SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
OR
[] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
-------- ----------
(State of incorporation) (IRS Employer Identification Number)
959 Maiden Lane, Ann Arbor, Michigan 48105
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 741-5858
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value outstanding at July 31, 2002: 3,852,548 shares
Page 1 of 25 pages
FORM 10-Q
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements PAGE
----
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statement of Comprehensive Income (loss) 7
Consolidated Statements of Cash Flows 8
Notes to the Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Summary 11
Results of Operations 12
Capital Resources 19
Liquidity 20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
PART II - Other Information
Item 1. Legal Proceedings 23
Item 5. Other Information: 23
Item 6. Exhibits & Reports on Form 8-K 23
Signatures 24
Exhibit 1 - Certification 25
- ------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals, which are in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
Part I. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001
June 30, December 31,
ASSETS 2002 2001
Cash and due from banks $ 1,529,213 $ 837,550
Short term investments 1,340,000
--------------------- ---------------------
Total cash and cash equivalents 2,869,213 837,550
Securities available for sale, at market 2,264,012 2,260,103
Federal Home Loan Bank Stock 848,400 848,400
Loans held for sale, at the lower of cost or market 937,757 2,137,786
Loans 32,982,090 35,026,024
Allowance for loan losses (569,647) (579,113)
--------------------- ---------------------
Loans, net 32,412,443 34,446,911
Premises and equipment, net 1,751,385 1,787,018
Investment in Michigan BIDCO Inc. 629,258 629,258
Investment in Michigan Capital Fund LPI 406,244 456,244
Mortgage servicing rights, net 573,737 606,537
Real estate owned, net 263,138 200,000
Accounts receivable 246,707 862,848
Accrued interest receivable 169,016 229,417
Prepaid expenses 139,131 191,700
Goodwill, net 104,041 63,914
Other assets 144,769 65,045
--------------------- ---------------------
TOTAL ASSETS $ 43,759,251 $ 45,622,731
===================== =====================
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
June 30, 2002 (Unaudited) and December 31, 2001
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
--------------------- ---------------------
Liabilities:
Deposits:
Demand - non interest bearing $ 1,967,093 $ 2,390,750
Demand - interest bearing 17,736,319 13,701,011
Savings 451,477 340,341
Time 19,924,599 23,765,478
--------------------- ---------------------
Total Deposits 40,079,488 40,197,580
Short term borrowings - 91,566
Long term borrowings 624,506 1,657,506
Accounts payable 126,203 339,536
Accrued interest payable 107,616 177,407
Other liabilities 53,608 117,398
--------------------- ---------------------
Total Liabilities 40,991,421 42,580,993
Minority Interest 293,282 305,129
Stockholders' equity:
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 3,967,732 shares in 2002 and
3,867,732 shares in 2001 39,677 38,677
Additional paid-in-capital 5,510,018 5,411,018
Accumulated deficit (2,465,329) (2,205,444)
Treasury stock - 115,184 shares in 2001 and 2000 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities available for sale, net (269,288) (167,112)
--------------------- ---------------------
--------------------- ---------------------
Total Stockholders' Equity 2,474,548 2,736,609
--------------------- ---------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 43,759,251 $ 45,622,731
===================== =====================
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended June 30, 2002 and 2001
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2002 2001 2002 2001
----------------- -------------- ----------------- ----------------
Interest income:
Interest and fees on loans $ 659,319 $ 793,398 $ 1,404,748 $ 1,630,586
Interest on securities:
U.S. Government agencies 148,106 1,933 159,418 89,329
Other securities 23,445 16,392 49,011 33,128
Interest on federal funds and other 6,861 19,038 12,100 21,516
----------------- -------------- ----------------- ----------------
----------------- -------------- ----------------- ----------------
Total interest income 837,731 830,761 1,625,277 1,774,559
----------------- -------------- ----------------- ----------------
Interest expense:
Interest on deposits:
Demand deposits 79,131 108,193 146,412 243,648
Savings deposits 1,163 1,693 2,252 3,605
Time deposits 165,878 373,004 373,638 734,627
Short term borrowings 311 4,174 1,352 41,812
Long term borrowings 5,691 17,684 11,559 33,867
----------------- -------------- ----------------- ----------------
Total interest expense 252,174 504,748 535,213 1,057,559
