<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, 1997
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 10, 1997
1,311,522 shares
page 1 of 33 pages
Exhibit index on sequentially numbered page 32
<PAGE> 2
FORM 10-Q 2
-----------------
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 Opera 9
Summary 9
Results of Operations 10
Liquidity and Capital Resources 23
PART II - Other Information
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 5. Other Information
Parent Company Condensed
Financial Information 27
Item 6. Exhibits & Reports on Form 8-K 31
Signature 31
Exhibit Index 32
____________________________________
The information furnished in these interim statements reflects all
adjustments and accruals which are, in the opinion of management,
necessary for a fair statement of the results for such periods. The
results of operations in the interim statements are not necessarily
indicative of the results that may be expected for the full year.
<PAGE> 3
Part 1. - Financial Information
Item 1.- Financial Statements 3
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,1997 and December 31,1996
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
ASSETS ------------ -----------
<S> <C> <C>
Cash and due from banks $ 2,022,490 $ 1,866,917
Federal funds sold 14,128,095 10,683,895
----------- -----------
Total cash and cash equivalents 16,150,584 12,550,812
Securities available for sale at market 3,130,811 7,346,856
Loans held for sale 13,232,982 30,534,574
Loans 28,224,624 20,966,290
Allowance for Loan Loss (533,310) (297,783)
----------- -----------
Loans, net 27,691,314 20,668,507
Premises and equipment 1,890,175 1,955,294
Mortgage servicing rights 1,611,143 2,312,436
Investment in and advances to
Michigan BIDCO 760,630 815,790
Other real estate owned 597,570 266,079
Other assets 2,551,290 1,910,331
----------- -----------
Total other assets 7,410,808 7,259,930
----------- -----------
TOTAL ASSETS $67,616,499 $78,360,679
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 4
UNIVERSITY BANCORP, INC. AND 4
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY ----------- -----------
<S> <C> <C>
Deposits:
Demand - non interest bearing $ 3,785,633 $ 6,814,000
Demand - interest bearing 22,050,941 15,786,832
Savings 139,566 976,479
Time 29,364,243 29,529,050
----------- -----------
Total Deposits 55,340,383 53,106,361
FHLB advances 0 6,000,000
Mortgage escrow 186,842 1,064,650
Short term borrowings 1,751,598 12,941,266
Deferred noncompete income 75,823 102,076
Other liabilities 5,957,778 1,032,130
----------- -----------
Total Liabilities 63,312,424 74,246,483
----------- -----------
Minority Interest 210,829 201,427
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
issued 0 shares in both 1997 and 1996 - -
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
issued 1,380,287 shares in 1997
and 1,295,366 shares in 1996 13,803 12,954
Treasury Stock - 68,765 shares in1997
and 1996 (300,883) (300,883)
Additional Paid-in-Capital 3,460,082 2,906,389
Retained earnings 910,987 1,299,473
Net unrealized gain/(loss) on
securities
available for sale, net of tax
of $4,769 in 1997, and
($2,659) in 1996. 9,257 (5,164)
----------- -----------
Total Stockholders' equity 4,093,246 3,912,769
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $67,616,499 $78,360,679
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<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,
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 1,046,143 $ 731,768 3,077,497 $ 1,932,746
Interest on securities:
U.S. Treasury Securities - 268 - 33,172
U.S. Government agencies 53,928 109,361 238,700 406,734
Other securities 9,306 24,125 50,668 58,582
Interest on bank deposits 29,279 8,742 45,041 33,432
Interest on federal funds 85,753 59,272 226,415 152,199
----------- ---------- ----------- ----------
Total interest income 1,224,409 933,536 3,638,321 2,616,865
----------- ---------- ----------- ----------
Interest expense:
Interest on deposits:
Demand deposits 262,024 221,681 742,784 378,939
Savings deposits 1,805 10,688 12,508 42,769
Time certificates of deposit 446,883 401,288 1,260,666 1,087,993
Bank and other short term borrowings 84,088 119,798 408,611 461,531
----------- ---------- ----------- ----------
Total interest expense 794,799 753,455 2,424,568 1,971,232
----------- ---------- ----------- ----------
Net interest income 429,610 180,081 1,213,753 645,633
Provision for loan losses 22,500 98,000 261,500 128,000
----------- ---------- ----------- ----------
Net interest income after
provision for loan losses 407,110 82,081 952,253 517,633
----------- ---------- ----------- ----------
Other income:
Net security gains (losses) 0 313,983 7,715 409,844
Increase (Decrease) in market value of
loans held for sale 18,839 73,917 6,198 (91,471)
Service charges and fees 7,466 54,640 13,315 62,153
Foreign exchange income (2,850) 7,374 (9,377) 26,938
Mortgage banking income 1,248,818 873,855 3,920,866 1,709,656
Profit(loss) from equity investment in
Michigan BIDCO (97,182) (8,821) (53,660) 31,179
Other (1,798) 264,201 118,145 368,310
----------- ---------- ----------- ----------
Total other income 1,173,292 1,579,149 4,003,201 2,516,609
----------- ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<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,
1997 1996 1997 1996
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Other expenses:
Salaries and wages $ 988,990 $ 670,769 3,063,025 $1,573,201
Employee benefits 115,588 93,021 388,507 244,277
Occupancy, net 80,216 81,115 280,497 230,056
Taxes other than income 54,519 9,645 69,912 21,401
Data processing and equipment expense 60,961 89,212 256,270 256,338
Correspondent bank service charges 4,808 7,015 18,822 15,664
Advertising 20,074 46,697 83,364 115,956
Net expense of other real estate owned 3,206 377 (3,154) 1,393
Legal and audit expense 37,898 76,368 151,369 205,719
Other operating expenses 394,536 421,256 1,202,167 870,279
---------- ---------- ---------- ------------
Total other expenses 1,760,796 1,495,475 5,510,779 3,534,284
---------- ---------- ---------- ------------
Income (Loss) before income taxes (180,393) 165,755 (555,324) (500,042)
---------- ---------- ---------- ------------
Income taxes (benefit) 6,212 (14,210) (166,840) (258,033)
---------- ---------- ---------- ------------
Net Income (Loss) $ (186,605) $ 179,965 (388,484) $ (242,009)
========== ========== =========== ==========
Earnings (loss) per common share (Note 1) ($0.14) $0.14 ($0.31) ($0.19)
========== ========== ======== ========
Weighted average shares
outstanding (Note 1) 1,311,261 1,250,663 1,268,048 1,249,842
========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 7
UNIVERSITY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine-Month
Periods Ended
September 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (388,484) $ (242,009)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 393,116 384,215
Provision for loan loss 261,500 128,000
Mortgage loans originated for sale (345,531,138) (196,463,178)
Proceeds from sale of loans and mortgage
backed trading securities 365,308,482 176,566,989
Net loss/(gain) on loan sales and securit (2,469,554) (630,380)
Market adjustment on loans held for sale (6,198) 0
Net amortization/accretion on securities 9,564 (21,273)
Loss/(Gain) on sale of securities availab (7,715) (409,844)
Loss/(Gain) on sale of trading account se 0 65,236
Proceeds from sale of trading account sec 0 9,683,339
Change in:
Investment in Northern Michigan BIDCO 256,361 (30,758)
