<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to _______________
Commission File Number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
(State of incorporation) (IRS Employer Identification Number)
209 East Portage Avenue,
Sault Ste. Marie, Michigan 49783
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 635-9794
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.010 par value Outstanding at November 11, 1996
1,249,777 shares
page 1 of 34 pages
Exhibit index on sequentially numbered page 33
<PAGE> 2
FORM 10-Q
TABLE OF CONTENTS
PART I - Financial Information
- ------------------------------
Item 1. Financial Statements PAGE
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Summary 10
Results of Operations 11
Liquidity and Capital Resources 22
PART II - Other Information
- ---------------------------
Item 1. Legal Proceedings 27
Item 5. Other Information
Parent Company Condensed
Financial Information 28
Item 6. Exhibits & Reports on Form 8-K 32
Signature 32
- ---------
Exhibit Index 33
Item 1. Financial Data Schedule 34
______________________________________________________
The information furnished in these interim statements reflects
all adjustments and accruals which are, in the opinion of management,
necessary for a fair statement of the results for such periods, and
reflect adjustments which are solely of a normal, recurring nature.
The results of operations in the interim statements are not
necessarily indicative of the results that may be expected for the
full year.
<PAGE> 3
Part 1 - Financial Information 3
Item 1. - Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,1996 and December 31,1995
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
ASSETS ------- -------
<S> <C> <C>
Cash and due from banks $ 1,836,514 $ 578,216
Federal funds sold 5,592,238 1,359,415
----------- -----------
Total cash and cash equivalents 7,428,752 1,937,631
Securities available for sale (note 2) 8,072,598 13,090,547
Loans held for sale 18,761,148 7,983,154
Loans, net 17,425,517 8,953,518
Premises and equipment 2,112,554 1,360,283
Mortgage servicing rights 2,381,550 2,936,703
Investment in and Advances to
Michigan BIDCO 796,626 765,858
Other real estate owned - 130,596
Other assets 1,988,249 1,116,238
----------- -----------
Total other assets 7,278,979 6,309,678
----------- -----------
TOTAL ASSETS $58,966,994 $38,274,528
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 4
UNIVERSITY BANCORP, INC. AND SUB 4
Consolidated Balance Sheets
September 30,1996 and December 31,1995
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY ------- -------
<S> <C> <C>
Deposits:
Demand - non interest bearing $ 2,717,570 $ 1,103,921
Demand - interest bearing 13,311,359 1,642,425
Savings 838,342 1,075,328
Time 27,452,067 16,923,492
----------- -----------
Total Deposits 44,319,338 20,745,166
FHLB advances 7,000,000 10,000,000
Mortgage escrow 1,264,252 1,055,337
Note payable 962,500 1,000,000
Deferred Noncompete income 110,827 137,080
Other Liabilities 823,426 484,912
----------- -----------
Total Liabilities 54,480,343 33,422,495
----------- -----------
Minority Interest 196,953 201,135
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
issued 0 shares in both 1995 and 1994 - -
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
issued and outstanding
1,290,823 shares in 1996
and 1,276,125 shares in 1995 12,908 12,761
Treasury Stock - 41,046 shares in 1996
and 37,282 shares in 1995 (160,754) (139,808)
Additional Paid-in-Capital 2,881,314 2,799,656
Retained earnings 1,594,223 1,836,231
Net unrealized gain (loss) on securities
available for sale, net of tax
of ($19,572) in 1996, and
$73,181 in 1995. (37,993) 142,058
----------- -----------
Total Stockholders' equity 4,289,698 4,650,898
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $58,966,994 $38,274,528
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 5
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Periods Ended Periods Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 731,768 $ 329,437 $ 1,932,746 $ 899,422
Interest on securities:
U.S. Treasury Securities 268 - 33,172 -
U.S. Government agencies 109,361 259,509 406,734 791,461
State and political subdivisions - 452 - 4,056
Other securities 24,125 6,744 58,582 14,641
Interest on bank deposits 8,742 5,836 33,432 25,919
Interest on federal funds 59,272 15,099 152,199 42,662
---------- ---------- ----------- -----------
Total interest income 933,536 617,077 2,616,865 1,778,161
---------- ---------- ----------- -----------
Interest expense:
Interest on deposits:
Demand deposits 221,681 27,536 378,939 100,871
Savings deposits 10,688 19,843 42,769 59,652
Time certificates of deposit 401,288 232,518 1,087,993 577,954
Bank borrowings 102,608 155,459 389,270 441,461
Repurchase agreements - 9,143 - 91,869
Interest expense on note payable 17,190 18,291 72,261 107,002
---------- ---------- ----------- -----------
Total interest expense 753,455 462,790 1,971,232 1,378,809
---------- ---------- ----------- -----------
Net interest income 180,081 154,287 645,633 399,352
Provision for loan losses 98,000 1,200 128,000 3,600
---------- ---------- ----------- -----------
Net interest income after
provision for loan losses 82,081 153,087 517,633 395,752
---------- ---------- ----------- -----------
Other income:
Net security gains 313,983 19,550 409,844 51,647
Increase(Decrease) in market value
of Loans Held for Sale 73,917 - (91,471) -
Service charges and Fees 54,640 1,055 62,153 3,614
Foreign exchange income 7,374 21,879 26,938 54,322
Mortgage banking income 873,855 39,793 1,709,656 347,648
Gain on sale of servicing rights 232,011 - 232,011 -
Profit (loss) from equity investment in
Michigan BIDCO (8,821) 33,372 31,179 103,854
Other 32,190 1,756 136,299 22,770
---------- ---------- ----------- -----------
Total other income 1,579,149 117,405 2,516,609 583,855
---------- ---------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 6
Consolidated Statements of Income (continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Periods Ended Periods Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Other expenses:
Salaries and wages $ 670,769 $ 95,858 $1,573,201 $ 275,572
Employee benefits 93,021 16,511 244,277 51,240
Occupancy, net 81,115 29,661 230,056 58,736
Taxes other than income 9,645 (41,117) 21,401 (26,216)
Data processing and equipment expense 89,212 21,299 256,338 66,410
Correspondent bank service charges 7,015 5,390 15,664 22,476
Advertising 46,697 9,207 115,956 15,401
Net expense of other real estate owned 377 5,380 1,393 12,897
FDIC insurance 500 (3,430) 1,500 32,270
Mortgage banking expense 93,240 5,751 195,433 42,610
Legal and audit expense 76,368 56,995 205,719 268,176
Other operating expenses 327,516 57,925 673,346 228,626
---------- ---------- ---------- ----------
Total other expenses 1,495,475 259,430 3,534,284 1,048,198
---------- ---------- ---------- ----------
Income (Loss) before income taxes 165,755 11,062 (500,042) (68,591)
---------- ---------- ---------- ----------
Income taxes (benefit) (14,210) (4,175) (258,033) (53,630)
---------- ---------- ---------- ----------
Net Income (Loss) $ 179,965 $ 15,237 $ (242,009) $ (14,961)
---------- ---------- ---------- ----------
Earnings(Loss) per common share (Note 1) $ 0.144 $ 0.013 $ (0.194) ($0.013)
---------- ---------- ---------- ----------
Weighted average shares outstanding (Note 1) 1,250,663 1,195,577 1,249,842 1,195,929
---------- ---------- ---------- ----------
Dividends declared per share $ --- $ --- $ --- $ ---
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 7
UNIVERSITY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine-Month
Periods Ended
September 30,
1996 1995
