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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
-------- ----------
(State of incorporation) (IRS Employer Identification Number)
959 Maiden Lane, Ann Arbor, Michigan 48105
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 741-5858
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value outstanding at April 30, 2005: 4,143,878 shares
page 1 of 28 pages
FORM 10-Q
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Unaudited Financial Statements PAGE
----
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statement of Comprehensive Income (loss) 7
Consolidated Statements of Cash Flows 8
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Summary 12
Results of Operations 13
Capital Resources 17
Liquidity 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
Item 4. Controls and Procedures 21
PART II - Other Information
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits & Reports on Form 8-K 21
Signatures 22
Exhibits 24
- ------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals, which are in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
2
Part I. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004
March 31, December 31,
ASSETS 2005 2004
----------------- -----------------
Cash and due from banks $ 2,484,885 $ 1,731,569
Securities available for sale, at market 1,050,670 1,106,607
Federal Home Loan Bank Stock 931,500 921,700
Loans held for sale, at the lower of cost or market 1,287,171 846,400
Loans 43,591,493 42,999,800
Allowance for loan losses (349,909) (353,124)
----------------- -----------------
Loans, net 43,241,584 42,646,676
Premises and equipment, net 912,056 946,704
Mortgage servicing rights, net 1,236,859 1,097,786
Real estate owned, net 435,512 534,043
Accounts receivable 47,606 30,949
Accrued interest receivable 175,623 148,344
Prepaid expenses 249,673 250,249
Goodwill 103,914 103,914
Other assets 382,927 420,757
----------------- -----------------
TOTAL ASSETS $ 52,539,980 $ 50,785,698
================= =================
-Continued-
3
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
March 31, 2005 (Unaudited) and December 31, 2004
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
----------------- -----------------
Liabilities:
Deposits:
Demand - non interest bearing $ 2,495,386 $ 3,047,397
Demand - interest bearing 29,854,273 28,600,355
Savings 505,633 499,865
Time 15,455,148 12,440,182
----------------- -----------------
Total Deposits 48,310,440 44,587,799
Short term borrowings 0 2,416,000
Long term borrowings 0 34,000
Accounts payable 296,511 115,230
Accrued interest payable 55,648 50,296
Other liabilities 207,103 140,629
----------------- -----------------
Total Liabilities 48,869,702 47,343,954
Minority Interest 462,919 440,118
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 - 4,264,062 shares in 2005 and
4,240,641 shares in 2004 42,642 42,406
Additional paid-in-capital 5,876,095 5,841,331
Accumulated deficit (2,326,359 (2,490,224)
Treasury stock - 115,184 shares in 2005
and 2004 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities
available for sale, net (44,489) (51,357)
----------------- -----------------
Total Stockholders' Equity 3,207,359 3,001,626
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,539,980 $ 50,785,698
================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 2005 and 2004 (Unaudited)
2005 2004
----------------- -----------------
Interest income:
Interest and fees on loans $ 785,395 $ 595,410
Interest and dividends on securities:
U.S. Government agencies 1,747 20,447
Other securities 9,922 19,001
Interest on federal funds and other 4,580 183
----------------- -----------------
Total interest income 801,644 635,041
----------------- -----------------
Interest expense:
Interest on deposits:
Demand deposits 116,558 106,102
Savings deposits 1,244 1,174
Time deposits 98,867 74,726
Short term borrowings 2,766 2,758
Long term borrowings 332 1,857
----------------- -----------------
Total interest expense 219,767 186,617
----------------- -----------------
Net interest income 581,877 448,424
Provision for loan losses 15,209 22,500
----------------- -----------------
Net interest income after
provision for loan losses 566,668 425,924
----------------- -----------------
Other income:
Loan servicing and subservicing fees 369,027 333,925
Initial loan set-up and other fees 398,193 382,551
Gain on sale of mortgage loans 103,545 89,352
Insurance and investment fee income 51,121 56,549
Deposit service charges and fees 23,585 25,550
Other 77,759 75,963
----------------- -----------------
Total other income 1,023,230 963,890
----------------- -----------------
-Continued-
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
For the Three Month Periods Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
----------------- -----------------
Salaries and benefits $ 741,886 $ 724,143
Occupancy, net 126,029 113,263
Data processing and equipment 138,432 124,085
Legal and audit expense 37,687 36,693
Consultant fees 33,891 35,023
Mortgage banking expense 52,323 64,531
Servicing rights amortization (854) 210,457
Advertising 34,386 30,898
Memberships and training 26,516 25,399
Travel and entertainment 32,002 25,486
Supplies and postage 48,993 45,228
Insurance 34,658 32,351
Other operating expenses 120,084 106,785
----------------- -----------------
Total other expenses 1,426,033 1,574,342
----------------- -----------------
Income (loss) before income taxes 163,865 (184,528)
----------------- -----------------
Income tax expense (benefit) - -
----------------- -----------------
Net income (loss) $ 163,865 $ (184,528)
================= =================
Basic and diluted income (loss)
per common share $ 0.04 $ (0.05)
================= ==================
Weighted average shares outstanding -Basic 4,138,849 4,058,108
================= =================
Weighted average shares outstanding -Diluted 4,177,787 4,058,108
================= =================
See accompanying notes to consolidated financial statements (unaudited).
