Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 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 October 31, 2002: 3,897,548 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 Statements of Comprehensive Income 7
Consolidated Statements of Cash Flows 8
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Summary 11
Results of Operations 12
Capital Resources 19
Liquidity 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
PART II - Other Information
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of
the Security-Holders 23
Item 6. Exhibits & Reports on Form 8-K 23
Signature 24
Exhibit 1 - Certifications 25
- ------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals, which are in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
Part I. - Financial Information
1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001
September 30,2002 December 31,2001
ASSETS
Cash and due from banks $ 2,761,440 $ 837,550
Securities available for sale, at market 1,854,784 2,260,103
Federal Home Loan Bank Stock 848,400 848,400
Loans held for sale, at the lower of
cost or market 1,677,094 2,137,786
Loans 32,308,158 35,026,024
Allowance for loan losses (588,959) (579,113)
------------- ------------
Loans, net 31,719,199 34,446,911
Premises and equipment, net 1,743,878 1,787,018
Investment in Michigan BIDCO Inc. 629,258 629,258
Investment in Michigan Capital Fund LPI 381,243 456,244
Mortgage servicing rights, net 583,957 606,537
Real estate owned, net 722,638 200,000
Accounts receivable 168,305 862,848
Accrued interest receivable 166,782 229,417
Prepaid expenses 165,108 191,700
Goodwill, net 103,914 63,914
Other assets 167,529 65,045
------------- --------------
TOTAL ASSETS $ 43,693,529 $ 45,622,731
============== ==============
-Continued-
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
September 30, 2002 (Unaudited) and December 31, 2001
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
--------------- --------------
Liabilities:
Deposits:
Demand - non interest bearing $ 1,373,334 $ 2,390,750
Demand - interest bearing 18,722,950 13,701,011
Savings 445,488 340,341
Time 19,078,926 23,765,478
-------------- --------------
Total Deposits 39,620,698 40,197,580
Short term borrowings - 91,566
Long term borrowings 558,506 1,657,506
Accounts payable 196,189 339,536
Accrued interest payable 69,695 177,407
Other liabilities 117,089 117,398
------------- --------------
Total Liabilities 40,562,177 42,580,993
Minority Interest 294,921 305,129
Stockholders' equity:
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4012,732 shares in 2002 and
3,867,732 shares in 2001 40,127 38,677
Additional paid-in-capital 5,537,980 5,411,018
Accumulated deficit (2,307,977) (2,205,444)
Treasury stock - 115,184 shares in 2002
and 2001 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities available
for sale, net (93,169) (167,112)
-------------- --------------
Total Stockholders' Equity 2,836,431 2,736,609
--------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 43,693,529 $ 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 September 30, 2002 and 2001
(Unaudited)
For the Three Month For the Nine Month
Period Ended Period Ended
2002 2001 2002 2001
Interest income:
Interest and fees on loans $ 740,087 $ 824,811 $ 2,144,835 $ 2,455,397
Interest on securities:
U.S. Government agencies 73,979 172,907 233,397 262,235
Other securities 23,047 15,507 72,058 48,635
Interest on federal funds and other 2,335 1,451 14,435 22,968
----------- ------------ ------------ ------------
Total interest income 839,448 1,014,676 2,464,725 2,789,235
----------- ------------ ------------ ------------
Interest expense:
Interest on deposits:
Demand deposits 86,172 93,272 232,584 336,920
Savings deposits 1,195 1,507 3,447 5,112
Time deposits 147,876 281,773 521,514 1,016,400
Short term borrowings 8,184 27,773 9,536 69,585
Long term borrowings 4,803 13,436 16,362 47,303
----------- ------------- ------------ ------------
Total interest expense 248,230 417,761 783,443 1,475,320
----------- ------------- ------------ ------------
Net interest income 591,218 596,916 1,681,282 1,313,916