Purchased mortgage servicing rights 640,063 368,989
Other real estate (331,491) 130,596
Increase in other assets (640,959) (764,973)
Increase/(Decrease) in other liabilities 4,891,966 308,079
------------- ------------
Net cash from (used in)
operating activities 22,385,513 (10,926,972)
------------- ------------
Cash flow from investing activities:
Purchase of securities available for
for sale (1,890,921) (10,702,723)
Proceeds from sales of securities
available for sale 5,879,886 9,904,101
Loans granted net of repayments (7,284,307) (8,599,999)
Premises and equipment expenditures (266,767) (950,332)
Principal paydowns on securities
available for sale 45,880 5,975,656
------------- ------------
Net cash from (used in)
investing activities (3,516,229) (4,373,297)
------------- ------------
Cash flow from financing activities:
Net increase (decrease) in deposits 2,234,022 23,574,171
Net increase(decrease) in
mortgage escrow (877,808) 208,915
Principal payment on notes payable (37,500) (37,500)
Purchase of treasury stock (20,946)
Net decrease in other short
term borrowings (17,152,169) (3,000,000)
Issuance of common stock 554,541 66,750
------------- ------------
Net cash from
financing activities (15,278,914) 20,791,390
------------- ------------
Non-Cash Activities:
Increase in minority interest 9,402 0
------------- ------------
Net change in cash and
cash equivalents 3,599,772 5,491,121
Cash and cash equivalents:
Beginning of period 12,550,812 1,937,631
------------- ------------
End of period $ 16,150,584 $ 7,428,752
============ ============
Supplemental disclosure of cash
flow information:
Cash paid for interest expense $ 2,362,125 $ 1,719,804
</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)
SEPTEMBER 30, 1997
(1) General
See note 1 of Notes to Financial Statements incorporated by reference
in the Company's 1996 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 1996 Annual Report on
Form 10-K. The current interim periods reported herein are included in the
fiscal year subject to independent audit at the end of the year.
Earnings per share is calculated based on the weighted average number
of common shares outstanding during each period as follows: 1,311,261 and
1,250,663, and 1,268,048 and 1,249,842 for the three and nine months ended
September 30, 1997 and 1996, respectively. Stock options are not dilutive and
are not included in earnings per share calculations.
(2) Securities available-for-sale
The Bank's securities available-for-sale portfolio has been reduced to
provide for increased loan demand.
Securities available for sale
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed 1,633 10 (4) 1,639
Other agency mortgage-backed 591 - (29) 562
U.S. agency equity 848 - - 848
Other equity 44 38 - 82
- ---------------------------------------------------------------
Total investment securities
available for sale $3,116 $48 $(33) $3,131
====== === ===== ======
</TABLE>
<PAGE> 9
Securities available-for-sale (continued) 9
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $5,367 $38 $(30) $5,375
Other agency mortgage-backed 681 - (35) 646
Other mortgage-backed 367 - (3) 364
U.S. agency equity 848 - - 848
Other equity 92 22 - 114
- --------------------------------------------------------------
Total securities
available for sale $7,355 $60 $(68) $7,347
====== === ===== ======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
SUMMARY
For the three months ended September 30, 1997, a net loss of $186,605
was realized versus net income of $179,965 in the same period in 1996. Net
interest income increased to $429,610 in the 1997 period from $180,081 in the
1996 period, and other income was $1,173,292 in the 1997 period versus
$1,579,149 in the 1996 period. The net loss was primarily the result of a
combination of continued (but decreased sequentially quarter to quarter)
operating losses at the Ann Arbor Bank operation, increased profits at Varsity
Mortgage and a special charge at Michigan BIDCO. The prior year net income at
the Bank was helped by securities gains. Other operating expenses remain at
higher than desired levels, and increased to $1,760,796 in the 1997 period from
$1,495,475 in the 1996 period. As discussed below under "Other Non-Interest
Expense", management is evaluating reductions in the Bank's other non-interest
expenses and options aimed at realigning the Bank's performance with budgetary
goals.
For the nine months ended September 30, 1997, a net loss of $388,484
was realized versus a net loss of $242,009 in the same period in 1996. Net
interest income increased to $1,213,753 in the 1997 period from $645,633 in the
1996 period, and other income was $4,003,201 in the 1997 period versus
$2,516,609 in the 1996 period. Other operating expense increased to $5,510,779
in the 1997 period from $3,534,284 in the 1996 period.
The increased net loss in the nine months ended September 30, 1997
versus the 1996 period was principally due to a combination of decreased losses
at the Ann Arbor bank operation, increased profits from the Bank's mortgage
subsidiaries, the special charge at Michigan BIDCO and the absence of
securities gains which assisted prior year results.
<PAGE> 10
10
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three and nine months ended September 30, 1997
and 1996 (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 1997 PRE-TAX INCOME (LOSS) SUMMARY
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Banking
Community & mortgage banking $(203) $(51)
Midwest Loan Services 12 1
Varsity Mortgage & Varsity Funding 147 248
Equity in the (loss) of Michigan BIDCO (97) (9)
Corporate Office (39) (23)
------ ----
Total $(180) 166
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 PRE-TAX INCOME (LOSS) SUMMARY
1997 1996
<S> <C> <C>
Banking
Community & mortgage banking $(681) (744)
Midwest Loan Services 49 0
Varsity Mortgage & Varsity Funding 295 308
Equity in the earnings (loss), Michigan BIDCO (54) 31
Corporate Office (164) (95)
------ -----
Total $(555) (500)
</TABLE>
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased to $429,610 for the three months ended
September 30, 1997 from $180,081 for the three months ended September 30, 1996.
Net interest income rose from the prior year period because of an increase in
the average balance of loans and an increase in the yield on interest earning
assets to 9.17% in the 1997 period from 8.03% in the 1996 period. The cost of
interest bearing liabilities decreased to 5.80% in the 1997 period from 6.10%
in the 1996 period. Net interest income as a percentage of total earning
assets increased to 3.22% from 1.55% in the 1996 period.
For the nine month period ended September 30, 1997, net interest income
increased to $1,213,753 from $645,633 in the 1996 period. The yield on
interest earning assets increased to 9.40% in the 1997 period from 7.95% in the
1996 period. The cost of interest bearing liabilities increased to 6.05% in
the 1997 period from 5.97% in 1996 period. As a result, net interest income
increased as a percent of total average earning assets to 3.14% from 1.96%.
Interest income
Interest income increased to $1,224,409 in the quarter ended September
30, 1997 from $933,536 in the quarter ended September 30,
<PAGE> 11
11
1996. The average volume of interest earning assets increased to
$52,950,048 in the 1997 period from $46,095,668 in the 1996 period, an increase
of 14.9%. The increased volume of earning assets was due to a 32.5% increase
in loans, only partially offset by a decline in investment securities.
