UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-QSB/A
Amendment No. 1
(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2007
OR
o 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 small business issuer as specified in its charter)
Delaware38-2929531
(State of incorporation)(IRS Employer Identification Number)
2015 Washtenaw Avenue, Ann Arbor, Michigan 48104
(Address of principal executive offices) (Zip Code)
Issuer’s telephone number, including area code: (734) 741-5858
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
State 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 August 13, 2007: 4,248,378 shares |
Transitional Small Business Disclosure Format (Check One) __Yes | _X_No |
University Bancorp, Inc.
FORM 10-QSB/A
For the period ended June 30, 2007
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-QSB/A (this "Amendment") amends the Quarterly Report on Form 10-QSB for the period ended June 30, 2007, as originally filed by University Bancorp, Inc. on August 14, 2007 (the "Original Filing"). The purpose of this filing is to:
| 1. | In Item 1, revise Note 4 Segment Reporting and to report the assets by segment. |
| 2. | Revise the Summary in Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations to conform with the segment information in Note 4. |
| 3. | Provide additional disclosure about the Islamic financing and its impact on the Allowance for Loan Losses reported in Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. |
| 4. | State that controls were ineffective in Item 3 Controls and Procedures. |
| 5. | Revise 302 Certification to conform to Item 601(b)(31) of Regulation S-K |
To comply with certain technical requirements of the SEC's rules in connection with the filing of this Amendment No. 1 on Form 10-QSB/A, we are adding, as exhibits, certain current dated certifications of our principal executive officer and principal financial officer. This Amendment No. 1 on Form 10-QSB/A continues to speak as of the date of Form 10-QSB as originally filed on August 14, 2007 (the "Original Report"). We have not updated the disclosures contained herein to reflect any events that occurred at a date subsequent to the date of the Original Report. The filing of this Amendment No. 1 on Form 10-QSB/A is not a representation that any statement contained in the Original Report or this Amendment No. 1 on Form 10-QSB/A is true or complete subsequent to the date of the Original Report. This Amendment No. 1 on Form 10-QSB/A does not affect the information set forth in the Original Report, except for the matters described in this Explanatory Note.
FORM 10-QSB/A
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Consolidated Financial Statements | PAGE |
Consolidated Balance Sheets | 4 |
Consolidated Statements of Operations | 6 |
Consolidated Statements of Comprehensive Income | 8 |
Consolidated Statements of Cash Flows | 9 |
Notes to Consolidated Financial Statements | 11 |
| |
Item 2. Management’s Discussion and Analysis of | |
Financial Condition and Results of Operations | 14 |
| |
Summary | 14 |
Results of Operations | 15 |
Capital Resources | 22 |
Liquidity | 22 |
| |
Item 3. Controls and Procedures | 23 |
| |
PART II - Other Information | |
Item 1. Legal Proceedings | 24 |
Item 2. Unregistered Sales of Equity | |
Securities and Use of Proceeds | 24 |
Item 3. Defaults Upon Senior Securities | 24 |
Item 4. Submission of Matters to a Vote | |
Of Security Holders | 24 |
Item 5. Other Information | 24 |
Item 6. Exhibits & Reports on Form 8-K | 24 |
| |
Signatures | 25 |
Exhibits | 26 |
____________________________________________________________
The information furnished in these interim statements reflects all adjustments and accruals, which are in the opinion of management, necessary for a fair statement of the results for such periods. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.
Part I. - Financial Information
| Item 1. - Consolidated Financial Statements |
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
| | (Unaudited) | | |
| | June 30, | | December 31, |
ASSETS | | 2007 | | 2006 |
Cash and due from banks | $ | 22,427,546 | $ | 27,381,113 |
Investment securities available for sale, at market | | 606,008 | | 672,588 |
Federal Home Loan Bank Stock | | 714,600 | | 714,600 |
Loans and financings held for sale, at the lower of cost or market | | 1,673,383 | | 1,951,629 |
Loans and financings | | 55,794,914 | | 50,927,197 |
Allowance for loan losses | | (519,620) | | (465,992) |
Loans and financings, net | | 55,275,294 | | 50,461,205 |
| | | | |
Premises and equipment, net | | 2,639,338 | | 2,696,062 |
Mortgage servicing rights, at fair value | | 1,767,244 | | - |
Mortgage servicing rights, net | | - | | 1,516,100 |
Real estate owned, net | | 215,550 | | 289,212 |
Accounts receivable | | 242,212 | | 253,866 |
Accrued interest and profit receivable | | 287,311 | | 304,863 |
Prepaid expenses | | 381,135 | | 384,113 |
Goodwill | | 103,914 | | 103,914 |
Other assets | | 507,231 | | 542,476 |
TOTAL ASSETS | $ | 86,840,766 | $ | 87,271,741 |
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
June 30, 2007 and December 31, 2006
| | (Unaudited) | | |
| | June 30, | | December 31, |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | 2007 | | 2006 |
Liabilities: | | | | |
Deposits: | | | | |
Demand - non interest bearing | $ | 33,822,380 | $ | 34,594,823 |
Demand – interest bearing and profit sharing | | 27,520,729 | | 28,417,453 |
Savings | | 272,005 | | 268,585 |
Time | | 15,540,469 | | 15,601,321 |
Total Deposits | | 77,155,583 | | 78,882,182 |
Accounts payable | | 24,347 | | 59,384 |