Provision for loan losses 15,000 22,500 60,000 67,500
----------- ------------ ------------ ------------
Net interest income after
provision for loan losses 576,218 574,416 1,621,282 1,246,416
Other income:
Loan origination and other fees 662,521 357,740 1,785,506 1,481,156
Loan servicing and subservicing
fees 143,033 198,445 534,841 1,529,714
Gain on sale of mortgage loans 42,607 19,404 97,610 50,264
Merchant banking/ BIDCO income - - - -
Insurance and investment fee income 28,888 16,896 78,701 66,202
Deposit service charges and fees 28,555 25,047 59,288 60,256
Net security gains (losses) 69,733 - 69,733 -
Other 44,537 21,605 107,952 60,589
----------- ------------ ------------ ------------
Total other income 1,019,874 639,137 2,733,631 3,248,181
----------- ------------ ------------ ------------
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended September 30, 2002 and 2001
(Unaudited)
For the Three Month For the Nine Month
Period Ended Period Ended
2002 2001 2002 2001
Other expenses:
Salaries and benefits $ 695,665 $ 793,519 $ 2,111,305 $ 2,598,066
Legal and audit expense 42,652 15,034 122,070 83,648
Occupancy, net 83,473 99,971 266,136 348,470
Data processing and equipment
Expense 107,373 52,851 323,871 207,947
Consulting fees 43,142 42,472 135,702 189,357
Advertising 7,216 28,775 46,199 80,889
Supplies and postage 43,103 78,480 140,460 283,660
Servicing rights amortization 142,589 225,550 410,698 298,821
Mortgage banking expense 102,338 28,470 402,198 63,720
Travel and entertainment 17,693 19,742 66,434 84,991
Insurance 23,507 19,392 65,497 65,582
Other operating expenses 129,988 13,747 366,876 312,113
----------- ------------ ------------ ------------
Total other expenses 1,438,739 1,418,003 4,457,446 4,617,264
----------- ------------ ------------- ------------
Income (loss) before income taxes 157,353 (204,450) (102,533) (122,667)
Income tax expense (benefit)
----------- ------------ ------------- ------------
Net Income (loss) $ 157,353 $ 204,450) $ (102,533) $ (122,667)
=========== ============ ============== =============
Preferred stock dividends 17,950 45,201
----------- ------------- -------------- -------------
Net income (loss) available to
common shareholders $ 157,353 $ (222,400) $ (102,533) $ (167,868)
============ ============= ============== ==============
Basic and diluted loss per common share $ 0.09 $ (0.21) $ (0.05) $ (0.16)
============ ============= ============== ==============
Weighted average shares outstanding
(adjusted for 1 for 2 reverse stock split) 1,937,769 1,046,156 1,922,785 1,030,617
============ ============= ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Periods Ended September 30, 2002 and 2001
(Unaudited)
For the Three Month For the Nine Month
Period Ended Period Ended
2002 2001 2002 2001
Net income (loss) $ 157,353 $ (204,450) $ (102,533) $ (122,667)
Other comprehensive income (loss):
Unrealized gains on securities
available for sale 245,852 230,081 143,676 117,556
Less: reclassification adjustment
for accumulated gains (losses)
included in net income(loss) 69,733 69,733
------------ ------------ ------------- -------------
Other comprehensive income,
before tax effect 176,119 230,081 73,943 117,556
Income tax expense (benefit)
Other comprehensive income,
net of tax 176,119 230,081 73,943 117,556
------------ ------------ ------------- -------------
Comprehensive income (loss) $ 333,472 $ 25,631 $ (28,590) $ (5,111)
============ ============ ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2002 and 2001
(Unaudited)
2002 2001
Cash flow from operating activities:
Net income (loss) $ (102,533) $ (122,667)
Adjustments to reconcile net income (loss)
to net cash from Operating Activities:
Depreciation 217,617 141,693
Amortization 485,699 326,945
Provision for loan losses 60,000 67,500
Net(gain) on mortgage loan sales (97,610) (30,860)
Net(accretion) on investment securities (233,389) (262,168)
Net(gain)on sale of securities available for
Sale (69,733) -
Change in:
Minority interest (10,208) 16,851
Mortgage servicing rights (388,118) (190,960)
