<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
- - ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer incorporation)
Identification No.)
209 E. Portage Ave, Sault S. Marie, Michigan 49783
- - ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 635-9794
--------------
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.010 per share
---------------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the average bid and asked price for the Registrant's
Common Stock on March 20, 1997, as reported by NASDAQ, was approximately
$2,059,347.*
The number of shares outstanding of the Registrant's Common Stock as of
March 20, 1997: 1,226,601 shares.
* For purposes of this calculation shares of the Registrant held by directors
and officers of the Registrant and officers of its subsidiaries and other
affiliates have been excluded.
Documents Incorporated by Reference: Portions of the registrant's Proxy
Statement, to be filed by April 30, 1997 for the 1997 Annual Meeting of
Stockholders, are incorporated by reference into Part III of this Report.
page 1 of 120 pages
Exhibit index on sequentially numbered page 87
<PAGE> 2
PART I.
ITEM 1. - BUSINESS
GENERAL
University Bancorp, Inc. a Delaware corporation (individually and on a
consolidated basis with its subsidiary where the context indicates, the
"Company" or the "Corporation"), operates as a bank holding company for its
wholly-owned subsidiary, University Bank. University Bank (the "Bank") is a
state chartered community bank. The Bank was chartered by the state of
Michigan in 1908 as successor to a banking organization organized in 1890. The
Bank changed its name from "The Newberry State Bank" to its current name in
July 1995 to more closely identify the name of the Bank with its current places
of business. Ann Arbor and Sault Ste. Marie are both university towns, the
first being the home of the University of Michigan, and the latter being the
home of Lake Superior State University. The Bank's accounts are insured by the
Federal Deposit Insurance Corporation.
University Bancorp, Inc. is essentially a holding company for the Bank and
it invests available cash resources in marketable equity and debt securities
and interest bearing deposits. At December 31, 1996 University Bancorp, Inc.
had cash on deposit of $41,113 and available for sale investments at fair value
of $316,772. University Bancorp, Inc. changed its name to University Bancorp,
Inc. from Newberry Bancorp, Inc. in June 1996, to more closely identify the
bank holding company with the Bank.
University Bank is headquartered in the town of Ann Arbor, Michigan, which
is the largest city in Washtenaw County, in the western suburbs of the Detroit
Metropolitan Statistical Area ("Detroit MSA"). Following the closing of its
sale of bank office assets and liabilities relating to its former main office
in Newberry, Michigan and its two branch offices in Sault Ste. Marie, Michigan
on December 5, 1994, more fully described below, during 1995, the Bank was
primarily engaged in residential mortgage lending and servicing operations, and
the investment of deposits and other bank borrowings in various investments,
including investment securities issued by government agencies and U.S.
Treasury securities. On February 6, 1996, the Bank opened its new Ann Arbor
main office.
The Bank conducts its banking business from its headquarters office in Ann
Arbor. The Bank's computer operations center and accounting function is
located in a separate office in Sault Ste. Marie along with portions of the
Bank's mortgage banking operation. The Bank's primary market area is defined
as the City of Ann Arbor with residential mortgage lending being conducted in
the greater Washtenaw County area. In addition, the Bank retains a portfolio
of loans from Chippewa County including the city of Sault Ste. Marie, Michigan,
the immediately adjacent areas of Sault Ste. Marie, Ontario, Canada, and Luce
County and its county seat, Newberry, which is located approximately 60 miles
east of Sault Ste. Marie, Michigan.
Eastern Upper Peninsula Banking. On December 5, 1994, the Bank sold
assets pertaining to its former main office in Newberry and two branch offices
in Sault Ste. Marie, including deposits and associated loan portfolios for a
premium above book value of $3,500,000, before certain expenses related to the
sale (the "Branch Sale"). Having
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operated solely in Newberry, Michigan, the largest city in Luce County, in the
eastern Upper Peninsula, for 100 years, the Bank opened its first branch office
in Sault Ste. Marie in February, 1991, and a second branch office in Sault Ste.
Marie in June, 1993. Following the Branch Sale, the Bank relocated its main
office to the offices of its mortgage operation, which is also the Company's
corporate headquarters in Sault Ste. Marie, Michigan. Sault Ste. Marie is
the largest city in the eastern Upper Peninsula of Michigan and the county
seat of Chippewa County.
Following the completion of the Branch Sale, the Bank retained and from
time to time originated a relatively small number of loans to borrowers engaged
in commercial businesses, agriculture and commercial real estate. The Bank
also retained a small consumer loan portfolio and credit card loan portfolio.
With few exceptions, until the opening of the Bank's new Ann Arbor main office,
all of the Bank's consumer and business loans were to borrowers located in the
eastern Upper Peninsula of Michigan.
Mortgage Banking. In October 1995, the Bank established a new mortgage
banking subsidiary, Varsity Funding, L.L.C. ("Varsity Funding"). Varsity
Funding specializes in the purchase and origination of impaired credit, or
subprime quality, residential mortgages, for sale to non-U.S. government
agency-backed mortgage conduits. Varsity Funding's offices are located in
Farmington Hills, Michigan, which is located on the northwest side of the
Detroit MSA.
In February 1996, Varsity Funding expanded the scope of its operations by
establishing another subsidiary of the Bank, Varsity Mortgage, L.L.C. ("Varsity
Mortgage"). The Varsity Mortgage mortgage banking operations purchases
residential home loans which generally qualify for sale to secondary market
investors under the underwriting criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") from
correspondents in Michigan and in adjacent states. Loans purchased from
correspondents or originated internally by the Bank are then either pooled into
mortgage-backed securities and the securities are sold to investors or they are
sold directly to FHLMC or FNMA. The Bank retains the servicing rights to the
loans or securities sold secured by properties located in Washtenaw County or
the eastern Upper Peninsula of Michigan, and sells on a continuous basis the
servicing rights to the loans or securities sold secured by other properties.
The Bank also retains a portfolio of residential mortgage servicing rights
located throughout the country which are guaranteed by government agencies,
from its previous wholesale activities operated out of Sault Ste. Marie.
The Bank originates residential loans from it's Ann Arbor office and sells
them to secondary mortgage correspondents via Varsity Mortgage. The Bank,
through its Sault Ste. Marie mortgage banking office previously operated in
similar fashion to Varsity Mortgage, by purchasing, from correspondents in
Michigan, or by originating residential home loans which generally qualify for
sale to secondary market investors under the underwriting criteria of the FHLMC
and FNMA. In November 1996, the Bank discontinued its wholesale operation in
Sault Ste. Marie and transferred all pooling and packaging of residential loans
to Varsity Mortgage. The Bank's accounting department continues to administer
the Bank's table funding mortgage broker lending operation from the Sault Ste.
Marie office.
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The profits of both Varsity Mortgage and Varsity Funding are subject to
agreements (the "Net Branch Agreements") with the executives who have organized
and supervised their operations under which profits and/or revenues are shared
with the Bank and where a portion of their compensation is available for
distribution to its managers and for the purchase of shares of the Company. In
future years, as a result of a profit sharing agreement, the Bank would be
entitled to share in the next $200,000 and $864,000 of pre-tax profit of
Varsity Funding and Varsity Mortgage, respectively, on a 50/50 basis with the
managers and employees of these subsidiaries, or a total of approximately
$1,064,000. The Bank would not receive further profits from the pre-tax income
of these operations above such profit threshold, except that the Bank is
entitled to 10% of the gross revenue (as defined in the LLC's operating
agreement) of Varsity Funding on an ongoing basis, and with the agreement of
the managers of Varsity Mortgage, this LLC could, if it obtains it's mortgage
warehouse financing from a third party other than the Bank, be restructured as
a 50/50 joint venture between the Company and the managers.
Mortgage Servicing. In July 1995 the Bank terminated its mortgage
servicing operation in Sault Ste. Marie by outsourcing its servicing operations
under a contract with Midwest Loan Services, Inc., of Houghton, Michigan
("Midwest Loan Services"). In December 1995, the Bank acquired 80% of the
common stock of Midwest Loan Services, which specializes in subservicing for
the account of other financial institutions and mortgage brokers, of
residential mortgage loans sold to FNMA, FHLMC and other private residential
mortgage conduits.
Michigan BIDCO. In May 1993, the Company established a Business and
Industrial Development Company (the "BIDCO") called Michigan BIDCO, Inc.
("Michigan BIDCO"). The BIDCO is licensed by the Michigan Financial
Institutions Bureau under the State of Michigan BIDCO program. Michigan BIDCO
invests in businesses in Michigan with the objective of fostering job growth
and economic development. Michigan BIDCO is currently 44.1%-owned by the Bank,
and is accounted for under the equity method. Such percentage is subject to
reduction in the event of conversion of the BIDCO's outstanding convertible
bonds. The BIDCO changed its name to Michigan BIDCO, Inc. from Northern
Michigan BIDCO, Inc. in late 1995 to reflect its strategic plan of seeking
investment opportunities throughout the entire state of Michigan. Originally,
the BIDCO limited its investments to the northern half of Michigan.
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. The BIDCO
anticipates that on an ongoing basis a portion of its overhead will be borne by
the Foundation. The BIDCO and the Foundation share administrative staffs and
offices, with the Foundation reimbursing the BIDCO for these services. As a
result of its capitalization by the BIDCO, the Foundation was able to gain the
right to borrow a total of up to $2,000,000 from the U.S. Rural Economic
Community Development Service Agency ("U.S. RECDS") at 1% interest with a 30
year term.
University Insurance & Investment Services. On December 31, 1996, the
Bank established a new insurance and investment sales agency subsidiary,
called, University Insurance & Investment Services, Inc., based in its Ann
Arbor main office. The agency is licensed by the State of Michigan as an
insurance agency. The focus of the insurance agency is expected to be life,
home, auto and healthcare insurance brokerage, and mutual fund and annuity
sales.
EMPLOYEES
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<PAGE> 5
The Company employed 63 full-time persons at December 31, 1996, including
the following:
University Bank, Ann Arbor 17
University Bank, Sault Ste. Marie 9
Michigan BIDCO 4
Midwest Loan Services 10
University Insurance & Investment 1
Varsity Funding 10
Varsity Mortgage 12
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<PAGE> 6
LINES OF BUSINESS
COMMUNITY BANKING, ANN ARBOR
The Bank opened a new main office in Ann Arbor on February 6, 1996. The
retail savings products and services of the Bank include demand deposit and NOW
interest-bearing checking accounts, money market deposit accounts, regular
savings accounts and term deposit certificates ranging in maturity from three
to sixty months. The Bank also offers self-directed retirement accounts, free
access to 24-Hour ATM machines and Gold VISA accounts. The Bank also is a
member of Mastercard, but currently is not offering a Mastercard product.
The Bank's community banking operation offers a range of traditional
lending products, including commercial small business loans, residential real
estate mortgage loans, commercial real estate mortgage loans, consumer
installment loans, and to a lesser extent land development and construction
loans.
MORTGAGE BANKING
The Bank became a seller/servicer of Federal Home Loan Mortgage
Corporation insured mortgages ("FHLMC mortgages") in late 1991 and began to
originate FHLMC mortgages for sale into the secondary market. In late 1994 the
Bank became a seller/servicer of Federal National Mortgage Association insured
mortgages ("FNMA mortgages") and began to originate FNMA mortgages for sale
into the secondary market. Varsity Mortgage utilizes the Bank's
seller/servicer licenses to pool, package and sell both FNMA and FHLMC
mortgages.
Varsity Funding, which began operations in late 1995, specializes in the
purchase and origination of impaired credit, or subprime quality, residential
mortgages, for sale to mortgage conduits. Borrowers who have substantial
downpayments or equity in their homes, as a result of past credit problems may
be unable to obtain home mortgages or may be in danger of losing their home to
foreclosure. Impaired credit lenders provide fixed rate higher interest loans
to these borrowers. Typically, within two years, borrowers who have improved
their credit rating can qualify for conventional home mortgages and refinance
into a lower interest rate at that time. Varsity Funding typically sells all
of the mortgages it purchases to secondary market investors.
The Bank has retained about 2/3 of the servicing rights on all mortgages
originated by it to date, however Varsity Mortgage and Varsity Funding are
selling the servicing right on all mortgages sold to date. Of the 2,237
mortgages serviced at year-end 1996, 4.43% (99) were delinquent one or more
payments.
The Bank's accounting department continues to administer the Bank's table
funding mortgage broker lending operation from the Sault Ste. Marie office.
Reference is made to the discussion of the mortgage banking business in
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, in the section entitled "Non-Interest Income and
Non-Interest Expense", under the heading Mortgage Banking.
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MORTGAGE SERVICING
The Bank's 80% owned subsidiary, Midwest Loan Services, specializes in
subservicing for the account of other financial institution and mortgage
brokers, residential mortgage loans sold to FNMA and FHLMC and other non-agency
private conduits. Mortgage servicing firms receive monthly payments from loan
customers, aggregate and account for these payments, and send the funds to
mortgage-backed securities holders, such as pension funds and financial
institutions. Mortgage servicers also dun delinquent accounts and foreclose
loans, if required. Midwest is regulated by FHLMC and FNMA. Mortgage
servicers receive a fixed monthly fee for performing this service. As of
December 31, 1996, Midwest Loan Services subserviced 3,261 loans for
non-affiliated companies, and serviced 2,237 loans for the Bank and its own
account.
INVESTMENT SECURITIES
The Bank maintains surplus investable funds in investments consisting of
short-term money market instruments, U.S. Treasury and federal agency
obligations, and mortgage-backed securities backed by federal agency
obligations. The Bank's investments and the Company's cash and equity
portfolio are managed by the President of the Company, subject to the review
and approval of the Board of Directors of the applicable corporate entity. The
securities of the Company and the Bank provide a source of liquidity to meet
operating needs. At December 31, 1996 the Bank's investments had a net
unrealized loss of approximately $30,154 versus a net unrealized gain of
approximately $139,373 at December 31, 1995. The decline in the net unrealized
gain was the result of a general increase in interest rates during 1996.
The following table discloses certain information regarding securities
held by the Company, the amortized cost of which exceeded more than 10% of
stockholders' equity as of December 31, 1996:
<TABLE>
<CAPTION>
Final Market Amortized
Issuer Coupon Yield Maturity Value Cost
- - ------ ------ ----- -------- -------- --------
<S> <C> <C> <C> <C> <C>
GNMA Pool #8216 (1) FRN 6.48% 02/20/24 $ 680,454 $ 687,661
RTC 91-12-A1 (2) FRN 5.48% 01/25/21 645,759 681,054
FHLMC #1576-F (3) FRN 5.81% 09/30/24 879,881 901,609
FHLMC #409251 (4) FRN 7.56% 01/15/24 622,748 621,235
FHLBI equity (5) VAR 6.00% None 848,400 848,400
FNMA CMO92-190F (6) FRN 6.78% 11/25/07 508,126 502,813
FNMA CMO92-199FN(7) FRN 6.18% 11/25/99 506,077 504,797
FHMLC 1463-A (8) FRN 5.76% 01/15/23 1,288,080 1,288,407
</TABLE>
_______________________
(1) The coupon of GNMA security adjusts annually at a rate of 1.50% over the
one year Treasury CMT rate, with a 1% annual and 6% life of security
adjustment cap.
(2) The floating rate Resolution Trust Corporation bond is backed by a
portfolio of single family home mortgages. Due to the structure of the
issue, the expected average life is 3-4 years. Although issued by a
government sponsored agency they are not government guaranteed. The bonds
are rated "AA" by Standard & Poor's and the
[footnotes to table continued on following page]
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coupon floats at 100 basis points over the 11th District Cost of Funds
Index, adjusted monthly.
(3) Due to the structure of the issue, the expected average life is 11-12
years. The coupon floats at 90 basis points over the 11th District Cost
of Funds Index, adjusted monthly.