Interest income increased as a result of an increase in earning assets and the
yield on earning assets. The overall yield on earning assets increased to
9.17% from 8.03%, 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, 1997
to $3,638,321 from $2,616,865 in the nine months ended September 30, 1996.
The average volume of interest earning assets increased from $44,028,384 in the
1996 period to $51,738,245 in the 1997 period, an increase of 17.5%. The
increase in interest income was attributable to the increase in the volume of
earning assets and an increase in the average yield on earning assets. The
overall yield on earning assets increased from 7.95% to 9.40%, as more earning
assets were invested in loans, and lower yielding investment securities were
sold to fund loan growth. The increases in loans were the result of the
activity generated from the Bank's Ann Arbor office and the activity generated
by Varsity Mortgage and Varsity Funding.
The average volume of securities and investments in the three months
ended September 30, 1997 decreased 26.9% over the same period in 1996, as the
Bank sold investment securities to fund loan growth. In the nine month
period, the average volume of securities and investments decreased 55.1% over
the same period in 1996, as the Bank sold investment securities to fund loan
growth. The yield increased from 5.85% in the three month period ended
September 30, 1996 to 7.08% in the 1997 period. The increase in yields was the
result of the sale of lower yielding investments and an increased yield on the
Bank's fed funds sold. In the nine month periods, the yield increased from
6.29% in the 1996 period to 8.13% in the 1997 period. The increase 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 maintained during 1997, as a result of the increased loan
origination activity associated with the Bank's Ann Arbor office, Varsity
Mortgage and Varsity Funding.
Interest Expense
Interest expense increased to $794,799 in the three months ended
September 30, 1997 from $753,455 in the 1996 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 wholesale
funds and borrowings and a lower cost of funds. The average cost of funds
decreased to 5.80% in the 1997 period from 6.10% in the 1996 period. The
average volume of interest bearing liabilities increased 11.0% in the 1997
period versus the 1996 period.
In the nine month periods ending September 30, 1997 and 1996, interest
expense increased to $2,424,568 in 1997 from $1,971,232 in the 1996 period.
The increase was due to the same factors as in the three months periods
discussed above, partially offset by a decline in the
<PAGE> 12
12
cost of funds. The cost of funds increased to 6.05% in the 1997 period from
5.97% in the 1996 period. The average volume of interest bearing liabilities
increased 21.3% in the 1997 period versus the 1996 period. The increase in
deposits is a result of increased deposit activity associated with the Bank's
Ann Arbor office. As of November 6, 1997 (the 21-month anniversary date of the
opening of the Ann Arbor office), a total of just under $35,000,000 in new
deposits had been generated in the Ann Arbor office.
DAILY AVERAGE BALANCE SHEET AND
INTEREST MARGIN ANALYSIS
The following tables summarize daily 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, 1997 and 1996.
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended September 30,
====================================================================================
1997 1996
====================================================================================
Average Interest Average Average Interest Average
Balance Inc/Exp Yield Balance Inc/Exp Yield
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposit 337,038 3,901 4.59% 689,183 8,742 5.03%
Fed Funds Sold 7,522,433 111,131 5.86% 4,560,924 59,272 5.16%
Securities (Taxable): 2,135,474 63,234 11.75% 8,427,378 133,754 6.30%
------------------------------------------------------------------------------------
Total Securities & S.T. Investments 9,994,945 178,266 7.08% 13,677,485 201,768 5.85%
------------------------------------------------------------------------------------
Loans:
Commercial 13,114,410 315,697 9.55% 5,605,317 132,772 9.40%
Real Estate Mortgage 24,592,072 596,096 9.62% 23,474,121 512,191 8.66%
Installment/Consumer 5,248,621 134,350 10.16% 3,338,745 86,805 10.31%
------------------------------------------------------------------------------------
Total Loans 42,955,103 1,046,143 9.66% 32,418,183 731,768 8.96%
------------------------------------------------------------------------------------
Total Interest Bearing Assets 52,950,048 1,224,409 9.17% 46,095,668 933,536 8.03%
------------------------------------------------------------------------------------
Less allowance for loan losses &
deferred fees (520,930) (250,238)
---------- ----------
52,429,118 45,845,430
Mortgage Servicing Rights 1,478,107 3,231,414
Non-earning assets 7,607,112 7,655,031
---------- ----------
Total Assets 61,514,337 56,731,875
========== ==========
LIABILITIES
Interest Bearing Liabilities
Deposit Accounts:
Now 3,621,020 45,240 4.96% 1,043,053 13,210 5.02%
Savings 106,121 676 2.53% 94,144 565 2.38%
Canadian Dollar Savings 188,333 1,129 2.38% 764,250 10,123 5.26%
Time 29,085,411 446,883 6.10% 27,362,562 454,502 6.59%
Borrowed Funds 3,136,381 58,691 7.42% 7,000,000 102,608 5.82%
Money Market Accounts 17,332,757 216,783 4.96% 11,799,908 155,257 5.22%
Holding Company Debt 929,212 25,397 10.84% 962,500 17,190 7.09%
------------------------------------------------------------------------------------
54,399,235 794,799 5.80% 49,026,417 753,455 6.10%
====================================================================================
Net Interest Income 429,610 180,081
======= =======
Weighted Average Rate Spread 3.38% 1.94%
===== =====
Net Yield on Average earning assets 3.22% 1.55%
===== =====
</TABLE>
(1) 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,
==============================================================================
1997 1996
==============================================================================
Average Interest Average Average Interest Average
Balance Inc/Exp Yield Balance Inc/Exp Yield
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposit 560,468 19,663 4.69% 917,947 33,432 4.87%
Fed Funds Sold 5,822,066 251,793 5.78% 3,917,714 152,199 5.19%
Securities (Taxable): 4,758,870 289,368 8.13% 10,596,172 498,488 6.29%
------------------------------------------------------------------------------
Total Securities & S.T. Investments 11,141,404 560,824 6.73% 15,431,833 684,119 5.93%
------------------------------------------------------------------------------
Loans:
Commercial 12,291,646 846,617 9.21% 5,030,880 364,259 9.68%
Real Estate Mortgage 23,749,437 1,888,059 10.63% 21,148,837 1,382,902 8.74%
Installment/Consumer 4,555,758 342,821 10.06% 2,416,834 185,585 10.27%
------------------------------------------------------------------------------
Total Loans 40,596,841 3,077,497 10.14% 28,596,551 1,932,746 9.04%
------------------------------------------------------------------------------
Total Interest Bearing Assets 51,738,245 3,638,321 9.40% 44,028,384 2,616,865 7.95%
------------------------------------------------------------------------------
Less allowance for loan losses &
deferred fees (357,134) (306,143)
---------- ----------
51,381,111 43,722,241
Mortgage Servicing Rights 1,492,628 3,137,247
Non-earning assets 7,658,904 1,761,273
---------- ----------
Total Assets 60,532,643 48,620,761
========== ==========
LIABILITIES
Interest Bearing Liabilities
Deposit Accounts:
Now 3,090,499 113,883 4.93% 595,823 22,569 5.06%
Savings 109,603 2,060 2.51% 68,778 1,250 2.43%
Canadian Dollar Savings 583,053 10,448 2.40% 1,025,473 41,519 5.41%
Time 27,069,558 1,260,666 6.23% 23,690,709 1,087,993 6.14%
Borrowed Funds 5,303,480 338,479 8.53% 8,690,000 389,270 5.99%
Money Market Accounts 16,482,414 628,900 5.10% 9,018,521 356,370 5.28%
Holding Company Debt 941,621 70,132 9.96% 1,075,000 72,261 8.99%
------------------------------------------------------------------------------
53,580,228 2,424,568 6.05% 44,164,304 1,971,232 5.97%
==============================================================================
Net Interest Income 1,213,753 645,633
========= =======
Weighted Average Rate Spread 3.35% 1.98%
===== =====
Net Yield on Average earning assets 3.14% 1.96%
===== =====
</TABLE>
(1) 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
Allowance for Loan Losses
The monthly loan loss provision remained at a rate of $7,500 in the
third quarter of 1997. In the 1996 period, the monthly provision was $6,000.