Real estate owned (522,638) 66,736
Accounts receivable 694,543 1,130,148
Accounts payable (143,347) (808,506)
Accrued interest receivable 62,635 50,113
Accrued interest payable (107,712) (186,458)
Other assets (115,892) (30,335)
Other liabilities (309) (186,664)
------------- -------------
Net cash(used in)operating activities (270,995) (18,632)
------------- -------------
Cash flow from investing activities:
Purchase of securities available for sale (488,705) -
Proceeds from sales of securities available
for sale 1,034,160 -
Proceeds from maturities and pay downs of
securities available for sale 236,929 472
Loans granted, net of repayments 3,226,014 (1,314,977)
Decrease in Investment in Michigan BIDCO, Inc. - 380,157
Premises and equipment expenditures (174,477) (520,065)
------------ -------------
Net cash provided by (used in)investing
activities 3,833,921 (1,454,413)
------------ -------------
Cash flow used in financing activities:
Net increase (decrease)in deposits (576,882) 1,412,720
Net(decrease)in short term borrowings (91,566) (706,491)
Principal payments on long term borrowings (1,119,000) (127,822)
-Continued-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2002 and 2001
(Unaudited)
2002 2001
Issuance of long term borrowings 20,000 76,280
Issuance of preferred stock - 537,000
Issuance of common stock 128,412 106,602
------------ -------------
Net cash provided by (used in)
financing activities (1,639,036) 1,298,289
------------ -------------
Net change in cash and cash equivalents 1,923,890 (174,756)
Cash and cash equivalents:
Beginning of period 837,550 2,546,620
------------ -------------
End of period $ 2,761,440 $ 2,371,864
============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 891,155 $ 1,659,033
Income taxes $ - $ -
The accompanying notes are an integral part of the consolidated financial
statements.
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See Note 1 of Notes to 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: 1,937,769 and
1,046,156 for the three months ended September 30, 2002 and 2001, respectively;
1,922,785 and 1,030,617 shares for the nine months ended September 30, 2002 and
2001, respectively. The weighted average number of common shares outstanding
reflect the 1 for 2 reverse stock split approved by the shareholders at the
annual meeting held October 25, 2002. 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 September 30,
2002 had a net unrealized loss of approximately $93,000 as compared with a net
unrealized loss of approximately $167,000 at December 31, 2001.
Securities available for sale at September 30, 2002:
($ in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed $ 1,922 $ - $ (93) $ 1,829
U.S Government Securities 26 - 26
-------- -------- -------- --------
$ 1,948 $ - $ (93) $ 1,855
======== ======== ======== ========
Securities available-for-sale at December 31, 2001
($ in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. agency mortgage-backed $ 1,948 $ - $ (111) $ 1,837
U.S. Treasury 479 - (56) 423
-------- -------- ---------- --------
Total $ 2,427 $ - $ (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 September 30, 2002, the Company had net
income of $157,353 compared to a net loss of $204,450 for the three months ended
September 30, 2001. Compared to the third quarter of 2001, substantial profits
were realized at the Bank's Community Banking operations. Gains were realized in
all areas of the Community Banking operation during the quarter, including
decreased interest expense from higher core deposits, increased fee income from
higher mortgage originations, higher fee income from product sales and account
fees, and higher securities portfolio income. The Bank's subsidiary, Midwest
Loan Services, was negatively impacted during the quarter by a $88,617 valuation
allowance as of September 2002 for a decrease in the appraised value of
Midwest's capitalized mortgage servicing. In the third quarter of 2001, the loss
was principally the result of a $224,175 impairment charge to the value of
Midwest Loan Services' mortgage servicing rights portfolio.