Accrued interest and profit sharing payable | | 89,596 | | 73,532 |
Other liabilities | | 259,951 | | 368,837 |
Total Liabilities | | 77,529,477 | | 79,383,935 |
Minority Interest | | 2,916,065 | | 2,636,559 |
Stockholders’ equity: | | | | |
Preferred stock, $0.001 par value; $1,000 liquidation value; | | | | |
Authorized - 500,000 shares; Issued – 47,384, shares in 2007 and 37,672 in 2006 | | 47 | | 38 |
Common stock, $0.01 par value; | | | | |
Authorized - 5,000,000 shares; | | | | |
Issued - 4,363,562 shares in 2007 and 2006 | | 43,635 | | 43,635 |
Additional paid-in-capital | | 6,586,042 | | 6,488,960 |
Additional paid-in-capital - stock options | | 38,968 | | 36,478 |
Treasury stock - 115,184 shares in 2007 | | | | |
and 2006 | | (340,530) | | (340,530) |
Retained earnings (accumulated deficit) | | 96,594 | | (950,038) |
Accumulated other comprehensive loss, | | | | |
unrealized losses on securities available for sale, net | | (29,532) | | (27,296) |
Total Stockholders’ Equity | | 6,395,224 | | 5,251,247 |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 86,840,766 | $ | 87,271,741 |
See notes to consolidated financial statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES |
Consolidated Statements of Operations |
For the Periods Ended June 30, 2007 and 2006 |
(Unaudited) |
| | For the Three-Month | | For the Six-Month |
| | Period Ended | | | Period Ended |
| | 2007 | | 2006 | | | 2007 | | 2006 |
Interest and financing income: | | | | | | | | | |
Interest and fees on loans and financing income | $ | 1,069,831 | $ | 906,700 | | $ | 2,135,604 | $ | 1,757,085 |
Interest on securities: | | | | | | | | | |
U.S. Government agencies | | 3,992 | | 1,604 | | | 15,352 | | 4,594 |
Other securities | | 6,896 | | 16,500 | | | 15,904 | | 26,400 |
Interest on federal funds and other | | 160,093 | | 73,484 | | | 332,850 | | 123,521 |
Total interest and financing income | | 1,240,812 | | 998,288 | | | 2,499,710 | | 1,911,600 |
Interest and profit sharing expense: | | | | | | | | | |
Interest and profit sharing on deposits: | | | | | | | | | |
Demand deposits | | 233,370 | | 159,356 | | | 439,302 | | 265,196 |
Savings deposits | | 701 | | 861 | | | 1,419 | | 1,871 |
Time deposits | | 193,034 | | 166,362 | | | 371,389 | | 334,401 |
Short-term borrowings | | - | | 1,779 | | | - | | 2,081 |
Total interest and profit sharing expense | | 427,105 | | 328,358 | | | 812,110 | | 603,549 |
Net interest and financing income | | 813,707 | | 669,930 | | | 1,687,600 | | 1,308,051 |
Provision for loan losses | | 53,589 | | 28,984 | | | 75,852 | | 48,984 |
Net interest and financing income after | | | | | | | | | |
provision for loan losses | | 760,118 | | 640,946 | | | 1,611,748 | | 1,259,067 |
Other income: | | | | | | | | | |
Loan servicing and sub-servicing fees | | 597,489 | | 608,483 | | | 1,264,660 | | 1,137,911 |
Initial loan set up and other fees | | 382,883 | | 323,972 | | | 838,683 | | 633,572 |
Net gain (loss) on sale of mortgage loans | | 19,734 | | (429) | | | 46,032 | | 38,892 |
Insurance and investment fee income | | 40,444 | | 50,018 | | | 83,301 | | 101,702 |
Deposit service charges and fees | | 55,847 | | 31,763 | | | 128,950 | | 55,004 |
Change in fair value of mortgage servicing rights | | 88,919 | | - | | | 54,144 | | - |
Termination Fees | | 1,175,284 | | - | | | 1,175,284 | | - |
Other | | 70,116 | | 22,457 | | | 102,137 | | 119,908 |
Total other income | | 2,430,716 | | 1,036,264 | | | 3,693,191 | | 2,086,989 |
-Continued- |
| | | | | | | | | |
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES | |
Consolidated Statements of Operations (continued) | |
For the Periods Ended June 30, 2007 and 2006 | |
(Unaudited) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | For the Three-Month | | For the Six-Month | |
| | Period Ended | | | Period Ended | |
| | 2007 | | 2006 | | | 2007 | | 2006 | |
Other expenses: | | | | | | | | | | |
Salaries and benefits | $ | 1,027,828 | $ | 845,038 | | $ | 1,998,033 | $ | 1,670,443 | |
Occupancy, net | | 147,135 | | 129,942 | | | 288,323 | | 261,857 | |
Data processing and equipment expense | | 163,221 | | 145,472 | | | 310,888 | | 297,073 | |
Legal and audit | | 122,640 | | 70,719 | | | 246,153 | | 120,408 | |
Consulting fees | | 62,700 | | 41,873 | | | 89,632 | | 96,306 | |
Mortgage banking | | 76,238 | | 44,816 | | | 153,022 | | 106,464 | |
Servicing rights amortization | | - | | (35,341) | | | - | | (34,028) | |
Advertising | | 83,555 | | 59,626 | | | 115,129 | | 106,397 | |
Memberships and training | | 38,208 | | 37,609 | | | 67,302 | | 62,066 | |
Travel and entertainment | | 86,570 | | 44,681 | | | 115,805 | | 90,715 | |
Supplies and postage | | 99,554 | | 71,731 | | | 179,355 | | 139,723 | |
Insurance | | 47,271 | | 38,885 | | | 95,192 | | 78,696 | |
Other operating expenses | | 108,746 | | 360,698 | | | 285,495 | | 486,958 | |
Total other expenses | | 2,063,666 | | 1,855,749 | | | 3,944,329 | | 3,483,078 | |
Income (loss) before income taxes and minority interest | | 1,127,168 | | (178,539) | | | 1,360,610 | | (137,022) | |
Income tax expense | | 20,000 | | - | | | 20,000 | | - | |
Income (loss) before minority interest | $ | 1,107,168 | $ | (178,539) | | $ | 1,340,610 | $ | (137,022) | |
Minority interest in consolidated subsidiaries’ earnings | | 202,617 | | 50,414 | | | 275,578 | | 77,244 | |
Net income (loss) | | 904,551 | | (228,953) | | | 1,065,032 | | (214,266) | |
Preferred stock dividends | | 10,040 | | 7,913 | | | 18,400 | | 14,394 | |
Net income (loss) available to common shareholders | $ | 894,511 | $ | (236,866) | | $ | 1,046,632 | $ | (228,660) | |