----------------- -------------- ----------------- ----------------
Net interest income 585,557 326,013 1,090,064 717,000
Provision for loan losses 22,500 22,500 45,000 45,000
----------------- -------------- ----------------- ----------------
Net interest income after
provision for loan losses 563,057 303,513 1,045,064 672,000
----------------- -------------- ----------------- ----------------
Other income:
Loan origination and other fees 470,929 629,694 1,122,985 1,123,416
Loan servicing and sub-servicing
fees 133,066 751,231 391,808 1,331,269
Gain on sale of mortgage loans 20,119 21,595 55,003 30,860
Insurance and investment fee income 20,550 25,916 49,813 49,306
Deposit service charges and fees 15,522 19,162 30,733 35,209
Other 21,928 24,430 63,415 38,984
----------------- -------------- ----------------- ----------------
Total other income 682,114 1,472,028 1,713,757 2,609,044
----------------- -------------- ----------------- ----------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended June 30, 2002 and 2001
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2002 2001 2002 2001
------------------- ----------------- --------------- -----------------
Other expenses:
Salaries and benefits $ 692,375 $ 980,336 $ 1,415,640 $ 1,804,547
Legal and audit expense 42,001 25,356 79,418 68,612
Occupancy, net 92,338 144,087 182,663 248,499
Data processing and equipment
Expense 106,654 75,906 216,498 155,096
Consulting fees 41,392 73,155 92,560 146,885
Advertising 21,822 32,711 38,983 52,114
Supplies and postage 48,508 104,201 97,357 205,180
Servicing rights amortization 218,670 51,645 268,109 73,271
Goodwill amortization - 6,970 - 13,941
Mortgage banking expense 120,595 (4,064) 299,860 35,250
Memberships and training 26,228 27,067 49,141 43,977
Travel and entertainment 31,539 44,344 48,741 65,249
Insurance 21,566 24,267 41,990 46,190
Other operating expenses 19,405 133,677 187,747 240,448
------------------- ----------------- --------------- -----------------
Total other expenses 1,483,093 1,719,658 3,018,707 3,199,261
------------------- ----------------- --------------- -----------------
Income (loss) before income taxes (237,922) 55,883 (259,886) 81,783
------------------- ----------------- --------------- -----------------
Income tax expense (benefit) - - - -
------------------- ----------------- --------------- -----------------
Net Income (loss) $ (237,922) $ 55,883 $ (259,886) $ 81,783
=================== ================= =============== =================
Preferred stock dividends 16,476 - 27,251
------------------- ----------------- ---------------------------------
Net income (loss) available to $ (237,922) $ 39,407 $ (259,886) $ 54,532
common shareholders
=================== ================= =============== =================
Basic and diluted loss per common
share $ (0.06) $ 0.02 $ (0.07) $ 0.03
=================== ================= =============== =================
Weighted average shares outstanding 3,850,130 2,062,878 3,830,338 2,045,436
=================== ================= =============== =================
The accompanying notes are an integral part of the
consolidated financial statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Periods Ended June 30, 2002 and 2001
(Unaudited)
For the Three Month For the Six Month
Period Ended Period Ended
2002 2001 2002 2001
--------------------------------------------------------------
Net income (loss) ($237,922) $55,883 ($259,886) $81,783
Other comprehensive loss:
Unrealized gains (losses) on securities
available for sale 62,993 (115,936) (102,176) (112,525)
Less: reclassification adjustment
for accumulated losses/(gains)
included in net loss - - - -
--------------------------------------------------------------
-----------------
Other comprehensive loss, before
tax effect 62,993 (115,936) (102,176) (112,525)
Income tax expense (benefit) - - - -
Other comprehensive loss, net
of tax 62,993 (115,936) (102,176) (112,525)
--------------------------------------------------------------
Comprehensive loss ($174,929) ($60,053) ($362,062) ($30,742)
==============================================================
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2002 and 2001
2002 2001
------------------- -------------------
Cash flow from operating activities:
Net (loss) income $ (259,886)$ 81,783
Adjustments to reconcile net income (loss) to net cash from Operating Activities:
Depreciation 146,801 146,302
Amortization 318,109 137,212
Provision for loan losses 45,000 45,000
Net (gain) on mortgage loan sales (55,003) (30,860)
Net (accretion) on investment securities (159,418) (89,285)
Change in:
Investment in Michigan BIDCO, Inc. - 250,349
Minority interest (11,847) 79,313
Mortgage servicing rights (235,309) (79,714)
Real estate owned (63,138) (58,545)
Accounts receivable 616,141 389,357
Accounts payable (213,333) 730,213
