42
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-16023
UNIVERSITY BANCORP, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 38-2929531
------------------------------------ ---------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
2015 Washtenaw, Ann Arbor, Michigan 48104
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 741-5858
--------------
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.010 per share
----------------------------------------
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act Yes ___ No __X_
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No X
--- ---
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Indicate by check mark if the registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer ____Accelerated filer ___ Non-accelerated filer _X_
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ]
1
The number of shares outstanding of the Registrant's Common Stock as of
March 30 2007: 4,248,378 shares. The aggregate market value of the voting stock
held by non-affiliates of the Registrant based on $1.90 per share, the closing
price for the Registrant's Common Stock on March 30, 2007, as reported by
NASDAQ, was approximately $2,932,738.
* For purposes of this calculation shares of the Registrant held by directors
and officers of the Registrant and by other affiliates have been excluded.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held June 15, 2007, are incorporated by reference into Part
III of this report.
Page 1 of 78 pages
Exhibit index on sequentially numbered page 67
2
PART I.
Item 1. - Business
General
University Bancorp, Inc. The Company is a Delaware corporation that
operates as a bank holding company for its wholly-owned subsidiary, University
Bank
University Bank. The Bank is a state chartered community bank. The Bank was
founded in 1890 as "The Newberry Bank" and was chartered by the State of
Michigan in 1908 as "The Newberry State Bank". In 1994, we sold the bank's
offices in Newberry, Michigan and Sault Ste. Marie, Michigan. In 1995 we
relocated the Bank's main office to Ann Arbor, Michigan and, changed the Bank's
name to "University Bank" to more closely align its identify with its current
place of business. Ann Arbor is a university town, home to the University of
Michigan and is the largest city in Washtenaw County, just west of the Detroit
Metropolitan Statistical Area. The Bank's primary market area is defined as the
City of Ann Arbor and surrounding areas in greater Washtenaw County.
Midwest Loan Services. In 1995, University Bank acquired 80% of the common
stock of Midwest Loan Services ("Midwest"). Midwest specializes in the
origination, servicing and sub-servicing of mortgage loans for various credit
unions, financial institutions and mortgage brokers. Most of their servicing and
sub-servicing portfolio is comprised of residential mortgage loans sold to
Fannie Mae, Freddie Mac and other private residential mortgage conduits, the
most important of which is a jumbo and sub prime loan conduit established by
Lehman Brothers.
University Insurance & Investment Services. In 1996, University Bank
established an insurance and investment products sales agency. This subsidiary
of the Bank, called "University Insurance & Investment Services, Inc." (the
"Agency") is based in the Bank's Ann Arbor office. The Agency is licensed by the
State of Michigan to sell insurance as agent for licensed insurance companies. A
d/b/a of the Agency, University Insurance Center, commenced business in 1999,
and this added a property casualty agency license to the original life and
health agency license, enabling the Agency to offer insurance for homes, autos,
apartments and businesses in addition to the original products which included
life and health care insurance, annuities and mutual fund sales. Employees of
the Agency are also licensed to sell investment products such as annuities and
mutual funds, and the President of the Bank, who is also Chairman of the Agency,
also offers broker-dealer investment services including stock and bond
investment accounts through a clearing arrangement with Equitas America LLC and
Pershing, a division of the Bank of New York.
University Islamic Financial Corporation. On December 30, 2005, University
Bank formed University Islamic Financial Corporation (UIFC). The Bank owns 80%
of the common stock of UIFC. UIFC engages in Islamic Banking with an initial
focus on its existing product set: soliciting Islamic Sharia'a FDIC-insured
Deposits held by University Bank and originating Islamic Sharia'a home
financings as agent for University Bank. UIFC's products have received favorable
legal rulings (fatwa) from some of the leading Islamic legal scholars in the
U.S. and the world. In February 2006, University Bank executed a master
commitment with the Federal Home Loan Mortgage Corporation to create a secondary
market for UIFC's Sharia'a
3
compliant home financing transactions in Michigan with the intent to expand this
program over time.
Employees
The Company employed 81 full-time equivalents as of March 29, 2006:
University Bank, Ann Arbor 24
Midwest Loan Services 46
University Insurance & Investment 3
University Islamic Financial Corporation 7
Lines of Business
Deposit Products & Services
University Bank offers traditional retail savings products and services to
its customers. These include demand deposit and NOW interest-bearing checking
accounts, money market deposit accounts, regular savings accounts and term
deposit certificates ranging in maturity from three to three hundred months. The
Bank also offers Sharia'a compliant profit-sharing deposits for Muslim
depositors. The Bank also offers free access to 24-Hour ATM machines, telephone
banking, internet banking, debit cards, online bill payment, Western Union(TM)
money transfer services and Gold VISA accounts. From time to time to raise
liquidity, the Bank relies on brokers to sell CDs. At December 31, 2006, the
Bank had approximately $1.5 million in CDs issued through brokers.
Lending Products
University Bank offers a range of traditional lending products, including
commercial small business loans, residential real estate mortgage loans, home
equity loans, commercial real estate mortgage loans, consumer installment loans,
and land development and construction loans. The Bank also offers Sharia'a
compliant mortgage alternative loan transactions (MALTs (TM))for Muslim
customers.
Classifications of the loan portfolio as of December 31, 2006 are as follows:
Amount
Outstanding(1) % of Total
Commercial, Real Estate & Other $15,705,255 30.84%
Residential Construction 1,031,027 2.02%
Residential Real Estate 29,166,983 57.27%
Residential Home Equity 4,632,170 9.10%
Consumer 122,904 0.24%
Credit Card 268,858 0.53%
----------- -------
Gross Loans $50,927,197 100.00%
=========== =======
(1) - Excludes loans held for sale.
The Bank's loan portfolio is geographically concentrated in Ann Arbor and
Washtenaw County, Michigan. The ability of individual loan customers to honor
their debts is partially dependent on the local economy. The Ann Arbor area is
primarily dependent on the education, healthcare, services and manufacturing
(automotive and other) industries (see "Risk Factors" below).
4
Most of the Bank's commercial loans are secured by commercial real estate.
Commercial real estate loans have a loan to value ratio typically less than 80%
at the time the loan is originated. In no cases is the loan to value ratio for
commercial real estate loans greater than 85% at the time of origination. The
primary risk of commercial loans is that the area's economy declines and rents
decrease while vacancy increases, thereby decreasing the value of the building.
If the guarantor suffers a financial reverse, the Bank is then exposed to a
loss.
Residential loans typically have a loan to value ratio less than 80% at the
time the loan is originated, unless the borrower's financial position is very
strong, in which case a loan to value ratio of up to 90% or private mortgage
insurance is considered. To meet the Bank's goals for first time homebuyers, the
Bank has originated 97% to 100% loan to value residential loans and currently
has under $2 million of these loans in its loan portfolio. Home equity secured
residential loans have loan to value ratios of less than 90% at time of
origination in the case of fixed rate fully-amortizing loans and 80% for home
equity lines of credit, with a few exceptions with higher ratios for borrowers
with strong credit. As of December 31, 2006, the Bank had a portfolio of $14.7
million of mortgage alternative loan transactions that are Sharia'a-compliant
mortgage alternatives for Muslim customers. The primary risk of residential
lending is that home prices drop (typically this occurs during recessions) and
borrowers walk away from their home or file for bankruptcy. All of the Bank's
construction loans are secured by residential properties with a loan to value
ratio of 80% or less at the time of origination. The Bank controls the risk of
construction lending by performing inspections prior to disbursing interim
construction funds to avoid cost overruns.
The Bank makes few unsecured loans, typically for borrowers who have a high
net worth, but even in these cases, the Bank usually takes collateral out of an
abundance of caution. Most of the Bank's credit card loans are secured by
residential properties. Consumer loans are generally secured by vehicles
(primarily cars or trucks). The primary risk of these loans is that the value of
the car depreciates faster than the loan balance amortizes, and the borrower
loses their job or has a severe medical problem in their family. In these
circumstances, the collateral could be insufficient to repay the loan if the
borrower files for bankruptcy. In addition, if the national or regional economy
is soft, used vehicle prices tend to deteriorate creating additional risk of
insufficient collateral in the event of a default.
The Bank makes very few business loans that are not secured by real estate.
Business Lines of Credit are typically made up to a 50% ratio of inventory and
other equipment at current market value, and 70% of current receivables.
Business Manager Loans are also structured as Lines of Credit and are secured by
individual receivables up to 90% of face value individually purchased with
recourse to the borrower and additional insurance to protect the bank against
fraud and bankruptcy of the issuer of the account that is receivable to the
borrower. The primary risk of this type of lending backed by non-real estate
business assets is that if the business suffers a financial reverse, an
unscrupulous borrower can easily dissipate the collateral, causing the Bank a
loss. For this reason, the Bank de-emphasizes this type of lending.
Typically with respect to all personal and residential loans, a ratio of
total debt payments to total income of all borrowers and guarantors less than
42% is required. With respect to commercial real estate and
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business loans, a ratio of income to all debt payments of greater than 1.25
times is required. Therefore, the Bank typically has both income and asset
backing to secure its loans. However, there can always be valid reasons to have
exceptions to each rule. The Bank's loan committee retains the power to take
unusual circumstances into account when evaluating each loan request versus the
Bank's policies. Loans that are lacking current demonstrated income are
classified and increased reserves are established for those loans. Loans that
are lacking both current demonstrated income and asset backing are allocated
even higher reserves equal to the amount estimated to be realized upon the sale
of the collateral less all estimated costs.
Mortgage Banking
The Bank and Midwest originate internally or via other financial
institutions residential home loans that generally qualify for sale to secondary
market investors under the underwriting criteria of the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA)
and the Government National Mortgage Association (GNMA). Midwest also originates
jumbo and non-standard home loans under the underwriting criteria of Lehman
Brothers and has originated a small portfolio of Alt-A home loans that it has
sold to FNMA. Loans purchased or originated internally are either sold directly
to FHLMC, FNMA or GNMA, or are pooled into mortgage-backed securities and the
securities are sold to investors in the secondary market. With the exception of
Midwest, the Bank is currently selling the servicing rights on all mortgages
originated that are sold to the secondary market. Some residential mortgages are
held in the Bank's loan portfolio as an investment.
University Bank became a seller/servicer and began originating Federal Home
Loan Mortgage Corporation (FHLMC) insured mortgages in 1991 and became a
seller/servicer and began originating Federal National Mortgage Association
insured mortgages in 1994. The Bank has also been approved as a seller/servicer
of Government National Mortgage Association mortgages for many years but only
began using its license in 1999 to originate and sell these loans without
retaining the servicing rights. Midwest is also licensed with FNMA, FHLMC and
GNMA.
Mortgage Servicing and Sub-servicing
Mortgage servicing firms receive monthly payments from loan customers,
aggregate and account for these payments, and send the funds to mortgage-backed
securities holders, including pension funds and financial institutions. For some
mortgage customers, escrow funds are also accumulated, and funds sent to taxing
authorities and insurance companies as needed. Mortgage servicers also dun
delinquent accounts and foreclose loans, if required. Mortgage servicers receive
a fixed monthly fee for performing this service. When these services are
performed for the Bank, it is called `servicing'. When these services are
performed for other institutions, it is called `sub-servicing'. The Bank's
80%-owned subsidiary, Midwest, specializes in sub-servicing residential mortgage
loans sold to FNMA and FHLMC and other non-agency private conduits for the
account of credit unions, other financial institutions and mortgage brokers.
Investment Securities
The Bank maintains surplus available funds in investments consisting of
short-term money market instruments, U.S. government bonds, U.S. federal agency
obligations and mortgage-backed securities backed by federal agency obligations.
The Bank's President, who is a licensed Registered
6
Representative, manages these investments. All purchase/sale decisions are
subject to the review and prior approval of the Asset Liability Committee of the
Bank and the Board of Directors. The securities portfolio provides a source of
liquidity to meet Bank's operating needs. At December 31, 2006, the portfolio
had a net unrealized loss of $27,296 versus a net unrealized loss of $34,721 at
December 31, 2005.
Information regarding securities where cost exceeded more than 10% of the
Company's stockholders' equity at December 31, 2006 is as follows:
Issuer Coupon Yield Final Maturity Market Value Amortized Cost
------ ------ ----- ------------- ------------- --------------
FHLBI equity (1) VAR 5.23% None $714,600 $714,600
(1) The rate varies quarterly. The Bank is required to maintain the
investment in Federal Home Loan Bank of Indianapolis (FHLBI) common stock
in an amount related to the Bank's single-family mortgage related assets
and FHLBI advances. Shares can be redeemed or sold at par value to the
FHLBI upon five-year prior notice.
Competition
Community Banking, Ann Arbor
The attraction and retention of deposits depend on the Bank's ability to
provide investment opportunities that satisfy the requirements of investors with
respect to rate of return, liquidity, risk and other factors. The Bank competes
for these deposits by offering personal service and attention, fair and
competitive rates, low fees, and a variety of savings programs including
tax-deferred retirement programs.
The Bank competes for loan originations primarily through the quality of
services provided to the loan customers, competitive interest rates and
reasonable loan fees, rapid and local decision-making and the range of services
offered. Competition in originating loans comes principally from other
commercial banks, credit unions, insurance companies, mortgage banking companies
and savings and loans.
The Bank's main office is near the University of Michigan Central Campus.
These institutions employ approximately 20,000 persons. The Bank is located in
an area that has strong competition from local credit unions and banks as well
as a number of large national banks. The University of Michigan Credit Union has
an onsite presence at the University of Michigan and Midwest Financial Credit
Union has an onsite presence at the University of Michigan Hospital Complex.
Banks owned by out-of-state holding companies dominate the Ann Arbor
banking market. The University of Michigan Credit Union is the largest locally
owned financial institution. The only locally-owned community financial
institutions, excluding University Bank, are University of Michigan Credit
Union, Bank of Ann Arbor, Huron River Area Credit Union, Midwest Financial
Credit Union, Automotive Federal Credit Union and several smaller credit unions.
Huron River Area Credit Union was placed into receivership by the NCUA and state
regulators in early 2007.
7
Mortgage Banking and Islamic Banking
The Bank and Midwest's retail mortgage origination operations encounter
competition for the origination of residential real estate loans primarily from
savings institutions, commercial banks, insurance companies and other mortgage
banking firms. Many of these firms have a well-established customer and/or
borrower client base. Some competitors, primarily savings institutions,
insurance companies and commercial banks, have the ability to create unique loan
products from time to time because they are able to hold the loans in their own
portfolio rather than sell into the secondary market. The Bank's ability to hold
mortgage loans in its portfolio helps it to compete more effectively. Most loans
sold into the secondary market, however, go to the same sources, those being
FHLMC, FNMA, and GNMA. Most lenders have access to these secondary market
sources; therefore, competition often becomes more a matter of service and
pricing than that of product. As a mortgage loan originator and a purchaser of
mortgage loans through correspondents, Midwest and the Bank must be able to
compete with respect to the types of loan products offered by competitors to
borrowers and correspondents, including the price of the loan in terms of
origination fees or fee premium or discount, loan processing costs, interest
rates, and the service provided by our staff. An important element to competing
is master purchase agreements negotiated periodically with FNMA and FHLMC with
low and competitive loan guarantee fees, a wide variety of mortgage programs,
and a variety of flexible underwriting criteria. Our ability to secure these
master purchase agreements is dependent upon the performance from a quality
perspective of loans previously sold to the agencies.
During lower interest rate environments, competition for loans is less
intense due to the large number of loans available for origination. As interest
rates rise and the number of loans available for origination diminishes,
competition becomes quite intense and companies with larger investor bases,
flexibility with respect to type of product offered and greater experience in
dealing in these types of markets tend to be the most successful.
The Bank also originates residential loans to be held in portfolio, and
management believes that this product together with the product offerings from
FHLMC, FNMA and GNMA are sufficient for the Bank to meet its customers' needs.
The Bank also is licensed as a HUD Title 1 and Multi-family seller/servicer, but
has no plans at this time to expand utilization of HUD or GNMA programs.