Basic earnings/(loss) per common share | $ | .21 | $ | (0.06) | | $ | .25 | $ | (0.05) | |
Diluted earnings/(loss) per common share | $ | .21 | $ | (0.06) | | $ | .24 | $ | (0.05) | |
Weighted average shares outstanding – Basic | | 4,248,378 | | 4,245,065 | | | 4,248,378 | | 4,196,740 | |
Weighted average shares outstanding – Diluted | | 4,286,593 | | 4,245,065 | | | 4,286,611 | | 4,196,740 | |
| | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Periods Ended June 30, 2007 and 2006
(Unaudited)
| For the Three-Month | For the Six-Month |
| Period Ended | Period Ended |
| 2007 | 2006 | 2007 | 2006 |
Net income (loss) | $904,551 | $(228,953) | $1,065,032 | $(214,266) |
Other comprehensive income (loss): | | | | |
Net unrealized loss on securities | | | |
available for sale – net of deferred | | | | |
taxes | (4,895) | (6,098) | (2,236) | (6,575) |
Comprehensive income (loss) | $899,656 | $(235,051) | $1,062,796 | $(220,841) |
See notes to consolidated financial statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES |
Consolidated Statements of Cash Flows |
For the Six-Month Periods Ended June 30, 2007 and 2006 |
(Unaudited) |
| | 2007 | | 2006 |
Operating activities: | | | | |
Net income (loss) | $ | 1,065,032 | $ | (214,266) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Depreciation | | 194,297 | | 197,075 |
Change in fair value of mortgage servicing rights | | (54,144) | | - |
Amortization | | - | | (34,028) |
Provision for loan losses | | 75,852 | | 48,984 |
Net gain on sale of mortgages | | (46,032) | | (38,892) |
Net amortization (accretion) on investment securities | | (3,541) | | 4,028 |
Net gain on the sale of other real estate owned | | (4,581) | | - |
Originations of mortgage loans | | (26,020,799) | | (16,172,367) |
Proceeds from mortgage loan sales | | 26,345,077 | | 16,349,034 |
Stock awards | | 2,490 | | - |
Non-employee stock awards | | - | | 259,023 |
Net change in: | | | | |
Other assets | | (129,571) | | 1,745,365 |
Other liabilities | | 151,647 | | 110,013 |
Net cash provided by operating activities | | 1,575,727 | | 2,253,969 |
Investing activities: | | | | |
Proceeds from maturities of investment securities | | 67,885 | | 94,721 |
Proceeds from sale of other real estate owned | | 78,243 | | - |
Loans granted, net of repayments | | (4,889,941) | | (1,889,004) |
Premises and equipment expenditures | | (137,573) | | (208,982) |
Net cash used in investing activities | | (4,881,386) | | (2,003,265) |
| | | | |
-Continued- | | | | |
| | | | |
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES |
Consolidated Statements of Cash Flows (continued) |
For the Six-Month Periods Ended June 30, 2007 and 2006 |
(Unaudited) |
| | 2007 | | 2006 |
Financing activities: | | | | |
Net change in deposits | $ | (1,726,599) | $ | 2,983,978 |
Dividends on preferred stock | | (18,400) | | (14,394) |
Issuance of preferred stock | | 97,091 | | 84,387 |
Net cash provided by (used in) financing activities | | (1,647,908) | | 3,053,971 |
Net change in cash and cash equivalents | | (4,953,567) | | 3,304,675 |
Cash and cash equivalents: | | | | |
Beginning of period | | 27,381,113 | | 7,746,666 |
End of period | $ | 22,427,546 | $ | 11,051,341 |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest | $ | 796,046 | $ | 653,008 |
Supplemental disclosure of non-cash transactions: | | | | |
Decrease (increase) in unrealized loss on securities available for sale, net of deferred taxes of $0 and $0, respectively. | $ | (2,236) | $ | (6,575) |
Mortgage loan converted to other real estate owned | $ | - | $ | 306,144 |
| | | | |
See notes to consolidated financial statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) General
See Note 1 of the consolidated financial statements incorporated by reference in the Company’s 2006 Annual Report on Form 10-KSB for a summary of the Company’s significant accounting policies.
The unaudited consolidated financial statements included herein were prepared from the books of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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. All adjustments made were of a normal recurring nature. These condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Such financial statements generally conform to the presentation reflected in the Company’s 2006 Annual Report on Form 10-KSB. 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 represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method. Earnings per common share have been computed based on the following:
| | | | For the Three-Month | For the Six-Month |
| | | | Period Ended June 30, | Period Ended June 30, |
| | | | 2007 | 2006 | 2007 | 2006 |
Net income (loss) | | | $904,551 | $(228,953) | $1,065,032 | $(214,266) |
Less: Preferred dividends | | (10,040) | 7,913 | 18,400 | 14,394 |
Net income available to common shareholders | $894,511 | ($236,866) | $1,046,632 | $(228,660) |
| | | | | | | |
Average Number of common shares outstanding | 4,248,378 | 4,245,065 | 4,248,378 | 4,196,740 |
Net dilutive effect of options | | 38,215 | - | 38,233 | - |
Diluted average shares outstanding | 4,286,593 | 4,245,065 | 4,286,611 | 4,196,740 |
Options to purchase shares of common stock were outstanding as of June 30, 2006 but were not included in the computation of diluted earnings per share for the three and six-month periods ended June 30, 2006 as the shares would be anti-dilutive.
(2) Investment Securities
The Bank’s available-for-sale securities portfolio at June 30, 2007 had a net unrealized loss of approximately $29,532 as compared to a net unrealized loss of approximately $27,296 at December 31, 2006.
