UNIVERSITY BANCORP INC /DE/
10-Q, 1997-08-14
STATE COMMERCIAL BANKS
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<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 June 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 August 12, 1997
                                                    1,310,599 shares


                               page 1 of 62 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 Operations            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
                      June 30,1997 and December 31,1996
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                 June 30                 December 31
                                                  1997                      1996
                                                ---------               ------------
<S>                                       <C>                      <C>
ASSETS

Cash and due from banks                  $       4,910,397             $       1,866,917 
Federal funds sold                              11,463,180                    10,683,895 
                                               -----------                   -----------

     Total cash and cash equivalents            16,373,577                    12,550,812 

Securities available for sale at 
market (note 2)                                  3,217,781                     7,346,856 

Loans held for sale                              6,436,301                    30,534,574 

Loans                                           28,488,449                    20,966,290 
Allowance for Loan Loss                           (513,055)                     (297,783)
                                               -----------                   -----------
     Loans, net                                 27,975,394                    20,668,507 

Premises and equipment                           1,988,551                     1,955,294 
Mortgage servicing rights                        2,428,672                     2,312,436 
Investment in and advances to
    Michigan BIDCO                                 858,058                       815,790 
Other real estate owned                            597,570                       266,079 
Other assets                                     2,753,855                     1,910,331 
                                               -----------                   -----------
      Total other assets                         8,626,706                     7,259,930 
                                               -----------                   -----------
      TOTAL ASSETS                      $       62,629,759            $       78,360,679 
                                                ==========                    ==========
</TABLE>


   The accompanying notes are an integral part of the consolidated financial
                                  statements.



<PAGE>   4


                  UNIVERSITY BANCORP, INC. AND SUBSIDIARIES             4
                         Consolidated Balance Sheets
                      June 30,1997 and December 31,1996
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                                       June 30                 December 31
                                                                       1997                       1996
                                                                     -----------                ----------
LIABILITIES AND STOCKHOLDERS' EQUITY                     
<S>                                                            <C>                          <C>     
Deposits:
  Demand - non interest bearing                                 $       2,500,872             $      6,814,000 
  Demand - interest bearing                                             20,419,535                  15,786,832 
  Savings                                                                  316,478                     976,479 
  Time                                                                  28,622,910                  29,529,050 
                                                                    --------------               --------------
     Total Deposits                                                     51,859,796                   53,106,361 

FHLB advances                                                           2,500,000                     6,000,000 
Mortgage escrow                                                           687,824                     1,064,650 
Short term borrowings                                                   1,764,218                    12,941,266 
Deferred noncompete income                                                 84,572                       102,076 
Other liabilities                                                       1,227,731                     1,032,130 
                                                                   --------------                --------------
     Total Liabilities                                                 58,124,141                    74,246,483 
                                                                   --------------                --------------

Minority Interest                                                        210,552                        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 1,379,364 shares in 1997
    and 1,295,366 shares in 1996                                          13,794                         12,954 
  Treasury Stock - 68,765 shares in 1997
    and 1996                                                            (300,883)                      (300,883)
  Additional Paid-in-Capital                                           3,454,562                      2,906,389 
  Retained earnings                                                    1,106,740                      1,299,473 
  Net unrealized gain/(loss) on securities
   available for sale, net of tax
   of $10,742 in 1997, and
   ($2,659) in 1996.                                                      20,853                         (5,164)
                                                                  --------------                  --------------
     Total Stockholders' equity                                        4,295,066                       3,912,769 
                                                                  --------------                  --------------
     TOTAL LIABILITIES AND
       STOCKHOLDERS' EQUITY                                   $       62,629,759              $       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
                                 (Unauditied)

<TABLE>
<CAPTION>
                                                                For the Three                            For the Six Month
                                                                Periods Ended                             Periods Ended
                                                        June 30,              June 30,              June 30,         June 30,
                                                         1997                  1996                  1997              1996
                                                       ----------           -----------           -----------        ----------
<S>                                               <C>                    <C>                      <C>            <C>
Interest income:
  Interest and fees on loans                          $       1,071,185     $       797,007        2,031,354     $       1,200,978 
  Interest on securities:
   U.S. Treasury Securities                                          -               28,293                -                32,904 
   U.S. Government agencies                                     90,178              123,319          184,772               297,373 
   Other securities                                             20,793               21,108           41,362                34,457 
   Interest on bank deposits                                     8,155               11,625           15,762                24,690 
   Interest on federal funds                                    76,515               36,883          140,662                92,927 
                                                         -------------         ------------     ------------          ------------
     Total interest income                                   1,266,826            1,018,235        2,413,912             1,683,329 
                                                         -------------         ------------     ------------          ------------
Interest expense:
  Interest on deposits:
   Demand deposits                                             251,197              112,055          480,760               157,258 
   Savings deposits                                              4,266               19,595           10,703                43,369 
   Time certificates of deposit                                425,857              383,943          813,783               686,705 
   Bank and other short term borrowings                        163,037              169,243          324,523               341,733 
                                                         -------------         ------------     ------------          ------------
     Total interest expense                                    844,357              684,836        1,629,769             1,229,065 

                                                         -------------         ------------     ------------          ------------
     Net interest income                                       422,469              333,399          784,143               454,264 

Provision for loan losses                                     216,500               18,000           239,000                30,000 
                                                        -------------         ------------      ------------          ------------
     Net interest income after
       provision for loan losses                              205,969              315,399           545,143               424,264 
                                                        -------------         ------------      ------------          ------------
Other income:
  Net security gains (losses)                                  30,066                9,340             7,715                95,861 
  Decrease in market value of
     loans held for sale                                       (8,902)             (75,697)          (12,641)             (165,388)
  Service charges and fees                                      1,465                6,917             5,849                 7,513 
  Foreign exchange income                                     (13,787)              12,364            (6,527)               30,852 
  Mortgage banking income                                   1,225,690              541,742         2,672,048               835,801 
  Profit from equity investment in
    Michigan BIDCO                                             38,704               20,000            43,522                40,000 
  Other                                                        46,067               60,342           119,943               104,109 
                                                        -------------         ------------      ------------          ------------
     Total other income                                     1,319,303              575,008         2,829,909               948,748 
                                                       -------------          ------------      ------------          ------------
</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 Six Month
                                                              Periods Ended                               Periods Ended
                                                      June 30,              June 30,              June 30,              June 30,
                                                       1997                   1996                  1997                  1996
                                                     ----------            ----------             ---------            ----------
<S>                                            <C>                   <C>                          <C>            <C>
Other expenses:
  Salaries and wages                            $       1,220,413     $       531,605               2,074,035     $       902,432 
  Employee benefits                                       158,921              93,236                 272,919             151,256 
  Occupancy, net                                           96,482              77,695                 200,281             148,941 
  Taxes other than income                                   8,580               6,958                  15,393              11,756 
  Data processing and equipment expense                    99,736              94,392                 195,309             167,126 
  Correspondent bank service charges                        4,664               4,470                  14,014               8,649 
  Advertising                                              27,217              43,207                  63,290              69,259 
  Net expense of other real estate owned                   (2,570)                602                  (6,360)              1,016 
  FDIC insurance                                            1,066                 500                   3,064               1,000 
  Legal and audit expense                                  45,343              72,307                 113,471             129,351 
  Other operating expenses                                418,903             266,357                 804,567             448,023 
                                                     ------------          ----------             -----------         -----------
     Total other expenses                               2,078,755           1,191,329               3,749,983           2,038,809 
                                                     ------------          ----------             -----------         -----------  
Income (Loss) before income taxes                        (553,483)           (300,922)               (374,931)           (665,797)
                                                     ------------          ----------             -----------         -----------
Income taxes (benefit)                                   (226,970)           (116,181)               (173,052)          (243,823)
                                                     ------------          ----------             -----------         -----------
     Net Income (Loss)                           $       (326,513)     $     (184,741)               (201,879)     $    (421,974)
                                                     ============          ==========             ===========         ==========
                                                                                                                      
Earnings (loss) per common share (Note 1)                  ($0.26)             ($0.15)                 ($0.16)            ($0.34)
                                                     ============          ==========             ===========         ==========

Weighted average shares outstanding (Note 1)            1,264,930           1,250,843               1,246,084          1,249,524 
                                                     ============          ==========             ===========         ==========
Dividends declared per share                       $ ---                  $ ---                    $ ---                  $ ---
                                                     ============          ==========             ===========         ==========
</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 Six-Month
                                                                     Periods Ended
                                                                        June 30,
                                                                1997                    1996
                                                               --------                --------
<S>                                                          <C>                    <C>
Cash flow from operating activities:
Net income (loss)                                       $       (201,879)             $       (421,974)
Adjustments to reconcile net income to net
  cash from operating activities:
    Depreciation and amortization                                201,559                       251,173 
    Provision for loan loss                                      239,000                        30,000 
    Mortgage loans originated for sale                      (162,322,413)                 (127,676,772)
    Proceeds from sale of loans and mortgage backed
      trading securities                                     187,959,745                   108,051,816 
    Net loss/(gain) on loan sales and securitization          (1,756,153)                     (345,150)
    Market adjustment on loans held for sale                      23,061                             0
    Net amortization/accretion on securities                       9,198                        (25,241)
    Loss/(Gain) on sale of securities available for sale          (7,715)                       (95,861)
    Loss/(Gain) on sale of trading account securities                                            62,336 
    Proceeds from sale of trading account securities                   0                      8,948,897 
    Change in:
      Investment in Northern Michigan BIDCO                      (42,268)                       (39,469)
      Purchased mortgage servicing rights                       (116,236)                      (386,251)
      Other real estate                                         (331,491)                       130,596 
      Increase in other assets                                  (843,524)                      (514,849)
      Increase/(Decrease) in other liabilities                   193,597                       1,322,104 
                                                            ------------                    ------------
       Net cash from (used in)
         operating activities                                 23,004,481                     (10,708,645)
                                                            ------------                    ------------
    Cash flow from investing activities:
      Purchase of securities available for sale               (1,890,921)                     (9,079,973)
      Proceeds from sales of securities available
       for sale                                                5,879,886                       8,627,779 
      Loans granted net of repayments                         (7,522,159)                     (6,048,597)
      Premises and equipment expenditures                       (185,238)                       (744,389)
      Principal paydowns on securities available
       for sale                                                  313,142                       5,622,375 
                                                            ------------                    ------------
       Net cash from (used in)
         investing activities                                 (3,405,290)                    (1,622,805)
                                                            ------------                    ------------
    Cash flow from financing activities:
      Net increase (decrease) in deposits                     (1,246,565)                    17,872,548 
      Net increase(decrease) in mortgage escrow accounts        (376,826)                       492,964 
      Principal payment on notes payable                         (25,000)                       (25,000)
      Net decrease in other short term borrowings             (14,677,048)                   (3,000,000)
      Issuance of common stock                                    549,013                        66,750 
                                                             ------------                  ------------
       Net cash from
         financing activities                                 (15,776,426)                   15,407,262 
                                                             ------------                  ------------
          Net change in cash and
            cash equivalents                                    3,822,765                     3,075,812 

   Cash and cash equivalents:
     Beginning of period                                       12,550,812                     1,937,631 
                                                             ------------                  ------------
     End of period                                     $       16,373,577             $       5,013,443 
                                                             ============                  ============

     Supplemental disclosure of cash flow information:

     Cash paid for interest expense                    $        1,879,692             $       1,166,519         
     Cash paid (received) for income taxes                              -                             -


</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)
          JUNE 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: 1,264,930 and
1,246,084, and 1,250,843 and 1,249,524 for the three and six months ended June
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 at June 30, 1997 had a
net unrealized loss of approximately $6,000 versus an unrealized gain at March
31, 1997 of approximately $1,000, and a net unrealized loss of approximately
$8,000 at December 31, 1996.  The securities portfolio continues to shrink to
provide for increased loan demand.

Securities available for sale
                                      June 30, 1997
                      ----------------------------------------------
                                                Gross      Estimated
                              Amortized       Unrealized        Fair
(in thousands)                     Cost      Gains  Losses     Value
- --------------------------------------------------------------------
U.S. agency mortgage-backed       1,636         31       -     1,667
Other agency mortgage-backed        628          -     (37)      591
U.S. agency equity                  848          -       -       848
Other equity                         75         37       -       112
- --------------------------------------------------------------------
Total investment securities
  available for sale          $   3,187      $  68  $  (37)  $ 3,218
                              =========      =====  ======   =======



<PAGE>   9

                                                                 9

Securities available-for-sale (continued)

                                      December 31, 1996
                      ----------------------------------------------

                                                Gross
                              Amortized       Unrealized        Fair
(in thousands)                     Cost      Gains  Losses     Value
- --------------------------------------------------------------------
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
                              =========      =====  ======   =======



   Item 2.  Management's Discussion and Analysis of Financial Condition and
        Results of Operations

SUMMARY

     For the three months ended June 30, 1997, a net loss of $326,513 was
realized versus a net loss of $184,741 in the same period in 1996.  Net
interest income increased to $422,469 in the 1997 period from $333,399 in the
1996 period, and other income was $1,319,303 in the 1997 period versus $575,008
in the 1996 period.  The increase in net loss was primarily the result of a
$194,000 special loan loss provision, $145,000 in one-time additional
profit-sharing expense at Varsity Mortgage resulting from a restructuring of
the Varsity Mortgage operating agreement and a faster rate of accrual of bonus
under the Bank President's five year employment contract in the amount of
$210,000 during the quarter.  Other operating expense increased to $2,094,255
in the 1997 period from $1,191,329 in the 1996 period.
     For the six months ended June 30, 1997, a net loss of $201,879 was
realized versus a net loss of $421,974 in the same period in 1996.  Net
interest income increased to $784,143 in the 1997 period from $454,264 in the
1996 period, and other income was $2,829,909 in the 1997 period versus $948,748
in the 1996 period.  Other operating expense increased to $3,765,483 in the
1997 period from $2,038,809 in the 1996 period.
     The decreased net loss in the six months ended June 30, 1997 versus the
1996 period were principally due to increased fee based income and increased
net interest income.  The improved results were caused by improvements in the
underlying operating results of the Bank's mortgage banking subsidiaries,
increased net interest margin in the Bank's retail operations, and $426,797 in
gains from the sale of loans from the Bank's own mortgage banking wholesale
operations.  Partially offsetting these positive factors were the special loan
loss reserve provision, one-time profit-sharing expense and accelerated
contract bonus accrual noted in the three months period comparison, above.  The
1996 period also reflected initial start-up losses of the Ann Arbor main
office, which opened February 6, 1996.