(4) The coupon of these FHLMC securities adjusts after 12 months and annually
thereafter at a rate of 2.00% over the one year Treasury CMT rate, with a
2% annual and 6% life of security cap.
(5) The rate varies quarterly. The Bank is required to maintain the
investment in Federal Home Loan Bank of Indianapolis (the "FHLBI") common
stock in an amount related to the Bank's single family mortgage related
assets and FHLBI advances. Shares are redeemed or sold at par value by
the FHLBI as required from time to time.
(6) The coupon of these FNMA securities adjusts every month to 1.60% over the
three month T-Bill rate, with a 9% life of security cap.
(7) The coupon of these FNMA securities adjusts every month to -0.50% over
the one month LIBOR, with a 9% life of security cap.
(8) The coupon of these FHLMC securities adjusts every month to 0.65% over
the one month LIBOR, with a 9% life of security cap.
EASTERN UPPER PENINSULA BANKING
Pursuant to the Branch Sale in late 1994 and early 1995 the Bank sold a
net amount of $20,787,407 of loans, leaving the Bank with approximately
$6,000,000 in loans originated by the Bank's eastern Upper Peninsula banking
operations. At December 31, 1996, the Bank retained approximately $3,300,000
of these commercial and installment loans, and a small additional amount of
residential real estate loans. The loans are generally secured by small
business and real estate assets in the area.
As a result of a non-compete agreement signed in conjunction with the sale
of the Bank branches, the Bank is restricted until December 5, 1999 from
competing with the buyer in the general banking business in the Upper Peninsula
of Michigan, excluding soliciting business from affiliates of the BIDCO,
existing customer relationships which the buyer did not assume, residential
mortgage loans from the general public, and non-Upper Peninsula residents.
The retail savings products and services of the Bank include (for those
exempt from the non-compete agreement) demand deposit and NOW accounts, money
market deposit accounts, regular savings accounts and term deposit certificates
ranging in maturity from three to sixty months. The Bank also offers
self-directed retirement accounts, 24-Hour ATM machine cards and Gold Visa
accounts. The Bank also offers a Canadian Dollar denominated, FDIC-insured
savings account to its customers. From time to time to raise liquidity, the
Bank sells CDs through brokers.
Foreign exchange revenue has in the past been a major focus of the
services offered at the Bank's former branches in Sault Ste. Marie. Pursuant
to the Branch Sale, the Bank has contracted to manage the foreign exchange
business of the bank which purchased the two branches in Sault Ste. Marie,
Michigan. The Bank also conducts
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foreign exchange for its own customers located outside of the Upper Peninsula
of Michigan.
MICHIGAN BIDCO
Michigan BIDCO, Inc., which was founded in May 1993, is licensed by the
Michigan Financial Institutions Bureau under the State of Michigan BIDCO Act.
The BIDCO is 44.1%-owned by the Bank, and is accounted for under the equity
method. There are $3,000,000 in convertible bonds outstanding. An initial
investment of $280,000 to buy 280 shares of common stock was made by the Bank
in Michigan BIDCO in 1993.
At the time of establishment, the BIDCO received $3,000,000 in financing
from the Michigan Strategic Fund. This investment was made in the form of a
ten year loan which carries concessionary terms allowing it to be converted to
a grant over time under certain circumstances. The BIDCO earns grants applied
against the $3,000,000 Michigan Strategic Fund financing if there is growth in
the sales and jobs of the businesses the BIDCO invests in. At the time of
establishment, Michigan BIDCO sold in installments $3,000,000 in 9% Senior
Convertible Bonds to match the State of Michigan's commitment, all of which
amount had been issued at December 31, 1996.
The Bank's investment in the BIDCO is accounted for under the equity
method, and $174,942, $94,538 and $50,301 of income from the BIDCO was included
in the results of operations for the years ended December 31, 1994, 1995, and
1996, respectively. At year-end 1996, the Company owned a total of $197,000 of
the convertible bonds at a cost of $203,500. If the $3,000,000 of convertible
bonds were converted, the Company's consolidated ownership of the BIDCO upon
conversion would be 411 shares of common stock, or 15.61%. Joseph and Stephen
Ranzini, officers and directors of the Company, and, together with members of
their family and family trusts, together the principal stockholders of the
Company, hold 55 shares of common stock of the BIDCO, and $693,000 principal
amount of convertible bonds, convertible into 462 shares of common stock, or a
total of an additional 19.62% of the common stock on a fully diluted basis
(assuming conversion of all convertible bonds referred to above).
Consideration is currently being given to the possibility of selling to the
Company some or all of the BIDCO convertible bonds held by the Ranzini family
for cash or shares of the Company or the Bank in order to maintain the
Company's ownership of the BIDCO after conversion, at a level of at least 20%
subsequent to bon conversion. If the bonds are converted and the Company's
ownership of the BIDCO at that time is less than 20%, the net income of the
BIDCO may not be included in the Company's statement of operations under the
equity method. There is no assurance that the Company's ownership of the BIDCO
will not drop under 20% in the future.
Michigan BIDCO invests in businesses in Michigan with the objective of
fostering job growth and economic development. The BIDCO has, by general
policy of its board of directors, a loan to one borrower limit of $500,000. In
order to be able to make investments larger than this lending limit, Michigan
BIDCO will leverage its investment with loan guarantees from government
agencies, the
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guaranteed portion of which is sold in the form of a participation, or if a
government agency loan guarantee is unavailable, a participation may be
sold to one or more investors, including BIDCO management, bondholders and
directors. As of December 31, 1996, the BIDCO had made nineteen such
investments, amounting to a total of $12,342,600 at original cost. At December
31, 1996, Michigan BIDCO had total assets of $6,526,093.
Michigan BIDCO makes its investments in the form of loans or direct equity
investments, or a combination thereof. It typically receives warrants or
participation rights in the companies in which it invests. As a matter of
policy, the Bank restricts itself from investing or lending to a business that
the BIDCO finances, and related parties which co-invest with the BIDCO must do
so on a basis equal to or less favorable than the BIDCO's. The BIDCO typically
requires warrants or participation rights in the companies in which it invests.
As of December 31, 1996, investments (at original investment cost) have been
made in the following types of businesses:
<TABLE>
<CAPTION>
Michigan BIDCO, investments:
--------------------------------
Total Equity
Industry Investment Participation?
<S> <C> <C>
ABC-TV affiliate $ 1,472,000 yes
Adult foster care 40,000 no
Cable TV 545,000 yes
Children's clothing manufacturer 200,000 repurchased
Commercial laundry 180,000 no
Environmental engineering 100,000 repurchased
Home health care 20,000 no
Industrial supply 85,000 no
Limited service hotels 738,600 yes
Metal manufacturing 80,000 no
Paper converting 2,762,000 yes
Plastic injection molding 2,000,000 repurchased
Plastic mold manufacturing 25,000 no
Railcar parts manufacturing 125,000 yes
Railroad boxcar leasing 1,500,000 no
Recycled paper pulp mill 780,000 yes
Residential mortgage servicing 450,000 repurchased
Secured credit card issuer 540,000 yes
Tissue paper mill 700,000 yes
-----------
Total $12,342,600
===========
</TABLE>
The $1,600,000 80% guaranteed portion of the $2,000,000 loan to the
plastic injection molding firm was sold to Federal Agricultural Mortgage
Corporation and subsequently the loan was paid off. The $1,245,150 guaranteed
portion of the $1,962,000 loan to the paper converting firm was sold to Federal
Agricultural Mortgage Corporation. An $800,000 participation in the railroad
boxcar lease was sold to a private investor group of nine individuals including
Joseph and Stephen Ranzini. This same investor group purchased a $280,000
participation in the recycled paper pulp mill financing, and also purchased a
$28,000 investment in one limited service hotel project to reduce the BIDCO's
net exposure to $500,000. The BIDCO's investment in the recycled paper pulp
mill consisted of an equity investment and
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a royalty on sales of a new $238,000,000 mixed office waste paper recycling/
de-inking pulp mill in Menominee, Michigan.
In December 1995, the Bank acquired 80% of the common stock of the
residential mortgage servicing business, Midwest Loan Services. In connection
with this acquisition, the BIDCO received 23,000 shares of Common Stock of the
Company, puttable to the Company at $5.00 per share in December 1996, in
exchange for its ownership of 10% of the common stock of Midwest Loan Services
and options to buy an additional 30% of the common stock of that company. The
consideration the BIDCO received for its stake was on substantially similar
terms to the terms the other selling shareholders of Midwest Loan Services
received from the Bank and the Company.
Reference is made to the discussion of the BIDCO's investments and
operations in ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, in the section entitled "Non-Interest
Income and Non-Interest Expense", under the heading Michigan BIDCO.
COMPETITION
COMMUNITY BANKING, ANN ARBOR
The Bank's attraction and retention of deposits depends on its ability to
provide investment opportunities that satisfy the requirements of investors
with respect to rate of return, liquidity, risk and other factors. The Bank
competes for these deposits by offering competitive rates, personal service, a
variety of savings programs, tax-deferred retirement programs and foreign
currency deposits.
The Bank competes for loan originations primarily through the interest
rates and loan fees it charges, the quality of services it provides to its loan
customers, and the range of services it offers. The Bank's competition in
originating loans comes principally from other commercial banks, credit unions,
insurance companies and savings and loans.
The following table shows market share of deposits for Washtenaw County by
financial institution for June 1995 and June 1996 (from the FDIC's annual
branch deposit survey):
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WASHTENAW COUNTY FINANCIAL INSTITUTION DEPOSITS:
<TABLE>
<CAPTION>
1996 1995 Change
<S> <C> <C> <C>
Great Lakes Bancorp 18.2% 19.0% -0.8%
First of America Bank 17.0% 17.4% -0.4%
NBD First Chicago Bank 10.4% 9.6% +0.8%
Comerica Bank 10.3% 9.3% +1.0%
Key Bank 9.4% 13.4% -4.0%
Republic Bank 5.8% 5.5% +0.3%
Standard Federal FSB 5.0% 4.9% +0.1%
Citizens Bank 3.6% 3.4% +0.2%
Chelsea State Bank 3.0% 3.2% -0.2%
University of Michigan CU 2.8% 2.7% +0.1%
Michigan Natl Bank 2.7% 2.5% +0.2%
Huron River Area CU 2.5% 2.3% +0.2%
Ann Arbor Commerce Bank 2.3% 1.8% +0.5%
Hospital & Health Services CU 1.9% 1.7% +0.2%
Automotive FCU 1.4% 1.4% 0.0%
Charter One 0.9% 0.9% 0.0%
Bank of Ann Arbor 0.6% 0.0% +0.6%
Old Kent 0.6% 0.2% +0.4%
University 0.3% 0.0% +0.3%
5 Credit Unions, 1 S&L 1.3% 0.8% +0.5%
Total Deposits (Bn) $3.503 $3.545
</TABLE>
Total deposits in the county declined 1.2% from June 1995 to June 1996.
In attracting deposits, the Bank's primary competitors are other commercial
banks, credit unions and savings and loans operating outside of the Upper
Peninsula of Michigan. At year-end 1996, the Bank had $23,100,000 in deposits
at its Washtenaw County branch, which is approximately 1.0% market share.
The Bank's main office is adjacent to the University of Michigan Hospital
Complex. The Complex employs a total of 8,500 persons. The nearest
competitors to the Bank's main office are First of America Bank and Hospital &
Health Services Credit Union. The Bank's main office was formerly the
headquarters of the latter credit union, which moved its office to a new office
building three miles from the Complex.
The Ann Arbor banking market is dominated by banks which are owned by
out-of-area holding companies. In the city of Ann Arbor, the University of
Michigan Credit Union is the largest locally-owned financial institution. The
only locally-owned community financial institutions, excluding University Bank,
are the Hospital & Health Services Credit Union and Bank of Ann Arbor, a new
start-up bank.
The Bank recruited a management team of local bankers, mostly from Great
Lakes Bancorp, to operate University Bank. Great Lakes was acquired in early
1994 by TFC Bank of Minneapolis, Minnesota. Prior to the acquisition, Great
Lakes was the largest locally-owned financial institution in the Ann Arbor
area.
- 12 -
<PAGE> 13
MORTGAGE BANKING
Origination. The Bank's Ann Arbor community bank, and Varsity Mortgage
purchase or originate internally residential home loans which generally qualify
for sale to secondary market investors under the underwriting criteria of the
Federal Home Loan Mortgage Corporation (FHLMC) or the Federal National Mortgage
Association (FNMA) from correspondents in Michigan and in the eastern United
States. Loans purchased or originated internally are either sold directly to
FHLMC or FNMA, or are pooled into mortgage-backed securities and the securities
are sold to investors in the secondary market.
The Bank's Ann Arbor community bank and Varsity Mortgage encounter
competition for the origination of residential real estate loans primarily from
savings institutions, commercial banks, insurance companies and other mortgage
banking firms. Many of these firms have a well established customer and/or
borrower client base. Some competitors, primarily savings institutions,
insurance companies and commercial banks, have the ability to create unique
loan products from time to time because they are able to close the loans for
their own portfolio rather than sell into the secondary market. Most loans
sold into the secondary market, however, go to the same sources, those being
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") and Government National Mortgage Association ("GNMA")
guaranteed securities. Most lenders have access to these secondary market
sources; therefore, competition often becomes more a matter of service and
pricing than that of product. As a mortgage loan originator and a purchaser of
mortgage loans through correspondents, the Bank and its affiliates must be able
to compete with respect to the types of loan products offered by competitors to
borrowers and correspondents, including the price of the loan in terms of
origination fees or fee premium or discount, loan processing costs, interest
rates, and the service provided by the Bank's staff.
During lower interest rate environments, competition for loans is less
intense due to the large number of loans available for origination. As
interest rates rise and the number of loans available for origination
diminishes, competition becomes quite intense and companies with larger
investor bases, flexibility with respect to type of product offered and greater
experience in dealing in these types of markets tend to be the most successful.
Although the Bank generally does not originate residential loans to be
held in portfolio, management believes that the product offerings which FHLMC
and FNMA have is sufficient for its competitive needs. Although the Bank is
currently licensed as a HUD Title 1 and Title 2 seller/servicer, it has no
plans at this time to expand its utilization of HUD or GNMA programs. The Bank
and Varsity Funding also are correspondents for several impaired credit
conduits and sell this type of residential mortgage on a non-recourse,
servicing released basis.
Varsity Funding operates in similar fashion to Varsity Mortgage and the
Bank's Ann Arbor community bank, in that it purchases or originates internally
residential home loans which generally qualify
-13-
<PAGE> 14
for sale to secondary market investors under the underwriting criteria of a
wide variety of secondary market correspondent from correspondents in Michigan
and the midwest United States. Loans purchased or originated internally are
either sold directly to private conduits, or are pooled into mortgage-backed
securities and the securities are sold to private conduit investors in the
secondary market. Varsity Funding competes primarily with other mortgage
banking firms, insurance companies, commercial banks, and savings and loans.
The Bank's accounting department continues to administer the Bank's table
funding mortgage broker lending operation from the Sault Ste. Marie office. By
providing working capital funding for mortgage bankers, the bank is able to
earn interest income on the amount of loans outstanding at any given time. The
bank competes in providing this service on interest rate and service. The Bank
encounters competition in table funding of mortgage brokers primarily from
savings institutions, commercial banks, insurance companies, other mortgage
banking firms and Wall Street broker/dealer conduits.
Mortgage Servicing. The Bank currently retains 2/3 of all FHLMC and FNMA
mortgage servicing rights originated or purchased to date. In the third
quarter of 1996, the Bank sold 1/3 of its portfolio of accumulated servicing
rights to reduce its investment in this class of asset for a gain of $232,011.