Accrued interest receivable 60,401 52,076
Accrued interest payable (69,791) (99,372)
Other assets (67,282) (74,906)
Other liabilities (63,790) (130,759)
------------------- -------------------
Net cash (used in) provided by operating activities (12,344) 1,348,164
------------------- -------------------
Cash flow from investing activities:
Proceeds from maturities and pay downs of securities
available for sale 53,333 199
Loans granted, net of repayments 3,244,500 (622,739)
Premises and equipment expenditures (111,168) (440,053)
------------------- -------------------
Net cash provided by (used in) investing activities 3,186,665 (1,062,593)
------------------- -------------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2002 and 2001
2002 2001
------------------- -------------------
Cash flow used in financing activities:
Net (decrease) increase in deposits (118,092) 1,304,571
Net (decrease) in short term borrowings (91,566) (2,330,282)
Principal payments on long term borrowings (1,033,000) (94,822)
Issuance of long term borrowings 20,000 76,280
Issuance of preferred stock - 419,000
Issuance of common stock 80,000 97,852
------------------- -------------------
-------------------
Net cash used in financing activities (1,142,658) (527,401)
------------------- -------------------
2,031,663 (241,830)
Net change in cash and cash equivalents Cash and cash equivalents:
Beginning of period 837,550 2,546,620
------------------- -------------------
End of period $ 2,869,213$ 2,304,790
=================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 605,004 $ 1,156,931
See accompanying notes to consolidated financial statements (unaudited).
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See Note 1 of the Financial Statements incorporated by reference in the
Company's 2001 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 2001 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.
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 3,850,130 and
2,062,878 for the three months ended June 30, 2002 and 2001, respectively;
3,830,338 and 2,045,436 shares for the six months ended June 30, 2002 and 2001,
respectively. Stock options are considered anti-dilutive for 2002 and 2001,
therefore, are not included in earnings per share calculations.
(2) Investment Securities
The Bank's available-for-sale securities portfolio at June 30, 2002 had
a net unrealized loss of approximately $269,000 as compared with a net
unrealized loss of approximately $167,000 at December 31, 2001.
Securities available for sale at June 30, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
U.S. agency mortgage-backed $ 2,042 $ 0 $ (231) $ 1,811
U.S. Treasury 491 0 (38) 453
---------------- ---------------- ---------------- ----------------
Total $ 2,533 $ 0 $ (269) $ 2,264
================ ================ ================ ================
Securities available for sale at December 31, 2001
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
U.S. agency mortgage-backed $ 1,948 $ 0 $ (111) $ 1,837
U.S. Treasury 479 0 (56) 423
---------------- ---------------- ---------------- ----------------
Total $ 2,427 $ 0 $ (167) $ 2,260
================ ================ ================ ================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains certain forward-looking statements that reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
merchant banking, mortgage banking and investment activities, and the nature and
adequacy of allowances for loan losses. The Company can give no assurance that
the expectations reflected in forward-looking statements will prove correct.
Various factors could cause results to differ materially from the Company's
expectations. Among these factors are those referred to in the introduction to
the Company's Management Discussion and Analysis of Financial Condition and
Results of Operations that appear as Item 7 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
SUMMARY
For the three months ended June 30, 2002, the Company had a net loss of
$237,922 compared to net income of $55,883 for the three months ended June 30,
2001. During the 2002 quarter the bank subsidiary, Midwest Loan Services posted
a loss of $183,000. As compared with same period last year, Midwest's results
were negatively impacted by a valuation allowance as of June 30, 2002 for a
decrease in the appraised value of Midwest's capitalized mortgage servicing
rights. The Community Bank showed a 93% reduction in losses from the prior year,
with the pre-tax loss for the three-month period ended June 30, 2002 at $21,000
as compared with $280,000 for the same period last year. Overall, interest
expense decreased 50% year over year. The decrease was primarily due to a drop
in the rate paid on deposits in 2002 to 2.58% from 5.02% in 2001 and a favorable
shift in the mix of deposits.