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (242,009) $ (14,961)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 384,215 100,065
Provision for loan loss 128,000 3,600
Mortgage loans originated for sale (196,463,178) (53,461,521)
Proceeds from sale of loans 176,566,989 45,625,889
Net loss/(gain) on loan sales (630,380) (1,153)
Net amortization/accretion on securities (21,273) (9,889)
Gain on sale of available for
sale securities (409,844) (51,647)
Loss/(Gain) on sale of trading account
securities 65,236 (7,973)
Proceeds from sales of trading account
securities 9,683,339 6,059,528
Change in:
Investment in Northern Michigan BIDCO (30,768) (103,854)
Purchased mortgage servicing rights 368,999 (468,002)
Other real estate 130,596 (40,705)
Increase in other assets (764,973) (596,079)
Increase/(Decrease) in other liabilities 308,079 (834,534)
------------- ------------
Net cash from (used in)
operating activities (10,926,972) (3,801,236)
------------- ------------
Cash flow from investing activities:
Purchase of available for sale
securities (10,702,723) (7,589,160)
Proceeds from sales of available for
sale securities 9,904,101 10,709,820
Loans granted net of repayments (8,599,999) (2,960,747)
Premises and equipment expenditures (950,332) (778,813)
Principal paydowns on available for
sale securities 5,975,656 1,742,080
------------- ------------
Net cash from (used in)
investing activities (4,373,297) 1,123,180
------------- ------------
Cash flow from financing activities:
Net increase in deposits 23,574,171 5,618,602
Other Bank Borrowings (3,000,000) 200,000
Net increase(decrease) in mortgage escrow accounts 208,915 (151,066)
Amount due to Broker - (1,288,169)
Principal payment on notes payable (37,500) -
Issuance of common stock 66,750 -
Purchase of treasury stock (20,946) (50,423)
------------- ------------
Net cash from
financing activities 20,791,390 4,328,944
------------- ------------
Net change in cash and
cash equivalents 5,491,121 1,650,888
Cash and cash equivalents:
Beginning of period 1,937,631 1,514,679
End of period $ 7,428,752 $ 3,165,567
------------- ------------
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 1,719,804 $ 1,296,288
Cash paid for income taxes - 881,719
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
NAME CHANGE. In June 1996, the Company changed its name from Newberry
Bancorp, Inc. to University Bancorp, Inc.
See note 1 of Notes to Financial Statements incorporated by reference in
the Company's 1995 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from the
books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and
financial position for the interim periods. Such financial statements generally
conform to the presentation reflected in the Company's 1995 Annual Report on
Form 10-K, and reflect adjustments which are solely of a normal, recurring
nature. The current interim periods reported herein are included in the fiscal
year subject to independent audit at the end of the year.
Earnings per share are calculated based on the weighted average number of
common shares outstanding during each period as follows: 1,250,663 and
1,195,577 for the three months ended September 30, 1996 and 1995,
respectively, and 1,249,842 and 1,195,929 for the nine months ended September
30, 1996 and 1995, respectively. Stock options are considered not dilutive and
therefore, not included in earnings per share calculations.
Subsequent to September 30, 1996, the Company agreed to repurchase 25,000
shares of its common stock at $5.00 per share from a stockholder pursuant to
the terms of the agreement whereby the Company acquired 80% of the outstanding
common stock of Midwest Loan Services on December 1, 1995.
(2) Available-for-sale Securities
The Bank's available-for-sale securities portfolio at September 30, 1996
had a net unrealized loss of approximately $57,000 as compared with a net
unrealized gain of approximately $86,000 at June 30, 1996 and $215,000 at
December 31, 1995, a decrease of $272,000 and $129,000, respectively, mainly
due to sales of securities at a profit during the periods. The bulk of the
securities were sold to provide funds for increased loan demand. Certain
equity securities of Federal Agricultural Mortgage Corp. (NASDAQ - FAMCK) held
by the Bank were sold during the quarter ended September 30, 1996 in response
to the sharp rise in the market value of these securities.
<PAGE> 9
<TABLE> 9
<CAPTION>
September 30, 1996
--------------------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury 499 - - 499
U.S. agency mortgage-backed 6,327 34 (103) 6,258
Other mortgage-backed 342 - - 342
U.S. agency equity 848 - - 848
Other equity 114 14 (2) 126
Total securities
available for sale $8,130 $48 $(105) $8,073
====== === ====== ======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed 6,685 33 (131) 6,587
Other mortgage-backed - - - -
U.S. agency equity 1,032 151 - 1,183
Other equity 110 33 - 143
Total securities
available for sale $7,827 $217 $(131) $7,913
====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $10,243 $163 $(63) $10,343
Other mortgage-backed 1,680 29 - 1,709
U.S. agency equity 842 13 - 855
Other equity 111 73 - 184
Total securities
available for sale $12,876 $278 $(63) $13,091
======= ==== ===== =======
</TABLE>
<PAGE> 10
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the nine months ended September 30, 1996 and 1995:
<TABLE>
<S> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1996 PRE-TAX INCOME (LOSS) SUMMARY
COMMUNITY BANKING $(730,906)
MIDWEST LOAN SERVICES (450)
VARSITY FUNDING 131,612
VARSITY MORTGAGE 176,074
EQUITY IN EARNINGS OF MICHIGAN BIDCO 31,179
CORPORATE OFFICE (94,517)
---------
TOTAL $(487,008)
NINE MONTHS ENDED SEPTEMBER 30, 1995 PRE-TAX INCOME (LOSS) SUMMARY
COMMUNITY BANKING (156,712)
EQUITY IN EARNINGS OF
NORTHERN MICHIGAN BIDCO 103,854
CORPORATE OFFICE (15,733)
---------
Total $ (68,591)
</TABLE>
For the three months ended September 30, 1996, net income of $179,965 was
realized versus net income of $15,237 in the same period in 1995. Net interest
income increased to $180,081 in the 1996 period from $154,287 in the 1995
period, and other income was $1,579,149 in the 1996 period versus $117,405 in
the 1995 period. The increase in net income was primarily the result of the
increase in other income, which was principally a result of a $834,062 increase
in the Bank's mortgage banking income, an increase in the market value of loans
held for sale of $73,917, a gain on the sale of mortgage servicing rights of
$232,011, and a net increase in security gains of $294,433.
For the nine months ended September 30, 1996, a net loss of $242,009 was
realized versus a net loss of $14,961 in the same period in 1995. Net interest
income increased to $645,633 in the 1996 period from $399,352 in the 1995
period, and other income was $2,516,609 in the 1996 period versus $583,855 in
the 1995 period. The increase in net loss was primarily the result of the
increase in other operating expenses in the quarter. Other operating expense
increased to $3,534,284 in the 1996 period from $1,048,198 in the 1995 period.
Other operating expenses increased in both the three and nine months
periods as a result of the start-up of the Ann Arbor main office, the start-up
of the Varsity Mortgage operation, and the increased level of expenses over the
prior year related to these operations and to the acquisition of Midwest Loan
Services and the start-up of Varsity Funding.
The net loss of the Company for the nine months ended September 30, 1995
was principally a result of a lack of profitability from the
Company's banking operations following the sale in December 1994 of the bulk of
the Bank's retail deposits and loans, which was only partially offset by the
equity in the earnings of Michigan BIDCO and income from the mortgage banking
operation.
