protectorates; and
o consolidation of one or more Michigan-chartered banks and FDIC-insured
banks, savings banks or savings and loan associations located in other
states, with the resulting organization chartered by one of the other
states.
Primary Regulator of Midwest. Midwest is an approved seller/servicer of
single family mortgage loans for FNMA, FHLMC and HUD Title II (GNMA), and is
subject to their rules, regulations and examinations.
Primary Regulator of University Insurance & Investment Services.
University Insurance & Investment Services is licensed by the State of
Michigan's Office of Financial and Insurance Services, Insurance Division as
both a life and health and a property casualty insurance agency, and is subject
to their rules, regulations and examinations. University Insurance & Investment
Services also sells broker-dealer investment products and it and its licensed
employees are subject to the rules, regulations and examinations of the National
Association of Securities Dealers, the Securities & Exchange Commission, and the
Insurance Division of Michigan's Office of Financial and Insurance Services.
Item 2. - Properties
Properties
In June 2003, the Bank sold a building in Ann Arbor, Michigan that is
the Bank's main office and sole branch location to Lowertown Development, LLC
("Lowertown") for $1,173,833, which represented a gain of $342,851. As part of
this transaction, the Bank received an option to purchase 10,000 square feet of
office space in a new facility to be constructed by Lowertown which was valued
at $200,000. Simultaneously, the Bank entered into a 24 month lease agreement
with Lowertown to leaseback the building sold. The lease included 5 six-month
options to extend the lease until the earlier of the completion of the new
building or December 2007. Lowertown is developing the neighboring area with a
major office, retail and apartment development. Under the terms of the
agreement, the Bank has an option to purchase 10,000 square feet of office space
in this new development for fair market value up to a maximum of $2,000,000. It
is currently anticipated that the new facility will be occupied in February
2007. Both the gain on the sale of the building and the purchase option are
being amortized into income over the life of the expected lease term. Lowertown
is obligated to pay the Bank $200,000 if the office space is not completed prior
to the end of the extended lease period in December 2007.
The Bank leases a site that includes a registered historic building in
Ann Arbor, at the corner of Washtenaw Avenue and Stadium Boulevard as a ATM
drive-through location, and an off-site storage facility. The minimum lease
period ends May 2006 with two optional five-year extensions. The Bank also owns
1/3 of the Company which owns the site, Tuomy, LLC.
The Bank leases an ATM location in Ann Arbor at the corner of State and
Liberty near the University of Michigan Campus. The minimum period of this lease
ends December 2005.
Midwest leases an office in Houghton, Michigan under a year-to-year
lease.
The Company believes that the office facilities are adequate to support
the anticipated level of future expansion of business.
Contractual Obligations
The following table summarizes the existing contractual obligations of the
Company:
Payments Due By Period
----------------------
Less than 1-3 3-5 More than
Total year years years 5 years
---------------------------------------------------
Operating leases $ 769,153 $ 196,752 $ 393,504 $178,897 $ 0
Certificates of deposit 12,440,182 8,152,465 3,636,762 209,614 441,341
Long term borrowings 34,000 34,000 0 0 0
----------- ---------- ---------- -------- ---------
Totals $13,243,335 $8,383,217 $4,030,266 $388,511 $ 441,341
=========== ========== ========== ======== =========
Item 3. - Legal Proceedings
At December 31, 2004 the Company had no outstanding legal proceedings
that would have a material affect on the financial statements.
Item 4. - Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 2004 to a vote
of our shareholders.
PART II.
Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock and Dividend Information
Our common stock trades on the NASDAQ Small-Cap Market under the symbol
UNIB. The high and low sales prices of our common stock as quoted by NASDAQ, for
each quarter since January 1, 2003 are listed below:
High Low
2005
First Quarter through March 7 $2.24 $1.63
2004
First Quarter $2.80 $2.05
Second Quarter 2.47 1.30
Third Quarter 1.72 1.05
Fourth Quarter 3.48 0.60
2003
First Quarter $3.00 $0.62
Second Quarter 2.25 0.91
Third Quarter 5.73 1.06
Fourth Quarter 3.38 2.22
As of the March 7, 2005 we had approximately 540 stockholders including
approximately 200 beneficial owners of shares held by brokerage firms or other
institutions.
Our shareholders authorized a 1 for 2 reverse stock split in November 2002;
however, management has opted, at this time, not to implement the reverse stock
split. No cash dividends have been paid on our common stock. We do not currently
anticipate declaring or paying dividends in 2005.
Certain Sales of Equity Securities
We sold 18,421 shares of our common stock at $1.90 in a private
placement in February 2005.
Item 6. - Selected Financial Data
University Bancorp, Inc.
Selected Consolidated Financial and Other Data
(Dollars in Thousands Except Per Share Data)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Summary of operations (1)
Interest income $2,744 $2,732 $3,194 $3,543 $3,315
Interest expense 784 842 1,039 1,805 2,074
Net interest income 1,960 1,890 2,155 1,738 1,241
Provision for loan losses (88) 189 100 40 111
Net interest income after
provision for loan losses 2,048 1,701 2,055 1,698 1,130
Net gain (loss) on securities - (54) 70 13 18
Profit(loss)from investment in Michigan BIDCO
- - - (115) 235
Gain on the sale of mortgage loans 340 756 236 67 40
Other non-interest income 3,482 5,230 4,205 3,990 2,357
Non-interest expense 6,375 7,619 6,291 5,960 4,695
Income (loss) before tax (505) 14 206 (307) (915)
Income tax expense (benefit) 80 (80) - - -
Net (loss)income (585) 94 206 (307) (915)
Selected Year End Balances
Total assets 50,786 43,549 46,249 45,623 47,671
Loans, net 42,647 34,474 32,784 34,447 35,644
Loans, held for sale 846 206 1,551 2,138 268
Cash, cash equivalents and
investment securities 2,838 4,701 6,521 3,946 5,340
Deposits 44,588 38,808 41,920 40,198 38,179
Short-term borrowings 2,416 - - 92 4,094
Long-term borrowings 34 166 298 1,658 926
Minority interest 440 445 360 305 283
Stockholders' equity 3,002 3,435 3,156 2,737 2,042
Per Share Data
Common shares, year-end 4,125 4,027 3,900 3,753 2,028
Weighted avg shares, year-end 4,085 3,940 3,859 2,278 2,027
Cash dividends - - - - -
Net income (loss)- basic and diluted $(0.14) $0.02 $0.05 ($0.13) ($0.45)
Book value of common shares $0.73 $0.85 $0.81 $0.73 $0.65
Selected Ratios
Net yield on earning assets 4.68% 4.78% 5.30% 4.37% 3.33%
Return on average assets (1.24)% 0.22% 0.47% (0.67%) (2.06%)
Return on average equity (18.18)% 2.80% 7.43% (12.49%) (53.56%)
Average equity to avg. assets 6.82% 7.75% 6.26% 5.38% 3.84%
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of the following discussion and analysis is to assist the
reader in understanding and evaluating the changes in financial position and
results of operations over the past several years. Investors should refer to the
consolidated financial statements, the related notes thereto, and statistical
information presented elsewhere in this report when reading this section of the
report.
The cautionary statements described below are for the purpose of
qualifying for the "safe harbor" provisions of Section 21E of the Securities
Exchange Act of 1934.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosures. On an on-going basis, we evaluate these
estimates, including those related to the allowance for loan losses, servicing
rights, other real estate owned and deferred tax assets. Estimates are based on
historical experience, information received from third parties and on various
other assumptions that are believed to be reasonable under the circumstances,
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is determined based on
management estimates of the amount required for losses inherent in the
portfolio. These estimates are based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged-off.
SERVICING RIGHTS - Servicing rights are evaluated quarterly for possible
impairment and are valued based on the lower of amortized cost or fair value of
the rights, using independent appraisals and grouping of the underlying loans as
to type, term and interest rates. Assumptions as to prepayment speeds and
retention rates may change and thereby impact the valuation. Any impairment of a
grouping is reported as a valuation allowance.
OTHER REAL ESTATE OWNED - Real estate properties acquired in collection of a
loan are recorded at fair value upon acquisition based on appraisals. Any
reduction to fair value from the carrying value of the related loan at the time
of foreclosure is accounted for as a loan loss. Subsequent reductions in the
value of the real estate owned are charged to earnings when probable and
estimable. Changes in real estate value in the future may impact the carrying
value.
DEFERRED TAX ASSETS - Deferred tax assets are recorded based on estimates of
future taxable income and utilization of existing net operating loss
carry-forwards. A valuation allowance adjusts deferred tax assets to the net
amount that is more likely than not to be realized. Actual results will impact
the estimates of these deferred tax assets.
RISK FACTORS
Our business involves a high degree of risk. The reader of this report
should carefully consider the risks and uncertainties described below and the
other information in this report before deciding whether to invest in shares of
our common stock. If any of the following risks actually occur, our business,
financial condition and results of operations could be materially adversely
affected. This could cause the trading price of our common stock to decline,
with the loss of all or part of an investment in our common stock.
Described below, are the material risks of investing in University
Bancorp's common stock. Investors should carefully consider these prior to
purchasing any shares.
University Bank Has Incurred Significant Losses And May Never Achieve Sustained
Profitability
University Bank sold its profitable Upper Peninsula operations in late 1994
and relocated to Ann Arbor in early 1996. University Bank had a net loss from
operations each year between 1995 and 2001 and again in 2004. University Bank
had a profit in 2002 and 2003. Although the Bank has been profitable for the
past five months ending February 28, 2005, the Bank's future profitability is
not assured. Management of the Bank believes that as the size of loan portfolio
and retail deposits continue to increase that the Bank should become more
profitable, but there is no assurance that expenses will not rise at a faster
rate than expected as the Bank grows. There is no assurance that University Bank
will grow to a size that will enable it to sustain profitability. University
Bancorp had an accumulated deficit from operations of $2,490,224 at December 31,
2004.
The Company's Stock Is Controlled By Insiders Of The Company, Which May Not
Provide You With The Best Possible Return On Your Investment
Insiders hold a majority of the shares outstanding of the Company. The
Ranzini Group (Mr. Stephen Lange Ranzini, Dr. Joseph Lange Ranzini, Mr. Paul
Lange Ranzini, Orpheus Capital, L.P. and the Ranzini Family Trust dated
12/20/89) beneficially owns 2,995,968, or 72.21% of the issued and outstanding
shares at March 7, 2005. These individuals are able to exert a significant
measure of control over University Bancorp's affairs and policies. This control
could be used, for example, to help prevent an acquisition of University
Bancorp, precluding shareholders from possibly realizing any possible premium
that may be offered for the common stock by a potential acquirer.
Your Ownership Of The Company May Be Further Diluted If The Bank Requires
Additional Capital
There can be no assurance that the Bank will not need additional capital in
the future to support the Bank's growth or to counter operating losses. Funds
necessary to meet the Bank's working capital needs and to finance its expansion
might not be available. If additional equity securities are needed to finance
future expansion, such sale could result in significant dilution to the existing
shareholders.
The Small Size Of University Bank Limits Its Ability To Compete With Larger
Financial Institutions
University Bank faces strong competition for deposits, loans and other
financial services from numerous Michigan and out-of-state banks, thrifts,
credit unions and other financial institutions. Some of the financial
institutions with which University Bank competes are not subject to the same
degree of regulation as University Bank. Many of these financial institutions
aggressively compete for business in the Ann Arbor area. Most of the Bank's
competitors have been in business for many years, have established customer
bases, have numerous branches, have substantially higher lending limits, and
offer certain services that we do not provide. The dominant competitors in the
Ann Arbor area are TCF National Bank, National City Bank, Comerica Bank, Chase
Bank and Key Bank. There can be no assurance that University Bank will be able
to compete effectively with these competitors unless it can continue to grow its
operations.
The Year Ended December 31, 2004 Compared to the Years Ended December 31, 2003
and 2002
Summary of Results of Operations
The Company's net loss was $584,820 in 2004, versus net income of $94,442
in 2003 and $205,598 in 2002. Basic and diluted (loss) earnings per share for
2004, 2003 and 2002 were $(0.14), $0.02 and $0.05, respectively.
The net loss in 2004 includes an $80,000 tax expense. This resulted from a
reduction in a deferred tax asset which was not expected to be realized in the
future due to the loss in 2004 from operations. Net income in 2003 included an
income tax benefit of $80,000.
Community Banking incurred a pretax loss of $388,000 during the current
year as opposed to a loss of $301,000 in 2003. In 2004, Community Banking
incurred approximately $305,000 in expense related to the resolution of other
real estate owned. Additionally, Community Banking recorded a $156,000
impairment charge against the investment in Michigan Capital Fund, L.P. I. The
charge will eliminate related expense and will therefore increase income by
$100,000 in 2005 and $56,000 in 2006. Community Banking is a tax benefit partner
in a low to moderate income housing partnership. The investment provides
Community Banking with tax credits that can be used to offset federal income
taxes. The Company's overall tax status does not allow for the tax credits to be
carried as an asset. Accordingly, an impairment charge was deemed appropriate.
The expenses for other real estate owned and the impairment more than offset
general operational improvement in Community Banking in 2004 as compared to
2003, including a 23.1% increase in loans and a 14.9% increase in deposits.
Midwest had a loss of $27,000 in 2004 as compared to income of $426,000 in
2003. In 2003, Midwest benefited from a significant volume of income derived
from the high level of mortgage refinancing due to lower rates. In 2004, this
income was substantially less. Income at Midwest was negatively impacted in the
first half of 2004 by investments of about $30,000 a month in overhead intended
to grow Midwest's jumbo and non-standard originations through a secondary market
conduit established with Lehman Brothers. The decrease in mortgage originations
offset improvements in other areas including a 21% increase in mortgage loans
subserviced, to 18,233 loans at December 31, 2004.