The increased monthly provision for loan losses is the result of management's
desire to build reserves, as new loans are originated in Ann Arbor. A special
loan loss provision of $194,000 was charged to income in June 1997 as directed
by the Bank's regulatory examiners. They required the special provision as a
result of ratio analysis rather than specific loan problems, expected loan
losses or actual loss experience.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1997 1996 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for loan losses $ 22,500 $ 98,000 $ 261,500 $ 128,000
Loan charge-offs (10,000) (134,636) (56,772) (170,470)
Recoveries 7,755 2,807 30,799 7,007
-------- -------- --------- ---------
Net increase (decrease)
in allowance $ 20,255 $(33,829) $ 235,527 $ (35,463)
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
At At At
Sept. 30 June 30, December 31,
1997 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Total loans (1) $28,224,624 $28,488,449 $20,966,290
Allowance for loan losses 533,310 513,055 297,783
Allowance/Loans, % (1) 1.89% 1.80% 1.42%
</TABLE>
(1) Excludes loans held for sale.
<PAGE> 16
16
The following schedule summarizes the Company's nonperforming
assets for the periods indicated:
<TABLE>
<CAPTION>
At At At
Sept. 30, June 30, December 31,
1997 1997 1996
--------------------------------------
<S> <C> <C> <C>
Past due 90 days and over
and still accruing:
Real estate 172,270 337,879 226,144
Installment 23,493 24,331 34,096
Commercial 340,385 94,738 29,479
------- ------- -------
Subtotal 536,148 456,948 289,719
Nonaccrual
loans:
Real estate 559,519 578,725 336,468
Installment 21,083 - 1,968
Commercial 113,216 85,263 125,761
------- ------- -------
Subtotal 693,818 663,988 464,197
Other real
estate owned (2) 597,570 597,570 266,079
------- ------- -------
Total 1,827,536 1,718,506 1,019,995
As % of total
loans (1) 6.47% 6.03% 4.86%
Ratio of allowance for
loan losses to total
non-performing loans 43.4% 45.8% 39.5%
</TABLE>
(1) Excluding loans held for sale.
(2) Other real estate owned at September 30, 1997, June 30, 1997 and December
31, 1996 includes a commercial development site in Sault Ste. Marie, Michigan.
Based upon its assessment of current market conditions, management believes the
16-acre site where a former loan office is located has a fair market value
substantially more than its carrying cost of $266,079. This property is carried
as other real estate owned in the Company's financial statements since the Bank
no longer plans to use it as a branch location. While it is management's goal
to sell this site in 1997, and the Bank is in negotiations at this time to sell
a significant portion of the property, there is no assurance that a sale will be
consummated.
With the exception of one $42,470 commercial real estate building, the
other real estate owned, other than the property mentioned above, consists of
residential single family homes. Based upon management's review of appraisal
information and current broker price opinions, management believes that with few
exceptions, the Bank is well secured with respect to these loans and the other
real estate owned which is carried at cost. Subsequent to quarter-end, two
houses carried as other real estate owned with a carrying value of $209,317 were
sold at cost.
<PAGE> 17
17
Since year-end 1996, the increases in non-performing assets mainly
relate to loans originated for the secondary market which have become delinquent
and are either under modification agreements to bring the loans current or in
the process of foreclosure.
The Bank's greatest credit risks relate to the commercial and home
equity/installment loan portfolios, and these levels showed decreases at
September 30 from the levels at June 30, 1997 and December 31, 1996, with the
exception of the $295,643 commercial credit discussed below. Included at
September 30, 1997 in commercial loans delinquent 90 days and over and still
accruing are two loans secured by a self-store warehouse and retail complex in
Sault Ste. Marie with a balance of $295,643 which matured in June 1997.
Management believes that the Bank is well secured by the real estate collateral
and is working with the borrowers to refinance the property with another local
bank. Subsequent to quarter-end, the Bank received paydowns on two commercial
loans in the non-accrual or over 90 day delinquent categories in the amount of
approximately $47,000 and charged-off the remaining balance of a third $26,000
loan, after a $13,000 principal payment.
Management believes that the current allowance for loan losses is
adequate to absorb losses inherent in the loan portfolio, although the ultimate
adequacy of the allowance is dependent upon future economic factors beyond the
Company's control. A downturn in the general nationwide economy will tend to
aggravate, for example, the problems of local loan customers currently facing
some difficulties, and could decrease residential home prices. A general
nationwide business expansion could however conversely diminish the severity of
any such difficulties.
Non-Interest Income
Total non-interest income decreased to $1,173,292 for the three months
ended September 30, 1996 from $1,579,149 for the three months ended September
30, 1997. The decrease was principally a result of an absence in the 1997
period of securities gains and special gains from the sale of loan servicing
rights which more than offset a $374,963 increase in the mortgage banking
income.
Total non-interest income increased to $4,003,201 for the nine months
ended September 30, 1997 from $2,516,609 for the nine months ended September 30,
1996. The increase was principally a result of a $2,211,210 increase in the
mortgage banking income.
Securities. During the nine months ended September 30, 1997, securities
totalling $5,774,430 were sold from the Bank's available-for-sale securities
portfolio with gross realized losses of $63,186 and gains of $29,746. During
the first half of 1997, the Bank sold most of its COFI-index and LIBOR-index
linked adjustable rate mortgage- backed securities. Taking into account
realized and unrealized gains and losses on the securities portfolio, during the
first nine months of 1997, the yield on the Company's investment securities
portfolio was 8.72%. During the nine months ended September 30, 1997, securities
totalling $138,883 were sold from the Company's available-for-sale securities
portfolio with gross realized gains of $41,155 and no
<PAGE> 18
18
losses.
