United States

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-QSB

 

(Mark One)

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2007

 

OR

 

o      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)

 

                Delaware38-2929531

(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.

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 

 

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

FORM 10-QSB

 

TABLE OF CONTENTS

 

PART I - Financial Information

 

 

 

 

____________________________________________________________

 

The information furnished in these interim statements reflects all adjustments and accruals, which are in the opinion of management, necessary for a fair statement of the results for such periods. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.

 

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Part I. - Financial Information        

 

 

UNIVERSITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2007 and December 31, 2006

 

 

 

4

UNIVERSITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)

September 30, 2007 and December 31, 2006

 

 

 

See notes to consolidated financial statements.

 

5

 

 

6

 

 

 

7

See notes to consolidated financial statements.

 

8

UNIVERSITY BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

For the Periods Ended September 30, 2007 and 2006

(Unaudited)

 

 

 

See notes to consolidated financial statements.

 

9

 

 

10

 

 

See notes to consolidated financial statements.

 

 

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UNIVERSITY BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(1) General

 

See Note 1 of the consolidated financial statements incorporated by reference in the Company’s 2006 Annual Report on Form 10-KSB for a summary of the Company’s significant accounting policies.

 

The unaudited consolidated financial statements included herein were prepared from the books of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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. All adjustments made were of a normal recurring nature. These condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Such financial statements generally conform to the presentation reflected in the Company’s 2006 Annual Report on Form 10-KSB. 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 reflect 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-months ended September 30, 2007 and 2006, and the nine-months ended September 30, 2006 the Company incurred a net loss. Accordingly, the anti-dilutive impact of the effect of stock options is not shown.

 

(2) Investment Securities

 

The Bank’s available-for-sale securities portfolio at September 30, 2007 had a net unrealized loss of approximately $11,005 as compared to a net unrealized loss of approximately $27,296 at December 31, 2006.

 

 

 

 

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Securities available for sale at September 30, 2007 consist of the following:

 

 

 

Securities available for sale at December 31, 2006 consist of the following:

 

 

The Bank’s trading securities portfolio at September 30, 2007 had a net realized gain of approximately $77,788 as compared to a net unrealized loss of $0 at December 31, 2006.

 

Trading securities at September 30, 2007 and December 31, 2006 consist of the following:

 

 

 

(3) Income Taxes

 

Income tax expense was $0 for the three-months ended September 30, 2007 and $0 for three-months ended September 30 2006. 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, tax credits, book-tax differences and valuation allowances recorded. At September 30, 2007 and December 31, 2006, the Company had a $140,000 deferred tax asset. This asset represents a loss carry forward that is expected to be realized.

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company adopted FIN 48 effective January 1, 2007. There was no adjustment required to retained earnings since the Company was not aware of any material tax position taken or expected to be taken in a tax return which the tax law is subject to varied interpretations.

 

 

 

 

 

 

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(4) Segment Reporting

 

Pre-tax income (loss) summary after minority interest for the three and nine-months ended September 30, 2007 (in thousands):

 

 

 

 

Pre-tax income (loss) summary after minority interest for the three and nine-months ended September 30, 2006 (in thousands):

 

 

The reportable segments are activities that fall under the corporate offices (i.e. holding company), bank operations, and the mortgage servicing operations located at Midwest Loan Services, Inc. Activities included in the banking activity are conventional banking, Islamic banking, and a small insurance agency.

 

Total assets for each reportable segment as of September 30, 2007 (in thousands):

 

 

 

Total assets for each reportable segment as of December 31, 2007 (in thousands):

 

 

 

(5) Recent Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority

 

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being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. While SFAS 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting SFAS 157 on its financial statements.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The Company is continuing to evaluate the impact of this statement.

 

(6) Adoption of Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets,” (“SFAS 156”)

 

In March 2006, the FASB issued SFAS 156, which amends Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” (“SFAS 140”). SFAS 156 changes SFAS 140 by requiring that mortgage servicing rights be initially recognized at their fair value and by providing the option to either: (1) carry mortgage servicing rights at fair value with changes in fair value recognized in earnings; or (2) continue recognizing periodic amortization expense and assess the mortgage servicing rights for impairment as originally required by SFAS 140. This option may be applied by class of servicing assets or liabilities.