Securities available for sale at June 30, 2007 consist of the following:
| Amortized | Unrealized | Fair |
| Cost | Gain | Losses | Value |
U.S. agency mortgage-backed securities | $635,540 | - | $ (29,532) | $606,008 |
Securities available for sale at December 31, 2006 consist of the following:
| Amortized | Unrealized | Fair |
| Cost | Gain | Losses | Value |
U.S. agency mortgage-backed securities | $699,884 | - | $ (27,296) | $672,588 |
(3) Income Taxes
Income tax expense was $20,000 for the three months ended June 30, 2007 and $-0-for three months ended June 30 2006, resulting in an effective tax rate of 1.8% and 0% for 2007 and 2006 respectively. 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, tax credits, book-tax differences and valuation allowances recorded. At June 30, 2007 and December 31, 2006, the Company had a $140,000 deferred tax asset. This asset represents a loss carry forward that is expected to be realized.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company adopted FIN 48 effective January 1, 2007. There was no adjustment required to retained earnings since the Company was not aware of any material tax position taken or expected to be taken in a tax return which the tax law is subject to varied interpretations.
(4) Segment Reporting
Pre-tax income (loss) summary after minority interest for the three and six-months ended June 30, 2007 (in thousands):
| Three-Months | Six-Months |
Community and Islamic Banking | $ (485) | $ (781) |
Midwest Loan Services | 1,635 | 2,179 |
Corporate Office | (22) | (37) |
Eliminations | (203) | (276) |
Total | $ 925 | $ 1,085 |
Pre-tax income (loss) summary after minority interest for the three and six-months ended June 30, 2006 (in thousands):
| Three-Months | Six-Months |
Community and Islamic Banking | $ (209) | $ (358) |
Midwest Loan Services | 298 | 503 |
Corporate Office | (268) | (282) |
Eliminations | (50) | (77) |
Total | $ (229) | $ (214) |
The reportable segments are activities that fall under the Corporate Offices (ie holding company), Bank operations and the mortgage servicing operations located at Midwest Loan Services, Inc. Included in the banking activity are conventional banking Islamic banking, and a small insurance agency.
Total assets for each reportable segment as of June 30, 2007 (in thousands):
| | |
Community and Islamic Banking | $ | 86,194 |
Midwest Loan Services | | 3,571 |
Corporate Office | | 5,428 |
Eliminations | | (8,352) |
Total | $ | 86,841 |
Total assets for each reportable segment as of December 31, 2006 (in thousands):
| | |
Community and Islamic Banking | $ | 87,011 |
Midwest Loan Services | | 3,905 |
Corporate Office | | 5,228 |
Eliminations | | (8,872) |
Total | $ | 87,272 |
(5) Recent Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. While SFAS 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting SFAS 157 on its financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The Company is continuing to evaluate the impact of this statement.
(6) Adoption of Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets,” (“SFAS 156”)
In March 2006, the FASB issued SFAS 156, which amends Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities,” (“SFAS 140”). SFAS 156 changes SFAS 140 by requiring that mortgage servicing rights be initially recognized at their fair value and by providing the option to either: (1) carry mortgage servicing rights at fair value with changes in fair value recognized in earnings; or (2) continue recognizing periodic amortization expense and assess the mortgage servicing rights for impairment as originally required by SFAS 140. This option may be applied by class of servicing assets or liabilities.
SFAS 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption permitted. The Company has chosen to adopt SFAS 156 effective January 1, 2007. The Company has identified mortgage servicing rights relating to mortgage loans as a class of servicing rights and has elected to apply fair value accounting to these assets. SFAS 156 requires that, at adoption, any adjustment necessary to record mortgage servicing rights at fair value be recognized in beginning stockholders’ equity. Due to the fact that the fair market value of mortgage servicing rights was less than the carrying value at December 31, 2006, there was no adoption adjustment required by the Company as of January 1, 2007, as noted below:
Balance at December 31, 2006 | |
Lower of Cost or Market | $1,516,100 |
Remeasurement to fair market value upon | |
Adoption of SFAS 156 | - |
Balance at January , 2007, Fair Value | 1,516,100 |
Additions – Originated Servicing Rights | 197,000 |
Change in Fair Value | 54,144 |
Balance at June 30, 2007, Fair Value | $1,767,244 |
(7) Reclassifications
Certain items in the prior period consolidated financial statements have been reclassified to conform to the June 30, 2007 presentation.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report includes “forward-looking statements” as that term is used in the securities laws. All statements regarding our expected financial position, business and strategies are forward-looking statements. In addition, the words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. The presentation and discussion of the provision and allowance for loan losses and statements concerning future profitability or future growth or increases, are examples of inherently forward looking statements in that they involve judgments and statements of belief as to the outcome of future events. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and our future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included in our other filings with the Securities and Exchange Commission.
SUMMARY
Net income for the Company for the six-month period ended June 30, 2007 was $1,065,032 as compared to a loss of $214,266 for the same period last year. The Bank’s subsidiary, Midwest Loan Services Inc., reported pre-tax net income of $1,635,000 for the second quarter of 2007 as compared to pre-tax net income of $298,000 for the same period in 2006. Income at Midwest was positively impacted in 2007 by a one time termination fee related to a sub-servicing contract severed in a previous period. The revenue was recognized in the current period as various uncertainties over the termination fee have been lifted. Community Banking reported a pre-tax net loss of $485,000 during the current year’s second quarter, an increase in loss over a pre-tax net loss of $209,000 for the same period in 2006.
At June 30, 2007, Midwest was subservicing 31,203 mortgages, a decrease of 3.8% from 32,461 mortgages subserviced at December 31, 2006 and a decrease of 13.4% from 36,012 mortgages subserviced at March 31, 2007. In April 2007 Midwest lost 7,000 mortgages from its subservicing portfolio related to one Credit Union Service Organization that terminated the subservicing relationship to pull the work in-house. As a result of the ongoing growth of new clients, management projects that Midwest will have about 36,650 mortgages subserviced by September 1, 2007, which would mean that Midwest will more than replace the 7,000 mortgages it lost from its subservicing portfolio by then. The loss of subservicing also had a negative impact in higher costs related to the process of transferring the 7,000 mortgage portfolios out from Midwest. As escrow deposits decreased, the result was a lower net interest margin during the second quarter of 2007 versus the first quarter of 2007. However, the 2007 results did represent an improvement over 2006 results, because the overall level of mortgages subserviced, escrow and Islamic deposits, net interest margin, and loans outstanding all increased versus the 2006 results.