<PAGE>   10


                                                                              10

     The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the six months ended June 30, 1997 and 1996 (in
thousands):


SIX MONTHS ENDED JUNE 30, 1997 PRE-TAX INCOME (LOSS) SUMMARY
Banking
     Community & mortgage banking                                         $(500)
     Midwest Loan Services                                                   37
     Varsity Mortgage & Varsity Funding                                     148
Equity in the earnings of Michigan BIDCO                                     44
Corporate Office                                                           (104)
                                                                          -----
Total                                                                     $(375)



SIX MONTHS ENDED JUNE 30, 1996 PRE-TAX INCOME (LOSS) SUMMARY
Banking
     Community & mortgage banking                                         $(693)
     Midwest Loan Services                                                   (1)
     Varsity Mortgage & Varsity Funding                                      60
Equity in the earnings of Michigan BIDCO                                     40
Corporate Office                                                            (72)
                                                                          -----
Total                                                                     $(666)



RESULTS OF OPERATIONS

Net Interest Income

     Net interest income increased to $422,469 for the three months ended June
30, 1997 from $333,399 for the three months ended June 30, 1996.  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.  In addition, the yield on interest earning assets increased to
9.73% in the 1997 period from 8.21% in the 1996 period.  The cost of interest
bearing liabilities was unchanged at 5.91% in the 1997 period, causing net
interest income as a percentage of total earning assets to increase to 3.25%
from 2.69% in the 1996 period.
     For the six month period ended June 30, 1997, net interest income
increased to $784,143 from $454,264 in the 1996 period.  The yield on interest
earning assets increased to 9.43% in the 1997 period from 7.82% in the 1996
period.  The cost of interest bearing liabilities decreased to 5.85% in the
1997 period from 6.00% in 1996 period, resulting in an increase in net interest
income as a percent of total average earning assets to 3.06% from 2.11%.

Interest income

     Interest income increased to $1,266,826 in the quarter ended June 30, 1997
from $1,018,235 in the quarter ended June 30, 1996.  The average volume of
interest earning assets increased to $52,054,913 in the 1996 period from
$49,602,663 in the 1996 period, an increase of 4.9%.  The increased volume of
earning assets was due to a 16.7%


<PAGE>   11

                                                                              11

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
9.73% from 8.21%, as more earning assets were invested in loans, and lower
yielding investment securities were sold to fund loan growth.
     Interest income increased in the six months ended June 30, 1996 from
$1,683,329 to $2,413,912 in the six months ended June 30, 1997.  The average
volume of interest earning assets increased from $43,040,892 in the 1996 period
to $51,221,509 in the 1997 period, an increase of 19.0%.  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 7.82% to 9.43%, 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 securities and investments in the three months ended
June 30, 1997 decreased 23.6% over the same period in 1996, as the Bank sold
investment securities to fund loan growth.  In the six month period, the
average volume of securities and investments decreased 27.9% over the same
period in 1996, as the Bank sold investment securities to fund loan growth.
     The yield increased from 6.10% in the three month period ended June 30,
1996 to 7.06% in the 1997 period.  The increase in yields was in line with the
general increase in short term interest rates between 1996 and 1997, partially
offset by an increase in lower yielding fed funds for liquidity management
purposes.  In the six month periods, the yield increased from 5.89% in the 1996
period to 6.47% 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 Funding and Varsity
Mortgage.

Interest Expense

     Interest expense increased to $844,357 in the three months ended June 30,
1997 from $684,836 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.  The cost of funds was unchanged at 5.91% in the 1997 period from
the 1996 period.  The average volume of interest bearing liabilities increased
23.2% in the 1997 period versus the 1996 period.
     In the six month periods ending June 30, 1997 and 1996, interest expense
increased to $1,629,769 in 1997 from $1,229,065 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 cost of funds.  The cost of funds
decreased to 5.85% in the 1997 period

<PAGE>   12


                                                                              12

from 6.00% in the 1996 period.  The average volume of interest bearing
liabilities increased 36.0% in the 1997 period versus the 1996 period.  The
increase in deposits is a result of the increased deposit activity associated
with the Bank's Ann Arbor office.  As of August 6, 1997 (the eighteen month
anniversary date of the opening of the Ann Arbor office), a total of just over
$31,500,000 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 six months
ended June 30, 1997 and 1996.





<PAGE>   13

                                                                              13
<TABLE>
<CAPTION>
                                           Three Months Ended June 30,                        
                              ----------------------------------------------------------------
                                   1997                             1996                     
                              -------------------------------  -------------------------------
                                            Interest  Average                Interest   Average
                                 Average     Income/  Yield/      Average     Income/   Yield/
                                 Balance     Expense    Rate      Balance     Expense   Rate
<S>                          <C>         <C>          <C>      <C>           <C>        <C>
ASSETS
Interest Earning Assets:
  Short Term Investments:
    Interest Bearing Deposit $   672,605 $     8,155    4.85%  $  1,052,677  $   11,625    4.42%
    Federal Funds Sold         4,535,797      62,823    5.54%     2,872,448      36,883    5.14%

  Securities:
    Non-taxable (1)                    -           -       -              -           -       -
    Taxable                    5,875,726     124,663    8.49%    10,574,961     172,720    6.53%
                             ----------- -----------  ------   ------------  ---------- -------
  Total Securities            11,084,128     195,641    7.06%    14,500,086     221,228    6.10%
                             ----------- -----------  ------   ------------  ---------- -------
  Loans:
    Commercial                12,821,639     267,756    8.35%     5,918,915     146,837    9.92%
    Real Estate Mortgage      23,567,143     688,784   11.69%    26,968,583     583,503    8.65%
    Installment/Consumer       4,582,003     114,645   10.01%     2,215,079      66,667   12.04%
                             ----------- -----------  ------   ------------  ---------- -------
  Total Loans                 40,970,785   1,071,185   10.46%    35,102,577     797,007    9.08%
                             ----------- -----------  ------   ------------  ---------- -------
Total Interest Bearing Assets 52,054,913   1,266,826    9.73%    49,602,663   1,018,235    8.21%
                             ----------- -----------  ------   ------------  ---------- -------
Less allowance for possible
  loan losses & deferred fees   (333,842)                          (331,575)
                             -----------                       ------------
                              51,721,071                         49,271,088

Mortgage servicing rights      2,412,980                          3,078,194
Non earning assets             6,553,457                            584,359 
                             -----------                       ------------
     Total Assets            $60,687,508                       $ 52,933,641 
                             ===========                       ============



LIABILITIES
Interest Bearing Liabilities:
  Deposit Accounts:
    Now/S-Now                $ 2,978,844 $    36,167    4.86%$ $    422,033  $    5,320    5.04%
    Savings                      110,009         690    2.51%        81,225         502    2.47%
    Canadian Dollar Savings      605,963       3,576    2.36%     1,490,797      19,093    5.12%
    Time                      26,752,691     425,857    6.37%    25,539,678     383,943    6.01%
    Borrowed Funds             8,791,209     139,710    6.36%     9,635,360     147,062    6.11%
  Money Market Accounts       16,951,616     215,030    5.07%     8,221,038     106,735    5.19%
  Holding Company Debt           940,000      20,923    8.90%       986,000      22,181    9.00%
                             ----------- -----------  ------   ------------  ---------- -------
     Total interest bearing
      liabilities            $57,130,332     841,953    5.89%  $ 46,376,131     684,836    5.91%
                              ---------- -----------  ------   ------------  ---------- -------
Net interest income                      $   424,873                         $  333,399 
                                         ===========                         ==========
Weighted average rate spread                            3.84%                              2.30%
                                                       =====                            =======
Net yield on average earning
  assets                                                3.26%                              2.69%
</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>
                                                              Six Months Ended June 30,                                   
                                         ------------------------------------------------------------------------------------
                                               1997                                    1996                               
                                         --------------------------------         -------------------------------------------
                                                        Interest    Average                           Interest        Average
                                             Average     Income/     Yield/            Average          Income/         Yield/
                                             Balance     Expense      Rate             Balance         Expense           Rate
<S>                                      <C>           <C>          <C>           <C>              <C>                <C>
ASSETS
Interest Earning Assets:
  Short Term Investments:
    Interest Bearing Deposits            $   669,191   $    15,762     4.71%$     $  1,046,828     $    24,690           4.72%
    Federal Funds Sold                     4,736,243       140,662     5.94%         3,608,546          92,927           5.15%

  Securities:
    Non-taxable (1)                                -             -        -                  -               -              -
    Taxable                                6,415,145       226,134     7.05%        11,728,818         364,734           6.22%
                                         -----------   -----------  -------       ------------     -----------        -------
  Total Securities & Investments          11,820,579       382,558     6.47%        16,384,192         482,351           5.89%
                                         -----------   -----------  -------       ------------     -----------        -------
  Loans:
    Commercial                            11,876,210       530,920     8.94%         4,660,916         231,487           9.93%
    Real Estate Mortgage                  23,321,137     1,291,963    11.08%        19,964,438         870,711           8.72%
    Installment/Consumer                   4,203,583       208,471     9.92%         2,031,346          98,780           9.73%
                                         -----------   -----------  -------       ------------     -----------        -------
  Total Loans                             39,400,930     2,031,354    10.31%        26,656,700       1,200,978           9.01%
                                         -----------   -----------  -------       ------------     -----------        -------
Total Interest Bearing Assets             51,221,509     2,413,912     9.43%        43,040,892       1,683,329           7.82%
                                         -----------   -----------  -------       ------------     -----------        -------
Less allowance for possible
  loan losses & deferred fees               (273,879)                                 (336,876)
                                         -----------                              ------------
                                          50,947,630                                42,704,016

Mortgage servicing rights                  2,403,974                                 3,003,773
Non earning assets                         6,010,802                                   677,853 
                                         -----------                              ------------
   Total Assets                          $59,362,406                              $ 46,385,642 
                                         ===========                              ============


LIABILITIES
Interest Bearing Liabilities:
  Deposit Accounts:
    Now/S-Now                            $ 2,820,842   $    68,643     4.87%      $    372,007     $     9,359           5.03%
    Savings                                  111,064         1,384     2.49%            55,207             685           2.48%
    Canadian Dollar Savings                  783,683         9,319     2.38%         1,540,036          42,684           5.54%
    Time                                  26,044,926       813,783     6.25%        22,586,228         686,705           6.08%
    Borrowed Funds                         8,959,182       277,788     6.20%         9,817,680         297,402           6.06%
  Money Market Accounts                   16,050,196       412,117     5.14%         5,612,685         147,899           5.27%
  Holding Company Debt                       937,500        43.331     9.46%           985,000          46,735           9.49%
                                         -----------   -----------  -------       ------------     -----------        -------
      Total interest bearing
        liabilities                      $55,707,393     1,627,769     5.84%$       40,968,843       1,231,469           6.01%
                                         -----------   -----------  -------       ------------     -----------        -------
Net interest income                                    $   786,547                                 $   451,880 
                                                       -----------                                 -----------
Weighted average rate spread                                           3.58%                                             1.81%
                                                                     -------                                          -------
Net yield on average earning
  assets                                                               3.06%                                             2.10%
</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

Allowance for Loan Losses

     The monthly loan loss allowance remained at a rate of $7,500 in the second
quarter of 1997.  In the 1996 period, the monthly allowance was increased in
February 1996 from $400 to $6,000.  The increased monthly allowance 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 allowance of $194,000 was charged
to income in June 1997 as directed by the Bank's regulatory examiners.  They
required the special allowance as a result of ratio analysis rather than
specific loan problems, expected loan losses or actual loss experience.  The
Bank had net loan loss recoveries of $5,273 in the six month period ended June
30, 1997 versus net loan losses of $31,634 in the six month period ended June
30, 1996.


<TABLE>
<CAPTION>
                               Three Months Ended    Six Months Ended         
                                    June 30,             June 30,             
                               1997          1996    1997        1996         
                               ------------------------------------------     
<S>                             <C>        <C>        <C>        <C>          
Allowance for loan losses       $ 216,500  $  18,000  $ 239,000  $ 30,000     
Loan charge-offs                  (16,731)   (33,662)   (17,772)  (35,834)    
Recoveries                         19,427      1,016     23,045     4,200     
                                ---------  ---------  ---------  --------     
Net increase (decrease)                                                       
  in allowance                  $ 219,196  $ (14,646) $ 244,273  $ (1,634)    
                                =========  =========  =========  ========     
</TABLE>                                                                      
                                                                              
                                                                              
<TABLE>                                                                       
<CAPTION>                                                                     
                                  At           At            At               
                               June 30,      March 31,    December 31,        
                                 1997          1997          1996             
                               -----------------------------------------      
<S>                            <C>          <C>          <C>                  
Total loans (1)                $28,488,449  $23,424,375  $20,966,290          
Reserve for loan losses            513,055      322,860      297,783          
Reserve/Loans, % (1)                 1.80%        1.38%        1.42%          
</TABLE>                                                                      

(1) Excludes loans held for sale.






<PAGE>   16


                                                                             16

     The following schedule summarizes the Company's nonperforming loans for
the periods indicated:


                              At        At          At
                            June 30,  March 31,  December 31,
                             1997      1997        1996

                           -----------------------------------------
Past due 90 days and over
    and still accruing:
  Real estate                337,879    234,352    226,144
  Installment                 24,331     45,044     34,096
  Commercial                  94,738     64,717     29,479
                           ---------  ---------  ---------
    Subtotal                 456,948    344,113    289,719

Nonaccrual loans:
  Real estate                578,725    506,376    336,468
  Installment                      -      1,840      1,968
  Commercial                  85,263     83,277    125,761
                           ---------  ---------  ---------
    Subtotal                 663,988    591,493    464,197

Other real estate
 owned (2)                   597,570    636,987    266,079
                           ---------  ---------  ---------

Total                      1,718,506  1,572,593  1,019,995

As % of loans (1)               6.03%      6.71%      4.86%
Ratio of reserve for loan
  losses to all loans
  90 days and over              45.8%      34.5%      39.5%


(1) Excluding loans held for sale.

(2) Other real estate owned at June 30, 1997, March 31, 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
it is surplus to the Bank's requirements.  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.