6
UNIVERSITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Three Month Periods Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
--------- ----------
Net income (loss) $163,865 $(184,528)
Other comprehensive income (loss):
Unrealized gains/(losses) on securities
available for sale 6,868 22,301
Less: reclassification adjustment
for accumulated (losses)/gains
included in net income (loss) - 1,311
--------- ---------
Other comprehensive income/(loss),
before tax effect 6,868 23,612
Income tax expense (benefit) - -
Other comprehensive income (loss),
net of tax 6,868 23,612
--------- ----------
Comprehensive income(loss) $ 170,733 $(160,916)
========= ==========
See accompanying notes to consolidated financial statements (unaudited).
7
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows For the three month periods ended March 31, 2005 and 2004
(Unaudited)
2005 2004
----------------- -----------------
Cash flow from operating activities:
Net income (loss) $ 163,865 $ (184,528)
Adjustments to reconcile net income (loss) to net cash from Operating Activities:
Depreciation 83,471 53,848
Amortization (854) 235,457
Provision for loan losses 15,209 22,500
Net gain on sale of securities - (1,311)
Gain on mortgage loan sales (103,545) (89,352)
Gain on the sale and leaseback of premises (184,873) -
Loss on other real estate owned 10,036 -
Originations of mortgage loans (13,300,492) (12,019,905)
Proceeds from mortgage loans sales 12,963,266 11,373,465
Net accretion on investment securities 4,468 (12,482)
Change in:
Real estate owned - -
Other assets (92,488) 9,801
Other liabilities 399,720 (120,906)
----------------- -----------------
Net cash (used in) provided by operating activities (42,217) (733,413)
----------------- -----------------
Cash flow from investing activities:
Purchase of investment securities - (7,388)
Proceeds from maturities/paydowns of
investment securites 58,337 109,384
Proceeds from sales of investment securities - 7,006
Proceeds from sale of other real estate owned 379,521 -
Loans granted, net of repayments (901,143) (438,729)
Premises and equipment expenditures (48,823) (82,041)
----------------- -----------------
Net cash used in investing activities (512,108) (411,171)
----------------- -----------------
-Continued-
8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows For the three month periods ended March 31, 2005 and 2004
(Unaudited)
2005 2004
----------------- -----------------
Cash flow used in financing activities:
Net (decrease) increase in deposits 3,722,641 (1,207,737)
Net (decrease) in short term borrowings (2,416,000) 1,870,500
Principal payments on long term borrowings (34,000) (33,000)
Issuance of common stock 35,000 123,000
----------------- -----------------
Net cash provided by financing activities 1,307,641 752,763
----------------- -----------------
Net change in cash and cash equivalents 753,316 (391,821)
Cash and cash equivalents:
Beginning of period 1,731,569 2,171,189
----------------- -----------------
End of period $ 2,484,885 $ 1,779,368
================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 214,415 $ 190,571
Supplemental disclosure of non-cash transactions:
Mortgage loans converted to other real estate owned $ 291,026 $ 379,650
Michigan BIDCO Preferred stock exchanged for a 7.5%
promissory note $ 0 $ 600,000
See accompanying notes to consolidated financial statements (unaudited).
9
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
See Note 1 of the Financial Statements incorporated by reference in the
Company's 2004 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's 2004 Annual Report on Form 10-K. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year.
Basic Earnings per share are calculated based on the weighted average
number of common shares outstanding during each period as follows: 4,138,849 and
4,058,108 for the three months ended March 31, 2005 and 2004, respectively.
(2) Investment Securities
The Bank's available-for-sale securities portfolio at March 31, 2005
had a net unrealized loss of $44,489 as compared with a net unrealized loss of
approximately $51,356 at December 31, 2004.