Islamic Banking. Competition for Islamic financing products is less intense
than for traditional mortgage products as products cannot be successfully
offered to the market without recognition from leading Sharia'a (Islamic Law)
scholars. In addition, documents must be created and customized for each state
that an originator intends to offer products in. The primary competition in
Islamic home finance is from Guidance Financial, a mortgage banking firm based
in Reston, Virginia, and Devon Bank, a community bank based in Chicago,
Illinois. Currently, we offer Islamic home financing products in Michigan only,
but our business plan in 2007 contemplates expansion of this product nationwide.
Mortgage Servicing and Sub-servicing. Servicing competition is somewhat
less intense than the loan origination aspect of mortgage banking. Due to net
worth and management requirements, many mortgage origination companies do not
have the capacity to service loans. Falling interest rates present competitive
challenges for the mortgage servicing operation in that
8
mortgagors are more likely to refinance existing mortgages. The quality of
service and the ability of the origination operation to compete on price and
service are important in retaining these customers by refinancing them
internally, rather than losing the refinancing transaction to a competitor.
Increased refinancing activity as a result of falling interest rates decreases
profitability of mortgage servicing by increasing amortization charges on
purchased mortgage servicing rights.
In the sub-servicing business, Midwest competes primarily with about 30
firms nationwide, including specialized sub-servicing units of mortgage banking
companies, and specialized firms owned by banks and savings and loans. Most of
these companies have substantially larger financial resources than Midwest, and
some of them are also located in rural areas with low prevailing wages. Midwest
specializes in subservicing for credit unions and is among the top four
subservicers for credit unions and is only firm that specializes solely on
providing service to credit unions.
Midwest is located in Houghton, Michigan in the western upper peninsula of
Michigan. Personnel and occupancy costs are the largest costs in a mortgage
servicing operation. However, the prevailing wages and occupancy costs in the
upper peninsula of Michigan are generally lower than the national average.
Midwest has developed a unique business extranet website for its business
partners and their retail customers. Through its website at www.subservice.com,
Midwest provides the opportunity for all customers to access their mortgage
information 24 hours a day 7 days a week in an environment which provides
seamless access to all information. Business partners have access to all
mortgage data as easily as if it were serviced on their in-house computer
system. Customers can access all information about their accounts and perform
any type of transaction through the internet. As a result of low personnel
costs, its internet technology and the relationships it has developed in the
credit union industry over time, the Company believes that Midwest' mortgage
servicing operation has a competitive advantage.
Regulation
Primary Regulators of University Bancorp. The Company is a bank holding
company registered under the Federal Bank Holding Company Act of 1956. The
Federal Reserve Bank of Chicago is the Company's primary regulator and the
Company is subject to regulation, supervision and examination by the Federal
Reserve. The Company is required to file semi-annual reports with the Federal
Reserve and other information as required under the rules of the Board of
Governors of the Federal Reserve System. Additionally, the Federal Reserve Board
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to bar the payment of dividends by banks and bank holding
companies.
Acquisitions. The Company is generally prohibited from engaging in
non-banking activities since it is a bank holding company. The Company cannot
acquire more than 5% of the shares of another company engaged in non-banking
activities. The Company can only acquire direct or indirect control of more than
5% of the voting shares of a company engaged in a banking related activity with
the prior approval by the Federal Reserve Board to acquire these shares or by
regulatory exemption. The Federal Reserve Board has identified specific banking
related activities in which a bank holding company may engage with notice to the
Federal Reserve. The Federal Reserve
9
considers managerial, capital and other financial factors, including the impact
on local competition of any proposal and past performance under the Community
Reinvestment Act in acting on acquisition or merger applications. Bank holding
companies may acquire other banks located in any state in the United States
without regard to geographic restrictions or reciprocity requirements imposed by
state law, but subject to certain conditions, including limitations on the
aggregate amount of deposits that may be held by the acquiring company and all
of its insured depository institution affiliates.
Commitments. In connection with obtaining the consent of the Federal
Reserve to a 1989 merger transaction when the Company obtained public listing on
the NASDAQ Capital Market, certain commitments were made to the Federal Reserve.
Management agreed that the Employee Stock Ownership Plan would not purchase more
than 10% of the common stock or 5% of any other class of our voting shares,
without the prior approval of the Federal Reserve. Management also agreed not to
incur additional debt or to have the Bank pay dividends to us without the prior
approval of the Federal Reserve.
Capital Requirements. The Federal Reserve Board imposes certain capital
requirements on the Company under the Federal Bank Holding Company Act,
including a minimum leverage ratio and a minimum ratio of "qualifying" capital
to risk-weighted assets. These requirements are described below under "Capital
Regulations". The Federal Reserve uses capital adequacy guidelines in its
examination and regulation of bank holding companies. If capital falls below
minimum guidelines, a bank holding company may, among other things, be denied
approval to acquire or establish additional banks or non-bank businesses. The
"prompt corrective action" provisions of federal law and regulation authorizes
the Federal Reserve to restrict the payment of dividends to us from an insured
bank which fails to meet specified capital levels.
Source of Strength. In accordance with Federal Reserve Board policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances in which the Company may
not otherwise wish to do so. Under the Federal Bank Holding Company Act, the
Federal Reserve may require a bank holding company to terminate any activity or
relinquish control of a bank subsidiary if the agency determines that
divestiture may aid the depository institution's financial condition. In
addition, if the Commissioner deems our Bank's capital to be impaired, the
Commissioner may require the Bank to restore its capital by a special assessment
upon us as University Bank's sole stockholder. If the Company were to fail to
pay an assessment, the directors of the Bank would be required, under Michigan
law, to sell the shares of the Bank's stock owned by the Company to the highest
bidder at either a public or private auction and use the proceeds of the sale to
restore the Bank's capital.
Financial Holding Companies. Bank holding companies may apply to become
Financial Holding Companies. We have not applied to become a Financial Holding
Company. Financial Holding Companies may engage in a wider range of non-banking
activities than Bank Holding Companies, including greater authority to engage in
securities and insurance activities. The expanded powers are available to a bank
holding company only if the bank holding company and its bank subsidiaries
remain well capitalized and well managed. The new law also imposes various
restrictions on transactions between the depository institution subsidiaries of
bank holding companies and their non-bank affiliates. These restrictions are
intended to protect the
10
depository institutions from the risks of the new non-banking activities
permitted to affiliates.
Public Company Regulation. Our common stock is registered with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). We are therefore subject to the information, proxy solicitation, insider
trading and other restrictions and requirements of the SEC under the Exchange
Act. The Sarbanes-Oxley Act of 2002 provides for numerous changes to the
reporting, accounting, corporate governance and business practices of companies
as well as financial and other professionals who have involvement with the U.S.
public markets.
The Sarbanes-Oxley Act was enacted in 2002. This Act is not a banking law,
but applies to all public companies, including the Corporation. Sarbanes-Oxley
is designed to restore investor confidence. Sarbanes-Oxley adopts new standards
of corporate governance and imposes new requirements on the board and management
of public companies. Under the Sarbanes-Oxley Act the chief executive officer
and chief financial officer of a public company must certify the financial
statements of the company. Definitions of "independent directors" were adopted,
and responsibilities and duties for the audit and other committees of the board.
In addition, the reporting requirements for insider stock transactions were
revised, requiring most transactions to be reported within two business days.
Section 404 of the Sarbanes-Oxley Act requires a company to include in its
annual reports a report by management on the company's internal control over
financial reporting and an accompanying auditor's report. The Commission
extended the original Section 404 compliance dates for all issuers three times.
Under the latest extension, non-accelerated filers will thus be required to file
management and audit reports under Section 404 with their annual reports for the
first year ending on or after July 15, 2007. (For example, a non-accelerated
filer with a December 31 year will be required to include the reports in its
annual report filed in early 2008, for the year ended December 31, 2007.) The
Company, based on the size of its market capitalization is considered a small
public company and thus is classified as a non-accelerated filer.
Complying with Sarbanes-Oxley will result in increased costs to the
Corporation in an amount likely to be between $50,000 and $150,000.
As a NASDAQ Capital Market(TM) listed corporation, we are subject to rules
of that market on director independence, board committee structure, price per
share and the amount of shares held by the public to remain listed. In addition,
we must pay an annual listing fee. This fee has increased over the past several
years from $4,000 a year to $27,500 a year.
Primary Regulators of University Bank. The Bank is a Michigan banking
corporation and its deposit accounts are insured by the Bank Insurance Fund
(BIF) of the Federal Deposit Insurance Corporation (FDIC). As a
Michigan-chartered commercial bank, University Bank is subject to the
examination, supervision, reporting and enforcement powers of the Commissioner,
as the chartering authority for Michigan banks, and the FDIC, as administrator
of the BIF. These agencies and the federal and state laws applicable to the Bank
and its operations, extensively regulate various aspects of the banking business
including, among other things, reserves against loans, capital levels relative
to operations, lending activities and practices, collateral for loans,
establishment of branches, mergers, acquisitions and consolidations, payment of
dividends, internal controls, permissible types
11
and amounts of loans, investments and other activities, interest rates on loans
and on deposits, and the safety and soundness and scope of banking practices. As
an insured bank, University Bank is also required to file quarterly reports and
other information as required with the FDIC.
All subsidiaries of University Bank including Midwest and University
Insurance & Investment Services are all also subject to all regulations
applicable to University Bank itself, including regular on-site examination by
both the OFIS and the FDIC.
Other Regulators. As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD
multifamily seller/servicer, University Bank's mortgage banking operation is
subject to regulation and regular on-site examination by FHLMC, FNMA and HUD.
o the Community Reinvestment Act,
o the Federal Truth-in-Lending Act,
o the Home Mortgage Disclosure Act,
o the Gramm-Leach Bliley Act (and related privacy regulations),
o the Patriot Act,
o the Check 21 Act,
o The Anti-Money Laundering Act,
o the Equal Credit Opportunity Act,
o the Fair Credit Reporting Act,
o the Fair Debt Collection Act,
o the Right to Privacy Act,
o the Real Estate Settlement Procedures Act,
o the Bank Secrecy Act,
o the Electronic Funds Transfer Act,
o Federal Reserve regulations,
o State usury laws, and
o Federal laws concerning interest rates.
Also, University Bank may not engage in any activity not authorized by the
Michigan Banking Code unless it is authorized by the Commissioner of the OFIS as
being closely related to banking.
These laws and regulations are primarily intended to protect depositors and
the deposit insurance fund of the FDIC, not the Bank or the Company's
stockholders. The following is a summary of certain statutes and regulations
affecting University Bank. The following information is qualified in its
entirety by reference to the particular statutory and regulatory provisions.
Various changes to the Federal Deposit Insurance Act (FDIA) were recently
signed into law. These changes will increase the FDIC insurance coverage for
retirement accounts, index future insurance coverage to inflation, provide the
bank with rebates for past premiums paid and merge the BIF with the Savings and
Loan Insurance Fund (SAIF). Any change in applicable laws, regulations or
regulatory policies of various governmental regulatory authorities may have a
material effect on the Company's business, operations and prospects. Those
authorities include, but are not limited to, the Board of Governors of the
Federal Reserve System, the FDIC, the Commissioner of the Michigan Office of
Financial and Insurance Services, the Internal Revenue Service, and state taxing
authorities. The Company
12
is unable to predict the nature or extent of the effects that fiscal or monetary
policies, economic controls or new federal or state legislation may have on
future business and earnings.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation. Banks
classified as well-capitalized, as defined by the FDIC, and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized, as defined by the FDIC, and considered to be of substantial
supervisory concern pay the highest premium. The FDIC makes a risk
classification of all insured institutions for each semi-annual assessment
period.
In early 2006, Congress passed the Federal Deposit Insurance Act of 2005,
which made certain changes to the federal deposit insurance program. These
changes included merging the BIF and the Savings Association Insurance Fund (the
"SAIF"), increasing retirement account coverage to $250,000 and providing for
inflationary adjustments to general coverage beginning in 2010, providing the
FDIC with the authority to set the fund's reserve ratio with a specified range,
and requiring dividends to banks if the reserve ratio exceeds certain levels.
The new statue grants banks an assessment credit based on their share of the
assessment base on December 31, 1996, and the amount of the credit can be used
to reduce assessments in any year subject to certain limitations. The FDIC is
required to issue regulations implanting the new Act.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted in 1996,
University Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation (FICO). FICO
was created in 1987 to finance the re-capitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (SAIF), which insures the deposits of thrift institutions. Until
the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. It is estimated that FICO assessments during this period will be less
than 0.025% of deposits. In addition, the Federal Home Loan Banks, including the
Federal Home Loan Bank of Indianapolis, in which University Bank is an investor,
pay 20% of their annual net income to a sinking fund to retire the FICO bonds
until they are paid in full.
13
Capital Regulations. The FDIC has established the following minimum capital
standards for state-chartered, FDIC-insured non-member banks, like University
Bank:
o a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with
minimum requirements of 4% to 5% for all others;
o and a risk-based capital requirement consisting of a minimum ratio of
total capital to total risk-weighted assets of 8%, at least one-half of
which must be Tier 1 capital.
Tier 1 capital consists principally of stockholders' equity. These capital
requirements are minimum requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
institutions. For example, FDIC regulations provide that higher capital may be
required to take adequate account of, among other things, interest rate risk and
the risks posed by concentrations of credit, nontraditional activities or
securities trading activities.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring the submission of
a capital restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock,
including additional voting stock, or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
The extent of the regulators' powers depends on whether the institution in
question is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized." An
institution is critically undercapitalized if it has a tangible equity to total
assets ratio that is equal to or less than 2%. An institution is well
capitalized if it has a total risk-based capital ratio of 10% or greater, core
risk-based capital of 6% or greater, and a leverage ratio of 5% or greater, and
the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure. An institution is adequately capitalized
if it has a total risk-based capital ratio of not less than 8%, a core
risk-based capital of not less than 4%, and a leverage ratio of not less than
4%.
These capital guidelines can affect the Bank in several ways. Capital
levels are currently adequate, however, rapid growth, poor loan portfolio
14
performance, or poor earnings performance, or a combination of these factors,
could change our capital position in a relatively short period of time, making
an additional capital infusion necessary. In general, if the FDIC's assessment
of a Bank's financial and managerial strength changes negatively, the Bank's
cost of FDIC insurance will rise in subsequent semi-annual periods. A financial
institution may also be ordered to restrict its growth, dispose of certain
assets, rescind agreements or contracts, or take other actions as determined by
the ordering agency to be appropriate.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts.
The Bank may not declare or pay a dividend unless the Bank will have a surplus
amounting to at least 20% of its capital after the payment of the dividend. In
addition, the Bank may not declare or pay any dividend until an amount equal to
at least 10% of net profits for the preceding one-half year (in the case of
quarterly or semi-annual dividends) or full-year (in the case of annual
dividends) has been transferred to surplus. At December 31, 2006, the Bank had
accumulated earnings of $14,186. The Bank may not declare or pay any dividend
until the cumulative dividends on any issued preferred stock have been paid in
full.
Federal law generally prohibits the Bank from making any capital
distribution, including payment of a dividend, or paying any management fee to
us if the Bank would thereafter be undercapitalized. The FDIC may prevent the
Bank from paying dividends if the Bank is in default of payment of any
assessment due to the FDIC. In addition, the FDIC may prohibit the payment of
dividends by the Bank, if a payment is determined, by reason of the financial
condition of the Bank, to be an unsafe and unsound banking practice. The Company
has an agreement with the Federal Reserve Bank of Chicago that requires us to
seek permission before paying any cash dividends.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act including any extensions of credit to us, investments
in our stock or other securities, and the acceptance of our stock as collateral
for loans. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to our directors
and officers, to our principal stockholders, and to "related interests" of the
directors, officers and principal stockholders. In addition, federal law and
regulations may affect the terms upon which any person becoming one of our
directors or officers or one of our principal stockholders may obtain credit
from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. Federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings.