 

SFAS 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption permitted. The Company has chosen to adopt SFAS 156 effective January 1, 2007. The Company has identified mortgage servicing rights relating to mortgage loans as a class of servicing rights and has elected to apply fair value accounting to these assets. SFAS 156 requires that, at adoption, any adjustment necessary to record mortgage servicing rights at fair value be recognized in beginning stockholders’ equity. Due to the fact that the fair market value of mortgage servicing rights was less than the carrying value at December 31, 2006, there was no adoption adjustment required by the Company as of January 1, 2007, as noted below:

 

 

 

 

 

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(7) Reclassifications

 

Certain items in the prior period consolidated financial statements have been reclassified to conform to the September 30, 2007 presentation.

 

Item 2. Management’s Discussion and Analysis or Plan of Operation

 

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 for 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 our 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 be considered in 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.

 

SUMMARY

 

Net loss for the Company for the three-month period ended September 30, 2007 was $49,738 as compared to a loss of $132,971 for the same period in 2006. The Bank’s subsidiary, Midwest Loan Services Inc., reported a pre-tax net loss of $19,000 for the third quarter of 2007 as compared to $11,000 for the same period in 2006. Income at Midwest was negatively impacted in the third quarter 2007 by decrease in long term mortgage interest rates which negatively impacted the fair value of mortgage servicing rights held for investment causing a valuation allowance of $236,914 which threw operating results into an overall loss for the quarter. Community Banking reported a pre-tax net loss of $12,000 during the current year’s third quarter, an improvement over a pre-tax net loss of $95,000 for the same period in 2006. Community Banking’s results continue to reflect ongoing investment in the expansion of University Islamic Financial, including legal and personnel costs to expand the product offering into additional states. Improvements in net interest and financing income driven by increases in loans and financings were offset by the mortgage servicing rights valuation allowance.

 

Net income for the Company for the nine-month period ended September 30, 2007 was $1,015,294 as compared to a loss of $347,237 for the same period last year. Income for the nine-months ended September 30, 2007 at Midwest Loan Services was positively impacted by termination fee income of $1,175,284 which more than offset a fair value mortgage servicing rights allowance of $182,770. Year-to-date key metrics of the bank have shown positive trends:

               

 

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At September 30, 2007, Midwest was subservicing 32,770 mortgages, an increase of 4.9% from 31,242 mortgages subserviced at June 30, 2007 and an increase of 1.0% from 32,461 mortgages subserviced at December 31, 2006.

 

RESULTS OF OPERATIONS

 

Net Interest and Financing Income

 

Net interest and financing income increased 45% to $883,522 for the three-months ended September 30, 2007 from $609,744 for the three-months ended September 30, 2006. Net interest and financing income rose primarily because of an increase in earning assets. The net spread increased to 3.23% in 2007 from 3.01% in 2006.

 

Net interest and financing income increased to $2,571,122 for the nine-months ended September 30, 2007 from $1,917,795 for the nine-months ended September 30, 2006. Net interest and financing income increased from a year ago as a result of a net increase in earning assets. The yield on interest and profit earning assets increased to 7.21% for the nine-months ended September 30, 2007 from 6.69% for the nine-months ended September 30, 2006. The cost of interest bearing and profit sharing liabilities increased to 3.73% for the nine-months ended September 30, 2007 from 3.14% for the nine-months ended September 30, 2006. Comparing the same two nine-month periods, net interest and financing income as a percentage of total average earning assets decreased to 3.48% from 3.55%.