Net income per share in the three months ended September 30, 1996 was
$0.144, and in
<PAGE> 11
11
the three months ended September 30, 1995 was $0.013 per share. Net loss per
share in the nine months ended September 30, 1996 was ($0.194), and in the nine
months ended September 30, 1995 was ($0.013) per share.
During the nine months ended September 30, 1996 there was a decrease of
$180,051 in the FASB 115 value of the securities available-for-sale, versus the
nine months ended September 30, 1995 when there was an improvement of $609,399
in the FASB 115 value of the securities available-for-sale.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased to $180,081 for the three months ended
September 30, 1996 from $154,287 for the three months ended September 30, 1995.
Net interest income rose from the year ago period because of an increase in
the average balance of loans and a decrease in the percentage cost of interest
bearing liabilities. Partially offsetting these trends, the yield on interest
earning assets decreased to 8.10% in the 1996 period from 8.26% in the 1995
period. The cost of interest bearing liabilities decreased to 6.15% in the
1996 period from 6.31% in the 1995 period, causing net interest income as a
percentage of total earning assets to remain relatively constant, with a
decrease to 1.95% from 1.96%.
For the nine month period ended September 30, 1996, net interest income
increased to $645,633 from $399,352 in the 1995 period. The yield on interest
earning assets increased to 7.92% in the 1996 period from 7.83% in the 1995
period. The cost of interest bearing liabilities decreased to 5.95% in the
1996 period from 6.41% in 1995 period, resulting in an increase in net interest
income as a percent of total average earning assets to 1.97% from 1.42%.
Interest income
Interest income increased to $933,536 in the quarter ended September 30,
1996 from $617,077 in the quarter ended September 30, 1995. The average volume
of interest earning assets increased to $56,731,875 in the 1996 period from
$35,147,166 in the 1995 period, an increase of 61.4%. The increased volume of
earning assets was due to a 145.7% increase in loans. Interest income
increased as a result of an increase in earning assets. The overall yield on
earning assets decreased from 8.26% to 8.10%, in line with a drop in the yield
on loans from 9.99% to 9.03%, as more earning assets were invested in
loans, and lower yielding investment securities were sold to fund loan growth.
Interest income increased in the nine months ended September 30, 1996 to
$2,616,865 from $1,778,161 in the nine months ended September 30, 1995. The
average volume of interest earning assets increased to $48,620,761 in the 1996
period from $35,038,520 in the 1995 period, an increase of 38.8%. The increase
in interest income was primarily attributable to the increase in the volume of
earning assets. The overall yield on earning assets increased to 7.92% from
7.83%, despite a drop in the yield on loans from 10.04% to 9.01%, as more
earning assets were invested in loans, and lower yielding investment securities
were sold to fund loan growth. The increases in loans are the result of the
new activity generated from the Bank's Ann Arbor office and the activity
generated by Varsity Funding and Varsity Mortgage.
The average volume of investment securities in the three months ended
September 30,
<PAGE> 12
12
1996 decreased 18.0% over the same period in 1995, as the Bank's investment
portfolio was drawn down. In the nine month period, the average volume of
investments decreased 36.3% over the same period in 1995, as the Bank sold
investment securities to fund loan growth.
The yield on investment securities decreased from 6.90% in the three month
period ended September 30, 1995 to 5.90% in the 1996 period. The decrease in
yields was in line with the general decrease in interest rates between 1995 and
1996, and an increase in lower yielding fed funds for liquidity management
purposes. In the nine month periods, the yield decreased from 6.39% in the
1995 period to 5.91% in the 1996 period. The decrease in yields was the result
of the same factors as in the three month period. The overall yield on the
investments was restrained by the increased amount of fed funds the Bank has
operated with during 1996, as a result of the increased loan origination
activity associated with the Bank's Ann Arbor office, Varsity Funding and
Varsity Mortgage.
Interest Expense
Interest expense increased to $753,455 in the three months ended September
30, 1996 from $462,790 in the 1995 period. The increase was due to an increase
in interest bearing liabilities as a result of the growth of the Bank's Ann
Arbor operation, only partially offset by a decrease in rates paid on deposits
and borrowings. The cost of funds decreased to 6.15% in the 1996 period from
6.31% in the 1995 period. The average volume of interest bearing liabilities
increased 67.1% in the 1996 period versus the 1995 period.
In the nine month periods ending September 30, 1996 and 1995, interest
expense increased to $1,971,232 in 1996 from $1,378,809 in the 1995 period.
The increase was due to the same factors as in the three months periods
discussed above. The cost of funds decreased to 5.95% in the 1996 period from
6.41% in the 1995 period. The average volume of interest bearing liabilities
increased 53.9% in the 1996 period versus the 1995 period. The increase in
deposits is a result of the increased deposit activity associated with the
Bank's Ann Arbor office.
As of November 6, 1996 (the nine month anniversary date of the opening of the
Ann Arbor office), a total of just over $20,000,000 in new deposits had been
generated in the Ann Arbor office.
MONTHLY AVERAGE BALANCE SHEET AND
INTEREST MARGIN ANALYSIS
The following tables summarize monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated
yield or cost and the net return on earning assets for the three and nine
months ended September 30, 1996 and 1995.
<PAGE> 13
13
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------------------------------
1996 1995
-------------------------------------- -----------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Short Term Investments:
Interest Bearing 689,183 $ 8,742 5.07% 460,735 5,836 5.07%
Federal Funds Sold 4,560,924 59,272 5.20% 1,023,631 15,099 5.90%
Investment Securities:
Non-taxable (1) - - - 33,848 452 5.34%
Taxable 8,427,378 133,754 6.35% 15,157,841 266,253 7.03%
----------- -------- ------ ----------- -------- ------
Total Investment Securities 13,677 201,768 5.90% 16,676,055 287,640 6.90%
----------- -------- ------ ----------- -------- ------
Loans:
Commercial 5,605,317 132,772 9.47% 2,092,599 59,484 11.37%
Real Estate Mortgage 23,474,121 512,191 8.73% 9,541,147 231,022 9.69%
Installment/Consumer 3,338,745 86,805 10.40% 1,558,465 38,931 9.99%
----------- -------- ------ ----------- -------- ------
Total Loans 32,418,183 731,768 9.03% 13,192,211 329,437 9.99%
----------- -------- ------ ----------- -------- ------
Total Interest Bearing Assets 46,095,668 933,536 8.10% 29,868,266 617,077 8.26%
----------- -------- ------ ----------- -------- ------
Less allowance for possible
loan losses & deferred fees (250,238) (307,206)
----------- -----------
45,845,430 29,561,060
Mortgage servicing rights 3,231,414 2,010,774
Non earning assets 7,655,031 3,575,332
----------- -----------
Total Assets 56,731,875 35,147,166
=========== ===========
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 1,043,053 $ 13,210 5.07% 50,361 317 2.52%
Savings 94,144 565 2.40% 43,573 310 2.85%
Canadian Dollar Savings 764,250 10,123 5.30% 1,164,039 19,533 6.71%
Time 27,362,562 454,502 6.64% 14,408,888 232,518 6.45%
Borrowed Funds 7,000,000 102,608 5.86% 11,166,311 171,289 6.14%
Money Market Accounts 11,799,908 155,257 5.26% 1,994,917 27,219 5.46%
Holding Company Debt 962,500 17,190 7.14% 515,120 11,604 9.01%
----------- -------- ----- ----------- -------- ------
Total interest bearing
liabilities 49,026,417 753,455 6.15% $29,343,209 462,790 6.31%
=========== ======== ------ =========== -------- -----
Net interest income $180,081 154,287
======== =======
Weighted average rate spread 1.95% 1.96%
====== =====
Net yield on average earning
assets 1.56% 2.07%
</TABLE>
(1) Actual yields; not adjusted for tax-equivalent yields
(2) For purposes of computing average yields on the loan portfolio as presented
in the above analysis, loans on non-accrual status are included in the
average loan balances.