In general, the guidelines prescribe the goals to be achieved in each area,
and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit a plan for achieving and maintaining
compliance. The preamble to the guidelines states that the agencies expect to
require a compliance plan from an institution whose failure to meet one or more
of the standards is of the severity that it could
15
threaten the safe and sound operation of the institution. Failure to submit an
acceptable compliance plan, or failure to adhere to a compliance plan that has
been accepted by the appropriate regulator, would constitute grounds for further
enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law.
o the Equal Credit Opportunity Act,
o the Fair Credit Reporting Act,
o the Truth in Lending Act,
o the Real Estate Settlement Procedures Act, and
o the Home Mortgage Disclosure Act.
Regulations flowing from these laws prohibit discrimination, specify
disclosures to be made to borrowers regarding credit and settlement costs, and
regulate the mortgage loan servicing activities of Midwest, including the
maintenance and operation of escrow accounts and the transfer of mortgage loan
servicing.
In receiving deposits, the Bank is subject to extensive regulation under
State and federal law and regulations, including:
o the Truth in Savings Act,
o the Expedited Funds Availability Act,
o the Bank Secrecy Act,
o the Electronic Funds Transfer Act,
o the Anti-Money Laundering Act,
o the Federal Deposit Insurance Act,
o the Patriot Act,
o the Check 21 Act, and
o the Gramm-Leach Bliley Act (and related privacy regulations).
Violation of these laws could result in the imposition of significant
damages and fines upon the Bank and its directors and officers.
Real Estate Lending Regulations. Federal regulators have adopted uniform
standards for appraisals of loans secured by real estate or made to finance
improvements to real estate. Banks are required to establish and maintain
written internal real estate lending policies consistent with safe and sound
banking practices and appropriate to the size of the institution and the nature
and scope of its operations. The regulations establish maximum loan to value
ratio limitations on real estate loans, which generally are equal to or greater
than the loan to value limitations established under the Bank's lending
policies.
16
Branching Authority. Michigan banks, including University Bank, have
authority under Michigan law to establish branches anywhere in the State of
Michigan, subject to receipt of all required regulatory approvals, including
approval of the Commissioner and the FDIC. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits that may be
held by the surviving bank and all of its insured depository institution
affiliates. The establishment of de novo interstate branches or the acquisition
of individual branches of a bank in another state, rather than the acquisition
of an out-of-state bank in its entirety, is allowed only if specifically
authorized by state law.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allowed individual states to "opt-out" of interstate branching authority by
enacting appropriate legislation prior to June 1, 1997. Michigan did not opt
out, and now permits both U.S. and non-U.S. banks to establish branch offices in
Michigan. The Michigan Banking Code permits the following in appropriate
circumstances and with the approval of the Commissioner:
o acquisition of all or substantially all of the assets of a Michigan-
chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state;
o acquisition by a Michigan-chartered bank of all or substantially all
of the assets of an FDIC-insured bank, savings bank or savings and
loan association located in another state;
o consolidation of one or more Michigan-chartered banks and FDIC-insured
banks, savings banks or savings and loan associations located in other
states having laws permitting this consolidation, with the resulting
organization chartered by Michigan;
o establishment by a foreign bank, which has not previously designated
any other state as its home state under the International Banking Act
of 1978, of branches located in Michigan;
o establishment or acquisition of branches in Michigan by FDIC-insured
banks located in other states, the District of Columbia or U.S.
territories or protectorates having laws permitting Michigan-chartered
banks to establish branches in these jurisdictions.
Further, the Michigan Banking Code permits the following, upon written notice to
the Commissioner:
o acquisition by a Michigan-chartered bank of one or more branches, not
comprising all or substantially all of the assets, of an FDIC-insured
bank, savings bank or savings and loan association located in another
state, the District of Columbia, or a U.S. territory or protectorate;
o establishment by Michigan-chartered banks of branches located in
other states, the District of Columbia, or U.S. territories or
protectorates; and
o consolidation of one or more Michigan-chartered banks and FDIC-insured
banks, savings banks or savings and loan associations located in other
states, with the resulting organization chartered by one of the other
states.
Primary Regulator of Midwest. Midwest is an approved seller/servicer of
single-family mortgage loans for FNMA, FHLMC and HUD Title II (GNMA), and is
subject to their rules, regulations and examinations.
17
Primary Regulator of University Insurance & Investment Services. University
Insurance & Investment Services is licensed by the State of Michigan's Office of
Financial and Insurance Services, Insurance Division as both a life and health
and a property casualty insurance agency, and is subject to their rules,
regulations and examinations. University Insurance & Investment Services also
sells broker-dealer investment products and it and its licensed employees are
subject to the rules, regulations and examinations of the National Association
of Securities Dealers, the Securities & Exchange Commission, and the Insurance
Division of Michigan's Office of Financial and Insurance Services.
Item 2. - Properties
Properties
In December 2005, the Bank moved its main office and sole branch to the
historic Hoover Mansion located at 2015 Washtenaw Avenue, Ann Arbor, Michigan.
In June 2005, the Bank purchased Hoover, LLC the owner of the Hoover Mansion, a
17,000 square foot facility. Previously the bank was located in a facility that
it sold in a sale-leaseback transaction in 2003. In April 2005, the owner of the
property offered the Bank an $800,000 early termination buyout of the lease if
the Bank could vacate the property by a date certain. The agreement was
subsequently amended and the move out date was set at December 15, 2005. The
Bank moved to the Hoover Mansion on the 10th of December, thus satisfying the
agreement for the financial incentive.
The Bank subleases a small portion of a site that includes a registered
historic building in Ann Arbor, at the corner of Washtenaw Avenue and Stadium
Boulevard as an ATM drive-through location. The minimum lease period ends
October 2010 with two optional five-year extensions. The Bank also owns 1/3 of
the Company that owns the site, Tuomy, LLC.
The Bank leases an ATM location in Ann Arbor at the corner of State and
Liberty near the University of Michigan Campus under a year-to-year lease.
Midwest leases an office in Houghton, Michigan under a year-to-year lease.
The Company believes that the office facilities are adequate to support the
anticipated level of future expansion of business.
Contractual Obligations
The following table summarizes the existing contractual obligations of the
Company:
Payments Due By Period
------------------------------------------------------
Less than More than
Total a year 2008-2009 2010-2011 5 years
----------- ----------- ----------- ----------- ------------
Operating leases $ 91,730 $ 61,140 $ 23,390 $ 7,200 $ -
Certificates of deposit 15,601,320 9,609,103 2,286,572 3,296,124 409,522
----------- ----------- ----------- ----------- -----------
Totals $15,693,051 $ 9,670,243 $ 2,309,962 $ 3,303,324 $ 409,522
=========== =========== =========== =========== ===========
18
Item 3. - Legal Proceedings
At December 31, 2006 the Company had no outstanding legal proceedings that
would have a material affect on the financial statements.
Item 4. - Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 2006 to a vote of
our shareholders.
PART II.
Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities
Common Stock and Dividend Information
Our common stock trades on the NASDAQ Capital Market under the symbol UNIB.
The high and low sales prices of our common stock as quoted by NASDAQ, for each
quarter since January 1, 2005 are listed below:
High Low
2007
First Quarter through March 16 $2.37 $1.85
2006
First Quarter 2.95 1.76
Second Quarter 2.90 1.95
Third Quarter 2.54 2.04
Fourth Quarter 2.38 1.90
2005
First Quarter 2.25 1.66
Second Quarter 2.35 1.75
Third Quarter 2.00 1.52
Fourth Quarter 2.00 1.53
As of the March 16, 2007 we had approximately 622 stockholders including
approximately 483 beneficial owners of shares held by brokerage firms or other
institutions.
Our shareholders authorized a 1 for 2 reverse stock split in November 2002;
however, management has opted, at this time, not to implement the reverse stock
split. No cash dividends have been paid on our common stock. We do not currently
anticipate declaring or paying cash dividends on our common stock in 2007.
Certain Sales of Equity Securities
In 2006, the Company issued 100,500 shares of common stock as compensation
for services rendered to a company that assisted in the development of UIFC and
its products. There were no repurchases of common stock in 2006.
Also during 2006, the Company sold 7,200 shares of preferred stock at
$1,000 per share. The Company issued 2,681 additional preferred shares to the
preferred shareholder as 9.0% paid-in-kind dividends. There were no repurchases
of preferred stock in 2006.
19
Item 6. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of the following discussion and analysis is to assist the
reader in understanding and evaluating the changes in financial position and
results of operations over the past several years. Investors should refer to the
consolidated financial statements, the related notes thereto, and statistical
information presented elsewhere in this report when reading this section of the
report.
The cautionary statements described below are for the purpose of qualifying
for the "safe harbor" provisions of Section 21E of the Securities Exchange Act
of 1934.
This report includes "forward-looking statements" as that term is used in
the securities laws. All statements regarding our expected financial position,
business and strategies are forward-looking statements. In addition, the words
"anticipates," believes," "estimates," "seeks," "expects" "plans," intends," and
similar expressions, as they relate to us or our management, are intended to
identify forward-looking statements. The presentation and discussion of the
provision and allowance fort loan losses and statements concerning future
profitability or future growth or increases, are examples of inherently
forward-looking statements in that they involve judgments and statements of
belief as to the outcome of future events. Our ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse affect on our operations and out future
prospects include, but are not limited to changes in: interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in our market area and accounting principles, policies and
guidelines. These risks and uncertainties should not be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning us and our business, including
additional factors that could materially affect our financial results, is
included in our other filings with the Securities and Exchange Commission.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and the related disclosures. On an on-going basis, we
evaluate these estimates, including those related to the allowance for loan
losses, servicing rights, other real estate owned and deferred tax assets.
Estimates are based on historical experience, information received from third
parties and on various other assumptions that are believed to be reasonable
under the circumstances, which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
20
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is determined
based on management estimates of the amount required for losses inherent in the
portfolio. These estimates are based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged-off.
SERVICING RIGHTS - Servicing rights are evaluated quarterly for possible
impairment and are valued based on the lower of amortized cost or fair value of
the rights, using independent appraisals and grouping of the underlying loans as
to type, term and interest rates. Assumptions as to prepayment speeds and
retention rates may change and thereby impact the valuation. Any impairment of a
grouping is reported as a valuation allowance.
OTHER REAL ESTATE OWNED - Real estate properties acquired in collection of
a loan are recorded at fair value upon acquisition based on appraisals. Any
reduction to fair value from the carrying value of the related loan at the time
of foreclosure is accounted for as a loan loss. Subsequent reductions in the
value of the real estate owned are charged to earnings when probable and
estimable. Changes in real estate value in the future may impact the carrying
value.
DEFERRED TAX ASSETS - Deferred tax assets are recorded based on estimates
of future taxable income and utilization of existing net operating loss
carry-forwards. A valuation allowance adjusts deferred tax assets to the net
amount that is more likely than not to be realized. Actual results will impact
the estimates of these deferred tax assets.
RISK FACTORS
Our business involves a high degree of risk. The reader of this report
should carefully consider the risks and uncertainties described below and the
other information in this report before deciding whether to invest in shares of
our common stock. If any of the following risks actually occur, our business,
financial condition and results of operations could be materially adversely
affected. This could cause the trading price of our common stock to decline,
with the loss of all or part of an investment in our common stock. Described
below, are the material risks of investing in University Bancorp's common stock.
Investors should carefully consider these prior to purchasing any shares.
University Bank Has Incurred Significant Losses And May Never Achieve Sustained
Profitability
University Bank sold its profitable Upper Peninsula operations in late 1994
and relocated to Ann Arbor in early 1996. University Bank had a net loss from
operations each year between 1995 and 2001 and again in 2004 and 2006.
University Bank had a profit in 2002, 2003 and 2005. Management of the Bank
believes the transfer into the bank of the remainder of the $30 million in zero
interest cost escrow deposits controlled by Midwest Loan Services in
mid-December 2006 should result in the bank achieving sustained profitability,
but there is no assurance that expenses will not rise or other income sources
will not fall as a result of some unanticipated future event.
21
University Bancorp had an accumulated deficit from operations of $950,038 at
December 31, 2006.
The Company's Stock Is Controlled By Insiders Of The Company, Which May Not
Provide You With The Best Possible Return On Your Investment
Insiders hold a majority of the shares outstanding of the Company. The
Ranzini Group (Mr. Stephen Lange Ranzini, Dr. Joseph Lange Ranzini, Mr. Paul
Lange Ranzini, Orpheus Capital, L.P., City Fed Financial and the Ranzini Family
Trust dated 12/20/89) beneficially owns 2,637,718, or 62.15% of the issued and
outstanding shares at March 16, 2007. These individuals are able to exert a
significant measure of control over University Bancorp's affairs and policies.
This control could be used, for example, to help prevent an acquisition of
University Bancorp, precluding shareholders from possibly realizing any possible
premium that may be offered for the common stock by a potential acquirer.
Your Ownership Of The Company May Be Further Diluted If University Bancorp
Requires Additional Capital
There can be no assurance that University Bancorp will not need additional
capital in the future to support the Bank's growth or to counter operating
losses. Funds necessary to meet the Bank's working capital needs and to finance
its expansion might not be available. If additional equity securities are needed
to finance future expansion, such sale could result in significant dilution to
the existing shareholders.
The Small Size Of University Bank Limits Its Ability To Compete With Larger
Financial Institutions
University Bank faces strong competition for deposits, loans and other
financial services from numerous Michigan and out-of-state banks, thrifts,
credit unions and other financial institutions. Some of the financial
institutions with which University Bank competes are not subject to the same
degree of regulation as University Bank. Many of these financial institutions
aggressively compete for business in the Ann Arbor area. Most of the Bank's
competitors have been in business for many years, have established customer
bases, have numerous branches, have substantially higher lending limits, and
offer certain services that we do not provide. The dominant competitors in the
Ann Arbor area are TCF National Bank, National City Bank, Comerica Bank, Chase
Bank, LaSalle Bank and Key Bank. There can be no assurance that University Bank
will be able to compete effectively with these competitors unless it can
continue to grow its operations.
The Michigan Economy and the Ann Arbor Area Economy are Likely to Shrink Over
the Next Few Years
In early 2007, Pfizer and ABN Amro Mortgage, the largest and third largest
private sector employers in Ann Arbor, announced the closure of their operations
in Ann Arbor, with the loss of approximately 5,200 jobs. The future impact on
the area economy of these cutbacks is expected to have a material adverse impact
on the Ann Arbor economy. Michigan's economy has declined for six years in a row
and current projections are that ongoing structural cutbacks in the auto
industry will cause further job losses through at least 2010. The overall impact
on banks located in areas of economic decline is to restrain growth and cause
greater than historical loan losses.
22
The Year Ended December 31, 2006 Compared to the Years Ended December 31, 2005
Summary of Results of Operations
The Company's net loss was $401,698 in 2006, versus net income of
$1,989,169 in 2005. Basic earnings (loss) per share for 2006 and 2005 were
$(0.10) and $0.48, respectively.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the years ended December 31, 2006 and 2005(in
thousands):
2006 2005
------ ------
Community Banking $(953) $1,361
Midwest Loan Services 1,016 646
Corporate Office (485) (118)
------ ------
Total $(422) $1,889
====== ======
Earnings during 2006 were restrained by start-up expenses at University
Islamic Financial Corporation and the restructuring of an agreement with a
company that assisted in the initial development of the Islamic subsidiary and
products. Community Banking reported a pre-tax loss of $953,000 during the year
ended December 31, 2006 compared to pre-tax net income of $1,361,000 during the
same period in 2005. There were two material transactions in 2005 that enhanced
results in that year. In 2005, the Bank was provided with a lease termination
buyout and recorded income of $800,000 from this agreement. As part of the
agreement the Bank moved out of its lease facility into another facility that
was purchased in June 2005. This income was partly offset by additional costs of
$300,000 incurred in carrying two headquarters for six months of 2005 during the
transition between the two locations. The second transaction occurred in
December 2005. The Bank spun off its Islamic banking division into a separate
corporation capitalized with $10,000,000. The Bank sold off 20% of its shares in
this corporation to outside investors for $3,000,000. The transaction resulted
in a $1,000,000 capital gain. This income was partially offset by a cost of
$80,000 incurred to buyout the rights to profit sharing in future mortgage
alternative securitization income of a consulting firm that assisted us in
forming the Islamic Banking Division.