For the nine months ended September 30, 2002, a net loss of $102,533 was
realized versus a net loss of $122,667 in the same period in 2001. A profit was
realized at Community Banking versus the prior year loss. However, the decrease
in the mortgage servicing rights valuation as of both June 30 and September 30,
2002 negated the improvements noted above for the nine-month period in 2002.
Similarly, for the same period in 2001, the impairment charge against the
mortgage servicing rights contributed significantly to the loss.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three months ended September 30, 2002 and 2001 (in
thousands):
Pre-tax income (loss) summary for the three and nine months ended
September 30, 2002
Three Months Nine Months
Community Banking $ 141 $ 19
Midwest Loan Services 13 (67)
Corporate Office 3 (55)
------ -------
Total $ 157 $ (103)
====== =======
Pre-tax income (loss) summary for the three and nine months ended September 30,
2001:
Three Months Nine Months
Community Banking $ 87 $(315)
Midwest Loan Services (327) 274
Corporate Office 35 (82)
------- ------
Total $ (205) $(123)
======= =======
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased slightly to $591,218 for the three months
ended September 30, 2002 from $596,916 for the three months ended September 30,
2001. The yield on interest earning assets decreased from 10.17% in the 2001
period to 8.55% in the 2002 period. The cost of interest bearing liabilities
decreased from 4.17% in the 2001 period to 2.57% in the 2002 period. Net
interest income as a percentage of total average earning assets increased from
5.98% to 6.02% in 2002.
Net interest income increased to $1,681,856 for the nine months ended
September 30, 2002 from $1,313,916 for the nine months ended September 30, 2001.
Net interest income for the nine months in 2002 rose from the previous period
because of a higher net yield on interest earning assets. The yield on interest
earning assets decreased from 9.32% in the 2001 period to 8.36% in the 2002
period. The cost of interest bearing liabilities decreased from 4.93% for the
2001 period to 2.70% for the nine months ended September 30, 2002. The net yield
on interest earning assets increased from 4.39% to 5.70%.
Interest income
Interest income decreased to $839,448 in the quarter ended September
30, 2002 from $1,014,677 in the quarter ended September 30, 2001. The average
volume of interest earning assets decreased to $38,950,638 in the 2002 period
from $40,033,601 in the 2001 period. The yield on interest bearing assets
declined from 10.17% in 2001 to 8.55% in 2002. The decrease was due principally
to a general decline in the yield of interest bearing assets responding to the
declining rate environment. Additionally, in third quarter of 2001 the
securities portfolio yielded 26.19% as compared with 11.11% in the same period
in 2002. In 2001, the yield resulted from accelerated income recognized on a
collateralized mortgage obligation. As interest rates declined, the expected
duration period for this bond was shortened. The reduction in the expected
duration period stimulated an accelerated accretion of the bond discount. The
acceleration in the third quarter of 2001 was significantly higher than in the
same period in 2002.
Interest income decreased to $2,464,725 in the nine months ended
September 30, 2002 from $2,789,235 in the nine months ended September 30, 2001.
The average volume of interest earning assets decreased to $39,434,253 in the
2002 period from $39,991,896 in the 2001 period. The overall yield on interest
bearing assets decreased to 8.36% from 9.32%, in response to a declining
interest rate during 2001 and 2002.
Interest Expense
Interest expense decreased to $248,230 in the three months ended
September 30, 2002 from $417,761 in the 2001 period. The decrease was due to a
drop in the yield in 2002 to 2.57% from 4.17% in 2001. The yield declined as the
interest rate liabilities re-priced in the declining rate environment occurring
in 2001 and 2002. Additionally, the lower interest expense was due to lower
interest bearing liabilities. The average volume of interest bearing liabilities
decreased to $38,251,051 in 2002 from $40,199,598 in 2001.