     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.  With the exception of one $42,470 commercial real estate
building, the other real estate owned, other than the property mentioned above,
is residential single family properties. Based upon management's review of
appraisal information
        




<PAGE>   17


                                                                             17

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.  The Bank's greatest loan credit
risks relate to the commercial and home equity/installment loan portfolios, and
these levels were similar at June 30, 1997, March 31, 1997 and December 31,
1996, although non-accrual commercial loans (perhaps the highest credit risk
category of loans) decreased 32.2% during the period.
     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 rapidly growing because of the establishment of
a major prison complex in the town by the State Department of Corrections.  A
new expansion of the prison is now occurring.
     Management believes that the current reserve level and the ongoing reserve
for loan losses is adequate to absorb 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 example, the problems of local loan
customers currently facing some difficulties, and could decrease residential
home prices.  A general nationwide business expansion could conversely tend to
diminish the severity of any such difficulties.

Non-Interest Income

     Total non-interest income increased from $575,008 for the three months
ended June 30, 1996 to $1,319,303 for the three months ended June 30, 1997.
The increase was principally a result of a $683,948 increase in the Bank's
mortgage banking income.
     Total non-interest income increased to $2,829,909 for the six months ended
June 30, 1997 from $948,748 for the six months ended June 30, 1996.  The
increase was principally a result of a $1,836,247 increase in the Bank's
mortgage banking income.

     Securities.  During the six months ended June 30, 1997, securities
totalling $5,774,430 were sold from the Bank's available-for-sale securities
portfolio with gross realized losses of $63,166 and gains of $35,310.  During
the first half, 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 half
of 1997, the yield on the Company's investment securities portfolio was 8.74%.
During the six months ended June 30, 1997, securities totalling $138,883 were
sold from the Company's available-for-sale securities portfolio with gross
realized gains of $35,571 and no losses.

     Mortgage Banking.  Mortgage banking income increased to $1,225,690 in the
three months ended June 30, 1997 from $541,742 in the three months ended June
30, 1996.  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
        
<PAGE>   18

                                                                             18

the discussion of the "RTC Loan Pool" below) were 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 $8,902 charged against income in the 1997 period to mark the
mortgages held for sale to the lower of cost or market, versus a charge of
$75,697 in the 1996 period.
     Although loan purchase and origination volumes increased during the
period, the amount of loans held for sale at June 30, 1997 decreased 78.9% 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 86.4% at June
30, 1997 from the amount at December 31, 1996.  Management anticipates that the
restructuring of the Varsity Mortgage operating agreement (see below) will
further reduce average daily volumes of loans held for sale per unit of monthly
volume, and reduce the Bank's need for temporary short term borrowings secured
by loans held for sale.
     At June 30, 1997, the Bank and its subsidiaries owned the right to service
$204,178,439 of FHLMC, FNMA and private conduit mortgages for others, of which
approximately 37% was owned by Midwest Loan Services, and the remainder by the
Bank.  The following table summarizes the portfolio by type and mortgage note
rate:

            Interest Rate Stratification of the Company's Servicing

($ in 000s)                                         FIXED RATE - BY MATURITY
                                        ----------------------------------------
MORTGAGE RATE (%)              ARMs     UNDER 10          10-25       OVER 25

9.00 and up                  1,103         41               325         3,822
8.50 - 8.99                  6,780        480             1,337        13,063
8.00 - 8.49                  5,281        508             2,943        29,360
7.50 - 7.99                    537        787             8,321        62,065
7.00 - 7.49                    259      1,152            17,711        22,590
6.50 - 6.99                      -        741            10,084         8,316
6.00 - 6.49                    234        398             1,887         1,238
under 6.00                   2,799         17                 -             -
                            ------     ------           -------       -------
                            16,993      4,124            42,608       140,454

Current market
 interest rates               6.38%      7.38%             7.38%         7.88%
Average annual
 servicing fee                0.47%      0.29%             0.27%         0.26%

     Interest rates have been very stable for nearly seventeen 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 indications of
market value from industry brokers, management believes that the current market
value of the Bank's portfolio of


<PAGE>   19


                                                                             19

mortgage servicing rights approximates cost.  Subsequent to quarter-end,
management entered into an agreement to sell approximately $83,900,000 of the
Bank's servicing rights portfolio at a price which approximates cost, prior to
sale expenses.  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 June 30, 1997, the Bank had outstanding purchase commitments to buy
single family FHLMC qualifying mortgage loans of $31,098,000 and outstanding
forward commitments to deliver FHLMC mortgage-backed securities of $12,500,000,
substantially all of which commitments were for delivery within three months or
less.

                      Servicing Rights Held by the Company


(amounts in $000s)                June 30,  March 31,  December 31,
                                   1997      1997         1996
                                  ---------------------------------
Total servicing (1)               204,178     208,104     214,046
Book value of servicing             2,429       2,408       2,312
Estimated market value
  of servicing:
  Management estimate (2)           2,528       2,504       2,371
  Discounted cash flow (3)          2,644       2,730       2,466
Estimated excess of market
  over book value (4)              215-99      322-96      154-59


(1)  Excludes servicing related to FHLMC and FNMA qualified loans held for
      delivery.
(2)  Assumes a price based upon market transactions at June 30, 1997, March
      31, and December 31, 1996 of 4.7x, 4.9x and 4.9x (4.9 times the servicing
      fee) for 30-year servicing, 3.6x, 3.75x and 3.75x for 15-year servicing,
      2.2x, 2.3x 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.
(3)  Uses net present value analysis of future cash flows, discounted back at
      13.14%.
(4)  Range based upon the two methods used in (2) and (3), above.

      During the period ended June 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 June 30, 1997, the value of servicing rights decreased as interest rates
fell briefly to new cycle lows and then rose again.
     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


<PAGE>   20


                                                                             20

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.
     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 is $426,797.
     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 which has since been submitted.  No monies
will be paid by the RTC however, until the entire refund request is finalized.
The Bank has not yet booked any of this receivable as income.  Additional
proceeds are anticipated from residential real estate related assets owned and
the loans underlying the Fifth Participation Certificate, all with a carrying
value of $215,000.  If realized, 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.  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.  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 basis by approximately $145,000 (see
"Non-interest Expense", below).
        
     Michigan BIDCO.  Michigan BIDCO (the "BIDCO") invests in businesses in
Michigan with the objective of fostering job growth and economic development.
As of June 30, 1997, the BIDCO had made twenty-three such investments,
amounting to a total of $13,002,600 at original cost (before repayments or
participations sold).  At June 30, 1997, the BIDCO had total unaudited assets
of $6,091,950.  For the three and six months ended June 30, 1997 and 1996, the
Bank's 44.1% equity share in the earnings of the BIDCO's reported net income
was $38,704 and $43,522, and $20,000 and $40,000, respectively.
     The Bank owns 280 shares of common stock in the BIDCO, currently





<PAGE>   21


                                                                             21

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) have
been made in the following types of businesses:


   Michigan BIDCO, investments:
   ----------------------------------
                                                        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  repurchased
   #5  Commercial laundry                             180,000  no
   #6  Environmental engineering                      100,000  repurchased
   #7  Home health care                                20,000  no
   #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
   #17 Plastic injection molding                    2,000,000  repurchased
   #18 Railcar parts manufacturing                    125,000  yes
   #19 Railroad boxcar leasing                      1,500,000  no
   #20 Recycled paper pulp mill                       780,000  yes
   #21 Residential mortgage servicing                 450,000  repurchased
   #22 Specialty financial services                   540,000  yes
   #23 Tissue paper mill                              700,000  yes
                                                  -----------
   Total                                          $13,002,600
                                                  ===========


     The loans associated with investments #2, 4, 5, 7, 17, and 21 have been
repaid in full.  Loan participations have been sold in loans associated with
investments #1, 3, 5, 7, 10, 12, 13, 14, 16, 17, 19, 20 and 23.  At June 30,
1997, the BIDCO had no outstanding conditional commitments to lend.

     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


<PAGE>   22


                                                                             22

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.  The monthly management fee paid by
the Foundation to the BIDCO for the first half of 1997 was $8,000, and
subsequent to June 30, 1997, the fee was raised to $10,000 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 June 30, 1997,
the Foundation had lent $1,520,000 of its available funds to eleven borrowers,
with $780,000 undrawn and available for lending from the U.S. RECDS loan, and
cash available for relending from paid off loans of $356,000.

Non-Interest Expense

     Non-interest expense increased to $2,078,755 in the three months ended
June 30, 1997 from $1,191,329 for the three months ended June 30, 1996.  The
increase was primarily the result of ongoing expansion of business at the Bank,
Varsity Mortgage and Varsity Funding.  Also, comparisons of the first half of
1997 versus the first half 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 the first half of 1997 reflects a
full two quarters of expenses as well as business expansion since the start-up.
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 faster rate of
accrual of bonus under the Bank President's five year contract in the amount of
$210,000 during the quarter.  A total of $285,000 in bonus remains available
under the contract, which has a remaining term of three and one-half years.
Taking into account these extra expenses, the non-interest expense in the three
months ended June 30, 1997 was similar to the expense in the three months ended
March 31, 1997.  Non-interest expense increased to $3,749,983 in the six months
ended June 30, 1997 from $2,038,809 for the six months ended June 30, 1996.
     Non-interest operating expense for only the parent company increased to
$95,487, for the three month 1997 period from $37,268 for the 1996 period.
Legal, audit and ESOP benefit expenses were higher.  Non-interest operating
expense for only the parent company increased to $131,577 for the six month
1997 period from $70,462 for the 1996 period.  Legal, audit, public listing and
ESOP benefit expenses were higher.


<PAGE>   23


                                                                             23

Liquidity and Capital Resources

     Capital Resources.  The table on the following page sets forth the Bank's
risk based assets, and the capital ratios and risk based capital ratios of the
Bank and Company.  At June 30, 1997, the Bank was well capitalized for bank
regulatory purposes (the required ratio for "well capitalized" was 5% of total
assets, 6% (Tier 1) of risk-based assets, and 10% (Tier 1 and 2) of risk-based
assets).

     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 June 30, 1997, the bank had cash and due from banks and fed funds on
hand of $16,373,577.  The Bank has an unused $3,000,000 line of credit secured
by investment securities and two lines of credit from correspondents secured by
mortgage loans for sale to the secondary market.  In order to bolster
liquidity, the Bank has also sold brokered CDs from time to time.
     The decline in time deposits during the three month period ended June 30,
1997 from $29,529,050 to $28,622,910 was the result of a decrease of
approximately $6,500,000 in brokered time deposits, offset by ongoing increases
in retail time deposits.  Management is de-emphasizing brokered time deposits
as retail deposit levels increase as a result of the expansion of the Bank's
Ann Arbor main office deposit base.

     Parent Company Liquidity.  At year-end 1996, University Bancorp, Inc. held
cash and marketable equity securities of $155,183.  This decreased by $23,197
to $131,986 at June 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 six months ended
June 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 owing to North Country Bank & Trust ("NCB&T"), which
amounted to $937,500 and $962,500 at June 30, 1997 and at December 31, 1996,
respectively.  The NCB&T note matures November 1, 1997, and the Company intends
to seek a renewal at that time.  Management believes that 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 dividends, with permission of the Company's secured debt lender,
is currently sufficient to cover expected required principal reductions during
1997 on the holding company's loan, assuming its renewal.
        
<PAGE>   24
                                                                              24


                                UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio at June 30, 1997
                                 ($ in 000's)                                  
- ------------------------------------------------------------------------------
                                                                      Risk Adj.
                                                 Value      Risk        Asset
                    Asset                       (000's)    Weight       Value  
- ---------------------------------------------  --------    -------    --------
Cash and Federal Reserve Deposits                 2,512          0%         0
U.S. Gov't Agency Securities                        628          0%         0
U.S. Treasury Securities                              0          0%         0
U.S. Gov't Guaranteed Loans                         187         20%        37
Balances at Domestic and Canadian Banks           1,749         20%       350
Fed Funds Sold                                   11,463         20%     2,293
U.S. Gov't Agency Mortgage-backed Securities      1,516         20%       303
U.S. Gov't Equity Securities                        848         20%       170
Other Mortgage-backed Securities                      0         50%         0
1-4 Family Mortgage Loans                        17,324         50%     8,662
Junior Liens                                      2,573        100%     2,573
All Other Loans                                  15,472        100%    15,472
Loan Loss Reserve                                  (513)         0%         0
All Other Securities                                  0        100%         0
Real Estate Owned                                   598        100%       598
Premises & Equipment                              1,946        100%     1,946
Mortgage Servicing Rights                         2,429        100%     2,429
Other Assets                                      3,480        100%     3,480
- ---------------------------------------------  --------                     
TOTAL ASSETS                                     62,212

Off Balance Sheet Items:
  Letters of Credit and Committments > 1 Year         0     100.00%         0
  Foreign Exchange Contracts                        500       1.00%         5
  Home Equity Lines of Credit                       882      50.00%       441
  Interest Rate Contracts                             0       0.00%(1)      0
  FHLMC/FNMA Loan Purchase Committments          31,098      50.00%    15,549
  MBS FHLMC/FNMA Forward Sell Committments       12,500       0.00%(1)    174
  Agency Guaranteed Commercial Loans Sold           203      20.00%        41 
                                               --------    -------    -------
TOTAL RISK-ADJUSTED ASSETS                                             54,522
                                                                      =======

CAPITAL RESOURCES
Shareholders Equity                               4,807
Net Unrealized Loss on AFS Securities                 4
Minority interest in consolidated subsidiary        214

                                               --------
Total Equity (Tier 1)                             5,025
Qualifying Loan Loss Reserve (Tier 2)               513
                                               --------
Regulatory Capital (Tier 1 & Tier 2)              5,538
                                               ========

Primary and Total Capital Ratio (Leverage)         8.90%
                                               ========
Risk-adjusted Capital Ratio (Tier 1)               9.22%
                                               ======== 
Risk-adjusted Capital Ratio (Tier 1 & Tier 2)     10.16%
                                               ======== 
University Bancorp Consolidated
  Total Capital Ratio (Leverage Ratio)             6.83%
                                               ======== 

(1) Plus market value, or replacement cost valuation, as required.

<PAGE>   25


                                                                             25

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 increases 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 June 30, 1997.