Community Banking incurred a pre-tax loss of $301,000 in 2003 as
opposed to pre-tax income of $20,000 in 2002. A drop in net interest margin and
an increase in the provision for loan losses accounted for most of this
variance. In contrast, pre-tax income at Midwest increased to $426,000 in 2003
from $281,000 in 2002. Income at Midwest increased with rapidly increasing
mortgage originations and a 61% increase in mortgage loans sub-serviced, to
15,033 loans from 9,319.
The following table summarizes the pre-tax (loss)income of each profit
center of the Company for the years ended December 31, 2004, 2003, and 2002 (in
thousands):
2004 2003 2002
---- ---- ----
Community Banking $(388) $(301) $ 20
Midwest Loan Services (27) 426 281
Corporate Office (90) (111) (95)
------- ------- ------
Total $(505) $ 14 $ 206
======= ======= ======
Net Interest Income
Net interest income increased to $1,960,313 for year ended December 31,
2004 from $1,890,462 for same period in 2003. The yield on average earning
assets dropped from 6.91% in 2003 to 6.55% in 2004. This drop occurred as loans
repriced in a generally lower medium term interest rate environment throughout
most of 2004. Additionally, the mix of assets changed. The Company increased its
single family real estate loans while other loans dropped. Single family real
estate loans have a lower yield as compared with commercial and installment
loans. Management directed its efforts in increasing this category since real
estate loans, specifically single family homes, tend to have lower credit risk.
Overall, average interest bearing assets increased to $41,921,020 in 2004 from
$39,511,963 in 2003.
The cost of interest bearing liabilities decreased from 2.21% for the
2003 period to 1.98% in 2004. Average interest bearing liabilities increased to
$39,575,806 in 2004 from $38,113,218 in 2003. The decrease in interest bearing
liabilities occurred despite rapidly rising short term interest rates because
the bank increased its mix of lower cost deposits relative to higher cost
deposits.
The net yield on interest earning assets decreased from 4.78% in 2003
to 4.68% in 2004 due principally to lower yields on loans. In an effort to
improve margins, management is targeting lower cost deposits to fund asset
growth.
For 2003, net interest income declined 12.29% year-over-year, falling
to $1,890,462 for the year ended December 31, 2003 compared to $2,155,289 for
the prior year. During 2002 and 2003 short term interest rates remained at
45-year lows while long-term interest rates showed a decline. Net interest
income for 2003 declined from the previous period because the average yield on
earning assets declined at a higher rate than the average yield on interest
bearing deposits. The yield on average earning assets dropped from 7.85% in 2002
to 6.91% in 2003. The cost of interest bearing liabilities decreased from 2.66%
for the 2002 period to 2.21% for the year ended December 31, 2003. The net yield
on interest earning assets decreased from 5.30% to 4.78%. In 2003, management
actively sought to attract lower cost deposits to offset the decline in the net
yield.
The following tables present for the average balances, the interest earned
or paid, and the weighted average yield for the period indicated:
NET INTEREST INCOME
2004
---------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
---------------------------------------------------
Interest Earning Assets:
Commercial Loans $17,007,088 $1,258,106 7.40%
Real Estate Loans (1) 20,309,592 1,220,300 6.01%
Installment Loans 1,917,802 157,151 8.19%
--------------------------------------
Total Loans 39,234,482 2,635,557 6.72%
--------------------------------------
Investment Securities 2,403,795 104,988 4.37%
Federal Funds & Bank Deposits 282,744 3,726 1.32%
--------------------------------------
Total Interest Bearing
Assets 41,921,021 2,744,271 6.55%
--------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 6,651,566 61,350 0.92%
Savings 449,143 4,758 1.06%
Time 11,831,102 328,683 2.78%
Money Market Accts 19,571,919 367,262 1.88%
Short-term Borrowings 972,076 16,999 1.75%
Long-term Borrowings 100,000 4,907 4.91%
--------------------------------------
Total Interest Bearing
Liabilities 39,575,806 783,959 1.98%
--------------------------------------
Net earning assets, net interest
income, and interest rate spread $ 2,345,215 $1,960,312 4.57%
======================================
Net yield on interest-earning assets 4.68%
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
NET INTEREST INCOME
2003
---------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
---------------------------------------------------
Interest Earning Assets:
Commercial Loans $18,283,474 $1,450,349 7.93%
Real Estate Loans (1) 14,353,880 928,763 6.47%
Installment Loans 2,102,820 175,398 8.34%
--------------------------------------
Total Loans 34,740,174 2,554,510 7.35%
--------------------------------------
Investment Securities 3,789,545 165,571 4.37%
Federal Funds & Bank Deposits 982,244 12,018 1.22%
--------------------------------------
Total Interest Bearing
Assets 39,511,963 2,732,099 6.91%
--------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 6,365,212 56,167 0.88%
Savings 409,633 4,634 1.13%
Time 13,658,810 420,932 3.08%
Money Market Accts 17,220,500 344,827 2.00%
Short-term Borrowings 227,063 2,933 1.29%
Long-term Borrowings 232,000 12,144 5.23%
------------------------------------
Total Interest Bearing
Liabilities 38,113,218 841,637 2.21%
------------------------------------
Net earning assets, net interest
income, and interest rate spread .........................................$ 1,398,745 $1,890,462 4.70%
====================================
Net yield on interest-earning assets
4.78%
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
NET INTEREST INCOME
2002
---------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
---------------------------------------------------
Interest Earning Assets:
Commercial Loans $18,047,370 $1,459,892 8.09%
Real Estate Loans (1) 14,104,750 1,049,280 7.44%
Installment Loans 3,237,782 296,532 9.16%
--------------------------------------
Total Loans 35,389,902 2,805,704 7.93%
--------------------------------------
Investment Securities 3,809,545 366,793 9.63%
Federal Funds & Bank Deposits 1,470,693 21,955 1.49%
------------------------------------
Total Interest Bearing
Assets 40,670,140 3,194,452 7.85%
--------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 5,287,117 58,291 1.10%
Savings 423,482 4,825 1.14%
Time 20,029,396 671,929 3.35%
Money Market Accts 12,282,311 271,887 2.21%
Short-term Borrowings 472,079 11,556 2.45%
Long-term Borrowings 572,547 20,675 3.61%
------------------------------------
Total Interest Bearing
Liabilities 39,066,932 1,039,163 2.66%
------------------------------------
Net earning assets, net interest
income, and interest rate spread $ 1,603,208 $2,155,289 5.19%
======================================
Net yield on interest-earning assets 5.30%
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
The tables above do not specify the average level of non-interest
bearing demand deposits, which were $2,768,253, $1,979,705, and $2,432,737 for
the years ended December 31, 2004, 2003 and 2002, respectively.
The following table presents information regarding fluctuations in
our interest income and interest expense for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate); and (2) changes in rate (changes in rate multiplied by
old volume); with the rate/volume variance allocated to changes in rate:
RATE VOLUME TABLE
--------------------------------------------------------------------
2004 - 2003
--------------------------------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
Interest Income:
Commercial Loans $ (97,777) $ (94,466) $(192,243)
Real Estate Mortgage Loans 361,888 (70,351) 291,537
Installment/Consumer Loans (15,206) (3,041) (18,247)
Investment Securities (60,524) (59) (60,583)
Federal Funds & Bank Deposits (9,154) 862 (8,292)
------------------------------------------------------------------
Total Interest Income 179,227 (167,055) 12,172
------------------------------------------------------------------
Interest Bearing Liabilities:
Demand Deposits 2,584 2,599 5,183
Savings Deposits 430 (306) 124
Time Deposits (53,129) (39,120) (92,249)
Money Market Accounts 45,058 (22,623) 22,435
Short-term Borrowings 12,697 1,369 14,066
Long-term Borrowings (6,520) (717) (7,237)
------------------------------------------------------------------
Total Interest Expense 1,120 (58,798) (57,678)
------------------------------------------------------------------
Net Interest Income $ 178,107 $ (108,257) $ 69,850
====================================================================
RATE VOLUME TABLE
--------------------------------------------------------------------
2003 - 2002
--------------------------------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
Interest Income:
Commercial Loans $ 18,950 $ (28,493) $ (9,543)
Real Estate Mortgage Loans 18,245 (138,762) (120,517)
Installment/Consumer Loans (96,551) (24,583) (121,134)
Investment Securities (1,916) (199,306) (201,222)
Federal Funds & Bank Deposits (6,439) (3,498) (9,937)
------------------------------------------------------------------
Total Interest Income (67,711) (394,642) (462,353)
------------------------------------------------------------------
Interest Bearing Liabilities:
Demand Deposits 10,687 (12,811) (2,124)
Savings Deposits (157) (34) (191)
Time Deposits (199,868) (51,129) (250,997)
Money Market Accounts 100,884 (27,944) 72,940
Short-term Borrowings (4,515) (4,108) (8,623)
Long-term Borrowings (15,446) 6,915 (8,531)
------------------------------------------------------------------
Total Interest Expense (108,415) (89,111) (197,526)
------------------------------------------------------------------
Net Interest Income $ 40,704 $(305,531) $(264,827)
====================================================================
Loan Portfolio
Information regarding the Bank's loan portfolio as of December 31, 2004 and
2003 is set forth under Note 5 to University Bancorp's consolidated financial
statements included with this report.
Provision for Loan Losses
The Bank charges to operations a provision for loan losses which is
intended to create an allowance for future loan losses inherent in the Bank's
portfolio. Each year's provision reflects management's analysis of the amount
necessary to maintain the allowance for loan losses at a level adequate to
absorb anticipated losses. In its evaluation, management considers factors like
historical loan loss experience, specifically identified problem loans,
composition and growth of the loan portfolio, current and projected economic
conditions, and other pertinent factors. A loan is charged-off by management as
a loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Non-performing loans are defined as loans which have been placed on
non-accrual status and loans over 90 days past due as to principal or interest
and still in an accrual status. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued. See Note 5 of
the Consolidated Financial Statements for additional information regarding
impaired and past due loans. Non-performing loans amounted to $648,020,
$1,117,127 and $679,560at December 31, 2004, 2003and 2002, respectively. At
December 31, 2004, there were loans totaling $371,109 that were past due over 90
days, but still accruing interest. Payments were made to bring these loans to a
current status shortly after year end.
The provision for loan losses in 2004 was $(87,500) compared to $189,400 in
2003 and $100,000 in 2002. In 2004, the analysis of the loan loss reserve
resulted in a reduction in the provision of $87,500. This resulted from lower
chargeoffs, payoffs of previously classified problem loans and an improvement in
the quality of the loans in the portfolio. The Bank determined the required
reserve was less than in previous years.
Loans charged off, net of recoveries, were $13,494, $143,501 and
$270,874 in 2004, 2003 and 2002, respectively. The allowance for possible loan
losses totaled $353,124, $454,118 and $408,219 at the end of 2004, 2003 and
2002, respectively. The following table summarizes the loan loss expense for the
Bank for the years ended December 31, 2004, 2003 and 2002.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands)
2004 2003 2002
---- ---- ----
Balance at beginning of the period $ 454 $ 408 $ 579
Charge offs - Domestic:
Commercial loans 64 227 270
Real estate mortgages 5 - -
Installment loans - 13 17
------------------- -------------- ---------------
Subtotal 69 240 287
------------------- -------------- ---------------
Recoveries - Domestic:
Commercial loans 54 94 13
Real estate mortgages 2 - -
Installment loans - 3 3
------------------- -------------- ---------------
Subtotal 56 97 16
------------------- -------------- ---------------
Net charge offs 13 143 271
------------------- -------------- ---------------
Provision for loan losses (88) 189 100
------------------- -------------- ---------------
Balance at end of period $ 353 $ 454 $ 408
=================== ============== ===============
Ratio of net charge offs during
period to average loans
outstanding during period 0.03% 0.41% 0.77%
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands)
Allocated portion
of allowance Percentage of loans in each
at December 31 category to total loans
2004 2003 2004 2003
---- ---- ---- ----
Loan category:
Domestic:
Commercial loans $ 129 $ 350 43.35% 56.26%
Real estate mortgages 175 40 51.76% 35.05%
Installment loans 49 43 4.89% 8.69%
Unallocated - 21 N/A N/A
-------------- --------------- -------------- --------------
$ 353 $ 454 100.0% 100.0%
============== =============== ============== ==============
At At
December 31, 2004 December 31, 2003
------------------------------ ---------------------------
Total loans (1) $42,999,800 $34,928,586
Reserve for loan losses $ 353,124 $ 454,118
Reserve/Loans % 0.82% 1.30%
(1) Excludes loans held for sale.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor and the future performance of these loans is dependent upon the
performance of relatively limited geographical areas. As a result of the weak
Michigan economy, the Bank's future loss ratios may exceed historical loss
ratios.
Management believes that the allowance for loan losses is adequate to
absorb losses inherent in the loan portfolio, although the ultimate adequacy of
the allowance for loan losses is dependent upon future economic factors beyond
our control. A downturn in the general nationwide economy will tend to
aggravate, for example, the problems of local loan customers currently facing
some difficulties. A general nationwide business expansion could result in fewer
loan customers being unable to repay their loans.
Non-Interest Income and Non-Interest Expense
Non-interest income. Total non-interest income decreased to $3,822,548
for the year ended December 31, 2004 from $5,932,492 for period ended in 2003.
The decrease was principally a result of decreases in loan origination and gain
on the sales of mortgage loans at Midwest. In 2003, the rates on mortgages were
historically low which spurred an increase in the re-financing market. In 2004,
the rates were still relatively low, but the re-financing activity decreased
significantly. The Bank's wholly-owned insurance and investment subsidiary,
University Insurance & Investment Services, enjoyed a record year, producing
$219,631 in fee income compared to $168,577, a 30% increase.