<PAGE> 14
14
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------------------
1996 1995
------------------------------- ---------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits 917,947 $ 33,432 4.86% 674,312 25,919 5.13%
Federal Funds Sold 3,917,714 152,199 5.18% 938,118 42,662 6.06%
Investment Securities:
Non-taxable (1) - - - 78,263 4,056 6.91%
Taxable 10,596,172 498,488 6.27% 16,646,730 806,102 6.46%
----------- ---------- ------ ----------- ---------- ------
Total Investment Securities 15,431,833 684,119 5.91% 18,337,423 878,739 6.39%
----------- ---------- ------ ----------- ---------- ------
Loans:
Commercial 5,030,880 364,259 9.65% 1,946,112 175,866 12.05%
Real Estate Mortgage 21,148,837 1,382,902 8.72% 8,360,980 596,233 9.51%
Installment/Consumer 2,416,834 185,585 10.24% 1,632,186 127,323 10.40%
----------- ---------- ------ ----------- ---------- ------
Total Loans 28,596,551 1,932,746 9.01% 11,939,278 899,422 10.04%
----------- ---------- ------ ----------- ---------- ------
Total Interest Bearing Assets 44,028,384 2,616,865 7.92% 30,276,701 1,778,161 7.83%
----------- ---------- ------ ----------- ---------- ------
Less allowance for possible
loan losses & deferred fees (306,143) (328,646)
----------- -----------
43,722,241 29,948,055
Mortgage servicing rights 3,137,247 1,915,910
Non earning assets 1,761,273 3,174,555
----------- -----------
Total Assets 48,620,761 35,038,520
=========== ===========
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 595,823 $ 22,569 5.05% 61,430 1,146 2.49%
Savings 68,778 1,250 2.42% 71,463 1,490 2.78%
Canadian Dollar Savings 1,025,473 41,519 5.40% 1,154,096 58,162 6.72%
Time 23,690,709 1,087,993 6.12% 11,973,313 577,954 6.44%
Borrowed Funds 8,690,000 389,270 5.97% 12,148,100 583,631 6.41%
Money Market Accounts 9,018,521 356,370 5.27% 2,444,730 99,725 5.44%
Holding Company Debt 1,075,000 72,261 8.96% 839,105 56,701 9.01%
----------- ---------- ------ ------------ ---------- ------
Total interest bearing
liabilities 44,164,304 1,971,232 5.95% 28,692,237 1,378,809 6.41%
=========== ========== ------ =========== ---------- ------
Net interest income $ 645,633 399,352
========== ==========
Weighted average rate spread 1.97% 1.42%
====== ======
Net yield on average earning
assets 1.76% 1.58%
</TABLE>
(1) Actual yields; not adjusted for tax-equivalent yields
(2) For purposes of computing average yields on the loan portfolio as
presented in the above analysis, loans on non-accrual status are included
in the average loan balances.
<PAGE> 15
15
Provision for Loan Losses
With the opening of the Bank's new Ann Arbor operation, management
increased the monthly loan loss provision to a rate of $6,000 in February 1996
from $400 in the prior-year period. In September 1996, management accrued a
special increase of $80,000 in the loan loss provision and increased the
monthly rate beginning in October 1996 to $7,500 per month. The special
increase and the increase in the monthly rate was the result of a specific
charge-off of $132,074 on one Upper Peninsula commercial loan, which had a
targeted reserve of $90,000 at December 31, 1995, combined with management's
desire to build reserves at a faster rate, as new loan activity in Ann Arbor is
exceeding original management projections. The actual loan losses were
$134,636 and $170,470 in the three and nine month periods ended September 30,
1996 versus $10,782 and $53,654 in the three and nine month periods ended
September 30, 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1996 1995 1996 1995
---------------------------------------
<S> <C> <C> <C> <C>
Provision for loan losses $ 98,000 $ 1,200 $128,000 $ 3,600
Loan charge-offs 134,636 10,782 170,470 53,654
Reclassification - - - (19,736)
Recoveries 2,807 2,023 7,007 12,921
-------- ------- -------- --------
Net increase (decrease)
in reserve $(33,829) $(7,559) $(35,463)$(56,869)
<CAPTION>
At At At
Sept. 30 June 30, December 31,
1996 1996 1995
----------------------------------------
<S> <C> <C> <C>
Total loans (1) $17,707,239 $15,287,666 $9,270,703
Reserve for loan losses 281,722 315,551 317,185
Reserve/Loans, % (1) 1.59% 2.06% 3.42%
</TABLE>
(1) Excludes loans held for sale.
In addition to the general loan loss reserve, the Company had a Michigan
Strategic Fund loan loss reserve balance of $5,932, $5,853 and $5,212 available
at September 30, 1996, June 30, 1996 and December 31, 1995, respectively, to
offset loan losses on a group of commercial loans with an original balance of
approximately $564,000 at September 30, 1996, June 30, 1996 and December 31,
1995. The Michigan Strategic Fund (the "MSF") is a State of Michigan sponsored
program. Under the terms of the program, the Bank can assign, at the Bank's
sole discretion, business loans to be covered by MSF guarantees. The funds
which are paid to the Bank by the MSF are held at the Bank in a segregated
account to offset such loan losses. If there are no losses and the loans are
all liquidated, the MSF would retain ownership of the funds in the segregated
account.
<PAGE> 16
16
The following schedule summarizes the Company's nonperforming loans for
the periods indicated:
<TABLE>
<CAPTION>
At At At
Sept. 30 June 30, December 31,
1996 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Past due 90 days and over
and still accruing:
Real estate 18,302 32,530 52,401
Installment 1,065 9,654 34,400
Commercial 250,515 71,537 9,557
------- ------- -------
Subtotal 269,882 113,721 96,358
Nonaccrual loans:
Real estate 537,060 374,773 85,666
Installment 7,519 - -
Commercial 127,669 130,878 326,312
------- ------- -------
Subtotal 672,248 505,651 411,978
Other real estate owned - - 130,596
------- ------- -------
Total 942,130 619,372 638,932
As % of loans (1) 5.32% 4.05% 6.89
Ratio of reserve for loan
losses to all
90 days and over 29.9% 50.9% 62.4%
</TABLE>
(1) Excluding loans held for sale.
Nonaccrual real estate loans at September 30, 1996 and June 30, 1996
includes $449,320 and $287,033, respectively, of single family mortgage loans
serviced by the Bank which are secured by residences in North Carolina which
were repurchased from FHLMC as a result of documentational deficiencies in the
original loan file. The Bank is pursuing legal action against a correspondent
which originated these loans for recission of purchase, lost interest, and any
credit losses, if any, on the sale of the properties pursuant to origination
agreements between the Bank and the correspondent. Although management feels
that its legal position is strong, there can be no assurance the Bank will be
successful in this action. Excluding these loans, the ratio of reserve for
loan losses to all loans 90 days and over would have been 57.2% and 94.9%,
respectively.
Economic conditions in the Bank's primary market area in Ann Arbor were
strong in the period. The Sault Ste. Marie area appears not to be growing.