The operating profit of Midwest increased to $1,016,000 from $646,000 in
2005. Due to increasing rates, mortgage originations income was down in 2006 as
compared to 2005. However, this decrease was offset by an increase in revenues
from mortgage loan servicing and sub-servicing. At Midwest, the volume of
mortgage loans serviced increased 24.2% to 32,461 at December 31, 2006 from
26,144 loans as of December 31, 2005.
Within the Corporate Office a large contract modification expense increased
the year to date pre-tax loss in 2006 to $350,000 from a pre-tax loss of $55,000
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
23
services for some of the Islamic financings. By modifying the agreement, the
Company will materially reduce future expenses related to the agreement.
Income tax (benefit) in 2006 was $(20,000) and $(100,000) in 2005. In 2006,
the Company recorded a deferred tax benefit of $40,000. The benefit results from
the expected utilization of the net operating carry-forward in future periods.
This benefit was offset by a current tax expense of $20,000. In 2005, a tax
benefit was recognized because of the operating profit in 2005 and 2003, and
therefore a portion of existing net operating loss carry-forwards were
reasonably expected to reduce future amounts of taxable income.
Net Interest and Financing Income
2006 as compared with 2005
Net interest and financing income increased to $2,759,432 for year ended
December 31, 2006 from $2,319,755 for the same period in 2005. The yield on
average earning assets increased from 6.90% in 2005 to 6.99% in 2006. This
increase occurred as interest and profit bearing assets re-priced in a higher
rate environment in 2006 than had prevailed in earlier periods. Overall, average
interest and profit bearing assets increased from $47,438,660 in 2005 to
$58,026,347 in 2006. The increase occurred primarily in Federal Funds and Bank
Deposits. This category increased by $6,231,322. The source for the increase
came primarily from an increase in custodial demand deposits which are
controlled by Midwest. In mid-December, these custodial demand deposits rose
from approximately $12 million to $30 million as Midwest transferred the
remainder of the custodial demand deposits that it controlled to the Bank from
another financial institution. The financial impact in 2007 and future years of
this transfer and the resulting increase in custodial demand deposits is
expected to be material, since each increase of $1 million in the average
monthly balance increases net interest income by approximately $45,000 per year.
The cost of interest bearing and profit sharing liabilities increased from
2.07% for the 2005 period to 2.41% in 2006. Average interest bearing and profit
sharing liabilities increased from $46,106,469 in 2005 to $53,719,641 in 2006.
As noted above, interest bearing demand deposits increased due to an increase in
custodial funds held by Midwest as part of its duties as a mortgage servicer and
subservicer.
The net yield on earning assets decreased slightly from 4.89% in 2005 to
4.76% in 2006. The decrease in the net interest and profit margin is
attributable primarily to a significant increase in Federal Funds and Bank
Deposits. This asset category is short term in nature and has a lower yield than
longer term asset categories such as loans. Accordingly, as interest rates rose
throughout 2005 and 2006, the yield on interesting bearing deposits increased at
a faster pace than the overall yield on interest bearing assets. Overall, due to
the growth in the volume of earning assets, net interest and financing income
increased from $2,319,755 in 2005 to $2,759,442 in 2006.
The following tables present for the average balances, the interest and
profit earned or paid, and the weighted average yield for the period indicated:
24
NET INTEREST AND PROFIT INCOME
2006
---------------------------------
Average Interest Average
Balance Inc(Exp) Yield
----------- ---------- --------
Interest and Profit Earning Assets:
Commercial Loans $17,961,252 $1,589,030 8.85%
Real Estate Loans (1) 29,866,139 1,930,141 6.46%
Installment Loans 1,549,014 121,527 7.85%
----------- ---------- --------
Total Loans 49,376,405 3,640,698 7.37%
----------- ---------- --------
Investment Securities 1,610,048 63,108 3.92%
Federal Funds & Bank Deposits 7,039,894 349,672 4.97%
----------- ---------- --------
Total Interest Bearing and
Profit Sharing Assets 58,026,347 4,053,478 6.99%
----------- ---------- --------
Interest Bearing and Profit Sharing Liabilities:
Deposit Accounts:
Demand 21,111,824 145,743 0.69%
Savings 329,838 3,283 1.00%
Time 14,219,749 651,025 4.58%
Money Market Accts 17,977,564 491,408 2.73%
Short-term Borrowings 80,666 2,587 3.21%
Long-term Borrowings 0 0 0.00%
----------- ---------- --------
Total Interest Bearing and Profit
Sharing Liabilities 53,719,641 1,294,046 2.41%
----------- ---------- --------
Net earning assets, net interest and profit
income , and net spread $ 4,306,706 $2,759,432 4.58%
=========== ==========
Net Interest and Profit Margin 4.76%
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
25
NET INTEREST AND PROFIT INCOME
2005
-----------------------------------
Average Interest Average
Balance Inc(Exp) Yield
----------- ---------- --------
Interest and Profit Earning Assets:
Commercial Loans $16,910,945 $1,416,280 8.37%
Real Estate Loans (1) 25,762,012 1,605,405 6.23%
Installment Loans 2,038,274 160,747 7.89%
----------- ---------- --------
Total Loans 44,711,231 3,182,432 7.12%
----------- ---------- --------
Investment Securities 1,918,857 55,784 2.91%
Federal Funds & Bank Deposits 808,572 34,675 4.29%
----------- ---------- --------
Total Interest Bearing and
Profit Sharing Assets 47,438,660 3,272,891 6.90%
----------- ---------- --------
Interest Bearing and Profit Sharing Liabilities:
Deposit Accounts:
Demand 10,202,304 32,146 0.32%
Savings 471,145 4,612 0.98%
Time 14,888,596 492,222 3.31%
Money Market Accts 19,312,868 380,621 1.97%
Short-term Borrowings 1,225,219 43,203 3.53%
Long-term Borrowings 6,337 332 5.24%
----------- ---------- --------
Total Interest Bearing and Profit
Sharing Liabilities 46,106,469 953,136 2.07%
----------- ---------- --------
Net earning assets, net interest and profit
income , and net spread $ 1,332,191 $2,319,755 4.83%
=========== ==========
Net Interest and Profit Margin 4.89%
(1) Actual yields; not adjusted to take into account tax-equivalent yields.
The tables above do not specify the average level of non-interest bearing
demand deposits, which were $6,467,744 and $3,641,640, for the years ended
December 31, 2006 and 2005, respectively.
The following table presents information regarding fluctuations in our
interest income and interest expense for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate); and (2) changes in rate (changes in rate multiplied by
old volume); with the rate/volume variance allocated to changes in rate:
26
RATE VOLUME TABLE
2006 - 2005
-----------------------------------
Change Change
Due To Due To Total
Volume Rate Change
--------- --------- ---------
Interest and Financing Income:
Commercial Loans $ 90,562 $ 82,188 $ 172,750
Real Estate Mortgage Loans 263,446 61,290 324,736
Installment/Consumer Loans (38,389) (831) (39,220)
Investment Securities (9,966) 17,290 7,324
Federal Funds & Bank Deposits 308,659 6,338 314,997
--------- ---------- ---------
Total Interest and Financing Income 614,312 166,275 780,587
--------- ---------- ---------
Interest Bearing and Profit Sharing Liabilities:
Demand Deposits 53,742 59,855 113,596
Savings Deposits (1,405) 76 (1,329)
Time Deposits (23,002) 181,805 158,803
Money Market Accounts (27,860) 138,647 110,787
Short-term Borrowings (37,041) (3,575) (40,615)
Long-term Borrowings (332) - (332)
--------- ---------- ---------
Total Interest and Profit
Sharing Expense (35,898) 376,808 340,910
--------- ---------- ---------
Net Interest and Financing Income $ 650,210 $(210,533) $ 439,677
========= ========== =========
Loan Portfolio
Information regarding the Bank's loan portfolio as of December 31, 2006 and
2005 is set forth under Note 5 to University Bancorp's consolidated financial
statements included with this report.
Provision for Loan Losses
The Bank charges to operations a provision for loan losses which is
intended to create an allowance for future loan losses inherent in the Bank's
portfolio. Each year's provision reflects management's analysis of the amount
necessary to maintain the allowance for loan losses at a level adequate to
absorb anticipated losses. In its evaluation, management considers factors like
historical loan loss experience, specifically identified problem loans,
composition and growth of the loan portfolio, current and projected economic
conditions, and other pertinent factors. A loan is charged-off by management as
a loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Non-performing loans are defined as loans which have been placed on
non-accrual status and loans over 90 days past due as to principal or interest
and still in an accrual status. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued. See Note 5 of
the Consolidated Financial Statements for additional information regarding
impaired and past due loans. Non-performing loans amounted to $59,605 and
$349,681 at December 31, 2006 and 2005, respectively. At December 31, 2005,
there were loans totaling $10,172 that were past due over 90 days,
27
but still accruing interest. Payments were made to bring these loans to a
current status shortly after year-end.
The provision for loan losses was $153,297 in 2006 and $17,209 for the same
period in 2005. The provision increased due to applying historical loss ratios
to the growth in the loan portfolio and weak economic conditions in the
southeastern Michigan area which increased management's estimates for future
losses from economic factors.
Loans charged off, net of recoveries, were $36,721 and $20,916 in 2006 and
2005, respectively. The allowance for possible loan losses totaled $465,992 and
$349,416 at the end of 2006 and 2005, respectively. The following table
summarizes the loan loss expense for the Bank for the years ended December 31,
2006 and 2005.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands)
2006 2005
---- ----
Balance at beginning of the period $ 349 $ 353
Charge offs - Domestic:
Commercial loans 43 23
Real estate mortgages - 11
Installment loans - -
---- ----
Subtotal 43 34
---- ----
Recoveries - Domestic:
Commercial loans 6 12
Real estate mortgages - -
Installment loans 1 1
---- ----
Subtotal 7 13
---- ----
Net charge offs 36 21
---- ----
Provision for loan losses 153 17
---- ----
Balance at end of period $ 466 $ 349
==== ====
Ratio of net charge offs during
period to average loans
outstanding during period 0.07% 0.05%
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands)
Allocated portion of Percentage of loans
allowance in each category to
at December 31 total loans
-------------------- ------------------
2006 2005 2006 2005
---- ---- ------ ------
Loan category:
Domestic:
Commercial loans $ 274 $ 69 33.44% 32.28%
Real estate mortgages 97 136 63.03% 64.00%
Installment loans 19 22 3.53% 3.72%
Allocated for economic factors 76 122 N/A N/A
----- ----- ------- -------
$ 466 $ 349 100.00% 100.00%
===== ===== ======= =======
At At
December 31, 2006 December 31, 2005
----------------- -----------------
Total loans (1) $50,927,197 $45,652,326
Reserve for loan losses $ 465,992 $ 349,416
Reserve/Loans % 0.92% 0.76%
(1) Excludes loans held for sale.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor and the future performance of these loans is dependent upon the
performance of relatively limited geographical areas. As a result of the
28
weak Michigan economy and recent negative developments in the Ann Arbor area
economy (see "Risk Factors" above), the Bank's future loss ratios may exceed
historical loss ratios.
Management believes that the allowance for loan losses is adequate to
absorb losses inherent in the loan portfolio, although the ultimate adequacy of
the allowance for loan losses is dependent upon future economic factors beyond
our control. A downturn in the general nationwide economy will tend to
aggravate, for example, the problems of local loan customers currently facing
some difficulties. A general nationwide business expansion could result in fewer
loan customers being unable to repay their loans.
Non-Interest Income and Non-Interest Expense
Non-interest income. Total non-interest income decreased to $4,467,845 for
the year ended December 31, 2006 from $5,891,330 for the same period in 2005. In
2005, non-interest income was impacted by two large non-recurring transactions.
Excluding the two non-recurring transactions, non-interest income showed an
overall increase in 2006 over 2005, principally due to growth of the mortgage
loan servicing operation at Midwest. Fees from loan servicing and sub-servicing
increased at Midwest as the number of customers increased. In 2005, other income
was significantly higher than in 2006 due to income derived from the buyout of
the Bank's lease from a developer and a gain from the sale of Bank owned shares
in the Islamic Banking subsidiary. The Bank agreed to terminate its lease
agreement early in exchange for $800,000. The Bank moved out of its leased
facility in December 2005 and moved to another facility that it purchased in
June 2005. Also, the Bank earned $1,000,000 from the sale of 20% of the Islamic
Banking subsidiary for $3,000,000.
Mortgage banking. At December 31, 2006, Midwest was sub-servicing 32,461
mortgages, an increase of 24.2% from 26,144 mortgages at December 31, 2005. The
balance of loans sub-serviced was $4.0 billion at December 31, 2006 as compared
with over $3.2 billion at December 31, 2005.
Securities. There were no sales of marketable and non-marketable equity
securities in 2006 and 2005.
At December 31, 2006 net unrealized losses in the available-for-sale
securities were $27,296 and net unrealized gains were $0. At December 31, 2005
net unrealized losses in our available-for-sale securities were $34,721 and net
unrealized gains were $0.
Non-interest expense increased to $7,495,678 in the period ended December
31, 2006 from $6,304,707 for the same period in 2005. The increase was due to
the growth in the servicing activity at Midwest and development activity of the
Islamic Banking subsidiary. The growth in the number of loans serviced at
Midwest has resulted in additional salaries and benefits and other costs related
to servicing mortgage loans. In the Islamic banking subsidiary, additional
expenses were incurred in the development of products and a contract
modification agreement where, 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 $260,844. This amount is included in other expense
Income Taxes
Income tax (benefit) expense in 2006 was $(20,000) and $(100,000) in 2005.
In 2006, the Company recorded a deferred tax benefit of $40,000. The benefit
results from the expected utilization of the net operating carry-forward
29
in future periods. This benefit was offset by a current tax expense of $20,000.
In 2005, a tax benefit was recognized because of the operating profit in 2005
and 2003, and therefore a portion of existing net operating loss carry-forwards
were reasonably expected to reduce future amounts of taxable income.
At December 31, 2006, the Company had net operating loss and tax credit
carry-forwards that could be utilized to shelter approximately $3.8 of future
taxable income. Realization of income tax benefits are not recorded in the
financial statements as realization of these benefits is dependent upon
generating sufficient future taxable income. See footnote 13 to the financial
statements for more information.
Liquidity and Capital Resources
Liquidity. Loans receivable, net of reserves and excluding loans held for
sale, increased to $50.46 million in 2006 from $45.30 million in 2005. Cash and
cash equivalents including Federal Funds sold on an overnight basis at the end
of 2006 were $27.38 million, while securities were $672,588. At year-end 2006,
the Bank had an unused line of credit from the Federal Home Loan Bank of
Indianapolis of $3.2 million, and an unused line of credit from the Federal
Reserve Bank of Chicago of $5.0 million.
University Bank, as an FDIC-insured bank, is subject to certain regulations
that require the maintenance of minimum liquidity levels of cash and eligible
investments. The Bank has historically exceeded this minimum as a result of its
investments in federal funds sold, U.S. government and U.S. agency securities
and cash. In addition, University Bancorp had $2,066 in cash at the end of 2006
to meet cash needs, primarily operating expenses including audit and NASDAQ
listing fees. Management intends that the cash on hand, the exercise of stock
options and possible sale of additional preferred stock will be sufficient to
cover our operating expenses during 2007 and 2008. The Company's total
stockholders' equity at December 31, 2006 was approximately $5.25 million
compared to $5.30 million at December 31, 2005.
As of December 31, 2006 and 2005, the Bank was in compliance with all the
regulatory capital requirements that were applicable (i.e., total capital and
Tier 1 capital to risk-weighted assets of at least 8% and 4%, respectively, and
Tier 1 capital to average assets of at least 4%). The Bank is considered to be
"well-capitalized" under prompt corrective action provisions for each of the
ratios. Set forth below are the Bank's regulatory capital ratios as of the end
of 2006 and 2005, based on FDIC guidelines. The Bank's overall capital ratios
declined in 2006 versus 2005 as a result of the 35.3% increase in the Bank's
total assets.
30
CAPITAL RATIOS 2006 2005
------ ------
Tier 1/Total Average Assets 9.77% 14.00%
Tier 1/Total Risk-Weighted Assets 15.66% 17.63%
Tier 1 & 2/Total Risk-Weighted Assets 16.55% 18.44%
Recently Issued Accounting Standards
Financial Accounting Standards Board's (FASB) Final Interpretation No.