Mortgage Banking. Mortgage banking income increased to $1,248,818 in
the three months ended September 30, 1997 from $873,855 in the three months
ended September 30, 1996, from sharply increased loan purchase and origination
volumes during the 1997 period as well as the gain on sale of participation
certificates in sub-performing home equity loans (see the discussion of the "RTC
Loan Pool" below). This was partially offset by a decrease in return from the
Bank's investment in FHLMC and FNMA single family mortgage loans serviced for
others, as a result of amortization of servicing right assets due to mortgage
payoffs. There was also a lower of cost or market adjustment of $18,839
credited to income in the 1997 period to mark the mortgages held for sale to the
lower of cost or market, versus income of $73,917 in the 1996 period.
Although loan purchase and origination volumes increased during the
period, the amount of loans held for sale at September 30, 1997 decreased 56.7%
from the level at December 31, 1996 as management changed its operating
procedures so that more loans held for sale which were purchased or originated
just prior to month-end were pooled or sold prior to month-end. This also
decreased the need for temporary month-end short term borrowings, which dropped
86.5% at September 30, 1997 from the amount at December 31, 1996.
At September 30, 1997, the Bank and its subsidiaries owned the right to
service $140,979,128 of FHLMC, FNMA and private conduit mortgages for others,
of which approximately 55% was owned by Midwest Loan Services, and the
remainder owned by the Bank. The following table summarizes the portfolio by
type and mortgage note rate:
Interest Rate Stratification of the Company's Servicing
<TABLE>
<CAPTION>
($ in 000s) FIXED RATE - BY MATURITY
-----------------------------
Mortgage Rate (%) ARMs UNDER 10 10-25 OVER 25
<S> <C> <C> <C> <C>
9.00 and up 2,217 109 223 3,702
8.50 - 8.99 8,208 - 431 6,800
8.00 - 8.49 5,044 115 1,302 18,397
7.50 - 7.99 2,178 64 4,055 41,522
7.00 - 7.49 1,257 193 8,279 19,296
6.50 - 6.99 - 175 5,683 8,854
6.00 - 6.49 - 159 934 1,377
under 6.00 391 - - 14
------ ------ ------ ------
19,295 815 20,907 99,962
Current market
interest rates 6.50% 7.25% 7.25% 7.50%
Average annual
servicing fee 0.47% 0.29% 0.27% 0.26%
</TABLE>
Interest rates have been very stable for nearly twenty months.
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. Based on recent comparable sales and
<PAGE> 19
19
indications of market value from industry brokers, management believes that the
current market value of the Company's mortgage servicing rights approximates
cost. During the 1997 third quarter, the Bank sold approximately
$83,900,000 of it's servicing portfolio for a net gain of $41,227. 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.
At September 30, 1997, the Bank had outstanding purchase commitments to
buy single family FHLMC qualifying mortgage loans of $33,573,000 and outstanding
forward commitments to deliver FNMA and FHLMC mortgage-backed securities of
$5,000,000, substantially all of which commitments were for delivery within
three months or less.
Servicing Rights Held by the Company
<TABLE>
<CAPTION>
(amounts in $000s) Sept. 30 June 30, December 31,
1997 1997 1996
---------------------------------
<S> <C> <C> <C>
Total servicing portfolio 140,979 204,178 214,046
Book value of servicing 1,611 2,429 2,312
Estimated market value
of servicing:
Management estimate (1) 1,628 2,528 2,371
Discounted cash flow (2) 1,636 2,644 2,466
Estimated excess of market
over book value (3) 25- 17 215- 99 154- 59
</TABLE>
(1) Assumes a price based upon market transactions at September 30, June 30,
1997 and December 31, 1996 of 4.7x, 4.7x and 4.9x (4.9 times the servicing
fee) for 30-year servicing, 3.6x, 3.6x and 3.75x for 15-year servicing,
2.2x, 2.2x and 2.3x for Balloon servicing and 2.1x, 2.1x and 2.1x for ARM
servicing, respectively. Excess servicing is discounted from these
amounts at a multiple of one times the servicing fee.
(2) Uses net present value analysis of future cash flows, discounted
back at 13.14%.
(3) Range based upon the two methods used in (1) and (2), above.
During the period ended September 30, 1997 purchases and sales of
mortgage servicing rights by third-parties evidenced a stable trend in price
which mirrored the generally stable interest rates throughout the period.
Subsequent to September 30, 1997, the value of servicing rights decreased as
interest rates fell to new cycle lows.
RTC Loan Pool. 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 (which had purchased them from the Resolution Trust
Corporation (RTC)) for approximately $1,903,000 (the "RTC Loan Pool"). In
September 1996 an additional $700,000 in home equity loans purchased from a home
equity loan originator were added to the RTC Loan Pool as a fifth Participation
Certificate at a cost of $115,000.
<PAGE> 20
20
Substantially all of the remaining loans underlying the first four
Participation Certificates were sold as of March 28, 1997 for $1,725,000. As a
result the Bank's investment in the RTC Loan Pool was reduced to zero, and the
balance of the proceeds from the sale, per the terms of the RTC Loan Pool
acquisition agreement, was split 50/50 with the servicer of the RTC Loan Pool.
The Bank's gain on this transaction to date, included in mortgage banking
income, is $408,237. Additional proceeds are anticipated from the loans
underlying the Fifth Participation Certificate with a face value of $215,000.
In mid-1996, the servicer submitted a request to the RTC for a $650,000
refund of loans that had previously been paid off, but were included in the RTC
Loan Pool, pursuant to the original purchase agreement. If received, this
amount would be split 50/50 with the RTC servicer of the RTC Loan Pool. In
April 1997, the servicer was notified that the RTC had accepted the refund
request in the amount of $300,000 with a request for additional information
regarding the remaining $350,000. After the additional information was
submitted, the RTC rejected the claim in total. As a result, the Bank filed a
lawsuit in late October 1997 against the RTC in the U.S. District Court for the
District of Columbia seeking recovery of the requested $650,000 refund. If
additional proceeds are realized from either the RTC or the Fifth Participation
Certificate, any of the amounts received would also be split 50/50 with the
servicer of the RTC Loan Pool, and any amount received by the Bank would be
income.
Varsity Mortgage. The Bank restructured the agreement with the managers
of Varsity Mortgage as of April 1, 1997. Under the revised agreement, the Bank
will have an ongoing profit participation equal to 50% of the net income of
Varsity Mortgage. Previously, the Bank's future profit participation was capped
at an amount related to its investment. The Bank also lowered it's capital
investment in Varsity Mortgage to $300,000 and extended a line of credit in the
amount of $500,000 at Wall Street Journal Prime Rate, of which line nothing has
been drawn to date. In exchange, the Bank lowered the tablefunding interest
rate on its tablefunding line to Varsity Mortgage so that it is now in line
with market interest rates on comparable tablefunding lines, and increased the
Managers' annual salaries by a total of $150,000 per year. Further, as a
result of the restructuring of the agreement, the Bank's income from Varsity
Mortgage for the quarter ending June 30, 1997 was decreased on a one-time
earnings adjustment of approximately $145,000 (see "Non-interest Expense",
below). In the three and nine months periods ended September 30, 1997, the
Bank's share of Varsity Mortgage's income was $109,370 and $239,130.