The Newberry area appears to be growing because of the establishment of a major
prison complex in the town by the State Department of Corrections. Excluding
the single family real estate loans discussed in the preceeding paragraph, the
bulk of the Bank's non-performing loans enumerated above relate to borrowers in
the Newberry area, with the remainder in the Sault Ste. Marie area.
Management believes that the current reserve level and the ongoing loan
loss reserve for loan losses is adequate to absorb future losses inherent in
the loan portfolio, although the ultimate adequacy of the reserve is dependent
upon future economic factors beyond the Company's control. A downturn in the
general nationwide economy will tend to aggravate, for general nationwide
business expansion could conversely tend to diminish the severity of any such
difficulties.
In mid-March 1995, the Bank purchased four Participation Certificates in
sub-performing home equity loans with approximately $6,600,000 in unpaid
principal balance and $1,000,000 of unpaid accrued interest from a private
investor group for approximately $1,903,000 (the "Loan Pool"). The investor
group had recently purchased the Loan Pool from the Resolution Trust
Corporation, which had not funded legal collection costs with respect to the
loans in
<PAGE> 17
17
the pool since 1990. The average stated interest rate on the mortgage loans is
over 19%. Approximately 70% of the loans in the pool are currently making some
payments (up from 50% at the time of the Bank's acquisition), and based on the
collection experience to date, management expects to amortize the remaining
purchase price together with a 12% return on the investment within a year,
leaving additional future income from the pool which will be split 50/50 with
the subservicer of the loan pool. Based upon its investigation of the loan
pool, management believes that 70% of the loans in the pool are backed by first
or second mortgages where the combined loan to value ratio, after taking into
account these liens is less than 100%. To further enhance the collateral of
the Participation Certificates, the servicer of the loans has provided
additional security, guarantees and collateral, including approximately
$283,000 in pledged deposits with the Bank.
In mid-1996, the servicer submitted a request to the RTC for a $600,000
refund of a portion of the purchase price of the Loan Pool pursuant to the
original purchase agreement with the RTC, which, if received, would reduce a
portion of the Bank's remaining net investment in the Loan Pool. In September
1996 an additional $700,000 in home equity loans purchased from a home equity
loan originator was added to the Loan Pool as a fifth Participation Certificate
at a cost of $115,000. The servicer is actively marketing the Loan Pool for
sale.
Including the Bank's investment in the fifth Participation Certificate, as
of September 30, 1996, the Bank's net investment in the Loan Pool was
$1,116,566.
Non-Interest Income
Total non-interest income increased to $1,579,149 for the three months
ended September 30, 1996 from $117,405 for the three months ended September 30,
1995. The increase was principally a result of a $834,062 increase in the
Bank's mortgage banking income, an increase in the market value of loans held
for sale of $73,917, a gain on the sale of mortgage servicing rights of
$232,011, and a net increase in security gains of $294,433.
Total non-interest income increased to $2,516,609 for the nine months
ended September 30, 1996 from $583,855 for the nine months ended September 30,
1995. The increase was principally a result of a $1,362,008 increase in the
Bank's mortgage banking income, increased security gains, and the gain on the
sale of mortgage servicing rights, which was partially offset by a decrease in
the market value of loans held for sale, and a loss from the share of the
results of the Company's equity investment in Michigan BIDCO.
Securities. During the nine months ended September 30, 1996, securities
totalling $8,544,583 were sold from the Bank's available-for-sale securities
portfolio with gross realized gains of $477,820 and gross realized losses of
$23,378. During the first two quarters of 1996, the Bank sold the bulk of its
fixed rate mortgage-backed securities and a portion of its agency backed CMOs
indexed monthly to one year CMT. During the third quarter of 1996, the Bank
realized capital gains from its investments in Federal Agricultural Mortgage
Corp. common stock and the Company realized gains from its investment in
Equitec Financial Group bonds.
Foreign Exchange. Foreign exchange revenues decreased from $21,879 for
the three months ended September 30, 1996 to $7,374 in the 1995 period, as a
result of lower customer activity at the Bank. For the nine months ended
September 30, 1996 and 1995, foreign exchange revenues decreased
<PAGE> 18
18
from $54,322 to $26,938.
Mortgage Banking. Mortgage banking income increased from $39,793 in the
three months ended September 30, 1995 to $873,855 in the three months ended
September 30, 1996. In addition, a gain on the sale of mortgage servicing
rights of $232,011 was realized by the Bank. The increase in mortgage banking
income was the result of sharply increased loan purchase and origination
volumes during the 1996 period. There was also a lower of cost or market
adjustment of $73,917 added to income in the 1996 period to reverse an earlier
period charge to mark the mortgages held for sale to the lower of cost or
market. No lower of cost or market adjustment was required in the 1995 period.
The result for the 1996 period was also dissimilar from the 1995 period in
that it also included revenue from Midwest Loan Services, Varsity Funding and
Varsity Mortgage. Varsity Mortgage began operations in March 1996, and posted
its first profitable month in June 1996. On a combined basis, Varsity Funding
and Varsity Mortgage had pre-tax profit of approximately $111,000 in the three
months ended June 1996 and a pre-tax profit of approximately $247,272 in the
third quarter of 1996. As of June 30, 1996 Varsity Funding and Varsity
Mortgage had earned enough profit to recoup the start-up losses of late 1995
and the first quarter of 1996.
In future quarters, as a result of a profit sharing agreement, the Bank
would be entitled to share in the next $290,000 and $546,000 of pre-tax profit
of Varsity Funding and Varsity Mortgage, respectively, on a 50/50 basis with
the managers and employees of these subsidiaries, or a total of approximately
$418,000. The Bank would not receive further profits from the pre-tax income
of these operations above such profit threshold, except that the Bank is
entitled to 10% of the gross revenue (as defined in the LLC's operating
agreement) of Varsity Funding on an ongoing basis, and with the agreement of
the managers of Varsity Mortgage, this LLC could, if it obtains its mortgage
warehouse financing from a third party other than the Bank, be restructured as
a 50/50 joint venture between the Company and the managers.
At September 30, 1996, the Bank and its subsidiaries owned the right to
service $204,701,000 of FHLMC mortgages for others, of which $122,924,000 was
owned by the Bank and $81,775,000 was owned by Midwest Loan Services. The
following table summarizes the portfolio by type and mortgage note rate:
<TABLE>
<CAPTION>
($ in 000s) FIXED RATE - BY MATURITY
----------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 807 467 391 2,990
8.50 - 8.99 6,158 856 998 11,967
8.00 - 8.49 7,973 2,240 3,008 22,273
7.50 - 7.99 1,436 7,697 7,070 52,590
7.00 - 7.49 73 5,478 18,578 20,013
6.50 - 6.99 95 5,170 10,753 6,149
6.00 - 6.49 892 1,335 1,946 1,327
under 6.00 3,246 618 - 106
------ -------- ------ -------
20,680 23,861 42,744 117,415
Current market
interest rates 5.75 7.50% 7.75% 8.00%
Average annual
servicing fee 0.39% 0.25% 0.27% 0.26%
</TABLE>
Lower interest rates in late 1995 were responsible for a surge in
refinancing. If interest rates were to drop back down to those levels,
refinancings and payoffs would likely increase over recent experience since a
significant portion of the fixed rate mortgages being serviced carry interest
rates at the current market rate. Based on recent comparable sales and
indications of market value from industry brokers, management believes that the
current market value of the Bank's portfolio of mortgage servicing rights
exceeds cost by
<PAGE> 19
19
approximately $144,000 to $33,000. 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. If interest rates were to
decline to levels briefly seen during the Summer of 1993, the portfolio would
experience significant refinancings and payoffs, which would hurt income.