RESULTS OF OPERATIONS
Net Interest and Financing Income
Net interest and financing income increased 21% to $813,707 for the three-months ended June 30, 2007 from $669,930 for the three months ended June 30, 2006. Net interest and financing income rose primarily because of an increase in earning assets. The net spread decreased to 4.61% in 2007 from 5.09% in 2006.
Net interest and financing income increased to $1,687,600 for the six-months ended June 30, 2007 from $1,308,051 for the six-months ended June 30, 2006. Net interest and financing income increased from a year ago as a result of a net increase in earning assets. The yield on interest and profit earning assets remained the same at 7.10% for the six-months ended June 30, 2007 and June 30, 2006. The cost of interest bearing and profit sharing liabilities increased to 3.75% for the six-months ended June 30, 2007 from 3.09% for the six-months ended June 30, 2006. Comparing the same two six-month periods, net interest and financing income as a percentage of total average earning assets decreased to 4.79% from 4.86%.
Interest and financing income
Interest and financing income increased 24% to $1,240,812 for the quarter ended June 30, 2007 from $998,288 for the quarter ended June 30, 2006. An increase in the average balance of earning assets of $17,966,119 was a major factor in the increase in interest income. The average volume of interest and profit earning assets increased to $70,779,777 in the 2007 period from $52,813,658 in the 2006 period. The overall yield on total interest and profit bearing assets decreased to 7.03% for the second quarter of 2007 as compared to 7.58% for the same period in 2006. The decrease occurred due to an increase in the amount of federal funds invested at lower rates throughout the period ended June 30, 2007.
Interest and financing income increased to $2,499,710 for the six-months ended June 30, 2007 from $1,911,600 for the six-months ended June 30, 2006. This increase
resulted from an increase in average earning assets. The overall yield on earning assets remained at 7.10% for the six-months ended June 30, 2007 and June 30, 2006.
The average volume of interest and profit earning assets increased to $71,029,858 for the six-months ended June 30, 2007 from $54,257,823 for the same 2006 period.
Interest and Profit Sharing Expense
Interest and profit sharing expense increased 30% to $427,105 for the three months ended June 30, 2007 from $328,358 for the same period in 2006. An increase in the average balance of interest bearing and profit sharing liabilities of $5,197,053 was a major factor in the increase in interest and profit sharing expense. The average volume of interest bearing and profit sharing liabilities increased to $44,550,902 in the 2007 period from $39,353,849 in the 2006 period. The cost of funds increased to 3.85% for the first quarter of 2007 as compared to 3.35% for the same period in 2006.
Interest and profit sharing expense increased to $812,110 for the six-months ended June 30, 2007 from $603,549 for the same 2006 period. The rise in interest and profit sharing expense was due to an increase in the yield on and volume of average interest bearing and profit sharing liabilities. The cost of funds increased to 3.75% for the six-months ended June 30, 2007 from 3.09% for the same 2006 period. In 2007, the rates on deposits were higher than in the six-month period in 2006. The average volume of interest bearing and profit sharing liabilities increased to $43,663,710 for the six-months ended June 30, 2007 from $39,447,748 for the same 2006 period.
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following tables summarize monthly average balances, interest and finance revenues from earning assets, expenses of interest bearing and profit sharing liabilities, their associated yield or cost and the net return on earning assets for the three and six-months ended June 30, 2007 and 2006:
| Three-Months Ended | | Three-Months Ended |
| June 30, 2007 | | June 30, 2006 |
| Average | Interest | Average | | Average | Interest | Average |
| Balance | Inc / Exp | Yield (1) | | Balance | Inc / Exp | Yield (1) |
Interest and Profit Earning Assets: | | | | | | | |
Loans: | | | | | | | |
Commercial Loans | $21,836,500 | $466,541 | 8.57% | | $17,808,092 | $392,397 | 8.84% |
Real Estate Loans | 33,159,676 | 559,185 | 6.76% | | 28,285,141 | 481,547 | 6.83% |
Installment Loans | 2,044,267 | 44,105 | 8.65% | | 1,611,597 | 32,756 | 8.15% |
Total Loans | 57,040,444 | 1,069,831 | 7.52% | ` | 47,704,830 | 906,700 | 7.62% |
Investment Securities | 1,342,116 | 10,888 | 3.25% | | 1,776,783 | 18,104 | 4.09% |
Federal Funds & Bank Deposits | 12,397,218 | 160,093 | 5.18% | | 3,332,045 | 73,484 | 8.85% |
Total Interest and Profit Earning Assets | 70,779,777 | 1,240,812 | 7.03% | | 52,813,658 | 998,288 | 7.58% |
| | | | | | | |
Interest Bearing and Profit Sharing Liabilities: | | | | | | | |
Deposit Accounts: | | | | | | | |
Demand | 5,996,756 | 48,506 | 3.24% | | 5,767,473 | 38,497 | 2.68% |
Savings | 283,062 | 701 | .99% | | 347,590 | 861 | 0.99% |
Time | 15,369,243 | 193,034 | 5.04% | | 14,827,575 | 166,362 | 4.50% |
Money Market Accts | 22,901,841 | 184,864 | 3.24% | | 18,294,327 | 120,859 | 2.65% |
Short-term Borrowings | - | - | 0.00% | | 116,884 | 1,779 | 6.10% |
Long-term Borrowings | - | - | 0.00% | | - | - | 0.00% |