Non-interest income was $5,932,492 in 2003 compared to $4,441,019 in
2002. Income generated in this category is principally from Midwest. During
2003, the mortgage re-financing market was stimulated by record low long-term
interest rates. Midwest and the Bank significantly increased income from loan
origination, loan sub-servicing fee income, and gain on the sale of mortgage
loans originated for sale into the secondary market. University Insurance &
Investment Services produced $168,577 in fee income compared to $113,870, a
48.0% increase.
Mortgage banking. At December 31, 2004, Midwest was sub-servicing 18,233
mortgages, an increase of 21.12% from 15,033 mortgages at December 31, 2003. The
balance of loans sub-serviced was $2.3 billion at December 31, 2004 as compared
with over $2.0 billion at December 31, 2003. Mortgage banking, servicing and
origination fees, and gain on the sale of loans decreased to $3,300,052 in 2004
from $5,267,418 in 2003. In 2003, the market for mortgage refinancing was
extremely active due to historically low rates. In 2004, mortgage refinancing
activity curtailed sharply. In 2005, mortgage rates are expected to rise and
this will further retard the re-financing market. Midwest has devoted
significant resources during 2004 to diversify its mortgage originations away
from the refinancing market and to increase the volume of its purchase business
by establishing the Lehman Brothers conduit and by increasing the number of
credit unions that originate mortgages through Midwest's outsourcing origination
services Mortgage banking, servicing and origination fees, and gain on the sale
of loans increased to $5,267,418 in 2003 from $4,040,363 in 2002. In 2003,
Midwest originated 670 mortgage loans, an increase of 31% over last year. During
the year, Midwest increased its credit union partners so that at year-end 2003
it had credit union partners with a total of 1,585,000 active members,
20,434,000 potential members and aggregate assets of $11.48 billion.
Securities. Proceeds from sales of marketable and non marketable equity
securities included in proceeds from sales of investment securities was $49,981
for the year ended December 31, 2003. Gross losses of $446 were realized in this
period.
Proceeds from sales of available for sale debt securities were $0,
$58,879 and $1,034,160 for the years ended December 31, 2004, 2003 and 2002,
respectively, excluding sales associated with the Bank's mortgage banking
operation. There were gross gains of $3,607, $0 and $69,733 on 2004, 2003 and
2002 sales, respectively and a gross loss of $54,011 on 2003 sales.
At December 31, 2004 gross unrealized losses in our available-for-sale
securities were $51,357 and gross unrealized gains were $0. At December 31, 2002
gross unrealized losses in our available-for-sale securities were $38,795 and
gross unrealized gains were $0.
Non-interest expense. Non-interest expense decreased to $6,375,181 in the
period ended December 31, 2004 from $7,619,112 for the same period in 2003. The
decrease was due principally to decreases in salaries and benefits, mortgage
banking expense, and amortization of servicing rights. The higher mortgage
interest rates in 2004 resulted in lower income from mortgage origination as
well as lower expenses. These decreases in costs were partially offset by an
increase in other real estate owned expense and an impairment charge as noted
previously.
In 2003, non-interest expenses increased by $1,328,402 or 21.1% to
$7,619,112 million from $6,290,710 in 2002. All but $200,353 of the increase was
due to increased non-interest expenses at Midwest, as Midwest's origination and
sub-servicing activity increased. As the volume expanded Midwest increased its
workforce to perform the required tasks. Other servicing and sub-servicing
related expenses, such as occupancy, supplies and postage also increased.
Non-interest expense was also impacted by an increase in the amortization of the
mortgage servicing rights due to the low long-term interest rate environment.
Personnel expenses at Community Banking were higher due to higher commissions
paid to mortgage and deposit origination personnel.
Income Taxes
Income tax expense (benefit) in 2004 was $80,000, and $(80,000) and $0
in 2003 and 2002. The tax benefit recognized in 2003
was reversed in 2004 because of the operating loss recognized during the year
and uncertainty of recoverability of the deferred tax asset. The tax benefit was
recognized because of the operating profit in 2003, and therefore a portion of
existing net operating loss carry-forwards were reasonably expected to reduce
future amounts of taxable income. In 2002 no tax benefit was realized due to
prior period net taxable losses from operations and uncertainties of future
taxable income. The effective tax (benefit) rate was 34% or 2004, (34)% for 2003
and 0% for 2002.
At December 31, 2004, the Company had net operating loss carryforwards
that could be utilized to shelter approximately $2,080,000 of future taxable
income. Realization of income tax benefits are not recorded in the financial
statements as realization of these benefits is dependent upon generating
sufficient future taxable income. See footnote 13 to the financial statements
for more information.
Liquidity and Capital Resources
Liquidity. Loans receivable, net of reserves and excluding loans held
for sale, increased to $42.65 million from $34.47 million in 2004 and 2003,
respectively. Cash and cash equivalents including Federal Funds sold on an
overnight basis at the end of 2004 were $1.73 million, while securities were
$1.11 million. At year-end 2004, the Bank had an unused line of credit from the
Federal Home Loan Bank of Indianapolis of $1.6 million, and an unused line of
credit from the Federal Reserve Bank of Chicago of $5.7 million.
University Bank, as an FDIC-insured bank, is subject to certain
regulations that require the maintenance of minimum liquidity levels of cash and
eligible investments. The Bank has historically exceeded this minimum as a
result of its investments in federal funds sold, U.S. government and U.S. agency
securities and cash. In addition, University Bancorp had $5,626 in cash at the
end of 2004 to meet cash needs, primarily operating expenses and interest and
principal reductions on the University Bancorp's note payable. The balance of
the loan was $34,000 and $166,000 at year-end 2004 and 2003. The note was paid
in full in early 2005. Management intends that the cash on hand, the exercise of
stock options and possible sale of stock will be sufficient to cover our
operating expenses during 2005 and 2006.
Capital. The Company's total stockholders' equity at December 31, 2004
was approximately $3.00 million (or 6.0% of total assets) compared to $3.43
million (or 7.9% of total assets) at December 31, 2003. The Bank's Tier 1
Capital at December 31, 2004 was $3.16 million or 6.5% of the Bank's total
regulatory assets. The risk-adjusted capital ratio of 9.5% exceeded the 8.0%
level which categorized the Bank as "adequately capitalized" as defined by the
FDIC. At December 31, 2003, the Bank's 12.3% risk-based capital ratio exceeded
the FDIC's threshold of 10.0% which placed the Bank in the "well capitalized"
category. The following table provides detailed information about the Bank's
risk-adjusted assets and actual capital percentages:
TIER 1 CAPITAL 2004 2003
-------- --------
Total Equity Capital $2,880 $3,511
Add: Unrealized losses on available-for-sale
securities 52 39
Add: Minority interest 440 445
Less: Other identifiable intangible assets 214 287
-------- --------
Total Tier 1 Capital 3,158 3,708
TIER 2 CAPITAL
Allowance for loan & lease losses 353 454
Less: Excess Allowance 0 33
-------- --------
Total Tier 2 Capital 353 421
-------- --------
Total Tier 1 & Tier 2 Capital $3,511 $4,129
======== =========
CAPITAL RATIOS
Tier 1/Total Average Assets 6.45% 8.58%
Tier 1/Total Risk-Weighted Assets 8.52% 11.03%
Tier 1 & 2/Total Risk-Weighted Assets 9.47% 12.28%
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 123(R) (revised 2004), Share-Based Payment. SFAS No. 123(R)
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements. The cost will be measured based on the
fair value of the instruments issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion
No. 25. As originally issued in 1995, SFAS No. 123 established as preferable the
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. We will be required to apply SFAS No. 123(R)
as of the first interim reporting period that begins after June 15, 2005, and we
plan to adopt it using the modified-prospective method, effective July 1, 2005.
We are currently evaluating the impact SFAS No. 123(R) will have on us. Based on
our preliminarily analysis, the impact of the additional compensation expense
will not be material during as a result of this new accounting standard.
Recent Events
The Bank signed an amendment on March 31, 2005 to its agreement with
Lower Town Development Group, LLC, the developer of the site on which its
current headquarters is located that could produce income of approx. $850,000
with respect to 2005 minus relocation costs estimated to be $100,000. Under the
agreement, if University Bank, in is sole discretion, can give notice on or
before June 15, 2005 that it will vacate the premises commonly known as 959
Maiden Lane, Ann Arbor, Michigan by August 1, 2005, Lower Town
Development Group, LLC shall pay to University Bank $800,000 upon the closing of
the construction financing pertaining to the project commonly known as Lower
Town or December 31, 2005, which ever occurs first; and Lower Town Development
Group, L.L.C. shall pay the $200,000 that was deferred from the sale of 959
Maiden Lane on or before December 31, 2005. The purchase price for the new
10,000 ft2 headquarters under the Agreement shall be $2,000,000 instead of
$1,800,000. Management of the Bank is advised by local real estate experts that
the market value of the 10,000 ft2 headquarters office condominium that is being
built for it is worth $2,400,000 to $2,600,000 in the current market.
ITEM 7A. MARKET RISK
Impact of Inflation
The primary impact of inflation on our operations is reflected in
increased operating costs. Since our assets and liabilities are primarily
monetary in nature, changes in interest rates have a more significant impact on
our performance than the general effects of inflation. However, to the extent
that inflation affects interest rates, it also affects our net income.
Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. This difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest' investment in mortgage servicing rights and improve Midwest'
current return on these rights by lowering required amortization rates on the
rights and decreasing the opportunity for customers to refinance those loans.
Rising interest rates tend to decrease new mortgage origination activity,
negatively impacting current income from the Bank's retail mortgage banking
operations and Midwest's mortgage banking operations. Rising interest rates also
slow Midwest' rate of growth, but increases the duration of its existing
mortgages being sub-serviced under contract.
The Bank's securities portfolio is designed to offset a portion of the
market value risk associated with the servicing rights. During period of
declining interest rates, the estimated duration period for the Bank's FNMA CMO
tends to shorten, thus accelerating the income from the accretion of the bond's
discount. This income mitigates the rapid amortization of the servicing rights.
In a rising rate environment, the accretion of income on the bond tends to
lessen.
The table on the following page details our interest sensitivity gap
between interest-earning assets and interest bearing liabilities at December 31,
2004. Certain items in the table are based upon various assumptions that may not
necessarily reflect future experience, and therefore, certain assets and
liabilities may in fact mature or re-price differently from what is illustrated.
The one-year static gap position at December 31, 2004 was estimated at ($15.2
million) or (29.83%):
Asset/Liability Position Analysis as of December 31, 2004
(Dollar amounts in Thousands)
Maturing or Repricing in
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 ALL
ASSETS Or Less 1 Year Years Years Years Other Total
- ------ ------- ------ ----- ----- ----- ----- -----
Loans - net $ 9,919 2,943 8,777 18,355 3,204 (353) $ 42,845
Non-accrual loans - - - - 648 648
Securities 100 500 - - 506 - 1,106
Other assets 922 - - - - 3,532 4,454
Cash and Due from
Banks 56 - - - 1,676 1,732
------------------------------------------------------------------------------------------
Total assets 10,997 3,443 8,777 18,355 3,710 5,503 50,785
------------------------------------------------------------------------------------------
LIABILITIES
- -----------
Time deposits 2,487 5,665 3,637 218 433 12,440
Demand -interest
Bearing 9,497 9,497 8,107 1,500 - - 28,600
Demand - non interest - - - - - 3,047 3,047
Savings - - 500 - - - 500
Other borrowings 2,450 - - - - - 2,450
Other liabilities - - - 746 746
Stockholders' equity - - - - - 3,002 3,002
------------------------------------------------------------------------------------------
Total liabilities $ 14,434 15,161 12,244 1,718 433 6,795 $ 50,785
------------------------------------------------------------------------------------------
Gap (3,437) (11,718) (3,467) 16,637 3,277 (1,292) -
==========================================================================================
Cumulative gap (3,437) (15,155) (18,622) (1,985) 1,292 -
=============================================================================
Gap percentage -6.77% -29.83% -36.65% -3.91% 2.54% 0.00%
=============================================================================
The following repricing information is provided for the Bank's investment
portfolio, using book values, as of December 31, 2004:
Investment Portfolio Maturities ($ amounts in thousands) and Yield by Type:
Maturity or Repricing Interval:
Less Than 1 Year to 5 Years to More Than
One Year 5 Years 10 Years 10 Years
-------- ------- -------- --------
Government Agencies:
Amount $0 $0 $0 $1,157
Yield 0% 0% 0% 4.86%
Additional information regarding the Bank's investments is set forth under Note
4 to the consolidated financial statements.
The following information illustrates maturities and sensitivities of the
Bank's loan portfolio to changes in interest rates as of December 31, 2004:
Loan Portfolio Maturities by Type ($ amounts in thousands):
Maturity Interval:
Less Than 1 Year to More Than
One Year 5 Years 5 Years Total
-------- ------- ------- -----
Commercial $ 6,099 $ 10,548 $2,314 $ 18,961
Real Estate Mortgage (1) 2,348 20,938 754 24,039
Installment/Consumer 0 0 0 0
------- -------- -------- --------
Total $ 8,446 $ 31,486 $ 3,068 $ 43,000
======= ======== ======== ========
Maturity Maturity
Less Than More Than
One Year One Year Total
Total Variable Rate Loans $5,211 $ 24,244 $ 29,455
Total Fixed Rate Loans 3,235 10,310 13,545
------ -------- --------
Total Loans (1) $8,446 $ 34,553 $ 43,000
====== ======== ========
(1) Excludes loans held for sale of $846,400 and the allowance for loan losses.
Item 8. - Financial Statements and Supplementary Data
UNIVERSITY BANCORP, INC.
