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 June 30, 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 July 31, 2006: 4,248,378 shares
Transitional Small Business Disclosure Format (Check One) __Yes _X_No
Page 1 of 29 pages
FORM 10-QSB
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Unaudited Consolidated 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 Unaudited Consolidated Financial
Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Summary 12
Results of Operations 14
Capital Resources 20
Liquidity 21
Item 3. Controls and Procedures 21
PART II - Other Information
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of matters to a Vote
of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits & Reports on Form 8-K 23
Signatures 24
Exhibits 26
------------------------------------------------------------
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.- Unaudited Consolidated Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2006 and December 31, 2005
(Unaudited)
June 30, December 31,
ASSETS 2006 2005
----------- -----------
Cash and due from banks $11,051,341 $ 7,746,666
Securities available for sale, at market 728,438 833,762
Federal Home Loan Bank Stock 941,200 941,200
Loans held for sale, at the lower of cost or market 1,308,800 1,446,575
Loans 47,239,000 45,652,326
Allowance for loan losses (402,214) (349,416)
----------- -----------
Loans, net 46,836,786 45,302,910
Premises and equipment, net 2,814,724 2,802,816
Mortgage servicing rights, net 1,661,047 1,471,808
Real estate owned, net 583,131 276,987
Accounts receivable 665,905 2,585,524
Accrued interest receivable 260,360 205,069
Prepaid expenses 301,462 285,015
Goodwill 103,914 103,914
Other assets 484,971 537,666
----------- -----------
TOTAL ASSETS $67,742,079 $64,539,912
=========== ===========
-Continued-
3
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets (continued)
June 30, 2006 and December 31, 2005
(Unaudited)
June 30, December 31,
2006 2005
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand - non interest bearing $ 3,688,179 $ 2,919,887
Demand - interest bearing and profit sharing 44,057,463 34,485,047
Savings 309,093 418,308
Time 10,950,288 18,197,803
----------- -----------
Total Deposits 59,005,023 56,021,045
Accounts payable 599,823 395,604
Accrued interest payable 61,160 110,619
Other liabilities 91,715 210,190
----------- ------------
Total Liabilities 59,757,721 56,737,458
Minority Interest 2,575,602 2,501,873
Stockholders' equity:
Preferred stock, $0.001 par value;
$1,000 liquidation value;
Authorized - 500,000 shares;
Issued - 36,230 shares in 2006 and
27,791 shares in 2005 36 28
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 4,363,562 shares in 2006 and
4,263,062 shares in 2005 43,636 42,630
Additional paid-in-capital 6,492,386 6,149,990
Accumulated deficit (745,476) (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 (41,296) (34,721)
----------- -----------
Total Stockholders' Equity 5,408,756 5,300,581
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $67,742,079 $64,539,912
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended June 30, 2006 and 2005
(Unaudited)
For the Three-Month For the Six-Month
Period Ended Period Ended
2006 2005 2006 2005
---------- ---------- ---------- ----------
Interest and financing income:
Interest and fees on loans and financing income $ 906,700 $ 788,452 $1,757,085 $1,573,846
Interest on securities:
U.S. Government agencies 1,604 6,998 4,594 8,745
Other securities 16,500 9,934 26,400 19,856
Interest on federal funds and other 73,484 8,067 123,521 12,647
---------- ---------- ---------- ----------
Total interest income 998,288 813,451 1,911,600 1,615,094
---------- ---------- ---------- ----------
Interest and profit sharing expense:
Interest and profit sharing on deposits:
Demand deposits 159,356 118,961 265,196 235,519
Savings deposits 861 1,153 1,871 2,397
Time deposits 166,362 113,807 334,401 212,673
Short term borrowings 1,779 5,427 2,081 8,194
Long term borrowings - - - 332