For the six months ended June 30, 2002, a net loss of $259,886 was realized
versus net income of $81,783 in the same period in 2001. Managements' efforts to
increase revenue and reduce expenses are having a positive impact on the
operations of the Community Bank. The pre-tax loss from Community Banking was
reduced by 70% in 2002 as compared with the same period in 2001. However on a
consolidated level, a decrease in the mortgage servicing rights valuation as of
June 30, 2002 negated the improvements noted above.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three months ended June 30, 2002 and 2001 (in
thousands):
Pre-tax income (loss) summary for the three and six months ended June 30, 2002
Three Months Six Months
Community Banking $(21) $(122)
Midwest Loan Services (183) (80)
Corporate Office (34) (58)
--------- ---------
Total $ (238) $ (260)
========= ==========
Pre-tax income (loss) summary for the three and six months ended June 30, 2001:
Three Months Six Months
Community Banking $ (280) $ (402)
Midwest Loan Services 397 601
Corporate Office (61) (117)
-------- ---------
Total $ 56 $ 82
========= =========
Recent Events
The Community Banking operation realized a profit from operations of over
$30,000 in July 2002 and is currently anticipated to have profits of over
$100,000 in the third quarter.
The Community Banking operation has reached an agreement in principle to
enter into a sale and leaseback of its headquarters building to a development
group that plans to build a $50 million "New Urbanism" project in the Lowertown
area of Ann Arbor. The Bank will relocate would relocate sometime in late 2004
to a new building several hundred yards from its current location as a result.
The closing is scheduled for September 30, 2002. The new location has better
visibility and management believes it is a better retail site than the current
location. The terms of the deal call for a sale of the 7,700 square foot
existing headquarters for $1,186,000, resulting in a $300,000 gain. The gain
would be amortized over two years under GAAP. In addition, the development group
would give the Bank the right to buy 10,000 square feet of space in the new
building for between $1,300,000 and $1,800,000.
Negotiations continue with interested parties for the sale of Midwest Loan
Services at a price that would generate an initial gain of about $1 million and
additional profits over time. A definitive agreement has been negotiated but not
signed with one buyer and that buyer is in the process of securing financing to
close the transaction. We are in discussions with other buyers. There is no
assurance that either the sale of the headquarters building or the sale of
Midwest will occur.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased to 585,557 for the three months ended
June 30, 2002 from $326,013 for the three months ended June 30, 2001. Net
interest income rose from a year ago period primarily as a result of a higher
interest rate spread. The yield on earning assets increased slightly from 8.36%
to 8.43% while the cost of earning liabilities declined from 5.02% to 2.58%.
Overall, the net interest income as a percentage of total average earning assets
increased from 3.28% to 5.90%.
Net interest income increased to $1,090,064 for the six months ended
June 30, 2002 from $717,000 for the six months ended June 30, 2001. Net interest
income rose from a year ago period primarily as a result of a higher interest
rate spread. The yield on interest earning assets decreased from 8.74% in the
2001 period to 8.17% in the 2002 period. The cost of interest bearing
liabilities decreased from 5.29% for the 2001 period to 2.76% for the period
ended June 30, 2002. Net interest income as a percentage of total average
earning assets increased from 3.58% to 5.48%.
Interest income
Interest income increased to $837,731 in the quarter ended June 30,
2002 from $830,760 in the quarter ended June 30, 2001. The average volume of
interest earning assets declined slightly to $39,840,081 in the 2002 period from
$39,872,682 in the 2001 period. Despite a declining interest rate environment
during throughout 2001, the yield on interest bearing assets rose from 8.36% in
2001 to 8.43% in 2002. The increase was due to income earned on the securities
portfolio. During the second quarter of 2002, this portfolio yielded a rate of
18.93%. The yield resulted from accelerated income recognized on a
principal-only collateralized mortgage obligation that began to pay down during
the quarter, as a result of the drop in long-term interest rates. As the
interest rates declined, the expected duration period for this bond was
shortened. The decrease in average expected duration stimulated an accelerated
accretion of the bond discount. Generally, the yield on other interest bearing
assets declined in response to the rate environment.
Interest income decreased to $1,625,277 in the six months ended June
30, 2002 from $1,774,558 in the six months ended June 30, 2001. This decrease
resulted from a decline in average earning assets and the yield on average
earning assets. The average volume of interest earning assets decreased to
$40,124,970 in the 2002 period from $40,925,216 in the 2001 period. The overall
yield on earning assets declined to 8.17% from 8.74%. Generally, the yield on
other interest bearing assets declined in response to the rate environment.