<PAGE>   26

                                UNIVERSITY BANK                              26
                  Asset/Liability Position Analysis 
                                  ($ in 000'S)                  6-30-97
                            Maturing or Repricing in

<TABLE>
<CAPTION>
                          3 Mos   91 Days to   1 - 5    Over 5    ALL
      ASSETS             or Less    1 Year     Years    Years    OTHERS   TOTAL
      ------             -------  ----------   -----    ------   ------   -----
 <S>                      <C>     <C>          <C>      <C>      <C>      <C>
 Fed Funds                11,463                                          11,463
 Loans (1)                   761       1,503   4,272     5,560            12,096
 Foreign Investments          49                                              49
 Securities                2,283           3       4         2             2,292
 Loans held for sale       9,729                                           9,729
 Matured loans               971                                             971
 Variable rate loans       9,446       4,809                              14,255
 Other assets                                                     3,022    3,022
 Cash & due from banks                                            4,866    4,866
 Overdrafts                   16                                              16
 Non-accrual loans                                                  664      664
 Valuation adjustment                                               (23)     (23)
                         -------     -------   -----     -----   ------   ------ 
   TOTAL ASSETS           34,718       6,315   4,276     5,562    8,529   59,400                

      LIABILITIES

 Large C.D.'s              3,470       3,632   4,777                      11,879
 Regular C.D.'s            2,313      13,410     968        53            16,744
 MMDA                     16,941                                          16,941
 NOW                       3,457                                           3,457
 Demand and escrow                                                3,271    3,271
 Savings                      98                                              98
 Canadian $ savings          219                                             219
 Other liabilities         2,489       2,500                          0    4,979
 Equity                                                           4,809    4,809
                         -------     -------   -----     -----    -----   ------ 
   TOTAL LIABILITIES      28,987      19,542   5,745         -    8,080   62,407


      GAP                  5,731     (13,227) (1,469)    5,562      449


      CUMULATIVE GAP       5,731      (7,496) (8,965)   (3,403)


      GAP PERCENTAGE        9.19%     -12.01% -14.37%    -5.46%
</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.

Item 2. Changes in Securities

     (c) The Company sold in a private placement the following shares of common
stock, par value $0.01 per share, at a price of $6.75: 7,408 shares for total
aggregate proceeds of $50,000 on May 2, 1997; and 22,223 shares for total
aggregate proceeds of $150,001 on June 30, 1997.  The common stock was sold to
three private investors, not otherwise affiliated with the Company, which the
Company believes met accredited investor criteria of Regulation D.  The Company
claimed exemption under the Securities Act of 1933 based on Section 4(2) of
said Act.  Such claim was based on certain representations and covenants set
forth in subscription agreements of the investors indicating, among other
matters, their status as accredited investors under Regulation D under said Act
and on such investors' agreement to the placement of restrictive legends on the
certificates for the shares issued to them.  This private placement did not
entail the use of an underwriter and there were no underwriting commissions or
discounts.

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)

                                            June 30,    December 31,
                                              1997          1996
ASSETS                                     ----------   ------------
Cash and due from banks                    $   50,437   $     41,113    
                                           ----------   ------------
Investment in subsidiary                    4,807,052      4,529,503    
                                           ----------   ------------
Due from ESOP                                   1,000          1,000
Securities available for sale (Note 2)         81,548        114,070
Investment in Michigan BIDCO                  201,448        202,702
Federal income tax receivable                 806,304        173,372
Deferred taxes                                  4,640          8,537
Prepaid expenses and other assets               8,865         34,040    
                                           ----------   ------------
Total other assets                          1,103,804        533,721

  TOTAL ASSETS                              5,961,293      5,104,337
                                           ==========   ============

                                           March 31,    December 31,
                                              1997          1996
LIABILITIES AND SHAREHOLDERS' EQUITY       ----------   ----------

Note payable                                  937,500        962,500
Accrued interest payable                       15,668         10,284
Accounts payable                               12,626        138,443
Due to subsidiary                             687,695         80,342
Deferred Tax Liability                         12,739              0    
                                           ----------   ------------
     Total Liabilities                      1,666,228      1,191,569

Stockholders' equity:
  Capital stock and paid in capital         3,167,472      2,618,459
  Retained earnings                         1,106,740      1,299,473
  Net unrealized loss on
    available-for-sale securities              20,853         (5,164)   
                                           ----------   ------------
     Total Stockholders' equity             4,295,066      3,912,768    
                                           ----------   ------------
     TOTAL LIABILITIES AND
       SHAREHOLDERS' EQUITY                $5,961,293   $  5,104,337
                                           ==========   ============


<PAGE>   29

       UNIVERSITY BANCORP, INC. (The Parent)                               29

<TABLE>
<CAPTION>
       Condensed Statement of Operations            For the Three-Month                 For the Six-Month
                   (Unaudited)                         Periods Ended                      Periods Ended
                                                          June 30,                          June 30,
                                                  1997            1996              1997            1996
                                                  ----            ----              ----            ----
<S>                                           <C>          <C>                <C>            <C>
  Net income (loss) from bank subsidiary      $ (245,401)  $    (169,045)     $  (97,706)    $  (357,806)
  Gain on sale of investments                     18,089          28,318          41,155          28,318
  Interest income                                  6,731           5,282          11,214           9,682
  Other income                                        (1)          2,153              88           4,625 
                                              ----------   -------------      ----------     -----------
     Total income (loss)                        (220,582)       (133,292)        (45,249)       (315,181)
                                              ----------   -------------      ----------     -----------
  Interest expense                                23,327          22,181          46,735          44,331
  Legal and Audit Expense                         16,576          19,563          32,254          38,768
  Public listing expense                          40,452           1,390          42,905           2,390
  Other expenses                                  38,458          16,315          56,418          29,304 
                                              ----------   -------------      ----------     -----------
     Total expenses                              118,813          59,449         178,312         114,793 
                                              ----------   -------------      ----------     -----------
     Income (loss) before income taxes          (339,395)       (192,741)       (223,561)       (429,974)
                                              ----------   -------------      ----------     -----------
     Income taxes (benefit)                      (12,882)         (8,000)        (21,682)         (8,000)
                                              ----------   -------------      ----------     -----------
     Net income (loss)                          (326,513)       (184,741)       (201,879)       (421,974)
                                              ==========   =============      ==========     =========== 
Net income (loss) per common share
     Primary                                      ($0.26)         ($0.15)         ($0.16)         ($0.34)
                                              ==========   =============      ==========     ===========

</TABLE>
<PAGE>   30
 UNIVERSITY BANCORP, INC. (The Parent)                               30

 Condensed Statement of Cash Flows
             (Unaudited)
<TABLE>
<CAPTION>
                                                            For the Six Month
                                                               Periods Ended
                                                                  June 31, 
                                                          1997            1996
                                                         ------        -----------
 <S>                                                     <C>           <C>
Reconciliation of net income (loss)                     
  to net cash used in
  operating activities:
    Net Income (Loss)                                    $ (201,879)   $  (421,974)
    Depreciation                                                  -          1,500
    Amortization of Premium on Securities                     1,254           (240)
    Contribution to ESOP                                     36,322              -
    Increase in Federal income tax receivable              (632,932)             -
    Increase in payable to affiliate for federal
             income tax receivable                          607,353              -
    Loss/(gain) on sale of investments                      (41,155)       (28,318)
    Decrease/(increase) in Other Assets                      29,072       (144,531)
    Increase(Decrease) in interest payable                    5,384         (8,382)
    Increase(Decrease) in other liabilities                (113,078)        67,436
    Subsidiary net (income)/loss                             97,706        357,806 
                                                         ----------    -----------
      Net cash provided by (used in)
       operating activities                                (211,953)      (176,703)
                                                         ----------    -----------

Cash flow from investing activities:
  Contributions of capital to subsidiary                   (350,000)             -
  Purchase of available for sale securities                 (55,309)       (49,438)
  Proceeds from sale of available 
    for sale securities                                     138,895              - 
                                                         ----------    -----------
      Net cash provided by (used in)
       investing activities:                               (266,414)       (49,438)
                                                         ----------    -----------

Cash flow from financing activities:
  Principal payment on notes payable                        (25,000)       (25,000)
  Proceeds from sale of common stock                        512,691         66,750 
                                                         ----------    -----------
      Net cash provided by (used in)
       financing activities:                                487,691         41,750 
                                                         ----------    -----------
    Net changes in cash and cash equivalents                  9,324       (184,391)

  Cash:
    Beginning of year                                        41,113        239,868 
                                                         ----------    -----------

    End of period                                        $   50,437    $    55,477
                                                         ==========    ===========

Supplemental disclosure of cash flow information:
  Cash paid (received) during the year for:
    Interest                                             $   29,629    $    36,717
    Income tax                                           $        -    $         -
</TABLE>

<PAGE>   31

                                                                             31


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

     (a) Exhibits.

          10.13 Revised Operating Agreement for Varsity Mortgage
               LLC and related Net Branch Agreement Modification, dated as of
               April 1, 1997, among University Bank and the LLC Managers.
          
          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: August 11, 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
                                                         ------------

10.13   Revised Operating Agreement for Varsity 
        Mortgage LLC and related Net Branch  
        Agreement Modification, dated as of April 
        1, 1997, among University Bank and the
        LLC Managers.                                        33

27.     Financial Data Schedule                              62



<PAGE>   1
                                                                EXHIBIT 10.13

                            AGREEMENT TO RESTRUCTURE

         THIS AGREEMENT is made effective April 1, 1997, by and among
UNIVERSITY BANCORP, INC., a Delaware bank holding company ("University
Bancorp") and UNIVERSITY BANK, a Michigan banking corporation ("University
Bank") and JESS MONTICELLO, WILLIAM W. COOK and MARIANNE OPT THOMPSON.

                                   BACKGROUND

         On February 13, 1996, University Bank and University Bancorp filed
Articles of Organization to form Varsity Mortgage Services, L.L.C., a Michigan
limited liability company (the "Company").  In connection therewith, University
Bancorp, University Bank and Jess Monticello, William W. Cook and Marianne Opt
Thompson, as managers, executed the Operating Agreement of the Company (the
"1996 Operating Agreement").

          The parties now wish to amend and restate the 1996 Operating
Agreement to create a class of non-voting members of the Company, to remove
University Bancorp from the Company and take certain other actions described in
this Agreement.

         NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions set forth below, the parties agree as follows:

                              TERMS AND CONDITIONS

         1.      Restatement of 1996 Operating Agreement.  The 1996 Operating
Agreement is hereby amended and restated in the form attached hereto as Exhibit
"A" (the "Amended and Restated Operating Agreement") whereby, among other
changes, a class of non-voting members of the Company is created and University
Bancorp is no longer a Member of the Company.  Contemporaneously with execution
of this Agreement, University Bank and Jess Monticello, William W. Cook and
Marianne Opt Thompson (the "Non-Voting Members"), shall execute the Amended and
Restated Operating Agreement.

         2.      Membership Interest.  As of the date of this Agreement, the
                 membership interest of the Company shall be owned as follows:

<TABLE>
<CAPTION>
         Voting Membership Interest                Non-Voting Membership Interest
         --------------------------                ------------------------------
         <S>                      <C>              <C>                     <C>         
         University Bank          100%             Jess Monticello           25%
                                                   William W. Cook           25%
                                                   Marianne Opt Thompson     50%
</TABLE>

To the extent necessary, this Section 2 shall constitute an assignment of
membership interest to cause the membership interests of the Company to be
owned as set forth herein.

         3.      Capital Accounts.  Giving effect to the distributions approved
by resolution pursuant to Section 5 below, the parties agree and acknowledge
that as of

<PAGE>   2

the date of this Agreement: (a) the capital account of University Bank is
$300,000; and (b) the capital account of each of the Non-Voting Members is
zero.

         4.      Termination of Net Branch Agreement.  On January 12, 1996,
University Bank and Jess Monticello, William W. Cook and Marianne Opt Thompson
executed a Net Branch Agreement which has been amended from time to time (the
"Net Branch Agreement").  The Net Branch Agreement, as amended, is hereby
terminated together with all rights, duties and obligations thereunder.

         5.      Approval of Resolutions.  Contemporaneously with execution of
this Agreement:  (i) University Bank shall approve the resolutions attached
hereto as Exhibit "B" by unanimous written consent; and (ii) Jess Monticello,
William W. Cook and Marianne Opt Thompson, as Managers of the Company, shall
approve the resolutions attached hereto as Exhibit "C" by unanimous written
consent.  To the extent the Non- Voting Members' consent is required for any of
the actions contemplated in the resolutions attached hereto as Exhibit "B",
such consent is hereby granted by the Non-Voting Members and such action is
approved.  Exhibits "B" and "C" and any of the provisions contained therein
cannot be rescinded without the consent of the Non-Voting Members.

         6.      Employment at Will.  Each of Jess Monticello, William W. Cook
and Marianne Opt Thompson hereby acknowledge that he or she is an employee "at
will" and may be terminated from employment with the Company at any time for
any reason or no reason whatsoever.

         7.      Investment Representation.  Each of the Non-Voting Members
acknowledges that his or her non-voting membership interest in the Company is
being offered in reliance upon an exemption from registration under the
Securities Act of 1933, and the Michigan Uniform Securities Act, and
accordingly, represents and warrants to the Company, as follows:

                               (a)         The non-voting membership interest
         is being purchased for the Non-Voting Member's own investment and not
         with a view to the distribution or resale thereof;

                               (b)         The Non-Voting Member will be
         actively engaged in the management of the Company, and has, and will
         have, full access to the books and records of the Company, and is
         knowledgeable and has experience in financial and business matters
         necessary to evaluate the merits or risk of an investment in the
         non-voting membership interest;

                               (c)         The Non-Voting Member understands
         that the transferability of the non-voting membership interest is
         severely limited and that the Non-Voting Member must continue to bear
         the economic risk of this investment for an indefinite period as the
         non-voting membership interest has not been registered under the
         Securities Act of 1933 or any other state securities law, and
         therefore, cannot be offered or sold unless it is subsequently
         registered under such acts or an exemption from such registration is
         available;





                                       2
<PAGE>   3


                               (d)         The Non-Voting Member acknowledges
         that no commission has been paid by the Non-Voting Member with respect
         to acquisition of the non-voting membership interest and the
         Non-Voting Member did not learn of or discover the opportunity to
         purchase the non-voting membership interest by virtue of any general
         advertising or general solicitations; and

                               (e)         The Non-Voting Member understands
         that the non-voting membership interest does not confer general voting
         rights on the Non-Voting Member and accordingly, operation of the
         Company will be subject to the exclusive control and direction of
         University Bank who has authority to make decisions affecting the
         Company and authority to elect or remove the managers of the Company.

         8.      Release.  Each of the parties to this Agreement hereby
releases each of the other parties to this Agreement and the Company of and
from any and all obligations, duties and liabilities arising under the 1996
Operating Agreement and the Net Branch Agreement.