Servicing competition is somewhat less intense than the loan origination aspect
of mortgage banking. Due to net worth and management requirements, many
mortgage origination companies do not have the capacity to service loans. The
ability to generate an increasing servicing portfolio is dependent on the
capability of the origination and loan purchase correspondent network to
generate sufficient volume. Falling interest rates also present competitive
challenges for the mortgage servicing operation in that mortgagors are more
likely to refinance existing mortgages. The quality of service and the ability
of the origination operation to compete on price and service is important in
retaining such customers by refinancing them internally, rather than losing the
refinancing transaction to a competitor. Increased refinancing activity as a
result of falling interest rates should decrease profitability of mortgage
servicing by increasing amortization charges on purchased mortgage servicing
rights.
In the subservicing business, Midwest Loan Services competes primarily
with a small group specialized servicing units of mortgage banking companies,
and a few specialized units owned by banks and savings and loans. Most of
these companies have substantially larger financial resources than Midwest Loan
Services.
Midwest Loan Services, Inc. is located in Houghton, Michigan in the
western Upper Peninsula of Michigan. Personnel and occupancy costs are the
largest costs in a mortgage servicing operation, and the prevailing wages and
occupancy costs in the Upper Peninsula of Michigan are substantially below the
national average. As a result, the Company believes that Midwest Loan
Services' mortgage servicing operation potentially offer its mortgage banking
operations a competitive advantage in the future if the mortgage servicing
-14-
<PAGE> 15
operation were to continue to grow. During 1996 growth in loans serviced for
third parties was offset by sales of Bank owned servicing, so that the amount
of loans serviced by Midwest was approximately equal throughout the year. If
Midwest Loan Services adds additional subservicing customers in the future, the
Company intends to continue to pursue this strategy of selling Company owned
servicing rights so that its subservicing operation is not dependent upon
Company owned mortgage servicing rights to maintain a critical mass and
economies of scale.
EASTERN UPPER PENINSULA BANKING
As noted above, pursuant to the Branch Sale, on December 5, 1994 the
Bank's existing two branches in Sault Ste. Marie, and its main office in
Newberry, Michigan were sold. Following the sale, the Bank established a new
branch office in its mortgage operation offices. At year-end 1996, this office
had approximately $30.0 million in deposits. Pursuant to the terms of the
Branch Sale, the Bank is restricted from soliciting deposits from
non-affiliates in the Upper Peninsula of Michigan. Accordingly, the Bank has
focused its efforts on soliciting deposits from its mortgage customers
nationwide, brokered deposits and local depositors from Sault Ste. Marie,
Ontario, which is the Canadian sister city of Sault Ste. Marie, Michigan.
With respect to attracting deposits and lending in Sault, Ontario, Canada,
the Bank's primary competitors include Royal Bank of Canada, Canadian Imperial
Bank of Commerce, Bank of Nova Scotia, Bank of Montreal, Toronto-Dominion Bank,
Hong Kong & Shanghai Bank, Algoma Steel Credit Union and Northern Credit Union,
most of which have substantially larger financial resources than the Bank. The
Sault, Canada deposit market is estimated by management to approximate
C$3,000,000,000, of which the Bank is believed to have approximately a 0.03%
market share.
The Bank also manages the foreign exchange business of the bank which
purchased its two branches in Sault Ste. Marie, and its main office in
Newberry, Michigan under a contract which calls for payment monthly at an
annual rate of $18,000.
MICHIGAN BIDCO AND NORTHERN MICHIGAN FOUNDATION
Michigan BIDCO seeks to invest in businesses located in Michigan. The
BIDCO's objective is to seek profit while fostering job growth and economic
development in its market area. Michigan BIDCO makes its investments directly,
or through investment entities formed with other participants, to make
investments, in the form of loans or direct equity investments, or a
combination thereof. As such, it competes with other specialized lenders and
wealthy investors who make risk-oriented investments in businesses located in
Michigan. The BIDCO assumes more credit risk in a typical investment than
commercial banks generally are willing to assume when they make loans. The
BIDCO does not make an investment in a company unless it can be shown that the
funds are not available from a traditional bank lender; therefore, the BIDCO
does not compete with banks. There is only one other BIDCO in
-15-
<PAGE> 16
Northern Michigan; the BIDCO is one of eleven BIDCOs in Michigan. At
year-end 1996, the BIDCO was essentially fully invested. The source of funds
for new loans will come from loan payoffs or scheduled amortization of loans,
or from additional pools of investment capital. The BIDCO is investigating its
options in this regard.
The BIDCO's staff manages under contract a non-profit relending company,
Northern Michigan Foundation which has received the right to borrow $2,000,000
at 1% interest for 30-years from the U.S. RECDS under the RECDS-sponsored
intermediate relending program. The Foundation is one of three non-profit,
privately-run, U.S. Rural Economic Community Development Service intermediate
relending programs located in Northern Michigan. U.S. RECDS was formerly the
Farmers Home Administration. Each of these community development loan funds
covers six counties as its primary market area.
CERTAIN FINANCIAL INFORMATION
for the years ended December 31, 1996, 1995 and 1994 (in thousands)(1):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Banking
Newberry office $ - $ - $2,164
Sault office - - 788
Mortgage banking 1,000 1,051 888
Other banking 2,970 1,976 3,850
Midwest Loan Services (3) 603 49 -
Varsity (4) 2,327 66 -
Corporate Office 84 102 16
------ ------ ------
Total 6,984 3,244 7,706
Michigan BIDCO 1,439 1,820 1,488
Expenses:
Banking
Newberry office $ - $ - $1,993
Sault office - - 977
Mortgage banking 826 769 981
Other banking 4,169 2,572 703
Midwest Loan Services (3) 601 40 -
Varsity (4) 2,125 99 -
Corporate Office 209 166 442
------ ------ ------
Total 7,930 3,646 5,096
Michigan BIDCO 1,389 1,495 728
Pre-tax income:
Banking
Newberry office $ - $ - $ 171
Sault office - - (189)
Mortgage banking 174 282 (93)
Other banking (1,199) (711) 2,974
Midwest Loan Services (3) 2 9 -
Varsity (4) 202 (33) -
Corporate Office (125) (44) (428)
Michigan BIDCO (1) 50 95 175
------ ------ ------
Total (896) (402) 2,610
(table continued on following page)
</TABLE>
- 16 -
<PAGE> 17
Assets, at Dec. 31, 1996, 1995 and 1994:
<TABLE>
<S> <C> <C> <C>
Banking
Newberry office $ - $ - $ -
Sault office - - -
Other banking &
Mortgage banking 53,016 35,781 31,638
Midwest Loan Services 2,391 1,576 -
Varsity 22,379 32 -
Corporate Office 575 886 189
------- ------- -------
Total 78,361 38,275 31,827
Michigan BIDCO 6,526 6,798 6,444
Liabilities and Stockholders' Equity,
at Dec. 31, 1996, 1995 and 1994 (in thousands):
Banking
Newberry office $ - $ - $ -
Sault office - - -
Other banking
& Mortgage banking 54,360 36,641 30,014
Midwest Loan Services 1,286 548 -
Varsity 21,582 32 -
Corporate Office 1,133 1,054 1,813
------- ------- -------
Total 78,361 38,275 31,827
Michigan BIDCO 6,526 6,798 6,444
Inter-office Information, at Dec. 31, 1996, 1995 and 1994:
Assets:
Newberry office $ - $ - $ -
Sault office - - -
Other banking
& Mortgage banking (1,344) (860) 1,624
Midwest Loan Services 1,105 1,028 -
Varsity 797 - -
Corporate Office (558) (168) (1,624)
Michigan BIDCO - - -
</TABLE>
NOTES TO CERTAIN FINANCIAL INFORMATION TABLE
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
(1) The Bank's share of Michigan BIDCO's net income in 1994 under the equity
method was 43.1%. The BIDCO's 1994 pre-tax income was $617 and net income
was $406. The Bank's share of the net income in 1995 and 1996 under the
equity method was 44.1%.
(2) 80% of the common stock of Midwest Loan Services was acquired effective
as of December 1, 1995. Revenues, expenses and pre-tax income for the
month ended December 31, 1995 is included above, with a reduction for
minority interest. Midwest Loan Services's pre-tax profit (loss) for the
years ended December 31, 1995 and 1994 was 17 and (75), respectively.
(3) Includes all Varsity LLCs. Varsity Funding commenced operations in
October 1995, and Varsity Mortgage commenced operations in March 1996.
-17-
<PAGE> 18
REGULATION
The Company and the Bank are extensively regulated under federal law and
state law.
As a bank holding company under the Federal Bank Holding Company Act of
1956, as amended, the Company is required to file semi-annual reports and other
information as required under the rules of the Board of Governors of the
Federal Reserve System (the "FRB") and is also subject to examination by the
FRB.
In connection with obtaining the consent of the FRB to a 1989 merger
transaction involving the Bank and University Bancorp, Inc., the Company has
made certain commitments to the Federal Reserve Bank of Minneapolis providing
that the Company will not incur additional debt, and that its Employee Stock
Ownership Plan would not purchase more than 10% of the common stock or 5% of
any other class of voting shares of the Company, without the prior approval of
such Reserve Bank.
Michigan-chartered commercial banks, such as the Bank, are regulated and
supervised by the Michigan Department of Commerce, Financial Institutions
Bureau, Bank and Trust Division (the "FIB"). As an insured bank, the Bank is
also subject to supervision and regulation by the Federal Deposit Insurance
Corporation (the "FDIC") and is required to file quarterly reports and other
information as required. As subsidiaries of the Bank, Midwest Loan Services,
Varsity Funding, Varsity Mortgage and University Insurance & Investment
Services (the "Agency") are all also subject to examination by both the FIB and
the FDIC. In addition, the Agency is also subject to examination by the State
of Michigan's Financial Institutions Bureau, Insurance Division
As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD multifamily
seller/servicer, the Bank's mortgage banking operation, and the Bank's mortgage
operation subsidiaries, including Midwest Loan Services and Varsity Mortgage
are subject to regulation and examination by FHLMC, FNMA and HUD.
Michigan BIDCO is also regulated and supervised by the FIB. The BIDCO is
examined annually by the FIB, and is required to make annual filings of
financial statements and to maintain a license from the Bureau. Licensing
under the terms of the Michigan BIDCO Act conveys certain exemptions upon the
BIDCO under Michigan law, which are beneficial to the operations and investment
flexibility of the BIDCO. The BIDCO is also required to permit an observer
from the Michigan Department of Commerce, Michigan Strategic Fund, BIDCO
Program to attend its Board of Directors meetings, and is required to make
regular reports and filings of its activities with this department, as a result
of the terms of the loan agreement between the Michigan Strategic Fund and
Michigan BIDCO.
-18-
<PAGE> 19
ITEM 2. - PROPERTIES
In May 1995, the Bank purchased a building in Ann Arbor, Michigan. The
Bank leased 58% of the building to the University of Michigan effective October
1, 1995. The lease calls for minimum payments of $68,000 (adjusted annually
for inflation) plus a pro rata share of the building's expenses. The initial
term of the lease is three years.
In mid-1996, the Bank purchased a bank branch building in Saline,
Michigan, a rapidly growing community in Washtenaw County, south of Ann Arbor.
The Bank is prevented by a deed restriction from utilizing this property as a
bank branch until June 1998.
In mid-1996, the Bank leased site which includes a registered historic
landmark building in Ann Arbor, at the corner where Washtenaw Avenue and
Stadium Boulevard merge. The Bank also loaned a limited liability company,
Tuomy, L.L.C. (associated with non-affiliated third-parties), a sum sufficient
to acquire the site, and earned a 1/3 L.L.C. membership interest in the L.L.C.
as additional consideration for making the loan. The Bank is now renovating
the historic building for its intended use as a remote ATM multiple
drive-through location.
The Company leases space in Sault Ste. Marie under a month to month
agreement for its corporate headquarters and the Bank's accounting and support
operations. Michigan BIDCO and Northern Michigan Foundation also utilize a
portion of this space for their office. This leased space is currently
adequate to support the needs of the Bank's accounting and support operations.
Until recently, the Bank leased its former loan office in Sault Ste. Marie
to an unrelated third-party. Management hopes to either develop this 16-acre
site or to sell it in the future.
The Bank owns a small commercial office building in Newberry, Michigan,
which the Bank purchased in early 1995.
Varsity Funding and Varsity Mortgage lease a small office in Farmington
Hills, Michigan under a three-year agreement.
Midwest Loan Services leases an office in Houghton, Michigan under a
year-to-year lease.
Management believes that its office facilities are adequate to support the
anticipated level of future expansion of the Bank's business.
The following table sets forth certain information relating to real estate
owned and leased at December 31, 1996. The Bank believes that the fair market
value of the real estate which it owns exceeds the book value of such real
estate. Based upon its assessment of current market conditions, management
believes the 16-acre site where the former loan office is located has a fair
market value substantially more than its carrying cost as of December 31, 1996
of
-19-
<PAGE> 20
$266,079. This property is carried as other real estate owned in the Company's
financial statements as of December 31, 1996 since it is surplus to the Bank's
requirements.
Year Owned or
Office Location Opened Leased Cost
---------------------------------- ------ -------- --------
Bank Main Office
959 Maiden Lane
Ann Arbor, MI 48105 1996 Owned $689,877
Corporate Office,
Bank Mortgage Banking Office,
Operations Center, and
Michigan BIDCO Office
Federal Heritage Building
209 E. Portage Avenue
Sault Ste. Marie, Michigan 1990 Leased -
Former Loan Office
Easterday & I-75
Sault Ste. Marie, Michigan 1991 Owned $266,079
[continued on following page]
Newberry Loan Collection Office
207 W. John St.
Newberry, Michigan 1995 Owned $ 30,000
Future Bank Branch Site
West Michigan Ave.
Saline, Michigan 1996 Owned $170,000
Tuomy ATM Drive-through
Washtenaw & Stadium
Ann Arbor, Michigan 1996 Leased (1) -
Varsity Funding & Varsity Mortgage
33493 14 Mile Rd., Ste. 20
Farmington Hills, Michigan 1995 Leased -
Midwest Loan Services
616 Sheldon Ave., Ste. 300
Houghton, Michigan 1991 Leased -
(1) The Bank owns a 1/3 L.L.C. membership interest in the L.L.C. which owns the
site.
ITEM 3. - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party to or to which any of their properties are
subject.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-20-
<PAGE> 21
PART II.
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK AND DIVIDEND INFORMATION
The Company's Common Stock trades on The NASDAQ Small-Cap Market under the
symbol UNIB. As of the March 1, 1997 there were approximately 380 stockholders
including approximately 240 beneficial owners of shares held by brokerage firms
or other institutions. The high and low sales prices of the Company's common
stock as quoted by NASDAQ, for each quarter of the two year period ended
December 31, 1996 are listed below. The quotations represent interdealer
prices only, without retail markups, markdowns or commissions:
High Low
1995
First Quarter $4 $3 3/4
Second Quarter 4 1/4 3 1/2
Third Quarter 4 1/4 3 1/2
Fourth Quarter 5 5/8 4
1996
First Quarter $6 1/8 $5
Second Quarter 6 1/8 5
Third Quarter 6 1/2 5 1/4
Fourth Quarter 8 1/2 6
No dividends have been paid on the Company's Common Stock. The Bank is
limited in its ability to pay dividends to the Company by reason of a covenant
in its term loan agreement (see Note 15 of the Notes to Consolidated Financial
Statements). The Company does not currently anticipate declaring or paying
dividends.