However, yield on the investment securities rose to 11.46% in 2002 from 8.85% in
2001 due the accelerated income on the bond described above.
Interest Expense
Interest expense decreased 50% to $252,174 in the three months ended June
30, 2002 from $504,748 in the 2001 period. The decrease was due to a drop in the
yield in 2002 to 2.58% from 5.02% in 2001, a decline in interest bearing
liabilities and a favorable shift in the mix of deposits. The yield declined as
the interest rate liabilities re-priced in the declining rate environment
throughout 2001. The average volume of interest bearing liabilities decreased to
$39,263,061 in 2002 from $40,331,473 in 2001. During the second quarter of 2002,
lower cost average demand deposits and money market accounts represented 44% of
average interest bearing liabilities as compared with 33% for the same period in
2001.
Interest expense decreased 49% to $535,213 in the six months ended June 30,
2002 from $1,057,559 in the 2001 period. The decrease was due to a lower yield
on the interest rate liabilities, a decrease in volume, and a favorable shift in
the mix of deposits. The yield dropped to 2.76% in 2002 from 5.29% in 2001. The
yield declined as the interest rate liabilities re-priced in the declining rate
environment throughout 2001. The volume of interest rate liabilities decreased
to $39,154,375 in 2002 from $40,282,745 in 2001. The decrease in volume
primarily occurred in time deposits, particularly brokered deposits, and
short-term borrowings. The decline in these liabilities was offset by a rise in
other interest bearing liabilities and non-interest bearing demand deposits.
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following table summarizes monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated yield
or cost and the net return on earning assets for the three months and six months
ended March 31, and June 30, 2002 and 2001.
Three Months Ended Three Months Ended
-----------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
-----------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc / Exp Yield (1) Balance Inc / Exp Yield (1)
Interest Earning Assets:
Commercial Loans $18,211,601 $332,133 7.32% $15,779,582 $365,251 9.28%
Real Estate Loans 13,011,889 247,085 7.62% 14,957,765 316,565 8.49%
Installment/Consumer Loans 3,374,049 80,101 9.52% 4,675,120 111,582 9.57%
------------ ------------ ------------ ------------
Total Loans 34,597,539 659,319 7.64% 35,412,467 793,398 8.99%
Investment Securities 3,635,201 171,551 18.93% 2,753,756 18,325 2.67%
Fed. Funds & Bank Deposits 1,607,341 6,861 1.71% 1,706,459 19,037 4.47%
------------ ------------ ------------ ------------
Total Interest Bearing Assets 39,840,081 837,731 8.43% 39,872,682 830,760 8.36%
------------ ------------ ------------ ------------
Interest Bearing Liabilities:
Demand Deposits 5,492,435 13,492 0.99% 3,354,528 19,574 2.34%
Savings Deposits 406,250 1,163 1.15% 339,465 1,693 2.00%
Time Deposits 20,696,436 165,878 3.21% 25,534,561 373,004 5.86%
Money Market Accts 11,970,784 65,639 2.20% 10,084,692 88,619 3.52%
Short-term Borrowings 72,650 311 1.72% 222,093 4,174 7.54%
Long-term Borrowings 624,506 5,691 3.66% 796,134 17,684 8.91%
Total Interest Bearing 39,263,061 252,174 2.58% 40,331,473 504,748 5.02%
Liabilities ------------ ------------ ------------ ------------
Net Earning Assets, net
interest income, and
interest rate spread $577,020 $585,557 5.86% $(458,791) 326,012 3.34%
=========== ============ ============ =============
Net Interest Margin 5.90% 3.28%
(1) Yield is annualized.