48,"Accounting for Uncertainty in Income Taxes" ("FIN 48"). This interpretation
was issued on July 13, 2006. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB No.
109, "Accounting for Income Taxes." This
interpretation provides guidance on the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Further, FIN 48 provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosures and transition. This
interpretation is effective for fiscal years beginning after December 15, 2006.
The cumulative effects, if any, of applying FIN 48 will be recorded as an
adjustment to retained earnings as of the beginning of the period of adoption.
Financial Accounting Standards Board Statement No. 156 - Accounting
for Servicing of Financial Assets. This Statement amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. This standard requires all
separately recognized servicing assets and liabilities to be initially measured
at fair value and either amortized over the period of estimated servicing income
and assessed for impairment each reporting period, or measured at fair value
each reporting period with changes in fair value reported in earnings the period
in which changes occur. This standard is effective for fiscal years beginning
after September 15, 2006. The Company is in the process of evaluating the
expected effect of this pronouncement and is currently unable to determine the
impact, if any, that they may have on its results of operations, financial
position and cash flows.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (FASB 157). FASB 157 enhances
existing guidance for measuring assets and liabilities using fair value. Prior
to the issuance of FASB 157, guidance for applying fair value was incorporated
in several accounting pronouncements. FASB 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. FASB
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 being quoted prices in active markets. Under FASB 157, fair
value measurements are disclosed by level within that hierarchy. While FASB 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. FASB
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 FASB 157 on its financial
statements.
In September 2006, the FASB issued FASB No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans (FASB 158), which
amends FASB 87 and FASB 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under FASB 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under FASB 87 and FASB 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The measurement date -
the date at which the benefit obligation and plan assets are measured
31
- is required to be the company's fiscal year end. FASB 158 is effective for
publicly-held companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after December 15, 2008. Adoption of this FASB is not expected to have a
material impact on the Company's financial statements.
In February 2007, the FASB issued FASB No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. 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 FASB No. 157. The
Company is continuing to evaluate the impact of this statement.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulleting No. 108 ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a potential current year
misstatement. Prior to SAB 108, companies might evaluate the materiality of
financial statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new misstatements
added in the current year, and the balance sheet approach focusing on the
cumulative amount of misstatement present in a company's balance sheet.
Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires
that companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet approach. The
Company has adopted SAB 108, with no impact on the Company's financial position
or results of operations.
32
Item 7. - Consolidated Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2006 and 2005
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
University Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of University
Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 2006 and 2005,
and the related consolidated statements of operations, comprehensive income
(loss), stockholders' equity and cash flows for the two year period ended
December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of University Bancorp,
Inc. and Subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for the two year period ended December 31, 2006,
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted statement of Financial Accounting Standards No. 123(R), "Share Based
Payments," effective January 1, 2006.
/s/ UHY LLP
Southfield, Michigan
April 9, 2007
34
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2006 and 2005
December 31, December 31,
ASSETS 2006 2005
----------- -----------
Cash and due from banks $27,381,113 $ 7,746,666
Investment securities available for sale, at market 672,588 833,762
Federal Home Loan Bank Stock 714,600 941,200
Loans and financings held for sale, at the lower of cost or market 1,951,629 1,446,575
Loans and financings 50,927,197 45,652,326
Allowance for loan losses (465,992) (349,416)
----------- -----------
Loans and financings, net 50,461,205 45,302,910
Premises and equipment, net 2,696,062 2,802,816
Mortgage servicing rights, net 1,516,100 1,471,808
Real estate owned, net 289,212 276,987
Accounts receivable 253,866 2,585,524
Accrued interest and profit receivable 304,863 205,069
Prepaid expenses 384,113 285,015
Goodwill 103,914 103,914
Other assets 616,616 537,666
----------- -----------
TOTAL ASSETS $87,271,741 $64,539,912
=========== ===========
-Continued-
35
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2006 and 2005
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
----------- -----------
Liabilities:
Deposits:
Demand - non interest bearing $ 5,086,312 $ 2,919,887
Demand - interest bearing and profit sharing 57,925,964 34,485,047
Savings 268,585 418,308
Time 15,601,321 18,197,803
----------- ------------
Total Deposits 78,882,182 56,021,045
Accounts payable 59,384 395,604
Accrued interest and profit sharing payable 73,532 110,619
Other liabilities 368,837 210,190
----------- -----------
Total Liabilities 79,383,935 56,737,458
Minority Interest 2,636,559 2,501,873
Stockholders' equity:
Preferred stock, $0.001 par value;
$1,000 liquidation value;
Authorized - 500,000 shares;
Issued - 37,672 shares in 2006 and
27,791 shares in 2005 38 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 43,635 42,630
Additional paid-in-capital 6,488,960 6,149,990
Additional paid-in-capital - stock options 36,478 -
Treasury stock - 115,184 shares in 2006
and 2005 (340,530) (340,530)
Accumulated deficit (950,038) (516,816)
Accumulated other comprehensive loss,
unrealized losses on securities
available for sale, net (27,296) (34,721)
----------- -----------
Total Stockholders' Equity 5,251,247 5,300,581
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $87,271,741 $64,539,912
=========== ===========
See notes to consolidated financial statements.
36
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2006 and 2005
2006 2005
----------- ------------
Interest and financing income:
Interest and fees on loans and financing income $ 3,640,698 $ 3,182,432
Interest on investment securities:
U.S. Government agencies 19,829 16,107
Other securities 43,279 39,677
Interest on Federal funds and other 349,672 34,675
----------- ------------
Total interest income and financing income 4,053,478 3,272,891
----------- ------------
Interest and profit sharing expense:
Interest and profit sharing on deposits:
Demand deposits 637,151 412,767
Savings deposits 3,283 4,612
Time certificates of deposit 651,025 492,222
Short term borrowings 2,587 43,203
Long term borrowings - 332
----------- ------------
Total interest and profit sharing expense 1,294,046 953,136
----------- ------------
Net interest and financing income 2,759,432 2,319,755
Provision for loan losses 153,297 17,209
----------- ------------
Net interest and financing income after
provision for loan losses 2,606,135 2,302,546
----------- ------------
Other income:
Loan servicing and sub-servicing
fees 2,390,681 1,736,285
Initial loan set-up and other fees 1,303,583 1,396,813
Net gain on sale of mortgage loans 100,450 308,648
Insurance & investment fee income 248,077 200,585
Deposit service charges and fees 90,521 107,100
Gain on the sale and leaseback of
premises - 210,315
Other 334,533 1,931,584
----------- ------------
Total other income 4,467,845 5,891,330
----------- ------------
-Continued-
37
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
For the Years Ended December 31, 2006 and 2005
2006 2005
----------- ------------
Other expenses:
Salaries and benefits $ 3,442,951 $ 3,000,918
Occupancy, net 524,979 517,167
Data processing and equipment expense 611,377 570,008
Legal and audit 307,219 343,135
Consulting fees 254,943 287,117
Mortgage banking 172,910 190,671
Servicing rights amortization 239,075 137,736
Advertising 239,183 162,296
Memberships and training 151,230 90,902
Travel and entertainment 193,790 148,159
Supplies and postage 310,826 240,322
Insurance 175,027 153,280
Other operating expenses 737,482 401,241
----------- ------------
Total other expenses 7,360,992 6,242,952
----------- ------------
Income(loss) before income taxes and minority interest (287,012) 1,950,924
Income tax (benefit) (20,000) (100,000)
----------- ------------
Income(loss) before minority interest (267,012) 2,050,924
Minority interest in consolidated subsidiaries' earnings 134,686 61,755
----------- ------------
Net Income(loss) $ (401,698) $ 1,989,169
=========== ============
Basic earnings(loss)per common share $ (0.10) $ 0.48
=========== ============
Diluted earnings(loss)per common share $ (0.10) $ 0.47
=========== ============
Weighted average shares outstanding -Basic 4,222,771 4,146,504
Weighted average shares outstanding -Diluted 4,222,771 4,184,430
See notes to consolidated financial statements.
38
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss)Income
For the Years Ended December 31, 2006 and 2005
2006 2005
---------- ----------
Net (loss)income $(401,698) $1,989,169
Other comprehensive income:
Net unrealized gains on
securities available for sale -
net of deferred taxes of $0 and
$0, respectively 7,425 16,636
---------- ----------
Comprehensive (loss)income $(394,273) $2,005,805
========== ==========
See notes to consolidated financial statements.
39
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2006 and 2005
Preferred Stock Common Stock Treasury Stock
$.001 Par Additional
Value $.01 Par Value Paid In
--------------- ---------------- Additional Capital-
Number of Par Number of Par Paid In Stock Number of
Shares Value Shares Value Capital options Shares Cost
---------------- --------- ------ --------- --------- --------- --------
Balance January 1, 2005 - $- 4,240,641 $42,406 $5,841,331 $ - (115,184) $(340,530)
--------- ----- --------- ------ --------- --------- --------- ---------
Issuance of preferred stock at $1,000 per
share, net of expenses of $10,000 27,791 28 267,883
Preferred stock dividend
Issuance of common stock at weighted average
price of $1.11 per share, net of expenses of
$0.00 22,421 224 40,776
Decrease in unrealized loss on securities
available for sale, net of tax
Net Income
--------- ----- --------- ------ --------- --------- --------- ---------
December 31, 2005 27,791 28 4,263,062 42,630 6,149,990 (115,184) (340,530)
--------- ----- --------- ------ --------- --------- --------- ---------
Issuance of preferred stock at $1,000 per share 7,200 7 71,993
Preferred stock dividend
Conversion of accrud preferred stock
dividends into shares of preferred stock 2,681 3 26,782
Issuance of common stock in exchange for
services - weighted average price of
$2.40 per share on effective date 100,500 1,005 240,195
Stock Option awards 36,478
Decrease in unrealized loss on securities
available for sale, net of tax
Net Income
--------- ----- --------- ------ --------- --------- --------- ---------
December 31, 2005 37,672 $38 4,363,562 $43,635 $6,488,960 $36,478 (115,184) $(340,530)
========= ===== ========= ====== ========= ========= ========= =========
-CONTIUNED-
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2006 and 2005
Accumulated
Retained
Earnings Comprehensive Stockholders'
(Deficit) Loss Equity
------------ --------- ----------
Balance January 1, 2005 $(2,490,224) $(51,357) $3,001,626
------------ --------- ----------
Issuance of preferred stock at $1,000 per 267,911
share, net of expenses of $10,000
Preferred stock dividend (15,761) (15,761)
Issuance of common stock at weighted average
price of $1.11 per share, net of expenses of
$0.00 41,000
Decrease in unrealized loss on securities
available for sale, net of tax 16,636 16,636
Net Income 1,989,169 1,989,169
------------ --------- ----------
Balance, December 31, 2005 (516,816) (34,721) $5,300,581
------------ --------- ----------
Issuance of preferred stock at $1,000 per share 72,000
Preferred stock dividend (31,524) (31,524)
Conversion of accrued preferred stock
dividends into shares of preferred stock 26,785
Issuance of common stock in exchange for
services - weighted average price of
$2.40 per share on effective date 241,200
Stock option awards 36,478
Decrease in unrealized loss on securities
available for sale, net of tax 7,425 7,425
Net Loss (401,698) (401,698)
------------ --------- ----------
Balance, December 31, 2006 $ (950,038) $(27,296) $5,251,247
============ ========= ==========
See notes to consolidated financial statements.
40
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2006 and 2005
2006 2005
------------ -------------
Operating activities:
Net income (loss) $ (401,698) $ 1,989,169
Adjustments to reconcile net income(loss) to net cash provided by
operating activities:
Depreciation 382,219 337,592
Amortization 239,075 137,736
Provision for loan loss 153,297 17,209
Net gain on sale of mortgages (100,450) (308,648)
Gain on the sale and leaseback of premises - (210,315)
Net gain on other real estate owned (105,414) (9,294)
Net accretion on securities (315) (1,143)
Deferred income tax (benefit) - (100,000)
Originations of mortgage loans (44,313,744) (55,785,241)
Proceeds from mortgage loan sales 43,909,140 55,493,714
Stock awards 5,479 -
Non-e,ployee stock awards 272,199 -
Net change in:
Other assets 2,071,189 (2,892,916)
Other liabilities (79,974) 2,482,328
------------ -------------
Net cash provided by operating activities 2,031,003 1,150,191
------------ -------------
Investing activities:
Proceeds from maturities of
investment securities 168,914 290,624
Proceeds from sale of other real estate
owned 472,997 713,611
Loans granted, net of repayments (5,691,400) (3,132,020)
Premises and equipment expenditures (275,465) (2,283,704)
------------ -------------
Net cash used in investing activities (5,324,954) (4,411,489)
------------ -------------
-Continued-
41
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 30, 2006 and 2005
2006 2005
------------ -------------
Financing activities:
Net increase in deposits 22,861,137 11,433,246
Net decrease in short term borrowings - (2,416,000)
Principal payments on long term borrowings - (34,000)
Dividends on preferred stock (4,739) (12,361)
Issuance of preferred stock 72,000 264,510
Issuance of common stock - 41,000
------------ -------------
Net cash provided by financing
activities 22,928,398 9,276,395
------------ -------------
Net change in cash and cash
equivalents 19,634,447 6,015,097
Cash and cash equivalents:
Beginning of year 7,746,666 1,731,569
------------ -------------
End of year $ 27,381,113 $ 7,746,666
============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,331,133 $ 892,813
Cash paid for federal income taxes $ 41,253 $ -
Supplemental disclosure of non-cash transactions:
Decrease in unrealized loss on securities available
for sale, net of deferred taxes of $0 and $0, respectively $ 7,425 $ 16,636
Mortgage loans converted to other real estate owned $ 379,808 $ 458,577
Fixed assets converted to basis in partnership $ - $ 90,000
Dividends on preferred stock converted to additional shares
of preferred stock $ 26,785 $ 3,400
See notes to consolidated financial statements.
42
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended December 31, 2006 and 2005
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements of University Bancorp, Inc. (the
Company) include the operations of its wholly owned subsidiary,
University Bank (the Bank), the Bank's wholly owned subsidiary,
University Insurance & Investment Services, Inc. ("Agency") and
Hoover, LLC. ("Hoover") and two 80% owned subsidiaries, Midwest Loan
Services, Inc. ("Midwest") and University Islamic Financial
Corporation ("UIFC"). The accounts are maintained on an accrual basis
in accordance with generally accepted accounting principles and
predominant practices within the banking and mortgage banking
industries. All significant intercompany balances and transactions
have been eliminated in preparing the consolidated financial
statements.
The Company is a bank holding company. University Bank, which is
located in Michigan, is a full service community bank, which offers
all customary banking services, including the acceptance of checking,
savings and time deposits. The Bank also makes commercial, real
estate, personal, home improvement, automotive and other installment,
credit card and consumer loans, and provides fee based services such
as annuity and mutual fund sales, stock brokerage and money
management, life insurance, property casualty insurance and foreign
currency exchange. The Bank's customer base is primarily located in
the Ann Arbor, Michigan area.
University Bank's loan portfolio is concentrated in Ann Arbor and
Washtenaw County, Michigan. While the loan portfolio is diversified,
the customers' ability to honor their debts is partially dependent on
the local economy. The Ann Arbor area is primarily dependent on the
education, healthcare, services and manufacturing (automotive and
other) industries. Most real estate loans are secured by residential
or commercial real estate and business assets secure most business
loans. Generally, installment loans are secured by various items of
personal property.
The Agency is engaged in the sale of insurance products including
life, health, property and casualty, and investment products including
annuities, mutual funds, stock brokerage and money management. The
Agency is located in the Bank's Ann Arbor main office. The Agency also
has a limited partnership investment in low-income housing tax credits
through Michigan Capital Fund for Housing Limited Partnership I with
financing assistance from the General Partner, Michigan Capital Fund
for Housing.
Midwest is engaged in the business of servicing and sub-servicing
residential mortgage loans. Midwest began operations in 1992 and was
acquired by University Bank in December, 1995. Midwest is based in
Houghton, Michigan, and also originates mortgage loans for itself and
other financial institutions, including the Bank (See Note 2).
