UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
for the fiscal year ended December 31, 2005
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
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(State or other jurisdiction of (I.R.S. Employer incorporation)
Identification No.
2015 Washtenaw, Ann Arbor, Michigan 48104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 741-5858
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Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.010 per share
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Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No X
---- ----
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark if the registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer X
---- ---- ----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ]
1
The number of shares outstanding of the Registrant's Common Stock as of
March 29 2006: 4,149,878 shares. The aggregate market value of the voting stock
held by non-affiliates of the Registrant based on $2.40 per share, the closing
price for the Registrant's Common Stock on March 29, 2006, as reported by
NASDAQ, was approximately $3,244,159.
* For purposes of this calculation shares of the Registrant held by directors
and officers of the Registrant and by other affiliates have been excluded.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held June 19, 2006, are incorporated by reference into Part
III of this report.
Page 2 of 87 pages
Exhibit index on sequentially numbered page 77
2
PART I.
Item 1. - Business
General
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University Bancorp, Inc. The Company is a Delaware corporation that
operates as a bank holding company for its wholly-owned subsidiary, University
Bank. The Company changed its name to `University Bancorp, Inc.' from `Newberry
Bancorp, Inc.' in 1996, in order to more closely align its identity with the
Bank's.
University Bank. The Bank is a state chartered community bank. The Bank
began business in 1890 and was chartered by the state of Michigan in 1908. In
1994, we sold the bank's offices in Newberry, Michigan and Sault Ste. Marie,
Michigan. In 1995 we relocated the Bank's main office to Ann Arbor, Michigan
and, changed the Bank's name from `The Newberry State Bank' to `University Bank'
to more closely align its identify with its current place of business. Ann Arbor
is a university town, home to the University of Michigan and is the largest city
in Washtenaw County, just west of the Detroit Metropolitan Statistical Area. The
Bank's primary market area is defined as the City of Ann Arbor and surrounding
areas in greater Washtenaw County.
Midwest Loan Services. In 1995, University Bank acquired 80% of the common
stock of Midwest Loan Services ("Midwest"). Midwest specializes in the
origination, servicing and sub-servicing of mortgage loans for various credit
unions, financial institutions and mortgage brokers. Most of their servicing and
sub-servicing portfolio is comprised of residential mortgage loans sold to
Fannie Mae, Freddie Mac and other private residential mortgage conduits, the
most important of which is a jumbo and subprime loan conduit established by
Lehman Brothers.
University Insurance & Investment Services. In 1996, University Bank
established an insurance and investment products sales agency. This subsidiary
of the Bank, called "University Insurance & Investment Services, Inc." (the
Agency) is based in the Bank's Ann Arbor office. The Agency is licensed by the
State of Michigan to sell insurance as agent for licensed insurance companies. A
d/b/a of the Agency, University Insurance Center, commenced business in 1999,
adding a full service property and casualty insurance agency offering insurance
for homes, autos, apartments and businesses in addition to the original products
which included life and health care insurance, annuities and mutual fund sales.
Employees of the Agency are also licensed to sell investment products such as
annuities and mutual funds, and the President of the Bank, who is also Chairman
of the Agency, also offers broker-dealer investment services including money
management through a clearing arrangement with Equitas America LLC and Pershing,
a division of the Bank of New York.
University Islamic Financial Corporation. On December 30, 2005, University
Bank formed University Islamic Financial Corporation (UIFC). At formation,
University Bank purchased 80% of the common stock of UIFC with a cost basis of
$8,000,000 and $5,588,000 Series A non-convertible preferred stock of UIFC. UIFC
intends to engage in Islamic Banking with an initial focus on its existing
product set: soliciting Islamic Sharia'a FDIC-insured Deposits held by
University Bank and originating Islamic Sharia'a home financings as agent for
University Bank. UIFC's products have received favorable legal rulings (fatawa)
from some of the leading Islamic legal
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scholars in the U.S. and the world. In February 2006, University Bank executed a
master commitment with the Federal Home Loan Mortage Corporation to create a
secondary market for UIFC's Sharia'a compliant home financing transactions in
Michigan with the intent to expand this program over time.
Employees
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The Company employed 63 full-time equivalents as of March 3, 2006:
University Bank, Ann Arbor 19
Midwest Loan Services 36
University Insurance & Investment 3
University Islamic Financial Corporation 5
Lines of Business
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Deposit Products & Services
University Bank offers traditional retail savings products and
services to its customers. These include demand deposit and NOW interest-bearing
checking accounts, money market deposit accounts, regular savings accounts and
term deposit certificates ranging in maturity from three to three hundred
months. The Bank also offers Sharia'a compliant profit-sharing deposits for
Muslim depositors. The Bank also offers free access to 24-Hour ATM machines,
telephone banking, internet banking, debit cards, online bill payment, Western
Union(TM) money transfer services and Gold VISA accounts. From time to time to
raise liquidity, the Bank relies on brokers to sell CDs. At December 31, 2005,
the Bank had approximately $5.9 million in CDs issued through brokers.
Lending Products
University Bank offers a range of traditional lending products,
including commercial small business loans, residential real estate mortgage
loans, home equity loans, commercial real estate mortgage loans, consumer
installment loans, and land development and construction loans. The Bank also
offers Sharia'a compliant mortgage alternative loan transactions (MALTs (TM))
for Muslim customers.
Classifications of the loan portfolio as of December 31, 2005 are as follows:
Amount
Outstanding(1) % of Total
Commercial, Real Estate & Other $12,547,975 27.49%
Residential Construction 1,958,485 4.29%
Residential Real estate 25,781,137 56.47%
Residential Home equity 4,847,478 10.62%
Consumer 205,145 0.45%
Credit Card 312,106 0.68%
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Gross Loans $45,652,326 100.00%
=========== ==========
(1) - Excludes loans held for sale.
The Bank's loan portfolio is geographically concentrated in Ann Arbor and
Washtenaw County, Michigan. The ability of individual loan customers to honor
their debts is partially dependent on the local economy. The Ann Arbor area is
primarily dependent on the education, healthcare, services and manufacturing
(automotive and other) industries.
4
Most of the Bank's commercial loans are secured by commercial real estate.
Commercial real estate loans have a loan to value ratio typically less than 80%
at the time the loan is originated. In no cases is the loan to value ratio for
commercial real estate loans greater than 85%. The primary risk of commercial
loans is that the area's economy declines and rents decrease while vacancy
increases, thereby decreasing the value of the building. If the guarantor
suffers a financial reverse, the Bank is then exposed to a loss.
Residential loans typically have a loan to value ratio less than 80% at the
time the loan is originated, unless the borrower's financial position is very
strong, in which case a loan to value ratio of up to 90% or private mortgage
insurance is considered. To meet the Bank's goals for first time homebuyers, the
Bank has originated 97% to 100% loan to value residential loans and currently
has about $2 million of these loans in its loan portfolio. Home equity secured
residential loans have loan to value ratios of less than 90% at time of
origination in the case of fixed rate fully-amortizing loans and 80% for home
equity lines of credit, with a few exceptions with higher ratios for borrowers
with strong credit. As of December 31, 2005, the Bank had a portfolio of $14.0
million of mortgage alternative loan transactions that are Sharia'a-compliant
mortgage alternatives for Muslim customers. The primary risk of residential
lending is that home prices drop (typically this occurs during recessions) and
borrowers walk away from their home or file for bankruptcy. All of the Bank's
construction loans are secured by residential properties with a loan to value
ratio of 80% or less. The Bank controls the risk of construction lending by
performing inspections prior to disbursing interim construction funds to avoid
cost overruns.
The Bank makes few unsecured loans, typically for borrowers who have a high
net worth, but even in these cases; the Bank usually takes collateral out of an
abundance of caution. Most of the Bank's credit card loans are secured by
residential properties. Consumer loans are generally secured by vehicles
(primarily cars or trucks). The primary risk of these loans is that the value of
the car depreciates faster than the loan balance amortizes, and the borrower
loses their job or has a severe medical problem in their family. In these
circumstances, the collateral could be insufficient to repay the loan if the
borrower files for bankruptcy. In addition, if the economy is soft, used vehicle
prices tend to deteriorate creating additional risk of insufficient collateral
in the event of a default.
The Bank makes very few business loans that are not secured by real estate.
Business Lines of Credit are typically made up to a 50% ratio of inventory and
other equipment at current market value, and 70% of current receivables.
Business Manager Loans are also structured as Lines of Credit and are secured by
individual receivables up to 90% of face value individually purchased with
recourse to the borrower and additional insurance to protect the bank against
fraud and bankruptcy of the issuer of the account that is receivable to the
borrower. The primary risk of this type of lending backed by non-real estate
business assets is that if the business suffers a financial reverse, an
unscrupulous borrower can easily dissipate the collateral, causing the Bank a
loss. For this reason, the Bank de-emphasizes this type of lending.
Typically with respect to all personal and residential loans, a ratio of
total debt payments to total income of all borrowers and guarantors less than
42% is required. With respect to commercial real estate and business loans, a
ratio of income to all debt payments of greater than 1.25x
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is required. Therefore, the Bank typically has both income and asset backing to
secure its loans. However, there can always be valid reasons to have exceptions
to each rule. The Bank's loan committee retains the power to take unusual
circumstances into account when evaluating each loan request versus the Bank's
policies. Loans that are lacking current demonstrated income are classified and
increased reserves are established for those loans. Loans that are lacking both
current demonstrated income and asset backing are allocated even higher reserves
equal to the amount estimated to be realized upon the sale of the collateral
less all estimated costs.
Mortgage Banking
The Bank and Midwest originate internally or via other financial
institutions residential home loans that generally qualify for sale to secondary
market investors under the underwriting criteria of the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA)
and the Government National Mortgage Association (GNMA). Loans purchased or
originated internally are either sold directly to FHLMC, FNMA or GNMA, or are
pooled into mortgage-backed securities and the securities are sold to investors
in the secondary market. With the exception of Midwest, the Bank is currently
selling the servicing rights on all mortgages originated that are sold to the
secondary market. Some residential mortgages are held in the Bank's loan
portfolio as an investment.
University Bank became a seller/servicer and began originating Federal Home
Loan Mortgage Corporation (FHLMC) insured mortgages in 1991 and became a
seller/servicer and began originating Federal National Mortgage Association
insured mortgages in 1994. The Bank has also been approved as a seller/servicer
of Government National Mortgage Association mortgages for many years but only
began using its license in 1999 to originate and sell these loans without
retaining the servicing rights. Midwest is also licensed with FNMA,FHLMC and
GNMA.
Mortgage Servicing and Sub-servicing
Mortgage servicing firms receive monthly payments from loan customers,
aggregate and account for these payments, and send the funds to mortgage-backed
securities holders, including pension funds and financial institutions. For some
mortgage customers, escrow funds are also accumulated, and funds sent to taxing
authorities and insurance companies as needed. Mortgage servicers also dun
delinquent accounts and foreclose loans, if required. Mortgage servicers receive
a fixed monthly fee for performing this service. When these services are
performed for the Bank, it is called `servicing'. When these services are
performed for other institutions, it is called `sub-servicing'. The Bank's
80%-owned subsidiary, Midwest, specializes in sub-servicing residential mortgage
loans sold to FNMA and FHLMC and other non-agency private conduits for the
account of credit unions, other financial institutions and mortgage brokers.
Investment Securities
The Bank maintains surplus available funds in investments consisting of
short-term money market instruments, U.S. government bonds, U.S. federal agency
obligations and mortgage-backed securities backed by federal agency obligations.
The Bank's President, who is a licensed Registered Representative, manages these
investments. All purchase/sale decisions are subject to the review and prior
approval of the Asset Liability Committee of the Bank and the Board of
Directors. The securities portfolio provides a source of liquidity to meet
Bank's operating needs. At December 31, 2005,
6
the portfolio had a net unrealized loss of $34,720 versus a net unrealized loss
of $51,356 at December 31, 2004, and $38,795 at December 31, 2003.
Information regarding securities where cost exceeded more than 10% of the
Company's stockholders' equity at December 31, 2005 is as follows:
Final Market Amortized
Issuer Coupon Yield Maturity Value Cost
- ------ ------ ----- -------- --------- --------
FHLBI equity (1) VAR 4.17% None $941,200 $941,200
FNMA CMO 93-205H (2) PO 1.83% 9/25/23 273,414 291,196
GNMA (various) VAR 6.15% 6/20/22 559,649 576,912
(1) The rate varies quarterly. The Bank is required to maintain the
investment in Federal Home Loan Bank of Indianapolis (FHLBI)common
stock in an amount related to the Bank's single-family mortgage
related assets and FHLBI advances. Shares can be redeemed or sold at
par value to the FHLBI upon five-year prior notice.
(2) This Principal Only strip has an expected average life of about five
years. The bond is rated AAA.
Competition
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Community Banking, Ann Arbor
The attraction and retention of deposits depend on the Bank's ability
to provide investment opportunities that satisfy the requirements of investors
with respect to rate of return, liquidity, risk and other factors. The Bank
competes for these deposits by offering personal service and attention, fair and
competitive rates, low fees, and a variety of savings programs including
tax-deferred retirement programs.
The Bank competes for loan originations primarily through the quality
of services provided to the loan customers, competitive interest rates and
reasonable loan fees, rapid and local decision-making and the range of services
offered. Competition in originating loans comes principally from other
commercial banks, credit unions, insurance companies, mortgage banking companies
and savings and loans.
The Bank's main office is near the University of Michigan and the
University of Michigan Hospital. These institutions employ approximately 20,000
persons. The Bank is located in an area that has strong competition from local
credit unions and banks as well as a number of large national banks. The
University of Michigan Credit Union has an onsite presence at University of
Michigan.
Banks owned by out-of-state holding companies dominate the Ann Arbor
banking market. The University of Michigan Credit Union is the largest locally
owned financial institution. The only locally-owned community financial
institutions, excluding University Bank, are University of Michigan Credit
Union, Bank of Ann Arbor, Huron River Area Credit Union, Midwest Financial
Credit Union, Automotive Federal Credit Union and several smaller credit unions.
Mortgage Banking
7
The Bank and Midwest's retail mortgage origination operations encounter
competition for the origination of residential real estate loans primarily from
savings institutions, commercial banks, insurance companies and other mortgage
banking firms. Many of these firms have a well-established customer and/or
borrower client base. Some competitors, primarily savings institutions,
insurance companies and commercial banks, have the ability to create unique loan
products from time to time because they are able to hold the loans in their own
portfolio rather than sell into the secondary market. The Bank's ability to hold
mortgage loans in its portfolio helps it to compete more effectively. Most loans
sold into the secondary market, however, go to the same sources, those being
FHLMC, FNMA, and GNMA. Most lenders have access to these secondary market
sources; therefore, competition often becomes more a matter of service and
pricing than that of product. As a mortgage loan originator and a purchaser of
mortgage loans through correspondents, Midwest and the Bank must be able to
compete with respect to the types of loan products offered by competitors to
borrowers and correspondents, including the price of the loan in terms of
origination fees or fee premium or discount, loan processing costs, interest
rates, and the service provided by our staff. An important element to competing
is master purchase agreements negotiated periodically with FNMA and FHLMC with
low and competitive loan guarantee fees, a wide variety of mortgage programs,
and a variety of flexible underwriting criteria. Our ability to secure these
master purchase agreements is dependent upon the performance from a quality
perspective of loans previously sold to the agencies.
During lower interest rate environments, competition for loans is less
intense due to the large number of loans available for origination. As interest
rates rise and the number of loans available for origination diminishes,
competition becomes quite intense and companies with larger investor bases,
flexibility with respect to type of product offered and greater experience in
dealing in these types of markets tend to be the most successful.
The Bank also originates residential loans to be held in portfolio, and
management believes that this product together with the product offerings from
FHLMC, FNMA and GNMA are sufficient for the Bank to meet its customers' needs.
The Bank also is licensed as a HUD Title 1 and Multi-family seller/servicer, but
has no plans at this time to expand utilization of HUD or GNMA programs.
Mortgage Servicing and Sub-servicing. Servicing competition is somewhat
less intense than the loan origination aspect of mortgage banking. Due to net
worth and management requirements, many mortgage origination companies do not
have the capacity to service loans. Falling interest rates present competitive
challenges for the mortgage servicing operation in that mortgagors are more
likely to refinance existing mortgages. The quality of service and the ability
of the origination operation to compete on price and service are important in
retaining these customers by refinancing them internally, rather than losing the
refinancing transaction to a competitor. Increased refinancing activity as a
result of falling interest rates decreases profitability of mortgage servicing
by increasing amortization charges on purchased mortgage servicing rights.
In the sub-servicing business, Midwest competes primarily with about 30
firms nationwide, including specialized sub-servicing units of mortgage banking
companies, and specialized firms owned by banks and savings and loans. Most of
these companies have substantially larger financial resources
8
than Midwest, and some of them are also located in rural areas with low
prevailing wages.
Midwest is located in Houghton, Michigan in the western upper peninsula of
Michigan. Personnel and occupancy costs are the largest costs in a mortgage
servicing operation. However, the prevailing wages and occupancy costs in the
upper peninsula of Michigan are generally lower than the national average.
Midwest has developed a unique business extranet website for its business
partners and their retail customers. Through its website at www.subservice.com,
Midwest provides the opportunity for all
customers to access their mortgage information 24 hours a day 7 days a week in
an environment which provides seamless access to all information. Business
partners have access to all mortgage data as easily as if it were serviced on
their in-house computer system. Customers can access all information about their
accounts and perform any type of transaction through the internet. As a result
of low personnel costs, its internet technology and the relationships it has
developed in the credit union industry over time, the Company believes that
Midwest' mortgage servicing operation has a competitive advantage.
Regulation
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Primary Regulators of University Bancorp. The Company is a bank holding
company registered under the Federal Bank Holding Company Act of 1956. The
Federal Reserve Bank of Chicago is the Company's primary regulator and the
Company is subject to regulation, supervision and examination by the Federal
Reserve. The Company is required to file semi-annual reports with the Federal
Reserve and other information as required under the rules of the Board of
Governors of the Federal Reserve System. Additionally, the Federal Reserve Board
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to bar the payment of dividends by banks and bank holding
companies.
