1
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, 2001
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 May 11, 2001: 2,087,801 shares
page 1 of 24 pages
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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 Cash Flows 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Summary 9
Results of Operations 10
Capital Resources 16
Liquidity 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
PART II - Other Information
Item 1. Legal Proceedings 20
Item 5. Other Information:
Parent Company Financial Information 20
Item 6. Exhibits & Reports on Form 8-K 20
Signatures 24
- --------------------------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals, which are in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
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Part I. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2001 (Unaudited) and December 31, 2000
March 31, December 31,
ASSETS 2001 2000
------------------------- -------------------------
Cash and due from banks $ 1,891,983 $ 2,537,313
Short term investments 1,506,440 9,307
----------------------- -----------------------
Total cash and cash equivalents 3,398,423 2,546,620
Securities available for sale, at market 2,035,631 1,944,629
Federal Home Loan Bank Stock 848,400 848,400
Loans held for sale, at the lower of cost or market 875,122 267,570
Loans 34,936,302 36,206,544
Allowance for loan losses (590,239) (562,997)
----------------------- -----------------------
Loans, net 34,346,063 35,643,547
Premises and equipment, net 1,591,265 1,375,757
Investment in Michigan BIDCO Inc. 1,030,384 1,277,384
Investment in Michigan Capital Fund LPI 531,904 556,904
Mortgage servicing rights, net 572,204 582,210
Real estate owned, net 399,623 340,881
Accounts receivable 837,493 1,639,962
Accrued interest receivable 311,639 307,600
Prepaid expenses 196,384 168,195
Goodwill, net 132,441 139,412
Other assets 40,747 31,582
----------------------- -----------------------
TOTAL ASSETS $ 47,147,723 $ 47,670,653
======================= =======================
-Continued-
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4
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
March 31, 2001 (Unaudited) and December 31, 2000
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------------------- -------------------------
Liabilities:
Deposits:
Demand - non interest bearing $ 2,283,947 $ 3,062,013
Demand - interest bearing 12,900,970 13,106,221
Savings 371,012 368,928
Time 26,841,904 21,641,561
----------------------- -----------------------
Total Deposits 42,397,833 38,178,723
Short term borrowings 0 4,093,954
Long term borrowings 969,410 926,130
Accounts payable 709,900 1,474,963
Accrued interest payable 282,839 426,470
Other liabilities 113,126 245,381
----------------------- -----------------------
Total Liabilities 44,473,108 45,345,621
Minority Interest 313,795 282,750
Stockholders' equity:
Preferred stock, $0.001 par value; $1,000
liquidation value; Authorized - 500,000 shares;
Issued 1,025 shares in 2001 and 725 shares in 2000 1,025,000 725,000
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 2,142,985 shares in 2000 and 1999 21,430 21,430
Additional paid-in-capital 3,817,608 3,817,608
Accumulated deficit (1,831,500) (1,846,627)
Treasury stock - 115,184 shares in 2001 and 2000 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities available for sale, net (331,188) (334,599)
----------------------- -----------------------
Total Stockholders' Equity 2,360,820 2,042,282
----------------------- -----------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 47,147,723 $ 47,670,653
======================= =======================
The accompanying notes are an integral part of the consolidated financial
statements.