CERTAIN SALES OF EQUITY SECURITIES
In February 1996, the Company issued to Mark Ouimet, a director of the
Company and President of its primary operating subsidiary, University Bank,
12,000 shares of Common Stock, par value $0.01 per share, of the Company,
awarded to him pursuant to the terms of his Employment Agreement, dated as of
October 30, 1995 with the Company and the Bank. Mr. Ouimet was not required to
pay any consideration for such award of shares. The Company claimed exemption
from registration requirements under the Securities Act of 1933 based on
Section 4(2) of said Act and on the position that the award of shares did not
constitute a "sale" under said Act. Such claims were based on Mr. Ouimet's
senior executive positions with the Company and University Bank and his
relationship with the Company, on the terms of such employment agreement, and
on restrictive legends as to the sale or transfer of such shares placed on the
applicable share certificates.
-21-
<PAGE> 22
In February 1996, the Company approved the grant to two employees of its
subsidiary, University Bank, stock awards under the Company's 1995 Stock Plan
for an aggregate of 1,300 shares of Common Stock, par value $0.01 per share, of
the Company. The awards did not require any payment by the recipients. The
Company claimed exemption from registration requirements under the Securities
Act of 1933 based on Section 4(2) of said Act and on the position that the
award of shares did not constitute "sales" under said Act. Such claims were
based on agreements and certifications executed by the recipients related to
the share awards and on restrictive legends as to the sale or transfer of such
shares placed on the applicable share certificates.
As of December 31, 1996, the Company issued to three key executives of one
or both of its subsidiaries, Varsity Funding, L.L.C. and Varsity Mortgage,
L.L.C., an aggregate of 4,541, shares of Common Stock, par value $0.01 per
share, of the Company, for an aggregate purchase price of $25,074. Such shares
were issued pursuant to the exercise of options for an equivalent number of
such shares granted under the Company's 1995 Stock Plan, and such options were
granted in satisfaction of provisions of the agreements with such executives
relating to the operations of such subsidiaries and providing for compensation
to such executives based on profits of such subsidiaries and for a portion of
such compensation to be utilized for the purchase of shares of common stock of
the Company. The Company claimed exemption from registration requirements
under the Securities Act of 1933 based on Section 4(2) of said Act. Such claim
was based on the status of the purchasers of the subject shares as key
executives of one or both of the subsidiaries of the Company referred to above,
the nature of the contractual arrangements providing for stock issuances to
such executives and agreements and certifications executed by the executives
in connection with such issuances of shares to them containing certain
representations and covenants, among other matters, as to their financial
experience, information reviewed and relied upon by them, their intentions as
holders of such shares, and restrictions on the sale or transfer of such shares
by them.
-22-
<PAGE> 23
ITEM 6. - SELECTED FINANCIAL DATA
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income 3,724 2,379 $3,987 $3,852 $3,749
Interest expense 2,733 1,845 2,104 1,660 1,755
Net interest income 991 534 1,883 2,192 1,994
Provision for loan losses 191 17 210 203 163
Net interest income after
provision for loan losses 800 517 1,673 1,989 1,831
Net gain (loss) on investments 399 56 (178) 203 141
Profit from equity investment
in Michigan BIDCO 50 95 178 13 -
Other non-interest income 2,770 631 702 580 357
Gain on sale of branches & loans - - 3,018 - -
Non-interest expense 4,915 1,699 2,782 2,624 1,937
Income (loss) before income tax (896) (402) 2,611 161 391
Income tax expense (benefit) (359) (107) 770 23 86
Net income (loss) (537) (295) $1,841 $ 138 $ 305
SELECTED YEAR END BALANCES
Total assets 78,366 38,275 31,827 64,468 49,991
Loans receivable, net 20,669 8,954 4,221 27,409 28,756
Loans held for sale 30,534 7,983 4,129 14,138 172
Cash, cash equivalents
and securities 19,898 15,028 19,264 14,741 16,322
Deposits 53,106 20,745 13,128 48,222 44,992
Note payable 963 1,000 1,000 2,294 1,908
FHLB advances 6,000 10,000 9,800 7,000 -
Minority interest 201 201 - - -
Stockholders' equity 3,913 4,651 4,096 2,411 2,326
SHARES OUTSTANDING AND PER SHARE DATA
Common shares, year-end 1,295 1,276 1,200 1,173 1,142
Weighted average shares, year 1,244 1,201 1,186 1,165 1,149
Cash dividends - - - - -
Net income (loss) ($0.43) ($0.25) $1.55 $0.12 $0.26
Book value $3.02 $3.64 $3.41 $2.06 $2.04
SELECTED RATIOS
Net average interest rate spread 2.09% 1.09% 3.03% 4.01% 4.46%
Net yield on average
earning assets 2.17% 1.69% 3.42% 4.38% 4.70%
Return on average assets (1.08%) (0.84%) 3.02% 0.24% 0.62%
Return on average equity (13.85%) (6.94%) 54.47% 5.83% 13.21%
Avg. equity to asset ratio 7.77% 12.14% 5.55% 4.14% 4.70%
</TABLE>
[See the Note on the following page]
23
<PAGE> 24
(1) The Bank sold three branches and associated loans and deposits on December
5, 1994. Income and expense associated with these branches are included up
until the date of the sale. Net income includes a gain from the Branch Sale of
$1.66 per share.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of the following discussion and analysis is to assist the
reader in understanding and evaluating the changes in financial position and
results of operations over the past three years. The discussion should be read
in conjunction with the consolidated financial statements, the related notes
thereto, and statistical information presented elsewhere in this report.
GENERAL
The discussion below must be considered in light of the fundamental
changes resulting from 1) the opening in February 1996 of a new main office of
the Bank in Ann Arbor, and 2) the closing on December 5, 1994 of the sale by
the Bank of assets pertaining to its Newberry, Michigan headquarters office and
its two branches in Sault Ste. Marie, Michigan, which included the sale of
deposits and loan portfolios (the "Branch Sale"). Accordingly, historical
results of operations of the commercial banking division are not indicative of
future operations. In addition, results of operations for 1996, 1995, and
1994, and attributes of the Bank's assets and liabilities at year-end 1995 and
1994, were significantly affected by the Branch Sale.
The operations of the Company and the banking industry in general are
significantly influenced by general economic conditions, related monetary and
fiscal policies of the federal government, and policies of financial
institution regulatory authorities, including the Federal Reserve Board (FRB),
the Michigan State Financial Institutions Bureau (FIB), and the Federal Deposit
Insurance Corporation (FDIC). Deposit flows and cost of funds are influenced
by interest rates in competing investments and general market rates of
interest. Lending activities are affected by the demand for loan borrowing,
which in turn is affected by the interest rates at which such financing may be
offered and other factors affecting the economy and the availability of funds.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets of the Company at December 31, 1996 amounted to $78.36
million compared to $38.27 million at December 31, 1995. Loans receivable, net
of reserves, increased by $11.72 million from $8.95 million to $20.67 million.
Cash and cash equivalents (including Federal Funds sold on an overnight basis
and time deposits) at the end of 1996 increased by $10.61 million from the
prior year, while securities decreased by $5.74 million. Loans held for sale
in the Bank's mortgage banking division increased by $22.53 million to $30.53
million from $7.98 million.
University Bank, as an FDIC-insured bank, is subject to certain
regulations which require the maintenance of minimum liquidity levels of cash
and eligible investments. The Bank has historically exceeded
-24-
<PAGE> 25
this minimum as a result of its investments in Federal Funds sold, U.S. Treasury
and Agency securities and cash. In addition the bank holding company had $0.12
million in cash and equity securities at the end of 1996 to meet cash needs,
primarily operating expenses and interest and principal reductions on the
holding company's bank loan. The balance of the loan was $962,500 and
$1,000,000 at year end 1996 and 1995. The note matures November 1, 1997, and
management will seek to refinance the note prior to maturity. Management
believes that the cash and securities on hand together with available
unrestricted retained earnings that University Bank is able to pay the Company
in the form of dividends, with permission of the Company's secured debt lender,
is currently sufficient to cover any required pre-maturity principal reductions
during 1997 on the holding company's loan. In addition, management is actively
considering options to raise additional capital for the bank holding company.
Total stockholders' equity of the Company at December 31, 1996 was
approximately $3.91 million (or 5.0% of total assets) compared to $4.65 million
(or 12.2% of total assets) the year earlier. The bank's total assets, total
regulatory assets and risk-adjusted assets included approx. $12,000,000,
$12,000,000 and $6,000,000 of pending loan sales that closed the day after
year-end 1996. As these assets arose in the last few days of the year, average
assets in all three categories were smaller by similar amounts in the fourth
quarter of 1996 versus the year-end 1996 amounts. The Bank's regulatory
capital at year end was $4.57 million or 5.88% of the Bank's total regulatory
assets and the risk-adjusted capital ratio of 9.18% exceeded the minimum
regulatory risk-based capital requirement of 8% of the risk-adjusted assets for
the Bank. The following table provides additional information about the
risk-adjusted assets of the Bank and the Company's actual capital percentages.
-25-
<PAGE> 26
UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio at December 31, 1996
($ in 000's)
<TABLE>
<CAPTION>
Risk Adj.
Value Risk Asset
Asset (000's) Weight Value
- - ------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cash and Federal Reserve Deposits 357 0% 0
U.S. Gov't Agency Securities 681 0% 0
U.S. Treasury Securities 0 0% 0
U.S. Gov't Guaranteed Loans 198 20% 40
Balances at Domestic and Canadian Banks 1,539 20% 308
Fed Funds Sold 10,684 20% 2,137
U.S. Gov't Agency Mortgage-backed Securities 5,366 20% 1,073
U.S. Gov't Equity Securities 848 20% 170
Other Mortgage-backed Securities 342 50% 171
1-4 Family Mortgage Loans 38,708 50% 19,354
Junior Liens 2,393 100% 2,393
All Other Loans 9,832 100% 9,832
All Other Securities 24 100% 24
Real Estate Owned 266 100% 266
Premises & Equipment 1,955 100% 1,955
Mortgage Servicing Rights 2,312 100% 2,312
Other Assets 2,381 100% 2,381
- - ------------------------------------------------------- ---------
TOTAL ASSETS 77,886
Off Balance Sheet Items:
Letters of Credit and Committments > 1 Year 0 100.00% 0
Foreign Exchange Contracts 800 1.00% 8
Interest Rate Contracts 0 0.00% (1) 0
FHLMC/FNMA Loan Purchase Committments 14,531 50.00% 7,266
MBS FHLMC/FNMA Forward Sell Committments 22,000 0.00% (1) 148
Agency Guaranteed Commercial Loans Sold 203 20.00% 41
--------- --------- ---------
TOTAL RISK-ADJUSTED ASSETS 49,877
=========
CAPITAL RESOURCES
Shareholders Equity 4,250
Net Unrealized Loss on AFS Equity Securities 20
Minority interest in consolidated subsidiary 201
Mortgage Servicing Rights Limitation (77)
---------
Total Equity (Tier 1) 4,394
Qualifying Loan Loss Reserve (Tier 2) 298
---------
Regulatory Capital (Tier 1 & Tier 2) 4,692
=========
Primary and Total Capital Ratio (Leverage) 6.02%
=========
Risk-adjusted Capital Ratio (Tier 1) 8.81%
=========
Risk-adjusted Capital Ratio (Tier 1 & Tier 2) 9.41%
=========
University Bancorp Consolidated
Total Capital Ratio (Leverage Ratio) 5.00%
=========
</TABLE>
(1) Plus market value, or replacement cost valuation, as required.
-26-
<PAGE> 27
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the notes thereto have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial condition and operating results in terms
of historical dollars (with the exception of the BIDCO, which uses the
investment company method of accounting), without considering changes in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations is reflected in increased operating costs.
Unlike most industrial companies, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or with the same magnitude as the prices of goods
and services, since such prices are affected by inflation. In the current
interest rate environment, where there are rapid increases and decreases of
interest rates, liquidity and the maturity structure of the Bank's assets and
liabilities are crucial determinants of the Bank's profitability.
ASSET/LIABILITY MANAGEMENT
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a positive gap position will result in generally
higher earnings as short-term assets are repricing upward faster than
longer-term liabilities. However during a declining rate environment, the
opposite effect on earnings is true, with earnings being reduced due to
short-term assets repricing downward faster than longer-term liabilities.
The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at December 31, 1996.
The table is based upon various assumptions of management which may not
necessarily reflect future experience. The one-year gap position at December
31, 1996 was estimated to be $9,056,000 or +11.64%:
- 27 -
<PAGE> 28
UNIVERSITY BANK
Asset/Liability Position Analysis 12/31/96
($ in 000's)
Maturing or Repricing in
<TABLE>
<CAPTION>
3 Mos 91 Days to 1 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years OTHERS TOTAL
------ ------- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Fed Funds 10,684 0 0 0 0 10,684
Loans (1) 1,429 1,292 4,277 7,252 0 14,250
Canadian Investments 49 0 0 0 0 49
Securities Available for Sale 4,737 1,298 36 1,192 613 7,876
Securities held for Sale 0 0 0 0 0 0
Loans held for Sale 30,535 0 0 0 0 30,535
Matured Loans 259 0 0 0 0 259
Variable Rate Loans 5,692 0 0 0 0 5,692
Other Assets 0 0 0 0 6,286 6,286
Cash and Due from Banks 0 0 0 0 1,818 1,818
Overdrafts 4 0 0 0 0 4
Non-Accrual Loans 0 0 0 0 464 464
Discount FHA Title 1 (1) 0 0 0 0 (1)
Valuation Adjustment 0 0 0 0 (30) (30)
------ ----- ----- ----- ----- ------
TOTAL ASSETS 53,387 2,590 4,313 8,445 9,151 77,886
LIABILITIES
CD's over $100,000 10,412 9,394 1,052 0 0 20,858
CD's under $100,000 2,356 3,773 2,543 0 0 8,671
MMDA 13,554 0 0 0 0 13,554
NOW 114 341 1,818 0 0 2,273
Demand 0 0 0 0 7,873 7,873
Savings 103 0 0 0 0 103
Canadian Savings 874 0 0 0 0 874
Other Liabilities 3,500 2,500 0 0 13,151 19,151
Borrowings 0 0 0 0 0 0
Equity 0 0 0 0 4,530 4,530
------ ----- ----- ----- ----- ------
TOTAL LIABILITIES 30,912 16,008 5,413 0 25,553 77,886
GAP 22,475 (13,418) (1,100) 8,445 (16,402) 0
CUMULATIVE
GAP 22,475 9,057 7,957 16,402 0
GAP
PERCENTAGE 28.86% 11.63% 10.22% 21.06% 0.00%
</TABLE>
Notes:
(1) Net of bad debt reserves.
-28-
<PAGE> 29
The following additional information is provided with respect to the
Bank's investment portfolio, at book value, as of December 31, 1996:
Investment Portfolio Maturities (in $000s) and Yield by Type:
<TABLE>
<CAPTION>
Maturity or Repricing Interval
------------------------------------------
Under 1 Year to 5 Years to More Than
One Year 5 Years 10 Years 10 Years
<S> <C> <C> <C> <C>
Treasuries and
Gov't Agencies
- Amount $ 6,883 $ 10 $ - $ 2
- Yield 6.42% 8.78% -% 6.49%
All Other Securities
- Amount $ 26 $ -0- $ -0- $ 342
- Yield 5.72% --% --% 6.50%
</TABLE>
Additional information regarding the Bank's investments as of December 31,
1996 and 1995 is set forth under note 3 to the Company's consolidated financial
statements included with this report.