Acquisitions. The Company is generally prohibited from engaging in
non-banking activities since it is a bank holding company. The Company cannot
acquire more than 5% of the shares of another company engaged in non-banking
activities. The Company can only acquire direct or indirect control of more than
5% of the voting shares of a company engaged in a banking related activity with
the prior approval by the Federal Reserve Board to acquire these shares or by
regulatory exemption. The Federal Reserve Board has identified specific banking
related activities in which a bank holding company may engage with notice to the
Federal Reserve. The Federal Reserve considers managerial, capital and other
financial factors, including the impact on local competition of any proposal and
past performance under the Community Reinvestment Act in acting on acquisition
or merger applications. Bank holding companies may acquire other banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
Commitments. In connection with obtaining the consent of the Federal
Reserve to a 1989 merger transaction when the Company obtained public listing on
the NASDAQ Small-Cap Market, certain commitments were made to the Federal
Reserve. Management agreed that the Employee Stock Ownership Plan would not
purchase more than 10% of the common stock or 5% of any other class of our
9
voting shares, without the prior approval of the Federal Reserve. Management
also agreed not to incur additional debt or to have the Bank pay dividends to us
without the prior approval of the Federal Reserve.
Capital Requirements. The Federal Reserve Board imposes certain capital
requirements on the Company under the Federal Bank Holding Company Act,
including a minimum leverage ratio and a minimum ratio of "qualifying" capital
to risk-weighted assets. These requirements are described below under "Capital
Regulations". The Federal Reserve uses capital adequacy guidelines in its
examination and regulation of bank holding companies. If capital falls below
minimum guidelines, a bank holding company may, among other things, be denied
approval to acquire or establish additional banks or non-bank businesses. The
"prompt corrective action" provisions of federal law and regulation authorizes
the Federal Reserve to restrict the payment of dividends to us from an insured
bank which fails to meet specified capital levels.
Source of Strength. In accordance with Federal Reserve Board policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances in which the Company may
not otherwise wish to do so. Under the Federal Bank Holding Company Act, the
Federal Reserve may require a bank holding company to terminate any activity or
relinquish control of a bank subsidiary if the agency determines that
divestiture may aid the depository institution's financial condition. In
addition, if the Commissioner deems our Bank's capital to be impaired, the
Commissioner may require the Bank to restore its capital by a special assessment
upon us as University Bank's sole stockholder. If the Company were to fail to
pay an assessment, the directors of the Bank would be required, under Michigan
law, to sell the shares of the Bank's stock owned by the Company to the highest
bidder at either a public or private auction and use the proceeds of the sale to
restore the Bank's capital.
Financial Holding Companies. Beginning March 11, 2000, bank holding
companies may apply to become Financial Holding Companies. We have not applied
to become a Financial Holding Company. Financial Holding Companies may engage in
a wider range of non-banking activities than Bank Holding Companies, including
greater authority to engage in securities and insurance activities. The expanded
powers are available to a bank holding company only if the bank holding company
and its bank subsidiaries remain well capitalized and well managed. The new law
also imposes various restrictions on transactions between the depository
institution subsidiaries of bank holding companies and their non-bank
affiliates. These restrictions are intended to protect the depository
institutions from the risks of the new non-banking activities permitted to
affiliates.
Public Company Regulation. Our common stock is registered with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). We are therefore subject to the information, proxy solicitation, insider
trading and other restrictions and requirements of the SEC under the Exchange
Act. The Sarbanes-Oxley Act of 2002 provides for numerous changes to the
reporting, accounting, corporate governance and business practices of companies
as well as financial and other professionals who have involvement with the U.S.
public markets.
The Sarbanes-Oxley Act was enacted in 2002. This Act is not a banking law,
but applies to all public companies, including the Corporation. Sarbanes-Oxley
is designed to restore investor confidence. Sarbanes-Oxley
10
adopts new standards of corporate governance and imposes new requirements on the
board and management of public companies. The chief executive officer and chief
financial officer of a public company must now certify the financial statements
of the company. New definitions of "independent directors" have been adopted,
and new responsibilities and duties have been established for the audit and
other committees of the board. In addition, the reporting requirements for
insider stock transactions have been revised, requiring most transactions to be
reported within two business days.
Section 404 of the Sarbanes-Oxley Act. requires a company to include in its
annual reports a report by management on the company's internal control over
financial reporting and an accompanying auditor's report. The Commission
extended the original Section 404 compliance dates for all issuers three times.
Under the latest extension, non-accelerated filers will thus be required to file
management and audit reports under Section 404 with their annual reports for the
first year ending on or after July 15, 2007. (For example, a non-accelerated
filer with a December 31 year will be required to include the reports in its
annual report filed in early 2008, for the year ended December 31, 2007.) The
Company, based on the size of its market capitalization is considered a small
public company and thus is classified as a non-accelerated filer.
While complying with Sarbanes-Oxley will result in increased costs to the
Corporation, the additional costs are not expected to have a material effect on
the Corporation
Primary Regulators of University Bank. The Bank is a Michigan banking
corporation and its deposit accounts are insured by the Bank Insurance Fund
(BIF) of the Federal Deposit Insurance Corporation (FDIC). As a
Michigan-chartered commercial bank, University Bank is subject to the
examination, supervision, reporting and enforcement powers of the Commissioner,
as the chartering authority for Michigan banks, and the FDIC, as administrator
of the BIF. These agencies and the federal and state laws applicable to the Bank
and its operations, extensively regulate various aspects of the banking business
including, among other things, reserves against loans, capital levels relative
to operations, lending activities and practices, collateral for loans,
establishment of branches, mergers, acquisitions and consolidations, payment of
dividends, internal controls, permissible types and amounts of loans,
investments and other activities, interest rates on loans and on deposits, and
the safety and soundness and scope of banking practices. As an insured bank,
University Bank is also required to file quarterly reports and other information
as required with the FDIC.
All subsidiaries of University Bank including Midwest and University
Insurance & Investment Services are all also subject to all regulations
applicable to University Bank itself, including regular on-site examination by
both the OFIS and the FDIC.
Other Regulators. As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD
multifamily seller/servicer, University Bank's mortgage banking operation is
subject to regulation and regular on-site examination by FHLMC, FNMA and HUD.
Other Regulations. University Bank and its subsidiaries are also subject to
various regulations including:
o the Community Reinvestment Act,
o the Federal Truth-in-Lending Act,
o the Home Mortgage Disclosure Act,
11
o the Gramm-Leach Bliley Act (and related privacy regulations),
o the Patriot Act,
o the Check 21 Act,
o The Anti-Money Laundering Act,
o the Equal Credit Opportunity Act,
o the Fair Credit Reporting Act,
o the Fair Debt Collection Act,
o the Right to Privacy Act,
o the Real Estate Settlement Procedures Act,
o the Bank Secrecy Act,
o the Electronic Funds Transfer Act,
o Federal Reserve regulations,
o State usury laws, and
o Federal laws concerning interest rates.
Also, University Bank may not engage in any activity not authorized by the
Michigan Banking Code unless it is authorized by the Commissioner of the OFIS as
being closely related to banking.
These laws and regulations are primarily intended to protect depositors and
the deposit insurance fund of the FDIC, not the Bank or the Company's
stockholders. The following is a summary of certain statutes and regulations
affecting University Bank. The following information is qualified in its
entirety by reference to the particular statutory and regulatory provisions.
Various changes to the Federal Deposit Insurance Act (FDIA) were recently
signed into law. These changes will increase the FDIC insurance coverage for
retirement accounts, index future insurance coverage to inflation, provide the
bank with rebates for past premiums paid and merge the BIF with the Savings and
Loan Insurance Fund (SAIF). Any change in applicable laws, regulations or
regulatory policies of various governmental regulatory authorities may have a
material effect on the Company's business, operations and prospects. Those
authorities include, but are not limited to, the Board of Governors of the
Federal Reserve System, the FDIC, the Commissioner of the Michigan Office of
Financial and Insurance Services, the Internal Revenue Service, and state taxing
authorities. The Company is unable to predict the nature or extent of the
effects that fiscal or monetary policies, economic controls or new federal or
state legislation may have on future business and earnings.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation. Banks
classified as well-capitalized, as defined by the FDIC, and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized, as defined by the FDIC, and considered to be of substantial
supervisory concern pay the highest premium. The FDIC makes a risk
classification of all insured institutions for each semi-annual assessment
period.
In early 2006, Congress passed the Federal Deposit Insurance Act of 2005,
which made certain changes to the federal deposit insurance program. These
changes included merging the BIF and the Savings Association Insurance Fund (the
"SAIF"), increasing retirement account coverage to $250,000
12
and providing for inflationary adjustments to general coverage beginning in
2010, providing the FDIC with the authority to set the fund's reserve ratio with
a specified range, and requiring dividends to banks if the reserve ratio exceeds
certain levels. The new statue grants banks an assessment credit based on their
share of the assessment base on December 31, 1996, and the amount of the credit
can be used to reduce assessments in any year subject to certain limitations.
The FDIC is required to issue regulations implanting the new Act.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted in 1996,
University Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation (FICO). FICO
was created in 1987 to finance the re-capitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (SAIF), which insures the deposits of thrift institutions.
Between January 1, 2000 and the maturity of the outstanding FICO obligations in
2019, BIF members and SAIF members will share the cost of the interest on the
FICO bonds on a pro rata basis. It is estimated that FICO assessments during
this period will be less than 0.025% of deposits. In addition, the Federal Home
Loan Banks, including the Federal Home Loan Bank of Indianapolis, in which
University Bank is an investor, pay 20% of their annual net income to a sinking
fund to retire the FICO bonds until they are paid in full.
Capital Regulations. The FDIC has established the following minimum capital
standards for state-chartered, FDIC-insured non-member banks, like University
Bank:
o a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks
with minimum requirements of 4% to 5% for all others;
o and a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8%, at
least one-half of which must be Tier 1 capital.
Tier 1 capital consists principally of stockholders' equity. These capital
requirements are minimum requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
institutions. For example, FDIC regulations provide that higher capital may be
required to take adequate account of, among other things, interest rate risk and
the risks posed by concentrations of credit, nontraditional activities or
securities trading activities.
13
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring the submission of
a capital restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock,
including additional voting stock, or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
The extent of the regulators' powers depends on whether the institution in
question is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized." An
institution is critically undercapitalized if it has a tangible equity to total
assets ratio that is equal to or less than 2%. An institution is well
capitalized if it has a total risk-based capital ratio of 10% or greater, core
risk-based capital of 6% or greater, and a leverage ratio of 5% or greater, and
the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure. An institution is adequately capitalized
if it has a total risk-based capital ratio of not less than 8%, a core
risk-based capital of not less than 4%, and a leverage ratio of not less than
4%.
These capital guidelines can affect the Bank in several ways. Capital
levels are currently adequate, however, rapid growth, poor loan portfolio
performance, or poor earnings performance, or a combination of these factors,
could change our capital position in a relatively short period of time, making
an additional capital infusion necessary. In general, if the FDIC's assessment
of a Bank's financial and managerial strength changes negatively, the Bank's
cost of FDIC insurance will rise in subsequent semi-annual periods. A financial
institution may also be ordered to restrict its growth, dispose of certain
assets, rescind agreements or contracts, or take other actions as determined by
the ordering agency to be appropriate.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts.
The Bank may not declare or pay a dividend unless the Bank will have a surplus
amounting to at least 20% of its capital after the payment of the dividend. In
addition, the Bank may not declare or pay any dividend until an amount equal to
at least 10% of net profits for the preceding one-half year (in the case of
quarterly or semi-annual dividends) or full-year (in the case of annual
dividends) has been transferred to surplus. At December 31, 2005, the Bank had
retained earnings of $75,833. The Bank may not declare or pay
14
any dividend until the cumulative dividends on any issued preferred stock have
been paid in full.
Federal law generally prohibits the Bank from making any capital
distribution, including payment of a dividend, or paying any management fee to
us if the Bank would thereafter be undercapitalized. The FDIC may prevent the
Bank from paying dividends if the Bank is in default of payment of any
assessment due to the FDIC. In addition, the FDIC may prohibit the payment of
dividends by the Bank, if a payment is determined, by reason of the financial
condition of the Bank, to be an unsafe and unsound banking practice. The Company
has an agreement with the Federal Reserve Bank of Chicago that requires us to
seek permission before paying any cash dividends.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act including any extensions of credit to us, investments
in our stock or other securities, and the acceptance of our stock as collateral
for loans. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to our directors
and officers, to our principal stockholders, and
to "related interests" of the directors, officers and principal stockholders. In
addition, federal law and regulations may affect the terms upon which any person
becoming one of our directors or officers or one of our principal stockholders
may obtain credit from banks with which the Bank maintains a correspondent
relationship.
Safety and Soundness Standards. Federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings.
In general, the guidelines prescribe the goals to be achieved in each area,
and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the agencies expect to
require a compliance plan from an institution whose failure to meet one or more
of the standards is of the severity that it could threaten the safe and sound
operation of the institution. Failure to submit an acceptable compliance plan,
or failure to adhere to a compliance plan that has been accepted by the
appropriate regulator, would constitute grounds for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law.
15
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
state usury and regulatory laws, and various federal statutes, including:
o the Equal Credit Opportunity Act,
o the Fair Credit Reporting Act,
o the Truth in Lending Act,
o the Real Estate Settlement Procedures Act, and
o the Home Mortgage Disclosure Act.
Regulations flowing from these laws prohibit discrimination, specify disclosures
to be made to borrowers regarding credit and settlement costs, and regulate the
mortgage loan servicing activities of Midwest, including the maintenance and
operation of escrow accounts and the transfer of mortgage loan servicing.
In receiving deposits, the Bank is subject to extensive regulation under
State and federal law and regulations, including:
o the Truth in Savings Act,
o the Expedited Funds Availability Act,
o the Bank Secrecy Act,
o the Electronic Funds Transfer Act,
o the Anti-Money Laundering Act,
o the Federal Deposit Insurance Act,
o the Patriot Act,
o the Check 21 Act, and
o the Gramm-Leach Bliley Act (and related privacy regulations).
Violation of these laws could result in the imposition of significant
damages and fines upon the Bank and its directors and officers.
Real Estate Lending Regulations. Federal regulators have adopted uniform
standards for appraisals of loans secured by real estate or made to finance
improvements to real estate. Banks are required to establish and maintain
written internal real estate lending policies consistent with safe and sound
banking practices and appropriate to the size of the institution and the nature
and scope of its operations. The regulations establish maximum loan to value
ratio limitations on real estate loans, which generally are equal to or greater
than the loan to value limitations established under the Bank's lending
policies.
Branching Authority. Michigan banks, including University Bank, have
authority under Michigan law to establish branches anywhere in the State of
Michigan, subject to receipt of all required regulatory approvals, including
approval of the Commissioner and the FDIC. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits that may be
held by the surviving bank and all of its insured depository institution
affiliates. The establishment of de novo interstate branches or the acquisition
of individual branches of a bank in another state, rather than the acquisition
of an out-of-state bank in its entirety, is allowed only if specifically
authorized by state law.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allowed individual states to "opt-out" of interstate branching authority by
enacting appropriate legislation prior to June 1, 1997. Michigan did not opt
out, and now permits both U.S. and non-U.S. banks to establish branch offices
16
in Michigan. The Michigan Banking Code permits the following in appropriate
circumstances and with the approval of the Commissioner:
o acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank,
or savings and loan association located in another state;
o acquisition by a Michigan-chartered bank of all or
substantially all of the assets of an FDIC-insured bank,
savings bank or savings and loan association located in another
state;
o consolidation of one or more Michigan-chartered banks and
FDIC-insured banks, savings banks or savings and loan
associations located in other states having laws permitting
this consolidation, with the resulting organization chartered
by Michigan;
o establishment by a foreign bank, which has not previously
designated any other state as its home state under the
International Banking Act of 1978, of branches located in
Michigan;
o establishment or acquisition of branches in Michigan by
FDIC-insured banks located in other states, the District of
Columbia or U.S. territories or protectorates having laws
permitting Michigan-chartered banks to establish branches in
these jurisdictions.
Further, the Michigan Banking Code permits the following, upon written notice to
the Commissioner:
o acquisition by a Michigan-chartered bank of one or more
branches, not comprising all or substantially all of the
assets, of an FDIC-insured bank, savings bank or savings and
loan association located in another state, the District of
Columbia, or a U.S. territory or protectorate;
o establishment by Michigan-chartered banks of branches located
in other states, the District of Columbia, or U.S. territories
or protectorates; and
o consolidation of one or more Michigan-chartered banks and
FDIC-insured banks, savings banks or savings and loan
associations located in other states, with the resulting
organization chartered by one of the other states.
Primary Regulator of Midwest. Midwest is an approved seller/servicer of
single-family mortgage loans for FNMA, FHLMC and HUD Title II (GNMA), and is
subject to their rules, regulations and examinations.
Primary Regulator of University Insurance & Investment Services. University
Insurance & Investment Services is licensed by the State of Michigan's Office of
Financial and Insurance Services, Insurance Division as both a life and health
and a property casualty insurance agency, and is subject to their rules,
regulations and examinations. University Insurance & Investment Services also
sells broker-dealer investment products and it and its licensed employees are
subject to the rules, regulations and examinations of the National Association
of Securities Dealers, the Securities & Exchange Commission, and the Insurance
Division of Michigan's Office of Financial and Insurance Services.
Item 1A. - Risk Factors
The information set forth under "Risk Factors: in Item 7 below is hereby
incorporated by reference.
Item 2. - Properties
17
Properties
- ----------
In December 2005, the Bank moved its main office and sole branch to the
historic Hoover Mansion located at 2015 Washtenaw Avenue, Ann Arbor, MI. In June
2005, the Bank purchased Hoover, LLC the owner of the Hoover Mansion, a 17,000
square foot facility. Previously the bank was located in a facility that it sold
in a sale-leaseback transaction in 2003. In April 2005, the owner of the
property offered the Bank an $800,000 early termination buyout of the lease if
the Bank could vacate the property by a date certain. The agreement was
subsequently amended and the move out date was set at December 15, 2005. The
Bank moved to the Hoover Mansion on the 10th of December, thus satisfying the
agreement for the financial incentive.
The Bank subleases a small portion of a site that includes a registered
historic building in Ann Arbor, at the corner of Washtenaw Avenue and Stadium
Boulevard as an ATM drive-through location. The minimum lease period ends
October 2010 with two optional five-year extensions. The Bank also owns 1/3 of
the Company that owns the site, Tuomy, LLC.
The Bank leases an ATM location in Ann Arbor at the corner of State and
Liberty near the University of Michigan Campus under a year-to-year lease.
Midwest leases an office in Houghton, Michigan under a year-to-year lease.
The Company believes that the office facilities are adequate to support the
anticipated level of future expansion of business.
Contractual Obligations
- -----------------------
The following table summarizes the existing contractual obligations of the
Company:
Payments Due By Period
----------------------
Less than 1-3 3-5 More than
Total year years years 5 years
---------------------------------------------------
Operating leases $ 84,612 $ 41,412 $ 14,400 $ 14,400 $ 14,400
Certificates of
deposit 18,197,803 12,295,703 2,800,460 2,713,559 388,081
---------- ---------- --------- --------- -------
Totals $18,282,415 $12,337,115 $2,814,860 $2,727,959 $402,481
========== ========== ========= ========= =======
Item 3. - Legal Proceedings
At December 31, 2005 the Company had no outstanding legal proceedings that
would have a material affect on the financial statements.
Item 4. - Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 2005 to a vote of
our shareholders.
18
PART II.
Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock and Dividend Information
Our common stock trades on the NASDAQ Small-Cap Market under the symbol
UNIB. The high and low sales prices of our common stock as quoted by NASDAQ, for
each quarter since January 1, 2004 are listed below:
High Low
First Quarter through March 7 $2.26 $1.76
2005
First Quarter 2.25 1.66
Second Quarter 2.35 1.75
Third Quarter 2.00 1.52
Fourth Quarter 2.00 1.53
2004
First Quarter $2.80 $2.05
Second Quarter 2.47 1.30
Third Quarter 1.72 1.05
Fourth Quarter 3.48 0.60
As of the March 7, 2006 we had approximately 540 stockholders including
approximately 200 beneficial owners of shares held by brokerage firms or other
institutions.
Our shareholders authorized a 1 for 2 reverse stock split in November 2002;
however, management has opted, at this time, not to implement the reverse stock
split. No cash dividends have been paid on our common stock. We do not currently
anticipate declaring or paying cash dividends on our common stock in 2006.
Certain Sales of Equity Securities
None
19
Item 6. - Selected Financial Data
University Bancorp, Inc.
Selected Consolidated Financial and Other Data
(Dollars in Thousands Except Per Share Data)
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Summary of operations (1)
Interest income $3,273 $2,744 $2,732 $3,194 $3,543
Interest expense 953 784 842 1,039 1,805
Net interest income 2,320 1,960 1,890 2,155 1,738
Provision for loan losses 17 (88) 189 100 40
Net interest income after
provision for loan losses 2,303 2,048 1,701 2,055 1,698
Net gain (loss) on
securities - - (54) 70 13
Profit(loss)from
investment in Michigan
BIDCO - - - - (115)
Gain on the sale of
mortgage loans 309 340 756 236 67
Other non-interest income 5,582 3,482 5,230 4,205 3,990
Non-interest expense 6,305 6,375 7,619 6,291 5,960
Income (loss) before tax 1,889 (505) 14 206 (307)
Income tax expense
(benefit) (100) 80 (80) - -
Net (loss)income 1,989 (585) 94 206 (307)
Selected Year End Balances
Total assets 64,540 50,786 43,549 46,249 45,623
Loans, net 45,303 42,647 34,474 32,784 34,447
Loans, held for sale 1,447 846 206 1,551 2,138
Cash, cash equivalents and
investment securities 8,580 2,838 4,701 6,521 3,946
Deposits 56,021 44,588 38,808 41,920 40,198
Short-term borrowings - 2,416 - - 92
Long-term borrowings - 34 166 298 1,658
Minority interest 2,502 440 445 360 305
Stockholders' equity 5,301 3,002 3,435 3,156 2,737
20
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Per Share Data
Common shares, year-end 4,148 4,125 4,027 3,900 3,753
Weighted avg shares,
year-end 4,147 4,085 3,940 3,859 2,278
Cash dividends - - - - -
Net income (loss)- basic
and diluted $0.48 $(0.14) $0.02 $0.05 ($0.13)
Book value of common shares $1.21 $0.73 $0.85 $0.81 $0.73
Selected Ratios
Net yield on earning assets 4.89% 4.68% 4.78% 5.30% 4.37%
Return on average assets 3.50% (1.24)% 0.22% 0.47% (0.67%)
Return on average equity 51.94% (18.18)% 2.80% 7.43% (12.49%)
Average equity to avg.
assets 6.77% 6.82% 7.75% 6.26% 5.38%
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of the following discussion and analysis is to assist the
reader in understanding and evaluating the changes in financial position and
results of operations over the past several years. Investors should refer to the
consolidated financial statements, the related notes thereto, and statistical
information presented elsewhere in this report when reading this section of the
report.
The cautionary statements described below are for the purpose of qualifying
for the "safe harbor" provisions of Section 21E of the Securities Exchange Act
of 1934.
This report includes "forward-looking statements" as that term is used in
the securities laws. All statements regarding our expected financial position,
business and strategies are forward-looking statements. In addition, the words
"anticipates," believes," "estimates," "seeks," "expects'" "plans," intends,"
and similar expressions, as they relate to us or our management, are intended to
identify forward-looking statements. The presentation and discussion of the
provision and allowance fort loan losses and statements concerning future
profitability or future growth or increases, are examples of inherently
forward-looking statements in that they involve judgments and statements of
belief as to the outcome of future events. Our ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse affect on our operations and out future
prospects include, but are not limited to changes in: interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in our market area and accounting principles, policies and
guidelines. These risks and uncertainties should not be considered in
21
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning us and our business, including
additional factors that could materially affect our financial results, is
included in our other filings with the Securities and Exchange Commission.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosures. On an on-going basis, we evaluate these
estimates, including those related to the allowance for loan losses, servicing
rights, other real estate owned and deferred tax assets. Estimates are based on
historical experience, information received from third parties and on various
other assumptions that are believed to be reasonable under the circumstances,
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is determined based on
management estimates of the amount required for losses inherent in the
portfolio. These estimates are based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged-off.
SERVICING RIGHTS - Servicing rights are evaluated quarterly for possible
impairment and are valued based on the lower of amortized cost or fair value of
the rights, using independent appraisals and grouping of the underlying loans as
to type, term and interest rates. Assumptions as to prepayment speeds and
retention rates may change and thereby impact the valuation. Any impairment of a
grouping is reported as a valuation allowance.
OTHER REAL ESTATE OWNED - Real estate properties acquired in collection of a
loan are recorded at fair value upon acquisition based on appraisals. Any
reduction to fair value from the carrying value of the related loan at the time
of foreclosure is accounted for as a loan loss. Subsequent reductions in the
value of the real estate owned are charged to earnings when probable and
estimable. Changes in real estate value in the future may impact the carrying
value.
DEFERRED TAX ASSETS - Deferred tax assets are recorded based on estimates of
future taxable income and utilization of existing net operating loss
carry-forwards. A valuation allowance adjusts deferred tax assets to the net
amount that is more likely than not to be realized. Actual results will impact
the estimates of these deferred tax assets.
RISK FACTORS
Our business involves a high degree of risk. The reader of this report
should carefully consider the risks and uncertainties described below and the
22
other information in this report before deciding whether to invest in shares of
our common stock. If any of the following risks actually occur, our business,
financial condition and results of operations could be materially adversely
affected. This could cause the trading price of our common stock to decline,
with the loss of all or part of an investment in our common stock. Described
below, are the material risks of investing in University Bancorp's common stock.
Investors should carefully consider these prior to purchasing any shares.
University Bank Has Incurred Significant Losses And May Never Achieve Sustained
Profitability
University Bank sold its profitable Upper Peninsula operations in late 1994
and relocated to Ann Arbor in early 1996. University Bank had a net loss from
operations each year between 1995 and 2001 and again in 2004. University Bank
had a profit in 2002, 2003 and 2005. Management of the Bank believes that as the
size of loan portfolio and retail deposits continue to increase that the Bank
should become more profitable, but there is no assurance that expenses will not
rise at a faster rate than expected as the Bank grows. There is no assurance
that University Bank will grow to a size that will enable it to sustain
profitability. University Bancorp had an accumulated deficit from operations of
$516,816 at December 31, 2005.
The Company's Stock Is Controlled By Insiders Of The Company, Which May Not
Provide You With The Best Possible Return On Your Investment
Insiders hold a majority of the shares outstanding of the Company. The
Ranzini Group (Mr. Stephen Lange Ranzini, Dr. Joseph Lange Ranzini, Mr. Paul
Lange Ranzini, Orpheus Capital, L.P. and the Ranzini Family Trust dated
12/20/89) beneficially owns 2,995,968, or 72.21% of the issued and outstanding
shares at March 29, 2006. These individuals are able to exert a significant
measure of control over University Bancorp's affairs and policies. This control
could be used, for example, to help prevent an acquisition of University
Bancorp, precluding shareholders from possibly realizing any possible premium
that may be offered for the common stock by a potential acquirer.
Your Ownership Of The Company May Be Further Diluted If University Bancorp
Requires Additional Capital
There can be no assurance that University Bancorp will not need additional
capital in the future to support the Bank's growth or to counter operating
losses. Funds necessary to meet the Bank's working capital needs and to finance
its expansion might not be available. If additional equity securities are needed
to finance future expansion, such sale could result in significant dilution to
the existing shareholders.
The Small Size Of University Bank Limits Its Ability To Compete With Larger
Financial Institutions
University Bank faces strong competition for deposits, loans and other
financial services from numerous Michigan and out-of-state banks, thrifts,
credit unions and other financial institutions. Some of the financial
institutions with which University Bank competes are not subject to the same
degree of regulation as University Bank. Many of these financial institutions
aggressively compete for business in the Ann Arbor area. Most of the Bank's
competitors have been in business for many years, have established customer
bases, have numerous branches, have substantially higher lending limits, and
offer certain services that we do not provide. The
23
dominant competitors in the Ann Arbor area are TCF National Bank, National City
Bank, Comerica Bank, Chase Bank, LaSalle Bank and Key Bank. There can be no
assurance that University Bank will be able to compete effectively with these
competitors unless it can continue to grow its operations. The Year Ended
December 31, 2005 Compared to the Years Ended December 31, 2004 and 2003
Summary of Results of Operations
The Company's net income was $1,989,169 in 2005, versus a net loss of
$584,820 in 2004 and net income of $94,442 in 2003. Basic and diluted (loss)
earnings per share for 2005, 2004 and 2003 were $0.48, $(0.14) and $0.02,
respectively.
The following table summarizes the pre-tax (loss) income of each profit
center of the Company for the years ended December 31, 2005, 2004, and 2003 (in
thousands):
2005 2004 2003
---- ---- ----
Community Banking $1,518 $(388) $(301)
Midwest Loan Services 426 (27) 426
Corporate Office (55) (90) (111)
------ ------ ------
Total $1,889 $(505) $ 14
====== ====== ======
2005 as compared with 2004
There were two material transactions in 2005 that resulted in the
significant change from the prior years. In 2005, the Bank was provided with a
lease termination buyout and recorded income of $800,000 from this agreement. As
part of the agreement the Bank moved out of its lease facility into another
facility that was purchased in June 2005. This income was partly offset by
additional costs of $300,000 incurred in carrying two headquarters for six
months of 2005 during the transition between the two locations. The second
transaction occurred in December 2005. The Bank spun off its Islamic banking
division into a separate corporation capitalized with $10,000,000. The Bank sold
off 20% of its shares in this corporation to outside investors for $3,000,000.
The transaction resulted in a $1,000,000 capital gain. This income was partially
offset by a cost of $80,000 incurred to buyout the rights to profit sharing to
future mortgage alternative securitization income of a consulting firm that
assisted us in forming the Islamic Banking Division.
Excluding the two material transactions in 2005, the operations of the Bank
and Midwest improved from 2004. The asset quality of Community Banking improved,
thus resulting in significantly lower problem asset expenses. Additionally, the
Islamic Banking division carried additional expenses throughout the year while
in the process of growing the business and forming the new corporation. At
Midwest, the volume of mortgage loans serviced increased 44.9% to 26,414 loans
as compared to year-end 2004.
The net income in 2005 includes a $100,000 tax benefit. This tax benefit is
derived from the expected utilization of tax loss carry forwards in 2006.
2004 as compared with 2003
The net loss in 2004 includes an $80,000 tax expense from a reduction in
deferred tax assets. Net income in 2003 included an income tax benefit of
$80,000.
24
Community Banking incurred a pretax loss of $388,000 during 2004 as opposed
to a loss of $301,000 in 2003. In 2004, Community Banking incurred approximately
$305,000 in expense related to the resolution of other real estate owned.
Additionally, Community Banking recorded a $156,000 impairment charge against
the investment in Michigan Capital Fund, L.P. I. The charge will eliminate
related expense and will therefore increase income by $100,000 in 2005 and
$56,000 in 2006. Community Banking is a tax benefit partner in a low to moderate
income housing partnership. The investment provides Community Banking with tax
credits that can be used to offset federal income taxes. The Company's overall
tax status in 2004 did not allow for the tax credits to be carried as an asset.
Accordingly, an impairment charge was deemed appropriate. The expenses for other
real estate owned and the impairment more than offset general operational
improvement in Community Banking in 2004 as compared to 2003, including a 23.1%
increase in loans and a 14.9% increase in deposits.
Midwest had a loss of $27,000 in 2004 as compared to income of $426,000 in
2003. In 2003, Midwest benefited from a significant volume of origination income
derived from the high level of mortgage refinancing due to lower rates. In 2004,
this income was substantially less. Income at Midwest was negatively impacted in
the first half of 2004 by investments of about $30,000 a month in overhead
intended to grow Midwest's jumbo and non-standard originations through a
secondary market conduit established with Lehman Brothers. The decrease in
mortgage originations offset improvements in other areas including a 21%
increase in mortgage loans sub-serviced, to 18,233 loans at December 31, 2004.
Net Interest Income
2005 as compared with 2004
Net interest income increased to $2,319,755 for year ended December 31,
2005 from $1,960,313 for same period in 2004. The yield on average earning
assets increased from 6.55% in 2004 to 6.90% in 2005. This increase occurred as
loans repriced in a higher interest rate environment throughout most of 2005.
Overall, average interest bearing assets increased from $41,921,021 in 2004 to
$47,438,660 in 2005.
The cost of interest bearing liabilities increased from 1.98% for the 2004
period to 2.07% in 2005. Average interest bearing liabilities increased from
$39,575,806 in 2004 to $46,106,469 in 2005.
The net yield on interest earning assets increased from 4.68% in 2004 to
4.89% in 2005. The increase in the net interest margin is attributable primarily
to an increase in low cost interest bearing demand deposits derived from
custodial funds from Midwest customers deposited at the Bank. The effect of
these low cost deposits mitigated the modest increase in the rise in the yield
on earning assets. In this case, the mix of the interest bearing assets has been
changing. As compared to 2004, the real estate loans represent a higher
percentage of total loans. Real estate loans, specifically single-family real
estate loans, generally have lower risk that commercial or installment loans.
Thus, the pricing of these loans tends to be lower than others.
2004 as compared with 2003
Net interest income increased to $1,960,313 for year ended December 31,
2004 from $1,890,462 for same period in 2003. The yield on average earning
assets dropped from 6.91% in 2003 to 6.55% in 2004. This drop occurred as
25
loans repriced in a generally lower medium term interest rate environment
throughout most of 2004. Additionally, the mix of assets changed. The Company
increased its single-family real estate loans while other loans dropped.
Single-family real estate loans have a lower yield as compared with commercial
and installment loans. Management directed its efforts in increasing this
category since real estate loans, specifically single-family homes, tend to have
lower credit risk. Overall, average interest bearing assets increased to
$41,921,020 in 2004 from $39,511,963 in 2003.
The following tables present for the average balances, the interest earned
or paid, and the weighted average yield for the period indicated:
NET INTEREST INCOME
<table>
2005
---------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
---------------------------------------------------
Interest Earning Assets:
Commercial Loans $16,910,945 $1,416,280 8.37%
Real Estate Loans (1) 25,762,012 1,605,405 6.23%
Installment Loans 2,038,274 160,747 7.89%
--------------------------------------
Total Loans 44,711,231 3,182,432 7.12%
--------------------------------------
Investment Securities 1,918,857 55,784 2.91%
Federal Funds & Bank Deposits 808,572 34,675 4.29%
--------------------------------------
Total Interest Bearing
Assets 47,438,660 3,272,891 6.90%
--------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 10,202,304 32,146 0.32%
Savings 471,145 4,612 0.98%
Time 14,888,596 492,222 3.31%
Money Market Accts 19,312,868 380,621 1.97%
Short-term Borrowings 1,225,219 43,203 3.53%
Long-term Borrowings 6,337 332 5.24%
--------------------------------------
Total Interest Bearing Liabilities 46,106,469 953,136 2.07%
--------------------------------------
Net earning assets, net interest
income, and interest rate spread $1,332,191 $2,319,755 4.83%
======================================
Net yield on interest-earning assets 4.89%
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
26
NET INTEREST INCOME
<table>
2004
----------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
----------------------------------------------------
Interest Earning Assets:
Commercial Loans $17,007,088 $1,258,106 7.40%
Real Estate Loans (1) 20,309,592 1,220,300 6.01%
Installment Loans 1,917,802 157,151 8.19%
---------------------------------------
Total Loans 39,234,482 2,635,557 6.72%
---------------------------------------
Investment Securities 2,403,795 104,988 4.37%
Federal Funds & Bank Deposits 282,744 3,726 1.32%
---------------------------------------
Total Interest Bearing
Assets 41,921,021 2,744,271 6.55%
---------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 6,651,566 61,350 0.92%
Savings 449,143 4,758 1.06%
Time 11,831,102 328,683 2.78%
Money Market Accts 19,571,919 367,262 1.88%
Short-term Borrowings 972,076 16,999 1.75%
Long-term Borrowings 100,000 4,907 4.91%
---------------------------------------
Total Interest Bearing Liabilities 39,575,806 783,959 1.98%
---------------------------------------
Net earning assets, net interest
income, and interest rate spread $ 2,345,215 $1,960,312 4.57%
=======================================
Net yield on interest-earning assets 4.68%
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
27
NET INTEREST INCOME
<table>
2003
---------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
---------------------------------------------------
Interest Earning Assets:
Commercial Loans $18,283,474 $1,450,349 7.93%
Real Estate Loans (1) 14,353,880 928,763 6.47%
Installment Loans 2,102,820 175,398 8.34%
--------------------------------------
Total Loans 34,740,174 2,554,510 7.35%
--------------------------------------
Investment Securities 3,789,545 165,571 4.37%
Federal Funds & Bank Deposits 982,244 12,018 1.22%
--------------------------------------
Total Interest Bearing Assets 39,511,963 2,732,099 6.91%
--------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 6,365,212 56,167 0.88%
Savings 409,633 4,634 1.13%
Time 13,658,810 420,932 3.08%
Money Market Accts 17,220,500 344,827 2.00%
Short-term Borrowings 227,063 2,933 1.29%
Long-term Borrowings 232,000 12,144 5.23%
------------------------------------
Total Interest Bearing Liabilities 38,113,218 841,637 2.21%
------------------------------------
Net earning assets, net interest
income, and interest rate spread $ 1,398,745 $1,890,462 4.70%
====================================
Net yield on interest-earning assets
4.78%
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
The tables above do not specify the average level of non-interest bearing
demand deposits, which were $3,641,640, $2,768,253, and $1,979,705 for the years
ended December 31, 2005, 2004 and 2003, respectively.
The following table presents information regarding fluctuations in our
interest income and interest expense for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate); and (2) changes in rate (changes in rate multiplied by
old volume); with the rate/volume variance allocated to changes in rate:
28
<table>
RATE VOLUME TABLE
-----------------------------------------------------------
2005 - 2004
-----------------------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
Interest Income:
Commercial Loans $ (7,151) 165,325 $ 158,174
Real Estate Mortgage Loans 338,298 46,806 385,104
Installment/Consumer Loans 9,640 (6,044) 3,596
Investment Securities (18,515) (30,689) (49,204)
Federal Funds & Bank Deposits 13,991 16,959 30,950
----------------------------------------------------------
Total Interest Income 336,263 192,357 528,620
----------------------------------------------------------
Interest Bearing Liabilities:
Demand Deposits 23,095 (52,298) (29,203)
Savings Deposits 226 (372) (146)
Time Deposits 94,242 69,297 163,539
Money Market Accounts (4,912) 18,271 13,359
Short-term Borrowings 5,344 20,860 26,204
Long-term Borrowings (4,887) 312 (4,575)
-----------------------------------------------------------
Total Interest Expense 113,108 56,070 169,178
-----------------------------------------------------------
Net Interest Income $223,155 $136,287 $359,442
===========================================================
RATE VOLUME TABLE
------------------------------------------------------------
2004 - 2003
------------------------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
Interest Income:
Commercial Loans $ (97,777) $(94,466) $(192,243)
Real Estate Mortgage Loans 361,888 (70,351) 291,537
Installment/Consumer Loans (15,206) (3,041) (18,247)
Investment Securities (60,524) (59) (60,583)
Federal Funds & Bank Deposits (9,154) 862 (8,292)
------------------------------------------------------------
Total Interest Income 179,227 (167,055) 12,172
------------------------------------------------------------
Interest Bearing Liabilities:
Demand Deposits 2,584 2,599 5,183
Savings Deposits 430 (306) 124
Time Deposits (53,129) (39,120) (92,249)
Money Market Accounts 45,058 (22,623) 22,435
Short-term Borrowings 12,697 1,369 14,066
Long-term Borrowings (6,520) (717) (7,237)
------------------------------------------------------------
Total Interest Expense 1,120 (58,798) (57,678)
------------------------------------------------------------
Net Interest Income $178,107 $ (108,257) $69,850
============================================================
29
Loan Portfolio
Information regarding the Bank's loan portfolio as of December 31, 2005 and
2004 is set forth under Note 5 to University Bancorp's consolidated financial
statements included with this report.
Provision for Loan Losses
The Bank charges to operations a provision for loan losses which is
intended to create an allowance for future loan losses inherent in the Bank's
portfolio. Each year's provision reflects management's analysis of the amount
necessary to maintain the allowance for loan losses at a level adequate to
absorb anticipated losses. In its evaluation, management considers factors like
historical loan loss experience, specifically identified problem loans,
composition and growth of the loan portfolio, current and projected economic
conditions, and other pertinent factors. A loan is charged-off by management as
a loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Non-performing loans are defined as loans which have been placed on
non-accrual status and loans over 90 days past due as to principal or interest
and still in an accrual status. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued. See Note 5 of
the Consolidated Financial Statements for additional information regarding
impaired and past due loans. Non-performing loans amounted to $349,681, $648,020
and $1,117,127 at December 31, 2005, 2004 and 2003, respectively. At December
31, 2005, there were loans totaling $10,172 that were past due over 90 days, but
still accruing interest. Payments were made to bring these loans to a current
status shortly after year-end.
The provision for loan losses in 2005 was $17,209 compared to $(87,500) in
2004 and $189,400 in 2003. In 2004, the analysis of the loan loss reserve
resulted in a reduction in the provision of $87,500. This resulted from lower
charge offs, payoffs of previously classified problem loans and an improvement
in the quality of the loans in the portfolio. The Bank determined the required
reserve was less than in previous years.
Loans charged off, net of recoveries, were $20,916, $13,494 and $143,501 in
2005, 2004 and 2003, respectively. The allowance for possible loan losses
totaled $349,416, $353,124 and $454,118 at the end of 2005, 2004 and 2003,
respectively. The following table summarizes the loan loss expense for the Bank
for the years ended December 31, 2005, 2004 and 2003.
<table>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands)
2005 2004 2003
---- ---- ----
Balance at beginning of the period $ 353 $ 454 $ 408
Charge offs - Domestic:
Commercial loans 23 64 227
Real estate mortgages 11 5 -
Installment loans - - 13
------- ------- -------
Subtotal 34 69 240
------- -------- -------
Recoveries - Domestic:
Commercial loans 12 54 94
Real estate mortgages - 2 -
Installment loans 1 - 3
------- ------- -------
Subtotal 13 56 97
------- ------- -------
Net charge offs 21 13 143
------- ------- -------
Provision for loan losses 17 (88) 189
------- ------- -------
Balance at end of period $ 349 $ 353 $ 454
======= ======== =======
Ratio of net charge offs during
period to average loans
outstanding during period 0.05% 0.03% 0.41%
30
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands)
<table>
Allocated portion
of allowance Percentage of loans in each
at December 31 category to total loans
2005 2004 2005 2004
---- ---- ---- ----
Loan category:
Domestic:
Commercial loans $ 69 $ 129 32.28% 43.35%
Real estate mortgages 136 175 64.00% 51.76%
Installment loans 22 49 3.72% 4.89%
Allocated for economic factors 122 - N/A N/A
-------- -------- -------- --------
$ 349 $ 353 100.0% 100.0%
======== ======== ======== ========
At At
December 31, 2005 December 31, 2004
---------------------------- ---------------------------
Total loans (1) $45,652,326 $42,999,800
Reserve for loan losses $ 349,416 $ 353,124
Reserve/Loans % 0.76% 0.82%
(1) Excludes loans held for sale.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor and the future performance of these loans is dependent upon the
performance of relatively limited geographical areas. As a result of the weak
Michigan economy, the Bank's future loss ratios may exceed historical loss
ratios.
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 and Non-Interest Expense
Non-interest income. Total non-interest income increased to $5,891,330 for
the year ended December 31, 2005 from $3,822,548 for period ended in 2004. The
increase was principally a result of increases in fees from loan servicing and
sub-sub-servicing other income and gains from the relocation of the Bank's
headquarters and formation of the Islamic Banking subsidiary. Fees from loan
servicing and sub-servicing increased at Midwest as the number of customers
increased. Other income was significantly higher than in 2004 due to income
derived from the buyout of the Bank's lease from a developer and a gain from the
sale of Bank owned shares in the Islamic Banking subsidiary. The Bank agreed to
terminate its lease agreement early in exchange for $800,000. The Bank moved out
of its leased facility in December 2005 and moved to a new another facility that
it purchased in June 2005. The Bank earned $1,000,000 from the sale of 20% of
the Islamic Banking subsidiary for $3,000,000
Total non-interest income decreased to $3,822,548 for the year ended
December 31, 2004 from $5,932,492 for period ended in 2003. The decrease was
principally a result of decreases in loan origination and gain on the sales
31
of mortgage loans at Midwest. In 2003, the rates on mortgages were historically
low which spurred an increase in the re-financing market. In 2004, the rates
were still relatively low, but the re-financing activity decreased
significantly. The Bank's wholly owned insurance and investment subsidiary,
University Insurance & Investment Services, enjoyed a record year, producing
$219,631 in fee income compared to $168,577, a 30% increase.
Mortgage banking. At December 31, 2005, Midwest was sub-servicing 26,144
mortgages, an increase of 44.9% from 18,233 mortgages at December 31, 2004. The
balance of loans sub-serviced was $3.2 billion at December 31, 2005 as compared
with over $2.3 billion at December 31, 2004.
Securities. There were no sales of marketable and non-marketable equity
securities in 2005 and 2004. Proceeds from sales of available for sale debt
securities were $0, $0 and $58,879 for the years ended December 31, 2005, 2004
and 2003, respectively, excluding sales associated with the Bank's mortgage
banking operation. There were gross gains of $0, $3,607 and $0 on 2005, 2004 and
2003 sales, respectively and a gross loss of $54,011 on 2003 sales.
At December 31, 2005 gross unrealized losses in our available-for-sale
securities were $34,721 and gross unrealized gains were $0. At December 31, 2004
gross unrealized losses in our available-for-sale securities were $51,357 and
gross unrealized gains were $0.
Non-interest expense. Non-interest expense decreased to $6,304,707 in the
period ended December 31, 2005 from $6,375,181 for the same period in 2004. The
decrease in non-interest expense in 2005 was the result of decreases in mortgage
banking expense and amortization of mortgage servicing rights which were
partially offset by increases in salaries and benefits flowing from ongoing
growth in the number of employees as our business at Midwest expanded, audit and
legal expense due to Sarbanes-Oxley related audit fee increases and legal
expense associated with the relocation of the bank's headquarters, occupancy
expense due to carrying two headquarters for six months of 2005 and increased
consulting fees related to business development. In addition, in 2004 we
incurred an impairment charge of $156,000 related to our remaining investment in
a tax credit partnership and 2005 had no impairment charges.
Non-interest expense decreased to $6,375,181 in the period ended December
31, 2004 from $7,619,112 for the same period in 2003. The decrease was due
principally to decreases in salaries and benefits, mortgage banking expense, and
amortization of servicing rights. The higher mortgage interest rates in 2004
resulted in lower income from mortgage origination as well as lower expenses.
These decreases in costs were partially offset by an increase in other real
estate owned expense and an impairment charge as noted previously.
Income Taxes
Income tax (benefit) expense in 2005 was $(100,000), $80,000 in 2004 and
(80,000) in 2003. The tax benefit was recognized because of the operating profit
in 2005 and 2003, and therefore a portion of existing net operating loss
carry-forwards were reasonably expected to reduce future amounts of taxable
income. The tax benefit recognized in 2003 was reversed in 2004 because of the
operating loss recognized during the year and uncertainty at that time based on
the 2004 results of recoverability of the deferred tax asset. The effective tax
(benefit) rate was 34% for each of the years 2005, 2004 and 2003.
32
At December 31, 2005, the Company had net operating loss and tax credit
carry-forwards that could be utilized to shelter approximately $3.6 of future
taxable income. Realization of income tax benefits are not recorded in the
financial statements as realization of these benefits is dependent upon
generating sufficient future taxable income. See footnote 13 to the financial
statements for more information.
Liquidity and Capital Resources
Liquidity. Loans receivable, net of reserves and excluding loans held for
sale, increased to $45.30 million in 2005 from $42.65 million in 2004. Cash and
cash equivalents including Federal Funds sold on an overnight basis at the end
of 2005 were $7.75 million, while securities were $833,762. At year-end 2005,
the Bank had an unused line of credit from the Federal Home Loan Bank of
Indianapolis of $3.2 million, and an unused line of credit from the Federal
Reserve Bank of Chicago of $6.7 million. The balance of the loan was $0 and
$34,000 at year-end 2005 and 2004. The note was paid in full in early 2005.
University Bank, as an FDIC-insured bank, is subject to certain regulations
that require the maintenance of minimum liquidity levels of cash and eligible
investments. The Bank has historically exceeded this minimum as a result of its
investments in federal funds sold, U.S. government and U.S. agency securities
and cash. In addition, University Bancorp had $3,747 in cash at the end of 2005
to meet cash needs, primarily operating expenses including audit and NASDAQ
listing fees. Management intends that the cash on hand, the exercise of stock
options and possible sale of additional preferred stock will be sufficient to
cover our operating expenses during 2006 and 2007. The Company's total
stockholders' equity at December 31, 2005 was approximately $5.30 million
compared to $3.00 million at December 31, 2004.
The Bank's Tier 1 Capital at December 31, 2005 was $7.6 million, or 14.0%.
The Tier 1 capital to total assets ratio of 14.0% exceeded the 5.0% level, which
categorized the Bank as "well capitalized" as defined by the FDIC. At December
31, 2005, the Bank's 18.4% total risk-based capital ratio exceeded the FDIC's
threshold of 10.0%, which placed the Bank in the "well capitalized" category.
The following table provides detailed information about the Bank's risk-adjusted
assets and actual capital percentages:
33
<table>
TIER 1 CAPITAL 2005 2004
----------------------------------
Total Equity Capital $5,311 $2,880
Add: Unrealized losses on available-for-sale securities 35 52
Add: Minority interest 2,502 440
Less: Other identifiable intangible assets 250 214
----------------------------------
Total Tier 1 Capital 7,598 3,158
TIER 2 CAPITAL
Allowance for loan & lease losses 349 353
Less: Excess Allowance 0 0
----------------------------------
Total Tier 2 Capital 349 353
Total Tier 1 & Tier 2 Capital $7,947 $3,511
==================================
CAPITAL RATIOS
Tier 1/Total Average Assets 14.00% 6.45%
Tier 1/Total Risk-Weighted Assets 17.63% 8.52%
Tier 1 & 2/Total Risk-Weighted Assets 18.44% 9.47%
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 123(R) (revised 2004), Share-Based Payment. SFAS No. 123(R) requires
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. The cost will be measured based on the fair
value of the instruments issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion
No. 25. As originally issued in 1995, SFAS No. 123 established as preferable the
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. We will be required to apply SFAS No. 123(R)
as of the first interim reporting period that begins after December 15, 2005,
and we plan to adopt it using the modified-prospective method, effective January
1, 2006. We are currently evaluating the impact SFAS No. 123(R) will have on us.
Based on our preliminarily analysis, the impact of the additional compensation
expense will not be material during as a result of this new accounting standard.
Recent Events
On February 15, 2006, the $1,500,000 subscription receivable for the
purchase of 20% of University Islamic Financial Corporation by Virtue Investors,
LLC was paid in full, completing the funding of the $3,000,000 sale.
On February 21, 2006, the Bank entered into a master purchase agreement
with the Federal Home Loan Mortgage Corporation to create a secondary market for
Sharia'a compliant loans to assist in home acquisitions by Islamic homebuyers.
The agreement calls for Freddie Mac to support $100,000,000 in Sharia'a home
financing transactions over the next year. The first transaction, under the
agreement, closed in mid-March 2006.
34
ITEM 7A. MARKET RISK
Impact of Inflation
The primary impact of inflation on our operations is reflected in increased
operating costs. Since our assets and liabilities are primarily monetary in
nature, changes in interest rates have a more significant impact on our
performance than the general effects of inflation. However, to the extent that
inflation affects interest rates, it also affects our net income.
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. This 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' investment in mortgage servicing rights and improve Midwest' current
return on these rights by lowering required amortization rates on the rights and
decreasing the opportunity for customers to refinance those loans. Rising
interest rates tend to decrease new mortgage origination activity, negatively
impacting current income from the Bank's retail mortgage banking operations and
Midwest's mortgage banking operations. Rising interest rates also slow Midwest'
rate of growth, but increases the duration of its existing mortgages being
sub-serviced under contract.
The Bank's securities portfolio is designed to offset a portion of the
market value risk associated with the servicing rights. During period of
declining interest rates, the estimated duration period for the Bank's FNMA CMO
tends to shorten, thus accelerating the income from the accretion of the bond's
discount. This income mitigates the rapid amortization of the servicing rights.
In a rising rate environment, the accretion of income on the bond tends to
lessen.
The table on the following page details our interest sensitivity gap
between interest-earning assets and interest bearing liabilities at December 31,
2005. Certain items in the table are based upon various assumptions that may not
necessarily reflect future experience, and therefore, certain assets and
liabilities may in fact mature or re-price differently from what is illustrated.
The one-year static gap position at December 31, 2005 was estimated to be ($8.3
million) or (12.82%):
35
<table>
Asset/Liability Position Analysis as of December 31, 2005
(Dollar amounts in Thousands)
Maturing or Repricing 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 $11,663 3,308 9,806 17,992 3,970 (349) $46,390
Non-accrual loans - - - - 360 360
Securities 50 540 150 94 - - 834
Other assets 2,641 800 - - - 5,768 9,209
Cash and Due from
Banks 7,247 - - - 500 7,747
------------------------------------------------------------------------------------------
Total assets 21,601 4,648 9,956 18,086 3,970 6,279 64,540
------------------------------------------------------------------------------------------
LIABILITIES
- -----------
Time deposits 9,762 3,729 2,801 1,629 277 18,198
Demand -interest
Bearing 14,080 6,952 9,955 3,500 - - 34,487
Demand - non interest - - - - - 2,919 2,919
Savings - - 418 - - - 418
Other borrowings - - - - - - -
Other liabilities - - - 3,217 3,217
Stockholders' equity - - - - - 5,301 5,301
------------------------------------------------------------------------------------------
Total liabilities $23,842 10,681 13,174 5,129 277 11,437 $64,540
------------------------------------------------------------------------------------------
Gap (2,241) (6,033) (3,218) 12,957 3,693 (5,158) -
==========================================================================================
Cumulative gap (2,241) (8,274) (11,492) 1,465 5,158 -
=============================================================================
Gap percentage -3.47 -12.82% -17.81% 2.27% 7.99% 0.00%
============================================================================
The following repricing information is provided for the Bank's investment
portfolio, using book values, as of December 31, 2005:
Investment Portfolio Maturities ($ amounts in thousands) and Yield by Type:
<table>
Maturity or Repricing Interval:
Less Than 1 Year to 5 Years to More Than
One Year 5 Years 10 Years 10 Years
-------- ------- -------- --------
Government Agencies:
Amount $559 $0 $0 $275
Yield 0% 0% 0% 4.70%
Additional information regarding the Bank's investments is set forth under Note
4 to the consolidated financial statements.
36
The following information illustrates maturities and sensitivities of the Bank's
loan portfolio to changes in interest rates as of December 31, 2005:
Loan Portfolio Maturities by Type ($ amounts in thousands):
<table>
Maturity Interval:
Less Than 1 Year to More Than
One Year 5 Years 5 Years Total
-------- ------- ------- -----
Commercial/Installment $ 5,873 $ 8,835 $2,450 $ 17,158
Real Estate Mortgage (1) 1,552 2,995 23,947 28,494
Installment/Consumer 0 0 0 0
------- -------- ------- --------
Total $ 7,425 $ 11,830 $26,397 $ 45,652
======= ======== ======= ========
Maturity Maturity
Less Than More Than
One Year One Year Total
------- -------- --------
Total Variable Rate Loans $3,627 $ 28,537 $ 32,164
Total Fixed Rate Loans 3,878 9,610 13,488
----- ----- ------
Total Loans (1) $7,505 $ 38,147 $ 45,652
====== ======== ========
(1) Excludes loans held for sale of $1,446,575 and the allowance for loan
losses.
37
Item 8. - Financial Statements and Supplementary Data
UNIVERSITY BANCORP, INC.
--------------------
CONSOLIDATED FINANCIAL STATEMENTS
--------------------
DECEMBER 31, 2005, 2004 and 2003
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
University Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of University
Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 2005, and the
related consolidated statement of operations, comprehensive income (loss),
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of University Bancorp,
Inc. and Subsidiaries as of December 31, 2005, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ UHY LLP
Southfield, Michigan
March 10, 2006
39
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholder
University Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of University
Bancorp, Inc. and subsidiaries as of December 31, 2004 and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for each of the two years ended December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Midwest Loan Services, Inc., an eighty percent owned subsidiary, which
statements reflect total assets of 5.2 percent as of December 31, 2004, and
total revenues of 44.7 percent and 48.7 percent, respectively, for each of the
two years ended December 31, 2004. Those statements were audited by other
auditors, whose report thereon has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Midwest Loan Services, Inc.,
is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of University Bancorp, Inc. and
subsidiaries as of December 31, 2004, and the results of their operations and
their cash flows for the each of the two years ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
/S/ GRANT THORNTON LLP
Southfield, Michigan
March 29, 2005
40
<table>
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets
December 31, 2005 and 2004
December 31, December 31,
ASSETS 2005 2004
--------------------- -------------------
Cash and due from banks $ 7,746,666 $ 1,731,569
Securities available for sale, at market 833,762 1,106,607
Federal Home Loan Bank Stock 941,200 921,700
Loans held for sale, at the lower of cost or market 1,446,575 846,400
Loans 45,652,326 42,999,800
Allowance for loan losses (349,416) (353,124)
--------------------- -------------------
Loans, net 45,302,910 42,646,676
Premises and equipment, net 2,802,816 946,704
Mortgage servicing rights, net 1,471,808 1,097,786
Real estate owned, net 276,987 534,043
Accounts receivable 2,585,524 30,949
Accrued interest receivable 205,069 148,344
Prepaid expenses 285,015 250,249
Goodwill 103,914 103,914
Other assets 537,666 420,757
--------------------- -------------------
TOTAL ASSETS $ 64,539,912 $ 50,785,698
===================== ===================
-Continued-
41
<table>
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
December 31, 2005 and 2004
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
--------------------- -------------------
Liabilities:
Deposits:
Demand - non interest bearing $ 2,919,887 $ 3,047,397
Demand - interest bearing 34,485,047 28,600,355
Savings 418,308 499,865
Time 18,197,803 12,440,182
--------------------- -------------------
Total Deposits 56,021,045 44,587,799
Short term borrowings - 2,416,000
Long term borrowings - 34,000
Accounts payable 395,604 115,230
Accrued interest payable 110,619 50,296
Other liabilities 210,190 140,629
--------------------- -------------------
Total Liabilities 56,737,458 47,343,954
Minority Interest 2,501,873 440,118
Stockholders' equity:
Preferred stock, $0.001 par value;
$1,000 liquidation value;
Authorized - 500,000 shares;
Issued - 27,791 shares in 2005 28 -
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,263,062 shares in 2005 and
4,240,641 shares in 2004 42,630 42,406
Additional paid-in-capital 6,149,990 5,841,331
Accumulated deficit (516,816) (2,490,224)
Treasury stock - 115,184 shares in 2005
and 2004 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities
available for sale, net (34,721) (51,357)
--------------------- -------------------
Total Stockholders' Equity 5,300,581 3,001,626
--------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,539,912 $ 50,785,698
===================== ===================
The accompanying notes are an integral part of the consolidated financial statements.
42
<table>
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
----------------- ---------------- -------------------
Interest income:
Interest and fees on loans $ 3,182,432 $ 2,635,557 $ 2,554,510
Interest on securities:
U.S. Government and agencies 16,107 48,064 81,269
Other securities 39,677 56,924 84,302
Other interest income 34,675 3,726 12,018
------------------ ---------------- ------------------
Total interest income 3,272,891 2,744,271 2,732,099
------------------ ---------------- ------------------
Interest expense:
Interest on deposits:
Demand deposits 412,767 428,611 400,994
Savings deposits 4,612 4,758 4,634
Time certificates of deposit 492,222 328,683 420,932
Short term borrowings 43,203 16,999 2,933
Long term borrowings 332 4,907 12,144
------------------ ---------------- ------------------
Total interest expense 953,136 783,958 841,637
------------------ ---------------- ------------------
Net interest income 2,319,755 1,960,313 1,890,462
(Credit) provision for loan losses 17,209 (87,500) 189,400
------------------ ---------------- ------------------
Net interest income after
(credit) provision for loan
losses 2,302,546 2,047,813 1,701,062
------------------ ---------------- ------------------
Other income:
Loan servicing and sub-servicing
fees 1,736,285 1,409,283 1,128,293
Initial loan set-up and other fees 1,396,813 1,550,620 3,382,955
Gain on sale of mortgage loans 308,648 340,149 756,170
Insurance & investment fee income 200,585 219,631 168,577
Deposit service charges and fees 107,100 112,163 110,608
Net security (losses) - (446) (54,011)
Gain on the sale and leaseback of
premises 210,315 184,873 217,053
Other 1,931,584 6,275 222,847
------------------ ---------------- ------------------
Total other income 5,891,330 3,822,548 5,932,492
------------------ ---------------- ------------------
-Continued-
43
<table>
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations (continued)
For the Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
------------------ ---------------- ------------------
Other expenses:
Salaries and benefits $ 3,000,918 $ 2,866,849 $ 3,358,060
Occupancy, net 517,167 415,156 422,767
Data processing and equipment 570,008 569,297 487,701
Legal and audit 343,135 217,414 202,865
Consulting fees 287,117 137,569 173,132
Mortgage banking 190,671 246,346 710,907
Servicing rights amortization 137,736 448,553 871,175
Advertising 162,296 145,592 142,996
Memberships and training 90,902 132,467 118,581
Travel and entertainment 148,159 103,875 121,631
Supplies and postage 240,322 207,141 244,615
Insurance 153,280 134,163 89,532
Other operating expenses 462,996 750,759 675,150
------------------ ---------------- ------------------
Total other expenses 6,304,707 6,375,181 7,619,112
------------------ ---------------- ------------------
Income(loss) before income taxes 1,889,169 (504,820) 14,442
Income tax (benefit) expense (100,000) 80,000 (80,000)
------------------ ---------------- ------------------
Net income(loss) $ 1,989,169 $ (584,820) $ 94,442
Basic income(loss)per common share $ 0.48 $ (0.14) $ 0.02
================== ================ ==================
Diluted income(loss)per common share $ 0.47 $ (0.14) $ 0.02
================== ================ ==================
Weighted average shares outstanding -Basic 4,146,504 4,085,244 3,940,433
Weighted average shares outstanding -Diluted 4,184,430 4,085,244 4,074,415
The accompanying notes are an integral part of the consolidated financial statements.
44
<table>
UNIVERSITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
-------------------- ------------------ ------------------
Net income (loss) $1,989,169 $(584,820) $94,442
Other comprehensive (loss)income:
Unrealized gains (losses) on
securities available for sale 16,636 (13,008) (11,042)
Less: reclassification
adjustment for accumulated
gains (losses) included in net
income (loss) - (446) (54,011)
-------------------- ------------------ ------------------
16,636 (12,562) 42,969
-------------------- ------------------ ------------------
Comprehensive income (loss) $2,005,805 $(597,382) $137,411
==================== ================== ==================
The accompanying notes are an integral part of the consolidated financial statements.
45
<table>
UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2005, 2004, and 2003
Preferred Stock Common Stock Accumulated
$.001 Par Value $.01 Par Value Additional Treasury Stock Retained Other Total
---------------- ------------------ ----------- -------- --------------- -------- ------ -------------
Number of Par Number of Par Paid In Number of Earnings Comprehensive Stockholder
Shares Value Shares Value Capital Shares Cost (Deficit) Loss Equity
------- ------ --------- ------- ---------- --------- ---------- ------------ --------- -----------
Balance January 1, 2003 - - 4,014,732 $40,147 $5,537,961 (115,184) $(340,530) $(1,999,846) $(81,764) $3,155,968
------ ------ --------- ------- ---------- ---------- ---------- ------------ --------- -----------
Issuance of common
stock at weighted
average price of $1.11
per share, net of
expenses of $0.00 127,000 1,270 139,980 141,250
Decrease in unrealized
loss on securities
available for sale,
net of tax 42,969 42,969
Net Income 94,442 94,442
------ ------ --------- ------- ---------- ---------- ---------- ------------ --------- -----------
December 31, 2003 4,141,732 41,417 5,677,940 (115,184) (340,530) (1,905,404) (38,795) 3,434,629
------ ------ --------- ------- ---------- ---------- ---------- ------------ --------- -----------
Issuance of common stock at 98,909 989 164,380
weighted average price of
$1.58 per share, net of
expenses of $0.00 163,391
Decrease in unrealized loss on
securities available for sale,
net of tax (12,562) (12,562)
Net Loss (584,820) (584,820)
------ ------ --------- ------- ---------- ---------- ---------- ------------ --------- -----------
December 31, 2004 4,240,641 42,406 5,841,331 (115,184) (340,530) (2,490,224) (51,357) 3,001,626
------ ------ --------- ------- ---------- ---------- ---------- ------------ --------- -----------
Issuance of preferred
stockat $1,000 per
share, net of expenses
of $10,000 27,791 $28 267,883 267,911
Preferred stock dividend (15,761) (15,761)
Issuance of common stock at
weighted average price of
$1.11 per share, net of
expenses of $0.00 22,421 224 40,776 41,000
Decrease in unrealized loss on
securities available for sale,
net of tax 16,636 16,636
Net Income 1,989,169 1,989,169
------ ------ --------- ------- ---------- ---------- ---------- ------------ --------- -----------
December 31, 2005 27,791 $28 4,263,062 $42,630 $6,149,990 (115,184) $(340,530) $ (516,816) $(34,721) $5,300,581
====== ====== ========= ======= ========== ========== ========== ============ ========= ===========
The accompanying notes are an integral part of the consolidated financial statement
46
<table>
UNIVERSITY BANCORP, INC.
Consolidated Statements of Cash Flows
For the years ended December 30, 2005, 2004 and 2003
2005 2004 2003
------------------ ------------------ -------------------
Cash flow provided by (used in) operating activities:
Net income (loss) $ 1,989,169 $ (584,820) $ 94,442
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 337,592 318,584 305,740
Amortization 137,736 704,797 971,175
Provision for loan loss 17,209 (87,500) 189,400
Gain on sale of mortgages (308,648) (340,149) (756,170)
Gain on the sale and leaseback of premises (210,315) (184,873) (217,053)
(Gain) loss on other real estate owned (9,294) 64,695 (134,668)
Accretion on securities (1,143) (11,562) (15,836)
Deferred income tax (benefit) expense (100,000) 80,000 (80,000)
Originations of mortgage loans (55,785,241) (52,016,364) (129,039,261)
Proceeds from mortgage loan sales 55,493,714 51,716,121 131,140,418
Net loss on sale of securities - 446 54,011
Net change in:
Other assets (2,892,916) (538,295) (1,025,362)
Other liabilities 2,482,328 (270,275) 265,470
------------------- ------------------ -------------------
Net cash provided (used in) by operating activities 1,150,191 (1,149,195) 1,752,306
------------------- ------------------ -------------------
Cash flow provided by (used in) investing activities:
Purchase of investment securities - (8,853) (98,533)
Proceeds from sales of investment
securities - 49,981 59,879
Proceeds from maturities/pay downs of
investment securities 290,624 529,247 1,497,117
Proceeds from sale of other real estate
owned 713,611 585,784 572,250
Loans granted, net of repayments (3,132,020) (8,239,730) (1,880,053)
Proceeds from sale of premises - - 1,033,464
Premises and equipment expenditures (2,283,704) (435,481) (231,056)
------------------- ------------------ -------------------
Net cash (used in) provided by investing activities (4,411,489) (7,519,052) 953,068
------------------- ------------------ -------------------
47
<table>
UNIVERSITY BANCORP, INC.
Consolidated Statements of Cash Flows
For the years ended December 30, 2005, 2004 and 2003
2005 2004 2003
------------------ ------------------ ---------------
Cash flow provided by (used in) financing activities:
Change in deposits 11,433,246 5,780,247 (3,112,904)
Change in short term borrowings (2,416,000) 2,416,000 -
Principal payments on long term borrowings (34,000) (132,000) (132,000)
Dividends on preferred stock (12,361) - -
Issuance of preferred stock 264,510 - -
Issuance of common stock 41,000 164,380 141,250
------------------ ----------------- -----------------
Net cash provided by (used in) financing
activities 9,276,395 8,228,627 (3,103,654)
------------------ ----------------- -----------------
Net change in cash and cash
equivalents 6,015,097 (439,620) (398,280)
Cash and cash equivalents:
Beginning of year 1,731,569 2,171,189 2,569,469
------------------ ----------------- -----------------
End of year $ 7,746,666 $ 1,731,569 $ 2,171,189
================== ================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $892,813 $785,275 $887,092
Supplemental disclosure of non-cash transactions:
Mortgage loans converted to other real estate owned $458,577 $755,022 $ -
Fixed assets converted to basis in Tuomy, LLC $ 90,000 $ - $ -
Michigan BIDCO Preferred stock exchanged for a 7.5%
promissory note $ - $600,000 $ -
Dividends on preferred stock converted to additional shares
of preferred stock $ 3,400 $ - $ -
The accompanying notes are an integral part of the consolidated financial statements.
48
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements of University Bancorp, Inc. (the
Company) include the operations of its wholly owned subsidiary,
University Bank (the Bank), the Bank's wholly owned subsidiary,
University Insurance & Investment Services, Inc. ("Agency") and Hoover,
LLC. ("Hoover") and two 80% owned subsidiaries, Midwest Loan Services,
Inc. ("Midwest") and University Islamic Financial Corporation ("UIFC").
The accounts are maintained on an accrual basis in accordance with
generally accepted accounting principles and predominant practices
within the banking and mortgage banking industries. All significant
intercompany balances and transactions have been eliminated in preparing
the consolidated financial statements.
The Company is a bank holding company. University Bank, which is located
in Michigan, is a full service community bank, which offers all
customary banking services, including the acceptance of checking,
savings and time deposits. The Bank also makes commercial, real estate,
personal, home improvement, automotive and other installment, credit
card and consumer loans, and provides fee based services such as annuity
and mutual fund sales, stock brokerage and money management, life
insurance, property casualty insurance and foreign currency exchange.
The Bank's customer base is primarily located in the Ann Arbor, Michigan
area.
University Bank's loan portfolio is concentrated in Ann Arbor and
Washtenaw County, Michigan. While the loan portfolio is diversified, the
customers' ability to honor their debts is partially dependent on the
local economy. The Ann Arbor area is primarily dependent on the
education, healthcare, services and manufacturing (automotive and other)
industries. Most real estate loans are secured by residential or
commercial real estate and business assets secure most business loans.
Generally, installment loans are secured by various items of personal
property.
The Agency is engaged in the sale of insurance products including life,
health, property and casualty, and investment products including
annuities, mutual funds, stock brokerage and money management. The
Agency is located in the Bank's Ann Arbor main office. The Agency also
has a limited partnership investment in low-income housing tax credits
through Michigan Capital Fund for Housing Limited Partnership I with
financing assistance from the General Partner, Michigan Capital Fund for
Housing.
Midwest is engaged in the business of servicing and sub-servicing
residential mortgage loans. Midwest began operations in 1992 and was
acquired by University Bank in December, 1995. Midwest is based in
Houghton, Michigan, and also originates mortgage loans for itself and
other financial institutions, including the Bank (See Note 3).
UIFC is engaged in Islamic Banking and was formed on December 30, 2005.
Its current products are Islamically compliant FDIC-insured deposits and
home financings (as agent for the Bank), mutual funds (as agent for a
third-party fund distribution company) and home financings (as principal
for its own account).
49
1. Summary of significant accounting policies (continued)
Hoover owns the Bank's headquarters facility and was purchased in June
2005.
Use of Estimates in Preparing Financial Statements:
--------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions based upon available information. These estimates and
assumptions affect the reported amounts and disclosures. Actual results
could differ from those estimates.
The significant estimates incorporated into these consolidated financial
statements, which are more susceptible to change in the near term,
include the value of mortgage servicing rights, the allowance for loan
losses, the identification and valuation of impaired loans, the
valuation of other real estate owned, the fair value of financial
instruments, and the valuation of deferred tax assets.
Cash flow reporting
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents is defined to include the cash on hand, interest bearing
deposits in other institutions, federal funds sold and other investments
with a maturity of three months or less when purchased. Net cash flows
are reported for customer loan and deposit transactions and interest
bearing deposits with other banks.
Securities
Securities are classified as available for sale when they might be sold
before maturity. Securities available for sale are carried at fair
value, with unrealized holding gains and losses reported in other
comprehensive income or loss. Realized gains are based on specific
identification of amortized cost. Securities are written down to fair
value when a decline in fair value is not temporary. Interest income
includes amortization of purchase premium or discount. Other securities
such as Federal Home Loan Bank stock are carried at cost.
Loans
Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on
such loans are reported as principal reductions, unless all interest and
principal payments in arrears are paid in full.
50
1. Summary of significant accounting policies (continued)
Mortgage banking activities
Mortgage banking activities includes retail and servicing operations.
Mortgage loans held for sale are valued at the lower of cost or market as
determined by bid prices for loans in the secondary market. The loans are
sold without recourse, except in the event that documentation errors are
made during the origination process. Loan servicing and sub-servicing
fees are contractually based and are recognized monthly as earned over
the life of the loans.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable
credit losses, increased by the provision for loan losses and recoveries
and decreased by charge-offs. Management estimates the balance required
based on past loan loss experience, known and inherent risks in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment,
should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage, consumer, and credit
card loans, and on an individual loan basis for other loans. If a loan
is impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using
the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or when
it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line
method for bank premises and the accelerated method for equipment and
land improvements over their estimated useful lives. The Company uses
the following useful lives as of December 31, 2005:
Buildings and building improvements 39 years
Land and leasehold improvements 15 years or term of lease
Furniture, fixtures, and equipment 3-7 years
Software 2-5 years
Other real estate owned
Real estate properties acquired in collection of a loan are recorded at
fair value upon foreclosure. Any reduction to fair value from the
carrying value of the related loan is accounted for as a loan loss.
51
1. Summary of significant accounting policies (continued)
After acquisition, a valuation allowance reduces the reported amount to
the lower of the initial amount or fair value less costs to sell.
Expenses, gains and losses on disposition, and changes in the valuation
allowance are reported in other expenses.
Servicing rights
Servicing rights represent both purchased rights and the allocated value
of servicing rights retained on loans originated and sold. Servicing
rights are expensed in proportion to, and over the period of, estimated
net servicing revenues. Impairment is evaluated based on the fair value
of the rights, using grouping of the underlying loans as to type, term
and interest rates. Any impairment of a grouping is reported as a
valuation allowance.
Income taxes
Income tax expense/benefit is the sum of the current year estimated tax
obligation or refund per the income tax return and the change in the
estimated future tax effects of temporary differences and
carry-forwards. Deferred tax assets or liabilities are computed by
applying enacted income tax rates to the expected reversals of temporary
differences between financial reporting and income tax reporting, and by
considering carry-forwards for operating losses and tax credits. A
valuation allowance adjusts deferred tax assets to the net amount that
is more likely than not to be realized.
Retirement plan
The Bank has a 401(K) Plan that allows an employee to contribute up to
15% of salary pre-tax, to the allowable limit prescribed by the Internal
Revenue Service. Management has discretion to make matching
contributions to the Plan. The Bank made no matching contributions for
the years ended December 31, 2005, 2004 and 2003.
Employee Stock Ownership Plan (ESOP)
The Company has a noncontributory ESOP covering all full-time employees
who have met certain service requirements. The employees' share in the
Company's contribution is based on their current compensation as a
percentage of the total employee compensation. As shares are contributed
to the plan they are allocated to employees and compensation expense is
recorded at the shares' fair value. The Company made no contribution in
2005, 2004 and 2003.
Stock options
At December 31, 2005, the Company has a stock-based employee compensation
plan, which is described more fully in Note 8. 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. The following table illustrates the effect on
net (loss) income and earnings per share if the company
52
1. Summary of significant accounting policies (continued)
had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Net income (loss), as reported $1,989,169 $(584,820) $94,442
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax 6,000 5,000 5,600
---------- ---------- --------
Pro forma net (loss) income $1,983,169 $(590,420) $89,442
========== ========== ========
Basic and Diluted (Loss) earnings per share:
As reported $0.48 $(0.14) $0.02
Pro forma $0.47 $(0.14) $0.02
Dividend restriction
Banking regulations require the maintenance of certain capital levels and
may limit the amount of dividends that may be paid by the bank to the
holding company or by the holding company to shareholders. In addition,
the Bank cannot pay a dividend until it has net retained earnings equal
to 20% of capital and surplus. The Bank's capital and surplus was
$5,280,767 and $5,080,767 at December 31, 2005 and 2004, respectively,
and accumulated retained earnings (deficit) of the Bank was $75,833 and
$(1,978,688) at December 31, 2005 and 2004, respectively.
Earnings(loss) earnings per share
Basic earnings per share represents income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate solely to outstanding
stock options, and are determined using the treasury stock method.
Earnings per common share have been computed based on the following:
53
1. Summary of significant accounting policies (continued)
2005 2004 2003
---- ---- ----
Net income (loss) $1,989,169 $(584,820) $94,442
Less: Preferred dividends 15,761 - -
---------- ---------- -------
Net income(loss available to
Common shareholders $1,973,408 $(584,820) $94,442
========== ========== =======
2005 2004 2003
----- ---- ----
Weighted average shares outstanding 4,146,504 4,085,244 3,940,433
Net dilutive effect of stock options 37,926 - 133,982
--------- --------- ---------
Diluted average shares outstanding 4,184,430 4,085,244 4,074,415
========== ========= =========
For December 31, 2004, the Company incurred a net loss. Accordingly,
anti-dilutive impact of the effect of stock options is not shown.
Comprehensive (Loss) Income
Comprehensive (loss) income includes both the net income (loss) and the
change in unrealized gains and losses on securities available for sale.
Segment Reporting
The Company's segments are determined by the products and services
offered, primarily distinguished between banking and mortgage banking
operations. Loans, investments, and deposits provide the revenues in the
banking operation, and servicing fees, underwriting fees and loan sales
provide the revenues in mortgage banking. All operations are domestic.
Reclassification
Certain items in the 2004 and 2003 consolidated financial statements and
notes have been reclassified to conform to the 2005 presentation.
2. Michigan BIDCO, Inc.
BIDCO was incorporated for the purpose of providing financing to small
businesses located in Michigan for the purpose of creating business and
industrial development in the State of Michigan. BIDCO is licensed under
the Michigan BIDCO Act, and is regulated by the Michigan Office of
Financial and Insurance Services, Bank and Trust Division. The President
of the Company serves as Chairman and President of BIDCO.
At December 31, 2003 University Bancorp owned 6.10% of BIDCO and the
Bank held a $600,000, 7.5% note collateralized by all assets of the
company. The note was paid off in December 2004. Additionally, the
shares of BIDCO were sold. At December 31, 2004, the company no longer
had a financial interest in BIDCO.
3. Secondary Market Operations
Midwest provides servicing and sub-servicing of real estate mortgage
loans for University Bank and several other financial institutions. The
unpaid principal balance of these loans was approximately $3.27 billion,
$2.31 billion and $1.94 billion as of December 31, 2005, 2004 and 2003
respectively. Custodial escrow balances maintained in connection with
these respective loans was $40.7 million, $30.2 million, and $26.8
million, at December 31, 2005, 2004 and 2003 respectively. Most of these
54
3. Secondary Market Operations (continued)
funds are off balance sheet and maintained at various financial
institutions. The following summarizes the operations of Midwest for the
years ended December 31:
2005 2004 2003
---------- ---------- -----------
Loan servicing and
sub-servicing fees $1,747,113 $1,127,416 $1,128,293
Loan set-up and other fees 1,416,870 1,550,620 2,865,708
Interest income 42,393 35,533 42,940
Gain on sale of loans 314,820 340,148 756,170
---------- ---------- -----------
Total income 3,521,196 3,053,717 4,793,111
Salaries and benefits 1,560,356 1,518,595 1,646,483
Amortization of servicing rights 135,155 448,553 865,977
Interest expense 35,429 11,320 3,798
Other operating expenses 1,364,341 1,101,840 1,851,073
---------- ---------- -----------
Total expenses 3,095,281 3,080,308 4,367,331
---------- ---------- -----------
Income (loss)of Midwest $ 425,915 $ (26,591) $ 425,780
========== ========== ===========
University Bank and Midwest sell conforming residential mortgage loans
to the secondary market. These loans are owned by other institutions and
are not included in the Company's consolidated balance sheets. Such
mortgage loans have been sold predominately without recourse or with
limited recourse. The unpaid principal balance of these loans was $143.4
million, $120.6 million and $112.3 million at December 31, 2005, 2004
and 2003 respectively.
The following summarizes the activity pertaining to mortgage servicing
rights, along with the aggregate activity in related valuation
allowances. Table A is calculated net of the valuation allowance
described in Table B.
Table A 2005 2004 2003
---------- ---------- -----------
Mortgage servicing rights:
Balance, January 1 $1,097,786 $1,031,575 $1,014,939
Additions - originated 462,283 514,764 887,811
Amortization expense (215,261) (380,553) (472,175)
---------- ---------- -----------
Adjustment for asset
impairment change 127,000 (68,000) (399,000)
---------- ---------- -----------
Balance, December 31 $1,471,808 $1,097,786 $1,031,575
========== ========== ===========
Table B
Valuation allowances:
Balance, January 1 $516,000 $448,000 $ 49,000
Additions (127,000) 68,000 399,000
--------- -------- ---------
Balance, December 31 $ 389,000 $516,000 $448,000
========== ======== =========
Market interest rate conditions can quickly affect the value of mortgage
servicing rights in a positive or negative fashion, as long-term
interest
55
3. Secondary Market Operations (continued)
---------------------------------------
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 servicing rights are recorded at the lower of cost
or market.
4. Securities available for sale
-----------------------------
The following is a summary of the amortized cost, gross unrealized gains,
gross unrealized losses and fair value of securities available for sale
at December 31, 2005, 2004 and 2003:
<table>
December 31, 2005
-----------------
Amortized Unrealized Fair
Cost Gains Losses Value
---------- -------- -------- ----------
U.S. agency mortgage-backed
securities $ 886,483 $ - $(34,721) $ 833,762
========== ======== ========= ==========
December 31, 2004
-----------------
Amortized Unrealized Fair
Cost Gains Losses Value
---------- -------- -------- ----------
U.S. agency mortgage-backed
securities $1,157,964 $ - $(51,356) $1,106,607
========== ======== ========= ===========
December 31, 2003
-----------------
Amortized Unrealized Fair
Cost Gains Losses Value
---------- -------- -------- ----------
U.S. agency mortgage-backed
Securities $1,675,648 $ - $(38,795) $1,636,853
Stocks 12,316 - - 12,316
--------- -------- --------- ----------
$1,687,964 - $(38,795) $1,649,169
========== ======== ========= ==========
At December 31, 2005 and 2004, the fair value of securities pledged to
secure certain borrowings were $833,762 and $1,106,607, respectively.
The balance of these borrowings at December 31, 2005 and 2004 were $0
and $2,416,000, respectively. Unrealized losses at December 31, 2005 and
2004 have existed for longer than twelve months. This decline is
considered temporary as the values of the mortgage-backed securities
fluctuate based on changes in current interest rates and prepayment
assumptions related to the underlying mortgages. Furthermore, the
Company expects to hold these securities sufficiently long enough to
recover these unrealized losses.
Sales of available for sale securities: 2005 2004 2003
---- ---- ----
Proceeds $0 $49,981 $59,879
Realized gains 0 3,605 -
Realized losses 0 4,051 54,011
56
4. Securities Available-for-sale (continued)
-----------------------------------------
The scheduled maturity date of the securities available for sale at
December 31, 2005 is:
Amortized Fair
Cost Value
-------- --------
2006-2010 $ 0 $ 0
2010-2015 0 0
After 2015 886,483 833,762
-------- --------
$886,483 $833,762
======== ========
5. Accounts Receivable
-------------------
Accounts receivable were $2,585,524 and $30,949 at December 31, 2005 and
2004, respectively. The balance at the end of 2005 included the
following:
Stock subscription receivable from sale of stock
in University Islamic Financial Corporation $1,500,000
Lease termination receivable 1,000,000
Other 85,524
---------
Total $2,585,524
==========
6. Loans
-----
Major classifications of loans are as follows as of December 31:
2005 2004 2003
------------ ------------ -------------
Commercial $ 12,547,975 $ 15,079,343 $ 15,943,127
Real estate - mortgage 29,126,299 24,657,078 15,687,265
Real estate -construction 1,958,485 1,238,530 1,270,789
Installment 1,707,461 1,820,515 1,905,793
Credit cards 312,106 204,334 121,612
------------ ------------ -------------
Gross Loans 45,652,326 42,999,800 34,928,586
Allowance for loan losses (349,416) (353,124) (454,118)
------------ ------------ -------------
Net Loans $ 45,302,910 $ 42,646,676 $ 34,474,468
============ ============ =============
Changes in the allowance for loan losses were as follows:
2005 2004 2003
--------- --------- ---------
Balance, beginning of year $ 353,124 $ 454,118 $ 408,219
Provision charged to operations 17,209 (87,500) 189,400
Recoveries 12,701 55,512 97,008
Charge-offs (33,618) (69,006) (240,509)
--------- --------- ---------
Balance, end of year $ 349,416 $ 353,124 $ 454,118
========= ========= =========
At December 31, 2005 and 2004, there are loans totaling $10,172 and
$371,109, respectively, that were past due over 90 days but still
accruing interest. These loans were brought current shortly after
December 31, 2005 and 2004, respectively. There are no past due loans
over 90 days and still accruing interest at December 31, 2003.
Non-accrual loans at December 31 are summarized as follows:
57
6. Loans (continued)
-----------------
2005 2004 2003
--------- --------- ----------
Non accrual loans:
Real estate - mortgage and
construction loans $ 317,013 $ 591,791 $ 907,599
Installment loans - 16,739 5,128
Commercial loans (non real
estate) 32,668 39,490 204,400
--------- --------- ----------
$ 349,681 $ 648,020 $1,117,127
========= ========= ===========
Information regarding impaired loans for the years ended December 31, is
as follows:
Impaired loans: 2005 2004 2003
-------------- --------- --------- ----------
Loans with no allowance allocated $ - $ 83,319 $ -
Loans with allowance allocated $ 263,344 $ 564,701 $1,117,127
Amount of allowance for loan losses
allocated $ 30,871 $ 83,548 $ 291,754
Impaired loans:
Average balance during the year $ 555,715 $ 719,667 $ 946,261
Interest Income recognized thereon $ - $ - $ 6,248
Cash-basis interest income recognized $ - $ - $ 6,248
7.Premises and equipment
----------------------
Classifications at December 31 are summarized as follows:
2005 2004 2003
---------- ---------- -----------
Land $ 397,811 $ 32,811 $ 32,811
Buildings and improvements 1,761,717 234,984 234,984
Furniture, fixtures, equipment and
software 3,023,891 2,756,982 2,327,279
---------- ---------- -----------
5,183,419 3,024,777 2,595,074
Less: accumulated depreciation (2,380,603) (2,078,073) (1,765,267)
---------- ---------- -----------
Net premises and equipment $2,802,816 $ 946,704 $ 829,807
========== ========== ===========
In December 2005, the Bank moved its main office and sole branch to the
historic Hoover Mansion located at 2015 Washtenaw Avenue, Ann Arbor, MI.
In June 2005, the Bank purchased Hoover, LLC, the owner of the Hoover
Mansion, a 17,000 square foot structure. Previously the bank was located
in a facility that it sold in a sale-leaseback transaction in 2003.
Depreciation expense amounted to $337,592, $318,584 and $305,740 for the
years ended December 31, 2005, 2004 and 2003, respectively.
The Bank leases an ATM drive-thru location in Ann Arbor for $7,200 per
year and one off-site ATM location for $9,000 per year. Midwest leases
its office space for approximately $50,424 per year in Houghton,
Michigan. Total rental expense for all operating leases was $195,958,
$192,663 and $144,778 in 2005, 2004 and 2003.
58
8. Time deposits
-------------
Time deposit liabilities issued in denominations of $100,000 or more
were $11,454,283 and $1,854,614 at December 31, 2005 and 2004
respectively.
At December 31, 2005, stated maturities of time deposits were:
2006 $12,295,703
2007 2,681,692
2008 118,768
2009 114,191
2010 2,599,368
Thereafter 388,081
-----------
$18,197,803
===========
The Bank had issued through brokers $5,951,000 and $3,651,000 of time
deposits as of December 31, 2005 and 2004, respectively. These time
deposits have maturities ranging from one to five months and are
included in the table above. These deposits are issued in denominations
of less than $100,000.
The Bank had deposits of $1,705,400 and $1,400,430 from directors,
officers and their affiliates as of December 31, 2005 and 2004,
respectively.
9. Stock options
-------------
In 1995, the Company adopted a stock option and stock award plan (the
1995 Stock Plan), which provides for the grant of incentive stock
options, as defined in Section 422(b) of the Internal Revenue Code of
1986, as amended, as well as the grant of non-qualified stock options
and other stock awards. The plan provides for the grant to officers,
directors and key employees of the Company, and independent contractors
providing services to the Company, of options to purchase and other
awards of common stock. The exercise price of options granted under the
plan shall be determined by the Board of Directors, or a compensation
committee thereof. Options shall expire on the date specified by the
Board of Directors or such committee, but not more than 10 years from
the date of grant (or five years from the date of grant for incentive
stock options if the grantee owned 10% of the Company's voting stock at
the date of grant). The 1995 Stock Plan terminated on November 15, 2005.
The following table summarizes the activity relating to options to
purchase the Company's common stock:
Number of Weighted Average
Options Exercise price
-------- ----------------
Outstanding at December 31, 2002 279,909 $1.44
Granted - 2003 ($0.10 Fair Value) 54,000 1.85
Exercised - 2003 (36,000) 1.33
Forfeited - 2003 (26,500) 1.26
--------
Outstanding at December 31, 2003 271,409 1.60
59
9. Stock options (continued)
-------------------------
Granted - 2004 ($0.46 Fair Value) 64,500 2.29
Exercised - 2004 (103,909) 1.65
Forfeited - 2004 (36,000) 2.00
---------
Outstanding at December 31, 2004 196,000 1.69
Granted - 2005 ($0.10 Fair Value) 118,463 3.00
Exercised - 2005 (4,000) 1.50
Forfeited - 2005 (3,500) 2.47
---------
Outstanding at December 31, 2005 306,963 2.20
==========
At December 31, 2005:
Number of options immediately exercisable 82,500
Weighted average exercise price of immediately
exercisable options $1.02
Range of exercise price of options outstanding $1.00 - $2.47
Weighted-average remaining life of options outstanding 3.56 years
The following summarizes assumptions used to value stock options.
2005 2004 2003
---- ---- ----
Risk-free interest rate 7.25% 4.50% 4.00%
Expected option life 5.0 years 5.0 years 5.0 years
Expected stock price
volatility 22.0% 23.4% 22.5%
Expected dividends $0 $0 $0
10.Employee stock ownership plan (ESOP)
------------------------------------
The employees' allocation of ESOP assets is based on their current
compensation, after 1 year of service and upon reaching the age of 21.
The annual contribution to the ESOP is at the discretion of the Board of
Directors. Assets of the plan are comprised entirely of 77,018 shares of
the Company's stock at December 31, 2005 and 2004, all of which were
fully allocated at December 31, 2005. Upon retirement from the plan,
participants can receive distributions of their allocated shares of the
Company's stock. The assets of the ESOP are held in trust and were
valued at approximately $139,000, and $139,000 at December 31, 2005 and
2004, respectively.
11.Minority Interest
-----------------
The Bank owns an 80% interest in the common stock of Midwest, with the
remaining 20% owned by the President of Midwest. At December 31, 2005
and 2004, total common stockholders' equity of Midwest was $2,624,990
and $2,200,229 resulting in a $524,265 and $440,118 minority interest
reflected on the Company's consolidated balance sheet, respectively. The
results of Midwest's operations for 2005, 2004 and 2003 are included in
the Company's consolidated statement of operations.
The Bank also owns 80% of University Islamic Financial Corporation
(UIFC). This corporation was formed on December 30, 2005. An outside
60
11.Minority Interest (continued)
-----------------------------
investor owns the remaining 20% of the corporation. At 12/31/05, total
common stockholders' equity of UIFC was $15,476,039, which includes
$10,000,000 in common stock and $5,588,000 of preferred stock. The
minority interest at December 31, 2005 was $1,977,608.
The Consolidated Statement of Operations includes minority interest
expense of $61,755 and $86,768 in 2005 and 2003, respectively, and
minority interest income of $4,178 in 2004.
12.Commitments and contingencies
-----------------------------
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to buy, sell
and fund loans, letters of credit and unused lines of credit. The Bank's
exposure to credit loss in the event of non-performance is equal to or
less than the contractual amount of these instruments. The Bank follows
the same credit policy to make such commitments as that followed by
loans recorded in the consolidated financial statements. The following
is a summary of commitments as of December 31:
2005 2004 2003
---- ---- ----
Unused lines of credit $ 4,514,000 $ 4,907,000 $ 3,762,000
Commitments to fund loans 2,019,000 3,366,000 2,562,000
Foreign exchange futures - - 75,000
----------- ----------- -----------
Total $ 6,533,000 $ 8,273,000 $ 6,399,000
=========== =========== ===========
13.Related party transactions
--------------------------
The Company's President also serves as President and Chairman of
Michigan BIDCO. As such, the President is actively involved in BIDCO's
operations, including investment activity and estimation of the fair
value of its equity investments. In December, 2004, BIDCO paid in full
its $600,000 note to the Bank. Additionally, the Company sold its 6.10%
interest in BIDCO. At December 31, 2004, neither the Bank nor the
Company had a financial interest in or with BIDCO.
The Bank had loans outstanding of $70,961 and $44,232 to related
officers and directors at December 31, 2005 and 2004, respectively.
There were no related party loans that were originated during 2005.
During 2004, two loans totaling $620,000 were originated. Available
lines of credit to related parties at the December 31, 2005 and 2004,
totaled $169,000 and $118,768 respectively. Related party loans were
made in the normal course of business and were performing pursuant to
terms at December 31, 2005.
14.Income taxes
------------
At December 31, 2005 an income tax benefit of $100,000 was recorded due
to expected utilization of net operating loss carry forwards against
2006 expected taxable income. The amount is included in other assets on
the balance sheet.
61
14.Income taxes (continued)
------------------------
The net deferred tax asset at December 31, 2005 and 2004 is comprised of
the following:
2005 2004
---------- ----------
Allowance for loan losses $ 129,584 $ 123,732
Net operating loss carry-forward 227,135 707,369
Tax credit carry-forward 1,234,497 1,111,810
Deferred gain on sale leaseback 207 71,715
Donation carry-forward 10,646 9,058
Other 135,083 138,189
---------- ----------
Deferred tax assets 1,737,152 2,161,873
---------- ---------- -
Servicing rights (500,415) (373,247)
Depreciation (22,438) (32,839)
---------- ----------
Deferred tax liabilities (522,853) (406,086)
---------- ----------
Net deferred tax asset 1,214,299 1,755,787
Valuation allowance for
deferred tax assets (1,114,299) (1,755,787)
---------- ----------
Net deferred tax asset $ 100,000 $ -
========== ===========
The Company has net operating loss carry-forwards of approximately
$672,000, which expire beginning in 2012, and general business credit
carry-forwards of approximately $1,234,000, which expire beginning in
2011. Financial statement tax expense amounts differ from the amounts
computed by applying the statutory federal tax rate of 34% to pretax
income because of operating losses and valuation allowances recorded to
reduce deferred tax assets as noted above.
15.Short Term Borrowings
---------------------
The Bank had a line of credit available from the Federal Home Loan Bank
(the FHLB) in the amount of $3.7 million and $4.0 million at December
31, 2005 and 2004, respectively. At December 31, 2005, borrowings were
secured by the pledge of specific mortgage loans held for investment
with unpaid principal balances of $3.6 million and available-for-sale
securities with a balance of $834,000.
The Bank had a line of credit available from the Federal Reserve Bank of
Chicago (the FRB) in the amount of $6.7 million. There were no amounts
outstanding on this line from the FRB at December 31, 2005 and 2004.
Borrowings are secured by the pledge of specific commercial loans held
for investment with unpaid principal balances of $7.9 million. The
following information provides a summary of short-term borrowings for
the years indicated:
2005 2004
---- ----
Amount outstanding at the end of
the year and interest rate $ - $2,416,000 1.65%
Maximum amount of borrowing outstanding
at any month end during the year $3,800,000 $2,601,000
Average amount outstanding during the
year and weighted average rate $1,225,000 3.69% $ 972,076 1.75%
62
16.Long Term Borrowings
--------------------
The Company had a note payable to North Country Bank & Trust (NCB&T)
secured by the stock of the Bank with a balance of $34,000 at December
31, 2004. The note matured on February 15, 2005 and was paid in full.
Interest was payable quarterly at the prime rate of NCB&T plus 1.00
percent.
17.Regulatory matters
------------------
University Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by regulators
about components, risk weightings, and other factors.
The Bank is also subject to prompt corrective action capital requirement
regulations set forth by the FDIC. The FDIC requires the Bank to maintain
a minimum of total capital and Tier 1 capital (as defined) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average total assets (as defined). As of December 31, 2005, the Bank met
all capital adequacy requirements to which it is subject as the Bank
presently has a written understanding with its regulators that the Bank
will maintain the ratio of Tier 1 Capital to average assets at 7% or
more.
<table>
To Be Adequately To Be Well
Capitalized Under Prompt Corrective Capitalized Under Prompt
Actual Action Provisions Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------------------- ----------------------- ----------------------
As of December 31, 2005:
Total capital (to risk weighted assets) $7,947,000 18.4% $3,448,000 8.0 % $4,310,000 10.0 %
Tier I capital (to risk weighted assets) 7,598,000 17.6% 1,724,000 4.0 % 2,586,000 6.0 %
Tier I capital (to average assets) 7,598,000 14.0% 2,171,000 4.0 % 2,714,000 5.0 %
As of December 31, 2004:
Total capital (to risk weighted assets) $3,515,000 9.5% $2,965,000 8.0 % $3,706,000 10.0 %
Tier I capital (to risk weighted assets) 3,158,000 8.5% 1,482,000 4.0 % 2,224,000 6.0 %
Tier I capital (to average assets) 3,158,000 6.5% 1,959,000 4.0 % 2,449,000 5.0 %
63
17.Regulatory Matters (continued)
------------------------------
As of December 31, 2005, the most recent guidelines from the FDIC
categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. At December 31, 2004 the Bank was
classified as "adequately capitalized." To be categorized as "well
capitalized," or "adequately capitalized" the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the above table.
18.Management's Plan Regarding Continuing Operations
-------------------------------------------------
At December 31, 2005, the Company had an accumulated deficit of
$516,816. University Bancorp's operations are intended to continue in
the future. Management has reviewed operating results, prepared
projections of possible future results, performed other analyses of its
operations to reduce operating costs and entered new product lines of
business.
Management of the Company has implemented a plan to improve core
earnings by moving to University Bank additional low-cost mortgage
escrow deposits held by Midwest, growing the loan portfolio of the Bank,
liquidating other real estate owned and improving the synergy between
its subsidiary operations. Both the Bank and Midwest are projected to
have net income in 2006, however, the Company's continued operation is
dependent upon its ability to maintain profitable operations and retain
adequate capital levels.
19.Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used to estimate fair values
for financial instruments. The carrying amount is considered to estimate
fair value for cash and short-term instruments, demand deposits,
short-term borrowings, accrued interest, and variable rate loans or
deposits that reprice frequently and fully. Securities fair values are
based on quoted market prices or, if no quotes are available, on the
rate and term of the security and on information about the issuer. For
fixed rate loans or deposits and for variable rate loan or deposits with
infrequent repricing or repricing limits, the fair value is estimated by
the discounted cash flow analysis using current market rates for the
estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses of underlying collateral
values, where applicable. Fair value of loans held for sale is based on
market estimates. Fair value of mortgage servicing rights is estimated
using discounted cash flows based on current market interest rates net
of estimated costs of servicing loans. Fair value of mortgage
sub-servicing rights is based on a multiple of servicing contract
revenue. The fair value of debt is based on currently available rates
for similar financing. The fair value of off-balance sheet items is
based on the fees or cost that would normally be charged to enter into
or terminate such agreements. Fair value of unrecognized financial
instruments includes commitments to extend credit and the fair value of
letters of credit is considered immaterial.
64
19.Fair Value of Financial Instruments (continued)
-----------------------------------------------
The carrying amounts and fair values of the Company's financial
instruments were as follows:
December 31, 2005
Carrying Fair
Financial Assets Amount Value
---------------- ------ -----
Cash and due from banks $ 7,747,000 $ 7,747,000
Securities available for sale 833,000 833,000
Federal Home Loan Bank stock 941,000 941,000
Loans held for sale 1,447,000 1,447,000
Loans, net 45,303,000 44,948,000
Mortgage servicing rights 1,472,000 1,472,000
Accrued interest receivable 205,000 205,000
Financial Liabilities
Deposits 56,021,000 56,136,000
Accrued interest payable 111,000 111,000
December 31, 2004
Carrying Fair
Financial Assets Amount Value
---------------- ------ -----
Cash and short term investments $ 1,732,000 $ 1,732,000
Securities available for sale 1,106,000 1,106,000
Federal Home Loan Bank stock 922,000 922,000
Loans held for sale 846,000 846,000
Loans, net 42,647,000 43,436,000
Mortgage servicing rights 1,097,000 1,097,000
Accrued interest receivable 148,000 148,000
Financial Liabilities
Deposits 44,588,000 44,640,000
Short term borrowings 2,416,000 2,416,000
Long term borrowings 34,000 34,000
Accrued interest payable 50,000 50,000
20.Segment Reporting
-----------------
The Company's operations include two primary segments: retail banking
and mortgage banking. Through its banking subsidiary's branch in Ann
Arbor, the Company provides traditional community banking services such
as accepting deposits, making loans, and providing cash management
services to individuals and local businesses. Mortgage banking
activities includes servicing of residential mortgage loans for others
(See Note 3).
The Company's two reportable segments are strategic business units that
are separately managed as they offer different products and services and
have different marketing strategies. In addition, the mortgage banking
segment services a different customer base from that of the retail
banking segment.
65
20.Segment Reporting (continued)
-----------------------------
The segment financial information provided below has been derived from
the internal profitability reporting system used by management to
monitor and manage the financial performance of the Company. The
accounting policies of the two segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
segment performance based on profit or loss before income taxes, not
including nonrecurring gains and losses. Certain indirect expenses have
been allocated based on actual volume measurements and other criteria,
as appropriate. The Company accounts for transactions between segments
at current market prices. Segment profit is measured before allocation
of corporate overhead and income tax expense. Information about
reportable segments for the years ended December 31, 2005, 2004 and 2003
follows:
<table>
2005
---- Retail Mortgage
Banking Banking Totals
--------- --------- -----------
Interest income $3,230,498 $ 42,393 $3,272,891
Gain (loss) on the sale of
mortgage loans (6,172) 314,820 308,648
Other non-interest income 2,599,645 2,983,037 5,582,682
Interest expense 917,706 35,430 953,136
Provision for loan losses 17,209 0 17,209
Salaries and benefits 1,440,562 1,560,356 3,000,918
Occupancy 362,791 154,376 517,167
Other operating expense 1,842,375 944,247 2,786,622
Income before tax
expense 1,243,328 645,841 1,889,169
Income tax (benefit) expense (319,927) 219,927 (100,000)
Segment profit 1,563,255 425,914 1,989,169
Segment assets 61,914,922 2,624,990 64,539,912
Capital expenditures 2,177,081 106,623 2,283,704
Depreciation 171,755 165,837 337,592
Amortization 2,851 135,155 137,736
2004
---- Retail Mortgage
Banking Banking Totals
--------- --------- ----------
Interest income $2,708,738 $ 35,533 $2,744,271
Gain on the sale of mortgage
loans 0 340,149 340,149
Other non-interest income 804,363 2,678,036 3,482,399
Interest expense 772,031 11,927 783,958
Provision for loan losses (87,500) 0 (87,500)
Salaries and benefits 1,348,254 1,518,595 2,866,849
Occupancy 284,147 131,009 415,156
Other operating expense 1,660,699 1,432,476 3,093,175
Loss before tax expense (benefit) (464,531) (40,289) (504,820)
Income tax expense (benefit) 93,698 (13,698) 80,000
Segment loss (558,229) (26,591) (584,820)
Segment assets 48,545,358 2,240,340 50,785,698
Capital expenditures 252,530 182,951 435,481
Depreciation 150,776 167,808 318,584
Amortization 258,510 446,287 704,797
66
<table>
20. Segment Reporting (continued)
-----------------------------
2003
---- Retail Mortgage
Banking Banking Totals
--------- --------- ----------
Interest income $2,689,157 $42,942 $2,732,099
Gain on the sale of mortgage
loans 0 756,170 756,170
Other non-interest income 1,182,413 3,993,999 5,176,322
Interest expense 836,734 4,903 841,637
Provision for loan losses 189,400 0 189,400
Salaries and benefits 1,711,577 1,646,483 3,358,060
Occupancy 245,931 176,836 422,767
Other operating expense 1,524,729 2,313,466 3,838,285
(Loss) income before tax
expense (636,801) 651,423 14,442
Income tax (benefit) expense (305,643) 225,643 (80,000)
Segment (loss) profit (331,158) 425,780 94,442
Segment assets 40,667,106 2,356,200 43,023,306
Capital expenditures 108,309 122,747 231,056
Depreciation 153,744 151,996 305,740
Amortization 105,198 865,977 971,175
21.Quarterly Financial Data - Unaudited
------------------------------------
The following tables represent summarized data for each of the quarters
in 2005 and 2004 (in thousands, except income (loss) per share data).
<table>
2005
- ---- Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31 June 30 September 30 December 31
--------- --------- ------------- -----------
Interest income $802 $813 $830 $828
Interest expense 220 239 278 216
--------- --------- --------- ---------
Net interest income 582 574 552 612
Provision for losses 15 2 - -
--------- --------- --------- ---------
Net interest income after
Provision for losses 567 572 552 612
Loan set-up and other fees 398 346 391 262
Loan servicing and sub-servicing fees 369 445 441 481
Gain on sale of loans 104 93 93 19
Other non-interest income 152 138 129 2,031
Non-interest expense 1,426 1,654 1,598 1,627
--------- --------- --------- ---------
Income tax expense - - - (100)
--------- --------- --------- ---------
Net (loss) available to common shareholders $164 ($60) $8 $1,878
========= ========= ========= =========
Basic and diluted loss per share $0.04 ($0.02) ($0.00) $0.46
========= ========= ========= =========
Weighted average shares outstanding 4,138,849 4,148,878 4,148,878 4,146,504
========= ========= ========= =========
Significant 4th quarter events. In the fourth quarter of 2005, the
Company executed two transactions resulting in a material increase in
other non-interest income. In the first transaction, the Company (Bank)
agreed to terminate its lease agreement early in exchange for $800,000.
The Bank moved out of its leased facility in December 2005 and into a new
67
21. Quarterly Financial Data - Unaudited (continued)
------------------------------------------------
facility that it purchased in June 2005. This early move out also
resulted in recognition of the remainder of the deferred gain on sale
leaseback in the 4th quarter. This amounted to $129,272. In the other
transaction, the Bank profited $1,000,000 from the sale of 20% interest
in the Islamic Banking subsidiary for a sale price of $3,000,000.
<table>
2004
- ---- Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31 June 30 September 30 December 31
--------- --------- ------------- -----------1
Interest income $635 $643 $720 $746
Interest expense 187 184 198 215
--------- --------- --------- ----------
Net interest income 448 459 522 531
Provision for losses 23 23 (28) (106)
--------- --------- --------- ----------
Net interest income after
Provision for losses 425 436 550 637
Loan set-up and other fees 383 508 311 370
Loan servicing and sub-servicing fees 334 348 357 349
Gain on sale of loans 89 69 65 117
Other non-interest income 158 147 120 99
Non-interest expense 1,574 1,594 1,539 1,669
--------- --------- --------- ----------
Income tax expense - - 80 -
--------- --------- --------- ----------
Net (loss) available to common shareholders ($185) ($86) ($216) ($97)
========= ========= ========= ==========
Basic and diluted loss per share ($0.05) ($0.02) ($0.05) ($0.02)
========= ========= ========= ==========
Weighted average shares outstanding 4,058,108 4,090,548 4,090,548 4,101,011
========= ========= ========= ==========
22.Parent Company Only Condensed Financial Information
---------------------------------------------------
Condensed Balance Sheet
December 31, 2005 December 31, 2004
--------------- ---------------------
ASSETS
Cash and cash equivalents $ 3,747 $ 5,626
Investment in University Bank 5,310,893 3,050,721
Other assets 2,791 3,137
---------- -----------
Total Assets $5,317,431 $3,059,484
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ - $ 34,000
Accounts payable 16,850 23,601
Accrued interest payable - 257
---------- ----------
Total Liabilities 16,850 57,858
Stockholders' Equity 5,300,581 3,001,626
---------- ----------
Total Liabilities and
Stockholders' Equity $5,317,431 $3,059,484
========== ==========
68
<table>
22 Parent Company Only Condensed Financial Information (continued)
---------------------------------------------------------------
Condensed Statements of Income
2005 2004 2003
---------- ---------- -----------
INCOME:
Interest and dividends on investments $ 48 $ 266 $ 339
Other 41,975 (446) (26,574)
Total (loss)income 42,023 (180) (26,235)
EXPENSES:
Interest 332 4,907 12,144
Public listing 41,288 45,696 43,088
Professional fees 53,139 36,976 24,000
Other miscellaneous 1,953 2,366 5,250
---------- ---------- -----------
Total Expense 96,712 89,945 84,482
Loss before federal income taxes
and equity in undistributed
net loss of subsidiaries (54,689) (90,125) (110,717)
Federal income taxes - - -
---------- ----------- -----------
Loss before equity in undistributed
net loss of subsidiaries (54,689) (90,125) (110,717)
Equity in undistributed net (loss)income
of subsidiaries 2,043,858 (494,695) 205,159
---------- ----------- ----------
Net income (loss) $1,989,169 $ (584,820) $ 94,442
========== =========== ==========
69
<table>
22.Parent Company Only Condensed Financial Information (continued)
---------------------------------------------------------------
Condensed Statements of Cash Flows
For Year Ended
2005 2004 2003
---------------- --------------- -------------------
Cash flow provided by (used in) investing activities:
Net Income (Loss) $ 1,989,169 $ (584,820) $ 94,442
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on sale of investments - 446 27,783
Decrease (increase) in other assets 346 631 (407)
Decrease (increase) in other liabilities (7,008) 20,498 (97,414)
Decrease (increase) investment in subsidiaries (2,043,858) 494,695 (205,159)
Decrease in investment in Michigan BIDCO - - -
------------- ------------ ----------
Net cash used in operating activities (61,351) (68,551) (180,755)
------------- ------------ ----------
Cash flow from investing activities:
Additional investment in subsidiary (199,677) - -
Purchase of available for sale securities - (8,853) (98,563)
Proceeds from sale of available for sale securities - 49,981 58,464
------------- ------------ ----------
Net cash provided by (used in) investing activities (199,677) 41,128 (40,099)
------------- ------------ ----------
Cash flow from financing activities:
Principal payment on notes payable (34,000) (132,000) (132,000)
Dividends on preferred stock (12,361) - -
Issuance of preferred stock 264,510 - -
Issuance of common stock 41,000 164,380 141,250
------------- ------------ ----------
Net cash provided by financing activities 259,149 32,380 9,250
------------- ------------ ----------
Net change in cash and cash equivalents (1,879) 4,957 (211,604)
Cash and cash equivalents:
Beginning of year 5,626 669 212,273
------------- ------------ ----------
End of year $ 3,747 $ 5,626 $ 669
============= ============ ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 589 $ 6,011 $ 12,755
Dividends on preferred stock converted to
additional shares of preferred stock $ 3,400 $ - $ -
70
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.
None
ITEM 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Disclosure controls are procedures that are designed with an
objective of ensuring that information required to be
disclosed in our company's periodic reports filed with the
Securities and Exchange Commission, such as this report on
Form 10-K, is recorded, processed, summarized, and reported
within the time periods specified by the Securities and
Exchange Commission. Disclosure controls also are designed
with an objective of ensuring that such information is
accumulated and communicated to our company's management,
including our chief executive officer and chief financial
officer, in order to allow timely consideration regarding
required disclosures
As of the end of the period covered by this report, an
evaluation was carried out under the supervision and with the
participation of the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c) under
the Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the operation of these disclosure
controls and procedures were effective.
(b) Changes in Internal Controls. Except as described above, there
were no significant changes in the Company's internal controls
over financial reporting during the fourth quarter of the
fiscal year ended December 31, 2005, that have materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting
Item 9B. - Recent Events
On February 21, 2006, the Bank entered into a master purchase agreement
with the Federal Home Loan Mortgage Corporation to create a secondary market for
Sharia'a compliant loans to assist in home acquisitions by Islamic homebuyers.
The agreement calls for Freddie Mac to support $100,000,000 in Sharia'a in
Sharia'a and conventional mortgage transactions over the next year.
71
PART III.
Item 10. - Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement for its 2006 Annual
Meeting (the "Proxy Statement") to be under the captions:
Election of Directors
Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance
We have adopted a Code of Ethics for all employees. A copy of the Code of Ethics
is available upon request by writing to the Chief Financial Officer, University
Bancorp, Inc., 2015 Washtenaw, Ann Arbor, Michigan 48104.
Item 11. - Executive Compensation
The information required by this item is incorporated by reference herein
from the portions of the Company's Proxy Statement to be under the captions:
Executive Compensation
Compensation Plans
Item 12. - Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference herein
from the portion of the Company's Proxy Statement to be under the caption:
Security Ownership of Certain Beneficial Owners and
Management
Equity Compensation Plan Information
The University Bancorp, Inc. 1995 Stock Option Plan authorizes stock
options for issuance to employees, consultants and directors in exchange for
services.
72
<table>
The following table sets forth certain information regarding the above
referenced equity compensation plan as of December 31, 2005.
Equity Compensation Plan Information
(a) (b) (c)
Number of Number of
securities to be securities remaining
issued upon exercise Weighted-average available for future
Plan Category of outstanding exercise price of issuance under equity
------------- options, warrants and outstanding options, compensation plans
rights warrants and rights (excluding securities
reflected in column (a))
Equity compensation plans approved
by security holders 196,000 $1.69 0
Equity compensation plans not approved
by security holders 0 NA 0
Total 196,000 $1.69 0
Item 13. - Certain Relationships and Related Transactions
The information required by this item is incorporated by reference herein
from the portion of the Company's Proxy Statement to be under the caption:
Certain Relationships and Related Transactions
ITEM 14: Principal Accountant Fees and Services.
Information relating to principal accountant fees and services is contained
on page 20, under the caption "Independent Public Accountants" in the University
Bancorp, Inc. definitive Proxy Statement dated April 30, 2006, relating to the
2005 Annual Meeting of Stockholders and the information within that section is
incorporated by reference.
73
PART IV.
Item 15. - Exhibits, Financial Statement Schedules
(a) Index of Financial Statements:
The following statements are filed as part of this Report:
Audited consolidated balance sheets as of December 31, 2005 and December
31, 2004, and consolidated statements of operations, comprehensive (loss)
income, stockholders' equity and cash flows for the years ended December
31, 2005, 2004, and 2003 of the Company.
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(b) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
3.1.1 Certificate of Amendment, dated June 10, 1998, of the Company's
Certificate of Incorporation (incorporated by reference to Exhibit
3.1.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
3.2 Composite By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1989).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997 issued to
North Country Bank & Trust (incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.2 University Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"),
as amended November 27, 1990 (incorporated by reference to Exhibit
10.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990).
10.2.1 Amendment to the ESOP, effective as of December 31, 1991
(incorporated by reference to Exhibit 10.2.A to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991).
10.3 University Bank 401(k) Profit Sharing Plan, adopted August 1, 1996,
effective as of January 1, 1996 (incorporated by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
74
10.4 1995 Stock Plan of the Company (incorporated by reference to Exhibit
A to the definitive Proxy Statement of the Company for 1996 Annual
Meeting of Stockholders).
10.4.1 Form of Stock Option Agreement related to the 1995 Stock Plan
(incorporated by reference to Exhibit 10.7.1 to the Annual Report on
Form 10-K for the year ended December 31, 1995).
10.5 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9).
10.6 Federal Income Tax Allocation Agreement Between Newberry State Bank
and Newberry Holding Inc. dated March 21, 1992 (incorporated by
reference to Exhibit 10.11).
10.6.1 Federal Income Tax Allocation Agreement Between Newberry Holding Inc.
and University Bancorp, Inc. dated May 21, 1991 (incorporated by
reference to Exhibit 10.11.1).
21 Subsidiaries of Registrant: List of subsidiaries filed herewith.
23.1 Reports of Independent Auditors, Richard C. Woodbury, P.C., dated
February 25, 2005 regarding Midwest Loan Services, Inc.
23.2 Consent of UHY, LLP, Independent Registered Public Accounting Firm
23.3 Consent of Grant Thornton, LLP, Certified Public Accountants
23.4 Consent of Richard C. Woodbury, P.C., Independent
Registered Public Accounting Firm
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certificate of the Chief Executive Officer and of University Bancorp,
Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of the Chief Financial Officer of University Bancorp,
Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
75
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
By: /s/Stephen Lange Ranzini
------------------------
Stephen Lange Ranzini,
President and Chief Executive Officer
Date: April 14, 2006
By: /s/Nicholas K. Fortson
----------------------
Nicholas K. Fortson
Chief Financial Officer
Date: April 14, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Stephen Lange Ranzini Director, President April 14, 2006
Stephen Lange Ranzini
/s/Robert Goldthorpe Director, Chairman April 14, 2006
- --------------------
Robert Goldthorpe
/s/Gary Baker Director April 14, 2006
- -------------
Gary Baker
/s/Michael Talley Director April 14, 2006
- -----------------
Michael Talley
/s/Joseph Lange Ranzini Director April 14, 2006
- ------------------------
Dr. Joseph Lange Ranzini
/s/Paul Lange Ranzini Director April 14, 2006
- ---------------------
Paul Lange Ranzini
/s/Charles McDowell Director April 14, 2006
- -------------------
Charles McDowell
76
Index of Exhibits
Sequentially
Exhibit Number and Description Numbered Page
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the June 30, 1996 10-Q).
3.1.1 Certificate of Amendment, dated June 10, 1998, of the Company's
Certificate of Incorporation (incorporated by reference to Exhibit
3.1.1 to the June 30, 1998 10-Q).
3.2 Composite By-laws of the Company (incorporated by reference to Exhibit
3.2 to the 1989 10-K).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997 issued to
North Country Bank & Trust (incorporated by reference to Exhibit 10.1
to the 1997 10-K))
10.2 University Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"), as
amended November 27, 1990 (incorporated by reference to Exhibit 10.2 to
the 1990 10-K).
10.2.1 Amendment to the ESOP, effective as of December 31, 1991 (incorporated
by reference to Exhibit 10.2.A to the 1991 10-K).
10.3 University Bank 401(k) Profit Sharing Plan, adopted August 1, 1996,
effective as of January 1, 1996 (incorporated by reference to Exhibit
10.3 to the 1996 10-K).
10.4 1995 Stock Plan of the Company (incorporated by reference to Exhibit A
to the definitive Proxy Statement of the Company for the 1996 Annual
Meeting of Stockholders.
10.4.1 Form of Stock Option Agreement related to the 1995 Stock Plan
(incorporated by reference to Exhibit 10.7.1 to the 1995 10-K).
10.5 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989
10-K).
10.6 Federal Income Tax Allocation Agreement Between
Newberry State Bank and Newberry Holding Inc. dated
March 21, 1992 (incorporated by reference to
77
Exhibit 10.11 to the 1991 10-K).
10.6.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc.
dated May 21, 1991 (incorporated by reference to
Exhibit 10.11.1 to the 1991 10-K).
21 Subsidiaries of Registrant. 79
23.1 Reports of Independent Auditors, Richard C. Woodbury, P.C., dated
February 25, 2005 regarding Midwest Loan Services, Inc. 80
23.2 Consent of UHY LLP, Independent Registered Public Accounting
Firm 81
23.3 Consent of Grant Thornton, LLP, Independent Registered Public
Accounting Firm 82
23.4 Consent of Richard C. Woodbury, P.C., Independent
Registered Public Accounting Firm 83
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 84
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 85
32.1 Certificate of the Chief Executive Officer and of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 86
32.3 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 87
78
Exhibit 21. Subsidiaries of Registrant.
University Bank, a Michigan banking corporation
University Insurance & Investment Services, Inc., a Michigan
Corporation (100% owned by Bank)
Midwest Loan Services, Inc., a Michigan Corporation (80% owned by Bank)
Hoover, LLC, a Michigan limited Liability Corporation (100% owned
by Bank)
University Islamic Financial Corporation, a Michigan Corporation (80%
owned by Bank)
79
EXHIBIT 23.1
Richard C. Woodbury, P.C.
Certified Public Accountant
20017 E. Sharon Avenue
Houghton, MI 49931-1904
----------------------
Phone: (906) 482-1305
Fax: (906) 482-9555
Email: rwoodbury@charterinternet.com
Website: www.rcwpc.com
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Midwest Loan Services, Inc.
Houghton, MI 49931
We have audited the accompanying balance sheets of Midwest Loan
Services, Inc., as of December 31, 2004 and 2003, and the related
statements of income, retained earnings, and cash flows for the three
years in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged
to perform an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the companies internal control over
financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Midwest
Loan Services Inc. as of December 31, 2004 and 2003, and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
Richard C. Woodbury, CPA
February 25, 2005
80
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM
We have issued our report dated March 10, 2006 accompanying the consolidated
financial statements incorporated by reference in the annual report of
University Bancorp, Inc. on Form 10-K for the year ended December 31, 2005. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of University Bancorp, Inc. on Form S-8 (File No.
333-109930) effective October 23, 2003.
/S/ UHY LLP
Southfield, Michigan
April 14, 2006
81
EXHIBIT 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 29, 2005 accompanying the 2004 and 2003
consolidated financial statements included in the annual report of University
Bancorp, Inc. on Form 10-K. We hereby consent to the incorporation by reference
of said report in the Registration Statement of University Bancorp, Inc. on Form
S-8 (File No. 333-109930) effective October 23, 2003.
/S/ GRANT THORNTON LLP
Southfield, Michigan
April 14, 2006
82
EXHIBIT 23.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM
We have issued our report dated February 25, 2005 accompanying the consolidated
financial statements incorporated by reference in the annual report of
University Bancorp, Inc. on Form 10-K for the year ended December 31, 2004. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of University Bancorp, Inc. on form S-8 (File No.
333-10993) effective October 23, 2003.
/S/ Richard C. Woodbury, P.C., CPA
Houghton, Michigan
April 13, 2006
83
Exhibit 31.1
FORM 10-K 302 CERTIFICATION
I
I, Stephen Ranzini certify that:
1) I have reviewed this annual report on Form 10-K of University Bancorp, Inc.;
2) Based on my knowledge, this annual 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 annual
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of the
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: April 14, 2006 /s/Stephen Lange Ranzini
------------------ ----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
84
Exhibit 31.2
FORM 10-K 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
1) I have reviewed this annual report on Form 10-K of University Bancorp, Inc.;
2) Based on my knowledge, this annual 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 annual
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of the
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: April 14, 2006 /s/Nicholas K. Fortson
------------------ ----------------------
Nicholas K. Fortson
Chief Financial Officer
85
Exhibit 32.1
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of University Bancorp, Inc. (the
"Registrant") on Form 10-K for the period ended December 31, 2005 as filed with
the Securities and Exchange Commission on March 29, 2006, hereof (the "Report"),
the undersigned officer certifies, 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: April 14, 2006 By: /s/ Stephen Lange Ranzini
------------------ --------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
86
Exhibit 32.2
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of University Bancorp, Inc. (the
"Registrant") on Form 10-K for the period ended December 31, 2005 as filed with
the Securities and Exchange Commission on March 29, 2006, hereof (the "Report"),
the undersigned officer certifies,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: April 14, 2006 By: /s/ Nicholas K. Fortson
------------------------
Nicholas K. Fortson
Chief Financial Officer
87