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, 1997, the BIDCO had made twenty-three such investments,
amounting to a total of $10,112,600 at original cost (before repayments or
participations sold). At September 30, 1997, the BIDCO had total unaudited
assets of $5,623,696. For the three and nine months ended September 30, 1997
and 1996, the Bank's 44.1% equity share in the earnings of the BIDCO's reported
net income
<PAGE> 21
21
(loss) was ($97,182) and ($8,821), and ($53,660) and $31,179, respectively.
The BIDCO's net loss in the 1997 period was the result of investment
mark to market adjustments primarily affecting two BIDCO investments, #16 and
#20, below. The carrying value of the BIDCO's investment in #16 was reduced to
$552,861, some $938,215 below cost. During the third quarter of 1997, the BIDCO
reached agreement with #20 on renegotiated terms of its investment in #20 as
part of a prepackaged bankruptcy reorganization of this firm during the fourth
quarter of 1997. The carrying value of the BIDCO's investment has been reduced
from $390,000 to $280,000 to reflect the value, post-restructuring.
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. By management policy,
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 before participation by other investors) have been made in the following
types of businesses (excluding investments repaid in full):
<TABLE>
<CAPTION>
Michigan BIDCO, investments:
----------------------------
Total Initial Equity
Industry Investment Participation?
<S> <C> <C>
#1 ABC-TV affiliate $1,472,000 yes
#3 Cable TV 545,000 yes
#6 Environmental engineering 100,000 repurchased
#8 Hunting supplies 60,000 no
#9 Injection mold equip.
manufacture 25,000 no
#10 Janitorial supplies 85,000 no
#11 Limited service hotels 738,600 yes
#12 Manufacturing 200,000 no
#13 Manufacturing 200,000 no
#14 Manufacturing 200,000 no
#15 Metal manufacturing 80,000 no
#16 Paper converting 2,762,000 yes
#18 Railcar parts manufacturing 125,000 yes
#19 Railroad boxcar leasing 1,500,000 no
#20 Recycled paper pulp mill 780,000 yes
#22 Specialty financial services 540,000 yes
#23 Tissue paper mill 700,000 yes
-----------
Total $10,112,600
===========
</TABLE>
Loan participations have been sold in loans associated with investments
#1, 3, 10, 12, 13, 14, 16, 19, 20 and 23. At September 30, 1997, the BIDCO had
no outstanding conditional commitments to lend.
<PAGE> 22
22
Northern Michigan Foundation. In December 1995, the BIDCO donated
$225,000 to capitalize 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. On an ongoing basis as the Foundation increases the size of its loan
portfolio an increased portion of the BIDCO's overhead has been borne by the
Foundation. The BIDCO and the Foundation share administrative staffs and
offices, with the Foundation reimbursing the BIDCO for these services. The
monthly management fee paid by the Foundation to the BIDCO for the firset half
of 1997 was $8,000, and in the third quarter of 1997, the fee was raised to
$11,000 per month. 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, 1997, the Foundation had lent $1,570,000 of its
available funds to twelve borrowers, with $730,000 undrawn and available for
lending from the U.S. RECDS loan, and cash available for relending from paid off
loans and the Foundation's initial equity capital of $674,000.
Non-Interest Expense
Non-interest expense increased to $1,760,796 in the three months ended
September 30, 1997 from $1,495,475 for the three months ended September 30,
1996. The increase was primarily the result of profit sharing reflected as
salary and wage expense at Varsity Mortgage, and the expansion of business at
the Ann Arbor office of the Bank, Varsity Mortgage and Varsity Funding.
Non-interest expense increased to $5,510,779 in the nine months ended
September 30, 1997 from $3,534,284 for the nine months ended September 30,
1996. Comparisons of the first nine months of 1997 versus the first nine
months of 1996 should take into account that fact that the Bank started-up the
Ann Arbor main office in February 1996, and Varsity Mortgage started operations
in March 1996, so that 1997 reflects a full three quarters of expenses as well
as business expansion since the start-up year. Non-interest expense in the
1997 second quarter also reflects $145,000 in one-time additional
profit-sharing expense at Varsity Mortgage resulting from a restructuring of
the Varsity Mortgage operating agreement and a substantial accrual of bonus
under the Bank President's five year employment contract in the amount of
$210,000.
Non-interest operating expense for the parent company only decreased to
$19,963, for the three month 1997 period from $37,873 for the 1996 period.
Legal, audit, public listing and ESOP benefit expenses were lower. Non-
interest operating expense for only the parent company increased to $151,540 for
the nine month 1997 period from $108,336 for the 1996 period. Public listing
and ESOP benefit expenses were higher.
<PAGE> 23
23
As a result of several factors, including regulatory criticism of past
performance of the Bank with respect to earnings and compliance, and the fact
that the Bank has not met it's internal budgetary goals for 1997, the Company is
evaluating various options. The future success of the Bank is dependent upon
firm management response to correct deficiencies noted by the Bank's regulators,
including a reduction in staff levels and other expenses to bring them in line
with the current volume of business, and specific measures to correct noted
deficiencies.
Liquidity and Capital Resources
Capital Resources. The table on page 24 sets forth the Bank's risk
based assets, and the capital ratios and risk based capital ratios of the Bank
and Company. At September 30, 1997, the Bank was "well" capitalized for bank
regulatory purposes (the required ratio for "well capitalized" was 5% of total
assets (Leverage), 6% (Tier 1) of risk-based assets, and 10% (Tier 1 and 2) of
risk-based assets).
The Company's common stock, par value $0.01 per share is listed on the
NASDAQ Small-Cap Stock Market. The Company recently received notification from
NASDAQ that it does not meet one of the new continued listing requirements
recently implemented by NASDAQ with respect to the number of shares held as
public float. The minimum requirement under the new rules is 500,000 shares
held by non-officers, directors and 10% shareholders. Although the Company
believes that if the Company were to declare a 50% stock dividend, it would meet
the above 500,000 share NASDAQ's public float requirement, there is no assurance
that the Company will meet NASDAQ's continued listing requirements, or that the
requirements for continued listing for the NASDAQ SmallCap Market will not be
raised in the future which could cause the Company's shares to be delisted. If
the Company were to cease to be listed on the Nasdaq SmallCap Market, it could
have a material adverse effect on the market price and liquidity of the market
for the Company's Common Stock, which in turn could have a material adverse
effect on the Company There has historically been a relatively inactive market
for the Company's Common Stock.
This report contains certain forward looking statements which reflects
the Company's expectation or belief containing future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking and
mortgage banking operations and the nature and adequacy of allowances for loan
losses. The Company can give no assurance that the expectations reflected in
its forward looking statements will prove to be correct. Various factors could
cause results to differ materially from the Company's expectations.