The following information pertaining to maturities and sensitivities of
the Bank's loan portfolio to changes in interest rates is provided as of
December 31, 1996:
Loan Portfolio Maturities by Type (in $000s):
--------------------------------------------
<TABLE>
<CAPTION>
Maturity
=================================
Under 1 Year to After 5
One Year 5 Years Years
<S> <C> <C> <C>
Commercial & Financial $5,428 $1,238 $ 903
Agricultural $ -0- $ -0- $ -0-
Real Estate:
Construction $ 826 $ -0- $ -0-
Mortgage (1) $1,805 $2,133 $4,818
Consumer $ 859 $1,038 $1,918
------ ------ ------
Total $8,918 $4,409 $7,639
<CAPTION>
Maturity Maturity
Under One Year Total
One Year or More Loans
<S> <C> <C> <C>
Total Variable Rate Loans $6,295 $-0- $6,295
Total Fixed Rate Loans $2,623 $12,048 $14,671
--------- -------- -------
Total Loans (1) $8,918 $12,048 $20,966
========= ======== =======
</TABLE>
(1) Excludes residential loans held for sale of $30,564, and the allowance for
loan losses.
29
<PAGE> 30
SUMMARY OF RESULTS OF OPERATIONS
The net loss from operations of the Company was $536,758 in 1996 and
$294,976 in 1995. There was net income of $1,841,001 in 1994. Earnings (loss)
per share for 1996, 1995 and 1994 were $(0.43), ($0.25) and $1.55,
respectively.
The increased loss in 1996 versus 1995 was principally due to start-up
losses of the Bank's new Ann Arbor main office. 1996 was a year where the Bank
grew its deposits in Ann Arbor from zero to a market share of 1%. Ann Arbor
originated loans also grew, with an increase in porfolio loans of $11.72
million. Although certain aspects of underlying operating results including
key indicators such as net interest income are improving each quarter, the main
office's costs are relatively fixed and the break-even point is still at a yet
higher level of deposits and loans. The Bank's mortgage banking and other
specialized financial subsidiaries were substantially more profitable in 1996
than 1995 and offset a portion of the losses from the community bank
operations.
When compared to the third quarter and first nine months of 1996, the
fourth quarter 1996 results were adversely affected by the absence of
substantial security sale gains and portfolio sales of mortgage servicing
rights which had helped the third quarter financial results, and the need for
substantial accruals in the fourth quarter related to formula-based
compensation for a key executive at the Bank and for the staff of Varsity
Mortgage. The Company's limited operating history hampered management in
predicting the amounts of formula-based compensation needed to be accrued prior
to December 1996.
1995 was primarily a transition year following the sale in December 1994
of the Bank's former main office in Newberry and two branch offices in Sault
Ste. Marie, including deposits and associated loan portfolios (the "Branch
Sale"). During 1995 plans were laid to establish a new main office of the Bank
in Ann Arbor and to expand the Bank's mortgage banking activities. Expenses
associated with these initiatives and other unusual expenses decreased income
in 1995. Also, the Bank sold most of its core loan portfolio in December 1994,
and a 42.7% decrease in average earning assets together with the resulting
decrease in net interest income as a percent of earning assets depressed the
income of the Bank in 1995 versus 1994. Unlike 1994, 1995 also did not benefit
from the Branch Sale gain of $3,500,000, before certain expenses related to the
sale.
SUBSEQUENT EVENT
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 "Loan Pool"). In September 1996 an
additional $700,000 in home equity loans purchased from a home equity loan
originator were added to the Loan Pool as a fifth Participation Certificate at
a cost of $115,000.
The Bank's investment in the Loan Pool has since been reduced to approx.
$850,000 as a result of loan payoffs and principal reductions
- 30 -
<PAGE> 31
on the loans. Future income from the Loan Pool once the Bank's original
investment is returned together with interest at 12% is to be split 50/50 with
the servicer of the loan pool. Substantially of all 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 Loan Pool was
reduced to zero, and the balance of the proceeds from the sale was split 50/50
with the servicer of the Loan Pool. The Bank's gain on the transaction was
approximately $438,000.
In mid-1996, the servicer submitted a request to the RTC for a $650,000 refund
of a portion of the purchase price of the Loan Pool pursuant to the original
purchase agreement, which, if received, would be split 50/50 with the servicer
of the Loan Pool. Certain realizations are anticipated from additional
residential real estate related assets and the loans underlying the Fifth
Participation Certificate, all with a carrying value of $215,000. If realized,
these would also be split 50/50 with the servicer of the Loan Pool.
NET INTEREST INCOME
Net interest income represents the dollar amount by which interest income
generated by interest-earning assets exceeds the cost of funds.
Interest-earning assets consist primarily of loans and investment securities,
and the principal cost of funds is the interest paid on deposit accounts and
other borrowings. Net interest income is affected by (i) the difference
between the average rate of interest earned on the Bank's interest-earning
assets and the average rate paid on its interest-bearing liabilities ("interest
rate spread") and (ii) the relative amounts of its average interest-earning
assets and interest-bearing liabilities. In order to maintain and increase
earnings during periods of fluctuating interest rates, it is imperative that
interest-earning assets and interest-bearing liabilities be managed
effectively. Trends in net interest income provide a measure of the
effectiveness by which a financial institution manages its interest rate
sensitivity.
In each period, net interest income on a consolidated basis was reduced by
interest expense associated with the holding company's bank loan indebtedness.
Such interest expense was $0.09 million in 1996, $0.08 million in 1995 and
$0.18 million in 1994.
In the following table, non-accrual loans are included in the average
balances. The table presents, for the periods and dates indicated, the average
balances (all averages are calculated using monthly averages) of, the interest
earned or paid on, and the weighted average yield earned or rate paid on, the
Company's interest-bearing assets and liabilities:
- 31 -
<PAGE> 32
Net Interest Income
<TABLE>
<CAPTION>
At Years Ended December 31,
December 31,----------------------------------------
1996 1996
-------- -----------------------------------------
Average Interest Average
Yield/ Average Income/ Yield/
Rate Balance Expense Rate
<S> <C> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial 9.28% 5,783,396 598,353 10.35%
Real Estate Construction 8.01% 145,197 13,134 9.05%
Real Estate Mortgage 8.28% 22,337,028 1,930,956 8.64%
Installment/Consumer 10.28% 2,647,155 278,564 10.52%
----- ---------- --------- -----
Total Loans 8.57% 30,912,776 2,821,007 9.13%
Investment Securities(1) 6.60% 9,908,962 623,854 6.30%
Federal Funds & Bank Deposits 5.57% 4,903,898 278,665 5.68%
----- ---------- --------- -----
Total Interest Bearing Assets 7.90% 45,725,636 3,723,526 8.14%
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 4.89% 906,551 45,578 5.03%
Savings 2.50% 77,600 1,910 2.46%
Canadian Dollar Savings 3.26% 989,805 49,948 5.05%
Time 5.85% 25,052,321 1,537,908 6.14%
Borrowed Funds 5.78% 8,193,989 534,500 6.52%
Money Markets 5.25% 8,918,471 477,002 5.35%
----- ---------- --------- -----
Total 5.59% 44,138,737 2,646,846 6.00%
Holding Company Debt 9.75% 977,500 85,867 8.78%
----- ---------- --------- -----
Total Interest Bearing
Liabilities 5.67% 45,116,237 2,732,713 6.06%
----- ---------- --------- -----
Net Earning Assets, net interest
income, and interest rate spread 2.23% 609,399 990,813 2.09%
Net yield on interest-earning assets 3.64% 2.17%
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1995 1994
------------------------------------------ ------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial 2,799,197 312,643 11.17% 6,419,846 595,750 9.28%
Real Estate Construction 137,524 12,251 8.91% 822,800 74,052 9.00%
Real Estate Mortgage 9,352,940 813,909 8.70% 16,298,685 1,360,401 8.35%
Installment/Consumer 958,889 103,825 10.83% 9,448,311 957,024 10.13%
---------- --------- ----- ---------- --------- -----
Total Loans 13,248,550 1,242,628 9.38% 32,989,642 2,987,227 9.06%
Investment Securities(1) 16,579,737 1,042,855 6.29% 19,311,243 882,791 4.57%
Federal Funds & Bank Deposits 1,704,543 93,494 5.48% 2,719,263 116,650 4.29%
---------- --------- ----- ---------- --------- -----
Total Interest Bearing Assets 31,532,830 2,378,977 7.54% 55,020,148 3,986,668 7.25%
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 61,212 1,774 2.90% 4,941,059 125,207 2.53%
Savings 63,381 1,658 2.62% 4,789,687 119,236 2.49%
Canadian Dollar Savings 1,225,086 59,169 4.83% 2,283,227 125,369 5.49%
Time 12,924,479 838,019 6.48% 9,959,058 478,727 4.81%
Borrowed Funds 11,088,914 739,898 6.67% 7,664,202 337,755 4.41%
Money Markets 2,344,207 123,708 5.28% 17,958,889 736,093 4.10%
---------- --------- ----- ---------- --------- -----
Total 27,707,279 1,764,226 6.37% 47,596,122 1,922,387 4.04%
Holding Company Debt 903,127 81,181 8.99% 2,231,241 181,510 8.13%
---------- --------- ----- ---------- --------- -----
Total Interest Bearing
Liabilities 28,610,406 1,845,407 6.45% 49,827,363 2,103,897 4.22%
---------- --------- ----- ---------- --------- -----
Net Earning Assets, net interest
income, and interest rate spread 2,922,424 533,570 1.09% 5,192,785 1,882,771 3.02%
Net yield on interest-earning assets 1.69% 3.42%
</TABLE>
(1) Actual yields; not adjusted to take into account tax-equivalent yields
resulting from tax-free municipal income and includes bank deposits.
-32-
<PAGE> 33
The table above does not specify the average level of non-interest bearing
demand deposits, which were $3,377,101, $2,156,136, and $9,341,903 for the
years ended December 31, 1996, 1995 and 1994, respectively, as computed using
month-end balances for such years.
Net interest income of the Bank increased to $0.99 million in 1996 from
$0.53 million in 1995, mainly as a result of an increase in the average
interest-earning assets, which was only partially offset by the rise in
interest-earning liabilities. During the year ended December 31, 1996, the
Bank's average interest-earning asset base rose by $14.19 million or 45.0% over
1995, while average interest-bearing liabilities increased by $16.43 million or
59.3%. Due to the growth of loans versus securities in the mix of
interest-earning assets, the average yield on interest-earning assets increased
from 7.54% to 8.14% in 1996. Due to the increase of retail deposits versus
wholesale funds in the mix of interest-earning liabilities, the average cost of
funds decreased from 6.45% in 1995 to 6.06% in 1996. As a result of an
expansion in loans and retail deposits, the net interest margin increased to
2.09% in 1996 from 1.09% in 1995. Interest rates rose slightly in early 1996,
but were mostly stable for the remainder of the year, and had a minor impact on
net interest margins during 1996.
Net interest income of the Bank decreased to $0.53 million in 1995 from
$1.88 million in 1994, mainly as a result of a decrease in the amount of
interest-earning assets and liabilities and a reduction of the spread achieved
on the smaller base. During the year ended December 31, 1995, the Bank's
average interest-earning asset base fell by $23.49 million or -42.7% over 1994,
while average interest-bearing liabilities decreased by $19.89 million or
- - -41.8%. Due to repricing of variable rate securities and increases in the
portfolio loan lending rate, the average yield on interest-earning assets
increased from 7.25% to 7.54% in 1995. Due to a rise in short term interest
rates, the average cost of funds increased from 4.04% in 1994 to 6.37% in 1995.
As a result of the Branch Sale, which increased funding costs and resulted in
a decrease in higher yielding loans, the net interest margin decreased to 1.09%
in 1995 from 3.02% in 1994.
At December 31, 1996, the net spread between the Bank's interest-earning
assets and interest-earning liabilities was 2.23% up from the average net
spread for the 1996 year of 2.09%, principally as a result of further increases
in loans and lower cost retail deposits. Fee income from the Bank's mortgage
banking originations and income from the Bank's portfolio of mortgage servicing
rights are not included in these calculations. As a result of the Branch Sale,
the relative importance of these types of non-interest income to the Bank's
profitability increased in 1995 and 1996.
- 33 -
<PAGE> 34
The following table presents information regarding fluctuations in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume multiplied by old rate); (2) changes in rate (changes in
rate multiplied by old volume); the rate/volume variance is allocated to
changes in rate:
<TABLE>
<CAPTION>
Rate / Volume Analysis
Years Ended December 31,
----------------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
Commercial 333,306 (47,596) 285,710 (335,990) 52,883 (283,107)
Real Estate Construction 684 199 883 (61,675) (126) (61,801)
Real Estate Mortgage 1,129,898 (12,851) 1,117,047 (579,740) 33,248 (546,492)
Installment/Consumer 182,799 (8,060) 174,739 (859,898) 6,699 (853,199)
----------- ----------- ----------- ------------ ----------- -------------
Total Loans 1,646,687 (68,308) 1,578,379 (1,837,302) 92,703 (1,744,599)
Investment Securities (419,588) 587 (419,001) (124,868) 284,932 160,064
Federal Funds 175,484 9,687 185,171 (43,529) 20,373 (23,156)
----------- ----------- ----------- ------------ ----------- -------------
Total Interest Income 1,402,583 (58,034) 1,344,549 (2,005,699) 398,008 (1,607,691)
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 24,499 19,305 43,804 (123,656) 223 (123,433)
Savings 372 (120) 252 (117,658) 80 (117,578)
Canadian Dollar Savings (11,364) 2,143 (9,221) (58,101) (8,099) (66,200)
Time 786,365 (86,476) 699,889 142,546 216,746 359,292
Borrowed Funds (193,161) (12,237) (205,398) 150,924 251,219 402,143
Money Markets 346,936 6,358 353,294 (640,009) 27,624 (612,385)
----------- ----------- ----------- ------------ ----------- -------------
Total Deposit Interest Expense 953,647 (71,027) 882,620 (645,954) 487,793 (158,161)
Holding Company Debt Interest 6,685 (1,999) 4,686 (108,041) 7,712 (100,329)
----------- ----------- ----------- ------------ ----------- -------------
Total Interest Expense 960,332 (73,026) 887,306 (753,995) 495,505 (258,490)
----------- ----------- ----------- ------------ ----------- -------------
Net Interest Income 442,251 14,992 457,243 (1,251,703) (97,498) (1,349,201)
=========== =========== =========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------
1994
-------------------------------------
Volume Rate Total
<S> <C> <C> <C>
Interest Income
Loans:
Commercial (54,781) 55,178 397
Real Estate Construction (6,179) (2,057) (8,236)
Real Estate Mortgage (123,348) (78,899) (202,247)
Installment/Consumer (60,079) 95,428 35,349
----------- ----------- -----------
Total Loans (244,387) 69,650 (174,737)
Investment Securities 396,094 (113,243) 282,851
Federal Funds 470 26,517 26,987
----------- ----------- -----------
Total Interest Income 152,177 (17,076) 135,101
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now (878) (5,695) (6,573)
Savings (2,080) (5,347) (7,427)
Canadian Dollar Savings 48,818 23,222 72,040
Time (30,237) (42,577) (72,814)
Borrowed Funds 168,031 91,360 259,391
Money Markets (36,894) 183,102 146,208
----------- ----------- -----------
Total Deposit Interest Expense 146,760 244,065 390,825
Holding Company Debt Interest 16,937 36,445 53,382
----------- ----------- -----------
Total Interest Expense 163,697 280,510 444,207
----------- ----------- -----------
Net Interest Income (11,520) (297,586) (309,106)
=========== =========== ===========
</TABLE>
34
<PAGE> 35
LOAN PORTFOLIO
Information regarding the Bank's loan portfolio is set forth under Note 5
to the Company's consolidated financial statements included with this report as
of December 31, 1996 and 1995.