At September 30, 1996, the Bank had outstanding purchase commitments to
buy single family FNMA/FHLMC qualifying mortgage loans of $15,599,000 and
outstanding forward commitments to deliver FNMA/FHLMC mortgage-backed
securities of $12,000,000, all of which commitments were for delivery within
three months or less, and financial futures used for hedging available-for-sale
mortgage loans of $2,400,000. The following tables summarize mortgage banking
activity for the three and nine months periods ending September 30, 1996 and
1995:
<TABLE>
<CAPTION>
(amounts in $000s) Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
1996 1995 1996 1995
-----------------------------------------
<S> <C> <C> <C> <C>
Servicing originated 14,411 5,602 41,503 11,974
Servicing amortized (5,492) (1,919) (18,155) (3,924)
Bulk servicing purchased - - - 29,996
Bulk servicing sold (91,924) - (91,924) -
------- ------ -------- ------
Net increase (decrease)
in servicing (1) (83,005) 3,683 (68,576) 38,046
======== ====== ======== ======
</TABLE>
(1) The above figures reflect only those of the Bank prior to the Bank's
acquisition of 80% of Midwest Loan Services on December 1, 1995.
<TABLE>
<CAPTION>
(amounts in $000s) Sept. 30 June 30, December 31,
1996 1996 1995
---------------------------------
<S> <C> <C> <C>
Total servicing (1) 122,924 204,655 188,319
Book value of servicing 2,382 3,190 2,937
Estimated market value
of servicing:
Management estimate (2) 2,415 3,426 3,110
Discounted cash flow (3) 2,556 3,534 3,220
Estimated excess of market
over book value (4) 174-33 344-236 283-173
</TABLE>
(1) Excludes servicing related to FHLMC and FNMA qualified loans held for
delivery.
(2) Assumes a price based upon market transactions at September 30, 1996 and
June 30, 1996 of 5.6x (5.6 times the servicing fee) for 30-year servicing,
4.6x for 15-year servicing, 3.0x for Balloon servicing and 2.9x for ARM
servicing. Assumes a price at December 31, 1995 of 4.7x for 30-year
servicing, 4.0x for 15-year servicing, 2.4x for Balloon servicing and 2.3x
for ARM servicing. Excess servicing and servicing related to California
properties are each discounted from these amounts at a multiple of one
times the servicing fee.
(3) Uses net present value analysis of future cash flows, discounted back at
13.14% (the original rate used to price a $100,000,000 bulk portfolio the
Bank purchased in 1993).
(4) Range based upon the two methods used in (2) and (3), above.
<PAGE> 20
20
During 1994 and early 1995, market transactions for servicing rights
showed a trend to increased prices. Prices decreased throughout the remainder
of 1995 to a low late in the year, and rose somewhat in the first nine months
of 1996.
Michigan BIDCO. Michigan BIDCO (the "BIDCO") invests in businesses in
Michigan with the objective of fostering job growth and economic development.
As of September 30, 1996, the BIDCO had made seventeen such investments,
amounting to a total of $10,717,600 at original cost (before repayments or
participations sold). At September 30, 1996, the BIDCO had total assets of
$6,215,228. For the three and nine months ended September 30, 1996 and 1995,
the Bank's 44.1% equity share in the earnings (loss) of the BIDCO's reported
net income (loss) was ($8,821) and $33,372, and $31,179 and $103,854,
respectively. Income for 1995 and the 1996 first quarter was negatively
impacted by an unusual expense associated with the start-up of the BIDCO's
affiliate, Northern Michigan Foundation (see below). Income for the third
quarter was negatively impacted by a decrease in managements' market evaluation
of an investment in a paper converting company.
The Bank owns 280 shares of common stock in the BIDCO, currently
representing a 44.1% equity interest. The Company's consolidated fully diluted
ownership in the BIDCO is 15.6%, after considering the impact of convertible
bonds.
Michigan BIDCO makes its investments in the form of loans or direct equity
investments, or a combination thereof. The BIDCO's limit on its investment in
one borrower is currently $500,000, and the BIDCO arranges participations for
investments in excess of this amount. The Bank is restricted from investing or
lending to a business that the BIDCO finances. The BIDCO typically receives
warrants or participation rights in the companies in which it invests. To
date, investments (at original investment cost) have been made in the following
types of businesses:
<PAGE> 21
21
<TABLE>
<CAPTION>
Michigan BIDCO, investments:
- ---------------------------
<S> <C> <C>
Total Equity
Industry Investment Participation?
#1 ABC-TV affiliate $1,472,000 yes
#2 Adult foster care 40,000 no
#3 Cable TV 545,000 yes
#4 Children's clothing manufacturer 200,000 yes
#5 Commercial laundry 180,000 no
#6 Environmental engineering 100,000 repurchased
#7 Home Health Care 20,000 no
#8 Limited service hotels 738,600 yes
#9 Metal manufacturing 80,000 no
#10 Paper converting 2,662,000 yes
#11 Plastic injection molding 2,000,000 repurchased
#12 Railcar parts manufacturing 125,000 yes
#13 Railroad boxcar leasing 1,300,000 no
#14 Recycled paper pulp mill 780,000 yes
#15 Residential mortgage servicing 450,000 repurchased
#16 Tissue paper mill 500,000 yes
#17 Injection molding equipment 25,000 no
-----------
Total $11,717,600
===========
</TABLE>
The loans associated with investments #2, 4, 5, 11, and 15 have been
repaid in full, and $300,000 of the loans to #1 have also been repaid in full.
Loan participations have been sold in loans associated with investments #1, 8,
10, 13, and 14. At September 30, 1996, the BIDCO had one outstanding
conditional commitment to lend an additional $172,000 to investee #1, and
outstanding commitments to buy participations totalling of $40,000 in loan to
two borrowers which Northern Michigan Foundation is originating (see below).
Northern Michigan Foundation. In December 1995, the BIDCO donated
$225,000 to provide the initial capitalization for Northern Michigan Foundation
(the "Foundation"), and in early 1996, donated an additional $75,000 to the
Foundation. These donations negatively impacted the BIDCO's and the Company's
earnings in the 1996 first quarter. The BIDCO anticipates that on an ongoing
basis a portion of its overhead will be borne by the Foundation. The BIDCO and
the Foundation share administrative staffs and offices, with the Foundation
reimbursing the BIDCO for these services. As a result of its capitalization by
the BIDCO, the Foundation was able to borrow a total of $2,000,000 from the
U.S. Rural Economic Community Development Service Agency ("U.S. RECDS") at 1%
interest with a 30 year term. As of September 30, 1996, the Foundation had
lent $580,000 of its available funds to three borrowers, and had two
outstanding conditional commitments to lend an additional $160,000 to two
borrowers.
<PAGE> 22
22
Non-Interest Expense
Non-interest expense increased to $1,495,475 in the three months ended
September 30, 1996 from $259,430 for the three months ended September 30, 1995.
The increase was primarily the result of the start-up of the Ann Arbor main
office, the start-up of the Varsity Mortgage operation in March 1996, and the
increased level of expenses over the prior year related to these locations and
Midwest Loan Services (which was acquired in December 1995) and Varsity Funding
(which commenced operations in October 1995).