Six Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc (Exp) Yield (1) Balance Inc (Exp) Yield (1)
Interest Bearing Asset:
Loans:
Commercial $17,968,833 $705,720 7.92% $ 15,476,696 $742,132 9.67%
Real Estate 13,560,871 534,047 7.94% 15,188,745 646,980 8.59%
Installment/Consumer 3,469,293 164,981 9.59% 6,502,402 241,474 7.49%
------------ ------------ ------------ ------------
Total Loans 34,998,997 1,404,748 8.09% 37,167,843 1,630,586 8.85%
Investment Securities 3,668,229 208,429 11.46% 2,821,050 122,456 8.75%
Federal Funds & Bank
Deposits 1,457,744 12,100 1.67% 936,323 21,516 4.63%
------------ ------------ ------------ ------------
Total Interest Bearing Assets 40,124,970 1,625,277 8.17% 40,925,216 1,774,558 8.74%
------------ ------------ ------------ ------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 4,658,966 24,856 1.08% 3,264,353 41,753 2.58%
Savings 397,921 2,252 1.14% 362,893 3,605 2.00%
Time 21,876,814 373,638 3.44% 24,445,378 734,627 6.06%
Money Market Accts 11,418,098 121,556 2.15% 10,029,729 201,895 4.06%
Short-term borrowings 169,683 1,352 1.61% 1,364,454 41,812 6.18%
Long-term borrowings 632,893 11,559 3.68% 815,938 33,867 8.37%
------------ ------------ ------------ ------------
Total Interest Bearing
Liabilities 39,154,375 535,213 2.76% 40,282,745 1,057,559 5.29%
------------ ------------ ------------ ------------
Net Earning Assets, net interest
income, and interest rate
spread $ 970,595 $1,090,064 5.41% $ 642,471 $716,999 3.45%
Net yield on interest-earning assets 5.48% 3.58%
(1) Yield is annualized.
Allowance for Loan Losses
The provision to the allowance for loan losses was $45,000 for the six
months period ended June 30, 2002 and 2001. The Bank went from net recoveries of
$4,742 for the quarter ended June 30, 2001 to net charge-offs of $1,820 for the
quarter ended June 30, 2002. Illustrated below is the activity within the
allowance for the period ended June 30 2002 and 2001, respectively.
2002 2001
---- ----
Balance, January 1 $ 579,113 $ 562,997
Provision for loan losses 45,000 45,000
Loan charge-offs (59,581) (17,465)
Recoveries 5,115 11,590
-------- ---------
Balance, June 30 $ 569,647 $ 602,122
======== =========
At June 30, 2002 At December 31, 2001
Total loans (1) $32,982,090 $35,026,024
Reserve for loan losses $569,647 $579,113
Reserve/Loans % (1) 1.73% 1.65%
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 relatively limited geographical areas.
The following schedule summarizes the Company's non-performing assets:
At June 30, 2002 At December 31, 2001
---------------- --------------------
Past due 90 days and over and still accruing (1):
Real estate $134,047 $ 276,654
Installment 3,793 24,194
Commercial 0 194,404
------------ -----------
Subtotal 137,840 495,252
Nonaccrual loans (1):
- --------------------
Real estate 611,157 770,024
Installment 0 0
Commercial 394,270 0
------------ -----------
Subtotal 1,005,427 770,024
------------ -----------
Other real estate owned 263,138 200,000
- -----------------------
Total non-performing assets $1,406,405 $1,465,276
============ ============
At June 30, 2002 At December 31, 2001
---------------- --------------------
Ratio of non-performing assets to total
loans (1) 4.26% 4.18%
======= =======
Ratio of loans past due over 90 days and
nonaccrual loans to loan loss reserve 201% 218%
======== ========
(1) Excludes loans held for sale which are valued at the lower of cost or fair
market value.
Other real estate owned at June 30, 2002 and December 31, 2001 includes
a commercial development site in Sault Ste. Marie, Michigan. The property is
being carried at a value of $200,000. The Bank has a sales contract with a
commercial developer who is planning a major development on the site. The
transaction is scheduled to close in the fourth quarter of 2002. There is no
assurance that a sale of the property will be consummated. The sales price is
$300,015, net of all expenses. The remaining balance of $63,138 in other real
estate owned at June 30, 2002 represents a house currently under contract for
sale with net proceeds to the Bank of approximately $75,000.
Included in real estate loans on nonaccrual at June 30, 2002 is an
$111,157 residential loan secured by a home that was sold in early July 2002 for
net proceeds to the Bank of approximately $133,000. Included in loan past due
for June 30, 2002 and still accruing is a $103,072 residential loan that was
paid off in early July 2002.