 

Interest and Financing Income

 

Interest and financing income increased 43% to $1,319,288 for the quarter ended September 30, 2007 from $922,483 for the quarter ended September 30, 2006. An increase in the average balance of earning assets of $19,169,273 was a major factor in the increase in interest income. The average volume of interest and profit earning assets increased to $75,578,338 in the 2007 period from $56,409,065 in the 2006 period. The overall yield on total interest and profit bearing assets increased to 6.93% for the third quarter of 2007 as compared to 6.49% for the same period in 2006. The increase occurred due to an increase in loans at higher rates throughout the period ended September 30, 2007.

 

Interest and financing income increased to $3,818,998 for the nine-months ended September 30, 2007 from $2,834,083 for the nine-months ended September 30, 2006. This increase resulted from an increase in average earning assets. The overall yield on earning assets increased to 7.21% for the nine-months ended September 30, 2007 from 6.69% for the nine-months ended September 30, 2006. The average volume of interest and profit earning assets increased to $70,828,526 for the nine-months ended September 30, 2007 from $56,646,689 for the same 2006 period.

 

Interest and Profit Sharing Expense

 

Interest and profit sharing expense increased 39% to $435,766 for the three-months ended September 30, 2007 from $312,739 for the same period in 2006. An increase in the average balance of interest bearing and profit sharing liabilities of $11,064,172 was a major factor in the increase in interest and profit sharing expense. The average volume of interest bearing and profit sharing liabilities increased to $46,774,100 in the 2007 period from $35,709,928 in the 2006 period. The cost of funds increased to 3.70% for the first quarter of 2007 as compared to 3.47% for the same period in 2006.

 

 

 

 

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Interest and profit sharing expense increased to $1,247,876 for the nine-months ended September 30, 2007 from $916,288 for the same 2006 period. The rise in interest and profit sharing expense was due to an increase in the yield on and volume of average interest bearing and profit sharing liabilities. The cost of funds increased to 3.73% for the nine-months ended September 30, 2007 from 3.14% for the same 2006 period. In 2007, the rates on deposits were higher than in the nine-month period in 2006. The average volume of interest bearing and profit sharing liabilities increased to $44,710,604 for the nine-months ended September 30, 2007 from $39,060,107 for the same 2006 period.

 

MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS

 

The following tables summarize monthly average balances, interest and finance 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 and nine-months ended September 30, 2007 and 2006:

 

18

 

 

 

19

 

 

 

 

 

 

 

 

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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. The provision to the allowance for loan losses was $91,803 for the nine-month period ended September 30, 2007 and $106,395 for the same period in 2006. Net charge-offs totaled $22,033 for the nine month period ended September 30, 2007 as compared to net recoveries of $1,700 for the same period in 2006. Illustrated below is the activity within the allowance for the nine-month period ended September 30, 2007 and 2006, respectively.

 

 

 

The Bank had approximately $19 million of Islamic financings on its books at September 30, 2007.  The allowance for loan losses for Islamic financing is determined under the same procedures and standards as for regular residential real estate loans.  The portion of the allowance for loan losses allocated to Islamic loans is $46,661. 

 

On the liability side of the balance sheet, the Bank offers FDIC–insured deposits that are compliant with Islamic Law. These deposits, by agreement, are specifically invested in the Islamic financings. The Islamic savings, money markets and certificates of deposit pay out earnings that are derived specifically from the revenues from the Islamic financings net of certain expenses. In essence, a portion of the net earnings from the Islamic financings are allocated to the depositors and to the Company in accordance with the agreement. Thus the depositor’s earnings can fluctuate with the fluctuation of the net revenues from the Islamic financing.  If the underlying portfolio of assets is not profitable, the Bank may elect reduce the overall profit sharing with the depositors or not distribute any profit sharing at all. While the loss sharing characteristics related to the Islamic deposits would tend to lower the required amount of allowance for Islamic financings, management has opted to retain the same level of required reserves for Islamic financings as for comparable mortgage loans.

 

 

 

 

 

 

 

21

 

The following schedule summarizes the Company’s non-performing assets:

 

 

 

 

(1) Excludes loans held for sale which are valued at the lower of cost or fair market value.