Total Interest Bearing and Profit Sharing Liabilities | 44,550,902 | 427,105 | 3.85% | | 39,353,849 | 328,358 | 3.35% |
| | | | | | | |
Net Earning Assets, Net | | | | | | | |
Interest and Financing Income, and Net Spread | $26,228,875 | $813,707 | 3.19% | | $13,459,809 | $669,930 | 4.23% |
| | | | | | | |
Net Interest and Financing Margin | | | 4.61% | | | | 5.09% |
(1) Yield is annualized. | | | | | | | |
| | | | | | | | | |
| Six-Months Ended June 30, | | Six-Months Ended June 30, |
| 2007 | | 2006 |
| Average | Interest | Average | | Average | Interest | Average |
| Balance | Inc / Exp | Yield (1) | | Balance | Inc / Exp | Yield (1) |
Interest and Profit Earning Assets: | | | | | | | |
Loans: | | | | | | | |
Commercial | $21,943,403 | $965,505 | 8.87% | | $17,460,476 | $765,390 | 8.84% |
Real Estate | 32,659,645 | 1,078,736 | 6.66% | | 28,119,817 | 929,649 | 6.67% |
Installment/Consumer | 2,027,647 | 91,363 | 9.09% | | 1,667,940 | 62,046 | 7.50% |
Total Loans | 56,630,695 | 2,135,604 | 7.60% | | 47,248,233 | 1,757,085 | 7.50% |
Investment Securities | 1,360,186 | 31,256 | 4.63% | | 1,724,735 | 30,994 | 3.62% |
Federal Funds & Bank Deposits | 13,038,977 | 332,850 | 5.15% | | 5,284,855 | 123,521 | 4.71% |
Total Interest and Profit Earning Assets | 71,029,858 | 2,499,710 | 7.10% | | 54,257,823 | 1,911,600 | 7.10% |
Interest Bearing and Profit Sharing Liabilities: | | | | | | | |
Deposit Accounts: | | | | | | | |
Demand | 6,692,040 | 97,530 | 2.94% | | 5,732,312 | 47,704 | 1.68% |
Savings | 289,167 | 1,419 | 0.99% | | 379,321 | 1,871 | 0.99% |
Time | 15,073,441 | 371,389 | 4.97% | | 15,858,571 | 334,401 | 4.25% |
Money Market | 21,609,062 | 341,772 | 3.19% | | 17,402,479 | 217,492 | 2.52% |
Short-term borrowings | - | - | 0.00% | | 75,065 | 2,081 | 5.59% |
Long-term borrowings | - | - | 0.00% | | - | - | 0.00% |
Total Interest Bearing | | | | | | | |
and Profit Sharing Liabilities | 43,663,710 | 812,110 | 3.75% | | 39,447,748 | 603,549 | 3.09% |
| | | | | | | |
Net Earning Assets, Net Interest and Financing Income, and Net Spread | $27,366,148 | $1,687,600 | 3.35% | | $14,810,075 | $1,308,051 | 4.02% |
| | | | | | | |
Net Interest and Financing Margin | | | 4.79% | | | | 4.86% |
| | | | | |
(1) Yield is annualized. | | | | | | | | |
| | | | | | |
| | | | | | | | | |
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. The provision to the allowance for loan losses was $75,852 for the six-month period ended June 30, 2007 and $48,984 for the same period in 2006. Net charge-offs totaled $22,224 for the six month period ended June 30, 2007 as compared to net recoveries of $3,814 for the same period in 2006. Illustrated below
is the activity within the allowance for the three month period ended June 30, 2007 and 2006, respectively.
Balance, January 1 | 2007 | | 2006 |
Provision for loan losses | $465,992 | | $349,416 |
Loan charge-offs | 75,852 | | 48,984 |
Recoveries | (23,596) | | (2,112) |
Balance, June 30 | 1,372 | | 5,926 |
Balance, January 1 | $519,620 | | $402,214 |
| At June 30, 2007 | At December 31, 2006 |
Total loans & financings(1) | $55,794,914 | $50,927,197 |
Reserve for loan losses | $ 519,620 | $ 465,992 |
Reserve/Loans % (1) | 0.93% | 0.92% |
The Bank had approximately $18 million of Islamic financings on its books at June 30, 2007. The allowance for loan losses for Islamic financing is determined under the same procedures and standards as for regular residential real estate loans. The portion of the allowance for loan losses allocated to Islamic loans is $43,900.
On the liability side of the balance sheet, the Bank offers FDIC–insured deposits that are compliant with Islamic Law. These deposits, by agreement, are specifically invested in the Islamic financings. The Islamic savings, money markets and certificates of deposit pay out earnings that are derived specifically from the revenues from the Islamic financings net of certain expenses. In essence, a portion of the net earnings from the Islamic financings are allocated to the depositors and to the Company in accordance with the agreement. Thus the depositor’s earnings can fluctuate with the fluctuation of the net revenues from the Islamic financing. If the underlying portfolio of assets is not profitable, the Bank may elect to reduce the overall profit sharing with the depositors or not distribute any profit sharing at all. While the loss sharing characteristics related to the Islamic deposits would tend to lower the required amount of allowance for Islamic financings, management has opted to retain the same level of required reserves for Islamic financings as for comparable mortgage loans.
The following schedule summarizes the Company’s non-performing assets:
| At June 30, 2007 | At December 31, 2006 |
Past due 90 days and over and still accruing (1): | $ - | $ - |
Nonaccrual loans (1): | | |
Real estate – mortgage and construction loans | 1,095,656 | 59,605 |
Installment | - | - |
Commercial | - | - |
Subtotal | 1,095,656 | 59,605 |
| | |
Other real estate owned | 215,550 | 289,212 |
| | |
Total nonperforming assets | $ 1,311,206 | $ 348,817 |
| At June 30, 2007 | At December 31, 2006 |
Ratio of non-performing loans to total loans (1) | 1.96% | 0.12% |
Ratio of loans past due over 90 days and non-accrual loans to loan loss reserve | 211% | 13% |
(1) Excludes loans held for sale which are valued at the lower of cost or fair market value.