43
1. Summary of significant accounting policies (continued)
UIFC is engaged in Islamic Banking and was formed on December 30,
2005. Its current products are Islamically compliant FDIC-insured
deposits and home financings (as agent for the Bank), mutual funds (as
agent for a third-party fund distribution company) and home financings
(as principal for its own account).
Hoover owns the Bank's headquarters facility and was purchased in June
2005.
Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions based upon available information. These estimates and
assumptions affect the reported amounts and disclosures. Actual
results could differ from those estimates.
The significant estimates incorporated into these consolidated
financial statements, which are more susceptible to change in the near
term, include the value of mortgage servicing rights, the allowance
for loan losses, the identification and valuation of impaired loans,
the valuation of other real estate owned, the fair value of financial
instruments, and the valuation of deferred tax assets.
Cash flow reporting
For purposes of the Consolidated Statements of Cash Flows, cash and
cash equivalents is defined to include the cash on hand, interest
bearing deposits in other institutions, federal funds sold and other
investments with a maturity of three months or less when purchased.
Net cash flows are reported for customer loan and deposit transactions
and interest bearing deposits with other banks.
Securities
Securities are classified as available for sale at the date of
purchase. All securities are classified as available for sale at
December 31, 2006 and 2005. Securities available for sale are carried
at fair value, with unrealized holding gains and losses reported in
other comprehensive income or loss. Realized gains are based on
specific identification of amortized cost. Securities are written down
to fair value when a decline in fair value is not temporary. Interest
income includes amortization of purchase premium or discount. Other
securities such as Federal Home Loan Bank stock are carried at cost.
Loans
Loans are reported at the principal balance outstanding, net of
unearned interest, deferred loan fees and costs, and an allowance for
loan losses. Interest income is reported on the interest method and
includes amortization of net deferred loan fees and costs over the
loan term. Interest income is not reported when full loan repayment is
in doubt, typically when payments are past due over 90 days. Payments
received on such loans are reported as principal reductions, unless
all interest and principal payments in arrears are paid in full.
44
1. Summary of significant accounting policies (continued)
Mortgage banking activities
Mortgage banking activities include retail and servicing operations.
Mortgage loans held for sale are valued at the lower of cost or market
as determined by bid prices for loans in the secondary market. The
loans are sold without recourse, except in the event that
documentation errors are made during the origination process. Loan
servicing and sub-servicing fees are contractually based and are
recognized monthly as earned over the life of the loans.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable
credit losses, increased by the provision for loan losses and
recoveries and decreased by charge-offs. Management estimates the
balance required based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and
other factors. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in total for smaller-balance
loans of similar nature such as residential mortgage, consumer, and
credit card loans, and on an individual loan basis for other loans. If
a loan is impaired, a portion of the allowance is allocated so that
the loan is reported, net, at the present value of estimated future
cash flows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90
days or more, or when it is probable that all principal and interest
amounts will not be collected according to the original terms of the
loan.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line
method for bank premises and the accelerated method for equipment and
land improvements over their estimated useful lives. The Company uses
the following useful lives as of December 31, 2006:
Buildings and building improvements 39 years
Land and leasehold improvements 15 years or term of lease
Furniture, fixtures, and equipment 3-7 years
Software 2-5 years
Other real estate owned
Real estate properties acquired in collection of a loan are recorded
at fair value upon foreclosure. Any reduction to fair value from the
carrying value of the related loan is accounted for as a loan loss.
45
1. Summary of significant accounting policies (continued)
After acquisition, a valuation allowance reduces the reported amount
to the lower of the initial amount or fair value less costs to sell.
Expenses, gains and losses on disposition, and changes in the
valuation allowance are reported in other expenses.
Servicing rights
Servicing rights represent both purchased rights and the allocated
value of servicing rights retained on loans originated and sold.
Servicing rights are expensed in proportion to, and over the period
of, estimated net servicing revenues. Impairment is evaluated based on
the fair value of the rights, using groupings of the underlying loans
as to type, term and interest rates. Any impairment of a grouping is
reported as a valuation allowance.
Goodwill
The Company evaluates the carrying value of goodwill during each
quarter of each year and between quarterly evaluations if events occur
or circumstances change that would more likely than not reduce the
fair value of the reporting unit below its carrying amount. When
evaluating whether goodwill is impaired, the Company compares the fair
value of the reporting unit to which the goodwill is assigned, to the
reporting unit's carrying amount, including goodwill. An impairment
loss would be recognized when the carrying amount of goodwill exceeds
its fair value. The Company's evaluation of goodwill completed during
the 2006 and 2005 resulted in no impairment losses.
Income taxes
Income tax expense/benefit is the sum of the current year estimated
tax obligation or refund per the income tax return and the change in
the estimated future tax effects of temporary differences and
carry-forwards. Deferred tax assets or liabilities are computed by
applying enacted income tax rates to the expected reversals of
temporary differences between financial reporting and income tax
reporting, and by considering carry-forwards for operating losses and
tax credits. A valuation allowance adjusts deferred tax assets to the
net amount that is more likely than not to be realized.
Retirement plan
The Bank has a 401(K) Plan that allows employees to contribute up to
15% of salary pre-tax, to the allowable limit prescribed by the
Internal Revenue Service. Management has discretion to make matching
contributions to the Plan. The Bank made no matching contributions for
the years ended December 31, 2006 and 2005.
Employee Stock Ownership Plan (ESOP)
The Company has a noncontributory ESOP covering all full-time
employees who have met certain service requirements. The employees'
share in the Company's contribution is based on their current
compensation as a percentage of the total employee compensation. As
shares are contributed to the plan they are allocated to employees and
compensation expense is
46
recorded at the shares' fair value. The Company made no contribution
in 2006 and 2005.
Stock options
The Company has adopted FASB No. 123(R), "Share-Based Payment", which
is a revision of FASB No. 123, "Accounting for Stock Based
Compensation", and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and was issued in December 2004. The
revisions require that the compensation cost relating to share-based
payment transactions be recognized in the financial statements. That
cost will be measured based on the fair value of the equity or
liability instruments issued. For the year ended December 31, 2006,
the Company recorded $36,478 of compensation expense related to stock
options.
Prior to the 2006 year, the Company adopted the disclosure-only
provisions of FASB 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 year period ended
December 31, 2005 would have been the pro forma amounts indicated
below:
Net income, as reported $1,989,169
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax 6,000
----------
Pro forma net income $1,983,169
==========
Earnings per share: Basic Diluted
------ -------
As reported $0.48 $0.47
Pro forma $0.48 $0.47
Dividend restriction
Banking regulations require the maintenance of certain capital levels
and may limit the amount of dividends that may be paid by a bank to a
holding company or by a holding company to shareholders. In addition,
a bank cannot pay a dividend until it has net retained earnings equal
to 20% of capital and surplus. The Bank's capital and surplus was
$5,280,767 at both December 31, 2006 and 2005, and retained earnings
of the Bank were $14,186 and $65,170 at December 31, 2006 and 2005,
respectively.
Earnings(loss) per share
Basic earnings per share represents income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share 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 Company relate solely
47
1. Summary of significant accounting policies (continued)
to outstanding stock options, and are determined using the treasury
stock method. Earnings per common share have been computed based on
the following:
2006 2005
----------- ----------
Net income (loss) $(401,698) $1,989,169
Less: Preferred dividends 31,524 15,761
----------- -----------
Net income(loss available to
Common shareholders) $(433,222) $1,973,408
========== ==========
2006 2005
----------- ----------
Weighted average shares outstanding 4,222,771 4,146,504
Net dilutive effect of stock options - 37,926
---------- ----------
Diluted average shares outstanding 4,222,771 4,184,430
========== ==========
For December 31, 2006, the Company incurred a net loss. Accordingly,
anti-dilutive impact of the effect of stock options is not shown.
Comprehensive Income(Loss)
Comprehensive income(loss) includes both the net income (loss) and the
change in unrealized gains and losses on securities available for
sale.
Segment Reporting
The Company's segments are determined by the products and services
offered, primarily distinguished between banking and mortgage banking
operations. Loans, investments, and deposits provide the revenues in
the banking operation, and servicing fees, underwriting fees and loan
sales provide the revenues in mortgage banking. All operations are
domestic.
Reclassification
Certain items in the 2005 consolidated financial statements and notes
have been reclassified to conform to the 2006 presentation.
2. Secondary Market Operations
Midwest provides servicing and sub-servicing of real estate mortgage
loans for University Bank and several other financial institutions.
The unpaid principal balance of these loans was approximately $4.0
billion and $3.2 billion as of December 31, 2006 and 2005,
respectively. Custodial escrow balances maintained in connection with
these respective loans was $57.1 million and 40.7 million, at December
31, 2006 and 2005 respectively Most of these Funds are off balance
sheet and maintained at University Bank. The following summarizes the
operations of Midwest for the years ended December 31:
48
2. Secondary Market Operations (continued)
2006 2005
---------- ----------
Loan servicing and sub-servicing fees $2,396,603 $1,747,113
Loan set-up and other fees 1,915,867 1,416,870
Interest income 65,764 42,393
Gain on sale of loans 100,450 314,820
---------- ----------
Total income 4,478,684 3,521,196
Salaries and benefits 1,812,724 1,560,356
Amortization of servicing rights 254,047 135,155
Interest expense 114,377 35,429
Other operating expenses 1,630,354 1,364,341
---------- ----------
Total expenses 3,811,502 3,095,281
---------- ----------
Income of Midwest $ 667,182 $ 425,915
========== ==========
University Bank and Midwest sell conforming residential mortgage loans
to the secondary market. These loans are owned by other institutions
and are not included in the Company's consolidated balance sheets.
Such mortgage loans have been sold predominately without recourse or
with limited recourse. The unpaid principal balance of these loans was
$152.7 million and 143.4 million at December 31, 2006 and 2005
respectively.
The following summarizes the activity pertaining to mortgage servicing
rights, along with the aggregate activity in related valuation
allowances. Table A is calculated net of the valuation allowance
described in Table B.
Table A 2006 2005
---------- ----------
Mortgage servicing rights:
Balance, January 1 $1,471,808 $1,097,786
Additions - originated 283,367 462,283
Amortization expense (203,075) (215,261)
Adjustment for asset impairment change (36,000) 127,000
---------- ----------
Balance, December 31 $1,516,100 $1,471,808
========== ==========
Table B
Valuation allowances:
Balance, January 1 $ 389,000 $ 516,000
Additions 36,000 (127,000)
---------- ----------
Balance, December 31 $ 425,000 $ 389,000
========== ==========
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. The servicing rights are
recorded at the lower of cost or market.
49
3. Securities available for sale
The following is a summary of the amortized cost, gross unrealized
gains, gross unrealized losses and fair value of securities available
for sale at December 31, 2006 and 2005:
December 31, 2006
Amortized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
U.S. agency mortgage-backed
securities $699,884 $ - $(27,296) $672,588
======== ======== ========= ========
December 31, 2005
Amortized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
U.S. agency mortgage-backed
securities $868,483 $ - $(34,721) $833,762
======== ======== ========= =========
At December 31, 2006 and 2005, the fair value of securities pledged to
secure certain borrowings were $672,588 and $833,762, respectively.
The balance of these borrowings at December 31, 2006 and 2005 were $0.
Unrealized losses at December 31, 2006 and 2005 have existed for
longer than twelve months. This decline is considered temporary as the
values of the mortgage-backed securities fluctuate based on changes in
current interest rates and prepayment assumptions related to the
underlying mortgages. Furthermore, the Company expects to hold these
securities sufficiently long enough to recover these unrealized
losses.
Sales of available for sale securities: 2006 2005
---- ----
Proceeds $0 $0
Realized gains 0 0
Realized losses 0 0
The scheduled maturity date of the securities available for sale at
December 31, 2006 is:
Amortized Fair
Cost Value
2007-2011 $ 0 $ 0
2012-2016 32,108 31,325
After 2016 667,776 641,263
------- -------
$699,884 $672,588
======== ========
4. Accounts Receivable
Accounts receivable were $253,866 and $2,585,524 at December 31, 2006
and 2005, respectively. These balances included the following:
2006 2005
Stock subscription receivable from
sale of stock in University Islamic
Financial Corporation $ - $1,500,000
Lease termination receivable - 1,000,000
Other 253,866 85,524
-------- ----------
Total $253,866 $2,585,524
======== ==========
50
5. Loans
Major classifications of loans are as follows as of December 31:
2006 2005
----------- -----------
Commercial $15,705,255 $12,547,975
Real estate - mortgage 32,126,182 29,126,299
Real estate -construction 1,031,027 1,958,485
Installment 1,795,875 1,707,461
Credit cards 268,858 312,106
----------- -----------
Gross Loans 50,927,197 45,652,326
Allowance for loan losses (465,922) (349,416)
----------- -----------
Net Loans $50,461,205 $45,302,910
=========== ============
Changes in the allowance for loan losses were as follows:
2006 2005
---------- ----------
Balance, beginning of year $ 349,416 $ 353,124
Provision charged to operations 153,297 17,209
Recoveries 7,139 12,701
Charge-offs (43,860) (33,618)
---------- ----------
Balance, end of year $ 465,992 $ 349,416
========== ==========
At December 31, 2005, there are loans totaling $10,172 that were past
due over 90 days but still accruing interest. These loans were brought
current shortly after December 31, 2005. There are no past due loans
over 90 days and still accruing interest at December 31, 2006.
Non-accrual loans at December 31 are summarized as follows:
2006 2005
---------- ----------
Non accrual loans:
Real estate - mortgage and
construction loans $ 59,605 $ 317,013
Commercial loans (non real estate) - 32,668
---------- ----------
$ 59,605 $ 349,681
========== ==========
Information regarding impaired loans for the years ended December 31,
is as follows:
Impaired loans: 2006 2005
-------------- ---------- ----------
Loans with no allowance allocated $ - $ -
Loans with allowance allocated $1,240,055 $ 263,344
Amount of allowance for loan losses allocated $ 243,507 $ 30,871
Impaired loans:
Average balance during the year $ 917,591 $ 555,715
Interest Income recognized thereon $ 123,786 $ -
Cash-basis interest income recognized $ 110,145 -
51
6. Premises and equipment, net:
Classifications at December 31 are summarized as follows:
2006 2005
---------- ----------
Land $ 365,000 $ 397,811
Buildings and improvements 1,725,099 1,761,717
Furniture, fixtures, equipment and
software 3,252,640 3,023,891
---------- ----------
5,342,739 5,183,419
Less: accumulated depreciation (2,646,677) (2,380,603)
---------- ----------
Net premises and equipment $2,696,062 $2,802,816
========== ==========
In June 2005, the Bank purchased Hoover, LLC, the owner of the Hoover
Mansion, a 17,000 square foot structure.In December 2005, the Bank
moved its main office and sole branch to the historic Hoover Mansion
located at 2015 Washtenaw Avenue, Ann Arbor, MI. Previously the bank
was located in a facility that it sold in a sale-leaseback transaction
in 2003.
Depreciation expense amounted to $382,219 and $337,592 for the years
ended December 31, 2006 and 2005, respectively.
The Bank leases an ATM drive-thru location in Ann Arbor for $7,200 per
year and one off-site ATM location for $9,000 per year. Midwest leases
its office space for approximately $53,940 per year in Houghton,
Michigan. Total rental expense for all operating leases was $63,942
and $195,958 in 2006 and 2005, respectively. The following table
summarizes the existing contractual obligations of the Company:
--------- Payments Due By Period -----------
Less than More than
Total a year 2008-2009 2010-2011 5 years
-------- -------- -------- -------- ---------
Operating leases $ 91,730 $ 61,140 $ 23,390 $ 7,200 $ -
======== ======== ======== ======== =========
7. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more
were $8,126,622 and $11,454,283 at December 31, 2006 and 2005
respectively.