--------------------
CONSOLIDATED FINANCIAL STATEMENTS
--------------------
DECEMBER 31, 2004, 2003 2002
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholder
University Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of University
Bancorp, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years ended December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Midwest Loan Services, Inc., an eighty percent owned subsidiary, which
statements reflect total assets of 5.2 percent and 5.4 percent as of December
31, 2004 and 2003, respectively, and total revenues of 44.7 percent, 48.7
percent and 39.9 percent, respectively, for each of the three years ended
December 31, 2004. Those statements were audited by other auditors, whose report
thereon has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Midwest Loan Services, Inc., is based solely on the report
of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of University Bancorp, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the each of the three years ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America.
/S/ GRANT THORNTON LLP
Southfield, Michigan
March 29, 2005
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets
December 31, 2004 and 2003
December 31, December 31,
ASSETS 2004 2003
------------- -------------
Cash and due from banks $ 1,731,569 $ 2,171,189
Securities available for sale, at market 1,106,607 1,649,169
Federal Home Loan Bank Stock 921,700 881,100
Loans held for sale, at the lower of cost or market 846,400 206,008
Loans 42,999,800 34,928,586
Allowance for loan losses (353,124) (454,118)
-------------- -------------
Loans, net 42,646,676 34,474,468
Premises and equipment, net 946,704 829,807
Investment in Michigan BIDCO Inc. 0 629,258
Investment in Michigan Capital Fund LPI 0 256,244
Mortgage servicing rights, net 1,097,786 1,031,575
Real estate owned, net 534,043 429,500
Accounts receivable 30,949 122,067
Accrued interest receivable 148,344 129,808
Prepaid expenses 250,249 183,143
Goodwill 103,914 103,914
Other assets 420,757 451,290
------------- -------------
TOTAL ASSETS $ 50,785,698 $ 43,548,540
============ =============
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
December 31, 2004 and 2003
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
------------- -------------
Liabilities:
Deposits:
Demand - non interest bearing $ 3,047,397 $ 3,146,688
Demand - interest bearing 28,600,355 25,827,337
Savings 499,865 377,545
Time 12,440,182 9,455,982
------------ -------------
Total Deposits 44,587,799 38,807,552
Short term borrowings 2,416,000 0
Long term borrowings 34,000 166,000
Accounts payable 115,230 289,150
Accrued interest payable 50,296 51,613
Other liabilities 140,629 354,273
------------ -------------
Total Liabilities 47,343,954 39,668,588
Minority Interest 440,118 445,324
Stockholders' equity:
Preferred stock, $0.001 par value;
$1,000 liquidation value;
Authorized - 500,000 shares; -
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,240,641 shares in 2004 and
4,141,732 shares in 2003 42,406 41,417
Additional paid-in-capital 5,841,331 5,677,940
Accumulated deficit (2,490,224) (1,905,404)
Treasury stock - 115,184 shares in 2004
and 2003 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities
available for sale, net (51,357) (38,795)
------------- -------------
Total Stockholders' Equity 3,001,626 3,434,628
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,785,698 $ 43,548,540
============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
----------------- ---------------- -------------------
Interest income:
Interest and fees on loans $ 2,635,557 $ 2,554,510 $ 2,805,704
Interest on securities:
U.S. Government and agencies 48,064 81,269 270,127
Other securities 56,924 84,302 96,666
Other interest income 3,726 12,018 21,955
------------------ ---------------- ------------------
Total interest income 2,744,271 2,732,099 3,194,452
------------------ ---------------- ------------------
Interest expense:
Interest on deposits:
Demand deposits 428,611 400,994 330,178
Savings deposits 4,758 4,634 4,825
Time certificates of deposit 328,683 420,932 671,929
Short term borrowings 16,999 2,933 11,556
Long term borrowings 4,907 12,144 20,675
------------------ ---------------- ------------------
Total interest expense 783,958 841,637 1,039,163
------------------ ---------------- ------------------
Net interest income 1,960,313 1,890,462 2,155,289
(Credit) provision for loan losses (87,500) 189,400 100,000
------------------ ---------------- ------------------
Net interest income after
(credit) provision for loan
losses 2,047,813 1,701,062 2,055,289
------------------ ---------------- ------------------
Other income:
Loan servicing and subservicing
fees 1,409,283 1,128,293 713,427
Initial loan set-up and other fees 1,550,620 3,382,955 3,090,838
Gain on sale of mortgage loans 340,149 756,170 236,098
Insurance & investment fee income 219,631 168,577 113,870
Deposit service charges and fees 112,163 110,608 92,955
Net security (losses)gains (446) (54,011) 69,733
Gain on the sale and leaseback of
premises 184,873 217,053 -
Other 6,275 222,847 124,098
------------------ ---------------- ------------------
Total other income 3,822,548 5,932,492 4,441,019
------------------ ---------------- ------------------
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations (continued)
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------------ ---------------- ------------------
Other expenses:
Salaries and benefits $ 2,866,849 $ 3,358,060 $ 2,929,540
Occupancy, net 415,156 422,767 349,186
Data processing and equipment 569,297 487,701 433,239
Legal and audit expense 217,414 202,865 173,139
Consulting fees 137,569 173,132 181,545
Mortgage banking expense 246,346 710,907 579,040
Servicing rights amortization 448,553 871,175 529,048
Advertising 145,592 142,996 92,944
Memberships and training 132,467 118,581 103,095
Travel and entertainment 103,875 121,631 91,330
Supplies and postage 207,141 244,615 199,338
Insurance 134,163 89,532 87,662
Other operating expenses 750,759 675,150 541,604
------------------ ---------------- ------------------
Total other expenses 6,375,181 7,619,112 6,290,710
------------------ ---------------- ------------------
(Loss)income before income taxes (504,820) 14,442 205,598
Income tax expense(benefit) 80,000 (80,000) 0
------------------------------------------------------
Net (loss)income $ (584,820) $ 94,442 $ 205,598
Basic and diluted (loss)income per common share $ (0.14) $ 0.02 $ 0.05
================== ================ ==================
Weighted average shares outstanding -Basic 4,085,244 3,940,433 3,859,433
Weighted average shares outstanding -Diluted 4,085,244 4,074,415 4,058,342
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC.
Consolidated Statements of Comprehensive (Loss)Income
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
-------------------- ------------------ ------------------
Net (loss) income $(584,820) $ 94,442 $205,598
Other comprehensive (loss)income:
Unrealized (losses) gains on
securities available for sale (13,008) (11,042) 155,081
Less: reclassification
adjustment for accumulated
(Losses) gains included in net
(Loss) income (446) (54,011) 69,733
-------------------- ------------------ ------------------
(12,562) 42,969 85,348
-------------------- ------------------ ------------------
Comprehensive (loss)income $(597,382) $137,411 $290,946
==================== ================== ==================
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2004, 2003, and 2002
Common Stock $.01 Treasury Stock Accumulated
Par Value Additional Retained Other Total
Number of Par Paid In Number of Earnings Comprehensive Stockholders'
Shares Value Capital Shares Cost (Deficit) Loss Equity
---------------------------------------------------------------------------------------------
Balance January 1, 2002 3,867,732 $38,677 $5,411,018 (115,184) $(340,530) $(2,205,444) $(167,112) $2,736,609
Issuance of common stock at
weighted average price of
$1.00 per share, net of
expenses of $18,587 147,000 1,470 126,943 128,413
Decrease in unrealized loss on
securities available for
sale, net of tax 85,348 85,348
Net lncome 205,598 205,598
---------------------------------------------------------------------------------------------
December 31, 2002 4,014,732 40,147 5,537,961 (115,184) (340,530) (1,999,846) (81,764) 3,155,968
---------------------------------------------------------------------------------------------
Issuance of common stock at
weighted average price of
$1.11 per share, net of
expenses of $0.00 127,000 1,270 139,980 141,250
Decrease in unrealized loss on
securities available for
sale, net of tax 42,969 42,969
Net Income 94,442 94,442
---------------------------------------------------------------------------------------------
December 31, 2003 4,141,732 41,417 5,677,940 (115,184) (340,530) (1,905,404) (38,795) 3,434,629
---------------------------------------------------------------------------------------------
Issuance of common stock at
weighted average price of
$1.58 per share, net of
expenses of $0.00 103,909 989 163,391 164,380
Decrease in unrealized loss
on securities available for
sale, net of tax (12,562) (12,562)
Net Loss (584,820) (542,820)
---------------------------------------------------------------------------------------------
December 31, 2004 4,245,641 $42,406 $5,841,331 (115,184) $(340,530) $(2,490,224) $(51,357) $3,043,627
=============================================================================================
The accompanying notes are an integral part of the consolidated financial statement
UNIVERSITY BANCORP, INC.
Consolidated Statements of Cash Flows
For the years ended December 30, 2004, 2003 and 2002
2004 2003 2002
------------------ ------------------ -------------------
Cash flow provided by (used in) operating activities:
Net (loss)income $ (584,820) $ 94,442 $ 205,598
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 318,584 305,740 195,070
Amortization 704,797 971,175 629,048
Provision for loan loss (87,500) 189,400 100,000
Gain on sale of mortgages (340,149) (756,170) (236,098)
Gain on the sale and leaseback of premises (184,873) (217,053) -
Loss(gain) on other real estate owned 64,695 (134,668) -
Accretion on securities (11,562) (15,836) (259,463)
Deferred income tax expense (benefit) 80,000 (80,000)
Originations of mortgage loans (52,016,364) (129,039,261) (70,457,559)
Proceeds from mortgage loan sales 51,716,121 131,140,418 71,280,448
Net loss (gain) on sale of securities 446 54,011 (69,733)
Net change in:
Other assets (538,295) (1,025,362) (268,115)
Other liabilities (270,275) 265,470 (64,580)
------------------- ------------------ -------------------
Net cash (used in) provided by operating activities (1,149,195) 1,752,306 1,054,616
------------------- ------------------ -------------------
Cash flow provided by (used in) investing activities:
Purchase of investment securities (8,853) (98,533) (2,139,503)
Proceeds from sales of investment
securities 49,981 59,879 1,034,160
Proceeds from maturities/pay downs of
investment securities 529,247 1,497,117 651,486
Proceeds from sale of other real estate
owned 585,784 572,250
Loans granted, net of repayments (8,239,730) (1,880,053) 859,898
Proceeds from sale of premises 0 1,033,464
Premises and equipment expenditures (435,481) (231,056) (128,954)
------------------- ------------------ -------------------
Net cash (used in) provided by investing activities (7,519,052) 953,068 277,087
------------------- ------------------ -------------------
UNIVERSITY BANCORP, INC.
Consolidated Statements of Cash Flows
For the years ended December 30, 2004, 2003 and 2002
2004 2003 2002
------------------ ------------------ ---------------
Cash flow provided by (used in) financing activities:
Change in deposits 5,780,247 (3,112,904) 1,722,875
Change in short term borrowings 2,416,000 0 (91,566)
Principal payments on long term borrowings (132,000) (132,000) (1,359,506)
Issuance of common stock 164,380 141,250 128,413
------------------ ----------------- -----------------
Net cash provided by (used in) financing
activities 8,228,627 (3,103,654) 400,216
------------------ ----------------- -----------------
Net change in cash and cash
equivalents (439,620) (398,280) 1,731,919
Cash and cash equivalents:
Beginning of year 2,171,189 2,569,469 837,550
------------------ ----------------- -----------------
End of year $ 1,731,569 $ 2,171,189 $ 2,569,469
================== ================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 785,275 $ 887,092 $ 1,119,502
Supplemental disclosure of non-cash transactions:
Mortgage loans converted to other real estate owned $ 755,022 $ 0 $ $703,198
Michigan BIDCO Preferred stock exchanged for a 7.5%
promissory note $ 600,000 $ 0 $ 0
The accompanying notes are an integral part of the consolidated financial
statements.
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements of University Bancorp, Inc. (the
Company) include the operations of its wholly-owned subsidiary,
University Bank (the Bank), the Bank's wholly-owned subsidiary,
University Insurance & Investment Services, Inc. (Agency) and an 80%
owned subsidiary, Midwest Loan Services, Inc. ("Midwest"). The accounts
are maintained on an accrual basis in accordance with generally accepted
accounting principles and predominant practices within the banking and
mortgage banking industries. All significant intercompany balances and
transactions have been eliminated in preparing the consolidated
financial statements.
The Company is a bank holding company. University Bank, which is located
in Michigan, is a full service community bank, which offers all
customary banking services, including the acceptance of checking,
savings and time deposits. The Bank also makes commercial, real estate,
personal, home improvement, automotive and other installment, credit
card and consumer loans, and provides fee based services such as annuity
and mutual fund sales, stock brokerage and money management, life
insurance, property casualty insurance and foreign currency exchange.
The Bank's customer base is primarily located in the Ann Arbor, Michigan
area. The Bank established its main office in Ann Arbor in February
1996, by relocating from the eastern upper peninsula of Michigan.
University Bank's loan portfolio is concentrated in Ann Arbor and
Washtenaw County, Michigan. While the loan portfolio is diversified, the
customers' ability to honor their debts is partially dependent on the
local economy. The Ann Arbor area is primarily dependent on the
education, healthcare, services and manufacturing (automotive and other)
industries. Most real estate loans are secured by residential or
commercial real estate and business assets secure most business loans.
Generally, installment loans are secured by various items of personal
property.
The Agency is engaged in the sale of insurance products including life,
health, property and casualty, and investment products including
annuities, mutual funds, stock brokerage and money management. The
Agency is located in the Bank's Ann Arbor main office. The Agency also
has a limited partnership investment in low-income housing tax credits
through Michigan Capital Fund for Housing Limited Partnership I with
financing assistance from the General Partner, Michigan Capital Fund for
Housing.
Midwest is engaged in the business of servicing and subservicing
residential mortgage loans. Midwest began operations in 1992 and was
acquired by University Bank in December, 1995. Midwest is based in
Houghton, Michigan, and also originates mortgage loans for itself and
other financial institutions, including the Bank (See Note 3).