Securities available for sale at March 31, 2005:
Amortized Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed
securities $1,095,159 $ - $(44,489) $1,050,670
========== ======== ========= ==========
Securities available for sale at December 31, 2004
Amortized Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed
securities $1,157,964 $ - $(51,356) $1,106,607
=========== ======== ========= ==========
(3) Stock options
At March 31, 2005, the Company has a stock-based employee compensation plan. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
greater than or equal to the market value of the underlying common stock on the
date of grant. As new options granted were only 0 and 48,000 during the quarters
ended March 31, 2005 and 2004, the effect on net income (loss) and earnings
(loss) per share if the Corporation had applied the fair value recognition
10
provisions of FASB Statement No. 123(R), Accounting for Share-Based Compensation
to stock-based employee compensation was less than $.01 per share in each of the
periods presented. In December 2002, SFAS No. 148, "Stock-Based Compensation,"
was issued, which requires that the Company illustrate the effect on net income
and earnings per share if it had applied the fair value principles included in
SFAS No. 123 for both annual and interim financial statements. Accordingly, if
the Company had elected to recognize compensation cost based on the fair value
of the options at grant date, the Company's earnings and earnings per share from
continuing operations, assuming dilution, for the three month periods ended
March 31, 2005 and 2004 would have been the pro forma amounts indicated below:
Three months ended March 31,
2005 2004
Net earnings:
As reported $163,865 ($184,528)
Compensation expense 0 1,370
Pro forma $163,865 ($185,898)
Net earnings per share:
As reported:
Basic $0.04 ($0.05)
Diluted $0.04 ($0.05)
Pro forma:
Basic $0.04 ($0.05)
Diluted $0.04 ($0.05)
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
merchant banking, mortgage banking and investment activities, and the nature and
adequacy of allowances for loan losses. The Company can give no assurance that
the expectations reflected in forward-looking statements will prove correct.
Various factors could cause results to differ materially from the Company's
expectations. Among these factors are those referred to in the introduction to
the Company's Management Discussion and Analysis of Financial Condition and
Results of Operations which appear as Item 7 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
SUMMARY
Net income for the Company for the first quarter of 2005 was $163,865,
versus a net loss of $184,528 for the same period last year. Community Banking
broke even during the current year's first quarter of 2005 as opposed to loss of
$53,000 in the prior year. The reduced loss is attributed to management's
actions to reduce operating expenses, improve the net interest margin and
improve asset quality. Midwest Loan Services, the Bank's subsidiary, reported
net income of $150,000 for the three months period March 31, 2005 as opposed to
a net loss of $115,000 in the same period in 2004. Operationally, Midwest has
reduced costs while increasing servicing and origination income. Midwest's
portfolio of mortgage subservicing grew 7.9% in the first quarter of 2005 and is
now 20.7% higher than at the end of the first quarter of 2004. Mortgage rates in
2005 increased as compared with December 31, 2004. As a result, the value of the
mortgage servicing rights portfolio increased to a point where previous charges
for impairment were reduced by approximately $90,000. In the three months ended
March 31, 2004, management recorded an impairment in the mortgage servicing
rights of $156,000 due to a drop in mortgage rates during March 2004.
The following table summarizes the net income (loss) of each profit
center of the Company for the three months ended March 31, 2005 and 2004 (in
thousands):
2005 2004
---- ----
Community Banking $ - $ (53)
Midwest Loan Services 150 (115)
Corporate Office 14 (17)
------ -------
Total $ 164 $ (185)
====== =======
12
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased 29.8% to $581,877 for the three months
ended March 31, 2005 from $448,424 for the three months ended March 31, 2004.
Net interest income rose primarily because of an increase in earning assets and
an increased in rates on those assets exceeding the increase on rates paid on
interest bearing liabilities. The net interest spread increased to 5.01% in 2005
from 4.57% in 2004.
Interest income
Interest income increased 26.2% to $801,644 in the quarter ended March
31, 2005 from $635,041 in the quarter ended March 31, 2004. An increase in
earning assets of $7,979,929 was a major factor in the increase in interest
income. The average volume of interest earning assets increased to $47,113,268
in the 2005 period from $39,411,303 in the 2004 period. Additionally, the first
quarter of 2005 saw an increased in the prime rate. The overall yield on total
interest bearing assets was 6.90% in 2005 as compared to 6.46% in the same
period in 2004.