Non-interest expense increased to $3,534,284 in the nine months ended
September 30, 1996 from $1,048,198 for the nine months ended September 30,
1995. The increase was a result of the same factors as in the three months
periods. Operations at the Bank in Ann Arbor reflect a full quarter of
personnel and other expenses in the first quarter of 1996, although the revenue
from the new main office did not begin to increase until after the new office
opened in early February 1996.
Non-interest operating expense for only the parent company increased from
$15,613 for the three month 1995 period to $37,873 for the 1996 period. Costs
associated with the Company's stock market listing and other miscellaneous
expenses were higher. Non-interest operating expense for only the parent
company increased from $55,976 for the nine month 1995 period to $108,336 for
the 1996 period. Public listing expenses, legal and audit expenses and other
miscellaneous expenses were higher.
Liquidity and Capital Resources
Parent Company Liquidity:
At year-end 1995, University Bancorp, Inc. held cash and marketable equity
securities of $400,870. This decreased by $224,025 to $176,845 at September
30, 1996. The decrease in cash and marketable equity securities was due to
operating expenses and payments of principal and interest on the Company's
loan. During the nine months ended September 30, 1996 no dividends were paid
from the Bank. Management anticipates that only modest dividends will be paid
from the Bank until the Bank's Ann Arbor operation grows large enough to
achieve profitability. Dividends from the Company's bank subsidiary together
with earnings from the cash and marketable equity securities held by the parent
company are the principal sources of income used to fund the parent company's
indebtedness owing to North Country Bank & Trust ("NCB&T"; formerly First
Northern Bank & Trust), which amounted to $962,500 and $1,000,000 at September
30, 1996 and at December 31, 1995, respectively. The Company has received a
commitment from NCB&T to extend the maturity of the note to November 1, 1997.
Management believes that the cash and securities on hand together with
available unrestricted retained earnings that University Bank is able to pay
the Company in the form of dividends, with permission of the Company's secured
debt lender, is currently sufficient to cover any required
<PAGE> 23
23
principal reductions during 1996 and 1997 on the holding company's loan,
although the Company will need to refinance the loan at maturity in November
1997.
Capital Resources:
The following table sets forth the Bank's risk based assets, and the
capital ratios and risk based capital ratios of the Bank and Company.
<PAGE> 24
24
UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio at September 30, 1996
($ in 000's)
<TABLE>
<CAPTION>
Risk Adj.
Value Risk Asset
Asset (000's) Weight Value
- --------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cash and Federal Reserve Deposits 278 0% 0
U.S. Gov't Agency Securities 713 0% 0
U.S. Treasury Securities 499 0% 0
U.S. Gov't Guaranteed Loans 204 20% 41
Balances at Domestic and Canadian Banks 1,524 20% 305
Fed Funds Sold 5,592 20% 1,118
U.S. Gov't Agency Mortgage-backed Securities 5,613 20% 1,123
U.S. Gov't Equity Securities 848 20% 170
Other Mortgage-backed Securities 342 50% 171
1-4 Family Mortgage Loans 25,237 50% 12,619
Junior Liens 2,081 100% 2,081
All Other Loans 8,946 100% 8,946
All Other Securities 23 100% 23
Real Estate Owned 0 100% 0
Premises & Equipment 2,113 100% 2,113
Mortgage Servicing Rights 2,381 100% 2,381
Other Assets 2,072 100% 2,072
- --------------------------------------------- -------
TOTAL ASSETS 58,466
=======
Off Balance Sheet Items:
Letters of Credit and Committments > 1 Year 0 100.00% 0
Foreign Exchange Contracts 800 1.00% 8
Interest Rate Contracts 2,400 0.00%(1) 7
FHLMC/FNMA Loan Purchase Committments 15,599 50.00% 7,800
MBS FHLMC/FNMA Forward Sell Committments 12,000 0.00%(1) 16
Agency Guaranteed Commercial Loans Sold 203 20.00% 41
------- ------ ------
TOTAL RISK-ADJUSTED ASSETS 41,033
======
CAPITAL RESOURCES
Shareholders Equity 4,554
Net Unrealized Loss on AFS Equity Securities 46
Minority interest in consolidated subsidiary 197
Mortgage Servicing Rights Limitation (5)
-----
Total Equity (Tier 1) 4,792
Qualifying Loan Loss Reserve (Tier 2) 282
-----
Regulatory Capital (Tier 1 & Tier 2) 5,074
=====
Primary and Total Capital Ratio (Leverage) 8.68%
=====
Risk-adjusted Capital Ratio (Tier 1) 11.68%
=====
Risk-adjusted Capital Ratio (Tier 1 & Tier 2) 12.37%
=====
University Bancorp Consolidated
Total Capital Ratio (Leverage Ratio) 7.27%
=====
</TABLE>
(1) Plus market value, or replacement cost valuation, as required.
<PAGE> 25
25
University Bank Liquidity:
The Bank's primary sources of liquidity are customer deposits, scheduled
amortization and prepayments of loan principal, cash flow from operations,
maturities of various investments, the sale of loans held for sale, reverse
repo credit lines and borrowings from the Federal Home Loan Bank secured by
securities and residential mortgage loans, and overnight fed funds credit lines
from correspondent banks. In addition, the Bank invests in overnight Federal
Funds. At September 30, 1996, the bank had cash and due from banks and fed
funds on hand of $7,428,752. At September 30, 1996 the Bank had available a
$10,000,000 line of credit secured by mortgage loans for sale to the secondary
market. In order to bolster liquidity, the Bank has also sold brokered CDs
from time to time.
Impact of Inflation
The primary impact of inflation on the Company's operations is reflected
in increased operating costs. Since the assets and liabilities of the Company
are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it
also affects the net income of the Company.
Rising long term and short term interest rates tend to increase the value
of the Bank's investment in mortgage servicing rights and improve the Bank's
current return on such rights by lowering required amortization rates on the
rights. However, rising interest rates tend to decrease new mortgage
origination activity, negatively impacting current income from mortgage banking
operations. The table on page 26 details the Bank's asset/liability
sensitivity as of September 30, 1996.
<PAGE> 26
26
UNIVERSITY BANK
Asset/Liability Position Analysis 9-30-96
($ in 000'S)
Maturing or Repricing in
<TABLE>
<CAPTION>
3 Mos 91 Days to 1 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years OTHERS TOTALS
<S> <C> <C> <C> <C> <C> <C>
FEDERAL FUNDS 5,592 5,592
LOANS (1) 524 1,765 4,430 5,665 12,384
CANADIAN INVESTMENTS 57 57
SECURITIES 4,800 2,011 12 1,215 594 8,632
LOANS HELD FOR SALE 18,761 18,761
MATURED LOANS 798 798
VARIABLE RATE LOANS 4,004 4,004
OTHER ASSETS 6,288 6,288
CASH & DUE FROM BANKS 1,780 1,780
OVERDRAFTS 17 17
NON-ACCRUAL LOANS 223 223
VALUATION ADJUSTMENT (70) (70)
------ ------ ----- ----- ----- ------
TOTAL ASSETS 34,553 3,776 4,442 6,880 8,815 58,466
LIABILITIES
LARGE C.D.'S 5,721 13,124 1,250 20,095
REGULAR C.D.'S 1,665 3,655 2,037 7,357
MMDA 11,979 11,979
NOW 1,405 1,405
DEMAND 3,982 3,982
SAVINGS 85 85
CANADIAN SAVINGS 753 753
OTHER LIABILITIES 4,500 2,500 1,022 8,022
EQUITY 4,788 4,788
------ ------ ----- ----- ----- ------
TOTAL LIABILITIES 26,108 19,279 3,287 - 9,792 58,466
GAP 8,445 (15,503) 1,155 6,880 (977) -
CUMULATIVE
GAP 8,445 (7,058) (5,903) 977
GAP
PERCENTAGE 14.44% -12.07% -10.10% 1.67%
</TABLE>
NOTES:
(1) Net of bad debt reserve
<PAGE> 27
27
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties are
subject.