Economic conditions in the Bank's primary market area in Ann Arbor were
stable but soft during the period ended June 30, 2002. 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 decreased to $682,114, for the three months
ended June 30, 2002 from $1,472,028 for the three months ended June 30,2001. The
significant decrease was primarily due to decreased loan origination and
sub-servicing fees and other loan set-up fees at Midwest Loan Services. The
volume of mortgages serviced and sub-serviced at Midwest is significantly lower
in 2002 than in 2001, though sequentially higher than the second half of 2001.
Total non-interest income decreased to $1,713,757 for the six months ended
June 30, 2002 from $2,609,044 for the six months ended June 30, 2001. The
decrease was principally a result of decreases in loan origination and loan
sub-servicing fee income at Midwest Loan Services. During the second quarter of
2001, Midwest's largest customer, the mortgage division of one of the top five
mortgage firms on Wall Street, decided to significantly scale back the amount of
business it was providing to Midwest. As of July 1, 2001, 18,500 loans or 95% of
the mortgages sub-serviced by Midwest for this customer had been transferred to
other sub-servicers including a subsidiary of this Wall Street firm. As of June
30, 2002, Midwest was sub-servicing approximately 6,000 loans versus about 5,000
at December 31, 2001.
Non-Interest Expense
Non-interest expense decreased to $1,483,093 in the three months ended
June 30, 2002 from $1,719,658 for the three months ended June 30, 2001. The
decrease was primarily the result of reduced operating costs at Midwest Loan
Services. These costs declined as the loan servicing volumes declined.
Additionally, the operating costs at the Bank have declined under a cost cutting
program implemented in late 2001.
At June 30 2002, the Bank and Midwest owned the rights to service
mortgages for Freddie Mac, Fannie Mae and other institutions, most of which was
owned by Midwest, an 80% owned subsidiary of the Bank. The value of mortgages
serviced for these institutions was approximately $71 million. The carrying
value of these servicing rights was $573,737 at June 30, 2002. Based on recent
comparable sales and indications of market value from industry brokers,
management believes that the current market value of the mortgage servicing
rights portfolio approximates cost. Market interest rate conditions can quickly
affect the value of mortgage servicing rights in a positive or negative fashion,
as long-term interest rates rise and fall. The amortization of these rights is
based upon the level of principal pay downs received and expected prepayments of
the mortgage loans. The amortization expense for the three-month period ended
June 30, 2002 was $218,670 up from an expense of $51,645 in 2001.
Non-interest expense decreased to $3,018,707 in the six months ended
June 30, 2002 from $3,199,261 for the six months ended June 30, 2001. The
decrease was primarily the result of decreased operating expenses at Midwest
Loan Services as well as cost control efforts in other areas at the Community
Banking operation.
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, 2002, the Bank was
considered "well-capitalized".
(in 000) Items Not Allocation By Risk
Weight Category
Subject To
Total Risk Weighting 0% 20% 50% 100%
------------------------------------------------------------------
Total Bank assets $43,763 (678) 816 5,462 11,695 26,468
-------------------------------------------------
Risk Weighted Assets 33,408 0 1,092 5,848 26,468
=================================================
Less: Excess allowance for loan losses 152
------------
Total risk-weighted assets
$33,256
============
Average total Bank assets for
leverage capital purposes $44,224
Tier 1 Capital Balance
Total Bank equity capital $2,620
Less: Net unrealized losses on available for sale securities (269)
Plus: Qualifying minority interest in consolidated subsidiaries 293
Less: Disallowed goodwill and servicing assets 161
-----------
Total Tier 1 Capital 3,021
Tier 2 Capital
llowance for loans & lease losses (net of excess
A above 1.25% of loans) 418
------------
Total Tier 2 Capital 418
-------------
Total Tier 1 & Tier 2 Capital $3,439
=============
Capital Ratios
Tier 1/Total Assets 6.83%
Tier 1 /Total Risk-Weighted Assets 9.08%
Tier 1 & 2/Total Risk-Weighted Assets 10.34%
Liquidity
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, borrowings from
correspondent lenders secured by securities, residential mortgage loans and/or
commercial loans. In addition, the Bank invests in overnight federal funds. At
June 30, 2002, the Bank had cash and cash equivalents of $2,869,213. The Bank
has a line of credit for $4.5 million from the Federal Home Loan Bank of
Indianapolis secured by investment securities and residential mortgage loans and
a line of credit for $4.9 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 June 30, 2002, the Bank had $9.2
million of these deposits outstanding.