Interest expense decreased to $783,443 in the nine months ended
September 30, 2002 from $1,475,320 in the 2001 period. The decrease was due to a
lower yield on the interest rate liabilities and by a decrease in the volume of
interest bearing liabilities. The yield dropped to 2.70% in 2002 from 4.93% in
2001. As rates dropped in 2001 and 2002, the liabilities re-priced at lower
rates. The volume of interest rate liabilities decreased to $38,844,397 in 2002
from $40,014,903 in 2001.
AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following tables summarize 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 and nine months ended
September 30, 2002 and 2001.
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Loans:
Commercial $18,035,906 $ 392,959 8.64% $15,857,311 $ 369,804 9.35%
Real Estate 13,695,408 277,441 8.04% 16,605,624 325,999 7.87%
Installment/Consumer 3,190,144 69,687 8.67% 4,527,998 129,008 11.43%
---------------------------------- -------------------------------
Total Loans 34,921,458 740,087 8.41% 36,990,933 824,811 8.94%
Investment Securities 3,464,893 97,026 11.11% 2,885,254 188,414 26.19%
Federal Funds & Bank
Deposits 564,287 2,335 1.64% 157,414 1,451 3.70%
---------------------------------- -------------------------------
Total Interest Bearing Assets 38,950,638 839,448 8.55% 40,033,601 1,014,676 10.17%
---------------------------------- -------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 5,985,391 16,175 1.07% 4,210,377 16,456 1.57%
Savings 418,736 1,195 1.13% 351,892 1,507 1.72%
Time 17,458,042 147,876 3.36% 21,515,665 281,773 5.25%
Money Market Accts 12,306,332 69,997 2.26% 10,873,333 76,816 2.83%
Short-term borrowings 1,507,185 8,184 2.15% 2,357,602 27,773 4.73%
Long-term borrowings 575,365 4,803 3.31% 890,729 13,436 6.05%
---------------------------------- -------------------------------
Total Interest Bearing
Liabilities 38,251,051 248,230 2.57% 40,199,598 417,761 4.17%
---------------------------------- -------------------------------
Net Earning Assets, net interest
income, and interest rate
spread $ 699,587 $ 591,218 5.98% $ (165,997) $ 596,916 6.00%
================================== ===============================
Net yield on interest-earning assets 6.02% 5.98%
(1) Yield is annualized.
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Loans:
Commercial $17,991,436 $1,098,679 8.16% $15,552,429 $1,111,936 9.56%
Real Estate 13,646,202 811,488 7.95% 16,043,827 972,979 8.11%
Installment/Consumer 3,375,221 234,668 9.30% 4,879,119 370,482 10.15%
--------------------------------- -------------------------------
Total Loans 35,012,859 2,144,835 8.19% 36,475,375 2,455,397 9.00%
Investment Securities 3,201,903 305,455 12.75% 2,842,687 310,870 14.62%
Federal Funds & Bank
Deposits 1,219,491 14,435 1.58% 673,834 22,968 4.56%
--------------------------------- -------------------------------
Total Interest Bearing Assets 39,434,253 2,464,725 8.36% 39,991,896 2,789,235 9.32%
--------------------------------- -------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 5,105,967 41,031 1.07% 3,270,771 58,209 2.38%
Savings 404,937 3,447 1.14% 359,186 5,112 1.90%
Time 20,387,702 521,514 3.42% 23,458,076 1,016,400 5.79%
Money Market Accts 11,717,429 191,553 2.19% 10,314,021 278,711 3.61%
Short-term borrowings 620,416 9,536 2.06% 1,699,141 69,585 5.48%
Long-term borrowings 607,946 16,362 3.60% 913,708 47,303 6.92%
---------------------------------
Total Interest Bearing
Liabilities 38,844,397 783,443 2.70% 40,014,903 1,475,320 4.93%
--------------------------------- -------------------------------
Net Earning Assets, net interest
income, and interest rate
spread $ 589,856 $1,681,282 5.66% $ (23,007) $1,313,916 4.40%
================================= ==============================
Net yield on interest-earning assets 5.70% 4.39%
(1) Yield is annualized.