         9.      University Bank Resolutions.  The President of University Bank
will approve the Resolutions attached hereto as Exhibit "D" pursuant to the
authority granted by the Board of Directors of University Bank at its June 24,
1997 meeting.

         10.     Miscellaneous Provisions.

                 10.1          Benefit and Assignment.  This Agreement shall be
binding upon and inure to the benefit of the parties hereto, and their
respective successors, assigns, heirs and legal representatives.  No party
shall assign or attempt to assign this Agreement without the prior written
consent of the other parties hereto.

                 10.2          Choice of Law and Choice of Forum.  This
Agreement shall be governed, construed and enforced in accordance with the laws
of the State of Michigan.  Unless otherwise precluded by Section 10.3 hereof,
any and all actions concerning any dispute arising hereunder shall be filed and
maintained only in a state or federal court sitting in the State of Michigan,
and the parties hereto consent and submit to the jurisdiction of such state or
federal court.

                 10.3          Arbitration.  No civil action concerning any
controversy or claim arising out of or relating to this Agreement or the breach
thereof, shall be instituted before any court, and all such controversies or
claims shall be submitted to final and binding arbitration in Ann Arbor,
Michigan, in accordance with the rules then pertaining of the American
Arbitration Association, and judgment upon the award rendered may be entered in
any court having jurisdiction thereof.

                 10.4          Counterparts.  This Agreement may be signed in
any number of counterparts with the same effect as if the signature on each
such counterpart were upon the same instrument.  Each executed copy shall be
deemed an executed original for all purposes.





                                       3
<PAGE>   4


                 10.5          Entire Agreement.  This Agreement, and all
documents and exhibits prepared or executed in connection herewith, represent
the entire understanding and agreement between the parties with respect to the
subject matter hereof, supersede all prior agreements or negotiations between
such parties, and may be amended, supplemented or changed only by an agreement
in writing which makes specific reference to this Agreement or the agreement
delivered pursuant hereto, as the case may be, and which is signed by the party
against whom enforcement of any such amendment, supplement or modification is
sought.

                 10.6          Acknowledgement of Legal Representation.  Each
of the Non-Voting Members acknowledges that this Agreement and the documents
delivered in connection herewith have been prepared by legal counsel to
University Bank and each of the Non-Voting Members has been advised to obtain
separate legal counsel to represent the legal interests of such Non-Voting
Member.

         IN WITNESS WHEREOF the parties hereto have executed this Agreement
effective the day and year first set forth above.


UNIVERSITY BANK

By:      Mark  Ouimet
         ------------------------------
Its:     President
         ------------------------------

The Non-Voting Members:

Jess Monticello                                   William W. Cook
- ------------------------------                    ------------------------------
Jess Monticello                                   William W. Cook

Marianne Opt Thompson
- ------------------------------
Marianne Opt Thompson





                                       4
<PAGE>   5
                             AMENDED AND RESTATED
                             OPERATIONG AGREEMENT


                                      OF


                      VARSITY MORTAGAGE SERVICES, L.L.C.
                    (A MICHIGAN LIMITED LIABILITY COMPANY)
<PAGE>   6



                       VARSITY MORTGAGE SERVICES, L.L.C.
                     (A MICHIGAN LIMITED LIABILITY COMPANY)

                             AMENDED AND RESTATED 
                              OPERATING AGREEMENT

                               Table of Contents

<TABLE>

                                                                                                                        Page
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ARTICLE I - ORGANIZATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
  Section 1.01 Organization.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
  Section 1.02 Name of Company.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
  Section 1.03 Duration.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
  Section 1.04 Purpose.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
  Section 1.05 Legal Status of Company.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
  Section 1.06 Definitions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
                                                                                                                        
ARTICLE II - MEMBERS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
  Section 2.01 Members  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
  Section 2.02 Additional Members   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
  Section 2.03 Information  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
  Section 2.04 Liability to Third Parties   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
  Section 2.05 Voting Rights  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
  Section 2.06 Meetings and Notice  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
  Section 2.07 Quorum   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
  Section 2.08 Member to Vote in Person or by Proxy   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
  Section 2.09 Action by Written Consent  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
  Section 2.10 No Authority to Commence Civil Suit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
  Section 2.11 Independent Activities   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
  Section 2.12 Transactions Permitted With Members and Affiliates   . . . . . . . . . . . . . . . . . . . . . . . . . .   3
  Section 2.13 Participation by Communication Equipment   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
                                                                                                                        
ARTICLE III - MANAGEMENT BY MANAGERS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
  Section 3.01 General Powers   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
  Section 3.02 Actions Requiring Unanimous Consent of all Members   . . . . . . . . . . . . . . . . . . . . . . . . . .   4
  Section 3.03 Actions Requiring Unanimous Consent of Voting Members  . . . . . . . . . . . . . . . . . . . . . . . . .   4
  Section 3.04 Number and Term of Office  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
  Section 3.05 Limitation of Authority of Members   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
  Section 3.06 Meetings and Notice  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
  Section 3.07 Quorum   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
  Section 3.08 Managers to Have One Vote Each   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
  Section 3.09 Action by Unanimous Written Consent  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
  Section 3.10 Resignation and Removal of Managers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
  Section 3.11 Discharge of Duties; Reliance on Reports   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
  Section 3.12 Accountable as Trustee   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
  Section 3.13 Authority to Execute Documents   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
  Section 3.14 Officers   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
</TABLE>                                                                     





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<TABLE>
<CAPTION>
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  Section 3.15 Removal, Resignation or Replacement of Officers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7
                                                                                                                          
ARTICLE IV - CAPITAL CONTRIBUTIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7
  Section 4.01 Membership Interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7
  Section 4.02 Subsequent Contributions   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7
  Section 4.03 Failure to Make Additional Contribution  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7
  Section 4.04 Contribution Returns   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8
  Section 4.05 Loans by Members   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8
  Section 4.06 Income Accounts  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8
  Section 4.07 Capital Accounts   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8
                                                                                                                          
ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8
  Section 5.01 Allocations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8
  Section 5.02 Distributions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9
                                                                                                                          
ARTICLE VI - WITHDRAWAL; TRANSFER OF MEMBERSHIP INTEREST  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9
  Section 6.01 No Withdrawal of Member  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9
  Section 6.02 Transferability of Membership Interest   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9
  Section 6.03 Permitted Transfers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9
  Section 6.04 Bankrupt Members   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9
  Section 6.05 Action or Derivative Proceeding by Member  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    10
  Section 6.06.  Involuntary Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    10
  Section 6.07 Death  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    10
  Section 6.08 Purchase Price and Payment   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    11
  Section 6.09 Sale of the Company  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    11
                                                                                                                          
ARTICLE VII - TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    11
  Section 7.01 Tax Returns  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    11
  Section 7.02 Accounting and Reports   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    11
  Section 7.03 Indemnification of Tax Matters Member  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
                                                                                                                          
ARTICLE VIII - DISSOLUTION, LIQUIDATION, AND TERMINATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
  Section 8.01 Dissolution  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
  Section 8.02 Certificate of Dissolution   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
  Section 8.03 Winding Up   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
  Section 8.04 Liquidation and Termination  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
  Section 8.05 Deficit Capital Accounts   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    14
                                                                                                                          
ARTICLE IX - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    14
  Section 9.01 Books and Records  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    14
  Section 9.02 Invalidity   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    14
  Section 9.03 Waiver   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    14
  Section 9.04 Choice of Law and Choice of Forum  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    14
  Section 9.05 Counterparts   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    15
  Section 9.06 Further Assistance   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    15
  Section 9.07 Notices  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    15
  Section 9.08 Arbitration  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    15
</TABLE>                                                                     





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<PAGE>   8

<TABLE>
<CAPTION>
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  Section 9.09 Conflict With Statute  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    15
  Section 9.10 Entire Agreement   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    15

</TABLE>




                                      iii
<PAGE>   9

                              AMENDED AND RESTATED
                              OPERATING AGREEMENT
                                       OF
                       VARSITY MORTGAGE SERVICES, L.L.C.
                     (A MICHIGAN LIMITED LIABILITY COMPANY)

         This AMENDED AND RESTATED OPERATING AGREEMENT of Varsity Mortgage
Services, L.L.C. (the "Company") made effective as of April 1, 1997, is hereby
adopted and agreed to, for good and valuable consideration, by the Members (as
defined below).

                            ARTICLE I - ORGANIZATION

         Section 1.01     Organization.  The Company has been organized as a
Michigan limited liability company under the Michigan Limited Liability Company
Act (the "MLLCA") pursuant to the Company's Articles of Organization (the
"Articles"), filed with the Michigan Department of Consumer and Industry
Services.

         Section 1.02     Name of Company.  The name of the Company shall be
Varsity Mortgage Services, L.L.C.  All business of the Company shall be
transacted in that name or in other names that are selected by the Company from
time to time and are in compliance with the MLLCA.

         Section 1.03     Duration.  The Company began its existence upon the
filing of its Articles of Organization with the Michigan Department of Consumer
and Industry Services, and it shall continue in existence for the period of
time specified in the Articles or in conformity with the provisions of this
Agreement.

         Section 1.04     Purpose.  The purposes of the Company is to engage in
any activity for which limited liability companies may be formed under the
MLLCA.  The Company shall have all the powers necessary or convenient to effect
any purpose for which it is formed, including all powers granted by the MLLCA.

         Section 1.05     Legal Status of Company.  The Members do not intend
that the Company be a co-partnership, limited partnership or corporation, and
none of the Members or Managers of the Company is a partner of any other Member
or Manager, except for purposes of federal and state tax law, and this
Agreement shall not be construed as providing otherwise.

         Section 1.06     Definitions.  Terms used herein which are not
otherwise defined shall have the meaning, if given, in the MLLCA.  Any
reference herein to the "Agreement" shall mean this Amended and Restated
Operating Agreement.

                              ARTICLE II - MEMBERS

         Section 2.01     Members.  The members of the Company are the persons
executing this Agreement effective as of the date hereof as members, each of
which is admitted to the Company as a member effective upon such execution (the
"Members").  There shall be two classes of Members, "Voting Members" and
"Non-Voting Members" and two classes of membership interests, "Voting
Membership Interest" and "Non-Voting Membership Interest."

<PAGE>   10

         Section 2.02     Additional Members.  Additional members may be
admitted, and the capital contribution to be made thereby shall be set, only
upon the approval (written or otherwise) of 100% of the existing Members.

         Section 2.03     Information.  In addition to the other rights
specifically set forth in this Agreement, each Member is entitled to all
information to which that Member is entitled to have access pursuant to Section
503 of the MLLCA under the circumstances and subject to the conditions therein
stated, including without limitation the books, records of account, business
records, the Articles and this Agreement.

         Section 2.04     Liability to Third Parties.  Unless provided by law
or expressly assumed, a person who is a Member or Manager, or both, shall not
be liable for the acts, debts, or liabilities of the Company, including those
under a judgment, decree or order of a court.

         Section 2.05     Voting Rights.  Each Voting Member shall be entitled
to vote on all matters to be submitted for a vote by the Members, including the
selection of Managers, in proportion to such Voting Member's Voting Membership
Interest of the Company; and the approval of all such matters and the selection
of Managers shall be by majority vote of the Voting Members (measured with
respect to all matters by their Voting Membership Interest), unless a higher
percentage is required for approval elsewhere in this Agreement.  Non-Voting
Members shall have no voting rights except as expressly stated in Section 3.02
of this Agreement and the MLLCA.

         Section 2.06     Meetings and Notice.  Regular meetings of the Members
and Managers shall be held on a monthly basis on or before the second Friday of
each month to determine the accruals for profit sharing, Member distributions
and bonuses.  In addition to the regular meetings, any Voting Member or Voting
Members with at least 25% of the Voting Membership Interests or the Managers
acting unanimously, may call a meeting of the Members for any reasonable time
at the principal office of the Company, upon at least 5 days' notice to all the
Members.  The notice shall state the nature of the business to be transacted
and the matters, if any, upon which the Members will be requested to vote
(subject to the voting limitations on Non-Voting Members); provided, however,
action may be taken on any matter to be brought before the meeting regardless
of whether set forth in the notice.

         Section 2.07     Quorum.  Except as otherwise required by the MLLCA or
the Articles, the presence of Voting Members (in person or by proxy) owning a
majority of the Voting Membership Interests in the Company at a meeting shall
be sufficient to constitute a quorum for the transaction of business.
Regardless of whether a quorum is present, the meeting may be adjourned by a
vote of the Voting Members present.  At the adjourned meeting at which the
requisite quorum shall be represented, any business may be transacted which
might have been transacted at the meeting as originally notified.

         Section 2.08     Member to Vote in Person or by Proxy.  A Member
entitled to vote at a meeting of Members or to express consent or dissent
without a meeting shall be entitled to vote in person, or by proxy appointed by
an instrument in writing authorizing other persons to act.  A proxy shall be
signed by the Member or authorized agent or representative and shall not be
valid after the expiration of 3 years from its date unless otherwise provided.





                                       2
<PAGE>   11


         Section 2.09     Action by Written Consent.  Any action required or
permitted to be taken at a meeting of Members may be taken without a meeting,
without prior notice and without a vote, if consents in writing, setting forth
the action so taken, are signed by all of the Members entitled to vote.  All
such consents shall be dated within a period of 90 days from the first date
thereof to the last date.

         Section 2.10     No Authority to Commence Civil Suit.  No Member shall
have the authority to commence and maintain a civil suit in the right of the
Company, and no such civil suit shall be commenced and maintained in the right
of the Company, except upon majority vote of the Voting Members, approval of
the Managers, or as provided in Section 510 of the MLLCA.

         Section 2.11     Independent Activities.  Any Member may,
notwithstanding the existence of this Agreement, engage in whatever other
activities such Member chooses, whether the same is competitive with the
Company or otherwise, without having or incurring any obligation to offer any
interest in such activities to the Company or to any other party to this
Agreement.

         Section 2.12     Transactions Permitted With Members and Affiliates.
The validity of any transaction, agreement or payment involving the Company,
the Members or any affiliate thereof, otherwise permitted by the terms of this
Agreement shall not be affected by reason of the relationship between any
Member and such affiliate or by reason of the approval of said transaction,
agreement or payment by any Member.

         Section 2.13     Participation by Communication Equipment.  A Member
may participate in a meeting of the Members by a conference telephone or by
other similar communications equipment through which all persons participating
in the meeting may communicate with the other participants.  All participants
shall be advised of the communications equipment and the names of the parties
in the conference shall be divulged to all participants.  Participation in a
meeting pursuant to this section constitutes presence in person at the meeting.