Without intending to be exhaustive, these factors include: reliance on
key personnel and the potential inability of the Company to attract or retain
qualified managers; the risks inherent in the establishment of a new business
enterprise, including substantial operating losses, associated with the
establishment and growth of the Bank's Ann Arbor branch, without any assurance
of future profitability; significant
<PAGE> 24
UNIVERSITY BANK 24
Risk Adjusted Assets & Risk Adjusted Capital Ratio at September 30, 1997
($ in 000's)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Risk Adjusted
Value Risk Asset
Asset Weight Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Federal Reserve Deposits 388 0% -
U.S. Gov't Agency Secuities 591 0% -
U.S. Treasury Securities - 0% -
U.S. Gov't Guaranteed Loans 187 20% 37
Balances at Domestic and Canadian Banks 1,176 20% 235
Fed Funds Sold 14,128 20% 2,826
U.S. Gov't Agency Mortgage-Backed Securities 1,490 20% 298
U.S. Gov't Equity Securities 848 20% 170
Other Mortgage-Backed Securities - 50% -
1-4 Family Mortgage Loans 23,484 50% 11,742
Junior Liens 3,626 100% 3,626
All Other Loans 14,687 100% 14,687
Loan Loss Reserve (533) 0% -
All Other Securities - 100% -
Real Estate Owned 598 100% 598
Premises & Equipment 1,890 100% 1,890
Mortgage Servicing Rights 1,611 100% 1,611
Other Assets 2,793 100% 2,793
- ----------------------------------------------------------------------------------------
TOTAL ASSETS 66,964 40,513
Off Balance Sheet Items:
Letters of Credit and Committments>1 year - 100% -
Foreign Exchange Contracts 200 1% 2
Home Equity Lines of Credit 2,768 50% 1,384
Interest Rate Contracts (1) - 0% -
FHLMC FNMA Loan Purchase Committments<1year 33,573 0% -
MBS FHLMC/FNMA Forward Sell Committments (1) 5,000 0% -
Agency Guaranteed Commercial Loans Sold 203 20% 41
------------------------------------
TOTAL RISK-ADJUSTED ASSETS 41,939
========
Capital Resources:
Shareholder Equity 4,611
Net Unrealized Loss on AFS Securities 15
Minority Interest in Consolidated Subsidiary 210
--------
Total Equity (Tier 1) 4,835
Qualifying Loan Loss Reserve (Tier 2) 511
--------
Regulatory Capital (Tier 1 & Tier 2) 5,346
========
Primary and Total Capital Ratio (Leverage) 7.22%
========
Risk Adjusted Capital Ratio (Tier 1) 11.53%
========
Risk-Adjusted Capital Ratio (Tier 1 & Tier 2) 12.75%
========
University Bancorp Consolidated
Total Capital Ratio (Leverage Ratio) 6.07%
========
</TABLE>
<PAGE> 25
25
competition from other financial institutions with far greater assets
and resources than the Company; credit and loan loss risks associated with the
relative lack of geographic diversity of the Bank's borrowers (who tend to be
concentrated in the Ann Arbor and eastern Upper Peninsula of Michigan areas);
the sensitivity of the Company's operations to many factors beyond its control,
including general economic conditions and monetary policies; and the effects of
extensive governmental regulation and supervision, including risks that
regulatory examiners give negative examination ratings.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
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, borrowings from correspondent lenders secured by securities and/or
residential mortgage loans. In addition, the Bank invests in overnight Federal
Funds. At September 30, 1997, the bank had cash and due from banks and fed
funds sold of $16,150,584. The Bank also has an unused $2,000,000 line of
credit secured by investment securities and two lines of credit from
correspondents secured by mortgage loans for sale to the secondary market. The
Bank has also sold brokered CDs from time to time in order to bolster liquidity.
During the nine month period ended September 30, 1997 the Bank reduced
its brokered deposits by approximately $6,500,000, which was more than offset
by a corresponding increase in retail time deposits. In addition, during the
nine month period ended September 30, 1997, the Bank repaid all Federal Home
Loan Bank advances, reducing the Bank's borrowings by $6,000,000.
Parent Company Liquidity. At year-end 1996, University Bancorp, Inc.
held cash and marketable equity securities of $155,183. This decreased by
$65,254 to $89,929 at September 30, 1997. The decrease in cash and marketable
equity securities was due to an increase in the Company's investment in the Bank
of $350,000 during the quarter, mostly offset by the sale of shares of the
Company's common stock in a private placement. During the nine months ended
September 30, 1997 no dividends were paid from the Bank, as a result of low
profitability at the Bank. 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 cash used to fund the parent
company's indebtedness to North Country Bank & Trust ("NCB&T"), which amounted
to $937,500 and $962,500 at September 30, 1997 and at December 31, 1996,
respectively. The NCB&T note matured November 1, 1997, and was recently
modified to extend the maturity date to December 31, 1997. The Company intends
to seek an additional renewal at that time. Management believes that if the
holding company's loan is renewed, the cash and securities on hand, federal tax
refunds receivable and the available unrestricted retained earnings that
University Bank is able to pay the Company in the form of
<PAGE> 26
26
University Bank
Asset/Liability Position Analysis
($ in 000's)
Maturing or Repricing in
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ASSETS 3 MOS 3 - 12 MOS 1-5 YEARS >5 YEARS ALL OTHERS TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fed Funds 14,128 14,128
Loans (1) 1,085 1,218 3,885 6,651 12,839
Securities 2,139 1 4 848 2 2,994
Loans Held For Sale 9,512 9,512
Matured Loans 1,013 1,013
Variable Loans 12,149 12,149
Servicing Rights -
Other Assets 5,395 5,395
Cash & Due From Banks 1,973 1,973
Overdrafts 30 30
Non-accrual Loans 651 651
TOTALS 40,056 1,219 3,889 7,499 8,021 60,684
-------------------------------------------------------------------
LIABILITIES & CAPITAL
- ---------------------------
Jumbo CD's 11,878 4,455 1,417 17,750
Other CD's 1,525 6,324 3,711 54 11,614
MMDA 17,939 17,939
NOW 206 617 3,291 4,114
Demand & Escrows 4,012 4,012
Savings 110 110
Can $ Savings 29 29
Other Liabilities 3,500 2,500 (5,514) 486
Repo's & Borrowings -
Equity 4,630 4,630
-------------------------------------------------------------------
TOTALS 35,187 13,896 8,419 54 3,128 60,684
Impact of Hedging - - - (22,000) 0
Impact of LHFS & Pending - 150 592 17,809 0
GAP 4,869 (12,527) (3,938) 3,254 4,893
CUMULATIVE GAP 4,869 (7,658) (11,596) (8,342) (3,449)
8.02% -12.62% -19.11% -13.75% -5.68%
</TABLE>
NOTES:
(1) Net of bad debt reserve.
<PAGE> 27
27
dividends, with permission of NCB&T, should currently be sufficient to
cover expected required principal reductions. There can be no assurance that
the loan will be renewed, and if not, the Company will seek an alternative
lending source.