---------- ---------- ---------- ----------
Total interest and profit sharing expense 328,358 239,348 603,549 459,115
---------- ---------- ---------- ----------
Net interest and financing income 669,930 574,103 1,308,051 1,155,979
Provision for loan losses 28,984 2,000 48,984 17,209
---------- ---------- ---------- ----------
Net interest and financing income after
provision for loan losses 640,946 572,103 1,259,067 1,138,770
---------- ---------- ---------- ----------
Other income:
Loan servicing and sub-servicing
fees 608,483 444,554 1,137,911 813,580
Initial loan set up and other fees 323,972 346,430 633,572 744,623
Gain (loss) on sale of mortgage loans (429) 92,900 38,892 196,444
Insurance and investment fee income 50,018 50,054 101,702 101,176
Deposit service charges and fees 31,763 26,393 55,004 49,979
Other 22,457 61,900 119,908 139,660
---------- ---------- ---------- ----------
Total other income 1,036,264 1,022,231 2,086,989 2,045,462
---------- ---------- ---------- ----------
-Continued-
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended June 30, 2006 and 2005
(Unaudited)
For the Three-Month For the Six-Month
Period Ended Period Ended
2006 2005 2006 2005
---------- ---------- ---------- ----------
Other expenses:
Salaries and benefits $ 845,038 $ 738,443 $1,670,443 $1,480,330
Occupancy, net 129,942 105,303 261,857 231,332
Data processing and equipment expense 145,472 141,193 297,073 279,625
Legal and audit expense 70,719 51,122 120,408 88,809
Consulting fees 41,873 37,439 96,306 71,330
Mortgage banking expense 44,816 68,217 106,464 120,540
Servicing rights amortization (35,341) 227,045 (34,028) 226,190
Advertising 59,626 35,440 106,397 69,826
Memberships and training 37,609 35,937 62,066 62,453
Travel and entertainment 44,681 34,013 90,715 66,015
Supplies and postage 71,731 62,194 139,723 111,186
Insurance 38,885 35,985 78,696 70,643
Other operating expenses 411,112 81,765 564,202 201,850
---------- ---------- ---------- ----------
Total other expenses 1,906,163 1,654,096 3,560,322 3,080,129
---------- ---------- ---------- ----------
Income (loss) before income taxes (228,953) (59,762) (214,266) 104,103
---------- ---------- ---------- ----------
Income tax expense (benefit) - - - -
---------- ---------- ---------- ----------
Net income (loss) $ (228,953)$ (59,762) $(214,266) $ 104,103
Preferred stock dividends 7,913 3,400 14,394 3,400
Net income (loss) available to
common shareholders $ (236,866) $ (63,162) $(228,660) $ 100,703
Basic earnings/(loss) per common share $ (0.06) $ (0.02) $ (0.05) $ 0.02
========== ========== ========== ==========
Diluted earnings/(loss) per common share $ (0.06) $ (0.02) $ (0.05) $ 0.02
========== ========== ========== ==========
Weighted average shares outstanding - Basic 4,245,065 4,148,878 4,196,740 4,143,891
========== ========== ========== ==========
Weighted average shares outstanding - Diluted 4,245,065 4,148,878 4,196,740 4,183,536
========== ========== ========== ==========
See accompanying notes to consolidated financial statements (unaudited).
6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Periods Ended June 30, 2006 and 2005
(Unaudited)
For the Three-Month For the Six-Month
Period Ended Period Ended
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net income (loss) $(228,953) $ (59,762) $(214,266) $ 104,103
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available for sale (6,098) 15,396 (6,575) 22,264
Less: reclassification adjustment
for accumulated gains
included in net income (loss) - - - -
---------- ---------- ---------- ----------
Other comprehensive income (loss), before
tax effect (6,098) 15,396 (6,575) 22,264
Income tax expense (benefit) - - - -
Other comprehensive income (loss), net
of tax (6,098) 15,396 (6,575) 22,264
---------- ---------- ---------- ----------
Comprehensive income (loss) $(235,051) $ (44,366) $(220,841) $ 126,367
========== ========== ========== ==========
See accompanying notes to consolidated financial statements (unaudited).