1. Summary of significant accounting policies (continued)
Use of Estimates in Preparing Financial Statements:
--------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions based upon available information. These estimates and
assumptions affect the reported amounts and disclosures. Actual results
could differ from those estimates.
The significant estimates incorporated into these consolidated financial
statements which are more susceptible to change in the near term include
the value of mortgage servicing rights, the allowance for loan losses,
the identification and valuation of impaired loans, the valuation of
other real estate owned, the fair value of financial instruments, and
the valuation of deferred tax assets.
Cash flow reporting
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents is defined to include the cash on hand, non-interest bearing
deposits in other institutions, federal funds sold and other investments
with a maturity of three months or less when purchased. Net cash flows
are reported for customer loan and deposit transactions and interest
bearing deposits with other banks.
Securities
Securities are classified as available for sale when they might be sold
before maturity. Securities available for sale are carried at fair
value, with unrealized holding gains and losses reported in other
comprehensive income or loss. Realized gains are based on specific
identification of amortized cost. Securities are written down to fair
value when a decline in fair value is not temporary. Interest income
includes amortization of purchase premium or discount. Other securities
such as Federal Home Loan Bank stock are carried at cost.
Loans
Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on
such loans are reported as principal reductions, unless all interest and
principal payments in arrears are paid in full.
1. Summary of significant accounting policies (continued)
Mortgage banking activities
Mortgage banking activities includes retail and servicing operations.
Mortgage loans held for sale are valued at the lower of cost or market as
determined by bid prices for loans in the secondary market. The loans are
sold without recourse, except in the event that documentation errors are
made during the origination process. Loan servicing and subservicing fees
are contractually based and are recognized monthly as earned over the
life of the loans.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable
credit losses, increased by the provision for loan losses and recoveries
and decreased by charge-offs. Management estimates the balance required
based on past loan loss experience, known and inherent risks in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment,
should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage, consumer, and credit
card loans, and on an individual loan basis for other loans. If a loan
is impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using
the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or when
it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line
method for bank premises and the accelerated method for equipment and
land improvements over their estimated useful lives. The Company uses
the following useful lives as of December 31, 2004:
Buildings and building improvements 39 years
Land and leasehold improvements 15 years
Furniture, fixtures, and equipment 3-7 years
Software 2-5 years
Other real estate owned
Real estate properties acquired in collection of a loan are recorded at
fair value upon foreclosure. Any reduction to fair value from the
carrying value of the related loan is accounted for as a loan loss.
1. Summary of significant accounting policies (continued)
After acquisition, a valuation allowance reduces the reported amount to
the lower of the initial amount or fair value less costs to sell.
Expenses, gains and losses on disposition, and changes in the valuation
allowance are reported in other expenses.
Servicing rights
Servicing rights represent both purchased rights and the allocated value
of servicing rights retained on loans originated and sold. Servicing
rights are expensed in proportion to, and over the period of, estimated
net servicing revenues. Impairment is evaluated based on the fair value
of the rights, using grouping of the underlying loans as to type, term
and interest rates. Any impairment of a grouping is reported as a
valuation allowance.
Income taxes
Income tax expense/benefit is the sum of the current year estimated tax
obligation or refund per the income tax return and the change in the
estimated future tax effects of temporary differences and
carry-forwards. Deferred tax assets or liabilities are computed by
applying enacted income tax rates to the expected reversals of temporary
differences between financial reporting and income tax reporting, and by
considering carry-forwards for operating losses and tax credits. A
valuation allowance adjusts deferred tax assets to the net amount that
is more likely than not to be realized.
Retirement plan
The Bank has a 401(K) Plan that allows an employee to contribute up to
15% of salary pre-tax, to the allowable limit prescribed by the Internal
Revenue Service. Management has discretion to make matching
contributions to the Plan. However, the Bank made no matching
contributions for the years ended December 31, 2004, 2003 and 2002.
Employees Stock Ownership Plan (ESOP)
The Company has a noncontributory ESOP covering all full-time employees
who have met certain service requirements. The employees' share in the
Company's contribution is based on their current compensation as a
percentage of the total employee compensation. As shares are contributed
to the plan they are allocated to employees and compensation expense is
recorded at the shares' fair value. The Company made no contribution in
2004, 2003 and 2002.
Stock options
At December 31, 2004, the Company has a stock-based employee compensation
plan, which is described more fully in Note 8. The Company accounts for
those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise
price greater than or equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on
net (loss) income and earnings per share if the company
1. Summary of significant accounting policies (continued)
had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Years Ended December 31,
2004 2003 2002
---- ---- ----
Net (loss) income, as reported $(584,820) $94,442 $205,578
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax 5,600 5,000 6,000
----------- ---------- ----------
Pro forma net (loss) income $(590,420) $89,442 $199,578
=========== ========== ==========
Basic and Diluted (Loss) earnings per share:
As reported $(0.14) $0.02 $0.05
Pro forma $(0.14) $0.02 $0.05
Dividend restriction
Banking regulations require the maintenance of certain capital levels and
may limit the amount of dividends that may be paid by the bank to the
holding company or by the holding company to shareholders. In addition,
the Bank cannot pay a dividend until it has net retained earnings or
unless it receives a waiver from the State of Michigan banking
regulators. The accumulated deficit of the Bank was $1,978,688 and
$1,483,994 at December 31, 2004 and 2003, respectively.
(Loss) earnings per share
Basic earnings per share are computed by dividing net (loss) income
available to common shareholders by the weighted average common shares
outstanding. Diluted earnings per share reflect the potential dilution
that would occur if dilutive securities were exercised or converted into
common stock. The following table presents a reconciliation of the
weighted average common shares outstanding for the earnings per share
calculation for the years ended December 31:
2004 2003 2002
----- ----- -----
Weighted average shares outstanding 4,085,244 3,940,433 3,859,433
Net dilutive effect of stock options - 133,982 198,909
----------------------------------
Diluted average shares outstanding 4,085,244 4,074,415 4,058,342
=================================
For December 31, 2004, the Company incurred a net loss. Accordingly,
anti-dilutive impact of the effect of stock options is not shown.
1. Summary of significant accounting policies (continued)
Comprehensive (Loss) Income
Comprehensive (loss) income includes both the net loss and the change in
unrealized gains and losses on securities available for sale.
Segment Reporting
The Company's segments are determined by the products and services
offered, primarily distinguished between banking and mortgage banking
operations. Loans, investments, and deposits provide the revenues in the
banking operation, and servicing fees, underwriting fees and loan sales
provide the revenues in mortgage banking. All operations are domestic.
Reclassification
Certain items in the 2003 and 2002 consolidated financial statements and
notes have been reclassified to conform to the 2004 presentation.
2. Michigan BIDCO, Inc.
BIDCO was incorporated for the purpose of providing financing to small
businesses located in Michigan for the purpose of creating business and
industrial development in the State of Michigan. BIDCO is licensed under
the Michigan BIDCO Act, and is regulated by the Michigan Office of
Financial and Insurance Services, Bank and Trust Division. The President
of the Company serves as Chairman and President of BIDCO.
At December 31, 2003 University Bancorp owned 6.10% of the BIDCO and the
Bank held a $600,000, 7.5% note collateralized by all assets of the
company. The note was paid off in December 2004. Additionally, the shares
of the BIDCO were sold. At December 31, 2004, the company no longer had a
financial interest in the BIDCO
3. Secondary Market Operations
Midwest provides servicing and subservicing of real estate mortgage
loans for University Bank and several other financial institutions. The
unpaid principal balance of these loans was approximately $2.31 billion,
$1.94 billion and $1.06 billion as of December 31, 2004, 2003 and 2002
respectively. Custodial escrow balances maintained in connection with
these respective loans was $30.2 million, $26.8 million, and $23.4
million, at December 31, 2003, 2002 and 2001 respectively. Most of these
funds are off balance sheet and maintained at various financial
institutions. The following summarizes the operations of Midwest for the
years ended December 31:
3. Secondary Market Operations (continued)
2004 2003 2002
--------------------- -------------------- ---------------------
Loan servicing and subservicing fees $1,127,416 $1,128,293 $713,427
Loan set-up and other fees 1,550,620 2,865,708 2,677,966
Interest income 35,533 42,940 45,922
Gain on sale of loans 340,149 756,170 236,098
--------------------- -------------------- ---------------------
Total income 3,053,717 4,793,111 3,673,413
Salaries and benefits 1,518,595 1,646,483 1,348,884
Amortization of servicing rights 448,553 865,977 522,081
Interest expense 11,320 3,798 2,520
Other operating expenses 1,104,106 1,851,073 1,365,091
--------------------- -------------------- ---------------------
Total expenses 3,080,308 4,367,331 3,238,576
--------------------- -------------------- ---------------------
(Loss)income of Midwest $ (26,591) $ 425,780 $ 434,837
===================== ==================== =====================
University Bank and Midwest sell conforming residential mortgage loans
to the secondary market. These loans are owned by other institutions and
are not included in the Company's consolidated balance sheets. Such
mortgage loans have been sold predominately without recourse or with
limited recourse. The unpaid principal balance of these loans was $120.6
million, $112.3 million and $87.0 million at December 31, 2004, 2003 and
2002 respectively.
The following summarizes the activity pertaining to mortgage servicing
rights, along with the aggregate activity in related valuation
allowances. Table A is calculated net of the valuation allowance
described in Table B.
Table A 2004 2003 2002
------------------- ------------------- -------------------
Mortgage servicing rights:
Balance, January 1 $1,031,575 $1,014,939 $ 606,537
Additions - originated 514,764 887,811 937,450
Amortization expense (380,553) (472,175) (480,048)
------------------- ------------------- -------------------
Adjustment for asset impairment change (68,000) (399,000) (49,000)
------------------- ------------------- -------------------
Balance, December 31 $1,097,786 $1,031,575 $1,014,939
=================== =================== ===================
Table B
Valuation allowances:
Balance, January 1 $ 448,000 $ 49,000 $ 0
Additions 68,000 399,000 49,000
------------------- ------------------- -------------------
Balance, December 31 $ 516,000 $ 448,000 $ 49,000
=================== =================== ===================
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. The servicing rights are recorded at the lower of
cost or market.
4. Securities available for sale (continued)
The following is a summary of the amortized cost, gross unrealized gains,
gross unrealized losses and fair value of securities available for sale
at December 31, 2004, 2003 and 2002:
December 31, 2004
Amortized Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed
securities $1,157,964 $ - $(51,356) $1,106,607
========= ======== ========= =========
December 31, 2003
Amortized Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed
Secuities $1,675,648 $ - $(38,795) $1,636,853
Stocks 12,316 - - 12,316
--------- -------- ------- ---------
$1,687,964 $ - $(38,795) $1,649,169
========== ======== ========= =========
December 31, 2002
Amortized Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed
Securities $3,184,835 $ - $(81,997) $3,102,838
========== ======= ========= =========
At December 31, 2004 and 2003, the fair value of securities pledged to
secure certain borrowings were $1,106,607 and $1,649,169, respectively.
Unrealized losses at December 31, 2004 and 2003 have existed for longer
than twelve months. This decline is considered temporary as the values
of the mortgage-backed securities fluctuate based on changes in current
interest rates and prepayment assumptions related to the underlying
mortgages. Furthermore, the Company expects to hold these securities
sufficiently long enough to recover these unrealized losses.
Sales of available for sale securities: 2004 2003 2002
---- ---- ----
Proceeds $49,981 $59,879 $1,034,160
Realized gains 3,605 - 69,733
Realized losses 4,051 54,011 -
The scheduled maturity date of the securities available for sale at
December 31, 2004 is:
Amortized Fair
Cost Value
2005-2008 $ 0 $ 0
2009-2013 0 0
After 2013 1,157,964 1,106,607
---------- ----------
$1,157,964 $1,106,607
========== ==========
5. Loans
Major classifications of loans are as follows as of December 31:
2004 2003 2002
---- ---- ----
Commercial $ 15,079,343 $ 15,943,127 $ 16,550,325
Real estate - mortgage 24,657,078 15,687,265 11,633,060
Real estate -construction 1,238,530 1,270,789 2,113,747
Installment 1,820,515 1,905,793 2,799,490
Credit cards 204,334 121,612 95,412
------------- ------------- -------------
Gross Loans 42,999,800 34,928,586 33,192,034
Allowance for loan losses (353,124) (454,118) (408,219)
------------- ------------- -------------
Net Loans $ 42,646,676 $ 34,474,468 $ 32,783,815
============= ============= =============
Changes in the allowance for loan losses were as follows:
2004 2003 2002
---- ---- ----
Balance, beginning of year $ 454,118 $ 408,219 $ 579,113
Provision charged to operations (87,500) 189,400 100,000
Recoveries 55,512 97,008 16,570
Charge-offs (69,006) (240,509) (287,464)
--------- --------- ---------
Balance, end of year $ 353,124 $ 454,118 $ 408,219
========= ========= =========
At December 31, 2004, there are loans totaling $371,109 that were past
due over 90 days but still accruing interest. These loans were brought
current shortly after December 31, 2004. There are no past due loans
over 90 days and still accruing interest at December 31, 2003 and 2002.