 

At September 30, 2007 there were four loans on non-accrual totaling $1,112,083 and one loan over 90 days totaling $175,446 that was paid in full in October 2007. One non-accrual loan, totaling $859,214 is a land development loan and has an impairment reserve of $223,220 allocated at September 30, 2007 and December 31, 2006. Management has reached a deal with the borrower to gain title to the property to facilitate the work required to prepare the property for sale. Although this loan was reserved for at December 31, 2006, it was not in non-accrual status until March 31, 2007. The other three non- accrual loans, totaling $252,869, are residential real estate loans and an installment loan. The largest of these three loans has mortgage insurance in place and no loss is anticipated on the work-out of the mortgage. The smaller real estate loan has an impairment reserve of $4,062 at September 30, 2007 and December 31, 2006.

 

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 and recent negative developments in the Ann Arbor area economy, the Bank’s future loss ratios may exceed historical loss ratios.

 

In general the bank has never originated the riskier types of mortgage products that are the focus of the recent crisis in the mortgage subprime industry. In particular the bank has no interest-only, optional payment, low or no documentation or 80/10/10 residential mortgage loans in its mortgage portfolio or managed servicing rights portfolio. Midwest has a small portfolio of Alt-A quality mortgage servicing rights on mortgages sold through its Lehman Brothers conduit that it manages for its own account, all of which mortgages were current as of September 30, 2007.

 

 

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Management believes that the current allowance for loan losses is adequate to absorb losses inherent in the loan portfolio, although the ultimate adequacy of the allowance is dependent upon future economic factors beyond the Company’s control. A downturn in the general nationwide economy will tend to aggravate, for example, the problems of local loan customers currently facing some difficulties, and could decrease residential home prices. A general nationwide business expansion could conversely tend to diminish the severity of any such difficulties.

 

Non-Interest Income

 

Total non-interest income increased 5.36% to $1,261,623 for the three-months ended September 30, 2007 from $1,197,433 for the three-months ended September 30, 2006.

 

Total non-interest income increased to $4,900,670 for the nine-months ended September 30, 2007 from $3,284,422 for the nine-months ended September 30, 2006. As compared with the nine-month period in 2006, the Company increased its sub-servicing operations. Income generated in this area was higher due to the higher termination fees which were only partially offset by a decline in the initial loan set up and other fees due to a decrease in loan originations.

 

At September 30, 2007, Midwest was subservicing 32,770 mortgages, an increase of 4.9% from 31,242 mortgages subserviced at June 30, 2007 and an increase of 1.0% from 32,461 mortgages subserviced at December 31, 2006.

 

Non-Interest Expense

 

Non-interest expense increased 16.3% to $2,157,950 for the three-months ended September 30, 2007 from $1,855,341 for the three-months ended September 30, 2006 as salaries and other operating expenses increased due to increases in the volume of loan servicing.

 

Non-interest expense increased to $6,048,135 for the nine-months ended September 30, 2007 from $5,338,419 for the nine-months ended September 30, 2006. The increase was primarily due to an increase in salaries and other operating expenses and an increase in legal fees for the expansion of products offered by the Islamic banking subsidiary.

 

At September 30, 2007, University Bank (“the Bank”) and Midwest Loan Services (“Midwest”) owned the rights to service mortgages for Fannie Mae, Freddie Mac and other institutions, most of which were owned by Midwest, an 80% owned subsidiary of the Bank. The balance of mortgages serviced for these institutions was approximately $157 million at September 30, 2007. The fair value of these servicing rights was $1,584,268 at September 30, 2007. 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 servicing rights are recorded at fair value at September 30, 2007 and at the lower of cost or market at September 30, 2006. In 2007, the Company adopted the fair value measurement method of accounting for mortgage servicing rights according to SFAS 156. Under this method, changes in fair value are reported in earnings at each reporting date.