7
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six-month periods ended June 30, 2006 and 2005
(Unaudited)
2006 2005
------------- -------------
Operating activities:
Net income (loss) $ (214,266) $ 104,103
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation 197,075 167,035
Amortization (34,028) 226,190
Provision for loan losses 48,984 17,209
Net gain on mortgage loan sales (38,892) (196,444)
Net accretion on investment securities 4,028 2,794
Gain on the sale of fixed assets - (57,074)
Gain on the sale of other real estate owned - (9,294)
Originations of mortgage loans (16,172,367) (24,855,110)
Proceeds from mortgage loan sales 16,349,034 24,671,848
Non-employee stock awards 259,023 -
Change in:
Real estate owned - 11,316
Other assets 1,745,365 (328,906)
Other liabilities 110,013 209,781
------------- -------------
Net cash provided by (used in) operating activities 2,253,969 (36,552)
------------- -------------
Investing activities:
Proceeds from maturities and pay downs of securities
available for sale 94,721 148,770
Loans granted, net of repayments (1,889,004) (1,117,039)
Proceeds from sale of other real estate - 713,610
Premises and equipment expenditures (208,982) (1,767,096)
------------- -------------
Net cash used in investing activities (2,003,265) (2,021,755)
------------- -------------
-Continued-
8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six-month periods ended June 30, 2006 and 2005
(Unaudited)
2006 2005
------------- -------------
Financing activities:
Net increase in deposits 2,983,978 2,635,444
Net decrease in short-term borrowings - (583,155)
Principal payments on long-term borrowings - (34,000)
Issuance of preferred stock 84,387 227,500
Issuance of common stock - 35,000
Dividends on preferred stock (14,394) (3,400)
------------- -------------
Net cash provided by financing activities 3,053,971 2,277,389
------------- -------------
3,304,675 219,082
Net change in cash and cash equivalents Cash and cash equivalents:
Beginning of period 7,746,666 1,731,569
------------- -------------
End of period $ 11,051,341 $ 1,950,651
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 653,008 $ 418,436
Supplemental disclosure of non-cash transactions:
Mortgage loans converted to other real estate owned $ 306,144 $ 292,026
See accompanying notes to consolidated financial statements (unaudited).
9
UNIVERSITY BANCORP, INC.
NOTES TO UNAUDITED 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 calendar 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 For the Six-Month
Period Ended June 30, Period Ended June 30,
2006 2005 2006 2005
---------- ---------- --------- ---------
Net income (loss) $(228,953) $(59,762) $(214,266) $ 104,103
Less: Preferred stock dividends payable 7,913 3,400 14,394 3,400
---------- --------- --------- ---------
Net income applicable to common stock $(236,866) ($63,162) $(228,660) $ 100,703
========== ========= ========= =========
Average Number of common shares outstanding 4,245,065 4,148,878 4,196,740 4,143,891
Effect of dilutive options - - - 39,645
---------- --------- --------- ---------
Average Number of common shares outstanding
used to calculate diluted earnings per
common share 4,245,065 4,148,878 4,196,740 4,183,536
========== ========= ========= =========
Options to purchase shares of common stock were outstanding at June 30,
2006 and 2005, but were not included in the computation of diluted earnings per
share for the six-month period ended June 30, 2006 or the three-month periods
ended June 30, 2006 and 2005, as these shares would be anti-dilutive.
10
(2) Investment Securities
The Bank's available-for-sale securities portfolio at June 30, 2006 had a
net unrealized loss of $41,296 as compared with a net unrealized loss of
approximately $34,721 at December 31, 2005.
Securities available for sale at June 30, 2006:
Amortized Unrealized Fair
Cost Gains Losses Value
--------- -------- --------- --------
U.S. agency mortgage-backed
securities $769,734 - $(41,296) $728,438
======== ======== ========= ========
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 require that the compensation cost
relating to share-based payment transactions to be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. For the six-month period ended June 30, 2006, the
Company recorded $17,823 of compensation expense related to stock options.
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 June 30, 2005 would have been the pro
forma amounts indicated below:
Six months ended
June 30, 2005
Net earnings:
As reported: $100,703
Compensation expense 2,989
-------------------
Pro forma $97,714
===================
Net earnings per share:
As reported:
Basic $0.02
Diluted $0.02
Pro forma:
Basic $0.02
Diluted $0.02
11
(4) Issuance of stock and stock options
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
providing trustee 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. The value of the shares
and options expensed in the second quarter totaled $259,023.
(5) Income Taxes
Income tax expense (benefit) was $0 in 2006 and 2005. The effective tax
rate was 0% for both six-month periods ended June 30, 2006 and 2005 due to
existence of loss carry forwards resulting from prior years' net operating
losses. At June 30, 2006, the Company had a $100,000 deferred tax asset. This
asset represents a loss carry forward that is expected to be realized. At June
30, 2005 the Company did not have a tax deferred asset or liability.