PROVISION FOR LOAN LOSSES
The Bank charges to operations a provision for possible loan losses which
is intended to create an allowance for future loan losses. Each year's
provision reflects management's analysis of the amount necessary to maintain
the allowance for possible loan losses at a level adequate to absorb
anticipated losses. In its evaluation, management considers such factors as
historical loan loss experience, specifically identified problem loans,
composition and growth of the loan portfolio, current and projected economic
conditions, and other pertinent factors. A loan is charged-off by management
as a loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Non-performing loans are defined as loans which have been placed on
non-accrual status and loans over 90 days past due as to principal or interest
and still in an accrual status. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued. See Note 5
of the Consolidated Financial Statements for additional information regarding
impaired loans.
Non-performing loans amounted to $753,916 and $508,336 at December 31,
1996 and 1995, respectively. The increase in non-performing loans during 1996
is the result of an approx. $500,000 increase in delinquent single family loans
associated with the Company's residential mortgage servicing operation, which
more than offset a drop of approx $180,000 in non-performing commercial loans.
The provision for loan losses in 1996 was $190,500, an increase of $173,700
from the 1995 level, which in turn was a decrease of $193,200 from the 1994
level of $210,000. Loans charged off net of recoveries were $209,432, $62,174,
and $14,274 in 1996, 1995, and 1994, respectively. The allowance for possible
loan losses totaled $297,783, $317,185, and $362,559 at the end of 1996, 1995,
and 1994, respectively.
In addition, the Bank is a participant in the Capital Access Program of
the Michigan Strategic Fund. The Michigan Strategic Fund (the "MSF") is a
State of Michigan sponsored program. Under the terms of the program, the Bank
can assign, at the Bank's sole discretion, business loans to be covered by MSF
guarantees. The borrower pays points at the loan closing which are matched
150% by the MSF. The funds which are paid to the Bank by the MSF are held at
the Bank in a segregated account to offset such loan losses. If there are no
losses and the loans are all liquidated, the MSF would retain ownership of the
funds in the segregated account. Management takes the MSF fund into account in
determining the collateral backing of its MSF guaranteed loans. A Michigan
Strategic Fund balance of $5,598, $5,212 and $64,816 was available at year-end
1996, 1995, and 1994, respectively, to offset loan losses on a group of
commercial loans with original balances amounting to $564,000, $564,000 and
$534,893 at year-end 1996, 1995, and 1994, respectively. A total of $24,597 of
the Bank's MSF Fund balance was transferred in connection with the Branch Sale.
- 35 -
<PAGE> 36
On December 5, 1994, the Bank sold approximately $22,510,298 in loans
associated with three bank offices. The general loan loss reserve associated
with such loans of $125,457 was transferred to the acquiror along with the loan
balances.
A summary of loan loss expense for the Bank for the years indicated is
presented below:
Analysis of the Allowance for Loan Losses
($ in thousands)
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $317 $363 $292
---- ---- ----
Chargeoffs:
Domestic:
Commercial, financial and agricultural 178 36 36
Real estate-construction 0 0 0
Real estate-mortgage 0 61 9
Installment loans to individuals 47 31 54
Lease financing 0 0 0
Foreign 0 0 0
---- ---- ----
225 108 99
---- ---- ----
Recoveries:
Domestic:
Commercial, financial and agricultural 10 30 68
Real estate-construction 0 0 0
Real estate-mortgage 0 2 3
Installment loans to individuals 5 13 14
Lease financing 0 0 0
Foreign 0 0 0
---- ---- ----
15 45 85
---- ---- ----
Net charge-offs 210 63 14
---- ---- ----
Provision for loan losses 191 17 210
---- ---- ----
Sale of loans with associated reserve 0 0 125
---- ---- ----
Balance at end of period $298(1) $317(1) $363(1)
==== ==== ====
Ratio of net charge-offs during period
to average loans outstanding during period 0.68% 0.48% 0.04%
==== ==== ====
</TABLE>
(1) Does not include Michigan Strategic Fund reserve balance of $5,598, $5,212
and $64,816 at year-end 1996, 1995 and 1994, respectively.
- 36 -
<PAGE> 37
Analysis of the Allowance for Loan Losses
($ in thousands)
December 31, 1996
<TABLE>
<CAPTION>
Percent of loans
Balance at End of Period in each category
Applicable to: Amount to total loans
------------------------- ------ ----------------
<S> <C> <C>
Domestic
Commercial, financial,
agricultural $156 40.0%
Real estate-construction - 0.0%
Real estate-mortgage 83 41.8%
Installment loans to
individuals 59 18.2%
Unallocated - N/A%
---- ------
298 100.0%
==== ======
<CAPTION>
December 31, December 31,
1996 1995
----------- -------------
<S> <C> <C>
Total loans (1) 20,966 9,271
Reserve for loan losses 298 317
MSF reserve balance 6 5
Reserve/Loans, % (1) 1.42% 3.42%
Reserve/Loans, % (1)(2) 1.45% 3.47%
</TABLE>
(1) Excludes loans held for sale.
(2) Includes both MSF and general loan loss reserve
With the opening of the Bank's new Ann Arbor operation, management
increased the monthly loan loss provision to a rate of $6,000 in February 1996
from $400 in the prior-year period. In September 1996, management accrued a
special increase of $80,000 in the loan loss provision and increased the
monthly rate beginning in October 1996 to $7,500 per month. The special
increase and the increase in the monthly rate was the result of a specific
charge-off of $132,074 on one Upper Peninsula commercial loan, which had a
targeted reserve of $90,000 at December 31, 1995, combined with management's
desire to build reserves at a faster rate, as new loan activity in Ann Arbor is
exceeding original management projections. At year-end 1996, management added
another $40,000 to the reserve based upon it's analysis of the growth of the
loan portfolio.
The historic and current levels of the reserve have been set at a level
which management believes will be sufficient to maintain the overall allowance,
including the Michigan Strategic Fund loan loss reserve, at an appropriate
amount. At year-end 1996, such ratio was 1.45%, or $304,000. The 1.45% ratio
reflects management's realization that the remaining approx. $3,300,000 of the
loan portfolio the Bank retained after the Branch Sale is, in some instances,
of lower credit quality than the much larger loan portfolio which was sold.
The buyer's decision to put back loans was not based solely on credit quality,
but on geography, familiarity with the borrower, and lack of time to complete
due diligence on smaller balance loans, among other reasons. Loans put back by
the buyer to the Bank subsequent to the Branch Sale were transferred at the
current payoff figure less the
-37-
<PAGE> 38
associated general or specific loan loss reserve which the Bank had assigned to
the loans immediately prior to the Branch Sale.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor and to a lesser extent the eastern Upper Peninsula of Michigan, and the
future performance of these loans is dependent upon the performance of
relatively limited geographical areas. The loan loss reserve goal is believed
to be higher than the Bank's peer group, and is reflective of management's
desire to have a loan loss reserve in excess of its peer group average as a
result of the forgoing.
Based upon current economic conditions in the Ann Arbor and eastern Upper
Peninsula market area, management currently anticipates that net loan losses in
1997 will not exceed $150,000. The redevelopment of the previously closed
State of Michigan Newberry Regional Mental Health Hospital into a medium
security prison, has had a positive impact on the Bank's loan portfolio. The
prison added 300 base economic jobs to the Newberry area economy, on a base of
2,200 jobs. Local area real estate prices rose 30% during 1995 and with
increased economic activity in the area, the prison may prove beneficial to the
Bank in mitigating future loan losses from the loan portfolio. Moreover, the
improving real estate market allowed the Bank to sell all of its repossessed
real estate properties in the Newberry area in 1995 and early 1996, and has
provided an incentive for borrowers to cure defaults rather than allowing
foreclosure of properties. While the Bank has just begun lending in the Ann
Arbor area, and the local economy is among the fastest growing in the state of
Michigan, management has no historical basis upon which to predict credit
losses from this new lending activity.
Management believes that the current reserve level is adequate to absorb
future losses inherent in the loan portfolio, although the ultimate adequacy of
the reserve is dependent upon future economic factors beyond the Company's
control. A downturn in the general nationwide economy will tend to aggravate,
for example, the problems of local loan customers currently facing some
difficulties. A general nationwide business expansion could conversely tend to
diminish the severity of any such difficulties.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income. Non-interest income in 1996 rose to $3,219,520 from
$780,960 in 1995, an increase of $2,438,560. The increase in 1996 was mainly
the result of mortgage banking income, which increased 383%, or $1,873,725, and
net gains from securities sales, which increased $341,402 primarily as a result
of the sale of the Bank's Farmer Mac class A and class C common stock (NASDAQ-
FAMCA & FAMCK).
Excluding the $3,018,408 gain in 1994 from the sale of bank branches and
related loans, non-interest income in 1995 for the Company increased by $79,759
from $701,201 in 1994 to $780,960. The increase in 1995 was a result of
increases in securities gains and mortgage banking income, which more than
offset decreases in foreign exchange income, the contribution from Michigan
BIDCO and service charges and fees.
Mortgage Banking. Mortgage servicing and origination fees increased to
$1,182,791 in 1996 from $427,660 in 1995. The increase in mortgage banking fee
income was the result of a 129% increase in loan purchase and origination
volumes during 1996 and profits from the Bank's mortgage banking subsidiaries,
Varsity
-38-
<PAGE> 39
Mortgage, Varsity Funding and Midwest Loan Services. Although the
Bank's retail residential mortgage group in Ann Arbor originated approx.
$25,000,000 in mortgages during 1996, profits were decreased by approx.
$250,000 in the first half of 1996 as a result of operational problems
associated with the start-up of operations which ultimately led to the
replacement of the retail residential group manager.
Including the mortgage servicing rights held directly by Midwest Loan
Services, at December 31, 1996, the Bank and its subsidiaries serviced
$214,046,211 of FHLMC and FNMA mortgages for others, versus $269,123,525 at
December 31, 1995. The amount decreased as a result of a portfolio sale of
servicing rights by the Bank in the third quarter of 1996. The following table
summarizes the portfolio by type and mortgage note rate:
Interest Rate Stratification of the Bank's Servicing
($ thousands) FIXED RATE - BY MATURITY (in years)
-----------------------------------
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 805 465 387 3,789
8.50 - 8.99 7,201 854 1,343 12,986
8.00 - 8.49 6,743 1,295 3,257 26,331
7.50 - 7.99 1,236 2,908 7,986 61,425
7.00 - 7.49 - 2,228 18,365 23,323
6.50 - 6.99 - 2,880 10,584 8,529
6.00 - 6.49 1,017 1,201 1,815 1,215
under 6.00 3,348 365 - 165
------ -------- ------ -------
20,350 12,196 43,737 137,763
Current market
interest rates 6.25% 7.88% 8.25% 8.75%
Average annual
servicing fee 0.39% 0.27% 0.26% 0.25%
If interest rates were to decline to levels briefly seen during the Summer
of 1993 and the Winter of 1995, 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 mortgage servicing rights exceeds cost by approximately
$60,000 to $154,000. Market interest rate conditions can quickly affect the
value of mortgage servicing rights in a positive or negative fashion, as long
term interest rates rise and fall.
-39-
<PAGE> 40
Servicing Rights Held by the Company
<TABLE>
<CAPTION>
(amounts in $ thousands) December 31, December 31,
1996 1995
-----------------------
<S> <C> <C>
Total servicing (1) 214,046 188,319
Book value of servicing 2,312 2,035
Estimated market value
of servicing:
Management estimate (2) 2,371 2,208
Discounted cash flow (3) 2,466 2,318
Estimated excess of market
over book value (4) 154- 59 283-173
</TABLE>
(1) Excludes servicing related to loans held for delivery of $30,535 at
December 31, 1996 and $7,983 at December 31, 1995. Includes servicing
held by Midwest Loan Services relating to $81MM in loans carried at
appraised value of $901 less amortization, as of December 31, 1995.
(2) Assumes a price based upon market transactions at December 31, 1996 of
4.9x (4.9 times the servicing fee) for 30-year
servicing, 3.75x for 15-year servicing, 2.3x for Balloon servicing and
2.1x for ARM servicing. The market value of servicing at December 31,
1995 was based on a price of 4.7x for 30-year servicing, 4.0x for 15-year
servicing, and 2.4x for Balloon servicing and 2.3x for ARM servicing.
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% (the original rate used to price a major bulk portfolio purchased
in 1993).
(4) Range based upon the two methods used in (2) and (3), above. During 1996
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 year.
Additional information regarding the Bank's mortgage banking activities
for the past three years is set forth in Note 4 to the Company's consolidated
financial statements.
Michigan BIDCO. Michigan BIDCO (the "BIDCO"), an equity affiliate,
invests in businesses in Michigan with the objective of fostering job growth
and economic development. As of December 31, 1996, the BIDCO had made nineteen
such investments, amounting to a total of $12,342,600 at original cost. At
December 31, 1996, the BIDCO had total assets of $6,526,903.
At December 31, 1996, the BIDCO had no outstanding conditional commitments
to lend. The Foundation had the following outstanding conditional commitment
to lend, of which the BIDCO had committed to purchase a 25% participation:
<TABLE>
<S> <C>
Furniture rental $200,000
--------
Total $200,000
========
</TABLE>
Securities. Proceeds from sales of marketable equity securities (included
in proceeds from sales of investment securities) were $631,278, $238,481 and
$14,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Gross gains of approximately $346,495, $46,240, and $13,456 and no gross losses
were realized on 1996, 1995 and 1994 sales, respectively.
Proceeds from sales of available for sale securities were $10,888,145,
$12,181,096, and $2,515,942 for the years ended December 31, 1996, 1995 and
1994, respectively (including sales of marketable equity securities and
excluding sales associated with the Bank's mortgage banking operation). Gross
gains of
- 40 -
<PAGE> 41
approximately $433,222 and gross losses of approximately $33,940 were
realized on 1996 sales. Gross gains of approximately $164,717 and gross losses
of approximately $153,080 were realized on 1995 sales. Gross gains of
approximately $242 and gross losses of approximately $6,889 were realized on
1994 sales.
At December 31, 1996 gross unrealized losses in the Company's
available-for-sale securities were $68,000 and gross unrealized gains were
$60,000. At December 31, 1995 gross unrealized losses in the Bank's
available-for-sale securities were $63,000 and gross unrealized gains were
$278,000. At December 31, 1994 gross unrealized losses in the Company's
available-for-sale securities were $865,000 and gross unrealized gains were
$26,000. Sales of loans pooled into mortgage backed securities in connection
with the Bank's mortgage banking activities were $54,137,028 in 1996,
$7,690,957 in 1995 and $25,018,952 in 1994.
Foreign Exchange. The Bank manages the foreign exchange business of the
bank which purchased the Bank's branches for a fee of $18,000 per year.
Although the Bank continues to pursue foreign exchange business for its own
customers' accounts, the revenue expected in 1997 from that activity will be
only a fraction of the level of years prior to 1995. Foreign exchange revenues
decreased to $31,847 in 1996 and $49,656 in 1995 from $192,841 in the 1994
period, as a result of lower volumes due to the Branch Sale, partially offset
by revenue under the management contract.
Non-interest expense. Non-interest expense for the Company increased by
$3,215,694 or 189% in 1996 to $4,915,349 from $1,699,655 in 1995. Increased
personnel, occupancy, data processing, advertising and depreciation expense
resulting from the start-up of the Bank's new full-service branch office in Ann
Arbor during the 1996 was the major factor in the increase. Legal expense
remained unusually high as a result of various projects and loan collection
legal expense. Bonuses to a key manager related to value creation with respect
to the growth of the Ann Arbor main office's deposits and loans added $255,000
in salary expense. Holding company total expense increased $23,404 primarily
as a result of increases in public listing expense and legal expense associated
with various projects.
Non-interest expense for the Company decreased by $1,082,051 or 38.9% in
1995 to $1,699,655 from $2,781,706 in 1994. Decreased personnel, occupancy,
data processing and depreciation expense resulting from the Branch Sale was a
major factor in the decrease. Increased legal expense, primarily in the first
half of 1995, was incurred as a result of loan collection legal expense.