Allowance for Loan Losses
The provision to the allowance for loan losses was $60,000 and $67,500
for the nine months period ended September 30, 2002 and 2001, respectively.
Illustrated below is the activity within the allowance for the period ended
September 30 2002 and 2001, respectively.
2002 2001
---- ----
Balance, January 1 $ 579,113 $ 562,997
Provision for loan losses 60,000 67,500
Loan charge-offs (59,581) (43,942)
Recoveries 9,427 17,312
---------- ----------
Balance, September 30 $ 588,959 $ 603,867
========== ==========
At September 30, 2002 At December 31, 2001
Total loans (1) $32,308,158 $35,026,024
Reserve for loan losses $588,959 $579,113
Reserve/Loans % (1) 1.82% 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 a relatively limited geographical area.
The following schedule summarizes the Company's non-performing assets
for the periods indicated:
At September 30, 2002 At December 31, 2001
Past due 90 days and over and still accruing (1):
Real estate $ 232,412 $ 276,654
Installment 13,970 24,194
Commercial - 194,404
--------- ----------
Subtotal 246,382 495,252
Nonaccrual loans (1):
- --------------------
Real estate 167,026 770,024
Installment - -
Commercial 230,000 -
-------- ----------
Subtotal 397,026 770,024
-------- ----------
Other real estate owned 722,638 200,000
--------- ----------
Total non-performing assets $1,366,046 $1,465,276
========== ==========
At September 30, 2002 At December 31, 2001
Ratio of non-performing assets
to total loans (1) 4.23% 4.18%
=========== ===========
Ratio of loans past due over
90 days and nonaccrual loans to
loan loss reserve 109% 218%
=========== ==========
(1) Excludes loans held for sale which are valued at the lower of cost or fair
market value.
During 2002, management directed lending personnel to focus on reducing
delinquencies and act proactively in light of the recession. If the current
economic slowdown persists, loan delinquencies would likely increase, negatively
impacting net interest income.
Other real estate owned at September 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 $150,000. The Bank has a sales contract with a commercial
developer who is planning a major development on the site. The transaction is
expected to close in the first quarter of 2003. 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 $572,638 in other real estate owned at
September 30, 2002 represents houses which are all expected to sale by the first
quarter of 2003. Management anticipates a gain of $50,000 to $100,000 on the
sale of these homes.
Economic conditions in the Bank's primary market area in Ann Arbor were
strong during the period. Management believes that the current allowance for
loan losses is adequate to absorb losses inherent in the loan portfolio,
although the ultimate adequacy of the allowance is dependent upon future
economic factors beyond the Company's control. A downturn in the general
nationwide economy will tend to aggravate, for example, the problems of local
loan customers currently facing some difficulties, and could decrease
residential home prices. A general nationwide business expansion could
conversely tend to diminish the severity of any such difficulties.
Non-Interest Income
Total non-interest income increased to $1,019,874 for the three months
ended September 30, 2002 from $639,137 for the three months ended September
30,2001. The significant increase was primarily due to increased loan
origination and other fees. During the third quarter of 2002, the low mortgage
rates generated significant activity in the mortgage re-financing category.
Income generated from this activity was significantly higher than in the third
quarter of 2001. Midwest has been increasing its emphasis on mortgage loan
originations through its credit union customers. In the first quarter of 2001,
Midwest originated an average of 26 loans per month. This has increased to an
average of 150 loans per month.
Total non-interest income decreased to $2,733,631 for the nine months
ended September 30, 2002 from $3,248,181 for the nine months ended September 30,
2001. The decrease was principally a result of a decrease in 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
September 30, 2002, Midwest was sub-servicing approximately 6,475 loans versus
about 5,000 at December 31, 2001. Midwest anticipates that it will be
subservicing over 10,000 loans effective January 2, 2003.