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
Second quarter 2006 compared to second quarter 2005
Net loss for the Company for the second quarter of 2006 was $228,953
versus net loss of $59,762 for the same period last year.
Earnings during the second quarter of 2006 were restrained by start-up
expenses at University Islamic Financial Corporation and a settlement agreement
with a company that assisted in the development of the Islamic subsidiary and
12
products. Community and Islamic Banking reported a loss of $130,000 during the
second quarter of 2006 as opposed to a net income of $43,000 during the same
period in 2005. Within the Corporate Office a large settlement expense increased
the second quarter loss in 2006 to $283,000 from a net loss of $29,000 in 2005.
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 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 providing
trustee services for some of the Islamic financings. By modifying the agreement,
the Company will materially reduce future expenses related to the agreement.
Six-months ended June 30, 2006 compared to six-months ended June 30, 2005
The Company's net loss for the first half of 2006 was $214,266, versus a
net income of $104,103 for the same period last year. Community Banking reported
a net loss of $166,000 during the current year's first half as opposed to net
income of $43,000 in the prior year. As noted above, start up expenses of the
Islamic banking company and a settlement agreement with a company that assisted
in the development of the Islamic subsidiary and products negatively impacted
the first half of 2006 as compared with the same period last year. The expenses
in these areas more than offset the increase in net income at Midwest Loan
Services. Net income in the six-months ended June 30, 2006 was $249,000 as
compared to $76,000 in 2005. Midwest has greatly increased its volume of
mortgages that it services. Additionally, Midwest benefited from a reduction of
the servicing rights impairment reserve in 2006 due to higher mortgage rates
during the current year. The impairment reserve was reduced by $149,000 in 2006
as compared to increase due to an impairment charge of $91,000 in 2005.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three and six-months ended June 30, 2006 and 2005
(in thousands):
Pre-tax income (loss) summary for the three and six-months ended June 30, 2006
Three-Months Six-Months
------------ ----------
Community Banking $ (130) $ (166)
Midwest Loan Services 184 249
Corporate Office (283) (297)
------- -------
Total $ (229) $ (214)
======= =======
Pre-tax income (loss) summary for the three and six-months ended June 30, 2005
Three-Months Six-Months
------------ ----------
Community Banking $ 43 $ 43
Midwest Loan Services (74) 76
Corporate Office (29) (15)
------- -------
Total $ (60) $ 104
======= =======
13
RESULTS OF OPERATIONS
Net interest and financing income
Net interest and financing income increased 16.69% to $669,930 for the
three-months ended June 30, 2006 from $574,103 for the three-months ended June
30, 2005. Net interest and profit income rose primarily because of an increase
in earning assets. The net spread increased to 5.09% for the three-months ended
June 30, 2006 from 4.86% for the three-months ended June 30, 2005.
Net interest and financing income increased to $1,308,051 for the
six-months ended June 30, 2006 from $1,155,979 for the six-months ended June 30,
2005. Net interest and financing income increased from a year ago as a result of
a higher net interest margin and a net increase in earning assets. The yield on
interest earning assets increased to 7.10% for the six-months ended June 30,
2006 from 6.92% for the six-months ended June 30, 2005. The cost of interest
bearing liabilities increased to 2.38% for the six-months ended June 30, 2006
from 2.04% for the six-months ended June 30, 2005. Comparing the same two
six-month periods, net interest income as a percentage of total average earning
assets decreased to 4.86% from 4.95%.
Interest and profit income
Interest and profit income increased 22.7% to $998,288 for the quarter
ended June 30, 2006 from $813,451 for the quarter ended June 30, 2005. An
increase in the average balance of earning assets of $5,418,752 was a major
factor in the increase in interest income. The average volume of interest and
profit earning assets increased to $52,813,658 for the quarter ended June 30,
2006 from $47,394,906 for the same 2005 period. The growth in earning assets is
primarily in the real estate loan category. The overall yield on total interest
and profit bearing assets increased to 7.58% for the quarter ended June 30, 2006
as compared to 6.88% for the same 2005 period. The increase occurred due to
increases in the prime and general federal lending rate throughout the period
after June 30, 2005.