Holding company total expense decreased $370,932 primarily as a result of
decreases in interest, amortization, management and legal expenses, to $180,247
from $551,179. The decrease in interest expense was the result of a decrease
in debt as a result of the Branch Sale.
INCOME TAXES
Income tax expense (benefit) in 1996 was $(358,758) versus $(106,949) in
1995 and $769,673 in 1994. The effective tax (benefit) rate was (40.1)% in
1996, (26.6)% in 1995, and 29.5% in 1994. A tax benefit was realized in both
1996 and 1995 for net operating loss carryforwards as a result of the net
losses from operations. The effective tax rate for 1994 was lower than the
statutory rate due to equity income from the Bank's investment in the BIDCO,
which earnings are taxed at the BIDCO.
In February 1996, the Bank, through its 98%-owned subsidiary, Arbor Street
LLC, purchased $1,000,000 in federal low income housing tax credits through a
partnership investment in Michigan Capital Fund
- 41 -
<PAGE> 42
for Housing Limited Partnership I, a Michigan limited partnership (the
"Partnership"). The investment consisted of a $50,000 equity purchase and the
execution by Arbor Street LLC of a $950,000 promissory note held by the
Partnership (the "Note"). The purchase of the tax credits increased the
Company's federal income tax refund receivable in 1996 and is expected to
decrease the amount of federal income taxes the Company would otherwise pay for
the next nine years.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements provided pursuant to this item are listed under
Item 14(a) below and appear beginning on page 43.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
- 42 -
<PAGE> 43
UNIVERSITY BANCORP, INC.
AND
SUBSIDIARIES
__________________
CONSOLIDATED FINANCIAL STATEMENTS
___________________
DECEMBER 31, 1996, 1995, 1994
- 43 -
<PAGE> 44
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
University Bancorp, Inc.
Sault Ste. Marie, Michigan
We have audited the accompanying consolidated balance sheets of University
Bancorp, Inc. as of December 31, 1996 and 1995 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of University Bancorp,
Inc. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for mortgage servicing rights in 1996 to
conform to new accounting guidance.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 14, 1997
- 44 -
<PAGE> 45
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and December 31, 1995
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,866,917 $ 578,216
Federal funds sold 10,683,895 1,359,415
----------- -----------
Total cash and cash equivalents 12,550,812 1,937,631
Securities available for sale at market (Note 3) 7,346,856 13,090,547
Loans held for sale (Note 4) 30,534,574 7,983,154
Loans, net (Notes 5 & 6) 20,668,507 8,953,518
Premises and equipment (Note 7) 1,955,294 1,360,283
Mortgage servicing rights (Note 4) 2,312,436 2,936,703
Investment in and Advances to
Michigan BIDCO (Note 1) 815,790 765,858
Other real estate owned 266,079 130,596
Other assets 1,910,331 1,116,238
----------- -----------
Total other assets 7,259,930 6,309,678
----------- -----------
TOTAL ASSETS $78,360,679 $38,274,538
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-45-
<PAGE> 46
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,1996 and December 31,1995
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY ----------- ------------
<S> <C> <C>
Deposits:
Demand - non interest bearing $ 6,814,000 $ 1,103,921
Demand - interest bearing 15,786,832 1,642,425
Savings 976,479 1,075,328
Time (Note 8) 29,529,050 16,923,492
------------ ------------
Total Deposits 53,106,361 20,745,166
FHLB advances (Note 16) 6,000,000 10,000,000
Mortgage escrow 1,064,650 1,055,337
Short term borrowings (Note 15) 12,941,266 1,000,000
Deferred noncompete income (Note 2) 102,076 137,080
Other liabilities 1,032,130 484,912
------------ ------------
Total Liabilities 74,246,483 33,422,495
------------ ------------
Minority Interest (Note 11) 201,427 201,135
Commitments and Contingencies (Note 7 and 12)
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
issued 0 shares in both 1996 and 1995 - -
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
issued:
1,295,366 shares in 1996
and 1,276,125 shares in 1995 12,954 12,761
Treasury Stock - 68,765 shares in 1996
and 37,282 shares in 1995 (300,883) (139,808)
Additional Paid-in-Capital 2,906,389 2,799,656
Retained earnings 1,299,473 1,836,231
Net unrealized gain (loss) on securities
available for sale, net of tax
of ($2,659) in 1996, and
$73,181 in 1995. (5,164) 142,058
------------ ------------
Total Stockholders' Equity 3,912,769 4,650,898
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 78,360,679 $ 38,274,528
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE> 47
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended December 31,1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $2,821,007 $1,242,628 $2,987,227
Interest on securities:
U.S. Treasury Securities 34,310 - 61,343
U.S. Government agencies 568,141 1,014,804 711,911
State and political subdivisions - 4,056 16,858
Other securities 21,403 23,995 6,516
Interest on bank deposits 41,212 - 86,163
Interest on federal funds 237,453 93,494 116,650
---------- ---------- ----------
Total interest income 3,723,526 2,378,977 3,986,668
---------- ---------- ----------
Interest expense:
Interest on deposits:
Demand deposits 522,580 125,482 861,300
Savings deposits 51,858 60,827 244,605
Time certificates of deposit 1,537,908 838,019 478,727
Bank borrowings 480,189 648,873 328,574
Repurchase agreements - 91,025 9,181
Interest expense on note payable 140,178 81,181 181,510
---------- ---------- ----------
Total interest expense 2,732,713 1,845,407 2,103,897
---------- ---------- ----------
Net interest income 990,813 533,570 1,882,771
Provision for loan losses (Note 5) 190,500 16,800 210,000
---------- ---------- ----------
Net interest income after
provision for loan losses 800,313 516,770 1,672,771
---------- ---------- ----------
Other income:
Net security gains (Note 3) 399,282 57,880 6,809
Service charges on deposit accounts 9,428 128 84,822
Foreign exchange income (Note 1) 31,847 49,656 192,841
Mortgage banking income (Note 4) 2,363,080 489,355 172,571
Gain on sale of servicing rights (Note 4) 256,840 - -
Profit (loss) from equity investment in
Michigan BIDCO (Note 1) 50,301 94,538 174,942
Profit on sale of branches
and loans (Note 2) - - 3,018,408
Other 108,742 89,403 69,216
---------- ---------- ----------
Total other income 3,219,520 780,960 3,719,609
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-47-
<PAGE> 48
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (continued)
For the years ended December 31,1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Other expenses:
Salaries and wages $2,431,561 $ 507,204 $ 801,183
Employee benefits 346,059 149,397 236,425
Occupancy, net 355,950 101,464 186,594
Taxes other than income 26,475 (41,059) 131,735
Data processing and equipment expense 351,796 194,419 344,751
Correspondent bank service charges 20,756 27,243 70,633
Advertising 138,957 18,574 63,057
Net expense of other real estate owned 7,016 12,365 15,151
FDIC insurance 1,500 34,052 106,918
Legal and audit expense 293,862 354,268 333,923
Amortization - - 12,737
Management fees - - 60,000
Other operating expenses 941,417 341,728 418,599
---------- ---------- ----------
Total other expenses 4,915,349 1,699,655 2,781,706
---------- ---------- ----------
Income (Loss) before income taxes (895,516) (401,925) 2,610,674
---------- ---------- ----------
Income taxes (benefit) (Note 13) (358,758) (106,949) 769,673
---------- ---------- ----------
Net Income (Loss) $ (536,758) $ (294,976) $1,841,001
========== ========== ==========
Weighted average shares outstanding (Note 1) 1,244,346 1,201,012 1,186,427
========== ========== ==========
Earnings (Loss) per common share (Note 1): ($0.43) ($0.25) $1.55
========== ========== ==========
Dividends declared per share $ --- $ --- $ ---
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 48 -
<PAGE> 49
UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Common stock $.01 Treasury stock
par value
----------------------- ------------------------ Additional
Number of Par Number of Paid in Retained
shares Value shares Cost Capital Earnings
--------- --------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1,1994 1,172,853 $ 11,729 - - $2,353,533 $ 290,206
Issuance of shares to ESOP at
$3.50 per share (Note 10) 7,147 71 - - 24,937 -
Issuance of shares at
$5.00 per share 20,000 200 - - 99,800 -
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - - - -
Net Income - - - - - 1,841,001
--------- --------- --------- --------- ---------- ----------
Balance December 31, 1994 1,200,000 12,000 - - 2,478,270 2,131,207
Issuance of shares at
$4.35 per share 66,125 661 - - 286,486 -
Issuance of shares to ESOP at 10,000 100 - - 34,900 -
$3.50 per share
Purchase of shares at
$3.75 per share - - (37,282) (139,808) - -
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - - - -
Net Income (Loss) - - - - - (294,976)
--------- --------- --------- --------- ---------- ----------
Balance December 31, 1995 1,276,125 $ 12,761 (37,282) ($139,808) $2,799,656 $1,836,231
Issuance of shares at
$5.55 per share 16,541 166 - - 91,704 -
Issuance of shares to ESOP at
$5.58 per share 2,700 27 - - 15,029 -
Purchase of shares at
$5.12 per share - - (31,483) (161,075) - -
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - - - -
Net Income (Loss) - - - - - (536,758)
--------- --------- --------- --------- ---------- ----------
Balance December 31, 1996 1,295,366 $ 12,954 (68,765) ($300,883) $2,906,389 $1,299,473
========= ========= ========= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on available Total
for sale Stockholders'
securities Equity
----------- ------------
<S> <C> <C>
Balance January 1,1994 $ 8,222 $ 2,663,690
Issuance of shares to ESOP at
$3.50 per share (Note 10) - 25,008
Issuance of shares at
$5.00 per share - 100,000
Net change in unrealized gain (loss)
on securities available for sale,
net of tax (534,010) (534,010)
Net Income - 1,841,001
---------- ------------
Balance December 31, 1994 (525,788) 4,095,689
Issuance of shares at
$4.35 per share - 287,147
Issuance of shares to ESOP at - 35,000
$3.50 per share
Purchase of shares at
$3.75 per share - (139,808)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax 667,846 667,846
Net Income (Loss) - (294,976)
---------- ------------
Balance December 31, 1995 $ 142,058 $ 4,650,898
Issuance of shares at
$5.55 per share - 91,870
Issuance of shares to ESOP at
$5.58 per share - 15,056
Purchase of shares at
$5.12 per share - (161,075)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax (147,222) (147,222)
Net Income (Loss) - (536,758)
---------- ------------
Balance December 31, 1996 ($5,164) $ 3,912,769
========== ============
</TABLE>
The accompanying notes are an integral part of
consolidated financial statements.
-49-
<PAGE> 50
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (536,758) $ (294,976) $ 1,841,001
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 562,141 212,621 295,673
Compensation expense 15,056 101,750 25,008
Equity in undistributed earnings of BIDCO (50,301) (94,538) (174,942)
Provision for loan loss 190,500 16,800 210,000
Gain on sale of mortgage servicing rights (256,840) - -
Mortgage loans originated for sale (193,356,147) (84,528,789) (24,044,097)
Proceeds from sale of loans and mortgage backed
trading securities 171,985,016 80,896,312 43,394,925
Net Loss/(Gain) on loan sales and securitization (1,180,289) (61,695) 184,570
Market Adjustment loss (gain) on loans held for sale - (64,661) 64,661
Net amortization/accretion on securities (18,932) (4,506) (69,089)
Net Loss/(Gain) on sale of available for
sale securities (399,282) (57,880) (6,809)
Gain from branch sale - - (3,018,408)
Expenses associated with branch sale - - (197,269)
Change in:
Other real estate (135,483) (581) 42,404
Decrease (increase) in other assets (717,937) (544,425) (136,866)
Increase (decrease) in other liabilities 512,506 (2,698,358) 2,289,640
------------- ------------ ------------
Net cash from operating activities $ (23,386,750) $ (7,122,926) $ 20,700,402
------------- ------------ ------------
Cash flow from investing activities:
Purchase of available for sale
securities (11,701,033) (7,974,794) (21,238,539)
Proceeds from sales of available for
sale securities 10,888,145 12,181,096 2,515,942
Proceeds from maturities and paydowns of
available for sale securities 6,751,784 2,453,703 2,371,268
Acquisition of Midwest Loan Services, net
of cash received - (161,882) -
Capitalized mortgage servicing rights (616,436) (534,112) (65,110)
Proceeds from sale of servicing rights 1,216,952 - -
Purchase of home equity loans - (1,903,212) -
Loans granted net of repayments (11,905,489) (2,846,473) 623,735
Investment in BIDCO (Note 1) - (203,500) -
Proceeds from disposal of assets - - 24,494
Premises and equipment expenditures (876,561) (983,436) (216,718)
Disbursement of funds due to
branch sale (Note 2) - - (19,641,424)
------------- ------------ ------------
Net cash from investing activities (6,242,638) 27,390 (35,626,352)
------------- ------------ ------------
</TABLE>
(Statement continued on following page)
- 50 -
<PAGE> 51
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31,1996, 1995 and 1994
<TABLE>
<S> <C> <C> <C>
Cash flow from financing activities:
Net increase (decrease)in repurchase agreements - - (483,569)
Net increase (decrease) in deposits 32,361,195 7,617,272 11,213,702
Proceeds from FHLB advances 7,000,000 7,500,000 2,800,000
Payments of FHLB advances (11,000,000) (7,300,000) -
Net increase (decrease) in mortgage
escrow accounts 9,313 (158,976) (2,351,020)
Net increase in short term borrowings 11,978,766 - -
Principal payment on notes payable (37,500) - (1,294,000)
Issuance of common stock 91,870 - 100,000
Purchase of treasury stock (161,075) (139,808) -
------------ ----------- -----------
Net cash from
financing activities 40,242,569 7,518,488 9,985,113
------------ ----------- -----------
Net change in cash and
cash equivalents 10,613,181 422,952 (4,940,837)
Cash and cash equivalents:
Beginning of period 1,937,631 1,514,679 6,455,516
------------ ----------- -----------
End of period $ 12,550,812 $ 1,937,631 $ 1,514,679
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 2,599,547 $ 1,773,595 2,047,987
Cash paid for income taxes - 740,108 18,570
Supplemental disclosure of noncash investing activities:
Par value of mortgage loans securitized $ 54,137,028 $ 6,100,390 25,018,952
Debt assumed in exchange for Midwest acquisition - 312,500 -
Fair value of shares exchanged for Midwest acquisition - 287,147 -
Assets and liabilities acquired in acquisition of Midwest
Other equity securities - 17,946 -
Loans held for sale - 95,000 -
Premises and equipment, net - 85,695 -
Purchased mortgage servicing rights - 906,598 -
Other assets - 198,559 -
Other liabilities - 342,357 -
Minority interest - 199,912 -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 51 -
<PAGE> 52
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements of University Bancorp, Inc. (the
Company or the Corporation) include the operations of its wholly-owned
subsidiary, University Bank (the Bank), the Bank's wholly-owned
subsidiaries, Varsity Funding Services, L.L.C. (Varsity Funding), Varsity
Mortgage, L.L.C. (Varsity Mortgage), and University Insurance & Investment
Services, Inc. (Agency), 98% owned subsidiary, Arbor Street, L.L.C. (Arbor)
and 80% owned subsidiary, Midwest Loan Services, Inc. (Midwest). The
accounts are maintained on an accrual basis in accordance with generally
accepted accounting principles and predominant practices within the banking
industry. All significant intercompany balances and transactions have been
eliminated in preparing the consolidated financial statements.