Interest Expense
Interest expense increased 17.8% to $219,767 in the three months ended
March 31, 2005 from $186,617 in the 2004 period. The increase was due to an
increase in rates paid on interest bearing liabilities and in increase in
volume. The cost of funds increased to 1.99% in the 2005 period from 1.82% in
the 2004 period.
13
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following table summarizes monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated yield
or cost and the net return on earning assets for the three months ended March
31, 2005 and 2004.
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Commercial Loans $17,016,061 $361,644 8.62% $16,962,760 $292,288 6.91%
Real Estate Loans 25,152,667 383,549 6.18% 17,369,982 262,589 6.06%
Installment/Consumer Loans 2,044,736 40,202 7.97% 1,900,793 40,533 8.55%
Total Loans 44,213,464 785,395 7.20% 36,233,535 595,410 6.59%
Investment Securities 2,016,554 11,669 2.35% 3,027,939 39,448 5.23%
Federal Funds & Bank
Deposits 883,250 4,580 2.10% 149,829 183 0.49%
Total Interest Bearing
Assets 47,113,268 801,644 6.90% 39,411,303 635,041 6.46%
Interest Bearing Liabilities:
Demand Deposits 8,964,321 22,111 1.00% 6,501,858 14,298 0.88%
Savings Deposits 507,965 1,244 0.99% 402,200 1,174 1.17%
Time Deposits 13,818,080 98,867 2.90% 13,658,810 74,726 2.19%
Money Market Accts 20,874,448 94,447 1.83% 19,600,250 91,804 1.88%
Short-term Borrowings 628,561 2,766 1.78% 828,349 2,758 1.34%
Long-term Borrowings 17,000 332 7.92% 149,500 1,857 4.98%
Total Interest Bearing Liabilities 44,810,375 219,767 1.99% 41,140,967 186,617 1.82%
Net Earning Assets, net interest
income, and
interest rate spread $2,302,893 $581,877 4.91% $(1,729,664) $448,426 4.65%
Net Interest Margin 5.01% 4.57%
(1) Yield is annualized.
14
Allowance for Loan Losses
The provision to the allowance for loan losses was $15,209 for the
quarters ended March 31, 2005 and $22,500 for the same period ended in 2004. Net
charge-offs totaled $18,424 for the three months period ended March 31, 2005 as
compared to $(45,278) for the same period in 2004. Illustrated below is the
activity within the allowance for the quarters ended March 31 2005 and 2004:
2005 2004
---- ----
Balance, January 1 $ 353,124 $ 454,118
Provision for loan losses 15,209 22,500
Loan charge-offs (20,399) -
Recoveries 1,975 45,278
--------- ----------
Balance, March 31 $ 349,909 $ 521,896
========= ==========
At March 31, 2005 At December 31, 2004
----------------- --------------------
Total loans (1) $43,591,493 $42,999,800
Reserve for loan losses $349,909 $ 353,124
Reserve/Loans % (1) 0.80% 0.82%
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor, Michigan and the future performance of these loans is dependent upon the
performance of a relatively limited geographical area.
The following schedule summarizes the Company's non-performing assets:
At March 31, 2005 At December 31, 2004
----------------- --------------------
Past due 90 days and over
and still accruing (1):
Real estate $ - $ -
Installment - 36,226
Commercial - 334,883
--------- --------
Subtotal - 371,109
Nonaccrual loans (1):
Real estate/construction
loans 211,387 591,791
Installment - 16,739
Commercial 66,550 39,490
--------- --------
Subtotal 277,937 648,020
--------- --------
Other real estate owned 435,512 534,043
--------- ----------
Total nonperforming assets $ 713,449 $1,553,172
========= ==========
15
At March 31, 2005 At December 31, 2004
--------------- --------------------
Ratio of non-performing
assets to total loans(1) 1.64% 4.40%
======== =========
Ratio of loans past due
over 90 days and
non-accrual loans to loan
loss reserve 79% 289%
======== =========
(1) Excludes loans held for sale which are valued at fair market value.
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 or regional 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. The percentage of the loan
loss reserve to loans has gone down from yearend and previous periods due to a
significant decrease in non-performing assets. Management has directed
significant attention to resolving and liquidating non-performing assets.
Other real estate owned decreased from $534,043 at December 31, 2004 to
$435,512 at March 31, 2005. Subsequent to March 21, 2005, substantial progress
was made in resolving non-performing assets, including real estate owned. As of
May 10, 2005, two properties with a caring cost of over $330,000 are under
contract to sell before the end of the second quarter. Significant effort is
being made to liquidate the remaining 2 properties. It is management's intent to
liquidate these properties for fair value as quickly as possible. In the
aggregate no losses are expected if all the properties are sold in a reasonable
time frame.