Interest and profit income increased to $1,911,600 for the six-months ended
June 30, 2006 from $1,615,094 for the six-months ended June 30, 2005. This
increase resulted from an increase in the yield on and volume of average earning
assets. The overall yield on earning assets rose to 7.10% for the six-months
ended June 30, 2006 from 6.92% for the six-months ended June 30, 2005. The
increase occurred due to increases in the prime and general federal lending rate
throughout the period after June 30, 2005. The average volume of interest
earning assets increased to $54,257,823 for the six-months ended June 30, 2006
from $47,098,149 for the same 2005 period.
Interest and Profit Sharing Expense
Interest and profit sharing expense increased 37.2% to $328,358 for the
three-months ended June 30, 2006 from $239,348 for the same 2005 period. The
increase was due to an increase in rates paid on interest bearing liabilities
and an increase in volume. The cost of funds increased to 2.54% for the
three-months ended June 30, 2006 from 2.12% for the same 2005 period.
Interest and profit sharing expense increased to $603,549 for the
six-months ended June 30, 2006 from $459,115 for the same 2005 period. The rise
in interest expense was due to an increase in the yield on and volume of average
14
interest bearing liabilities. The yield increased to 2.38% for the six-months
ended June 30, 2006 from 2.04% for the same 2005 period. In 2006, the rates on
deposits were higher than in the six-month period in 2005. The average volume of
interest bearing liabilities increased to $51,099,937 for the six-months ended
June 30, 2006 from $45,351,064 for the same 2005 period.
15
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following table summarizes monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated yield
or cost, and the net return on earning assets for the three-months and
six-months ended June 30, 2006 and 2005.
Three-Months Ended Three-Months Ended
-----------------------------------------------------------------------------------------
June 30, 2006 June 30, 2005
-----------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc / Exp Yield (1) Balance Inc / Exp Yield (1)
Interest and Profit Earning Assets:
Commercial Loans $17,808,092 $392,397 8.84% $17,093,411 $358,984 8.42%
Real Estate Loans 28,285,141 481,547 6.83% 25,305,250 393,913 6.24%
Installment/Consumer
Loans 1,611,597 32,756 8.15% 1,621,534 35,555 8.79%
----------- -------- ----------- --------
Total Loans 47,704,830 906,700 7.62% 44,020,195 788,452 7.18%
Investment Securities 1,776,783 18,104 4.09% 1,953,303 16,932 3.48%
Fed. Funds & Bank Deposits 3,332,045 73,484 8.84% 1,421,408 8,067 2.28%
----------- -------- ----------- --------
Total Interest Bearing and
Profit Earning Assets 52,813,658 998,288 7.58% 47,394,906 813,451 6.88%
----------- -------- ----------- --------
Interest Bearing and Profit Sharing Liabilities:
Deposit Accounts:
Demand 18,361,040 38,497 0.84% 9,250,713 23,063 1.00%
Savings 347,590 861 0.99% 486,012 1,153 0.95%
Time 14,827,575 166,362 4.50% 14,524,035 113,807 3.14%
Money Market 18,294,327 120,859 2.65% 20,456,489 95,898 1.88%
Short-term Borrowings 116,884 1,779 6.10% 669,011 5,427 3.25%
----------- -------- ----------- --------
Total Interest Bearing
and Profit Sharing Liabilities 51,947,416 328,358 2.54% 45,386,260 239,348 2.12%
----------- -------- ----------- --------
Net Earning Assets, net interest and
profit income, and net spread $ 866,242 $669,930 5.05% $ 2,008,646 $574,103 4.77%
=========== ========= ============ ========
Net Interest Margin 5.09% 4.86%
(1) Yield is annualized.