Non-accrual loans at December 31 are summarized as follows:
2004 2003 2002
---- ---- ----
Non accrual loans:
Real estate - mortgage and construction loans $ 591,791 $ 907,599 $ 102,713
Installment loans 16,739 5,128 67,546
Commercial loans (non real estate) 39,490 204,400 509,301
--------- ----------- ---------
$ 648,020 $ 1,117,127 $ 679,560
========= =========== =========
Information regarding impaired loans for the years ended December 31, is
as follows:
Impaired loans: 2004 2003 2002
-------------- ---- ---- ----
Loans with no allowance allocated $ 83,319 $ 0 $ 0
Loans with allowance allocated $ 564,701 $ 1,117,127 $ 679,560
Amount of allowance for loan losses allocated $ 83,548 $ 291,754 $ 177,069
Impaired loans:
Average balance during the year $ 719,667 $ 946,261 $ 531,823
Interest Income recognized thereon $ 0 $ 6,248 $ 8,412
Cash-basis interest income recognized $ 0 $ 6,248 $ 8,412
6. Premises and equipment
Classifications at December 31 are summarized as follows:
2004 2003 2002
---- ---- ----
Land $ 32,811 $ 32,811 $ 132,931
Buildings and improvements 234,984 234,984 1,157,624
Furniture, fixtures,equipment and
software 2,756,982 2,327,279 2,108,391
------------ ------------ -----------
3,024,777 2,595,074 3,398,946
Less: accumulated depreciation (2,078,073) (1,765,267) (1,678,044)
------------ ------------ ------------
Net premises and equipment $ 946,704 $ 829,807 $ 1,720,902
============ ============ ============
In June 2003, the Bank sold its main office and sole branch
location to Lowertown Development, LLC ("Lowertown") for $1,173,833, and
a gain of $342,851. As part of this transaction, the Bank received an
option to purchase 10,000 square feet of office space in a new facility
to be constructed by Lowertown which was valued at $200,000.
Simultaneously, the Bank entered into a 24 month lease agreement with
Lowertown to leaseback the building sold. The lease included 5 six-month
options to extend the lease until the earlier of the completion of the
new building or December 2007. Lowertown is developing the neighboring
area with a major office, retail and apartment development. Under the
terms of the agreement, the Bank has an option to purchase 10,000 square
feet of office space in this new development for fair market value up to
a maximum of $2,000,000. It is currently anticipated that the new
facility will be occupied in February 2007. Both the gain on the sale of
the building and the purchase option are being amortized into income over
the life of the expected lease term. Lowertown is obligated to pay the
Bank $200,000 if the office space is not completed prior to the end of
the extended lease period in December 2007.
Depreciation expense amounted to $318,584, $305,741 and $290,516 for the
years ended December 31, 2004, 2003 and 2002, respectively.
The Bank began leasing its Maiden Lane building in June 2003. The rent
for 2004 totaled $106,740. The Bank leases an ATM drive-thru location in
Ann Arbor for $28,656 per year and one off-site ATM location for $9,000
per year. Midwest leases its office space for approximately $50,424 per
year in Houghton, Michigan. Total rental expense for all operating
leases was $192,663, $144,778 and $55,861 in 2004, 2003 and 2002.
7. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more
were $1,854,614 and $2,632,451 at December 31, 2004 and 2003
respectively.
At December 31, 2004, stated maturities of time deposits were:
2005 $8,199,043
2006 3,068,588
2007 521,596
2008 95,870
2009 113,744
Thereafter 441,341
-------------
$12,440,182
=============
7. Time deposits (continued)
The Bank had issued through brokers $3,651,000 and $1,101,000 of time
deposits as of December 31, 2004 and 2003, respectively. These time
deposits have maturities ranging from one to five months and are
included in the table above. These deposits are issued in denominations
of less than $100,000.
The Bank had deposits of $1,400,430 and $1,550,233 from directors,
officers and their affiliates as of December 31, 2004 and 2003,
respectively.
8. Stock options
In 1995, the Company adopted a stock option and stock award plan (the
1995 Stock Plan), which provides for the grant of incentive stock
options, as defined in Section 422(b) of the Internal Revenue Code of
1986, as amended, as well as the grant of non-qualified stock options
and other stock awards. The plan provides for the grant to officers,
directors and key employees of the Company, and independent contractors
providing services to the Company, of options to purchase and other
awards of common stock. The exercise price of options granted under the
plan shall be determined by the Board of Directors, or a compensation
committee thereof. Options shall expire on the date specified by the
Board of Directors or such committee, but not more than 10 years from
the
date of grant (or five years from the date of grant for incentive stock
options if the grantee owned 10% of the Company's voting stock at the
date of grant). Unless amended, the 1995 Stock Plan will terminate on
November 15, 2005. The following table summarizes the activity relating
to options to purchase the Company's common stock:
Number of Weighted Average
Options Exercise price
Outstanding at December 31, 2001 251,909 $1.60
Forfeited - 2002 (47,000) 1.61
Granted - 2002 ($0.08 Fair Value) 75,000 1.00
----------
Outstanding at December 31, 2002 279,909 1.44
Granted - 2003 ($0.10 Fair Value) 54,000 1.85
Exercised - 2003 (36,000) 1.33
Forfeited - 2003 (26,500) 1.26
----------
Outstanding at December 31, 2003 271,409 1.60
----------
Granted - 2004 ($0.46 Fair Value) 64,500 2.29
Exercised - 2004 (103,909) 1.65
Forfeited - 2004 (36,000) 2.00
----------
Outstanding at December 31, 2004 196,000 1.69
===========
At December 31, 2004:
Number of options immediately exercisable 117,200
Weighted average exercise price of immediately
exercisable options $1.39
Range of exercise price of options outstanding $1.00 - $2.47
Weighted-average remaining life of options outstanding 4.62 years
8. Stock options (continued)
The following summarizes assumptions used to value stock options.
2004 2003 2002
---- ---- ----
Risk-free interest rate 4.50% 4.00% 4.13%
Expected option life 5.0 years 5.0 years 5.0 years
Expected stock price
Volatility 23.4% 22.5% 21.2%
Expected dividends $0 $0 $0
9. Employee stock ownership plan (ESOP)
The employees' allocation of ESOP assets is based on their current
compensation, after 1 year of service and upon reaching the age of 21.
The annual contribution to the ESOP is at the discretion of the Board of
Directors. Assets of the plan are comprised entirely of 77,018 shares of
the Company's stock at December 31, 2004 and 2003, all of which were
fully allocated at December 31, 2004. Upon retirement from the plan,
participants can receive distributions of their allocated shares of the
Company's stock. The assets of the ESOP are held in trust and were
valued at approximately $139,000, and $199,000 at December 31, 2004 and
2003, respectively.
10. Minority Interest
The Bank owns an 80% interest in the common stock of Midwest, with the
remaining 20% owned by the President of Midwest. At December 31, 2004
and 2003, total common stockholders' equity of Midwest was $2,200,229
and $2,226,820 resulting in a $440,118 and $445,324 minority interest
reflected on the Company's consolidated balance sheet, respectively. The
results of Midwest's operations for 2004, 2003 and 2002 are included in
the Company's consolidated statement of operations.
11. Commitments and contingencies
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to buy, sell
and fund loans, letters of credit and unused lines of credit. The Bank's
exposure to credit loss in the event of non-performance is equal to or
less than the contractual amount of these instruments. The Bank follows
the same credit policy to make such commitments as that followed by
loans recorded in the consolidated financial statements. The following
is a summary of commitments as of December 31:
2004 2003 2002
---- ---- ----
Unused lines of credit $ 4,907,000 $ 3,762,000 $2,094,000
Commitments to fund loans 3,366,000 2,562,000 3,748,000
Foreign exchange futures 75,000
----------- ----------- ----------
Total $ 8,273,000 $ 6,399,000 $5,842,000
=========== =========== ==========
12. Related party transactions
The Company's President also serves as President and Chairman of
Michigan BIDCO. As such, the President is actively involved in the
BIDCO's operations, including investment activity and estimation of the
fair value of its equity investments. In December, 2004, the BIDCO paid
in full its $600,000 note to the Bank. Additionally, the Bancorp sold
its 6.10% in the BIDCO. At December 31, 2004, neither the Bank nor the
Bancorp had a financial interest in or with BIDCO.
The Bank had loans outstanding of $44,232 and $280,690 to related
officers and directors at December 31, 2004 and 2003, respectively.
During 2004, two loans totaling $620,000 were originated. There were no
related party loans that were originated during 2003 that were
outstanding at year end. During 2003, a construction line of credit
issued in 2002 was terminated. Available lines of credit to related
parties at the December 31, 2004 and 2003, totaled $118,768 and $156,373
respectively. Related party loans were made in the normal course of
business and were performing pursuant to terms at December 31, 2004.
13. Income taxes
At December 31, 2004 income tax expense of $80,000 was recorded due to
uncertainties as to the future benefits of the net operating losses.
At December 31, 2003, the Company recorded an $80,000 tax benefit as a
deferred tax asset which represented a portion of the existing net
operating loss carry-forward that was expected to be utilized to offset
future taxable income.
The net deferred tax asset at December 31, 2004 and 2003 is comprised
of the following:
2004 2003
Allowance for loan losses $ 123,732 $ 276,579
Net operating loss carry-forward 707,369 487,663
Tax credit carry-forward 1,111,810 989,123
Deferred gain on sale leaseback 71,715 85,568
Donation carry-forward 9,058 46,819
Other 138,189 57,708
------------- ------------
Deferred tax assets 2,161,873 1,943,460
------------- ------------
Servicing rights (373,247) (339,009)
Depreciation (32,839) (32,661)
------------- ------------
Deferred tax liabilities (406,086) (371,670)
------------- ------------
Net deferred tax asset 1,755,787 1,571,790
Valuation allowance for
deferred tax assets (1,755,787) (1,491,790)
------------- ------------
Net deferred tax asset $ 0 $ 80,000
============= ============
The Company has net operating loss carry-forwards of approximately
$2,080,000 which expire beginning in 2012 and general business credit
carry-forwards of approximately $1,112,000 which expire beginning in
2011. Financial statement tax expense amounts differ from the amounts
computed by applying the statutory federal tax rate of 34% to pretax
income because of operating losses and valuation allowances recorded to
reduce deferred tax assets as noted above.
14. Short Term Borrowings
The Bank had a line of credit available from the Federal Home Loan Bank
(the FHLB) in the amount of $4.0 million and $3.0 million at December
31, 2004 and 2003, respectively. At December 31, 2004, borrowings were
secured by the pledge of specific mortgage loans held for investment
with unpaid principal balances of $5.4 million and available-for-sale
securities with a balance of $1.1 million.
The Bank had a line of credit available from the Federal Reserve Bank of
Chicago (the FRB) in the amount of $5.7 million. There were no amounts
outstanding on this line from the FRB at December 31, 2004 and 2003.
Borrowings are secured by the pledge of specific commercial loans held
for investment with unpaid principal balances of $7.8 million. The
following information provides a summary of short-term borrowings for
the years indicated:
2004 2003
---- ----
Amount outstanding at the end of
the year and interest rate $2,416,000 1.65% $ 0
Maximum amount of borrowing outstanding
at any month end during the year $2,601,000 $991,000
Average amount outstanding during the
year and weighted average rate $972,076 1.75% $227,063 1.29%
15. Long Term Borrowings
The Company had a note payable to North Country Bank & Trust (NCB&T)
secured by the stock of the Bank with a balance of $34,000 and $166,000
at December 31, 2004 and 2003, respectively. The note has a maturity
date of February 15, 2005. Interest is payable quarterly at the prime
rate of NCB&T plus 1.00 percent.
Dividends by the Bank to the holding company in excess of the prior
year's annual net income are not permitted without prior permission from
NCB&T under the terms of the Company's credit facility.
16. Regulatory matters
University Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by regulators
about components, risk weightings, and other factors.
The Bank is also subject to prompt corrective action capital requirement
regulations set forth by the FDIC. The FDIC requires the Bank to maintain
a minimum of total capital and Tier 1 capital (as defined) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
16. Regulatory matters (continued)
average total assets (as defined). As of December 31, 2004, the Bank did
not meet all capital adequacy requirements to which it is subject as the
Bank presently has a written understanding with its regulators that the
Bank will maintain the ratio of Tier 1 Capital to average assets at 7% or
more. Management has submitted a plan of corrective action to the FDIC.
This plan includes the possible issuance of preferred stock.
As of December 31, 2004, the most recent guidelines from the FDIC
categorized the Bank as "adequately capitalized" under the regulatory
framework for prompt corrective action. At December 31, 2003 the Bank was
classified as "well capitalized." To be categorized as "well
capitalized," or "adequately capitalized" the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table.
To Be Adequately To Be Well
Capitalized Capitalized
Under Prompt Under Prompt
Corrective Action Corrective Action
Provisions Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2004:
Total capital (to risk
weighted assets) $3,515,000 9.5 % $2,965,000 8.0 % $3,706,000 10.0 %
Tier I capital (to risk
weighted assets) 3,158,000 8.5 % 1,482,000 4.0 % 2,224,000 6.0 %
Tier I capital (to
average assets) 3,158,000 6.5 % 1,959,000 4.0 % 2,449,000 5.0 %
As of December 31, 2003:
Total capital (to risk
weighted assets) $4,129,000 12.3 % $2,689,000 8.0 % $3,362,000 10.0 %
Tier I capital (to risk
weighted assets) 3,708,000 11.0 % 1,345,000 4.0 % 2,017,000 6.0 %
Tier I capital (to
average assets) 3,708,000 8.6 % 1,728,000 4.0 % 2,160,000 5.0 %
17. Management's Plan Regarding Continuing Operations
At December 31, 2004, University Bancorp had an accumulated deficit of
$2,490,224 and recurring losses from operations for 3 of the past 5
years. University Bancorp's operations are intended to continue in the
future. Management has reviewed operating results, prepared projections
of possible future results, performed other analyses of its operations
to reduce operating costs and entered new product lines of business.