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 and Midwest Loan Services' investment in mortgage servicing
rights and improve the Bank's and Midwest Loan Services' current return on such
rights by lowering required amortization rates on the rights. Rising long and
short term interest rates also increase origination activity at Varsity Funding
as more residential borrowers need alternative sources of funding outside of
traditional secondary market loans. However, rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the Bank's retail mortgage banking operations and Varsity Mortgage's
operations. Rising interest rates also slow Midwest Loan Services' rate of
growth, but increases the duration of its existing subservicing contracts. The
table on page 26 details the Bank's asset/liability sensitivity as of September
30, 1997.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Other than the lawsuit filed by the Bank, further described in Part I,
Item 2 under "Non-Interest Income", RTC Loan Pool, there are no material pending
legal proceedings to which the Company or any of its subsidiaries is party or to
which any of their properties are subject.
Item 2. Changes in Securities
None
Item 5. Other information
Parent Company Financial Information
Certain condensed financial information with respect to University
Bancorp, Inc. follows:
<PAGE> 28
UNIVERSITY BANCORP, INC. (The Parent) 28
Condensed Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
ASSETS ------------ ---------------
<S> <C> <C>
Cash and due from banks $ 8,381 $ 41,113
------------- ---------------
Investment in subsidiary 4,611,427 4,529,503
------------- ---------------
Due from ESOP 1,000 1,000
Securities available for sale (Note 2) 81,548 114,070
Investment in Michigan BIDCO 201,201 202,702
Federal income tax receivable 901,301 173,372
Deferred taxes 4,640 8,537
Prepaid expenses and other assets 4,433 34,040
------------- ---------------
Total other assets 1,194,123 533,721
TOTAL ASSETS 5,813,931 5,104,337
============= ===============
<CAPTION>
March 31, December 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY -------------- ---------------
Note payable 925,000 962,500
Accrued interest payable 15,459 10,284
Accounts payable 11,679 138,443
Due to subsidiary 755,807 80,342
Deferred Tax Liability 12,739 0
------------- ---------------
Total Liabilities 1,720,684 1,191,569
Stockholders' equity:
Capital stock and paid in capital 3,173,002 2,618,459
Retained earnings 910,988 1,299,473
Net unrealized loss on
available-for-sale securities 9,257 (5,164)
------------- ---------------
Total Stockholders' equity 4,093,247 3,912,768
------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 5,813,931 $ 5,104,337
============= ===============
</TABLE>
<PAGE> 29
29
<TABLE>
<CAPTION>
UNIVERSITY BANCORP, INC. (The Parent)
Condensed Statement of Operations For the Three-Month For the Nine-Month
(Unaudited) Periods Ended Periods Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) from bank subsidiary $ (174,800) $ 195,313 $ (272,506) $ (162,492)
Gain on sale of investments 0 16,280 41,155 44,598
Interest income 4,671 5,617 15,885 15,299
Other income 0 13,877 88 18,502
------------ ---------- ------------ ----------
Total income (loss) (170,129) 231,087 (215,379) (84,093)
------------ ---------- --------- ----------
Interest expense 23,397 20,249 70,132 64,580
Legal and Audit Expense 6,594 8,124 38,848 46,891
Public listing expense 10,215 13,075 53,120 29,068
Other expenses 3,154 16,674 59,572 32,377
------------ ---------- --------- ----------
Total expenses 43,360 58,122 221,672 172,916
------------ ---------- --------- ----------
Income (loss) before income taxes (213,489) 172,965 (437,051) (257,009)
------------ ---------- --------- ----------
Income taxes (benefit) (26,885) (7,000) (48,567) (15,000)
------------ ---------- --------- ----------
Net income (loss) (186,604) 179,965 (388,484) (242,009)
=========== ========== ========= ==========
Net income (loss) per common share ($0.14) $0.14 ($0.31) ($0.19)
=========== ========== ========= ==========
</TABLE>
<PAGE> 30
UNIVERSITY BANCORP, INC. (The Parent) 30
Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Month
Periods Ended
September 30,
1997 1996
----------- -----------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net Income (Loss) $ (388,485) $ (242,009)
Depreciation 0 1,743
Increase in Federal income tax receivable (727,929) 0
Increase in payable to affiliate for federal
income tax receivable 675,465 0
Decrease/(increase) in Other Assets 35,005 (162,449)
Increase(Decrease) in interest payable 5,175 (9,639)
Increase(Decrease) in other liabilities (121,454) 100,437
Subsidiary net (income)/loss (81,924) 162,492
---------- ----------
Net cash provided by (used in)
operating activities (604,147) (149,425)
---------- ----------
Cash flow from investing activities:
Contributions of capital to subsidiary 0 (66,750)
Purchase of available for sale securities 0 (97,442)
Proceeds from sale of available for sale securities 54,372 138,216
---------- ----------
Net cash provided by (used in)
investing activities: 54,372 (25,976)
---------- ----------
Cash flow from financing activities:
Principal payment on notes payable (37,500) (37,500)
Proceeds from sale of common stock 554,543 66,750
Purchase of treasury stock 0 (20,946)
---------- ----------
Net cash provided by (used in)
financing activities: 517,043 8,304
---------- ----------
Net changes in cash and cash equivalents (32,732) (167,097)
Cash:
Beginning of year 41,113 239,868
---------- ----------
End of period $ 8,381 $ 72,771
========= =========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 18,726 $ 49,538
</TABLE>
<PAGE> 31
31
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 12, 1997 /s/ Donald F. Rositano
_________________________
Donald F. Rositano
Chief Financial Officer
(On behalf of the registrant
and as
Principal Financial Officer)
<PAGE> 32
32
Exhibit Index
------------- Sequentially
Numbered
Page
------------
27. Financial Data Schedule 33
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,905,956
<INT-BEARING-DEPOSITS> 116,534
<FED-FUNDS-SOLD> 14,128,095
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,130,811
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 28,224,624
<ALLOWANCE> (533,310)
<TOTAL-ASSETS> 67,616,499
<DEPOSITS> 55,340,383
<SHORT-TERM> 1,751,598
<LIABILITIES-OTHER> 6,220,443
<LONG-TERM> 0
0
0
<COMMON> 13,803
<OTHER-SE> 4,079,443
<TOTAL-LIABILITIES-AND-EQUITY> 67,616,499
<INTEREST-LOAN> 3,077,497
<INTEREST-INVEST> 560,824
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,638,321
<INTEREST-DEPOSIT> 2,015,957
<INTEREST-EXPENSE> 2,424,568
<INTEREST-INCOME-NET> 1,213,753
<LOAN-LOSSES> 261,500
<SECURITIES-GAINS> 7,715
<EXPENSE-OTHER> 5,510,779
<INCOME-PRETAX> (555,324)
<INCOME-PRE-EXTRAORDINARY> (555,324)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (388,484)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> 0.00
<YIELD-ACTUAL> 3.14
<LOANS-NON> 693,818
<LOANS-PAST> 536,148
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,527,877
<ALLOWANCE-OPEN> 297,783
<CHARGE-OFFS> 56,772
<RECOVERIES> 30,799
<ALLOWANCE-CLOSE> 533,310
<ALLOWANCE-DOMESTIC> 533,310
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 220,196
</TABLE>