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5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 2001 and 2000
(Unaudited)
2001 2000
----------------------- -----------------------
Interest income:
Interest and fees on loans $ 837,188 $ 719,855
Interest and dividends on securities:
U.S. Government agencies 87,395 35,277
Other securities 16,736 16,875
Interest on federal funds and other 2,479 388
--------------------- ---------------------
Total interest income 943,798 772,395
--------------------- ---------------------
Interest expense:
Interest on deposits:
Demand deposits 135,455 146,806
Savings deposits 1,912 1,441
Time deposits 361,623 218,604
Short term borrowings 37,638 46,355
Long term borrowings 16,183 48,795
--------------------- ---------------------
Total interest expense 552,811 462,001
--------------------- ---------------------
Net interest income 390,987 310,394
Provision for loan losses 22,500 1,000
--------------------- ---------------------
Net interest income after
provision for loan losses 368,487 309,394
--------------------- ---------------------
Other income:
Loan servicing and subservicing fees 580,038 156,053
Initial loan set-up and other fees 493,722 131,738
Gain on sale of mortgage loans 9,265 6,806
Merchant banking/ BIDCO income 0 209,811
Insurance and investment fee income 23,390 23,554
Deposit service charges and fees 16,047 14,585
Net security gains (losses) 0 3,501
Other 14,554 6,338
--------------------- ---------------------
Total other income 1,137,016 552,386
--------------------- ---------------------
-Continued-
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UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
For the Three Month Periods Ended March 31, 2001 and 2000
(Unaudited)
2001 2000
----------------------- -----------------------
Salaries and benefits $ 824,211 $ 467,724
Occupancy, net 104,412 70,371
Data processing and equipment 79,190 83,897
Legal and audit expense 43,258 134,771
Consultant fees 73,730 14,707
Mortgage banking expense 39,314 22,855
Servicing rights amortization 21,626 50,031
Goodwill amortization 6,971 0
Advertising 19,403 21,262
Memberships and training 16,910 13,928
Travel and entertainment 20,905 17,645
Supplies and postage 100,979 37,319
Insurance 21,923 11,440
Other operating expenses 106,771 81,849
--------------------- ---------------------
Total other expenses 1,479,603 1,027,799
--------------------- ---------------------
Income (loss) from continuing operations
before income taxes 25,900 (166,019)
--------------------- ---------------------
Income tax expense (benefit) 0 9,373
--------------------- ---------------------
Net income (loss) from continuing operations 25,900 (175,392)
Net income (loss) $ 25,900 $ (175,392)
===================== =====================
Comprehensive income (loss) $ 29,311 $ (127,588)
===================== =====================
Preferred stock dividends 10,775 0
--------------------- ---------------------
Net income (loss) available to common shareholders $ 15,125 $ (175,392)
===================== =====================
Basic and diluted income (loss)
per common share $ 0.01 $ (0.09)
===================== =====================
Weighted average shares outstanding 2,027,801 1,993,607
===================== =====================
See accompanying notes to consolidated financial statements (unaudited).
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7
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2001 and 2000
(Unaudited)
2001 2000
-------------- ---------------
Cash flow from operating activities:
Net income (loss) $ 25,900 (175,392)
Adjustments to reconcile net income (loss) to net cash from Operating Activities:
Depreciation 74,757 61,292
Amortization 53,597 75,031
Provision for loan losses 22,500 1,000
Net loss/(gain) on mortgage loan sales (9,265) (6,806)
Net (accretion) on investment securities (87,378) (29,759)
Net loss/(gain) on sale of securities available for sale 0 (3,501)
Change in:
Investment in Michigan BIDCO, Inc. 247,000 0
Minority interest 31,045 15,103
Mortgage servicing rights (11,620) (11,292)
Real estate owned (58,742) (13,380)
Accounts receivable 802,469 (7,782)
Accounts payable (765,063) (211,784)
Accrued interest receivable (4,039) (19,552)
Accrued interest payable (143,631) (18,982)
Other assets (37,354) (10,802)
Other liabilities (143,261) (11,477)
----------- -----------
Net cash used in operating activities (3,085) (368,083)
----------- -----------
Cash flow from investing activities:
Purchase of securities available for sale 0 (37,500)
Proceeds from sales of securities available for sale 0 103,501
Proceeds from maturities and paydowns of securities available for sale 20 2,806
Net change in market value of Michigan BIDCO equity investments 0 197,302
Loans granted, net of repayments 676,697 (558,547)
Premises and equipment expenditures (290,265) (43,977)
----------- -----------
Net cash provided by (used in) investing activities 386,452 (336,415)
----------- -----------
Cash flow used in financing activities:
Net increase (decrease) in deposits 4,219,110 940,732
Net increase (decrease) in short term borrowings (4,093,954) (152,224)
Principal payments on long term borrowings (33,000) (33,000)
Issuance of long term borrowings 76,280 61,000
Issuance of preferred stock 300,000 0
Issuance of common stock 0 31,250
----------- -----------
Net cash provided by financing activities 468,436 847,758
----------- -----------
Net change in cash and cash equivalents 851,803 143,260
Cash and cash equivalents:
Beginning of period 2,546,620 1,551,320
----------- -----------
End of period $ 3,398,423 1,694,580
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 696,442 $ 480,983
See accompanying notes to consolidated financial statements (unaudited).