At December 31, 2006, stated maturities of time deposits were:
2007 $9,609,103
2008 1,938,677
2009 347,895
2010 2,574,606
2011 721,518
Thereafter 409,522
-----------
$15,601,321
===========
The Bank had issued through brokers $1,530,471 and $5,926,000 of time
deposits as of December 31, 2006 and 2005, respectively. These time
deposits have maturities ranging from one to five months and are
included in the table above. These deposits are issued in
denominations of less than $100,000.
The Bank had deposits of $1,157,765 and $1,705,400 from directors,
officers and their affiliates as of December 31, 2006 and 2005,
respectively.
52
8. Stock options
In 1995, the Company adopted a stock option and stock award plan (the
1995 Stock Plan), which provides for the grant of incentive stock
options, as defined in Section 422(b) of the Internal Revenue Code of
1986, as amended, as well as the grant of non-qualified stock options
and other stock awards. The plan provides for the grant to officers,
directors and key employees of the Company, and independent
contractors providing services to the Company, of options to purchase
and other awards of common stock. The exercise price of options
granted under the plan shall be determined by the Board of Directors,
or a compensation committee thereof. Options shall expire on the date
specified by the Board of Directors or such committee, but not more
than 10 years from the date of grant (or five years from the date of
grant for incentive stock options if the grantee owned 10% of the
Company's voting stock at the date of grant). The 1995 Stock Plan
terminated on November 15, 2005, however, all outstanding options
under the plan remain outstanding until expiration, exercise or
forfeiture. The following table summarizes the activity relating to
options to purchase the Company's common stock:
Number of Weighted Average
Options Exercise Price
---------- ----------
Outstanding at January 1, 2005 196,000 $1.69
Granted - 2005 118,463 3.00
Exercised - 2005 (4,000) 1.50
Forfeited - 2005 (3,500) 2.47
----------
Outstanding at December 31,2005 306,963 2.20
Granted - 2006 48,563 3.00
Exercised - 2006 -0- 0.00
Forfeited - 2006 (7,500) 2.47
----------
Outstanding at December 31, 2006 348,026 2.23
==========
-------------------------------------------------------------------------
At December 31, 2006:
Number of options immediately exercisable 312,926
Weighted average exercise price of immediately
exercisable options $2.24
Range of exercise price of options outstanding $1.00 - $3.00
Weighted-average remaining life of options outstanding 4.56 years
The following summarizes assumptions used to value stock options.
2006 2005
---- ----
Risk-free interest rate 7.25% 7.25%
Expected option life 5.0 years 5.0 years
Expected stock price
volatility 22.0% 22.0%
Expected dividends $0 $0
53
9. Employee stock ownership plan (ESOP)
The employees' allocation of ESOP assets is based on their current
compensation, after 1 year of service and upon reaching the age of 21.
The annual contribution to the ESOP is at the discretion of the Board
of Directors. Assets of the plan are comprised entirely of 77,018
shares of the Company's stock at December 31, 2006 and 2005, all of
which were fully allocated at December 31, 2006. Upon retirement from
the plan, participants can receive distributions of their allocated
shares of the Company's stock. The assets of the ESOP are held in
trust and were valued at approximately $160,000, and $139,000 at
December 31, 2006 and 2005, respectively.
10 Minority Interest
The Bank owns an 80% interest in the common stock of Midwest, with the
remaining 20% owned by the President of Midwest. At December 31, 2006
and 2005, total stockholders' equity of Midwest was $3,293,328 and
$2,626,146 resulting in a $657,946 and $524,265 minority interest
reflected on the Company's consolidated balance sheets, respectively.
The results of Midwest's operations for 2006 and 2005 are included in
the Company's consolidated statements of operations.
Also, included in the consolidated financial statements are the
results for University Islamic Financial Corporation (UIFC). The Bank
also owns 80% of UIFC. This corporation was formed on December 30,
2005. An outside investor owns the remaining 20% of the corporation.
At December 31, 2006, total common stockholders' equity of UIFC was
$22,267,069, which includes $10,000,000 in common stock and
$12,374,000 of preferred stock. The minority interest at December 31,
2006 and 2005 was $1,978,613 and $1,977,608, respectively.
The Consolidated Statements of Operations include minority interest
expense of $134,686 and $61,755 in 2006 and 2005, respectively.
11. Commitments and contingencies
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to buy,
sell and fund loans, letters of credit and unused lines of credit. The
Bank's exposure to credit loss in the event of non-performance is
equal to or less than the contractual amount of these instruments. The
Bank follows the same credit policy to make such commitments as that
followed by loans recorded in the consolidated financial statements.
The following is a summary of commitments as of December 31:
2006 2005
----------- -----------
Unused lines of credit $ 4,295,000 $ 4,514,000
Commitments to fund loans 5,704,000 2,019,000
----------- -----------
Total $ 9,999,000 $ 6,533,000
=========== ===========
54
12 Related party transactions
The Bank had loans outstanding of $117,927 and $70,961 to related
officers and directors at December 31, 2006 and 2005, respectively.
There were no related party loans that were originated during 2006 and
2005. Available lines of credit to related parties at the December 31,
2006 and 2005, totaled $208,000 and $169,000 respectively. Related
party loans were made in the normal course of business and were
performing pursuant to terms at December 31, 2006 and 2005.
13. Income taxes
At December 31, 2006 an income tax benefit of $40,000 was recorded due
to expected utilization of net operating loss carry forwards against
2006 expected taxable income. Additionally, current tax expense of
$20,000 was recorded for 2006. The tax benefit increased the net
deferred tax assets included in other assets in the consolidated
balance sheets. The net deferred tax asset at December 31, 2006 and
2005 is comprised of the following:
2006 2005
----------- -----------
Allowance for loan losses $ 158,437 $ 129,584
Net operating loss carry-forward 283,533 227,135
Tax credit carry-forward 1,357,065 1,234,497
Deferred gain on sale leaseback - 207
Donation carry-forward 6,604 10,646
Depreciation 5,111 -
Other 52,185 135,083
----------- ------------
Deferred tax assets 1,862,935 1,737,152
----------- -----------
Servicing rights (515,474) (500,415)
Depreciation - (22,438)
Other (48,843) -
----------- ------------
Deferred tax liabilities (564,317) (522,853)
----------- -----------
Net deferred tax asset 1,298,618 1,214,299
Valuation allowance (1,158,618) (1,114,299)
----------- ------------
Net deferred tax asset $ 140,000 $ 100,000
=========== ============
The components of income tax expense (benefit) for each year ended
December 31 are as follows:
2006 2005
----------- ------------
Current expense $ 20,000 $ -
Deferred expense (benefit) (84,319) 541,488
Change in valuation allowance 44,319 (641,488)
----------- ------------
Income tax benefit $ (20,000) $ (100,000)
=========== ============
The Company has net operating loss carry-forwards of approximately
$834,000, which expire beginning in 2012, and general business credit
carry-forwards of approximately $1,357,000, which expire beginning in
2011. Financial statement tax expense amounts differ from the amounts
computed by applying the statutory federal tax rate of 34% to pretax
income because of operating losses and valuation allowances recorded
to reduce deferred tax assets as noted above.
55
14. Short Term Borrowings
The Bank had a line of credit available from the Federal Home Loan
Bank (the FHLB) in the amount of $3.2 million and $3.7 million at
December 31, 2006 and 2005, respectively. At December 31, 2006,
borrowings were secured by the pledge of specific mortgage loans held
for investment with unpaid principal balances of $4.0 million and
available-for-sale securities with a balance of $672,588.
The Bank had a line of credit available from the Federal Reserve Bank
of Chicago (the FRB) in the amount of $5.0 million and $6.7 million at
December 31, 2006 and 2005, respectively. Borrowings are secured by
the pledge of specific commercial loans held for investment with
unpaid principal balances of $5.9 million as of December 31, 2006. The
following information provides a summary of short-term borrowings for
the years indicated:
2006 2005
---- ----
Amount outstanding at the end of
the year and interest rate $ - $ -
Maximum amount of borrowing outstanding
at any month end during the year $ - $3,800,000
Average amount outstanding during the
year and weighted average rate $81,000 3.21% $1,225,000 3.69%
15. Regulatory matters
University Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by regulators
about components, risk weightings, and other factors.
The Bank is also subject to prompt corrective action capital
requirement regulations set forth by the FDIC. The FDIC requires the
Bank to maintain a minimum of total capital and Tier 1 capital (as
defined) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average total assets (as defined). As of December 31,
2006, the Bank met all capital adequacy requirements to which it is
subject as the Bank presently has a written understanding with its
regulators that the Bank will maintain the ratio of Tier 1 Capital to
average assets at 7% or more.
56
To Be Adequately To Be Well
Capitalized Under Prompt Corrective Capitalized Under Prompt
Actual Action Provisions Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------------------- ----------------------- ----------------------
As of December 31, 2006:
Total capital (to risk weighted assets) $8,142,000 16.7% $3,911,000 8.0 % $4,889,000 10.0 %
Tier I capital (to risk weighted assets) 7,676,000 15.7% 1,955,000 4.0 % 2,933,000 6.0 %
Tier I capital (to average assets) 7,676,000 9.8% 3,122,000 4.0 % 3,903,000 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 %
15. Regulatory Matters (continued)
As of December 31, 2006 and 2005, the most recent guidelines from the
FDIC categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the above
table.
16. Management's Plan Regarding Continuing Operations
At December 31, 2006, the Company had an accumulated deficit of
950,038. University Bancorp's operations are intended to continue in
the future. Management has reviewed operating results, prepared
projections of possible future results, performed other analyses of
its operations to reduce operating costs and entered new product lines
of business.
Management of the Company has implemented a plan to improve core
earnings by moving to University Bank additional low-cost mortgage
escrow deposits held by Midwest, growing the loan portfolio of the
Bank, liquidating other real estate owned and improving the synergy
between its subsidiary operations. Both the Bank and Midwest are
projected to have net income in 2007, however, the Company's continued
operation is dependent upon its ability to maintain profitable
operations and retain adequate capital levels.
17. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair
values for financial instruments. The carrying amount is considered to
estimate fair value for cash and short-term instruments, demand
deposits, short-term borrowings, accrued interest, and variable rate
loans or deposits
57
17. Fair Value of Financial Instruments(continued)
that reprice frequently and fully. Securities fair values are based on
quoted market prices or, if no quotes are available, on the rate and
term of the security and on information about the issuer. For fixed
rate loans or deposits and for variable rate loan or deposits with
infrequent repricing or repricing limits, the fair value is estimated
by the discounted cash flow analysis using current market rates for
the estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses of underlying collateral
values, where applicable. Fair value of loans held for sale is based
on market estimates. Fair value of mortgage servicing rights is
estimated using discounted cash flows based on current market interest
rates net of estimated costs of servicing loans. Fair value of
mortgage sub-servicing rights is based on a multiple of servicing
contract revenue. The fair value of debt is based on currently
available rates for similar financing. The fair value of off-balance
sheet items is based on the fees or cost that would normally be
charged to enter into or terminate such agreements. Fair value of
unrecognized financial instruments includes commitments to extend
credit and the fair value of letters of credit is considered
immaterial.
The carrying amounts and fair values of the Company's financial
instruments were as follows:
December 31, 2006
Carrying Fair
Financial Assets Amount Value
---------------- ----------- -----------
Cash and due from banks $27,381,000 $27,381,000
Securities available for sale 673,000 673,000
Federal Home Loan Bank stock 715,000 715,000
Loans held for sale 1,952,000 1,952,000
Loans, net 50,461,000 49,699,000
Mortgage servicing rights 1,516,000 1,516,000
Accrued interest receivable 305,000 305,000
Financial Liabilities
Deposits 78,882,000 78,895,000
Accrued interest payable 73,000 73,000
December 31, 2005
Carrying Fair
Financial Assets Amount Value
---------------- ----------- -----------
Cash and short term investments $ 7,747,000 $ 7,747,000
Securities available for sale 834,000 834,000
Federal Home Loan Bank stock 941,000 941,000
Loans held for sale 1,447,000 1,447,000
Loans, net 45,303,000 44,948,000
Mortgage servicing rights 1,472,000 1,472,000
Accrued interest receivable 205,000 205,000
Financial Liabilities
Deposits 56,021,000 56,136,000
Accrued interest payable 111,000 111,000
58
18. Segment Reporting
The Company's operations include two primary segments: retail banking
and mortgage banking. Through its banking subsidiary's branch in Ann
Arbor, the Company provides traditional community banking services
such as accepting deposits, making loans, and providing cash
management services to individuals and local businesses. Mortgage
banking activities includes servicing of residential mortgage loans
for others (See Note 2).
The Company's two reportable segments are strategic business units
that are separately managed as they offer different products and
services and have different marketing strategies. In addition, the
mortgage banking segment services a different customer base from that
of the retail banking segment.
The segment financial information provided below has been derived from
the internal profitability reporting system used by management to
monitor and manage the financial performance of the Company. The
accounting policies of the two segments are the same as those
described in the summary of significant accounting policies. The
Company evaluates segment performance based on profit or loss before
income taxes, not including nonrecurring gains and losses. Certain
indirect expenses have been allocated based on actual volume
measurements and other criteria, as appropriate. The Company accounts
for transactions between segments at current market prices. Segment
profit is measured before allocation of corporate overhead and income
tax expense. Information about reportable segments for the years ended
December 31, 2006 and 2005 follows:
2006
---- Retail Mortgage
Banking Banking Eliminations Totals
----------- ----------- ----------- -----------
Interest income $ 4,009,528 $ 65,764 $ (21,814) $ 4,053,478
Gain (loss) on the sale of
mortgage loans - 100,450 - 100,450
Other non-interest income 797,714 4,312,470 (742,789) 4,367,395
Interest expense 1,896,200 114,377 (716,531) 1,294,046
Provision for loan losses 153,297 - - 153,297
Salaries and benefits 1,630,227 1,812,724 - 3,442,951
Occupancy, net 381,350 143,629 - 524,979
Other operating expense 2,049,037 1,392,077 86,634 3,527,748
Income(loss) before tax
expense (1,302,869) 1,015,877 (134,706) (421,698)
Income tax (benefit) expense (16,649) 348,695 (352,046) 20,000
Segment profit(loss) (1,286,220) 667,182 217,340 (401,698)
Segment assets 83,366,458 3,905,283 - 87,271,741
Capital expenditures 173,453 102,012 - 275,465
Depreciation 242,892 139,327 - 382,219
Amortization (14,972) 254,047 - 239,075
59
18. Segment Reporting (contiued)
2005
---- Retail Mortgage
Banking Banking Eliminations Totals
----------- ----------- ----------- -----------
Interest income $ 3,265,522 $ 42,393 $ (35,024) $ 3,272,891
Gain (loss) on the sale of
mortgage loans (6,172) 314,820 - 308,648
Other non-interest income 2,647,645 3,163,983 (228,946) 5,582,682
Interest expense 1,133,677 35,429 (215,970) 953,136
Provision for loan losses 17,209 - - 17,209
Salaries and benefits 1,440,562 1,560,356 - 3,000,918
Occupancy, net 356,791 154,376 6,000 517,167
Other operating expense 1,652,639 1,125,193 8,790 2,786,622
Income before tax
expense 1,306,117 645,842 (62,790) 1,889,169
Income tax (benefit) expense (100,000) 219,927 (219,927) (100,000)
Segment profit 1,406,117 425,915 157,137 1,989,169
Segment assets 61,914,922 2,624,990 - 64,539,912
Capital expenditures 2,177,081 106,623 - 2,283,704
Depreciation 171,755 165,837 - 337,592
Amortization 2,581 135,155 - 137,736
19. Quarterly Financial Data - Unaudited
The following tables represent summarized data for each of the
quarters in 2006 and 2005 (in thousands, except income (loss) per
share data).