Non-Interest Expense
Non-interest expense increased slightly to $1,438,739 in the three months
ended September 30, 2002 from $1,418,003 for the three months ended September
30, 2001. Comparing the 2002 period to 2001, increase costs related to the
mortgage banking activity and charges related to other real estate owned
slightly exceeded a general decline in expenses at the Bank and Midwest.
At September 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 $79 million. The
carrying value of these servicing rights was $583,957 at September 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 September 30, 2002 was $142,589 down from an expense of
$225,550 in 2001. For the nine months in 2002, Midwest has taken special
provisions of $275,721 to write down the servicing rights as a result of the
decrease in long term interest rates to 40 year lows.
Non-interest expense decreased to $4,457,446 in the nine months ended
September 30, 2002 from $4,617,264 for the nine months ended September 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. The increase in servicing rights amortization was due to
market conditions as noted above. Relatedly, the mortgage banking expense
increased for the nine month period in 2002 over the same period last year as a
result of a significant increase in mortgage originations.
Capital Resources
The table below sets forth the Bank's risk based assets, capital ratios
and risk-based capital ratios of the Bank. At September 30, 2002, the Bank was
considered "well-capitalized".
(in 000) Items Not Allocation By Risk
Subject To Weight Category
Risk Weighting
Total 0% 20% 50% 100%
Total Bank assets $43,608 (520) 233 3,906 13,228 26,761
--------------------------------------------------
Risk Weighted Assets 34,156 - 781 6,614 26,761
==================================================
Less: Excess allowance for loan losses 162
------------
Total risk-weighted assets $33,994
============
Average total Bank assets for
leverage capital purposes $43,780
Tier 1 Capital Balance
Total Bank equity capital $2,950
Less: Net unrealized losses on available for sale securities (93)
Plus: Qualifying minority interest in consolidated subsidiaries 295
Less: Disallowed goodwill and servicing assets 162
----------
Total Tier 1 Capital 3,176
Tier 2 Capital
llowance for loans & lease losses (net of excess
A above 1.25% of loans) 427
----------
Total Tier 2 Capital 427
----------
Total Tier 1 & Tier 2 Capital $3,603
==========
Capital Ratios
Tier 1/Total Assets 7.25%
Tier 1 /Total Risk-Weighted Assets 9.34%
Tier 1 & 2/Total Risk-Weighted Assets 10.60%
Liquidity
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, borrowings from
correspondent lenders secured by securities, residential mortgage loans and/or
commercial loans. In addition, the Bank invests in overnight federal funds. At
September 30, 2002, the Bank had cash and cash equivalents of $2,761,440. The
Bank has a line of credit for $4.0 million from the Federal Home Loan Bank of
Indianapolis secured by investment securities and residential mortgage loans and
a line of credit for $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 September 30, 2002, the Bank had
$9.9 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 September 30, 2002, the Bank's Tier 1 capital was 7.25%.
At September 30, 2002, $331,000 was payable to another financial
institution as compared to $463,000 at September 30, 2001. Long-term borrowings
at September 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 September 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 re-pricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets re-pricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on such rights by lowering
required amortization rates on the rights. Rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the retail mortgage banking operations of the Bank and Midwest Loan
Services. Rising interest rates also slow Midwest Loan Services' rate of growth,
but increases the duration of its existing sub-servicing contracts.
Falling long term and short term interest rates tend to decrease the
value of Midwest Loan Services' investment in mortgage servicing rights and
decrease Midwest Loan Services' current return on such rights by increasing
prepayments, by increasing amortization rates on the rights, and in some cases,
by impairment of the rights. Falling interest rates tends to increase new
mortgage origination activity, positively impacting current income from the
retail mortgage banking operations of the Bank and Midwest Loan Services.