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8
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See Note 1 of the Financial Statements incorporated by reference in the
Company's 2000 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 2000 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: 2,027,801 and
2,023,515 for the three months ended March 31, 2001 and 2000, respectively.
Stock options are not dilutive for the 2000 period.
(2) Investment Securities
The Bank's available-for-sale securities portfolio at March 31, 2001
had a net unrealized loss of approximately $331,000 as compared with a net
unrealized loss of approximately $335,000 at December 31, 2000, an improvement
of $4,000.
Securities available for sale at March 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
U.S. agency mortgage-backed $ 1,854 $ 0 $ (263) $ 1,591
U.S. Treasury 512 0 (68) 444
------------------------------------------------------------
Total $ 2,366 $ 0 $ (331) $ 2,035
============================================================
Securities available for sale at December 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------
U.S. agency mortgage-backed $ 1,774 $ 0 $ (293) $ 1,481
U.S. Treasury 506 0 (42) 464
----------------------------------------------------------
Total $ 2,280 $ 0 $ (335) $ 1,945
==========================================================
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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, 2000, 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 March 31, 2001, the Company made a profit of
$25,900 compared to a net loss of $175,392 for the three months ended March 31,
2000. The preferred stock dividends of $10,775 made $15,125 of net income
available to common stockholders. Net interest income increased to $390,987 in
the 2001 period from $310,394 in the 2000 period, and other income increased to
$1,137,016 in the 2001 period from $552,386 in the 2000 period. Operating
expenses from continuing operations increased to $1,479,603 in the 2001 period
from $1,027,799 in the 2000 period. Basic and diluted net income per share of
common in the three months ended March 31, 2001 was $0.01, compared to a net
loss of ($0.09) for the three months ended March 31, 2000.
The Company's return to profitability in 2001 was due to improved
results at Midwest Loan Services and decreased losses at University Bank's
community banking operation. The following table summarizes the pre-tax income
(loss) of each profit center of the Company for the three months ended March 31,
2001 and 2000 (in thousands):
2001 2000
---- ----
Community Banking $ (122) $ (230)
Midwest Loan Services 204 (15)
Merchant Banking (Michigan BIDCO) 0 106
Corporate Office (56) (27)
-----------------------
Total $ 26 $ (166)
=======================
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RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased 26% to $390,987 for the three months
ended March 31, 2001 from $310,394 for the three months ended March 31, 2000.
Net interest income rose primarily because of a higher interest rate spread. The
yield on interest earning assets increased from 8.78% in the 2000 period to
9.79% in the 2001 period. The cost of interest bearing liabilities increased
from 5.19% in the 2000 period to 5.57% in the 2001 period. Net interest income
as a percentage of total earning assets increased from 3.53% to 4.05%.
Interest income
Interest income increased 22% to $943,798 in the quarter ended March
31, 2001 from $772,395 in the quarter ended March 31, 2000. The average volume
of interest earning assets increased 9.7% to $39,111,949 in the 2001 period from
$35,668,207 in the 2000 period. The increased volume of earning assets was
attributable to overall growth in all types of loans. The overall yield on the
loan portfolio increased to 9.42% from 9.05% primarily due to better yields on
the Bank's commercial portfolio. The yield on investment securities increased to
14.58% from 6.28%, as the Bank significantly reduced the estimated life on a
mortgage-backed security due to a decrease in long term interest rates.
Interest Expense
Interest expense increased 19.7% to $552,811 in the three months ended
March 31, 2001 from $462,001 in the 2001 period. The increase was due to a large
increase in interest bearing liabilities as a result of increased brokered time
deposits and other time deposits. Rates increased for all deposit products
except savings accounts decreased due to a rising market rates in the latter
half of 2000. The increase in retail deposit costs was partially offset by
decreased long-term borrowings caused by the exclusion of BIDCO's bonds in 2001.
The cost of funds increased to 5.57% in the 2001 period from 5.19% in the 2000
period. The average volume of interest bearing liabilities increased 11.3% in
the 2001 period versus the 2000 period.
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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, 2001 and 2000.
Three Months Ended Three Months Ended
---------------------------------------- --------------------------------------
March 31, 2001 March 31, 2000
---------------------------------------- --------------------------------------
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Commercial Loans $ 15,170,445 $ 376,881 10.08% $ 14,236,447 $317,892 9.06%
Real Estate Loans 15,430,983 330,415 8.68% 13,704,147 294,608 8.72%
Installment/Consumer Loans 5,444,555 129,892 9.68% 4,314,053 107,355 10.09%
------------ --------- ------------ --------
Total Loans 36,045,983 837,188 9.42% 32,254,647 719,855 9.05%
Investment Securities 2,895,839 104,131 14.58% 3,370,345 52,152 6.28%
Federal Funds & Bank Deposits 170,127 2,479 5.91% 43,215 388 3.64%
------------ --------- ------------ --------
Total Interest Bearing Assets 39,111,949 943,798 9.79% 35,668,207 772,395 8.78%
------------ --------- ------------ --------
Interest Bearing Liabilities:
Demand Deposits 3,173,177 22,179 2.83% 3,011,687 20,437 2.75%
Savings Deposits 386,583 1,912 2.01% 285,701 1,441 2.05%
Time Deposits 23,344,093 361,623 6.28% 14,764,726 218,604 6.00%
Money Market Accts 9,974,156 113,276 4.61% 12,776,317 126,370 4.01%
Short-term Borrowings 2,519,508 37,638 6.06% 3,161,974 46,355 5.95%
Long-term Borrowings 835,963 16,183 7.85% 2,135,000 48,794 9.27%
------------ --------- ------------ --------
Total Interest Bearing Liabilities 40,233,480 552,811 5.57% 36,135,405 462,001 5.19%
------------ --------- ------------ --------
Net Earning Assets, net interest
income, and interest rate spread (1,121,531) 390,987 4.21% (467,198) 310,394 3.60%
============ ========= ============ ========
Net yield on interest-earning assets 4.05% 3.53%
(1) Yield is annualized.
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Allowance for Loan Losses
The provision to the allowance for loan losses was increased to $7,500
per month for the quarter ended March 31, 2001 due to rising loan delinquencies
and uncertainties in the overall economy. In the prior year period, the
provision was reduced to $1,000 for the quarter as a result of management's
assessment of improved loan quality and strengthened economy at that time. The
Bank went from net charge-offs of $15,834 for the quarter ended March 31, 2000
to net recoveries of $4,742 for the quarter ended March 31, 2001. Illustrated
below is the activity within the allowance for the quarter ended March 31 2001
and 2000, respectively.
2001 2000
---- ----
Balance, January 1 $ 562,997 $ 532,585
Provision for loan losses 22,500 1,000
Loan charge-offs (3,465) (47,779)
Recoveries 8,207 31,945
----------- -----------
Balance, March 31 $ 590,239 $ 517,751
=========== ===========
At March 31, 2001 At December 31, 2000
----------------- --------------------
Total loans (1) $ 34,934,853 $ 36,206,544
Reserve for loan losses 590,239 562,997
Reserve/Loans % (1) 1.69% 1.55%
The allowance for loan losses is calculated using the following assumptions:
Bank's Average Peer Group Ratio Used By
5 Year Average Loss Bank in Allowance
Loss Ratio Ratio Calculation
-------------- ------------- -----------------
Commercial loans, performing (1) 0.61% 0.43% 0.61%
Commercial loans, classified (2) N/A N/A (2)
Commercial loan commitments to lend 0.00% N/A 0.20%
Real estate mortgage, performing 0.22% 0.07% 0.30%
Real estate mortgage, classified (3) N/A N/A (3)
Installment loans to individuals (4) 0.00% 0.74% 1.00%
Home Equity loans, performing (5) 0.00% 0.04% 0.50%
Credit Cards (6) 0.00% 1.83% 2.76%
Overdrafts (7) N/A N/A 15.00%
(1) Performing Loans:
The Bank's actual 5-year average losses were 0.61%, and this is the rate used.
Per the FDIC Quarterly Banking Profile (FDIC Profile) the loss rate for loans in
the central region is 0.38%. Real estate construction loans are included in
commercial loan balances.
(2) Commercial Classified Loans: The allocation for the classified loans was
determined by a combination of the risk rating and the collateral value. The
loan loss reserve is the greater of the collateral deficiency or the required
loan loss reserve for the risk rating. All loans are rated 1 (highest quality)
to 8 (lowest quality), with performing loans rated 1 to 4. A `Special Mention'
or `Watch List' loan (5) requires a minimum of a 5% allocation, a `Substandard'
loan (6) requires a minimum of a 15% allocation, a `Doubtful loan' (7) requires
a minimum of a 50% allocation and a `Loss' loan (8) requires a complete
charge-off of the loan.
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(3) Classified Residential Mortgages: A specific analysis is used, based on the
`Broker Price Opinion' value of the home, less a 15% liquidation expense. If the
estimated loss is $0, then a 5% (Watch List) allocation ratio is used to account
for increased administration costs and risks associated with the foreclosure
process.
(4) Installment loans to individuals: The FDIC Profile loss ratio is 1.39%. All
Installment loans are rated A-D, with A being highest quality and D being lowest
quality. For loans between 32 -120 days delinquent, an allocation can be taken
as follows: `A' & `B' Loans - 2.5%, `C' - 5%, `D' - 15%. The Bank typically
gives a 15% allocation for all installment loans over 32 days delinquent.
However, a specific analysis, based on the fair market value of the collateral,
less liquidation costs was used for secured installment loans greater than 120
days past due.
(5) Home Equity: Term Loans & Lines of Credit: The rate shown above of 0.50% is
for Home Equity Term Loans. The allocation ratio for Home Equity Lines of Credit
is 0.75% since they carry higher risk since they do not amortize during the life
of the loan.
(6) Credit Cards: The FDIC Profile loss ratio is 4.13%.
(7) Overdrafts: Overdrafts generally carry an unusually high risk of loss as
they are generally unsecured and are rated the same way as non-performing
installment loans with an allocation ratio of 15%.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor, Michigan and the future performance of these loans is dependent upon the
performance of relatively limited geographical areas. Since the Bank has a
limited experience with its loan portfolio in Ann Arbor, the Bank's historical
loss ratios may be less than future loss ratios.
The following schedule summarizes the Company's nonperforming assets:
At March 31, 2001 At December 31, 2000
----------------- --------------------
Past due 90 days and over
and still accruing (1):
Real estate 339,812 457,486
Installment 14,000 4,059
Commercial 0 158,299
-------------------------------------------
Subtotal 353,812 619,844
Nonaccrual loans (1):
Real estate 145,175 72,375
Installment 0 0
Commercial 0 0
-------------------------------------------
Subtotal 145,175 72,375
-------------------------------------------
Other real estate owned 399,623 340,881
-------------------------------------------
Total nonperforming assets 898,610 1,033,100
===========================================
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At March 31, 2001 At December 31, 2000
----------------- --------------------
Ratio of nonperforming
assets to total loans (1) 2.57% 2.85%
=========================================
Ratio of loans past due
over 90 days and nonaccrual 85% 123%
loans to loan loss reserve =========================================
(1) Excludes loans held for sale which are valued at fair market value.
The Bank's loan portfolio continues to experience a high level of loan
delinquencies as compared to the portfolio at December 31, 2000. Loan
originations during the first quarter of 2001 were modest and the size of the
portfolio actually decreased as management directed lending personnel to focus
on reducing delinquencies during the quarter and act proactively in light of a
possible recession.
Other real estate owned at March 31, 2001 and December 31, 2000
includes a commercial development site in Sault Ste. Marie, Michigan, which
based on a recent appraisal, management believes has a fair market value
substantially more than its carrying cost of $266,079 at March 31, 2001. The
Bank recently optioned the property to a commercial developer who is planning a
major development on the site. There is no assurance that a sale of the property
will be consummated. The purchase price will be determined by averaging two new
appraisals.
Economic conditions in the Bank's primary market area in Ann Arbor were
stable but soft during the period ended March 31, 2001. 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.
15
15
Non-Interest Income
Total non-interest income increased 106% to $1,137,016 for the three
months ended March 31, 2001 from $552,386 for the three months ended March 31,
2000. The significant increase was primarily due to loan servicing and
subservicing fees and loan set-up fees resulting from the increased servicing
and subservicing portfolios at Midwest Loan Services. Midwest increased its
mortgage subservicing contracts by over 370% since March 2000 to $2.75 billion
as a result of increased business with the mortgage-banking subsidiary of a
major Wall Street firm. Management was informed on April 26, 2001 that this
customer intends to cut back its volume of business in the third quarter of 2001
by at least 50% and possibly 90% from the current levels. This firm also
committed to a new strategic partnership that will allow Midwest to offer a
unique type of loan servicing program targeted at credit union mortgage
origination. Management believes that the long-term impact of this change will
have a positive impact on earnings as the new program is rolled out, however, it
will negatively impact income in the third and possibly fourth quarters of 2001.
At March 31, 2001, 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, and the remainder by the Bank. The carrying value of these
servicing rights was $572,204 at March 31, 2001. Based on recent comparable
sales and indications of market value from industry brokers, management believes
that the current market value of the Bank's portfolio of mortgage servicing
rights 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 paydowns received and expected prepayments of
mortgage loan customers of Midwest and the Bank.
Michigan BIDCO. The significant increase in 2001 was partly offset by
the loss of merchant banking income from Michigan BIDCO, because the BIDCO is no
longer consolidated with the results of the Company. In May 2000, the BIDCO
converted or redeemed all outstanding bonds into common stock of Michigan BIDCO,
thus diluting the Company's ownership to 28.8%. Management of the BIDCO has
requested to repurchase the shares held by University Bank, but is awaiting
regulatory approval to do so. Management of the Bank and BIDCO has already
approved the transaction.
Non-Interest Expense
Non-interest expense increased 44% to $1,479,603 in the three months
ended March 31, 2001 from $1,027,799 for the three months ended March 31, 2000.
The increase was primarily the result of increased personnel costs at Midwest
Loan Services due to the explosive growth. Decreased legal and audit expenses
were offset by increases in consultant fees, occupancy expense and higher costs
for supplies and postage.
Non-interest operating expense for only the parent company increased to
$28,774 for the quarter ending March 31, 2001 from $7,943 for the same period in
2000. The increase was primarily due to amortization and higher legal, audit and
consulting costs associated with maintaining the public listing.
Internet Banking. The Bank has developed an on-line banking system and
is currently completing compliance, functionality and firewall testing to make
the product available to customers in the second quarter of 2001.
16
16
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, 2001, the Bank was
considered "well-capitalized".
0% RISK CATEGORY Balance Sheet Risk Weighted Assets
-----------------------------------------
Currency & Coin 356 -
US Treasury Strip 445 -
Cash maintained at Federal Reserve Balance 26 -
---------------------------------
TOTAL 827 -
20% RISK CATEGORY
Interest-bearing Balances 130 26
Federal funds sold 1,506 301
U.S. Government agency sponsored securities 2,439 488
Cash items 253 51
Balances due from depository institutions 1,127 225
---------------------------------
TOTAL 5,455 1,091
50% RISK CATEGORY
Qualifying 1st liens on 1-4 family residential mortgages 13,792 6,896
---------------------------------
TOTAL 13,792 6,896
100% RISK CATEGORY
All other Assets 27,122 27,122
Items Excluded from Total Assets Calculation (331) (147)
---------------------------------
TOTAL ASSETS 46,865 34,962
=================================
TIER 1 CAPITAL Balance
-------------- -------
Common Stock 200
Surplus 4,733
Undivided Profits & Capital Reserves (1,731)
Minority Interest 314
Other identifiable Intangible Assets (57)
--------
TOTAL TIER 1 CAPITAL 3,459
TIER 2 CAPITAL
Allowance for loans & lease losses (less excess) 439
--------
TOTAL TIER 2 CAPITAL 439
--------
TOTAL TIER 1 & TIER 2 CAPITAL 3,898
TIER 1/TOTAL ASSETS 7.38%
TIER 1 & 2/TOTAL ASSETS 8.32%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 9.89%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 11.15%
17
17
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, 2001, the Bank had cash and cash equivalents of $3,398,423. The Bank
has a line of credit for $5.5 million secured by investment securities and
residential mortgage loans and a line of credit for $2.3 million secured by
commercial loans. In order to bolster liquidity from time to time, the Bank also
sells brokered time deposits. At March 31, 2001, the Bank had $12.9 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 2001 or 2002. Management intends to raise additional capital through a
stock rights offering anticipated to take place during 2001. This capital is
needed for the Company's operating expenses and for the expected principal
reductions on the Company's long-term borrowings. These borrowings totaled
$969,410 and $926,130 at March 31, 2001 and December 31, 2000, respectively.
At March 31, 2001, $529,000 was payable to another financial
institution. Long-term borrowings at March 31, 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 March 31, 2001 also includes $76,280 of equity
conversion notes of the Company which are redeemable by the Company only in the
context of an offering of additional shares of common stock. These equity
conversion notes have no set maturity date and interest payments are deferred
until maturity.
At March 31, 2000, long-term borrowings included $1,123,000 of bonds
issued by Michigan BIDCO, Inc. These bonds were converted or redeemed in May of
2000 by BIDCO.
The Company also has authorized 500,000 shares of preferred stock with
a liquidation value of $1,000 per share. 725 shares, or $725,000 was issued in
November 2000 to help boost capital levels, and another 300 shares, or $300,000
was issued in March 2001 and contributed to University Bank. These shares are 6%
cumulative, non-voting, and convertible into common stock of the Company. It is
anticipated that these shares will be redeemed with proceeds from the expected
stock rights offering scheduled for 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.
18
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on such rights by lowering
required amortization rates on the rights. Rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the retail mortgage banking operations of the Bank and Midwest Loan
Services. Rising interest rates also slow Midwest Loan Services' rate of growth,
but increases the duration of its existing subservicing contracts.
The Bank performs a static gap analysis 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, 2001. 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, 2001 was estimated to be
($19,051,000) or -40.65%.
19
19
UNIVERSITY BANK
Asset/Liability Position Analysis as of March 31, 2001
(Dollar amounts in thousand's)
Maturing or Repricing in
3 Months 91 Days to 1 - 3 3 - 5 Over 5 All
ASSETS or Less 1 Year Years Years Years Others Total
- ------ ------- ------ ----- ----- ----- ------ -----
Cash and Due from Banks 130 - - - - 1,762 1,892
Federal Funds Sold 1,506 - - - - - 1,506
Securities - - - - 2,884 - 2,884
Loans - Net 9,490 1,801 12,884 5,818 5,673 (590) 35,076
Non-Accrual Loans - - - - - 145 145
Other Assets - 953 - - - 4,409 5,362
----------------------------------------------------------------------------------------
TOTAL ASSETS 11,126 2,754 12,884 5,818 8,557 5,726 46,865
----------------------------------------------------------------------------------------
LIABILITIES
Demand deposits - - - - - 2,288 2,288
NOW accounts - - 3,675 - - - 3,675
Savings accounts - - 371 - - - 371
Money Market accounts 4,613 4,613 - - - - 9,226
CD's under $100,000 3,658 13,148 2,065 5 436 - 19,312
CD's over $100,000 4,682 1,989 749 - 110 - 7,530
Other Borrowings - 228 - - - - 228
Other Liabilities - - - - - 1,368 1,368
Equity - - - - - 2,867 2,867
-------------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,953 19,978 6,860 5 546 6,523 46,865
-------------------------------------------------------------------------------------------
GAP (1,827) (17,224) 6,024 5,813 8,011 (797) -
===========================================================================================
CUMULATIVE
GAP (1,827) (19,051) (13,027) (7,214) 797 -
===============================================================================
GAP
PERCENTAGE -3.90% -40.65% -27.80% -15.39% 1.70% 0.00%
===============================================================================
20
20
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
Parent Company Financial Information
Certain financial information with respect to University Bancorp, Inc. is
presented on pages 21, 22, and 23.
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.
21
21
UNIVERSITY BANCORP, INC. (PARENT-ONLY)
Condensed Balance Sheet
At March 31, 2001 and December 31, 2000
(Unaudited)
March 31, December 31,
2001 2000
-------------- ---------------
ASSETS
Cash and cash equivalents $ 356 $ 15,860
Securities available for sale 233 233
Investment in University Bank 2,867,425 2,493,426
Investment in Michigan BIDCO 77,157 77,157
Goodwill, net 132,441 139,412
Receivable from University Bank 286,196 149,572
Prepaid expenses 72,300 57,602
Other assets 1,000 1,000
----------- -----------
Total Assets $ 3,437,108 $ 2,934,262
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 741,904 $ 562,000
Accounts payable 310,505 318,601
Accrued interest payable 9,171 11,379
Other liabilities 14,708 0
----------- -----------
Total Liabilities 1,076,288 891,980
Stockholders Equity 2,360,820 2,042,282
----------- -----------
Total Liabilities and Stockholders Equity $ 3,437,108 $ 2,934,262
=========== ===========
22
22
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Statements of Operations
For the Three Month Periods Ended March 31
(Unaudited)
2001 2000
------------- -------------
INCOME:
- ------
Dividends from subsidiary $ 0 $ 0
Interest & dividends on investments 272 135
Income from Michigan BIDCO 0 4,338
Gain (loss) on sale of securities 0 0
--------- ----------
Total Income 272 4,473
EXPENSES:
- ---------
Interest on notes 16,183 23,532
Goodwill amortization 6,971 0
Public listing 4,194 3,401
Legal, audit & consulting 17,039 4,249
Other miscellaneous 570 293
--------- ----------
Total Expense 44,957 31,475
Income (loss) before federal income taxes (benefit) and
equity in undistributed net income (loss) of subsidiaries (44,685) (27,002)
Federal income taxes (benefit) 0 0
--------- ----------
Income (loss) before equity in undistributed net income of (44,685) (27,002)
subsidiaries
Equity in undistributed net income (loss) of subsidiaries 70,585 (148,390)
--------- ----------
Net income (loss) $ 25,900 $ (175,392)
--------- ----------
Preferred stock dividends 10,775 0
--------- ----------
$ 15,125 $ (175,392)
========= ==========
Basic and diluted income (loss) per common share $ 0.01 $ (0.09)
========= ==========
23
23
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Statement of Cash Flows
For the Three Month Periods Ended March 31
2001 2000
--------------- --------------
Cash flow from operating activities:
Net income (loss) $ 25,900 $(175,392)
Reconciliation of net income (loss) to net cash used
in operating activities:
Amortization 6,971 0
Decrease/(Increase) in other assets (14,702) (4,105)
Increase(Decrease) in other liabilities (6,368) 1,608
Decrease(Increase) investment in Michigan BIDCO 0 (4,337)
Decrease(Increase) investment in University Bank (70,585) 148,390
--------- ---------
Net cash used in operating activities (58,784) (33,836)
--------- ---------
Cash flow from investing activities:
Contributions of capital to University Bank (300,000) 0
Purchase of securities available for sale 0 (37,500)
Proceeds from sale of securities available for sale 0 0
--------- ---------
Net cash used in investing activities (300,000) (37,500)
--------- ---------
Cash flow from financing activities:
Principal payment on notes payable (33,000) (33,000)
Issuance of equity conversion notes 76,280 61,000
Issuance of preferred stock 300,000 0
Issuance of common stock 0 31,250
--------- ---------
Net cash provided by financing activities 343,280 59,250
--------- ---------
Net change in cash and cash equivalents (15,504) (12,086)
Cash and cash equivalents at beginning of period 15,860 15,834
--------- ---------
Cash and cash equivalents at end of period $ 356 $ 3,748
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for Interest $ 18,391 $ 16,631
24
24
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 11, 2001 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President