2006 Quarter Quarter Quarter Quarter
---- Ended Ended Ended Ended
March 31 June 30 September 30 December 31
--------- --------- --------- ---------
Interest income $ 913 $ 998 $ 922 $ 1,220
Interest expense 275 328 313 378
--------- --------- --------- ---------
Net interest income 638 670 609 842
Provision for losses 20 29 57 47
--------- --------- --------- ---------
Net interest income after
Provision for losses 618 641 552 795
Loan set-up and other fees 310 324 423 247
Loan servicing and sub-servicing fees 529 608 619 635
Gain on sale of loans 39 - (1) 62
Other non-interest income 171 104 157 242
Non-interest expense 1,654 1,906 1,883 2,053
--------- --------- --------- ---------
Income tax expense(benefit) - - - (20)
--------- --------- --------- ---------
Net (loss) available to common shareholders $ 13 ($229) ($133) ($52)
========= ========= ========= ==========
Basic and diluted loss per share $0.00 ($0.06) ($0.03) $(0.01)
========= ========= ========= ==========
Weighted average shares outstanding 4,147,878 4,245,065 4,248,378 4,248,378
========= ========= ========= =========
Significant 4th quarter event. During the fourth quarter of 2006, net
interest income increased significantly. In mid-December 2006, Midwest
Loan Services transferred the remainder of the approximately $30
million in custodian funds under its control of its servicing and
60
19. Quarterly Financial Data - Unaudited (continued)
subservicing customers to University Bank from another bank. These
deposits were invested in interest bearing assets, particularly
Federal Funds and Bank Deposits. The average balance for this asset
category increased substantially during the fourth quarter resulting
in an increase in net interest income.
2005 Quarter Quarter Quarter Quarter
---- Ended Ended Ended Ended
March 31 June 30 September 30 December 31
--------- --------- --------- ---------
Interest income $ 802 $ 813 $ 830 $ 828
Interest expense 220 239 278 216
--------- --------- --------- ---------
Net interest income 582 574 552 612
Provision for losses 15 2 - -
--------- --------- --------- ---------
Net interest income after
Provision for losses 567 572 552 612
Loan set-up and other fees 398 346 391 262
Loan servicing and sub-servicing fees 369 445 441 481
Gain on sale of loans 104 93 93 19
Other non-interest income 152 138 129 2,031
Non-interest expense 1,426 1,654 1,598 1,627
--------- --------- --------- ---------
Income tax expense - - - (100)
--------- --------- --------- ---------
Net (loss) available to common shareholders $ 164 ($60) $8 $ 1,878
========= ========= ========= =========
Basic and diluted loss per share $0.04 ($0.02) $0.00 $ 0.46
========= ========= ========= =========
Weighted average shares outstanding 4,138,849 4,143,878 4,143,878 4,144,269
========= ========= ========= =========
Significant 4th quarter event. In the fourth quarter of 2005, the
Company executed two transactions resulting in a material increase in
other non-interest income. In the first transaction, the Bank agreed
to terminate its lease agreement early in exchange for $800,000. The
Bank moved out of its leased facility in December 2005 and into a new
facility that it purchased in June 2005. This early move out also
resulted in recognition of the remainder of the deferred gain on sale
leaseback in the 4th quarter. This amounted to $129,272. In the other
transaction, the Bank profited $1,000,000 from the sale of 20%
interest in the Islamic Banking subsidiary for a sale price of
$3,000,000.
61
20. Parent Company Only Condensed Financial Information
Condensed Balance Sheet
December 31, December 31,
2006 2005
----------- -----------
ASSETS
Cash and cash equivalents $ 2,066 $ 3,747
Investment in University Bank 5,267,331 5,310,893
Other assets 8,941 2,791
----------- -----------
Total Assets $ 5,278,338 $ 5,317,431
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 27,091 $ 16,850
----------- -----------
Total Liabilities 27,091 16,850
Stockholders' Equity 5,251,247 5,300,581
----------- -----------
Total Liabilities and Stockholders' Equity $ 5,278,338 $ 5,317,431
=========== ===========
62
20 Parent Company Only Condensed Financial Information (continued)
Condensed Statements of Income
2006 2005
----------- -----------
INCOME:
Interest and dividends on investments $ 222 $ 48
Other 24,000 41,975
Total (loss)income 24,222 42,023
EXPENSES:
Stock compensation 277,681 -
Interest 75 332
Public listing 44,787 41,288
Professional fees 45,313 53,139
Other miscellaneous 7,077 1,953
----------- -----------
Total Expense 374,933 96,712
Loss before federal income taxes
and equity in undistributed
net income(loss)of subsidiaries (350,711) (54,689)
Federal income taxes - -
----------- -----------
Loss before equity in undistributed
net income(loss) of subsidiaries (350,711) (54,689)
Equity in undistributed net income(loss)
of subsidiaries (50,987) 2,043,858
----------- ----------
Net income(loss) $ (401,698) $1,989,169
=========== ==========
63
20. Parent Company Only Condensed Financial Information (continued)
Condensed Statements of Cash Flows
2006 2005
----------- -----------
Operating activities:
Net income(loss) $ (401,698) $ 1,989,169
Adjustments to reconcile net income(loss) to net cash used in
operating activities:
Stock awards 5,479 -
Non-employee stock awards 272,199 -
Net change in:
Other assets (6,150) 346
Other liabilities 10,241 (7,008)
Investment in subsidiaries 50,987 (2,043,858)
----------- ------------
Net cash used in operating activities (68,942) (61,351)
----------- -----------
Investing activities:
Additional investment in subsidiary - (199,677)
----------- ------------
Net cash used in investing activities - (199,677)
----------- -----------
Financing activities:
Principal payment on notes payable - (34,000)
Dividends on preferred stock (4,739) (12,361)
Issuance of preferred stock 72,000 264,510
Issuance of common stock - 41,000
----------- -----------
Net cash provided by financing activities 67,261 259,149
----------- -----------
Net change in cash and cash equivalents (1,681) (1,879)
Cash and cash equivalents:
Beginning of year 3,747 5,626
----------- -----------
End of year $ 2,066 $ 3,747
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 75 $ 589
Dividends on preferred stock converted to
additional shares of preferred stock $ 26,785 $ 3,400
64
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
ITEM 8A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Disclosure controls are procedures that are designed with an
objective of ensuring that information required to be disclosed
in our company's periodic reports filed with the Securities and
Exchange Commission, such as this report on Form 10-KSB, is
recorded, processed, summarized, and reported within the time
periods specified by the Securities and Exchange Commission.
Disclosure controls also are designed with an objective of
ensuring that such information is accumulated and communicated to
our company's management, including our chief executive officer
and chief financial officer, in order to allow timely
consideration regarding required disclosures
As of the end of the period covered by this report, an evaluation
was carried out under the supervision and with the participation
of the Company's management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in Rules 13a-14(c) under the Securities Exchange Act
of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the operation of these
disclosure controls and procedures were effective.
(b) Changes in Internal Controls.
Except as described above, there were no significant changes in
the Company's internal controls over financial reporting during
the fourth quarter of the fiscal year ended December 31, 2006,
that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting. However, management intends to implement the changes
described below. The Company has recorded material post closing
audit adjustments to the consolidated financial statements. In
addition, the Company has not timely filed certain SEC reports,
including the Form 10-K for 2006 with the Securities Exchange
Commission (SEC) within the required due dates. The above items,
under Section 404 of the Sarbanes Oxley Act of 2002, constitute
significant deficiencies and collectively material weaknesses in
internal controls over financial reporting. The Company seeks to
implement a short and long-term correction of these internal
control deficiencies and believes it can make progress toward
correction of these matters
Item 8B. - Other Information
None
65
PART III.
Item 9. - Directors, Executive Officers, Promoters, Control Persons, Compliance
with Section 16(a) of the Exchange Act
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement for its 2006 Annual
Meeting (the "Proxy Statement") to be under the captions:
Election of Directors
Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance
We have adopted a Code of Ethics for all employees. A copy of the Code of Ethics
is available upon request by writing to the Chief Financial Officer, University
Bancorp, Inc., 2015 Washtenaw, Ann Arbor, Michigan 48104.
Item 10. - Executive Compensation
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement to be under the
captions:
Executive Compensation
Compensation Plans
Item 11. - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Security Ownership of Certain Beneficial Owners and
Management
Equity Compensation Plan Information
The University Bancorp, Inc. 1995 Stock Option Plan authorizes stock options
for issuance to employees, consultants and directors in exchange for services.
The following table sets forth certain information regarding the above
referenced equity compensation plan as of December 31, 2006.
66
..
Equity Compensation Plan Information
(a) (b) (c)
Number of
Number of securities remaining
securities to be available for future
issued upon exercise Weighted-average issuance under equit
of outstanding exercise price of compensation plans
options, warrants outstanding options, (excluding securities
Plan Category and Rights warrants and rights reflected in column (a))
------------- ------------------ --------------------- --------------------------
Equity compensation
plans approved by
security holders 348,026 $2.23 0
Equity compensation
plans not approved
by security holders 0 NA 0
Total 348,026 $2.23 0
Item 12. - Certain Relationships and Related Transactions and Director
Independence
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Certain Relationships and Related Transactions
Corporate Governance
Item 13. - Exhibits
(a) Index of Financial Statements:
The following statements are filed as part of this Report:
Audited consolidated balance sheets as of December 31, 2006 and
December 31, 2005, and consolidated statements of operations,
comprehensive (loss) income, stockholders' equity and cash flows
for the two year period ended December 31, 2006 and 2005 of the
Company.
Schedules to the consolidated financial statements required by
Article 9 of Regulation S-X are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(b) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company,
as amended (incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
67
3.1.1 Certificate of Amendment, dated June 10, 1998, of the
Company's Certificate of Incorporation (incorporated by
reference to Exhibit 3.1.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
3.2 Composite By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1989).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997
issued to North Country Bank & Trust (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated
by reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.2.1 Amendment to the ESOP, effective as of December 31, 1991
(incorporated by reference to Exhibit 10.2.A to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991).
10.3 University Bank 401(k) Profit Sharing Plan, adopted August
1, 1996, effective as of January 1, 1996 (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
10.4 1995 Stock Plan of the Company (incorporated by reference
to Exhibit A to the definitive Proxy Statement of the
Company for 1996 Annual Meeting of Stockholders).
10.4.1 Form of Stock Option Agreement related to the 1995 Stock
Plan (incorporated by reference to Exhibit 10.7.1 to the
Annual Report on Form 10-K for the year ended December 31,
1995).
10.5 Letter, dated December 1, 1989, from Federal Reserve Bank
of Minneapolis (incorporated by reference to Exhibit
10.9).
10.6 Federal Income Tax Allocation Agreement Between Newberry
State Bank and Newberry Holding Inc. dated March 21, 1992
(incorporated by reference to Exhibit 10.11).
10.6.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc.
dated May 21, 1991 (incorporated by reference to Exhibit
10.11.1).
21 Subsidiaries of Registrant: List of subsidiaries filed herewith.
23.1 Consent of UHY LLP, Independent Registered Public Accounting Firm
Registered Public Accounting Firm
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
68
32.1 Certificate of the Chief Executive Officer and of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 14: Principal Accountant Fees and Services.
Information relating to principal accountant fees and services is contained
on page 20, under the caption "Independent Public Accountants" in the University
Bancorp, Inc. definitive Proxy Statement relating to the 2007 Annual Meeting of
Stockholders and the information within that section is incorporated by
reference.
69
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIVERSITY BANCORP, INC.
By: /s/Stephen Lange Ranzini
-----------------------------------------
Stephen Lange Ranzini,
President and Chief Executive Officer
Date: April 16, 2007
By: /s/Nicholas K. Fortson
-----------------------------------
Nicholas K. Fortson
Chief Financial Officer
Date: April 16, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Stephen Lange Ranzini
------------------------- Director, President April 16, 2007
Stephen Lange Ranzini
/s/ Charles McDowell Director, Chairman April 16, 2007
---------------------------
Charles McDowell
/s/ Gary Baker Director April 16, 2007
------------------------
Gary Baker
/s/ Michael Talley Director April 16, 2007
---------------------------
Michael Talley
/s/Dr. Joseph Lange Ranzini Director April 16, 2007
------------------------------
Dr. Joseph Lange Ranzini
/s/Paul Lange Ranzini Director April 16, 2007
---------------------------
Paul Lange Ranzini
70
Index of Exhibits
Sequentially
Exhibit Number and Description Numbered Page
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the June 30, 1996 10-Q).
3.1.1 Certificate of Amendment, dated June 10, 1998, of the Company's
Certificate of Incorporation (incorporated by reference to Exhibit
3.1.1 to the June 30, 1998 10-Q).
3.2 Composite By-laws of the Company (incorporated by reference to Exhibit
3.2 to the 1989 10-K).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997 issued to
North Country Bank & Trust (incorporated by reference to Exhibit 10.1
to the 1997 10-K))
10.2 University Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"), as
amended November 27, 1990 (incorporated by reference to Exhibit 10.2 to
the 1990 10-K).
10.2.1 Amendment to the ESOP, effective as of December 31, 1991 (incorporated
by reference to Exhibit 10.2.A to the 1991 10-K).
10.3 University Bank 401(k) Profit Sharing Plan, adopted August 1, 1996,
effective as of January 1, 1996 (incorporated by reference to Exhibit
10.3 to the 1996 10-K).
10.4 1995 Stock Plan of the Company (incorporated by reference to Exhibit A
to the definitive Proxy Statement of the Company for the 1996 Annual
Meeting of Stockholders.
10.4.1 Form of Stock Option Agreement related to the 1995 Stock Plan
(incorporated by reference to Exhibit 10.7.1 to the 1995 10-K).
10.5 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989
10-K).
10.6 Federal Income Tax Allocation Agreement Between
Newberry State Bank and Newberry Holding Inc. dated
March 21, 1992 (incorporated by reference to
Exhibit 10.11 to the 1991 10-K).
71
10.6.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc.
dated May 21, 1991 (incorporated by reference to
Exhibit 10.11.1 to the 1991 10-K).
21 Subsidiaries of Registrant. 73
23.1 Consent of UHY LLP, Independent Registered Public Accounting
Firm
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 75
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 76
32.1 Certificate of the Chief Executive Officer and of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 77
32.3 Certificate of the Chief Financial Officer of University
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 78
72
Exhibit 21. Subsidiaries of Registrant.
University Bank, a Michigan banking corporation
University Insurance & Investment Services, Inc., a Michigan
Corporation (100% owned by Bank)
Midwest Loan Services, Inc., a Michigan Corporation (80% owned by Bank)
Hoover, LLC, a Michigan limited Liability Corporation (100% owned
by Bank)
University Islamic Financial Corporation, a Michigan Corporation (80%
owned by Bank)
73
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM
W
We have issued our report dated April 9, 2007 accompanying the consolidated
financial statements included in the annual report of University Bancorp, Inc.
on Form 10-KSB for the years ended December 31, 2006 and 2005. We hereby consent
to the incorporation by reference of said report in the Registration Statement
of University Bancorp, Inc. on Form S-8 (File No. 333-109930) effective October
23, 2003.
/S/ UHY LLP
Southfield, Michigan
April 13, 2007
74
Exhibit 31.1
FORM 10-KSB 302 CERTIFICATION
I, Stephen Ranzini certify that:
1) I have reviewed this annual report on Form 10-KSB of
University Bancorp, Inc.;
2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of the annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: April 16, 2007 /s/Stephen Lange Ranzini
------------------ ----------------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
75
Exhibit 31.2
FORM 10-KSB 302 CERTIFICATION
I, Nicholas K. Fortson certify that:
1) I have reviewed this annual report on Form 10-KSB of
University Bancorp, Inc.;
2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of the annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: April 16, 2007 /s/Nicholas K. Fortson
------------------ ----------------------
Nicholas K. Fortson
Chief Financial Officer
76
Exhibit 32.1
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of University Bancorp, Inc. (the
"Registrant") on Form 10-KSB for the period ended December 31, 2006 as filed
with the Securities and Exchange Commission, hereof (the "Report"), the
undersigned officer certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
University Bancorp, Inc
Date: April 16, 2007 By: /s/ Stephen Lange Ranzini
------------------ --------------------------
Stephen Lange Ranzini
President and Chief Executive Officer
77
Exhibit 32.2
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of University Bancorp, Inc. (the
"Registrant") on Form 10-KSB for the period ended December 31, 2006 as filed
with the Securities and Exchange Commission, hereof (the "Report"), the
undersigned officer certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
University Bancorp, Inc
Date: April 16, 2007 By: /s/ Nicholas K. Fortson
-----------------------
Nicholas K. Fortson
Chief Financial Officer
78