At June 30, 2007 there were three loans on non-accrual. One loan, totaling $859,214 is a land development loan and has an impairment reserve of $223,220 allocated at June 30, 2007 and December 31, 2006. Management has reached a deal with the borrower to gain title to the property to facilitate the work required to prepare the property for sale. Although this loan was reserved for at December 31, 2006, it was not in non-accrual status until March 31, 2007. The other two loans, totaling $236,442, are residential real estate loans. The larger of these two loans has mortgage insurance in place and no loss is anticipated on the work-out of the mortgage. The smaller loan has an impairment reserve of $4,062 at June 30, 2007 and December 31, 2006.
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 and recent negative developments in the Ann Arbor area economy, the Bank’s future loss ratios may exceed historical loss ratios.
In general the bank has never originated the riskier types of mortgage products that are the focus of the recent crisis in the mortgage subprime industry. In particular the bank has no interest-only, optional payment or 80/10/10 residential mortgage loans in its portfolio or managed servicing rights portfolio. Midwest has a small portfolio of Alt-A quality mortgage servicing rights on mortgages sold through its Lehman Brothers conduit that it manages for its own account, all of which mortgages were current as of June 30, 2007.
Management believes that the current allowance for loan losses is adequate to absorb losses inherent in the loan portfolio, although the ultimate adequacy of the allowance is dependent upon future economic factors beyond the Company’s control. A downturn in the general nationwide economy will tend to aggravate, for example, the problems of local loan customers currently facing some difficulties, and could decrease residential home prices. A general nationwide business expansion could conversely tend to diminish the severity of any such difficulties.
Non-Interest Income
Total non-interest income increased 138% to $2,430,316 for the three-months ended June 30, 2007 from $1,036,264 for the three-months ended June 30, 2006. The increase was primarily due to the receipt by Midwest of a one time termination fee of $1,175,284. The termination fee was negotiated by Midwest and a former customer in prior periods. However due to various uncertainties, the revenue was not realized. Those uncertainties have cleared and allow for the revenue to be reported in the current period.
Total non-interest income increased to $3,693,191 for the six-months ended June 30, 2007 from $2,086,989 for the six-months ended June 30, 2006. As compared with the six-month period in 2006, the Company increased its sub-servicing operations. Income generated in this area was higher due to the higher termination fees which were only partially offset by a decline in the initial loan set up and other fees due to a decrease in loan originations.
| At June 30, 2007, Midwest was subservicing 31,203 mortgages, a decrease of |
3.8% from 32,461 mortgages subserviced at December 31, 2006 and a decrease of 13.4% from 36,012 mortgages subserviced at March 31, 2007. In April 2007, Midwest lost 7,000 mortgages from its subservicing portfolio related to one Credit Union Service Organization that terminated the subservicing relationship to pull the work in-house. As a result of the ongoing growth of new clients, management projects that Midwest will have 36,650 mortgages subserviced by September 1, 2007, which would mean that
Midwest will more than replace the 7,000 mortgages it lost from its subservicing portfolio by then.
Non-Interest Expense
Non-interest expense increased 11.2% to $2,063,666 for the three-months ended June 30, 2007 from $1,855,749 for the three-months ended June 30, 2006 as salaries and other operating expenses increased due to increases in the volume of loan servicing and the expenses related to the transfer out from Midwest of the 7,000 mortgage portfolio.
Non-interest expense increased to $3,944,329 for the six-months ended June 30, 2007 from $3,483,078 for the six-months ended June 30, 2006. The increase was primarily due to an increase in salaries and other operating expenses and an increase legal fees for the expansion of products offered by the Islamic banking subsidiary. During the period, University Islamic Financial completed the legal work for its first commercial real estate financing product and added several additional states to the residential financing product document set.
At June 30, 2007, University Bank (“the Bank”) and Midwest Loan Services (“Midwest”) owned the rights to service mortgages for Fannie Mae, Freddie Mac and other institutions, most of which were owned by Midwest, an 80% owned subsidiary of the Bank. The balance of mortgages serviced for these institutions was approximately $155 million at June 30, 2007. The fair value of these servicing rights was $1,767,244 at June 30, 2007. 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 servicing rights are recorded at fair value at June 30, 2007 and at the lower of cost or market at June 30, 2006. In 2007, the Company adopted the fair value measurement method of accounting for mortgage servicing rights according to SFAS 156. Under this method, changes in fair value are reported in earnings at each reporting date.
Following is an analysis of the change the Company’s mortgage servicing rights for the periods ended June 30, 2007 and 2006:
| 2007 | 2006 |
Balance, January 1 | $1,516,100 | $1,471,808 |
Additions – originated | 197,000 | 155,212 |
Amortization expense | - | (114,973) |
Adjustment for asset impairment change | - | 149,000 |
Change in fair value | 54,144 | - |
Balance, June 30 | $1,767,244 | $1,661,047 |
Capital Resources
The table below sets forth the Bank’s risk based assets, capital ratios and risk-based capital ratios of the Bank. At June 30, 2007 and December 31, 2006, the Bank was considered “well-capitalized” and exceeded the regulatory guidelines.