                      ARTICLE III - MANAGEMENT BY MANAGERS

         Section 3.01     General Powers.  Except as otherwise provided in this
Agreement, the property, affairs, and business of the Company shall be managed
by the Managers, and the Managers may exercise all the powers of the Company,
whether derived from law, the Articles or otherwise.  The Members shall only
act as a member, and the Members shall have no managerial power unless
explicitly authorized by this Agreement or a majority vote of the Managers.
Each Manager has the power, on behalf of the Company, to do all things
necessary or convenient to carry out the business and affairs of the Company in
the ordinary course of business, including, the power to: (i) purchase, lease
or otherwise acquire any real or personal property with a purchase price not
exceeding $25,000; (ii) sell, convey, mortgage, grant a security interest in,
pledge, lease, exchange or otherwise dispose of or encumber any real or
personal property; (iii) borrow money and incur liabilities and other
obligations; (iv) enter into any and all agreements and execute any and all
contracts, documents and instruments; (v) engage employees and agents, define
their respective duties, and establish their compensation or remuneration; (vi)
establish pension plans, trusts, profit sharing plans and other benefit





                                       3
<PAGE>   12

and incentive plans for Members, employees and agents of the Company; (vii)
obtain insurance covering the business and affairs of the Company and its
property and on the lives and well being of its Members, employees and agents;
(viii) commence, prosecute or defend any proceeding in the Company's name; and
(ix) participate with others in partnerships, joint ventures and other
associations and strategic alliances.

         Section 3.02     Actions Requiring Unanimous Consent of all Members.
Notwithstanding the foregoing Section 3.01 or any other provision contained in
this Agreement to the contrary, the following actions shall require the
unanimous approval of all the Voting Members and Non- Voting Members: (i)
distributions of profits and losses to the Members, except for profits not
exceeding the profit allocated to a Member for the monthly period most recently
ended; (ii) amendments to the Articles or this Agreement; (iii) sale or
transfer of all or substantially all of the Company's assets except as provided
in Section 6.09 below; (iv) change in any Member's Membership Interest relative
to all other Members; (v) establishment of the consideration to be accepted for
the sale of any Membership Interest in the Company; (vi) approval of any merger
or consolidation, except as provided in Section 6.09 below; (vii) admission of
new Members as provided in Section 2.02; (viii) changes in the amount of life
insurance on Non-Voting Members acquired by the Company as provided in Section
6.07; (ix) approval of additional capital contributions by Members as provided
in Section 4.02; and (x) election and compensation of Managers and payment of
bonuses to any employees of the Company.

         Section 3.03     Actions Requiring Unanimous Consent of Voting
Members.  Notwithstanding the foregoing Section 3.01 or any other provision
contained in this Agreement to the contrary, the following actions shall
require the unanimous approval of all the Voting Members (and shall not require
the consent of the Non-Voting Members or the Managers): (i) approval of any
liquidation or dissolution; (ii) creation of any mortgage, pledge, lien, charge
or encumbrance upon any of the assets now owned or hereafter acquired by the
Company or disposition of any such property or assets except in the ordinary
course of business; (iii) approval of capital expenditures over $25,000,
including capital expenditures to purchase, lease or otherwise acquire any real
or personal property; (iv) the guaranty of obligations of any other person or
entity; (v) approval or disapproval of the purchase of any Membership Interest;
(vi) any substantial change in the character of the business and affairs of the
Company; (vii) the opening of a depository account on behalf of the Company;
(viii) authorization of any person other than the Comptroller to sign checks or
withdraw funds from a depository account of the Company; and (ix) election and
compensation of the Comptroller of the Company who shall be an employee of
University Bank.

         Section 3.04     Number and Term of Office.  The number of Managers of
the Company shall be determined from time to time by the Voting Members.  If
the Voting Members make no such determination, the number of Managers shall be
3.  A Manager shall hold office for the term elected, until a successor is
elected and qualified or until death, resignation or removal.  The Managers
shall be elected by the Voting Members on an annual basis.  The election of a
Manager does not of itself create contract rights.  The initial Managers shall
be Jess Monticello, William W. Cook and Marianne Opt Thompson.  The annual
salaries of the initial Managers shall be as follows:


                 Jess Monticello                   $ 67,500
                 William W. Cook                     67,500





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<PAGE>   13

                 Marianne Opt Thompson             135,000

The annual salaries for the initial Managers shall be increased on January 1st
of each successive year by the following amounts:

                 Jess Monticello                              $1,500
                 William W. Cook                               1,500
                 Marianne Opt Thompson                         3,000

In the event Jess Monticello or William W. Cook no longer serves as a Manager
of the Company for any reason, the salary of the individual who no longer
serves as a Manager shall be added to the salary of the remaining of these two
Managers.

NOTWITHSTANDING ANYTHING TO THE CONTRARY, IT IS AGREED AND ACKNOWLEDGED BY THE
VOTING MEMBERS AND THE NON-VOTING MEMBERS THAT JESS MONTICELLO, WILLIAM W. COOK
AND MARIANNE OPT THOMPSON ARE EMPLOYED AT THE WILL OF THE COMPANY AND THEY MAY
BE TERMINATED AS MANAGERS AND EMPLOYEES BY THE VOTE OF THE VOTING MEMBERS AT
ANY TIME, FOR ANY REASON OR FOR NO REASON.

         Section 3.05     Limitation of Authority of Members.  No Member (other
than a Manager) has the authority or power to act for or on behalf of the
Company, to do any act which would be binding on the Company or to incur any
expenditures on behalf of the Company.

         Section 3.06     Meetings and Notice.  Meetings of the Managers shall
be held whenever called by the Chairman of the Managers, or by any Manager, at
such time and place as may be specified in the notice or waiver of notice.
Special meetings of the Managers may be called on 24 hours' notice to each
Manager, given personally or by telephone, or on 3 days' written notice.
Notice of any special meeting need not be given to any Manager who shall be
present at the meeting, or who shall waive notice of the meeting in writing,
whether before or after the time of the meeting.  No notice need be given of
any adjourned special meeting.  A Manager may participate in a meeting of the
Managers by a conference telephone or by other similar communications equipment
through which all persons participating in the meeting may communicate with the
other participants.  All participants shall be advised of the communications
equipment and the names of the parties in the conference shall be divulged to
all participants.  Participation in a meeting pursuant to this section
constitutes presence in person at the meeting.

         Section 3.07     Quorum.  A majority of the Managers then in office
constitutes a quorum for transaction of business, unless the Articles or this
Agreement, provide for a larger or smaller number.  The vote of the majority of
Managers present at a meeting at which a quorum is present constitutes the
action of the Managers, unless the vote of a larger number is required by the
MLLCA, the Articles or this Agreement.

         Section 3.08     Managers to Have One Vote Each.  Each Manager shall
have one vote.  Except as otherwise required by the MLLCA or the Articles, all
questions shall be decided by a majority vote of the Managers represented at
the meeting in person or by proxy.





                                       5
<PAGE>   14

         Section 3.09     Action by Unanimous Written Consent.  Any action
required or permitted to be taken at any meeting of the Managers or a committee
appointed by the Managers may be taken without a meeting if, under
authorization voted before or after the action, written consents thereto are
signed by all Managers then in office or of a committee of Members and such
written consents are filed with the minutes of the proceedings of the Managers
or committee.  All such consents shall be dated within a period of 90 days from
the first date thereof to the last date.

         Section 3.10     Resignation and Removal of Managers.  Any Manager may
resign at any time by delivering a written resignation to the remaining
Managers and each of the Voting Members and such resignation shall be effective
upon receipt thereby or at a subsequent time as set forth in the notice of
resignation.  Any or all of the Managers may be removed from office at any time
with or without cause upon the vote for removal of a majority of the Voting
Members.  However, in the event a Manager is removed by vote of the Voting
Members (and not by voluntary resignation or death), the Company shall pay the
removed Manager, within fourteen (14) days of the effective removal date, cash
in an amount equal to one year's salary (without bonus) of the removed Manager.

         Section 3.11     Discharge of Duties; Reliance on Reports.  A Manager
shall discharge his or her duties as a Manager in good faith, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances and in a manner he or she reasonably believes to be in the best
interests of the Company.  In discharging his or her duties, a Manager may rely
on information, opinions, reports or statements, including financial statements
and other financial data, if prepared or presented by any of the following:

                 (a)      One or more Members, or employees of the Company whom
the Manager reasonably believes to be reliable and competent in the matter
presented.

                 (b)      Legal counsel, public accountants, engineers, or
other persons as to matters the Manager reasonably believes are within the
person's professional or expert competence.

                 (c)      A committee of Managers of which he or she is not a
member if the Manager reasonably believes the committee merits confidence.

A Manager is not entitled to rely on the information set forth in this section
if the Manager has knowledge concerning the matter in question that makes
reliance otherwise permitted by this provision unwarranted.  A Manager is not
liable for any action taken as a Manager or any failure to take any action if
he or she performs the duties of his or her office in compliance with this
section.

         Section 3.12     Accountable as Trustee.  A Manager shall account to
the Company and hold as trustee for it any profit or benefit derived without
the informed consent of the Members by the Manager from any transaction
connected with the conduct or winding up of the Company or from any personal
use by him or her of its property.

         Section 3.13     Authority to Execute Documents.  All deeds,
documents, contracts, agreements, bonds, debentures, notes, obligations,
evidences of indebtedness,





                                       6
<PAGE>   15

checks, drafts, and other instruments requiring execution by the Company shall
be executed and delivered by one or more Managers as may from time to time be
authorized by the Managers.  All funds of the Company not otherwise employed
shall be deposited to the credit of the Company in such financial institutions
as designated by the Managers.  The Managers may execute or cause to be
executed in the name and on behalf of the Company, as the holder of stock or
other securities in any corporation, all written proxies, powers of attorney or
other written instruments as the Managers may deem necessary for the Company to
exercise such powers and rights.

         Section 3.14     Officers.  The Company may have one or more officers
who shall be elected or appointed by the Managers, and who shall have the
title, authority and duties as authorized or directed by the Managers.  An
officer shall hold office for the term for which elected or appointed and until
a successor is elected or appointed and qualified, or until resignation or
removal.

         Section 3.15     Removal, Resignation or Replacement of Officers.  An
officer elected or appointed by the Managers may be removed by the Managers
with or without cause.  The removal of an officer shall be without prejudice to
his or her contract rights, if any.  The election or appointment of an officer
does not of itself create contract rights.  An officer may resign by written
notice to the Company, which resignation is effective upon its receipt by the
Company or at a subsequent time specified in the notice of resignation.
Vacancies in any office may be filled by the Managers.

                       ARTICLE IV - CAPITAL CONTRIBUTIONS

         Section 4.01     Membership Interest.  The Voting Membership Interest
and Non-Voting Membership Interest shall be referred to herein collectively as
the "Membership Interest".  The respective rights of each Voting Member in the
Company, including, but not limited to, any right to vote or receive
distributions with respect to Voting Membership Interest, shall be in
proportion to the Voting Membership Interest set forth in Exhibit "A" attached,
as may be adjusted from time to time as provided in this Agreement.  The
respective rights of each Non-Voting Member in the Company including, but not
limited to, any right to receive distributions with respect to Non-Voting
Membership Interest, shall be in proportion to the Non-Voting Membership
Interest as set forth in Exhibit "A" attached, as may be adjusted from time to
time as provided in this Agreement.  Except as set forth in Section 4.07 below,
all distributions of the Company's profits and other assets shall be allocated
50% to the Voting Members and 50% to the Non-Voting Members until such time as
one or more of the Member's capital accounts is reduced to $0 or is negative.
If any distribution is made when one or more of the Member's capital accounts
is $0 or is negative, such distribution shall be made to the Members in
proportion to their respective positive capital account balances.

         Section 4.02     Subsequent Contributions.  No Member shall be
required to advance or contribute any additional funds to the Company except
upon approval by all of the Members.

         Section 4.03     Failure to Make Additional Contribution.  Upon the
failure by a Member to make the full amount of any additional capital
contribution described in Section 4.02 above, the Membership Interests of the
Members shall be reallocated so that the noncontributing Members' percentage
interests in the Company shall be reduced as





                                       7
<PAGE>   16

provided herein to reflect the failure to make the required capital
contribution, and the Members making such contributions shall be allocated a
percentage interest in the Company to equitably reflect such contribution.

         Section 4.04     Contribution Returns.  Except as provided herein, a
Member is not entitled to the return of any part of the Member's capital
contributions or to be paid interest in respect of either the capital account
or the capital contributions.  An unrepaid capital contribution is not a
liability of the Company or of any Member.  A Member is not required to
contribute or to lend any cash or property to the Company to enable it to
return any Member's capital contribution.

         Section 4.05     Loans by Members.  Should the Company lack sufficient
cash to pay its obligations, any Member that may agree to do so may advance all
or part of the needed funds to or on behalf of the Company.  An advance
described in this section constitutes a loan from the Member to the Company,
bears interest at the interest rate agreed to by the Company and the lending
Member from the date of the advance until the date of payment, and is not a
capital contribution.

         Section 4.06     Income Accounts.  An individual income account shall
be maintained for each Member.  At the end of each month, each Member's share
of net profits or net losses of the Company, if not previously credited or
debited, shall be credited or debited to such Member's income account.  After
such amounts have been credited or debited to such Member's income account, any
balance or deficit remaining in such account at the end of such month shall be
transferred to or charged against such Member's capital account.

         Section 4.07     Capital Accounts.  A capital account shall be
maintained for each Member.  The capital account for each Member shall consist
of: (i) that Member's initial contribution to capital, if any; (ii) any amounts
that have been assigned from such Member's capital account to another Member's
capital account as a result of a sale, devise or transfer of their interest or
a part thereof in the Company; (iii) any additional capital contributions; and
(iv) any amounts transferred from a Member's capital account to their capital
account pursuant to this Agreement, and reduced by all distributions and
reductions of Company capital.  The Members acknowledge and agree that the
initial capital accounts of the Members, as of the date of this Agreement, are
as set forth on Exhibit "A" attached, subject to the right of the Voting
Members to receive a one-time special distribution to reduce their capital
accounts to the balances described in Exhibit "A."

