FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2006
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 small business issuer as specified in its charter)
Delaware 38-2929531
-------- ----------
(State of incorporation) (IRS Employer Identification Number)
2015 Washtenaw Avenue, Ann Arbor, Michigan 48104
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (734) 741-5858
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
X Yes ___No
Indicate by check mark whether the registrant is a shell company(as defined
in Rule 12b-2 of the Exchange Act)
___Yes X No
-
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value outstanding at April 30, 2006: 4,248,378 shares
Transitional Small Business Disclosure Format (Check One) __Yes _X_No
Page 1 of 26 pages
FORM 10-QSB
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Unaudited Financial Statements PAGE
----
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statement of Comprehensive Income 7
Consolidated Statements of Cash Flows 8
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Summary 12
Results of Operations 13
Capital Resources 17
Liquidity 18
Item 3. Controls and Procedures 18
PART II - Other Information
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of matters to a Vote
Of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits & Reports on Form 8-K 19
Signatures 21
Exhibits 22
------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals, which are in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
2
Part I. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2006 and December 31, 2005
(Unaudited)
March 31 December 31
ASSETS 2006 2005
----------- -----------
Cash and due from banks $ 6,919,931 $ 7,746,666
Securities available for sale, at market 777,982 833,762
Federal Home Loan Bank Stock 941,200 941,200
Loans held for sale, at the lower of cost or market 919,050 1,446,575
Loans 47,546,035 45,652,326
Allowance for loan losses (372,390) (349,416)
----------- -----------
Loans, net 47,173,645 45,302,910
Premises and equipment, net 2,832,223 2,802,816
Mortgage servicing rights, net 1,559,811 1,471,808
Real estate owned, net 276,987 276,987
Accounts receivable 921,118 2,585,524
Accrued interest receivable 204,835 205,069
Prepaid expenses 294,898 285,015
Goodwill 103,914 103,914
Other assets 471,713 537,666
----------- -----------
TOTAL ASSETS $63,397,307 $64,539,912
=========== ===========
-Continued-
3
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
March 31, 2006 and December 31, 2005
(Unaudited)
March 31 December 31
2006 2005
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non interest bearing $ 3,643,016 $ 2,919,887
Demand - interest bearing and profit sharing 35,136,016 34,485,047
Savings 405,999 418,308
Time 15,437,746 18,197,803
----------- -----------
Total Deposits 54,622,777 56,021,045
Accounts payable 594,015 395,604
Accrued interest payable 60,946 110,619
Other liabilities 270,169 210,190
----------- -----------
Total Liabilities 55,547,907 56,737,458
Minority Interest 2,528,703 2,501,873
Stockholders' equity:
Preferred stock, $0.001 par value;
$1,000 liquidation value;
Authorized - 500,000 shares;
Issued - 29,030 shares in 2006 and
27,791 shares in 2005 29 28
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,263,062 shares in 2006 and
2005 42,630 42,630
Additional paid-in-capital 6,162,376 6,149,990
Accumulated deficit (508,610) (516,816)
Treasury stock - 115,184 shares in 2006
and 2005 (340,530) (340,530)
Accumulated other comprehensive loss,
unrealized losses on securities
available for sale, net (35,198) (34,721)
----------- -----------
Total Stockholders' Equity 5,320,697 5,300,581
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $63,397,307 $64,539,912
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 2006 and 2005 (Unaudited)
2006 2005
----------- -----------
Interest and financing income:
Interest and fees on loans and financing income $ 850,385 $ 785,395
Interest and dividends on securities:
U.S. Government agencies 2,990 1,747
Other securities 9,900 9,922
Interest on federal funds and other 50,037 4,580
----------- -----------
Total interest and financing income 913,312 801,644
----------- -----------
Interest and profit sharing expense:
Interest and profit sharing on deposits:
Demand deposits 105,840 116,558
Savings deposits 1,010 1,244
Time deposits 168,039 98,867
Short term borrowings 302 2,766
Long term borrowings - 332
----------- -----------
Total interest and profit sharing expense 275,191 219,767
----------- -----------
Net interest and financing income 638,121 581,877
Provision for loan losses 20,000 15,209
----------- -----------
Net interest and financing income after
provision for loan losses 618,121 566,668
----------- -----------
Other income:
Loan servicing and subservicing fees 529,428 369,027
Initial loan set-up and other fees 309,600 398,193
Gain on sale of mortgage loans 39,321 103,545
Insurance and investment fee income 51,684 51,121
Deposit service charges and fees 23,241 23,585