 

 

 

 

 

 

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Following is an analysis of the change the Company’s mortgage servicing rights for the periods ended September 30, 2007 and 2006:

 

 

 

Capital Resources

 

The table below sets forth the Bank’s risk based assets, capital ratios and risk-based capital ratios of the Bank. At September 30, 2007 and December 31, 2006, the Bank was considered “well-capitalized” and exceeded the regulatory guidelines. Tier 1 Capital increased 17.2% to $9,031,000 during the nine-months ended September 30, 2007.

 

 

Liquidity

 

Bank Liquidity. The Bank’s primary sources of liquidity are customer deposits, scheduled payments and prepayments of loan principal, cash flow from operations, maturities of various investments, borrowings from correspondent lenders secured by securities, residential mortgage loans and/or commercial loans. In addition, the Bank invests in overnight federal funds. At September 30, 2007, the Bank had cash and cash equivalents of $14,001,947. The Bank’s lines of credit include the following:

 

       

 

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At September 30, 2007, the Bank had $0 outstanding on the Federal Home Loan Bank and Federal Reserve Bank lines of credit. In order to bolster liquidity from time to time, the Bank also sells brokered time deposits. There were no brokered deposits outstanding at September 30, 2007.

 

Bancorp Liquidity. At September 30, 2007, Bancorp had $22,584 in cash and investments on hand to meet its working capital needs. In an effort to increase the Bank’s Tier 1 capital to assets ratio through retained earnings, management does not expect that the Bank will pay dividends to the Company during the balance of 2007.

 

 

 

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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-QSB, 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 for the quarter ended September 30, 2007. Significant improvements in internal controls over reporting were made from prior quarters where disclosure controls and procedures were deemed to be not effective.

 

   

 

At December 31, 2006 and the first two quarters of 2007, there were material weaknesses in the SEC reporting. After the first draft of the Form 10-KSB for 2006 and the March 31, 2007 Form 10-QSB, management and the auditors discovered adjustments to the financial statements. The adjustments were discovered in the audit and review of the financial statements of the various subsidiaries of the company. The failure to initially book certain transactions for the initial draft of the financial statements resulted from various staff changes occurring at critical points in the reporting cycle. The new staff failed to book certain transactions, which included certain accruals and reclassifications. The Form 10-KSB was amended after the original filing due to typographical errors in the original filings. These typographical errors resulted from an SEC edgarization process that resulted in significant manual adjustments to get the SEC compliant document to appear like the original Word Document. At June 30, 2007, the material weaknesses were cut down to one reclassification and timely filing of the SEC document. The edgarization process was greatly improved and did not require any substantial manual intervention to prepare the Form 10-QSB into an SEC compliant document. The above items, under Section 404 of the Sarbanes Oxley Act of 2002, constitute significant deficiencies and material weaknesses in internal controls over financial reporting.

 

 

 

 

 

 

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During the third quarter of 2007, specific steps to remediate the material weaknesses were implemented by the Bank Cashier and Chief Executive Officer. They include a thorough review of the financial statements prior to submission to the auditors. The review was performed by multiple parties. Experienced staff members were hired to assist in the monitoring of disclosure controls and procedures.

 

Additionally, the Company also implemented a new edgarization process that eliminates substantial manual intervention to conform the Form 10-KSB Word document into an SEC compliant document.

 

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

 

 

Item 3. Defaults upon Senior Securities

 

 

 

Item 4. Submission of Matters to a Vote of Security Holders

 

 

 

Item 5. Other information

 

 

 

Item 6. Exhibits and Reports on Form 8-K.

 

   

 

   

 

   

 

   

 

   

 

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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.

 

 

 

 

     

 

 

     

 

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EXHIBIT INDEX

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Exhibit 31.1

 

10-QSB 302 CERTIFICATION

 

I, Stephen Lange Ranzini, certify that:

 

               

(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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

   

(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.

 

 

 

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President and Chief Executive Officer

 

Exhibit 31.2

10-QSB 302 CERTIFICATION

 

I, Nicholas K. Fortson, certify that:

 

               

(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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

   

(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.

 

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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 September 30, 2007 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.

 

 

 

     

President and Chief Executive Officer 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, the 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 September 30, 2007 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.

 

 

 

     

 

 

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