17. Management's Plan Regarding Continuing Operations (continued)
Management of the Company has implemented a plan to improve core
earnings by adding low-cost deposits, adjusting fees, growing the loan
portfolio of the Bank, reducing loan delinquencies, liquidating other
real estate owned, improving the synergy between its subsidiary
operations, and eliminating inefficient or redundant costs at the Bank
level. Both the Bank and Midwest are projected to have net income in
2005, however, the Company's continued operation is dependent upon its
ability to maintain profitable operations and retain adequate capital
levels.
18. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair values
for financial instruments. The carrying amount is considered to estimate
fair value for cash and short-term instruments, demand deposits,
short-term borrowings, accrued interest, and variable rate loans or
deposits that reprice frequently and fully. Securities fair values are
based on quoted market prices or, if no quotes are available, on the
rate and term of the security and on information about the issuer. For
fixed rate loans or deposits and for variable rate loan or deposits with
infrequent repricing or repricing limits, the fair value is estimated by
the discounted cash flow analysis using current market rates for the
estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses of underlying collateral
values, where applicable. Fair value of loans held for sale is based on
market estimates. Fair value of mortgage servicing rights is estimated
using discounted cash flows based on current market interest rates net
of estimated costs of servicing loans. Fair value of mortgage
subservicing rights is based on a multiple of servicing contract
revenue. The fair value of debt is based on currently available rates
for similar financing. The fair value of off-balance sheet items is
based on the fees or cost that would normally be charged to enter into
or terminate such agreements. Fair value of unrecognized financial
instruments includes commitments to extend credit and the fair value of
letters of credit is considered immaterial.
18. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial
instruments were as follows:
December 31, 2004
Carrying Fair
Financial Assets Amount Value
---------------- ------ -----
Cash and short term investments $ 1,732,000 $ 1,732,000
Securities available for sale 1,106,000 1,106,000
Federal Home Loan Bank stock 922,000 922,000
Loans held for sale 846,000 846,000
Loans, net 42,647,000 43,436,000
Mortgage servicing rights 1,097,000 1,097,000
Accrued interest receivable 148,000 148,000
Financial Liabilities
Deposits 44,588,000 44,640,000
Short term borrowings 2,416,000 2,416,000
Long term borrowings 34,000 34,000
Accrued interest payable 50,000 50,000
December 31, 2003
Carrying Fair
Financial Assets Amount Value
---------------- ------ -----
Cash and short term investments $ 2,171,000 $ 2,171,000
Securities available for sale 1,649,000 1,649,000
Federal Home Loan Bank stock 881,100 881,100
Loans held for sale 206,000 206,000
Loans, net 34,474,000 35,630,000
Mortgage servicing rights 1,032,000 1,032,000
Accrued interest receivable 130,000 130,000
Financial Liabilities
Deposits 38,808,000 39,048,000
Long term borrowings 166,000 166,000
Accrued interest payable 52,000 52,000
19. Segment Reporting
The Company's operations include two primary segments: retail banking
and mortgage banking. Through its banking subsidiary's branch in Ann
Arbor, the Company provides traditional community banking services such
as accepting deposits, making loans, and providing cash management
services to individuals and local businesses. Mortgage banking
activities includes servicing of residential mortgage loans for others
(See Note 2).
19. Segment Reporting (continued)
The Company's two reportable segments are strategic business units that
are separately managed as they offer different products and services and
have different marketing strategies. In addition, the mortgage banking
segment services a different customer base from that of the retail
banking segment.
The segment financial information provided below has been derived from
the internal profitability reporting system used by management to
monitor and manage the financial performance of the Company. The
accounting policies of the three segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates segment performance based on profit or loss before income
taxes, not including nonrecurring gains and losses. Certain indirect
expenses have been allocated based on actual volume measurements and
other criteria, as appropriate. The Company accounts for transactions
between segments at current market prices. Segment profit is measured
before allocation of corporate overhead and income tax expense.
Information about reportable segments for the year ended December 31,
2004 follows:
Retail Mortgage
Banking Banking Totals
Interest income $2,708,738 $ 35,533 $2,744,271
Gain on the sale of mortgage
loans 0 340,149 340,149
Other non-interest income 804,363 2,678,036 3,482,399
Interest expense 772,031 11,927 783,958
Provision for loan losses (87,500) 0 (87,500)
Salaries and benefits 1,348,254 1,518,595 2,866,849
Occupancy 284,147 131,009 415,156
Other operating expense 1,660,699 1,432,476 3,093,175
(Loss) income before tax
expense (464,531) (40,289) (504,820)
Income tax (benefit) expense 93,698 (13,698) 80,000
Segment (loss) profit (558,229) (26,591) (584,820)
Segment assets 48,545,358 2,240,340 50,785,698
Capital expenditures 252,530 182,951 435,481
Depreciation 150,776 167,808 318,584
Amortization 258,510 446,287 704,797
19. Segment Reporting (continued)
Information about reportable segments for the year ended December 31,
2003 follows:
Retail Mortgage
Banking Banking Totals
Interest income $2,689,157 $42,942 $2,732,099
Gain on the sale of mortgage
loans 0 756,170 756,170
Other non-interest income 1,182,413 3,993,999 5,176,322
Interest expense 836,734 4,903 841,637
Provision for loan losses 189,400 0 189,400
Salaries and benefits 1,711,577 1,646,483 3,358,060
Occupancy 245,931 176,836 422,767
Other operating expense 1,524,729 2,313,466 3,838,285
(Loss) income before tax
expense (636,801) 651,423 14,442
Income tax (benefit) expense (305,643) 225,643 (80,000)
Segment (loss) profit (331,158) 425,780 94,442
Segment assets 40,667,106 2,356,200 43,023,306
Capital expenditures 108,309 122,747 231,056
Depreciation 153,744 151,996 305,740
Amortization 105,198 865,977 971,175
Information about reportable segments for the year ended December 31,
2002 follows:
Retail Mortgage
Banking Banking Totals
Interest income $3,148,530 $45,922 $3,194,452
Gain on the sale of mortgage
loans 0 236,098 236,098
Other non-interest income 813,528 3,391,393 4,204,921
Interest expense 1,036,643 2,520 1,039,163
Provision for loan losses 110,000 (11,000) 100,000
Salaries and benefits 1,580,656 1,348,884 2,929,540
Occupancy 185,859 163,327 349,186
Other operating expense 1,246,494 1,755,051 3,001,545
(Loss) income before tax
expense (229,239) 434,837 205,598
Income tax (benefit) expense (153,665) 153,665 0
Segment (loss) profit (75,574) 281,172 205,598
Segment assets 44,078,661 2,170,652 46,249,313
Capital expenditures 22,255 106,699 128,954
Depreciation 75,831 119,239 195,070
Amortization 106,967 $522,081 629,048
20. Quarterly Financial Data -Unaudited
The following tables represent summarized data for each of the quarters
in 2004 and 2003 (in thousands, except loss per share data).
2004
------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31 June 30 September 30 December 31
Interest income $635 $643 $720 $746
Interest expense 187 184 198 215
-----------------------------------------------------------------
Net interest income 448 459 522 531
Provision for losses 23 23 (28) (106)
-----------------------------------------------------------------
Net interest income after
Provision for losses 425 436 550 637
Loan set-up and other fees 383 508 311 370
Loan servicing and subservicing fees 334 348 357 349
Gain on sale of loans 89 69 65 117
Other non-interest income 158 147 120 99
Non-interest expense 1,574 1,594 1,539 1,669
------------------------------------------------------------------
Income tax expense - - 80 -
------------------------------------------------------------------
Net (loss) available to common shareholders ($185) ($86) ($216) ($97)
==================================================================
Basic and diluted loss per share ($0.05) ($0.02) ($0.05) ($0.02)
===================================================================
Weighted average shares outstanding 4,058,108 4,090,548 4,090,548 4,101,011
===================================================================
20. Quarterly Financial Data -Unaudited (continued)
2003
-----------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31 June 30 September 30 December 31
-----------------------------------------------------------------
Interest income $ 695 $ 681 $ 671 $ 685
Interest expense 227 218 195 202
-----------------------------------------------------------------
Net interest income 468 463 476 483
Provision (credit)for losses 106 39 22 22
-----------------------------------------------------------------
Net interest income after
Provision for losses 362 424 454 461
Loan set-up and other fees 822 1,068 965 528
Loan servicing and subservicing fees 201 232 280 415
Gain on sale of loans 184 305 180 87
Other non-interest income 115 90 277 183
Non-interest expense 1,611 2,105 2,124 1,779
-----------------------------------------------------------------
Income before tax benefit 73 14 32 (105)
-----------------------------------------------------------------
Income tax benefit - - (80) -
-----------------------------------------------------------------
Net earnings(loss) available to common $ 73 $ 14 $ 112 $ (105)
shareholders
==================================================================
Basic and diluted earnings (loss) per share $ 0.02 $ 0.00 $0.03 $(0.03)
===================================================================
Weighted average shares outstanding 3,899,548 3,899,548 3,951,944 4,009,309
===================================================================
21. Parent Company Only Condensed Financial Information
Condensed Balance Sheet
December 31, December 31,
2004 2003
--------------------- -----------------
ASSETS
Cash and cash equivalents $ 5,626 $ 669
Securities available for sale - 12,316
Investment in University Bank 3,050,721 3,557,977
Investment in Michigan BIDCO - 29,258
Other assets 3,137 3,768
----------- -----------
Total Assets $ 3,059,484 $ 3,603,988
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 34,000 $ 166,000
Accounts payable 23,601 2,000
Accrued interest payable 257 1,361
----------- -----------
Total Liabilities 57,858 169,361
Stockholders' Equity 3,001,626 3,434,627
----------- -----------
Total Liabilities and
Stockholders' Equity $ 3,059,484 $3,603,988
=========== ===========
21 Parent Company Only Condensed Financial Information (continued)
Condensed Statements of Income
2004 2003 2002
----------- --------- --------
INCOME:
Interest and dividends on
investments $ 266 $ 339 $ 328
Net security losses (446) (26,574) -
----------- --------- -------
Total (loss)income (180) (26,235) 328
EXPENSES:
Interest 4,907 12,144 20,675
Public listing 45,696 43,088 38,202
Professional fees 36,976 24,000 33,513
Other miscellaneous 2,726 5,250 3,014
---------- -------- -------
Total Expense 90,305 84,482 95,404
Loss before federal income taxes
and equity in undistributed
net loss of subsidiaries (90,125) (110,717) (95,076)
Federal income taxes - - -
---------- -------- -------
Loss before equity in undistributed
net loss of subsidiaries (90,125) (110,717) (95,076)
Equity in undistributed net
(loss)income of subsidiaries (494,695) 205,159 300,674
---------- -------- --------
Net(loss)income $(584,820) $ 94,442 $205,598
========== ======== ========
21. Parent Company Only Condensed Financial Information (continued)
Condensed Statements of Cash Flows
For Year Ended
2004 2003 2002
---------- ------------ ----------
Cash flow provided by (used in) investing activities:
Net Income (Loss) $ (584,820) $ 94,442 $ 205,598
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of goodwill - - -
Loss on sale of investments 446 27,783 -
Decrease (increase) in receivable from affiliate - - 286,196
Decrease (increase) in other assets 631 (407) (256)
Decrease (increase) in other liabilities 20,498 (97,414) (71,050)
Decrease (increase) investment in subsidiaries 494,695 (205,159) (300,673)
Decrease in investment in Michigan BIDCO - - -
---------- ------------ ----------
Net cash (used in) provided by operating activities (68,551) (180,755) 119,815
---------- ------------ ----------
Cash flow from investing activities:
Purchase of available for sale securities (8,853) (98,563)
Proceeds from sale of available for sale securities 49,981 58,464 -
---------- ------------ ----------
Net cash provided by (used in) investing activities 41,128 (40,099)
---------- ------------ ----------
Cash flow from financing activities:
Principal payment on notes payable (132,000) (132,000) (132,000)
Issuance of common stock 164,380 141,250 128,413
---------- ------------ ----------
Net cash provided by (used in) financing activities 32,380 9,250 (3,587)
---------- ------------ ----------
Net change in cash and cash equivalents 4,957 (211,604) 116,228
Cash and cash equivalents:
Beginning of year 669 212,273 96,045
---------- ------------ ----------
End of year $ 5,626 $ 669 $ 212,273
========== ============ ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 6,011 $ 12,755 60,686
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
ITEM 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. As of the
end of the period covered by this report, an
----------------------------------------------------- evaluation
was carried out under the supervision and with the participation
of the Company's management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in Rules 13a-14(c) under the Securities Exchange Act
of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, except as described
below, the operation of these disclosure controls and procedures
were effective for gathering, analyzing and disclosing
information required to be disclosed in connection with the
Company's filing of its Annual Report on Form 10-K for the year
ended December 31, 2004. During the course of the audit of our
financial statements for the year ended December 31, 2004, our
independent registered public accounting firm, Grant Thornton
LLP, indicated that the following material deficiencies, in the
aggregate, constitute a material weakness in our internal
controls pursuant to standards established by the Public Company
Accounting Oversight Board:
(1) The Company lacks sufficiently formalized accounting
policies and procedures, including written procedures
for the preparation of the Quarterly Report on Form
10-Q in accordance with applicable SEC guidelines.
(2) The Company's manual procedures for performing
consolidations increase the possibility that errors
could occur and our dual controls may not be
sufficient to guarantee avoidance of all errors in
consolidation.
(3) The Company may have insufficient staff in the
accounting and financial reporting departments to
meet the needs of Sarbanes-Oxley Section 404
standards by June 2006
(4) The Company replaced its core banking software
application during the summer of 2004. The core
banking system is now out-sourced to a service
bureau whereas previously the bank maintained the
core banking system in house. During the transition
and for a period afterwards it was necessary to
give certain members of senior management additional
access rights for training and the transition
requirements in the new system. In March 2005,
access rights for the banking software were revised
and access rights were reassigned to levels
appropriate for a routine operating environment.