Other 97,451 77,759
----------- -----------
Total other income 1,050,725 1,023,230
----------- -----------
-Continued-
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
For the Three Month Periods Ended March 31, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Salaries and benefits $ 825,405 $ 741,886
Occupancy, net 131,915 126,029
Data processing and equipment 151,601 138,432
Legal and audit expense 49,689 37,687
Consultant fees 54,433 33,891
Mortgage banking expense 61,648 52,323
Servicing rights amortization 1,313 (854)
Advertising 46,771 34,386
Memberships and training 24,457 26,516
Travel and entertainment 46,034 32,002
Supplies and postage 67,992 48,993
Insurance 39,811 34,658
Other operating expenses 153,090 120,084
----------- -----------
Total other expenses 1,654,159 1,426,033
----------- -----------
Income before income taxes 14,687 163,865
----------- -----------
Income tax expense (benefit) - -
----------- -----------
Net income $ 14,687 $ 163,865
----------- -----------
Preferred stock dividends 6,481 -
----------- -----------
Net income available to common shareholders $ 8,206 $ 163,865
=========== ===========
Basic and diluted income
per common share $ 0.00 $ 0.04
=========== ===========
Weighted average shares outstanding -Basic 4,147,878 4,138,849
=========== ===========
Weighted average shares outstanding -Diluted 4,191,878 4,177,787
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
6
UNIVERSITY BANCORP, INC.
Consolidated Statements of Comprehensive Income
For the Three Month Periods Ended March 31, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Net income $ 14,687 $163,865
Other comprehensive income (loss):
Unrealized gains/(losses) on securities
available for sale (477) 6,868
----------- -----------
Other comprehensive income/(loss),
before tax effect (477) 6,868
Income tax expense (benefit) - -
Other comprehensive income (loss),
net of tax (477) 6,868
----------- -----------
Comprehensive income $ 14,210 $ 170,733
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
7
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows For the three month periods ended March
31, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Operating activities:
Net income $ 14,687 $ 163,865
Adjustments to reconcile net income to net
cash from Operating Activities:
Depreciation 102,685 83,471
Amortization 1,313 (854)
Provision for loan losses 20,000 15,209
Gain on mortgage loan sales (39,321) (103,545)
Gain on the sale and leaseback of premises - (184,873)
Loss on other real estate owned - 10,036
Originations of mortgage loans (8,233,323) (13,300,492)
Proceeds from mortgage loans sales 8,800,169 12,963,266
Net accretion on investment securities 1,221 4,468
Change in:
Other assets 1,631,394 (92,488)
Other liabilities 235,547 399,720
----------- -----------
Net cash (used in) provided
by operating activities 2,534,372 (42,217)
----------- -----------
Investing activities:
Proceeds from maturities/paydowns of
investment securites 54,082 58,337
Proceeds from sale of other real estate owned - 379,521
Loans granted, net of repayments (1,890,735) (901,143)
Premises and equipment expenditures (132,092) (48,823)
----------- -----------
Net cash used in investing activities (1,968,745) (512,108)
----------- -----------
-Continued-
8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows For the three month periods ended March
31, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Financing activities:
Net (decrease) increase in deposits (1,398,268) 3,722,641
Net decrease in short term borrowings - (2,416,000)
Principal payments on long term borrowings - (34,000)
Issuance of common stock - 35,000
Issuance of preferred stock 12,387 -
Dividends on preferred stock (6,481) -
----------- -----------
Net cash provided by (used in)
financing activities (1,392,362) 1,307,641
----------- -----------
(826,735) 753,316
Net change in cash and cash equivalents
Cash and cash equivalents:
Beginning of period 7,746,666 1,731,569
----------- -----------
End of period $ 6,919,931 $ 2,484,885
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 324,864 $ 214,415
Supplemental disclosure of non-cash transactions:
Mortgage loans converted to other
real estate owned $ - $ 291,026
See accompanying notes to consolidated financial statements (unaudited).
9
UNIVERSITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
See Note 1 of the Financial Statements incorporated by reference in the
Company's 2005 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from the
books of the Company in accordance with generally accepted accounting principles
and reflect all adjustments which are, in the opinion of management, necessary
to provide a fair statement of the results of operations and financial position
for the interim periods. Such financial statements generally conform to the
presentation reflected in the Company's 2005 Annual Report on Form 10-K. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year.
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 Corporation 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:
For the Three Month
Period Ended March 31,
2006 2005
----------- -----------
Net Income $ 14,687 $ 163,865
Less: Preferred stock dividends payable 6,481 -
----------- -----------
Net income applicable to common stock $ 8,206 $ 163,865
=========== ===========
Average Number of common shares outstanding 4,147,878 4,138,849
Effect of dilutive options 44,000 38,938
----------- -----------
Average Number of common shares outstanding
used to calculate diluted earnings per
common share 4,191,878 4,177,787
=========== ===========
(2) Investment Securities
The Bank's available-for-sale securities portfolio at March 31, 2006 had a
net unrealized loss of $35,198 as compared with a net unrealized loss of
approximately $34,721 at December 31, 2005.
Securities available for sale at March 31, 2006:
Amortized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. agency mortgage-backed
securities $ 813,180 $ - $(35,198) $ 777,982
========= ========= ========= =========
10
Securities available for sale at December 31, 2005
Amortized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. agency mortgage-backed
securities $ 868,483 $ - $(34,721) $ 833,762
========= ========= ========= =========
(3) Stock options
The Company has adopted SFAS No. 123(R), "Share-Based Payment", which is a
revision of SFAS No. 123, "Accounting for Stock Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees", which
was issued in December 2004. The revisions are intended to provide investors and
other users of financial statements with more complete and neutral financial
information by requiring that the compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued.
Prior to the 2006 year, the Company adopted the disclosure-only provisions
of SFAS No. 123. Accordingly, if the Company had elected to recognize
compensation cost based on the fair value of the options at grant date, the
Company's earnings and earnings per share from continuing operations, assuming
dilution, for the three-month period ended March 31, 2005 would have been the
pro forma amounts indicated below:
Three months ended
March 31,
------------
2005
-----------
Net earnings:
As reported $ 163,865
Pro forma $ 162,495
Net earnings per share:
As reported:
Basic $ 0.04
Diluted 0.04
-----------
Pro forma:
Basic $ 0.04
Diluted 0.04
-----------
(4) Income Taxes
Income tax expense (benefit) was $0 in 2006 and 2005. The effective tax
rate was 0% for both three month periods ended March 31 due to existence of loss
carryforwards resulting from prior years' net operating losses. At March 31,
2006, the Company had a $100,000 deferred tax asset. This asset represents a
loss carryforward that is expected to be realized. At March 31, 2005 the Company
did not have a tax deferred asset or liability.
(5)SUBSEQUENT EVENT
In April, 2006, the Company agreed to modify a relationship with a company
that assisted in the development of the Islamic Banking subsidiary and products.
Under the original agreement, University Islamic Financial Corporation was to
pay a share of revenue earned from all future mortgage alternative products sold
in the secondary market. University Islamic Financial Corporation agreed to pay
this company $100,000 in cash and the Company paid 100,500 shares of University
Bancorp, Inc common stock and fully invested stock options totaling 48,563 with
a strike price starting at $2.50 and increasing to $3.50 through
June 30, 2015 to eliminate this provision in the agreement, as well as to
acquire the firm providingtrustee services for some of the Islamic financings.
By modifying the agreement,management believes University Islamic Financial
will materially reduce future expenses related to the agreement.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward-looking statements which reflect the
Company's expectation or belief concerning future events that involve risks and
uncertainties. Among others, certain forward looking statements relate to the
continued growth of various aspects of the Company's community banking, merchant
banking, mortgage banking and investment activities, and the nature and adequacy
of allowances for loan losses. The Company can give no assurance that the
expectations reflected in forward-looking statements will prove correct. Various
factors could cause results to differ materially from the Company's
expectations. Among these factors are those referred to in the introduction to
the Company's Management Discussion and Analysis of Financial Condition and
Results of Operations which appear as Item 7 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
SUMMARY
Net income for the Company for the first quarter of 2006 was $14,687,
versus net income of $163,865 for the same period last year. Earnings during the
2006 quarter were restrained by start-up expenses at University Islamic
Financial Corporation and at Midwest Loan Services a profit sharing payment of
$70,000 and lower mortgage origination income more than offset significantly
higher mortgage subservicing fee income. Also, in the prior year period, Midwest
Loan Services had a positive $90,000 adjustment for the valuation of servicing
rights which decreased to $48,000 in the current period.
Community and Islamic Banking reported a loss of $36,000 during the first
three months of 2006 as opposed to breaking even during the first quarter of
2005.
Midwest Loan Services, the Bank's subsidiary, reported net income of
$65,000 for the three months period March 31, 2006 versus net income of $150,000
in the same period in 2005. Midwest's portfolio of mortgage subservicing grew to
$3.3 billion, 32.0% higher than at the end of the first quarter of 2005.
Mortgage rates in 2006 increased, continuing a trend set in 2005. As a result of
the increase, origination income was down in the first quarter of 2006 as
compared with the first quarter of 2005.
The following table summarizes the net income (loss) of each profit center
of the Company for the three months ended March 31, 2006 and 2005 (in
thousands):
2006 2005
------ ------
Community and Islamic Banking $ (36) $ -
Midwest Loan Services 65 150
Corporate Office (14) 14
------ ------
Total $ 15 $ 164
====== ======
RESULTS OF OPERATIONS
Net Interest Income
Net interest and financing income increased 9.7% to $638,121 for the three
months ended March 31, 2006 from $581,877 for the three months ended March 31,
2005. Net interest and profit income rose primarily because of an increase in
earning assets. The net spread decreased to 4.79% in 2006 from 5.01% in 2005.
12
Interest and profit income
Interest and profit income increased 13.9% to $913,312 in the quarter ended
March 31, 2006 from $801,644 in the quarter ended March 31, 2005. An increase in
the average balance of earning assets of $6,933,083 was a major factor in the
increase in interest income. The average volume of interest and profit earning
assets increased to $54,046,351 in the 2006 period from $47,113,268 in the 2005
period. The overall yield on total interest and profit bearing assets declined
to 6.85% in 2006 as compared to 6.90% in the same period in 2005. The decline
occurred despite an increase in the prime rate throughout the period after March
31, 2005. The lower rate is due to an increase in real estate loans as a percent
of all interest and profit bearing assets. Real estate loans are less risky than
other types of earning assets, particularly loans, and thus they tend to have a
lower interest and profit rate.
Interest and Profit Sharing Expense
Interest and profit sharing expense increased 25.2% to $275,191 in the
three months ended March 31, 2006 from $219,767 in the 2005 period. The increase
was due to an increase in rates paid on interest bearing liabilities and in
increase in volume. The cost of funds increased to 2.31% in the 2006 period from
1.99% in the 2005 period.
13
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following table summarizes monthly average balances, revenues from
earning assets, expenses of interest bearing and profit sharing liabilities,
their associated yield or cost and the net return on earning assets for the
three months ended March 31, 2006 and 2005.
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
Interest and Interest and
Average Profit Average Average Profit Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
----------- ----------- ----------- ----------- ----------- -----------
Interest and Profit Earning Assets:
Commercial Loans $17,045,046 $372,994 8.87% $17,016,061 $361,644 8.62%
Real Estate Loans 29,289,570 448,101 6.20% 25,152,667 383,549 6.18%
Installment/Consumer
Loans 1,340,153 29,290 8.86% 2,044,736 40,202 7.97%
----------- -------- ----------- --------
Total Loans 47,674,769 850,385 7.23% 44,213,464 785,395 7.20%
Investment Securities 1,757,302 12,890 2.97% 2,016,554 11,669 2.35%
Federal Funds & Bank
Deposits 4,614,280 50,037 4.40% 883,250 4,580 2.10%
----------- -------- ----------- --------
Total Interest and
Profit Earning Assets 54,046,351 913,312 6.85% 47,113,268 801,644 6.90%
Interest Bearing and Profit Sharing
Liabilities:
Demand Deposits 14,417,090 8,392 0.24% 8,964,321 22,111 1.00%
Savings Deposits 411,501 1,010 1.00% 507,965 1,244 0.99%
Time Deposits 16,932,770 168,039 4.02% 13,818,080 98,867 2.90%
Money Market Accts 16,483,435 97,448 2.40% 20,874,448 94,447 1.83%
Short-term Borrowings 31,723 302 3.86% 628,561 2,766 1.78%
Long-term Borrowings - - 0.00% 17,000 332 7.92%
----------- -------- ----------- --------
Total Interest Bearing
and Profit Sharing
Liabilities 48,276,519 275,191 2.31% 44,810,375 219,767 1.99%
----------- -------- ----------- --------
Net Earning Assets, net interest and
profit income, and net spread $5,769,832 $638,121 4.54% $ 2,302,893 $581,877 4.91%
Net Spread Margin 4.79% 5.01%
(1) Yield is annualized.
14
Allowance for Loan Losses
The provision to the allowance for loan losses was $20,000 for the quarter
ended March 31, 2006 and $15,209 for the same period ended in 2005. Net
recoveries totaled $2,974 for the three months period ended March 31, 2006 as
compared to net charges offs of $(18,424) for the same period in 2005.
Illustrated below is the activity within the allowance for the quarters ended
March 31, 2006 and 2005:
2006 2005
--------- ---------
Balance, January 1 $ 349,416 $ 353,124
Provision for loan losses 20,000 15,209
Loan charge-offs (1,334) (20,399)
Recoveries 4,308 1,975
--------- ---------
Balance, March 31 $ 372,390 $ 349,909
========= =========
At March 31, 2006 At December 31, 2005
----------------- --------------------
Total loans (1) $47,546,035 $45,652,326
Reserve for loan losses $ 372,390 $ 349,413
Reserve/Loans % (1) 0.78% 0.76%
(1) Total loans do not include loans held for sale.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor, Michigan and the future performance of these loans is dependent upon the
performance of a relatively limited geographical area.
The following schedule summarizes the Company's non-performing assets:
At March 31, 2006 At December 31, 2005
----------------- --------------------
Past due 90 days and over
and still accruing (1):
Real estate $ - $ -
Installment - -
Commercial - -
--------- ---------
Subtotal - -
--------- ---------
Nonaccrual loans (1):
Real estate/construction loans 405,571 317,013
Installment 48,999 -
Commercial 29,516 32,668
--------- ---------
Subtotal 484,086 349,681
--------- ---------
Other real estate owned 276,987 276,987
-----------------------
--------- ---------
Total nonperforming assets $ 761,073 $ 626,668
========= =========
15
At March 31, 2006 At December 31, 2005
----------------- --------------------
Ratio of non-performing loans
to total loans (1) 1.02% 0.77%
========= =========
Ratio of loans past due over
90 days and non-accrual loans
to loan loss reserve 130% 100%
========= =========
(1) Excludes loans held for sale which are valued at fair market value.
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 or regional 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. The percentage of the loan
loss reserve to loans has gone down from yearend and previous periods due to a
significant decrease in non-performing assets. Management has directed
significant attention to resolving and liquidating non-performing assets.
Non-Interest Income
Total non-interest income increased 2.7% to $1,050,725 for the three months
ended March 31, 2006 from $1,023,230 for the three months ended March 31, 2005.
The increase was primarily due to higher mortgage servicing activity. This
increase offset a decline in origination income which declined due to higher
mortgage interest rates.
At March 31, 2006, Midwest was subservicing 26,792 mortgages, an increase
of 2.5% from 26,144 mortgages subserviced at December 31, 2005.
Non-Interest Expense
Non-interest expense increased 16.0% to $1,654,159 in the three months
ended March 31, 2006 from $1,426,033 for the three months ended March 31, 2005.
The increase was due principally to expenses related to the Islamic Banking
subsidiairy of the Bank and expenses related to settling into the new Bank
facility.
At March 31, 2006 the Bank and Midwest owned the rights to service
mortgages for other institutions, most of which was owned by Midwest. The
balance of mortgages serviced for these institutions was approximately $146
million. The carrying value of these servicing rights was $1,559,811 at March
31, 2006. Market interest rate conditions can quickly affect the value of
mortgage servicing rights in a positive or negative fashion, as long-term
interest rates rise and fall. The amortization of these rights is based upon the
level of principal pay downs received and expected prepayments of the mortgage
loans. Mortgage rates in 2006 increased as compared with December 31, 2005. As a
result, the value of the mortgage servicing rights portfolio
16
increased to a point where previous charges for impairment were reduced by
approximately $48,000. In the three months ended March 31, 2005, management
recorded a $90,000 partial recovery of the impairment reserve also due to an
increase in the mortgage rates during March 2005.
Capital Resources
The table below sets forth the Bank's risk based assets, capital ratios and
risk-based capital ratios of the Bank. At March 31, 2006 and December 31, 2005,
the Bank was considered "well-capitalized" and exceeded the regulatory
guidelines.
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 March 31, 2006:
Total capital (to risk weighted assets) $8,087,000 18.9% $3,428,000 8.0 % $4,284,000 10.0 %
Tier I capital (to risk weighted
assets) 7,715,000 18.0% 1,714,000 4.0 % 2,571,000 6.0 %
Tier I capital (to average assets) 7,715,000 13.1% 2,358,000 4.0 % 2,947,000 5.0 %
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 %
17
Liquidity
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, borrowings from
correspondent lenders secured by securities, residential mortgage loans and/or
commercial loans. In addition, the Bank invests in overnight federal funds. At
March 31, 2006, the Bank had cash and cash equivalents of $6.92 million The Bank
has a line of credit for $3.2 million from the Federal Home Loan Bank of
Indianapolis secured by investment securities and residential mortgage loans and
a line of credit for $7.7 million from the Federal Reserve Bank of Chicago
secured by commercial loans. In order to bolster liquidity from time to time,
the Bank also sells brokered time deposits. At March 31, 2006, the Bank had
$4.75 million of these deposits outstanding.
Bancorp Liquidity. In an effort to maintain the Bank's Tier 1 capital to
assets ratio above current levels and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during 2006.
At March 31, 2006, Bancorp had $3,535 in cash and investments on hand to
meet its working capital needs. Subsequent to March 31, 2006, Bancorp raised
$72,000 through the sale of additional shares of 9%, seven year pay-in-kind
preferred stock.
Impact of Inflation
The primary impact of inflation on the Company's operations is reflected in
increased operating costs. Since the assets and liabilities of the Company are
primarily monetary in nature, changes in interest rates have a more significant
impact on the Company's performance than the general effects of inflation.
However, to the extent that inflation affects interest rates, it also affects
the net income of the Company.
18
ITEM 3. 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 periodic reports filed
with the SEC, such as this report on Form 10-QSB, is recorded, processed,
summarized, and reported within the time periods specified by the SEC.
Disclosure controls also are designed with an objective of ensuring that such
information is accumulated and communicated to our 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-15(e) under the Securities Exchange Act of
1934). Based upon that evaluation the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
(b) Changes in Internal Controls.
During the period covered by this report, there have been no changes in the
Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties
are subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of matters to a Vote Of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
19
31.1 Certificate of the President and Chief Executive Officer of
University Bancorp, Inc. pursuant to 15 U.S.C. Section 7241,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of the Chief Executive 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.
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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: May 22, 2006 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
/s/ Nicholas K. Fortson
-------------------------
Nicholas K. Fortson
Chief Financial Officer
21
EXHIBIT INDEX
Exhibit Description
------- ------------
31.1 Certificate of the President and Chief Executive Officer of
University Bancorp, Inc. pursuant to 15 U.S.C. Section 7241,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of the President and Chief Executive 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.
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.
22
Exhibit 31.1
10-QSB 302 CERTIFICATION
I, Stephen Lange Ranzini, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of University
Bancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officer 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 quarterly 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;
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 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 officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies 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: May 22, 2006 /s/Stephen Lange Ranzini
----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
23
Exhibit 31.2
10-QSB 302 CERTIFICATION
I, Nicholas K. Fortson, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of University
Bancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officer 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 quarterly 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;
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 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 officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies 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: May 22, 2006 /s/Nicholas K. Fortson
----------------------
Nicholas K. Fortson
Chief Financial Officer
24
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
I, Stephen Lange Ranzini, the President and Chief Executive Officer of
University Bancorp, Inc., certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of University Bancorp, Inc. on Form 10-QSB for the quarter
ended March 31, 2006 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that information contained in
such report on Form 10-QSB fairly presents in all material respects the
financial condition and results of operations of University Bancorp, Inc.
University Bancorp, Inc
Date: May 22, 2006 By: /s/ Stephen Lange Ranzini
---------------- --------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
25
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
I, Nicholas K. Fortson, Chief Financial Officer of University Bancorp, Inc.,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of University
Bancorp, Inc. on Form 10-QSB for the quarter ended March 31, 2006 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that information contained in such report on Form 10-QSB fairly
presents in all material respects the financial condition and results of
operations of University Bancorp, Inc.
University Bancorp, Inc
Date: May 22, 2006 By: /s/ Nicholas K. Fortson
-----------------------
Nicholas K. Fortson
Chief Financial Officer
26