Non-Interest Income
Total non-interest income increased 6.2% to $1,023,230 for the three
months ended March 31, 2005 from $963,890 for the three months ended March 31,
2004. The increase was primarily due to higher mortgage servicing and loan
origination activity.
At March 31, 2005, Midwest was subservicing 19,670 mortgages, an
increase of 7.9 % from 18,233 mortgages subserviced at December 31, 2004.
Non-Interest Expense
Non-interest expense decreased 9.4% to $1,426,033 in the three months
ended March 31, 2005 from $1,574,342 for the three months ended March 31, 2004.
The decrease was due principally to lower amortization expense of the mortgage
servincing rights in the three month period ended March 31, 2005 as compared to
the prior year. At March 31, 2005 the Bank and Midwest owned the rights to
service mortgages for other institutions, most of which was owned by Midwest.
16
The balance of mortgages serviced for these institutions was approximately $128
million. The carrying value of these servicing rights was $1,287,171 at March
31, 2005. 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. Mortgage rates in 2005 increased as compared with December 31, 2004. As a
result, the value of the mortgage servicing rights portfolio increased to a
point where previous charges for impairment were reduced by approximately
$90,000. In the three months ended March 31, 2004, management recorded an
impairment in the mortgage servicing rights of $156,000 due to a drop in the
mortgage rates during March 2004.
Income Taxes
Income tax expense (benefit) was $0 in 2005 and 2004. The effective tax
rate was 0% for both three month periods ended March 31 due to existence of loss
carryforwards resulting from prior years net operating losses. Future tax
benefits have not been recognized as their realization is not considered more
likely than not.
Capital Resources
The table below sets forth the Bank's risk based assets, capital ratios
and risk-based capital ratios of the Bank. At March 31, 2005, the Bank was
considered "well-capitalized".
March 31, 2005
TIER 1 CAPITAL (in $000s)
Total Equity Capital $3,020
Less: Unrealized losses on available-for-Sale
Securities (44)
Plus: Minority Interest 462
Less: Other identifiable Intangible Assets 228
Total Tier 1 Capital 3,422
TIER 2 CAPITAL
Allowance for loans & Lease losses 350
Less: Excess Allowance -
Total Tier 2 Capital 350
Total Tier 1 & Tier 2 Capital $3,648
CAPITAL RATIOS
Tier 1/Total Average Assets of $50,750 6.50%
Tier 1/Total Risk-Weighted Assets of $37,385 8.85%
Tier 1 & 2/Total Risk-Weighted Assets of $37,385 9.76%
17
Subsequent to March 31, 2005, University Bancorp sold $217,500 of 9%,
seven year pay-in-kind preferred stock. Two hundred thousand dollars of the
amount raised was invested into University Bank to raise its capital levels to
support its ongoing growth.
Liquidity
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, borrowings from
correspondent lenders secured by securities, residential mortgage loans and/or
commercial loans. In addition, the Bank invests in overnight federal funds. At
March 31, 2005, the Bank had cash and cash equivalents of $2,484,885. The Bank
has a line of credit for $4.0 million from the Federal Home Loan Bank of
Indianapolis secured by investment securities and residential mortgage loans and
a line of credit for $5.4 million from the Federal Reserve Bank of Chicago
secured by commercial loans. In order to bolster liquidity from time to time,
the Bank also sells brokered time deposits. At March 31, 2005, the Bank had
$6.3 million of these deposits outstanding.
Bancorp Liquidity. In an effort to maintain the Bank's Tier 1 capital
to assets ratio above current levels and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during 2005.
At March 31, 2005, $0 in debt was outstanding as compared to $133,000
at March 31, 2004. At March 31, 2005, Bancorp had $2,947 in cash and investments
on hand to meet its working capital needs. Subsequent to March 31, 2005, Bancorp
raised $217,500 in 9%, seven year pay in kind preferred stock.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are re-pricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets re-pricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on such rights by lowering
required amortization rates on the rights. Rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the retail mortgage banking operations of the Bank and Midwest Loan
Services. Rising interest rates also slow Midwest Loan Services' rate of growth,
but increases the duration of its existing subservicing contracts.