Bancorp Liquidity. In an effort to maintain the Bank's Tier 1 capital
to assets ratio above 7% and to increase capital through retained earnings,
management does not expect that the Bank will pay dividends to the Company
during 2002 or 2003. At June 30, 2002, the Bank's Tier 1 capital was 6.83%.
At June 30, 2002, $397,000 was payable to another financial institution
as compared to $496,000 at June 30, 2001. Long-term borrowings at June 30, 2002
and 2001 also includes $227,506 of a note payable to another financial
institution with respect to a low-income housing partnership investment by
University Insurance and Investment Services.
Long-term borrowings at June 30, 2001 also included $184,082 of equity
conversion notes of the Company that were redeemed by the Company in late 2001.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on such rights by lowering
required amortization rates on the rights. Rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the retail mortgage banking operations of the Bank and Midwest Loan
Services. Rising interest rates also slow Midwest Loan Services' rate of growth,
but increases the duration of its existing subservicing contracts.
The Bank performs a static gap analysis that has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on the following page details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at June 30, 2002. The table is based upon various assumptions of management that
may not necessarily reflect future experience. As a result, certain assets and
liabilities indicated in the table as maturing or re-pricing within a stated
period may, in fact, mature or re-price in other periods or at different
volumes. The one-year static gap position at June 30, 2002 was estimated to be
($12,988,000) or -29.68%, a decrease from ($15,562,000) or -34.49% at March 31,
2002.
UNIVERSITY BANK
Asset/Liability Position Analysis as of June 30, 2002
(Dollar amounts in thousand's)
Maturing or Repricing in
3 Months 91 Days 1 - 3 3 - 5 Over 5 All
ASSETS or Less to 1 Year Years Years Years Others Total
- ------ ------- --------- ----- ----- ----- ------- --------
Cash and Due from Banks 1,340 - - - - 1,529 2,869
Securities 150 - - - 2,962 - 3,112
Loans - Net 7,186 5,210 4,162 12,522 3,835 (570) 32,345
Non-Accrual Loans - - - - - 1,005 1,005
Other Assets - 892 - - - 3,536 4,428
-----------------------------------------------------------------------------------------------------
TOTAL ASSETS 8,676 6,102 4,162 12,522 6,797 5,500 43,759
-----------------------------------------------------------------------------------------------------
LIABILITIES
Demand deposits - - - - - 1,967 1,967
NOW accounts - - 5,336 - - - 5,336
Savings accounts - - 451 - - - 451
Money Market accounts 6,200 6,200 - - - - 12,400
CD's under $100,000 10,380 1,944 2,614 332 324 - 15,594
CD's over $100,000 1,861 1,016 1,236 100 118 - 4,331
Other Borrowings 33 132 480 - - - 645
Other Liabilities - - - - - 560 560
Equity - - - - - 2,475 2,475
-----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 18,474 9,292 10,117 432 442 5,002 43,759
-----------------------------------------------------------------------------------------------------
GAP (9,798) (3,190) (5,955) 12,090 6,355 498 -
=====================================================================================================
CUMULATIVE GAP (9,798) (12,988) (18,943) (6,853) 498 -
========================================================================
GAP PERCENTAGE -22.39% -29.68% -43.29% -15.66% -1.14% 0.00%
=====================================================================================
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties
are subject.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
1. Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: August 13, 2002 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President
Date: August 13, 2002 /s/Nicholas K. Fortson
---------------------------
Nicholas K. Fortson
Chief Financial Officer
Exhibit 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 three accompanying Quarterly Report on Form 10-Q of
University Bancorp, Inc. for the quarter ended June 30, 2002 we Stephen L.
Ranzini, Chief Executive Officer and Nicholas K. Fortson, Chief Financial
Officer hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our knowledge
and belief, that:
(1) such Quarterly Report on From 10-Q of University Bancorp, Inc. for
the quarter ended June 30, 2002, fully complies with the requirements
of Section 13(a) of 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in such Quarterly Report on Form 10-Q of
University Bancorp, Inc. for the quarter ended June 30, 2002, fairly
presents, in all material respects, the financial condition and
results of operations of University Bancorp, Inc.
August 13, 2002
/s/Stephen L. Ranzini
Stephen L. Ranzini
President
/s/Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer