25 Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission File Number 0-16023 UNIVERSITY BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 38-2929531 -------- ---------- (State of incorporation) (IRS Employer Identification Number) 959 Maiden Lane, Ann Arbor, Michigan 48105 - ------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (734) 741-5858 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 par value outstanding at April 30, 2004: 4,090,548 shares page 1 of 26 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 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Summary 12 Results of Operations 13 Capital Resources 17 Liquidity 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 PART II - Other Information Item 1. Legal Proceedings 21 Item 5. Other Information 21 Item 6. Exhibits & Reports on Form 8-K 21 Signatures 22 Certifications 23 - ------------------------------------------------------------ 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 March 31, 2004 (Unaudited) and December 31, 2003 March 31, December 31, ASSETS 2004 2003 ------------------ ----------------- Cash and due from banks $ 1,779,368 $ 2,171,189 Securities available for sale, at market 1,576,974 1,649,169 Federal Home Loan Bank Stock 881,100 881,100 Loans held for sale, at the lower of cost or market 941,800 206,008 Loans 35,632,943 34,928,586 Allowance for loan losses (521,896) (454,118) ------------------ ------------------ Loans, net 35,111,047 34,474,468 Premises and equipment, net 858,000 829,807 Investment in Michigan BIDCO Inc. 29,258 629,258 Investment in Michigan Capital Fund LPI 231,244 256,244 Mortgage servicing rights , net 907,412 1,031,575 Real estate owned, net 809,150 429,500 Accounts receivable 91,274 122,067 Accrued interest receivable 112,403 129,808 Prepaid expenses 219,950 183,143 Goodwill, net 103,914 103,914 Other assets 366,586 451,290 ------------------ ------------------ TOTAL ASSETS $ 44,019,480 $ 43,548,540 ================== ================== -Continued- UNIVERSITY BANCORP, INC. Consolidated Balance Sheets (continued) March 31, 2004 (Unaudited) and December 31, 2003 March 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003 ------------------ ------------------ Liabilities: Deposits: Demand - non interest bearing $ 3,322,998 $ 3,146,688 Demand - interest bearing 23,687,365 25,827,337 Savings 440,332 377,545 Time 10,149,120 9,455,982 ------------------ ------------------ Total Deposits 37,599,815 38,807,552 Short term borrowings 1,870,500 0 Long term borrowings 133,000 166,000 Accounts payable 243,148 289,150 Accrued interest payable 47,659 51,613 Other liabilities 300,861 354,273 ------------------ ------------------ Total Liabilities 40,194,983 39,668,588 Minority Interest 427,786 445,324 Stockholders' equity: Common stock, $0.01 par value; Authorized - 5,000,000 shares; Issued -4,205,732 shares at March 31, 2004 and 4,141,732 shares at December 31, 2003 42,057 41,417 Additional paid-in-capital 5,800,300 5,677,940 Accumulated deficit (2,089,932) (1,905,404) Treasury stock - 115,184 shares at March 31, 2004 and December 31, 2003 (340,530) (340,530) Accumulated other comprehensive loss, unrealized losses on securities available for sale, net (15,184) (38,795) ------------------ ------------------ Total Stockholders' Equity 3,396,711 3,434,628 ------------------ ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,019,480 $ 43,548,540 ================== ================== The accompanying notes are an integral part of the consolidated financial statements. UNIVERSITY BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Three Month Periods Ended March 31, 2004 and 2003 (Unaudited) 2004 2003 ---------------- ----------------- Interest income: Interest and fees on loans $ 595,410 $ 631,339 Interest and dividends on securities: U.S. Government agencies 20,447 35,284 Other securities 19,001 23,250 Interest on federal funds and other 183 4,987 ---------------- ---------------- Total interest income 635,041 694,860 ---------------- ---------------- Interest expense: Interest on deposits: Demand deposits 106,102 91,506 Savings deposits 1,174 1,281 Time deposits 74,726 131,067 Short term borrowings 2,758 - Long term borrowings 1,857 3,558 ---------------- ---------------- Total interest expense 186,617 227,412 ---------------- ---------------- Net interest income 448,424 467,448 Provision for loan losses 22,500 105,900 ---------------- ---------------- Net interest income after provision for loan losses 425,924 361,548 ---------------- ---------------- Other income: Loan servicing and subservicing fees 333,925 200,711 Initial loan set-up and other fees 382,551 822,085 Gain on sale of mortgage loans 89,352 183,705 Insurance and investment fee income 56,549 48,048 Deposit service charges and fees 25,550 28,127 Other 75,963 39,300 ---------------- ---------------- Total other income 963,890 1,321,976 ---------------- ---------------- -Continued- UNIVERSITY BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (continued) For the Three Month Periods Ended March 31, 2004 and 2003 (Unaudited) 2004 2003 ---------------- ---------------- Salaries and benefits $ 724,143 $ 785,308 Occupancy, net 113,263 88,897 Data processing and equipment 124,085 108,226 Legal and audit expense 36,693 37,774 Consultant fees 35,023 33,438 Mortgage banking expense 64,531 169,563 Servicing rights amortization 210,457 102,173 Advertising 30,898 25,963 Memberships and training 25,399 21,118 Travel and entertainment 25,486 27,178 Supplies and postage 45,228 45,946 Insurance 32,351 21,574 Other operating expenses 106,785 143,114 ---------------- ---------------- Total other expenses 1,574,342 1,610,272 ---------------- ---------------- Income (loss) before income taxes (184,528) 73,252 ---------------- ---------------- Income tax expense (benefit) - - ---------------- ---------------- Net income (loss) $ (184,528) $ 73,252 ================ ================ Basic and diluted income (loss) per common share $ (0.05) $ 0.02 ================ ================ Weighted average shares outstanding -Basic 4,058,108 3,899,548 ================ ================ Weighted average shares outstanding -Diluted 4,136,177 3,900,774 ================ ================ See accompanying notes to consolidated financial statements (unaudited). UNIVERSITY BANCORP, INC. Consolidated Statements of Comprehensive Income (Loss) For the Three Month Periods Ended March 31, 2004 and 2003 (Unaudited) 2004 2003 ----------------- --------------- Net income (loss) $(184,528) $ 73,252 Other comprehensive income (loss): Unrealized gains/(losses) on securities available for sale 22,301 16,914 Less: reclassification adjustment for accumulated (losses)/gains included in net income (loss) 1,311 - ----------------- --------------- Other comprehensive income/(loss), before tax effect 23,612 16,914 Income tax expense (benefit) - - Other comprehensive income (loss), net of tax 23,612 16,914 ----------------- --------------- Comprehensive income(loss) $(160,916) $90,166 ================= =============== See accompanying notes to consolidated financial statements (unaudited). UNIVERSITY BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the three month periods ended March 31, 2004 and 2003 (Unaudited) 2004 2003 ------------------- ------------------ Cash flow from operating activities: Net income (loss) $ (184,528) $ 73,252 Adjustments to reconcile net income (loss) to net cash from Operating Activities: Depreciation 53,848 73,653 Amortization 235,457 127,173 Provision for loan losses 22,500 105,900 Net loss (gain) on sale of securities (1,311) - Gain on mortgage loan sales (89,352) (183,705) Originations of mortgage loans (12,019,905) (37,251,962) Proceeds from mortgage loans sales 11,373,465 37,711,810 Net accretion on investment securities (12,482) (10,887) Change in: Real estate owned - 135,096 Other assets 9,801 (382,149) Other liabilities (120,906) (10,785) ------------------- ------------------ Net cash (used in) provided by operating activities (733,413) 387,396 ------------------- ------------------ Cash flow from investing activities: Purchase of investment securities (7,388) (92,567) Proceeds from maturities/paydowns of investment securites 109,384 491,667 Proceeds from sales of investment securities 7,006 - Loans granted, net of repayments (438,729) 40,046 Premises and equipment expenditures (82,041) (35,035) ------------------- ------------------ Net cash (used in) provided by investing activities (411,171) 404,111 ------------------- ------------------ -Continued- UNIVERSITY BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the three month periods ended March 31, 2004 and 2003 (Unaudited) 2004 2003 ------------------- ------------------ Cash flow used in financing activities: Net (decrease) increase in deposits (1,207,737) (1,486,937) Net (decrease) in short term borrowings 1,870,500 - Principal payments on long term borrowings (33,000) (33,000) Issuance of common stock 123,000 - ------------------- ------------------ Net cash provided by(used in) financing activities 752,763 (1,519,937) ------------------- ------------------ (391,821) (728,430) Net change in cash and cash equivalents Cash and cash equivalents: Beginning of period 2,171,189 2,569,469 ------------------- ------------------ End of period $ 1,779,368$ 1,841,039 =================== ================== Supplemental disclosure of cash flow information: Cash paid for interest $ 190,571 $ 245,045 Supplemental disclosure of non-cash transactions: Mortgage loans converted to other real estate owned $ 379,650 $ - Michigan BIDCO Preferred stock exchanged for a 7.5% promissory note $ 600,000 $ - See accompanying notes to consolidated financial statements (unaudited). UNIVERSITY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) General See Note 1 of the Financial Statements incorporated by reference in the Company's 2003 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 2003 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: 4,058,108 and 3,899,548 for the three months ended March 31, 2004 and 2003, respectively. (2) Investment Securities The Bank's available-for-sale securities portfolio at March 31, 2004 had a net unrealized loss of approximately $16,000 as compared with a net unrealized loss of approximately $39,000 at December 31, 2003. Securities available for sale at March 31, 2004(in thousands): Gross Gross Amortized Realized Unrealized Fair Cost Gains Losses Value ---------------- ---------------- ---------------- ---------------- Stocks and other securities $ 13 $ 11 $ (1) $ 23 ---------------- ---------------- ---------------- ---------------- U.S. agency mortgage-backed 1,580 - (26) 1,554 ---------------- ---------------- ---------------- ---------------- Total $1,593 $ 11 $ (27) $ 1,577 ================ ================ ================ ================ Securities available for sale at December 31, 2003 Gross Gross Amortized Realized Unrealized Fair Cost Gains Losses Value ---------------- ---------------- ---------------- ---------------- Stocks and other securities $ 12 $ - $ - $ 12 ---------------- ---------------- ---------------- ---------------- U.S. agency mortgage-backed 1,676 - (39) 1,637 ---------------- ---------------- ---------------- ---------------- Total $1,688 $ - $ (39) $ 1,649 ================ ================ ================ ================ (3) Stock options At March 31, 2004, the Company has a stock-based employee compensation plan. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price greater than or equal to the market value of the underlying common stock on the date of grant. As new options granted were only 48,000 and 10,000 during the quarters ended March 31, 2004 and 2003, the effect on net income (loss) and earnings (loss) per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, as amended by FASB Statement No. 148, to stock-based employee compensation was less than $.01 in each of the periods presented. (4) Michigan BIDCO At December 31, 2003 University Bancorp owned 6.10% of the BIDCO. The Bank also held $600,000 of 7.5% cumulative preferred stock of the BIDCO. On March 24, 2003, the Bank exchanged its preferred stock in BIDCO for a note from a company in which Stephen Lange Ranzini, the Bank's President, is a shareholder. The note is collateralized by all assets of the company. The note bears interest at 7.5% and is due not later than December 31, 2004. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains certain forward-looking statements which reflect the Company's expectation or belief concerning future events that involve risks and uncertainties. Among others, certain forward looking statements relate to the continued growth of various aspects of the Company's community banking, merchant banking, mortgage banking and investment activities, and the nature and adequacy of allowances for loan losses. The Company can give no assurance that the expectations reflected in forward-looking statements will prove correct. Various factors could cause results to differ materially from the Company's expectations. Among these factors are those referred to in the introduction to the Company's Management Discussion and Analysis of Financial Condition and Results of Operations which appear as Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which should be read in conjunction with this Report. The above cautionary statement is for the purpose of qualifying for the "safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934. SUMMARY Net (loss) income for the Company for the first quarter of 2004 was $(184,528), versus $73,252 for the same period last year. Community Banking incurred a loss of $53,000 during the current year's first quarter of 2004 a decrease from a loss of $137,000 in the prior year. The reduced loss is attributed to aggressive action to reduce expenses, particular in the salary and benefits category, partially offset by $39,000 of expenses to liquidate foreclosed real estate. Midwest Loan Services, the Bank's subsidiary, incurred a loss of $115,000 for the three month period March 31, 2004 as opposed to a profit of $137,000 in the same period in 2003. The income from loan origination was down due to lower mortgage re-financing activity. Additionally, management recorded an impairment in the mortgage servicing rights of $156,000 due to a temporary drop in the mortgage rates during March 2004. Subsequent to March the mortgage rates rose. The following table summarizes the pre-tax income (loss) of each profit center of the Company for the three months ended March 31, 2004 and 2003 (in thousands): 2004 2003 ---- ---- Community Banking $ (53) $ (137) Midwest Loan Services (115) 240 Corporate Office (17) (30) -------- -------- Total $ (185) $ 73 ======== ======== RESULTS OF OPERATIONS Net Interest Income Net interest income decreased 4.1% to $448,426 for the three months ended March 31, 2004 from $467,448 for the three months ended March 31, 2003. Net interest income declined primarily because of a lower earning asset base and lower rates on those assets. The net interest spread decreased from 4.75% in 2003 to 4.65% in 2004. Interest income Interest income decreased 8.6% to $635,041 in the quarter ended March 31, 2004 from $694,860 in the quarter ended March 31, 2003. An increase in non-accrual loans and other real estate owned was a major component in the decline. The overall yield on total interest bearing assets was 6.46% in 2004 as compared to 7.03% in the same period in 2003. The average volume of interest earning assets decreased by $675,255 to $39,411,303 in the 2004 period from $40,086,558 in the 2003 period. Interest Expense Interest expense decreased 17.9% to $186,617 in the three months ended March 31, 2004 from $227,412 in the 2003 period. The decrease was principally due to a shift from higher cost Time Deposits to lower cost Money Market Accounts. Over the last year, management of the Bank has aggressively pursued building its core deposit base and reducing its dependence on brokered funds. At March 31, 2004 the Bank had $1.1 million in brokered time deposits as compared to $5.9 million at March 31, 2003. The cost of funds decreased to 1.82% in the 2004 period from 2.28% in the 2003 period. MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS The following table summarizes monthly average balances, revenues from earning assets, expenses of interest bearing liabilities, their associated yield or cost and the net return on earning assets for the three months ended March 31, 2004 and 2002. Three Months Ended Three Months Ended ------------------------------------------- --------------------------------------- March 31, 2004 March 31, 2003 ------------------------------------------- --------------------------------------- Average Interest Average Average Interest Average Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1) Interest Earning Assets: Commercial Loans $ 16,962,760 292,288 6.91% $ 18,998,030 $ 357,987 7.64% Real Estate Loans 17,369,982 262,589 6.06% 12,465,046 217,937 7.09% Installment/Consumer Loans 1,900,793 40,533 8.55% 2,500,759 55,415 8.99% -------------------------------- ------------------------------ Total Loans 36,233,535 595,410 6.59% 33,963,835 631,339 7.54% Investment Securities 3,027,939 39,448 5.23% 4,346,189 58,534 5.46% Federal Funds & Bank Deposits 149,829 183 0.49% 1,776,534 4,987 1.14% -------------------------------- ------------------------------ Total Interest Bearing Assets 39,411,303 635,041 6.46% 40,086,558 694,860 7.03% -------------------------------- ------------------------------ Interest Bearing Liabilities: Demand Deposits 6,501,858 14,298 0.88% 6,558,035 11,894 0.74% Savings Deposits 402,200 1,174 1.17% 459,433 1,281 1.13% Time Deposits 13,658,810 74,726 2.19% 17,498,374 131,067 3.04% Money Market Accts 19,600,250 91,804 1.88% 15,208,816 79,612 2.12% Short-term Borrowings 828,349 2,758 1.34% 472,079 0 0.00% Long-term Borrowings 149,500 1,857 4.98% 281,500 3,558 5.13% -------------------------------- ------------------------------ Total Interest Bearing Liabilities 41,140,967 186,617 1.82% 40,478,237 227,412 2.28% -------------------------------- ------------------------------ Net Earning Assets, net interest income, and interest rate spread $ (1,729,664) $ 448,426 4.65% $(391,679) $ 467,448 4.75% ================================ ============================== Net Interest Margin 4.57% 4.73% (1) Yield is annualized. Allowance for Loan Losses The provision to the allowance for loan losses was $22,500 for the quarters ended March 31, 2004 and $105,900 for the same period ended in 2003. Net charge-offs totaled ($45,278) for the three month period ended March 31, 2004 as compared to $115,107 for the same period in 2003. Illustrated below is the activity within the allowance for the quarter ended March 31 2004 and 2003, respectively. 2004 2003 ---- ---- Balance, January 1 $ 454,118 $ 408,219 Provision for loan losses 22,500 105,900 Loan charge-offs - (117,342) Recoveries 45,278 2,235 ---------- ----------- Balance, March 31 $ 521,896 $ 399,012 ========== =========== At March 31, 2004 At December 31, 2003 ----------------- -------------------- Total loans (1) $35,632,943 $34,928,586 Reserve for loan losses $ 521,896 $ 454,118 Reserve/Loans % (1) 1.46% 1.30% The Bank's overall loan portfolio is geographically concentrated in Ann Arbor, Michigan and the future performance of these loans is dependent upon the performance of a relatively limited geographical area. The following schedule summarizes the Company's non-performing assets: At March 31, 2004 At December 31, 2003 ----------------- -------------------- Past due 90 days and over and still accruing (1): Real estate $ - $ - Installment - - Commercial - - ------------ ------------ Subtotal - - Nonaccrual loans (1): Real estate 163,903 111,020 Installment - 5,128 Commercial 950,605 1,000,979 ------------ ------------ Subtotal 1,114,508 1,117,127 ------------ ------------ Other real estate owned 809,150 429,500 ------------ ------------ Total nonperforming assets $1,923,658 $1,546,627 ============ ============== At March 31, 2004 At December 31, 2003 ----------------- -------------------- Ratio of non-performing assets to total loans (1) 5.40% 4.43% ============ ============== Ratio of loans past due over 90 days and non-accrual loans to loan loss reserve 214% 246% ============ ============== (1) Excludes loans held for sale which are valued at fair market value. Other real estate owned increased from 429,500 at December 31, 2003 to $809,150 at March 31, 2004 as the sesult of foreclosure on four single family homes. Subsequent to March 21, 2004, substantial progress was made in resolving non-performing assets, including real estate owned. As of May 10, 2004, three of the four houses in other real estate owned were sold and the remaining home is under a contract to sell within 30 days. Management is expecting to add additional properties to the other real estate owned category from the non-accrual loan category in the second quarter of 2004. Certain of these properties are in the redemption period. It is management's intent to liquidate these properties for fair value as quickly as possible if the loans are not paid in full in the next 60 days. Management believes that the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio, although the ultimate adequacy of the allowance for loan losses is dependent upon future economic factors beyond our control. A downturn in the general nationwide economy will tend to aggravate, for example, the problems of local loan customers currently facing some difficulties. A general nationwide business expansion could result in fewer loan customers being unable to repay their loans. Non-Interest Income Total non-interest income decreased 27.1% to $963,890 for the three months ended March 31, 2004 from $1,321,976 for the three months ended March 31, 2003. The decrease was primarily due to lower mortgage loan origination activity. In 2004, the rates on mortgages rose from historically low environment in 2003 and this resulted in a decrease in the re-financing market. At March 31, 2004, the Bank and Midwest owned the rights to service mortgages for Fannie Mae, Freddie Mac and other institutions, most of which was owned by Midwest, an 80% owned subsidiary of the Bank. The balance of mortgages serviced for these institutions was approximately $112 million. The carrying value of these servicing rights was $907,412 at March 31, 2003. 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. At March 31, 2004, Midwest was subservicing 16,295 mortgages, an increase of 8.40% from 15,033 mortgages at December 31, 2003. Non-Interest Expense Non-interest expense decreased 2.2% to $1,574,342 in the three months ended March 31, 2004 from $1,610,272 for the three months ended March 31, 2003. The decrease was due principally to lower salaries and benefits and mortgage banking expenses. In general, these expenses declined due to a slow down in the mortgage re-financing market. The reduction in these categories were offset to a large degree by an increase in the amortization of servicing rights. Servicing rights amortization increased due to a $156,000 impairment charge. This charge resulted from a valuation lower than carrying cost. During March 2004, the mortgage rates dipped for a short period of time. This drop significantly impacted the valuation. Income Taxes Income tax expense (benefit) was $0 in 2004 and 2003. The effective tax rate was 0% for both three month periods ended March 31 due to existence of loss carryforwards resulting from prior years net operating losses. Future tax benefits have not been recognized as their realization is not considered more likely than not. Capital Resources The table below sets forth the Bank's risk based assets, capital ratios and risk-based capital ratios of the Bank. At March 31, 2004, the Bank was considered "well-capitalized". March 31, 2004 TIER 1 CAPITAL (in $000s) Total Equity Capital $3,397 Less: Unrealized losses on available-for-Sale Securities (15) Plus: Minority Interest 428 Less: Other identifiable Intangible Assets 195 ------- Total Tier 1 Capital 3,619 TIER 2 CAPITAL Allowance for loans & Lease losses 522 Less: Excess Allowance 69 Total Tier 2 Capital 453 Total Tier 1 & Tier 2 Capital $4,072 ======== CAPITAL RATIOS Tier 1/Total Average Assets of $43,920 8.24% Tier 1/Total Risk-Weighted Assets of $34,342 10.54% Tier 1 & 2/Total Risk-Weighted Assets of $34,324 11.86% Liquidity Bank Liquidity. The Bank's primary sources of liquidity are customer deposits, scheduled amortization and prepayments of loan principal, cash flow from operations, maturities of various investments, borrowings from correspondent lenders secured by securities, residential mortgage loans and/or commercial loans. In addition, the Bank invests in overnight federal funds. At March 31, 2004, the Bank had cash and cash equivalents of $1,779,368. The Bank has a line of credit for $4.0 million from the Federal Home Loan Bank of Indianapolis secured by investment securities and residential mortgage loans and a line of credit for $5.9 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 March 31, 2004, the Bank had $1.1 million of these deposits outstanding. Bancorp Liquidity. In an effort to maintain the Bank's Tier 1 capital to assets ratio above current levels and to increase capital through retained earnings, management does not expect that the Bank will pay dividends to the Company during the first half of 2004, though a dividend may begin in the second half of the year. At March 31, 2004, $133,000 in debt was outstanding as compared to $265,000 at March 31, 2003. At March 31, 2004, Bancorp had $87,531 in cash and investments on hand to meet its working capital needs. Subsequent to March 31, 2004, Bancorp exchange its shares in Michigan BIDCO carried at cost of $29,258 for shares of another firm with an estimated value of $54,000. The cash on hand plus cash from the exercise of in-the-money stock options and the ultimate proceeds from the sale of these shares should be sufficient to fully amortize the remaining debt. 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 subservicing contracts. The Bank performs a static gap analysis which has limited value as a simulation because of competitive and other influences that are beyond the control of the Bank. The table on the following page details the Bank's interest sensitivity gap between interest-earning assets and interest-bearing liabilities at March 31, 2004. The table is based upon various assumptions of management which may not necessarily reflect future experience. As a result, certain assets and liabilities indicated in the table as maturing or re-pricing within a stated period may, in fact, mature or re-price in other periods or at different volumes. The one-year static gap position at March 31, 2004 was estimated to be ($13,937,000) or -31.66%. In addition, management prepares an estimate of sensitivity to immediate changes in short term interest rates. At March 31, 2004, the following impact was estimated on net interest margin in the 12 months following an immediate movement of interest rates: Effect on Net Rate Change Interest Margin -1.00% 2.23% +1.00% -1.80% +3.00% -5.39% Asset/Liability Position Analysis as of March 31, 2004 (Dollar amounts in Thousands) Maturing or Repricing in 3 Mos 91 Days to 1 - 3 3 - 5 Over 5 ALL ASSETS Or Less 1 Year Years Years Years Other Total - ------ ------- ------ ----- ----- ----- ----- ----- Loans - net $ 7,948 $ 3,384 $ 5,540 $14,591 $ 3,999 $ (522) $34,940 Non-accrual loans - - - - - 1,114 1,114 Securities 200 500 - - 877 - 1,577 Other assets - - - - - 4,609 4,609 Cash and Due from Banks 57 - - - - 1,722 1,779 --------------------------------------------------------------------------------------------- Total assets 8,205 3,884 5,540 14,591 4,876 6,923 44,019 --------------------------------------------------------------------------------------------- LIABILITIES - ----------- Time deposits 1,763 3,222 4,429 311 424 - 10,149 Demand -interest Bearing 9,519 9,518 6,799 - - - 25,837 Demand - non interest - - - - 1,175 1,175 Savings - - 440 - - - 440 Borrowings 1,904 100 - - - 2,004 Other liabilities - - - 1,018 1,018 Stockholders' equity - - - - - 3,397 3,397 --------------------------------------------------------------------------------------------- Total liabilities 13,186 12,840 11,668 311 424 5,590 $44,019 --------------------------------------------------------------------------------------------- Gap (4,981) (8,956) (6,128) 14,280 4,452 1,333 --------------------------------------------------------------------------------------------- Cumulative gap $(4,981) $(13,937) $(20,065) $(5,785) $(1,333) $ 0 ============================================================================================= Gap percentage -11.32% -31.66% -45.58% -13.14% -3.03% 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. None. (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: May 14, 2004 /s/ Stephen Lange Ranzini ------------------------- Stephen Lange Ranzini President and Chief Executive Officer /s/ Nicholas K. Fortson Nicholas K. Fortson Chief Financial Officer 10-Q 302 CERTIFICATION I, Stephen Lange Ranzini certify that: 1) I have reviewed this quarterly report on Form 10-Q of University Bancorp, Inc.; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-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. Date: May 14, 2004 /s/Stephen Lange Ranzini ---------------------------------- Stephen Lange Ranzini President and Chief Executive Officer 10-Q 302 CERTIFICATION I, Nicholas K. Fortson certify that: 1) I have reviewed this quarterly report on Form 10-Q of University Bancorp, Inc.; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-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. Date: May 14, 2004 /s/Nicholas K. Fortson ---------------------- Nicholas K. Fortson Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of University Bancorp, Inc. (the "Registrant") on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on May 13, 2003, hereof (the "Report"), the undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. University Bancorp, Inc Date: May 14, 2004 By: /s/ Stephen Lange Ranzini ---------------- -------------------------- Stephen Lange Ranzini President and Chief Executive Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of University Bancorp, Inc. (the "Registrant") on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on May 13, 2003, hereof (the "Report"), the undersigned officers certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. University Bancorp, Inc Date: May 14, 2004 By: /s/ Nicholas K. Fortson -------------------------- Nicholas K. Fortson Chief Financial Officer