<PAGE> 28
28
Item 5. Other information
Parent Company Financial Information
Certain condensed financial information with respect to
University Bancorp, Inc. follows:
<PAGE> 29
29
UNIVERSITY BANCORP, INC. (The Parent)
Condensed Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
ASSETS ------ ------
<S> <C> <C>
Cash and due from banks $ 72,771 $ 239,868
---------- ----------
Investment in subsidiary 4,787,705 5,023,367
---------- ----------
Due from ESOP 1,000 1,000
Securities available for sale (Note 2) 104,074 161,002
Investment in Michigan BIDCO 202,660 202,780
Federal income tax receivable 153,372 58,030
Furniture, fixtures & equipment - 1,743
Deferred taxes 8,537 8,537
Prepaid expenses and other assets 31,494 8,865
---------- ----------
Total other assets 501,137 441,957
TOTAL ASSETS 5,361,613 5,705,192
========== ==========
<CAPTION>
September 30, December 31,
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY ------ ------
<S> <C> <C>
Note payable 962,500 1,000,000
Accrued interest payable 14,840 24,479
Accounts payable 14,233 29,815
Due to subsidiary 80,342 -
---------- ----------
Total Liabilities 1,071,915 1,054,294
Stockholders' equity:
Capital stock and paid in capital 2,733,468 2,672,609
Retained earnings 1,594,223 1,836,231
Net unrealized gain on
available-for-sale securities (37,993) 142,058
---------- ----------
Total Stockholders' equity 4,289,698 4,650,898
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $5,361,613 $5,705,192
========== ==========
</TABLE>
<PAGE> 30
UNIVERSITY BANCORP, INC. (The Parent) 30
<TABLE>
<CAPTION>
Condensed Statement of Operations For the Three-Month For the Nine-Month
(Unaudited) Periods Ended Periods Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income (loss) from bank subsidiary $ 195,313 $ (10,203) $(162,492) $ (4,578)
Gain on sale of investments 16,280 30,913 44,598 46,243
Interest income 5,617 7,371 15,299 12,851
Other income 13,877 27,198 18,502 37,570
--------- --------- --------- ---------
Total income (loss) 231,087 55,279 (84,093) 92,086
--------- --------- --------- ---------
Interest expense 20,249 11,604 64,580 56,701
Legal and Audit Expense 8,124 5,000 46,891 23,755
Public listing expense 13,075 1,000 29,068 3,000
Other expenses 16,674 9,613 32,377 29,221
--------- --------- --------- ---------
Total expenses 58,122 27,217 172,916 112,677
--------- --------- --------- ---------
Income (loss) before income taxes 172,965 28,062 (257,009) (20,591)
--------- --------- --------- ---------
Income taxes (benefit) (7,000) 12,825 (15,000) (5,630)
--------- --------- --------- ---------
Net income (loss) 179,965 15,237 (242,009) (14,961)
========= ========= ========= =========
Net income (loss) per common share $0.144 $0.013 ($0.194) ($0.013)
========= ========= ========= =========
Dividends declared per share $ --- $ --- $ --- $ ---
========= ========= ========= =========
</TABLE>
<PAGE> 31
31
UNIVERSITY BANCORP, INC. (The Parent)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
(Unaudited)
For the Nine Month
Periods Ended
September 30,
1996 1995
<S> <C> <C>
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net Loss $(242,009) $ (14,961)
Depreciation 1,743 2,251
Amortization of Premium on Securities 120 -
Proceeds from sales of trading securities - 167,690
Purchases of trading securities - (366,284)
Gain on sale of investments (44,598) (46,243)
Contribution to ESOP 15,056 -
Decrease in receivable from affiliate - 973,211
Increase in Other Assets (117,971) (276,846)
Decrease in interest payable (9,639) (78,798)
Increase (decrease) in Other Liabilities 85,381 (702,153)
Subsidiary net loss 162,492 4,578
--------- ----------
Net cash provided by (used in)
operating activities (149,425) (337,555)
--------- ----------
Cash flow from investing activities:
Subsidiary dividends received - 1,350,000
Contributions of capital to subsidiary (66,750) (920,000)
Purchase of available for sale securities (97,442) -
Proceeds from sale of available for sale sec 138,216 -
Advances to Michigan BIDCO - -
Capital expenditures - -
--------- ----------
Net cash provided by (used in)
investing activities: (25,976) 430,000
--------- ----------
Cash flow from financing activities:
Proceeds from bank financing
Principal payment on notes payable (37,500) -
Proceeds from sale of common stock 66,750 -
Purchase of treasury stock (20,946) (50,423)
--------- ----------
Net cash provided by (used in)
financing activities: 8,304 (50,423)
--------- ----------
Net changes in cash and cash equivalents (167,097) 42,022
Cash:
Beginning of year 239,868 54,151
--------- ----------
End of period $ 72,771 $ 96,173
========= ==========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 49,538 $ 116,637
Income tax $ - $ (22,281)
</TABLE>
<PAGE> 32
32
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP INC.
Date: November 14, 1996 /s/ Thomas J. Vandermus
-------------------------
Thomas J. Vandermus
Chief Financial Officer
(On behalf of the registrant
and as
Principal Financial Officer)
<PAGE> 33
33
Exhibit Index
- ------------- Sequentially
Numbered
Page
------------
27. Financial Data Schedule 34
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,588,003
<INT-BEARING-DEPOSITS> 248,511
<FED-FUNDS-SOLD> 5,592,238
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,072,598
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 36,186,665
<ALLOWANCE> (281,722)
<TOTAL-ASSETS> 58,966,994
<DEPOSITS> 45,583,590
<SHORT-TERM> 7,962,500
<LIABILITIES-OTHER> 934,253
<LONG-TERM> 0
0
0
<COMMON> 12,908
<OTHER-SE> 4,079,837
<TOTAL-LIABILITIES-AND-EQUITY> 58,966,994
<INTEREST-LOAN> 1,932,746
<INTEREST-INVEST> 684,119
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,616,865
<INTEREST-DEPOSIT> 1,509,701
<INTEREST-EXPENSE> 461,531
<INTEREST-INCOME-NET> 645,633
<LOAN-LOSSES> 128,000
<SECURITIES-GAINS> 409,844
<EXPENSE-OTHER> 3,534,284
<INCOME-PRETAX> (500,042)
<INCOME-PRE-EXTRAORDINARY> (500,042)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (242,009)
<EPS-PRIMARY> (0.194)
<EPS-DILUTED> (0.194)
<YIELD-ACTUAL> 7.92
<LOANS-NON> 672,248
<LOANS-PAST> 269,882
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 171,022
<ALLOWANCE-OPEN> 317,185
<CHARGE-OFFS> 170,470
<RECOVERIES> 7,007
<ALLOWANCE-CLOSE> 281,722
<ALLOWANCE-DOMESTIC> 281,722
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