                   ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS

         Section 5.01     Allocations.  Except as may be required by Section
704(c) of the Internal Revenue Code of 1986, as amended, (the "Code") and
Treasury Regulation Section 1.704-1(b)(2)(iv)(f)(4); all items of income, gain,
loss, deduction, and credit of the Company shall be allocated among the Voting
Members and Non-Voting Members in accordance with their proportional Membership
Interest (with Voting Membership in the aggregate and Non-Voting Membership in
the aggregate treated equally).  All items of income, gain, loss, deduction and
credit allocable to any Membership Interest that may have been transferred or
reallocated shall be allocated between the transferor and transferee based upon
the portion of the tax year during which each was recognized as





                                       8
<PAGE>   17

owning that Membership Interest, without regard to the results of Company
operations during any particular portion of that tax year and without regard to
whether cash distributions were made to the transferor or the transferee during
that tax year; provided, however, that this allocation must be made in
accordance with a method permissible under Section 706 of the Code and the
regulations thereunder.

         Section 5.02     Distributions.  Except for monthly distributions to
the extent profit is allocated to a Member's capital account which may be
authorized by the Managers, the Company shall pay such distributions to the
Members as may be agreed upon unanimously by all of the Members.  Cash
available for distribution shall be determined monthly and shall be distributed
on a regular periodic basis, taking into account the reasonable business needs
of the Company.  All distributions shall be in accordance with Section 4.01
above.

            ARTICLE VI - WITHDRAWAL; TRANSFER OF MEMBERSHIP INTEREST

         Section 6.01     No Withdrawal of Member.  A Member does not have the
right or power to voluntarily withdraw from the Company as a Member.  Any such
voluntary withdrawal shall be in violation of this Agreement and the
withdrawing Member shall not be entitled to receive any distribution pursuant
to Section 305 of the MLLCA.  A "voluntary withdrawal" shall mean a Member's
disassociation from the Company by any means other than under Section 6.03
(transfer with consent of the Members), Section 6.04 (bankruptcy), Section 6.05
(proceedings), Section 6.06 (involuntary transfer), Section 6.07 (death) or
Section 6.09 (sale of the Company).

         Section 6.02     Transferability of Membership Interest.  Except as
specifically permitted in this Agreement, no Member shall sell or otherwise
transfer any portion of the Member's Membership Interest in the Company in any
manner, voluntarily or involuntarily, including without limitation, by sale,
gift, granting an option to purchase, bequest, descent, divorce, device or
operation of law, or any other disposition.  Any attempted disposition by a
Member of an interest or right, or any part thereof, in or in respect of the
Company other than in accordance with this Section shall be null and void.  A
Membership Interest may not be assigned, in whole or in part.

         Section 6.03     Permitted Transfers.  Notwithstanding Section 6.02,
any Member may transfer all or a portion of the Membership Interest in the
Company by first obtaining the unanimous consent of all the other Members upon
which the transferor Member shall cease to be a Member of the Company and the
transferor Member's assignee shall become a Member of the Company with all
rights and obligations thereof.

         Section 6.04     Bankrupt Members.  If any Member becomes a Bankrupt
Member (as defined below), the Company shall have the option, exercisable by
notice from the Company to the Bankrupt Member at any time prior to the 180th
day after receipt of notice of the occurrence of the event causing it to become
a Bankrupt Member, to buy and on the exercise of this option the Bankrupt
Member shall sell the Membership Interest of such Member.  The purchase price
and payment terms under this Section shall be as set forth in Section 6.08.  As
used herein a "Bankrupt Member" shall mean a Member who: (i) has been declared
bankrupt through the issuance of an order of relief; (ii) has filed a petition
in bankruptcy or for reorganization, or to effect a plan or other agreement
with creditors; or (iii) has any bankruptcy petition filed against such Member





                                       9
<PAGE>   18

unless discharged within 60 days; or (iv) has filed an answer to a creditor's
petition (admitting the material allocations thereof) in bankruptcy or for
reorganization or to affect a plan or other arrangement of creditors; or (v)
has applied to have a receiver, trustee or custodian appointed with respect to
any of the Member's assets.

         Section 6.05     Action or Derivative Proceeding by Member.  In the
event a Member commences an action for dissolution of the Company under Section
801 of the MLLCA or a derivative proceeding against the Company pursuant to
Section 510 of the MLLCA, the Company shall, for a period of 90 days after such
an action or proceeding is served upon the Company have the option to purchase
the Member's Membership Interest in the Company by giving written notice to the
Member of the exercise thereof.  The purchase price and payment terms under
this Section shall be as set forth in Section 6.08.

         Section 6.06.    Involuntary Transfer.  In the event of an involuntary
transfer of any Membership Interest by operation of law or otherwise,
including, without limitation, transfer by virtue of divorce, insolvency or
creditor's proceedings or arrangements of any kind, execution or attachment,
the Company shall, for a period of 90 days after such transfer have the option
to purchase the transferred Membership Interest in the Company by giving
written notice to the Member of the exercise thereof.  The purchase price and
payment terms under this Section shall be as set forth in Section 6.08.

         Section 6.07     Death.  In the event of the death of a Member, within
90 days of the date of death, the Company shall purchase and the deceased
Member's heirs or legal representatives shall sell to the Company the deceased
Member's Membership Interest.  The purchase price and payment terms under this
Section shall be as set forth in Section 6.08.  In addition, the Company shall
purchase and maintain life insurance on each of the Non-Voting Members in an
amount of no less than $2,000,000 for Marianne Opt Thompson, $1,000,000 for
Jess Monticello and $1,000,000 for William W. Cook for as long as such
individuals are Non-Voting Members.  Such policies shall not be canceled, nor
the amount of insurance coverage changed without the unanimous consent of all
the Members; provided however, that a Non-Voting Member may request Crowe
Chizek or the accountant then servicing the Company, to determine, at the
Company's expense not more than once in a 3 year period, the fair market value
of that Non-Voting Member's Membership Interest and determine whether the
amount of such insurance adequately reflects the fair market value of that
Non-Voting Member's Membership Interest.  In the event that Crowe Chizek
determines that the amount of life insurance is lower than the fair market
value of such Membership Interest, the Company shall purchase such additional
insurance for the Non-Voting Members as is necessary to cover the fair market
value of the Membership Interest.  Upon the death of a Non-Voting Member, the
proceeds of the insurance shall be paid to the beneficiary designated by such
Non-Voting Member.  Such payment of proceeds shall be separate from and in
addition to any payment for the Membership Interest under Section 6.08.  This
Section 6.07 shall not be construed to guarantee payment of the "fair market
value" of the deceased Member's Membership Interest.  The deceased Member's
estate, representatives and/or beneficiaries are only entitled to receive the
proceeds of the insurance policy on the life of the deceased Member existing as
of the date of death and the purchase price under Section 6.08 which may or may
not equal in the aggregate the fair market value of the deceased Member's
Membership Interest.





                                       10
<PAGE>   19


         Section 6.08     Purchase Price and Payment.  The purchase price under
Sections 6.04, 6.05, 6.06 and 6.07 shall equal the positive balance of the
capital account of the Membership Interest to be purchased as of the date of
exercise of the option or death, as the case may be.  Determination of the
purchase price shall be made by the accountant then regularly servicing the
Company whose determination shall be final and binding upon the Company, all of
the Members and any non-Member transferor.  The Company shall pay the purchase
price in cash, which payment shall be in complete liquidation and satisfaction
of all rights and interests of the Member.  The closing shall be on or before
the 30th day after determination of the purchase price.

         Section 6.09     Sale of the Company.  The Non-Voting Members, acting
unanimously as a group, and the Voting Members, acting unanimously as a group,
will each have the right to present in writing to the other group, at any time,
a good faith bona fide cash offer to purchase the Company.  The group receiving
notice of such offer (the "Notified Group") may accept such offer by giving
written notice to the group presenting such offer (the "Presenting Group")
within 60 days of notification of such offer.  In the event the Notified Group
fails to accept the offer within the 60 day time period, such offer shall be
deemed rejected by the Notified Group and the firm of Crowe Chizek or another
firm to be unanimously agreed upon by the Voting Members and the Non-Voting
Members (the "Appraisal Firm") shall be retained at the expense of the Company
to determine whether such offer is fair.  The Appraisal Firm shall render such
decision within 90 days from the date of being retained and its decision shall
be final and binding on the Members and the Company.  In the event the offer is
determined by the Appraisal Firm to be less than fair, no Member will have any
further obligation with respect to such offer.  In the event the Appraisal Firm
determines the offer to be fair, the Notified Group will be obligated to sell
the Company in accordance with the terms of such cash offer.   As a condition
to any sale of the Company pursuant to this Section 6.09, the Voting Members
shall receive repayment of the $300,000 in their capital accounts as of the
date of this Agreement (or any remaining part thereof) and the balance of the
sale proceeds shall be paid one-half for the benefit of the Voting Members and
one-half for the benefit of the Non-Voting Members.

                              ARTICLE VII - TAXES

         Section 7.01     Tax Returns.  The Voting Members shall designate an
individual  as the Tax Matters Member, and he shall cause to be prepared and
filed all necessary federal and state income tax returns for the Company.

         Section 7.02     Accounting and Reports.  Unaudited financial
statements shall be prepared at least monthly and delivered to the Members.
Within 60 days after the close of the Company's fiscal year, a balance sheet
and profit and loss statement of the Company relating to the prior fiscal year
shall be prepared in accordance with generally accepted accounting principles,
consistently applied, and delivered to the Members.   All financial statements
shall be certified as to accuracy by the Managers.

         Section 7.03     Indemnification of Tax Matters Member.  The Company
shall defend, indemnify and hold harmless the Tax Matters Member for all
expenses including, but not limited to, legal and accounting fees, claims,
liabilities, losses and damages incurred in connection with the performance of
such Member as Tax Matters Member.





                                       11
<PAGE>   20

            ARTICLE VIII - DISSOLUTION, LIQUIDATION, AND TERMINATION

         Section 8.01     Dissolution.  The Company is dissolved and its
affairs shall be wound up upon the first occurrence of any of the following:

                 (a)      at the time specified in the Articles;

                 (b)      upon the happening of events specified in this
Agreement;

                 (c)      by the unanimous consent of all the Voting Members;

                 (d)      Upon the entry of a decree of judicial dissolution.

         Section 8.02     Certificate of Dissolution.  Upon the dissolution and
commencement of winding up the Company, a certificate of dissolution shall be
duly executed and filed with the Michigan Department of Consumer and Industry
Services containing the information required by the MLLCA.

         Section 8.03     Winding Up.  Except as otherwise provided in the
Articles, this Agreement, or Section 805 of the MLLCA, the Members or Managers
who have not wrongfully dissolved the Company may wind up the Company's
affairs.  The Members or Managers who are winding up the Company's affairs
shall continue to function, for the purpose of winding up, in accordance with
the procedures set by the MLLCA, the Articles, and this Agreement, shall be
held to no greater standard of conduct than that described by Section 404 of
the MLLCA and shall be subject to no greater liabilities than would apply in
the absence of dissolution.  The Company may sue and be sued in its name and
process may issue by and against the Company in the same manner as if
dissolution had not occurred.  An action brought by or against the Company
before its dissolution does not abate because of the dissolution.

         Section 8.04     Liquidation and Termination.  On dissolution of the
Company, one or more Members or Managers shall serve as liquidator.  The
liquidator shall proceed diligently to wind up the affairs of the Company and
make final distributions as provided herein and in the MLLCA.  The costs of
liquidation shall be borne as a Company expense.  Until final distribution, the
liquidator shall continue to operate the Company properties with all of the
power and authority of the Managers.  The steps to be accomplished by the
liquidator are as follows:

                 (a)      As promptly as possible after dissolution and again
after final liquidation, the liquidator shall cause a proper accounting to be
made by a recognized firm of certified public accountants of the Company's
assets, liabilities, and operations through the last day of the calendar month
in which the dissolution occurs or the final liquidation is completed, as
applicable.

                 (b)      The liquidator shall cause the notice described in
Sections 806 and 807 of the MLLCA to be mailed to each known creditor of and
claimant against the Company and published in the manner described in Sections
806 and 807.

                 (c)      The assets shall be distributed in the following
order:





                                       12
<PAGE>   21

                          (i)     To creditors, including Members who are
         creditors, to the extent permitted by law, in satisfaction of
         liabilities of the Company other than liabilities for distributions to
         Members under Section 304 or 305 of the MLLCA.  Reasonable provisions
         shall be made for debts, liabilities, and obligations that are not
         liquidated but will not be barred under Sections 806 or 807 of the
         MLLCA.

                          (ii)    To Members and former Members in satisfaction
         of liabilities for distributions under Section 304 of the MLLCA.

                          (iii)   To the Members pursuant to (d) below.

                 (d)      The distribution of assets to the Members shall be as
follows:

                          (i)     The liquidator may sell any or all Company
         property, including to Members, and any resulting gain or loss from
         each sale shall be computed and allocated to the capital accounts of
         the Members;

                          (ii)    With respect to all Company property that has
         not been sold, the fair market value of that property shall be
         determined and the capital accounts of the Members shall be adjusted
         to reflect the manner in which the unrealized income, gain, loss, and
         deduction inherent in property that has not previously been reflected
         in the capital accounts would be allocated among the Members if there
         were a taxable disposition of that property for the fair market value
         of that property on the date of distribution; and

                          (iii)   Company property shall be distributed among
         the Members in accordance with the positive capital account balances
         of the Members, as determined after taking into account all capital
         account adjustments for the taxable year of the Company during which
         the liquidation of the Company occurs (other than those made by reason
         of this clause (iii)); and those distributions shall be made by the
         end of the taxable year of the Company during which the liquidation of
         the Company occurs (or, if later, 90 days after the date of the
         liquidation).

All distributions in kind to the Members shall be made subject to the liability
of each distributee for costs, expenses, and liabilities theretofore incurred
or for which the Company has committed prior to the date of termination and
those costs, expenses, and liabilities shall be allocated to the distributee
pursuant to this Section.  The distribution of cash and/or property to a Member
in accordance with the provisions of this Section constitutes a complete return
to the Member of its capital contributions and a complete distribution to the
Member of its Membership Interest and all the Company's property and
constitutes a compromise to which all Members have consented within the meaning
of Section 808(1)(c) of the MLLCA.

         Section 8.05     Deficit Capital Accounts.  Notwithstanding anything
to the contrary contained in this Agreement, and notwithstanding any custom or
rule of law to the contrary, to the extent that the deficit, if any, in the
capital account of any Member results from or is attributable to deductions and
losses of the Company (including non-cash items such as depreciation), or
distributions of money pursuant to this Agreement to all Members in proportion
to their respective Membership Interests, upon dissolution of the Company such
deficit shall not be an asset of the Company and such Members





                                       13
<PAGE>   22

shall not be obligated to contribute such amount to the Company to bring the
balance of such Member's capital account to zero.