| | | To Be Well |
| | To be Adequately | Capitalized |
| Actual | Capitalized Under | Under Prompt |
| | Prompt Corrective | Corrective |
| | Action Provisions | Action Provisions |
| Amount | Ratio | Amount | Ratio | Amount | Ratio |
As of June 30, 2007: | | | | | | |
Total capital (to risk weighted assets) | $9,559,000 | 18.6% | $4,074,000 | 8.0 % | $4,102,160 | 10.0 % |
Tier I capital (to risk weighted assets) | 9,039,000 | 17.6% | 2,037,000 | 4.0 % | 2,051,080 | 6.0 % |
Tier I capital (to average assets) | 9,039,000 | 10.9% | 3,508,000 | 4.0 % | 3,319,240 | 5.0 % |
As of December 31, 2006: | | | | | | |
Total capital (to risk weighted assets) | $8,142,000 | 16.7% | $3,911,000 | 8.0 % | $4,889,000 | 10.0 % |
Tier I capital (to risk weighted assets) | 7,676,000 | 15.7% | 1,955,000 | 4.0 % | 2,933,000 | 6.0 % |
Tier I capital (to average assets) | 7,676,000 | 9.8% | 3,122,000 | 4.0 % | 3,903,000 | 5.0 % |
Liquidity
Bank Liquidity. The Bank’s primary sources of liquidity are customer deposits, scheduled payments and prepayments of loan principal, cash flow from operations, maturities of various investments, borrowings from correspondent lenders secured by securities, residential mortgage loans and/or commercial loans. In addition, the Bank invests in overnight federal funds. At June 30, 2007, the Bank had cash and cash equivalents of $22,427,546. The Bank’s lines of credit include the following:
$2.7 million from the Federal Home Loan Bank of Indianapolis secured by investment securities and residential mortgage loans, and
$4.7 million from the Federal Reserve Bank of Chicago secured by commercial loans.
At June 30, 2007, the Bank had $0 outstanding on the Federal Home Loan Bank and Federal Reserve Bank lines of credit. In order to bolster liquidity from time to time, the Bank also sells brokered time deposits. There were no brokered deposits outstanding at June 30, 2007.
Bancorp Liquidity. At June 30, 2007, Bancorp had $30,000 in cash and investments on hand to meet its working capital needs. In an effort to increase the Bank’s Tier 1 capital to assets ratio through retained earnings, management does not expect that the Bank will pay dividends to the Company during the balance of 2007.
ITEM 3. | CONTROLS AND PROCEDURES |
| (a) | Evaluation of Disclosure Controls and Procedures. |
Disclosure controls are procedures that are designed with an objective of ensuring that information required to be disclosed in our company’s periodic reports filed with the Securities and Exchange Commission, such as this report on Form 10-QSB, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls also are designed with an objective of ensuring that such information is accumulated and communicated to our company’s management, including our Chief Executive Officer and Chief Financial Officer, in order to allow timely consideration regarding required disclosures
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 the operation of these disclosure controls and procedures were not effective because of the following weaknesses noted below.
At December 31, 2006 and the first two quarters of 2007, there were material weaknesses in the SEC reporting. After the first draft of the Form 10-KSB for 2006 and the March 31, 2007 Form 10-QSB, management and the auditors discovered adjustments to the financial statements. The adjustments were discovered in the audit and review of the financial statements of the various subsidiaries of the company. The failure to initially book certain transactions for the initial draft of the financial statements resulted from various staff changes occurring at critical points in the in the reporting cycle. The new staff failed to book certain transactions, which included certain accruals, reclassifications. Also, the Form 10-KSB was amended after the original filing due to typographical errors in the original filings. These typographical errors resulted from an SEC edgarization process that resulted in significant manual adjustments to get the SEC compliant document to appear like the original Word Document.
At June 30, 2007, the material weaknesses were cut down to one reclassification and timely filing of the SEC document. The edgarization process was greatly improved and did not require any substantial manual intervention to prepare the Form 10-QSB into an SEC compliant document.
The above items, under Section 404 of the Sarbanes Oxley Act of 2002, constitute significant deficiencies and material weaknesses in internal controls over financial reporting.
(b) | Changes in Internal Controls. |
During the second quarter of 2007, specific steps to remediate the material weaknesses were implemented by the Bank Cashier and Chief Executive Officer. They include a thorough review of the financial statements prior to submission to the auditors. The review was performed by multiple parties. Experienced staff members were hired to assist in the monitoring of disclosure controls and procedures.
Additionally, the Company also implemented a new edgarization process that eliminates substantial manual intervention to conform the Form 10-KSB and 10-QSB Word document into an SEC compliant document
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of 2007, the Company sold 8,000 shares of its 9% pay-in-kind option cumulative preferred stock for total proceeds of $80,000 to bolster working capital. The sale of preferred shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D.
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K.
| 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 Principal Accounting 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 Principal Accounting 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 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.
Date: | May 21, 2008 | /s/ Stephen Lange Ranzini |
| President and Chief Executive Officer |
| Principal Accounting Officer |
EXHIBIT INDEX
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 Principal Accounting 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 Principal Accounting 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. |
Exhibit 31.1
10-QSB 302 CERTIFICATION
I, Stephen Lange Ranzini, certify that:
1. | I have reviewed this quarterly report on Form 10-QSB/A of University Bancorp, Inc; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The small business issuer's other certifying officer(s) and I are responsible for establishing for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer 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 report is being prepared;
(b) Evaluated the effectiveness of the small business issuer'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 small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting.
5. | The small business issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer'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 21, 2008 | /s/Stephen Lange Ranzini |
President and Chief Executive Officer
Exhibit 31.2
10-QSB 302 CERTIFICATION
I, Dennis Agresta, certify that:
1. | I have reviewed this quarterly report on Form 10-QSB/A of University Bancorp, Inc; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The small business issuer's other certifying officer(s) and I are responsible for establishing for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer 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 report is being prepared;
(b) Evaluated the effectiveness of the small business issuer'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 small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting.
5. | The small business issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer'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 21, 2008 | /s/ Dennis Agresta |
| Dennis Agresta |
| Principal Accounting 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
I, Stephen Lange Ranzini, the President and Chief Executive Officer of University Bancorp, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of University Bancorp, Inc. on Form 10-QSB/A for the quarter ended June 30, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such report on Form 10-QSB/A fairly presents in all material respects the financial condition and results of operations of University Bancorp, Inc.
| /s/ 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
I, Dennis Agresta, the Principal Accounting Officer of University Bancorp, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of University Bancorp, Inc. on Form 10-QSB/A for the quarter ended June 30, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such report on Form 10-QSB/A fairly presents in all material respects the financial condition and results of operations of University Bancorp, Inc.
Date: | May 21, 2008 | /s/ Dennis Agresta |
| Principal Accounting Officer |