16
Six-Months Ended Six-Months Ended
------------------------------------------------------------------------------------------
June 30, 2006 June 30, 2005
------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc / Exp Yield (1) Balance Inc / Exp Yield (1)
Interest and Profit Earning Assets:
Loans:
Commercial $17,460,476 $ 765,390 8.84% $17,141,924 $ 720,627 8.48%
Real Estate 28,119,817 929,649 6.67% 25,295,195 780,689 6.22%
Installment/Consumer 1,667,940 62,046 7.50% 1,616,001 72,530 9.05%
----------- ---------- ----------- ----------
Total Loans 47,248,233 1,757,085 7.50% 44,053,120 1,573,846 7.20%
Investment Securities 1,724,735 30,994 3.62% 1,972,960 28,601 2.92%
Federal Funds & Bank
Deposits 5,284,855 123,521 4.71% 1,072,069 12,647 2.38%
----------- ---------- ----------- ----------
Total Interest and
Profit Earning Assets 54,257,823 1,911,600 7.10% 47,098,149 1,615,094 6.92%
----------- ---------- ----------- ----------
Interest Bearing and Profit Sharing Liabilities:
Deposit Accounts:
Demand 17,384,501 47,704 0.55% 9,148,294 45,365 1.00%
Savings 379,321 1,871 0.99% 490,265 2,397 0.99%
Time 15,858,571 334,401 4.25% 14,195,470 212,673 3.02%
Money Market 17,402,479 217,492 2.52% 20,437,492 190,154 1.88%
Short-term borrowings 75,065 2,081 5.59% 1,066,791 8,194 1.55%
Long-term borrowings - - 0.00% 12,752 332 5.25%
----------- ---------- ----------- ----------
Total Interest Bearing
and Profit Sharing Liabilities 51,099,937 603,549 2.38% 45,351,064 459,115 2.04%
----------- ---------- ----------- ----------
Net Earning Assets, net interest and
profit income, and net spread $ 3,157,886 $1,308,051 4.72% $ 1,747,085 $1,155,979 4.87%
=========== ========== =========== ==========
Net Interest Margin 4.86% 4.95%
(1) Yield is annualized.
17
Allowance for Loan Losses
The provision for loan losses was $48,984 for the six-months ended June 30,
2006 and $17,209 for the same period ended in 2005. Net recoveries totaled
$3,814 for the six-months ended June 30, 2006 as compared to net charges-offs of
$(12,099) for the same period in 2005. Illustrated below is the activity within
the allowance for the six-months ended June 30, 2006 and 2005:
2006 2005
---- ----
Balance, January 1 $ 349,416 $ 353,124
Provision for loan losses 48,984 17,209
Loan charge-offs (2,112) (20,399)
Recoveries 5,926 8,300
--------- ----------
Balance, June 30 $ 402,214 $ 358,234
========= ==========
At June 30, 2006 At December 31, 2005
---------------- --------------------
Total loans (1) $47,239,000 $45,652,326
Reserve for loan losses $ 402,214 $ 349,413
Reserve/Loans % (1) 0.85% 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 June 30, 2006 At December 31, 2005
---------------- --------------------
Past due 90 days and over
and still accruing (1) $ - $ -
----------------------
--------- --------
Nonaccrual loans (1):
Real estate/construction loans 133,268 317,013
Installment - -
Commercial - 32,668
-------- --------
Subtotal 133,268 349,681
-------- --------
Other real estate owned 583,131 276,987
-----------------------
-------- --------
Total nonperforming assets $716,399 $626,668
======== ========
18
At June 30, 2006 At December 31, 2005
---------------- --------------------
Ratio of non-performing loans to
total loans (1) 0.28% 0.77%
======== ========
Ratio of loans past due over 90 days and
non-accrual loans to loan loss reserve 33% 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
non-performing loans to the loan loss reserve has decreased from year-end 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 slightly to $1,036,264 for the three-
months ended June 30, 2006 from $1,022,231 for the three-months ended June 30,
2005.
Total non-interest income increased to $2,086,989 for the six-months ended
June 30, 2006 from $2,045,462 for the six-months ended June 30, 2005. As
compared with the six-month period in 2005, the Company increased its
sub-servicing operations. Income generated in this area is offsetting a decline
in the initial loan set up and other fees due to a decrease in loan
originations. At June 30, 2006, Midwest was sub-servicing 30,581 mortgages, an
increase of 16.9% from 26,144 mortgages sub-serviced at December 31, 2005.
Non-Interest Expense
Non-interest expense increased to $1,906,163 for the three-months ended
June 30, 2006 from $1,654,096 for the three-months ended June 30, 2005 primarily
due to a settlement agreement. 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. The cost of this agreement in the second
quarter of 2006 totaled $259,023. This amount is included in other expense.