                        ARTICLE IX - GENERAL PROVISIONS

         Section 9.01     Books and Records.  The Company shall keep at its
registered office all the following:

                 (a)      A current list of the full name and last known
address of each Member and Manager.

                 (b)      A copy of the Articles of Organization, together with
any amendments to the Articles.

                 (c)      Copies of the Company's federal, state, and local tax
returns and reports, if any, for the three most recent years.

                 (d)      Copies of any financial statements of the Company for
the three most recent years.

                 (e)      Copies of operating agreements, including this
Agreement.

                 (f)      Copies of records that would enable a Member to
determine the Member's relative share of the Company's distributions and their
relative voting rights.

         Section 9.02     Invalidity.  The invalidity of any provision of this
Agreement shall not affect the validity of the remainder of any such provision
or the remaining provisions of this Agreement.

         Section 9.03     Waiver.  The failure of any party at any time to
require performance by any other party of any provision of this Agreement shall
not be deemed a continuing waiver of that provision or a waiver of any other
provision of this Agreement and shall in no way affect the full right to
require such performance from the other party at any time thereafter.

         Section 9.04     Choice of Law and Choice of Forum.  This Agreement
shall be governed by and construed according to the laws of the State of
Michigan.  Any and all actions concerning any dispute arising hereunder that is
not subject to Section 9.08 shall be filed and maintained only in a state or
federal court sitting in the State of Michigan, and the parties hereto
specifically consent and submit to the jurisdiction of such state or federal
court.

         Section 9.05     Counterparts.  This Agreement may be signed in any
number of counterparts with the same effect as if the signature on each such
counterpart were upon the same instrument.  Each executed copy shall be deemed
an executed original for all purposes.

         Section 9.06     Further Assistance.  Each party shall, at the request
of any other party, furnish, execute and deliver such other documents as the
other party may reasonably request and shall take such other actions as any
other party shall reasonably





                                       14
<PAGE>   23

request, provided only that the furnishing of such documents and taking of such
action shall be necessary and convenient to consummate or confirm the
transactions contemplated herein.

         Section 9.07     Notices.  All notices, demands and requests required
or permitted to be given under the provisions of this Agreement shall be in
writing and shall be deemed given:  (i) when personally delivered to the party
to be given such notice or other communication; (ii) on the business day that
such notice or other communication is sent by facsimile or similar electronic
device, fully prepaid, which facsimile or similar electronic communication
shall promptly be confirmed by written notice; (iii) on the third business day
following the date of deposit in the United States mail if such notice or other
communication is sent by first class mail with postage thereon fully prepaid;
or (iv) on the business day following the day such notice or other
communication is sent by reputable overnight courier, to the address that the
party receiving notice designates in writing.

         Section 9.08     Arbitration.  No civil action concerning any
controversy or claim arising out of or relating to this Agreement or the breach
thereof, shall be instituted before any court, and all such controversies or
claims shall be submitted to final and binding arbitration in Ann Arbor,
Michigan, in accordance with the rules then pertaining of the American
Arbitration Association, and judgment upon the award rendered may be entered in
any court having jurisdiction thereof.

         Section 9.09     Conflict With Statute.  In the event any article or
section of this Agreement shall conflict with the MLLCA, as amended from time
to time, the MLLCA, as amended, shall control.

         Section 9.10     Entire Agreement.  This Agreement represents the
entire understanding and agreement between the parties with respect to the
subject matter hereof and supersedes all prior agreements or negotiations
between such parties including an Operating Agreement executed in 1996 by
University Bank and Newberry Bancorp, Inc. n/k/a University Bancorp, Inc., as
members and Jess Monticello, William Cook and Marianne Opt Thompson, as
Managers.

         IN WITNESS WHEREOF, the members have made this Agreement effective as
of the date first set forth above.

The Voting Member:

UNIVERSITY BANK


By:      Mark Ouimet
         ----------------------------
Its:     President
         ----------------------------




                                       15
<PAGE>   24


The Non-Voting Members:

Jess Monticello                              William W. Cook
- --------------------------------------       ----------------------------------
Jess Monticello                              William W. Cook

Marianne Opt Thompson
- ------------------------------------
Marianne Opt Thompson





                                       16
<PAGE>   25

                                  EXHIBIT "A"

                         VOTING MEMBERSHIP INFORMATION

<TABLE>
<CAPTION>
                                                                                                Initial
Name, Taxpayer                                     Phone No.             Membership             Capital                         
Identification No.           Address               Fax No.                 Interest           Contribution
- -------------------          -------              -----------            ------------         -------------
<S>                         <C>                  <C>                     <C>                 <C>

University Bank              959 Maiden Lane        313-741-5858            100%                  $300,000
                             Ann Arbor, Mich.       313-741-5859


<CAPTION>

                       NON-VOTING MEMBERSHIP INFORMATION

                                                                                             Initial
Name, Taxpayer                                  Phone No.              Membership            Capital                         
Identification No.        Address               Fax No.                 Interest           Contribution
- -------------------       -------              -----------            ------------         -------------
<S>                      <C>                     <C>                     <C>                 <C>

Jess Monticello          6374 Odessa Dr.           248-360-0931            25%                    $0
###-##-####              W. Bloomfield, Mi  48324  248-360-0931

William N. Cook          233 Woodlake Dr           (248) 661-9036          25%                    $0
###-##-####              Brighton, MI  48116       (248) 661-9184

Marianne Opt Thompson    725 Half Moon             248-258-5033            50%                    $0 
###-##-####              Bloomfield Hills, MI      248-661-2192
                                48301

</TABLE>


<PAGE>   26



                                  EXHIBIT "B"

                      ACTION BY UNANIMOUS WRITTEN CONSENT
                            OF THE VOTING MEMBERS OF
                       VARSITY MORTGAGE SERVICES, L.L.C.

- --------------------------------------------------------------------------------
         The undersigned, being all the Voting Members of VARSITY MORTGAGE
SERVICES, L.L.C., a limited liability company duly organized and existing under
the laws of the State of Michigan (the "Company"), acting pursuant to the
Articles of Organization of the Company and the Michigan Limited Liability
Company Act, do hereby consent to, approve and adopt the following resolutions:


                             Distribution of Assets

         "RESOLVED, that the Company shall distribute cash to University
         Bancorp, Inc. equal to the positive balance of the capital account of
         University Bancorp, Inc. as of March 31, 1997."

         "RESOLVED FURTHER, that the Company shall distribute cash to
         University Bank equal to the positive balance of the capital account
         of University Bank as of March 31, 1997 to the extent such capital
         account balance exceeded $300,000."

                    Amended and Restated Operating Agreement

         "RESOLVED FURTHER, that the Amended and Restated Operating Agreement
         of the Company dated April 1, 1997 is hereby approved and adopted as
         the Operating Agreement of the Company."

                              Election of Managers

         "RESOLVED FURTHER, that the following individuals are hereby elected
         as the Managers of the Company, to hold office until the election and
         qualification of their respective successors or until their
         resignation or removal:
                   Jess Monticello
                   William W. Cook
                   Marianne Opt Thompson."

                       Bonus to Non-Bonus Pool Employees

         "RESOLVED FURTHER, that the employees (the "Non-Bonus Pool Employees")
         of the Company not entitled to profit sharing under the Bonus Pool (as
         defined below) shall be eligible to receive a monthly bonus from the
         Company which shall be determined by the Managers provided such bonus
         in the aggregate to all Non-Bonus Pool Employees shall not exceed
         $4,000 per month."

         "RESOLVED FURTHER, that the bonus to the Non-Bonus Pool Employees
         shall be accrued on the books of the Company on a monthly basis as an
         expense."
<PAGE>   27


                         Bonus to Bonus Pool Employees

         "RESOLVED FURTHER, that the employees of the Company entitled to
         receive profit sharing (the "Bonus Pool Employees") together with the
         Managers shall be entitled to receive a monthly bonus from the Company
         which shall be determined by the Managers; provided such bonus in the
         aggregate shall not exceed one-third of the Company's net income (the
         "Bonus Pool"), and further provided that the amount of such bonus in
         the aggregate for Bonus Pool Employees only shall not exceed
         two-ninths of the Company's net income.  For purposes hereof, the "net
         income" of the Company each month shall be determined after payment of
         the bonuses to the Non-Bonus Pool Employees, before payment of the
         Bonus Pool, before payment of bonuses to the Managers and before
         payment of any distributions to the Voting and Non-Voting Members."

         "RESOLVED FURTHER, that the bonus to the Bonus Pool Employees shall be
         estimated and accrued on the books of the Company on a monthly basis
         as an expense and adjusted to actual when the true accounting results
         have been determined."

         "RESOLVED FURTHER, that any funds from the Bonus Pool not paid to
         Bonus Pool Employees may be paid to the Managers at the Managers'
         discretion."

Dated: April 1, 1997                               UNIVERSITY BANK, Member


                                        By:   Mark  Ouimet
                                           ------------------------------

                                        Its:   President
                                            ------------------------------




                                       2
<PAGE>   28


                                  EXHIBIT "C"

                      ACTION BY UNANIMOUS WRITTEN CONSENT
                               OF THE MANAGERS OF
                       VARSITY MORTGAGE SERVICES, L.L.C.

- --------------------------------------------------------------------------------

         The undersigned, being all the Managers of VARSITY MORTGAGE SERVICES,
L.L.C., a limited liability company duly organized and existing under the laws
of the State of Michigan (the "Company"), acting pursuant to the Articles of
Organization of the Company and the Michigan Limited Liability Company Act, do
hereby consent to, approve and adopt the following resolutions:

                        Administrative Support Services

                 "RESOLVED, that the Company's monthly charge for
                 administrative support services paid to University Bank shall
                 increase to $4,210."

                 "RESOLVED FURTHER, that this fee shall be adjusted
                 semi-annually based on actual expenses."

                 "RESOLVED FURTHER, that the Company shall enter into a
                 subcontracting arrangement to provide administrative support
                 services directly to Varsity Funding."


                            William W. Cook
Dated: April 1, 1997        -----------------------------------
                            William W. Cook, Manager

                            Jess Monticello
                            -----------------------------------
                            Jess Monticello, Manager

                            Marianne Opt Thompson
                            -----------------------------------             
                            Marianne Opt Thompson, Manager
<PAGE>   29


                                  EXHIBIT "D"

                                  RESOLUTIONS


         The undersigned, President of University Bank, pursuant to the
authority     granted by the Board of Directors of University Bank, hereby
approves the actions set forth in the Resolutions below:

                               Table Funding Rate

                 "RESOLVED, that the table funding rate charged to Varsity
                 Mortgage Services, L.L.C., a Michigan limited liability
                 company ("Varsity Mortgage") shall be the Federal Funds Rate
                 plus 1% and that such funding arrangement shall be made
                 available to Varsity Mortgage on a non-exclusive basis
                 permitting Varsity Mortgage to seek funds from other lenders."

                 "RESOLVED FURTHER, that any officer of the Corporation is
                 authorized to execute a letter agreement with Varsity Mortgage
                 that provides for a three year commitment for the above
                 described table funding line, subject to the availability of
                 funds, the Corporation's capital position and any applicable
                 regulatory restrictions."


                                 Line of Credit

                 "RESOLVED FURTHER, that an operating line of credit to Varsity
                 Mortgage in the amount of $500,000, without points or fees and
                 interest at the prime rate of interest listed in the Wall
                 Street Journal,  is hereby approved."

                 "RESOLVED FURTHER, that any officer of the Corporation is
                 hereby authorized to prepare loan documentation for the above
                 described line of credit for an initial term of three (3)
                 years with an automatic renewal for one year, unless there is
                 notice of an intent not to renew within six (6) months of the
                 end of the initial term."


                        Administrative Support Services

                 "RESOLVED FURTHER, that the Corporation shall charge $4,210
                 per month to Varsity Mortgage for administrative support
                 services provided to Varsity Mortgage by the Corporation.
                 This fee shall be adjusted semi-annually based on actual
                 expenses."


Dated:  April 1    ,1997
      -------------                     Mark Ouimet               
                                        -----------------------------------
                                                          President
                                         ---------------, 



<TABLE> <S> <C>

<ARTICLE> 9
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-END>                               JUN-30-1997
<CASH>                                       4,784,982
<INT-BEARING-DEPOSITS>                         125,415
<FED-FUNDS-SOLD>                            11,463,180
<TRADING-ASSETS>                                     0
<INVESTMENTS-HELD-FOR-SALE>                  3,217,781
<INVESTMENTS-CARRYING>                               0
<INVESTMENTS-MARKET>                                 0
<LOANS>                                     34,924,750
<ALLOWANCE>                                  (513,055)
<TOTAL-ASSETS>                              62,629,759
<DEPOSITS>                                  51,859,796
<SHORT-TERM>                                 4,264,218
<LIABILITIES-OTHER>                          2,000,127
<LONG-TERM>                                          0
                                0
                                          0
<COMMON>                                        13,794
<OTHER-SE>                                   4,265,772
<TOTAL-LIABILITIES-AND-EQUITY>              62,629,759
<INTEREST-LOAN>                              2,031,354
<INTEREST-INVEST>                              382,558
<INTEREST-OTHER>                                     0
<INTEREST-TOTAL>                             2,413,912
<INTEREST-DEPOSIT>                           1,305,246
<INTEREST-EXPENSE>                           1,629,769
<INTEREST-INCOME-NET>                          784,143
<LOAN-LOSSES>                                  239,000
<SECURITIES-GAINS>                               7,715
<EXPENSE-OTHER>                              3,749,983
<INCOME-PRETAX>                              (374,931)
<INCOME-PRE-EXTRAORDINARY>                   (374,931)
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 (201,879)
<EPS-PRIMARY>                                   (0.16)
<EPS-DILUTED>                                     0.00
<YIELD-ACTUAL>                                    3.07
<LOANS-NON>                                    663,988
<LOANS-PAST>                                   456,948
<LOANS-TROUBLED>                                     0
<LOANS-PROBLEM>                                171,022
<ALLOWANCE-OPEN>                               342,033
<CHARGE-OFFS>                                   17,772
<RECOVERIES>                                    23,045
<ALLOWANCE-CLOSE>                              513,055
<ALLOWANCE-DOMESTIC>                           513,055
<ALLOWANCE-FOREIGN>                                  0
<ALLOWANCE-UNALLOCATED>                        220,196
        

</TABLE>


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