The controls in the new core banking application in
place today are significantly better than the
overall control levels in the system that was
replaced.
Management has begun implementing plans to address each of
items 1-3, further improving on the systems and procedures
already in place. Management believes that its plans with
respect to each of these items will be completed and
implemented in the second quarter of 2005.
With respect to policies and procedures for the Quarterly
Report on Form 10-Q, management notes that it uses a checklist
prepared by the American Institute of Certified Public
Accountants to assist in the preparation of SEC reports and
that it maintains a reference library of SEC and accounting
handbooks. Management is implementing plans to further
formalize its procedures and
expects to complete and implement this in the second quarter
of 2005.
Management believes that the Company's general ledger and core
processing systems for each entity in the consolidation are
effective and are consistent with systems used by others in
our industry. We have evaluated our procedures and made
changes to increase the automation and dual controls for
preparing consolidated results.
Management believes that the current staff in the accounting
and financial reporting is sufficient and properly trained to
implement appropriate internal controls and to generate
accurate financial statements. We continue to provide training
and to document our systems and procedures to make sure that
the Company is able to comply with the internal control report
requirements by the applicable deadline.
(b) Changes in Internal Controls. Except as described above, there
were no significant changes in the Company's internal controls
over financial reporting during the fourth quarter of the
fiscal year ended December 31, 2004, that have materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting
Item 9B. - Recent Events
On March 31, 2005, the Bank signed a Fourth Amendment to its Purchase
Agreement dated September 14, 2002, with Lower Town Development Group, LLC, the
developer of the site on which the Bank's current headquarters is located. The
Purchase Agreement, as amended, contemplates that the Bank will purchase an
office condominium from Lower Town Development Group, LLC, an entity affiliated
with the current owner and lessor of the Bank's headquarters. The office
condominium would be built on land currently occupied by the Bank's
headquarters.
The Bank has previously sold and leased back its headquarters facility
at 959 Maiden Lane, Ann Arbor, Michigan. The purchaser of the property, an
affiliate of Lower Town Development Group, L.L.C., owes the Bank a deferred
payment of $200,000. Under the amended purchase agreement, if University Bank,
in is sole discretion, can give notice on or before June 15, 2005 that it will
vacate its 959 Maiden Lane, Ann Arbor, Michigan headquarters by August 1, 2005,
then Lower Town Development Group, LLC agrees to pay University Bank $800,000.
The $800,000 will be payable upon either (i) the closing of the construction
financing pertaining to the office condominium project or (ii) by December 31,
2005, whichever occurs first. The amended purchase agreement provides that the
purchase price for the new 10,000 square foot headquarters will be $2,000,000
instead of $1,800,000.
PART III.
Item 10. - Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement for its 2004 Annual
Meeting (the "Proxy Statement") to be under the captions:
Election of Directors
Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance
We have adopted a Code of Ethics for all employees. A copy of the Code of Ethics
is available upon request by writing to the Chief Financial Officer, University
Bancorp, Inc.,959 Maiden Land, Ann Arbor, Michigan 48105.
Item 11. - Executive Compensation
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement to be under the
captions:
Executive Compensation
Compensation Plans
Item 12. - Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Security Ownership of Certain Beneficial Owners and
Management
Equity Compensation Plan Information
The University Bancorp, Inc. 1995 Stock Option Plan authorizes stock options for
issuance to employees, consultants and directors in exchange for services.
The following table sets forth certain information regarding the above
referenced equity compensation plan as of December 31, 2004.
Equity Compensation Plan Information
(a) (b) (c)
Number of Number of
securities to be securities remaining
issued upon exercise Weighted-average available for future
Plan Category of outstanding exercise price of ssuance under equity
options, warrants and outstanding options, compensation plans
rights (1) warrants and rights (excluding securities
reflected in column (a))
Equity compensation
plans approved by
security holders 196,000 $1.69 0
Equity compensation
plans not approved
by security holders 0 NA 0
Total 196,000 $1.69 0
(1) University Bancorp has not granted rights or warrants applicable to this
chart.
Item 13. - Certain Relationships and Related Transactions
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Certain Relationships and Related Transactions
ITEM 14: Principal Accountant Fees and Services.
Information relating to principal accountant fees and services is
contained on page 20, under the caption "Independent Public Accountants" in the
University Bancorp, Inc. definitive Proxy Statement dated April 30, 2005,
relating to the 2004 Annual Meeting of Stockholders and the information within
that section is incorporated by reference.
PART IV.
Item 15. - Exhibits, Financial Statement Schedules
(a) Index of Financial Statements:
The following statements are filed as part of this Report:
Audited consolidated balance sheets as of December 31, 2004
and December 31, 2003, and consolidated statements of
operations, comprehensive (loss) income, stockholders' equity
and cash flows for the years ended December 31, 2004, 2003,
and 2002 of the Company.
(b) Schedules to the consolidated financial statements required by
Article 9 of Regulation S-X are not required under the related
instructions or are inapplicable, and therefore have been omitted.
(c) Form S-8 relating to the University Bancorp, Inc. 1995 Stock Option
Plan
(d) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
3.1.1 Certificate of Amendment, dated June 10, 1998, of the
Company's Certificate of Incorporation (incorporated by
reference to Exhibit 3.1.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
3.2 Composite By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1989).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997
issued to North Country Bank & Trust (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated
by reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
*
10.2.1 Amendment to the ESOP, effective as of December 31, 1991
(incorporated by reference to Exhibit 10.2.A to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991). *
10.3 University Bank 401(k) Profit Sharing Plan, adopted August
1, 1996, effective as of January 1, 1996 (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996). *
10.4 1995 Stock Plan of the Company (incorporated by reference
to Exhibit A to the definitive Proxy Statement of the
Company for 1996 Annual Meeting of Stockholders). *
10.4.1 Form of Stock Option Agreement related to the 1995 Stock
Plan (incorporated by reference to Exhibit 10.7.1 to the
Annual Report on Form 10-K for the year ended December 31,
1995). *
10.5 Letter, dated December 1, 1989, from Federal Reserve Bank
of Minneapolis (incorporated by reference to Exhibit
10.9).
10.6 Federal Income Tax Allocation Agreement Between Newberry
State Bank and Newberry Holding Inc. dated March 21, 1992
(incorporated by reference to Exhibit 10.11).
10.6.1 Federal Income Tax Allocation Agreement Between Newberry
Holding Inc. and University Bancorp, Inc. dated May 21,
1991 (incorporated by reference to Exhibit 10.11.1).
21 Subsidiaries of Registrant: List of subsidiaries filed
herewith.
23.1 Reports of Independent Auditors, Richard C. Woodbury,
P.C., dated February 25, 2005 regarding Midwest Loan
Services, Inc.
23.2 Consent of Grant Thornton, LLP, Certified Public
Accountants
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certificate of the Chief Executive Officer and of
University Bancorp, Inc. pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.1 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIVERSITY BANCORP, INC.
By: /s/Stephen Lange Ranzini
Stephen Lange Ranzini,
President and Chief Executive Officer
Date: March 29, 2005
By: /s/Nicholas K. Fortson
Chief Financial Officer
Date: March 29, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Stephen Lange Ranzini Director, President March 29, 2005
- ------------------------
Stephen Lange Ranzini
/s/Robert Goldthorpe Director, Chairman March 29, 2005
- --------------------
Robert Goldthorpe
/s/Gary Baker Director March 29, 2005
- -------------
Gary Baker
/s/Michael Talley Director March 29, 2005
- -----------------
Michael Talley
/s/Dr. Joseph L. Ranzini Director March 29, 2005
- ------------------------
Dr. Joseph Lange Ranzini
/s/Paul Lange Ranzini Director March 29, 2005
- ---------------------
Paul Lange Ranzini
/s/Charles McDowell Director March 29, 2005
- -------------------
Charles McDowell
Index of Exhibits
Sequentially
Exhibit Number and Description Numbered Page
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the June 30, 1996 10-Q").
3.1.1 Certificate of Amendment, dated June 10, 1998, of the Company's
Certificate of Incorporation (incorporated by reference to Exhibit
3.1.1 to the June 30, 1998 10-Q").
3.2 Composite By-laws of the Company (incorporated by reference to Exhibit
3.2 to the 1989 10-K).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997 issued to
North Country Bank & Trust (incorporated by reference to Exhibit 10.1
to the 1997 10-K"))
10.2 University Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"), as
amended November 27, 1990 (incorporated by reference to Exhibit 10.2 to
the 1990 10-K).
10.2.1 Amendment to the ESOP, effective as of December 31, 1991 (incorporated
by reference to Exhibit 10.2.A to the 1991 10-K).
10.3 University Bank 401(k) Profit Sharing Plan, adopted August 1, 1996,
effective as of January 1, 1996 (incorporated by reference to Exhibit
10.3 to the 1996 10-K).
10.4 1995 Stock Plan of the Company (incorporated by reference to Exhibit A
to the definitive Proxy Statement of the Company for the 1996 Annual
Meeting of Stockholders (the "1996 Proxy).
10.4.1 Form of Stock Option Agreement related to the 1995 Stock Plan
(incorporated by reference to Exhibit 10.7.1 to the 1995 10-K).
10.5 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989
10-K).
10.6 Federal Income Tax Allocation Agreement Between
Newberry State Bank and Newberry Holding Inc. dated
March 21, 1992 (incorporated by reference to
Exhibit 10.11 to the 1991 10-K).
10.6.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc.
dated May 21, 1991 (incorporated by reference to
Exhibit 10.11.1 to the 1991 10-K).
21 Subsidiaries of Registrant. 79
23.1 Reports of Independent Auditors, Richard C. Woodbury, P.C., dated
February 25, 2005 regarding Midwest Loan Services, Inc. 80
23.2 Consent of Grant Thornton, LLP, Independent Registered Public Accounting
Firm 81
23.3 Consent of Richard C. Woodbury, P.C., Independent
Registered Public Accounting Firm 82
31.3 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 83
31.4 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 84
32.2 Certificate of the Chief Executive Officer and of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 85
32.2 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 86
Exhibit 21. Subsidiaries of Registrant.
University Bank, a Michigan state chartered bank.
University Insurance & Investment Services, Inc., a Michigan
Corporation (100% owned by Bank)
Midwest Loan Services, Inc., a Michigan Corporation (80% owned by
University Bank)
EXHIBIT 23.1
Richard C. Woodbury, P.C.
Certified Public Accountant
20017 E. Sharon Avenue
Houghton, MI 49931-1904
----------------------
Phone: (906) 482-1305
Fax: (906) 482-9555
Email: rwoodbury@charterinternet.com
Website: www.rcwpc.com
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Midwest Loan Services, Inc.
Houghton, MI 49931
We have audited the accompanying balance sheet of Midwest Loan
Services, Inc., as of December 31, 2004 and 2003, and the related
statements of income, retained earnings, and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America and the standards applicable
to financial audits contained in Governmental Auditing Standards,
issued by the Comptroller General of the United States. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Midwest
Loan Services Inc. as of December 31, 2004, and the results of its
operations and its cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of
America.
In accordance with Government Auditing Standards, we have also issued
our report dated February 26, 2004, on our consideration of Midwest
Loan Services, Inc., internal control and on our tests of its
compliance with certain provisions of laws, regulations, contracts, and
grants. Those reports are an integral part of the audit performed in
accordance with Government Auditing Standards and should be read in
conjunction with this report in considering the results of our audit.
The accompanying supplemental information (shown on pages 18-24) is
presented for the purposes of additional analysis and is not a required
part of the basic financial statements of Midwest Loan Services Inc.
Such information has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, In our opinion, is
fairly stated, in all material respects, in relation to the financial
statements taken as a whole.
Richard C. Woodbury, CPA
February 25, 2005
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 29, 2005 accompanying the consolidated
financial statements incorporated by reference in the annual report of
University Bancorp, Inc. on Form 10-K for the year ended December 31, 2004. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of University Bancorp, Inc. on Form S-8 (File No. 333-
109930 ) effective October 23, 2003.
/S/ GRANT THORNTON LLP
Southfield, Michigan
April 13, 2005
EXHIBIT 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM
We have issued our report dated February 25, 2005 accompanying the consolidated
financial statements incorporated by reference in the annual report of
University Bancorp, Inc. on Form 10-K for the year ended December 31, 2004. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of University Bancorp, Inc. on form S-8 (File No.
333-10993) effective October 23, 2003.
/S/ Richard C. Woodbury, P.C., CPA
Houghton, Michigan
April 13, 2005
Exhibit 31.1
FORM 10-K 302 CERTIFICATION
I
I, Stephen Ranzini certify that:
1) I have reviewed this annual report on Form 10-K of University
Bancorp, Inc.;
2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of the annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, 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 and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting. s; and
Date: March 29, 2005 /s/Stephen Lange Ranzini
------------------ ----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
Exhibit 31.2
FORM 10-K 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
1) I have reviewed this annual report on Form 10-K of University
Bancorp, Inc.;
2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
d) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
e) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
f) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of the annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
6. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, 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 and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting. s; and
Date: March 29, 2005 /s/Nicholas K. Fortson
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Nicholas K. Fortson
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of University Bancorp, Inc. (the
"Registrant") on Form 10-K for the period ended December 31, 2002 as filed with
the Securities and Exchange Commission on March 29, 2005, hereof (the "Report"),
the undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
University Bancorp, Inc
Date: March 29, 2005 By: /s/ Stephen Lange Ranzini
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Stephen Lange Ranzini
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of University Bancorp, Inc. (the
"Registrant") on Form 10-K for the period ended December 31, 2002 as filed with
the Securities and Exchange Commission on March 29, 2005, hereof (the "Report"),
the undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
University Bancorp, Inc
Date: March 29, 2005 By: /s/ Nicholas K. Fortson
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Nicholas K. Fortson
Chief Financial Officer