Non-interest expense increased to $3,560,322 in the six-months ended June
30, 2006 from $3,080,129 for the six-months ended June 30, 2005. In general the
increase was due to start up expense of the Islamic banking subsidiary and a
settlement agreement discussed in the preceding paragraph.
At June 30, 2006 the Bank and Midwest owned the rights to service mortgages
for other institutions, most of which were owned by Midwest. The balance of
mortgages serviced for these institutions was approximately $146 million. The
carrying value of these servicing rights was $1,661,047 at June
19
30, 2006. The servicing rights are recorded at the lower of cost or market. The
impairment reserves at June 30, 2006 and 2005 are $240,000 and $607,000,
respectively. 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 increased to a
point where previous charges for impairment were reduced by approximately
$149,000. In the six-months ended June 30, 2005, management recorded a $91,000
impairment charge due to a decrease in the mortgage rates during 2005.
2006 2005
---- ----
Balance, January 1 $1,471,808 $ 1,097,786
Additions - originated 155,212 241,381
Amortization expense (114,973) (135,092)
Adjustment for asset impairment change 149,000 (91,000)
---------- -----------
Balance, June 30 $1,661,047 $1,113,075
========== ===========
Income Taxes
Income tax expense (benefit) was $0 in 2006 and 2005. The effective tax
rate was 0% for both six-month periods ended June 30, 2006 and 2005 due to
existence of loss carry forwards resulting from prior years' net operating
losses. At June 30, 2006, the Company had a $100,000 deferred tax asset. This
asset represents a loss carry forward that is expected to be realized. At June
30, 2005 the Company did not have a tax deferred asset or liability.
Capital Resources
The table below sets forth the Bank's risk based assets, capital ratios and
risk-based capital ratios of the Bank. At June 30, 2006 and December 31, 2005,
the Bank was considered "well-capitalized" and exceeded the regulatory
guidelines.
To Be Adequately Capitalized To Be Well
Under Prompt Corrective Capitalized Under Prompt
Actual Action Provisions Corrective Action Provisions
------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ------------ ----- ----------- ------
As of June 30, 2006:
Total capital (to risk weighted assets) $7,500,000 17.2% $3,425,000 8.0 % $4,281,000 10.0 %
Tier I capital (to risk weighted
assets) 6,946,000 15.9% 1,743,000 4.0 % 2,614,000 6.0 %
Tier I capital (to average assets) 6,946,000 11.6% 2,395,000 4.0 % 2,994,000 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 %
20
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
June 30, 2006, the Bank had cash and cash equivalents of $10.92 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 $6.4 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 June 30, 2006, the Bank had zero
brokered 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 June 30, 2006, Bancorp had $34,487 in cash and investments on hand to
meet its working capital needs.
Impact of Inflation
The primary impact of inflation on the Company's operations is reflected in
increased operating costs. Since the assets and liabilities of the Company are
primarily monetary in nature, changes in interest rates have a more significant
impact on the Company's performance than the general effects of inflation.
However, to the extent that inflation affects interest rates, it also affects
the net income of the Company.
ITEM 3. 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
21
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
(a) The annual meeting of the registrant's shareholders was held on June 19,
2006.
(b) The following seven director nominees were elected at the meeting:
Nominee Elected Votes For Votes Withheld
--------------- --------- --------------
Gary Baker 3,888,993 4,029
Robert Goldthorpe 3,888,993 4,029
Charles McDowell 3,889,462 3,560
Joseph Lange Ranzini 3,885,503 7,069
Paul Lange Ranzini 3,885,503 7,069
Stephen Lange Ranzini 3,885,972 7,050
Michael Talley 3,889,653 3,369
Item 5. Other information
None
22
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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.
23
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: August 14, 2006 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
/s/ Nicholas K. Fortson
-----------------------
Nicholas K. Fortson
Chief Financial Officer
24
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.
25
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: August 14, 2006 /s/Stephen Lange Ranzini
----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
26
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: August 14, 2006 /s/Nicholas K. Fortson
-----------------------
Nicholas K. Fortson
Chief Financial Officer
27
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 June 30, 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: August 14, 2006 By: /s/ Stephen Lange Ranzini
--------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
28
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 June 30, 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: August 14, 2006 By: /s/ Nicholas K. Fortson
------------------------
Nicholas K. Fortson
Chief Financial Officer
29