Falling interest rates also increases Midwest Loan Services' rate of growth of
new subservicing contracts, but decreases the duration of its existing
sub-servicing contracts.
The Bank performs a static gap analysis that has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on the following page details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at September 30, 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 September 30, 2002 was estimated to
be ($9,365,000) or (21.48)%.
UNIVERSITY BANK
Asset/Liability Position Analysis as of September 30, 2002
(Dollar amount in Thousand's)
Maturing or Re-pricing in
3 Months 91 Days to 1 - 3 3 - 5 Over 5 ALL
ASSETS Or Less 1 Year Years Years Years Other Total
- ------ ------- ------ ----- ----- ----- ----- -----
Loans - Net $11,428 $2,510 $3,429 12,924 $3,297 $(589) $32,999
Non-Accrual Loans - - - - 397 397
Securities 240 1000 615 - - - 1,855
Other Assets - 600 - - - 4,996 5,596
Cash and Due from Banks 1424 - - - - 1,337 2,761
---------------------------------------------------------------------------------------------
TOTAL ASSETS 13,092 4,110 4,044 12,924 3,297 6,141 43,608
---------------------------------------------------------------------------------------------
LIABILITIES
- -----------
CD's under $100,000 5,907 6,795 3,042 587 279 - 16,610
CD's over $100,000 310 1,049 890 100 120 - 2,469
MMDA 6,139 6,139 - - - - 12,278
NOW - - 6,445 - - - 6,445
Demand and Escrow - - - - 1,374 1,374
Savings - - 445 - - - 445
Other Borrowings - 228 - - - 228
Other Liabilities - - - 809 809
Equity - - - - - 2,950 2,950
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,356 14,211 10,822 687 399 5,133 43,608
---------------------------------------------------------------------------------------------
GAP 736 (10,101) (6,778) 12,237 2,898 1,008 -
=============================================================================================
CUMULATIVE GAP $736 $(9,365) $16,143) $3,906) $1,008) $-
==================================================================================
GAP PERCENTAGE 1.69% -21.48% -37.02% -8.96% -2.31% 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 4. Submission of Matters to a Vote of the Security-Holders
On October 25, 2002, the 2002 Annual Meeting of Stockholders of the
Company was held. The following is a brief description of the matters
voted upon at the meeting and tabulation of the voting therefor:
1. Election of seven directors to serve until the next Annual Meeting
of Stockholders:
Number of Votes
Nominee For Withheld
Gary Baker 2,191,189 2,051
Robert Goldthrope 2,191,489 1,751
Joseph L Ranzini 2,191,156 2,084
Dr. Joseph L. Ranzini 2,191,156 2,084
Paul L. Ranzini 2,191,156 2,084
Stephen L. Ranzini 2,191,156 2,084
Michael Talley 2,191,564 1,676
There were no broker non-votes with respect to the election of
directors.
2. The proposal to an amendment to University Bancorp's Amended and
Restated Certificate of Incorporation effecting a 1-for-2 reverse split
of University Bancorp's common stock was approved with 2,161,203 votes
cast for, 11,926 votes cast withheld, 20,011 votes abstained and 0
broker non-votes.
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.
November 14, 2002 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President
November 14, 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
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Nicholas K. Fortson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of University
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 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
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen Lange Ranzini, certify that:
1. I have reviewed this quarterly report on Form 10-Q of University
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002
/s/Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President
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 the accompanying Quarterly Report on Form 10-Q of
University Bancorp, Inc. for the quarter ended September 30, 2002 we Stephen L.
Ranzini, President 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 September 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 September 30, 2002,
fairly presents, in all material respects, the financial condition and
results of operations of University Bancorp, Inc.
November 14, 2002
/s/Stephen L. Ranzini
Stephen L. Ranzini
President
/s/Nicholas K. Fortson
Nicholas K. Fortson
Chief Financial Officer