The Bank performs a static gap analysis which has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on the following page details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at March 31, 2005. The table is based upon various assumptions of management
which may not necessarily reflect future experience. As a result, certain assets
and liabilities indicated in the table as maturing or re-pricing within a stated
period may, in fact, mature or re-price in other periods or at different
volumes. The one-year static gap position at March 31, 2005 was estimated to be
($12,638,000) or -24.05%.
In addition, management prepares an estimate of sensitivity to
immediate changes in short term interest rates. At March 31, 2005, the following
impact was estimated on net interest margin in the 12 months following an
immediate movement of interest rates:
Effect on Net
Rate Change Interest Margin
-1.00% 2.31%
-3.00% 6.93%
+1.00% -1.39%
+3.00% -4.17%
19
Asset/Liability Position Analysis as of March 31, 2005
(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 $ 11,873 $ 2,428 $ 8,268 $19,721 $ 2,311 $ (350) $44,251
Non-accrual loans - - - - 278 278
Securities 100 500 - - 451 - 1,051
Other assets 932 - - - - 3,543 4,475
Cash and Due from
Banks 1,005 - - - - 1,480 2,485
---------------------------------------------------------------------------------------------
Total assets 13,910 2,928 8,268 19,721 2,762 4.951 52,540
---------------------------------------------------------------------------------------------
LIABILITIES
- -----------
Time deposits 4,952 7,275 2,355 609 264 - 15,455
Demand -interest
Bearing 8,625 8,624 9,685 2,920 - - 29,854
Demand - non interest - - - - - 2,495 2,495
Savings - - 506 - - - 506
Borrowings - - - - - - -
Other liabilities - - - - - 1,023 1,023
Stockholders' equity - - - - - 3,207 3,207
---------------------------------------------------------------------------------------------
Total liabilities 13,577 15,899 12,546 3,529 264 6,725 $52,540
---------------------------------------------------------------------------------------------
Gap 334 (12,971) (4,278) 16,192 2,498 (1,774)
---------------------------------------------------------------------------------------------
Cumulative gap $ 334 $(12,638) $(16,916) $ (724) $ 1,774 $ 0
=============================================================================================
Gap percentage 0.63% -24.05% -32.20% -1.38% 3.38% 0.00%
=============================================================================================
20
ITEM 4. 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, which considered the material weaknesses
mentioned above, the Chief Executive Officer and Chief Financial Officer
concluded that 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 Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005. No significant changes were made
in our internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
(b) Changes in Internal Controls.
During the period covered by this report, there have been no changes in the
Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties
are subject.
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Material definitive agreement (Incorporated by reference to
Exhibit 10.1 to the Company's report on Form 8K filed on April
15, 2005
16.1 Change in Certifying Accountants (Incorporated by reference to
Exhibit 16.1 to the Company's report on Form 8K filed on May
16, 2005)
21
31.1 Certificate of the President and Chief Executive Officer of
University Bancorp, Inc. pursuant to 15 U.S.C. Section
7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certificate of the Chief Executive 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.
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.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: May 23, 2005 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
/s/ Nicholas K. Fortson
-------------------------
Nicholas K. Fortson
Chief Financial Officer
23
EXHIBIT INDEX
Exhibit Description
31.1 Certificate of the President and Chief Executive Officer
of University Bancorp, Inc. pursuant to 15 U.S.C. Section
7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certificate of the President and Chief Executive 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.
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.
24
Exhibit 31.1
10-Q 302 CERTIFICATION
I, Stephen Lange Ranzini certify that:
1) I have reviewed this quarterly report on Form 10-Q of University
Bancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 quarterly 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;
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 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, 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.
Date: May 23, 2005 /s/Stephen Lange Ranzini
----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
25
Exhibit 31.2
10-Q 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
1) I have reviewed this quarterly report on Form 10-Q of University
Bancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 quarterly 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;
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 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, 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.
Date: May 23, 2005 /s/Nicholas K. Fortson
----------------------
Nicholas K. Fortson
Chief Financial Officer
26
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 quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended March 31, 2005 as filed with the
Securities and Exchange Commission on May 23, 2003, hereof (the "Report"), the
undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
University Bancorp, Inc
Date: May 23, 2005 By: /s/ Stephen Lange Ranzini
---------------- --------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
27
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 quarterly report of University Bancorp, Inc. (the
"Registrant") on Form 10-Q for the period ended March 31, 2005 as filed with the
Securities and Exchange Commission on May 23, 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: May 23, 2005 By: /s/ Nicholas K. Fortson
---------------- --------------------------
Nicholas K. Fortson
Chief Financial Officer
28