The Company is a bank holding company. The subsidiary Bank, which is
located in Michigan, is a full service community bank, which offers all
customary banking services, including the acceptance of checking, savings
and time deposits, and the making of commercial, real estate, personal,
home improvement, automotive and other installment, credit card and
consumer loans, and fee based services such as foreign currency exchange,
life insurance, annuity and mutual fund sales for customers primarily
located in Ann Arbor and to a lesser extent, the eastern Upper Peninsula of
Michigan. The Bank established it's main office in Ann Arbor in February
1996, by relocating from the eastern Upper Peninsula of Michigan. The bank
also maintains a limited service branch office in Sault Ste. Marie,
Michigan. The Ann Arbor office is the focus of the Bank's future business
development plan. The consolidated assets of the Company of $78,360,679 as
of December 31, 1996, primarily represent commercial and retail banking
activity. Mortgage loans which were sold into the secondary market and are
being serviced by the Bank and Midwest for others of $214,000,000 as of
December 31, 1996, are not included in the Company's consolidated balance
sheet. The Bank uses brokers to arrange time deposits, and during 1996, a
significant portion of the Bank's time deposits were brokered deposits (See
Note 8).
The Bank's operating subsidiaries, Midwest, Varsity Funding and Varsity
Mortgage, are engaged in residential home mortgage origination, mortgage
sales to the secondary market, and mortgage servicing. Midwest Loan
Services is based in Houghton, Michigan, and is a specialist in servicing
residential mortgage loans for itself and other financial institutions,
including the Bank (See Notes, 4 & 11). Varsity Funding and Varsity
Mortgage which are based in Farmington Hills, Michigan, specialize in the
purchase, from correspondents, and the sale to the secondary market, of
nonconforming and conforming residential loans, respectively. Varsity
Funding commenced operations in October 1995 and Varsity Mortgage commenced
operations in March 1996 (See Note 4).
- 52 -
<PAGE> 53
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of significant accounting policies (continued)
On December 31, 1996, the Bank acquired a 100%-owned subsidiary,
University Insurance & Investment Services, Inc. (the Agency), through
which the Bank intends to sell insurance products including life, health,
auto and home insurance, and investment products including annuities and
mutual funds. The Agency is located in the Bank's Ann Arbor main office.
Since the Agency was acquired on December 31, 1996, the consolidated
financial statements include no operating results of the Agency.
In February 1996, the Bank established a 98%-owned subsidiary, Arbor Street
LLC, which purchased, with the assistance of $950,000 in initial financing
in the form of a loan from the Michigan Housing Development Authority,
$1,000,000 in federal low income housing tax credits through a partnership
investment in Michigan Capital Fund for Housing Limited Partnership I, a
Michigan limited partnership.
The Company's loan portfolio is concentrated in Ann Arbor, and to a lesser
extent in the eastern Upper Peninsula of Michigan. Management is of the
opinion that no concentrations exist that make the Company vulnerable to
the risk of a near term severe impact. While the loan portfolio is
diversified, the customers' ability to honor their debts are partially
dependent on the local economies. The Ann Arbor area is primarily
dependent on the education, healthcare, services, and manufacturing
(automotive and other) industries. The eastern Upper Peninsula of Michigan
is primarily dependent on the recreation, gambling, government (education
and other), cross-border shopping and manufacturing (automotive and other)
industries. Most real estate loans are secured by federal agency
guarantees and residential or commercial real estate and most business
loans are secured by business assets. Generally, installment loans are
secured by various items of personal property. A large portion of time
deposits consist of certificates of deposit obtained through brokers and
are subject to withdrawl (with penalties for early withdrawl) should the
Company's credit worthiness downgrade.
Michigan BIDCO, Inc.
The Bank's investment in Michigan BIDCO, Inc. (the BIDCO) is accounted for
under the equity method of accounting. The Bank owns 44.1% (43.1% at
December 31, 1994) of the outstanding shares of the BIDCO at December 31,
1996, which began operations in May, 1993. At December 31, 1996, the
Company owned $203,500 in bonds issued by the BIDCO. Assuming conversion
of outstanding convertible bonds, the Bank and the Company together owned
15.61% at December 31, 1996 and 1995. In addition, upon conversion,
certain Corporation officers and directors and their immediate family (two
of whom serve as President and Chairman of the Corporation) would have an
ownership interest in the BIDCO of 19.6%. The conversion may take place,
at the election of the BIDCO, subsequent to any time that the BIDCO's
equity pursuant to an audit performed using generally accepted accounting
principles
1. Summary of significant accounting policies (continued)
- 53 -
<PAGE> 54
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
exceeds $1,500,000. The financial statements of Michigan BIDCO, Inc. are
stated using the investment company method. As a result, investments made
by the BIDCO are evaluated by management and carried at estimated fair
value. Total equity of the BIDCO was $1,390,540 at December 31, 1996.
Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions based upon
available information. These estimates and assumptions affect the reported
amounts and disclosures. Actual results could differ from those estimates.
The primary estimates incorporated into these consolidated financial
statements which are more susceptible to change in the near term include
the value of mortgage servicing rights, the allowance for loan losses, the
carrying value of impaired loans and other real estate, the equity interest
in the fair value and the change in the fair value of investments made by
the BIDCO, and the fair value of financial instruments.
Goodwill: Goodwill, which relates to the purchase of the Bank in 1988, was
being amortized on a straight-line basis over 15 years. After the sale of
branches in December 1994, it was determined that goodwill should be fully
amortized (Note 2). Accumulated amortization of goodwill was $191,048 at
December 31, 1994.
Trading account securities
All trading securities are designated as such at the time of purchase.
Realized and unrealized gains and losses on trading account securities are
included immediately in other income. Trading securities consist of loans
pooled and securitized into mortgage backed securities in connection with
the Bank's mortgage banking activities.
Securities available for sale
Securities available for sale consist of bonds, notes, mortgage-backed
securities and certain equity securities. For securities classified as
securities available for sale, it is the intention of management to hold
such assets for an indefinite period of time. From time to time,
management may decide to sell such securities prior to maturity for
liquidity purposes, asset/liability strategy, tax planning, changes in
interest rates, changes in prepayment risk, the need to increase regulatory
capital, or other similar factors. Securities classified as available for
sale are reported at their fair value and the related net unrealized
holding gain or loss is reported, net of related income tax effects, as a
separate component of stockholders' equity until realized.
- 54 -
<PAGE> 55
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of significant accounting policies (continued)
Premiums and discounts on securities available for sale are recognized in
interest income using the interest method over the period to maturity.
Gains or losses on the sale of securities available for sale are determined
using the specific identification method.
Securities held to maturity
Investment securities held to maturity reflect securities which the
Corporation has the ability and intent to hold until maturity. As of
December 31, 1996 and 1995, there were no investment securities classified
as held to maturity.
Mortgage banking activities
Mortgage banking activities include the purchase of loans from
correspondents. The agreements with the correspondents and the degree of
underwriting the Bank performs on the loans determine whether the loans are
purchased with or without recourse. Mortgage loans held for sale as part
of the Bank's mortgage banking activities are valued at the lower of cost
or market as determined by bid prices for loans in the secondary market.
Certain loans are securitized into mortgage backed trading securities.
Upon securitization, the loans are transferred at market value to trading
securities, and a gain or loss on securitization of loans is recorded.
Prior to adopting Financial Accounting Standard No. 122 (FAS 122) at the
start of 1996, servicing right assets were recorded only for purchased
rights to service mortgage loans. Subsequent to adopting this standard,
servicing rights represent both purchased rights and the allocated value of
servicing rights retained on loans sold. See Note 4 regarding the effect
of adopting FAS 122. Servicing rights are expensed in proportion to, and
over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to type, term and interest rates. Any impairment of a
grouping is reported as a valuation allowance. Prior to adopting this
standard, impairment was evaluated in aggregate. Fair values for
individual stratum are based on the present value of estimated future cash
flows using a discount rate commensurate with the risks involved.
Estimates of fair value include assumptions about prepayment, default and
interest rates, and other factors which are subject to change over time.
Changes in these underlying assumptions could cause the fair value of
mortgage servicing rights, and the related valuation allowance, to change
significantly in the future.
- 55 -
<PAGE> 56
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of significant accounting policies (continued)
Allowance for loan losses
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. Increases in the allowance are recorded by a provision for
loan losses charged to expense. Estimating the risk of loss and the amount
of loss on any loan is necessarily subjective. Accordingly, the allowance
is maintained by management at a level considered adequate to cover
possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific
borrower situations including their financial position and collateral
values, and other factors and estimates which are subject to change over
time. While management may periodically allocate portions of the allowance
for specific problem loan situations, the whole allowance is available for
any loan charge-offs that occur. A loan is charged-off by management as a
loss when deemed uncollectible, although collection efforts may continue
and future recoveries may occur.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No, 114, Accounting by
Creditors for Impairment of a Loan, and later amended by No. 118,
Accounting by Creditors for Impairment of Loan - Income Recognition and
Disclosures (SFAS No. 114 and 118). As amended, SFAS No. 114, adopted by
the Company at January 1, 1995, requires that impaired loans, as defined,
be measured based on the present value of expected cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or at the fair value of collateral if the
loan is collateral dependent. Under this standard, loans considered to be
impaired are reduced to the present value of expected cash flows or to the
fair value of collateral, by allocating a portion of the allowance for loan
losses to such loans. If these allocations cause the allowance for loan
losses to require an increase, such increase is reported as bad debt
expense. The effect of adopting this standard is reported in the provision
for loan losses, and was not material for 1995.
Smaller balance homogeneous loans such as real estate, consumer and
installment loans are collectively evaluated for impairment. Commercial
loans and first mortgage loans secured by non-residential properties are
evaluated individually for impairment. When credit analysis of the
borrower's operating results and financial condition indicates the
underlying ability of the borrower's business activity is not sufficient to
generate adequate cash flow to service the business' cash needs, including
the Company's loans to the borrower, the loan is evaluated for impairment.
Often this is associated with a delay or shortfall in payments of 90 days
or less. Commercial credits are rated on a scale of A to E, with grade A
being pass, B being special attention or watch, C substandard, D doubtful,
and E loss. Loans graded B, C, D & E are considered for impairment. Where
serious
- 56 -
<PAGE> 57
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of significant accounting policies (continued)
doubt exists as to the collectibility of a loan, the accrual of interest is
discontinued. These loans are often also considered impaired. Impaired
loans, or portions thereof, are charged off when deemed uncollectible. The
nature of disclosures for impaired loans is considered generally comparable
to prior nonaccrual and renegotiated loans and nonperforming and past-due
asset disclosures.
Loan fees and interest income
Interest on loans is accrued over the term of the loan based on the amount
of principal outstanding. Under SFAS No. 114, as amended by SFAS No. 118,
the carrying value of impaired loans is periodically adjusted to reflect
cash payments, revised estimates of future cash flows and increases in the
present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such and other cash
payments are reported as reductions in carrying value. Increases or
decreases in carrying value due to changes in estimates of future payments
or the passage of time are reported as reductions or increases in bad debt
expense.
Loan fees, net of direct origination costs, are deferred and amortized over
the life of the loan as a yield adjustment.
Other real estate
During 1996 and 1995, other real estate consisted of property acquired
through or in lieu of foreclosure, which are initially recorded at fair
value at the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of cost or fair value minus estimated
costs to sell. At December 31, 1996, all other real estate acquired
through or in lieu of foreclosure had been sold, and the sole other real
estate held by the Company related to surplus property surrounding a former
branch bank site held for sale at original cost of $266,079, which is less
than market.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Provisions for depreciation are computed primarily on the
straight-line method for bank premises and the accelerated methods for
equipment and land improvements over their estimated useful lives. These
assets are reviewed for impairment under SFAS No. 121 when events indicate
the carrying amount may not be recoverable, which was adopted by the
Company January 1, 1996. Its adoption had no material effect on the
Company's consolidated financial position or results of operations. The
estimated useful lives and methods of depreciation for principal items are
as follows:
- 57 -
<PAGE> 58
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of significant accounting policies (continued)
<TABLE>
<CAPTION>
Depreciation Depreciation
Type of asset Life in years Method
------------------- ------------- ----------------------
<S> <C> <C>
Land improvements 15 150% declining balance
Buildings and
improvements 15-40 Straight-line
Furniture, fixtures
and equipment 5-7 200% declining balance
</TABLE>
Income taxes
Income tax expense is the sum of the current year estimated tax obligation
or refund per the income tax return, and the change in the estimated future
tax effects of temporary differences and carryforwards. Deferred tax
assets or liabilities are computed by applying enacted income tax rates to
the expected reversals of temporary differences between financial reporting
and income tax reporting, and by considering carryforwards for operating
losses and tax credits. A valuation allowance, if needed, adjusts deferred
tax assets to the net amount that is more likely than not to be realized.
Retirement plan
Until September 30, 1994 the Bank offered a 401-K Plan which allowed an
employee to contribute up to 15% of salary pre-tax, to the allowable limit
prescribed by the Internal Revenue Service. The Bank matched up to 3% of
an employee's salary multiplied by 100 times the Bank's percentage return
on assets (with a minimum payment of 1.5% of employee's salary). The
Corporation's contributions to the plan were $16,722 for the year ended
December 31, 1994. The plan was terminated on September 30, 1994, and
replaced by a noncontributory SEP IRA contribution plan. The Bank
contributes 3% of an employee's salary multiplied by 100 times the Bank's
percentage return on assets (with a minimum payment of 1.5% of employee's
salary) to an employee SEP IRA, with immediate vesting. The Corporation
made no contributions to the plan for the years ended December 31, 1995 and
1994, and made a contribution of $6,904 for the year ended December 31,
1996.
In August 1996 the Bank replaced the SEP IRA plan with a new 401-K Plan,
effective January 1, 1996, which allowed an employee to contribute up to
15% of salary pre-tax, to the allowable limit prescribed by the Internal
Revenue Service. Management has discretion to make matching contributions
to the Plan, however, no matching contributions were made by the Bank for
the year ended December 31, 1996.
Employees Stock Ownership Plan (ESOP)
The Corporation has a noncontributory ESOP covering all full-time employees
who have met certain service requirements. The
- 58 -
<PAGE> 59
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of significant accounting policies (continued)
employees' share in the Corporation's contribution is based on their
current compensation as a percentage of the total employee compensation.
As shares are contributed to the plan they are allocated to employees and
compensation expense is recorded at the shares' fair value.
Stock Compensation
Expense for employee compensation under stock option plans is based on
Opinion 25, with expense reported only if options are granted below market
price at grant date. Pro forma disclosures of net income and earnings per
share are provided as if the fair value method SFAS No. 123 were used for
stock-based compensation.
Statement of cash flows
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents is defined to include the cash on hand, non-interest bearing
deposits in other institutions, Federal funds sold and other investments
with a maturity of three months or less when purchased. Net cash flows are
reported for customer loan and deposit transactions and interest bearing
deposits with other banks.
Per share calculations
Earnings (loss) per common share is calculated based on the weighted
average number of common shares outstanding during each period. Stock
options are not dilutive in 1996 and 1995 and are not material in 1994, and
therefore, are not included in earnings per share calculations.
Foreign activities and hedging policy
The Bank exchanges foreign currency for the Bank's United States and
Canadian customers. The Bank enters into foreign exchange futures
contracts as a hedge against the Bank's exchange of foreign currency.
Realized and unrealized hedging gains and losses and brokerage fees are
netted against currency exchange income.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed separately.
Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other
factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect
the estimates. The fair value estimates of existing on- and off-balance
sheet financial instruments does not include the value of anticipated
- 59 -
<PAGE> 60
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of significant accounting policies (continued)
future business or the values of assets and liabilities not considered
financial instruments.
Issued But Not Yet Adopted Accounting Standards
In 1996, the FASB issued Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. It revises the accounting for transfers of
financial assets, such as loans and securities, and for distinguishing
between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial
statements has not yet been determined.
In March 1997, the accounting requirements for calculating earnings per
share were revised. Basic earnings per share for 1997 and later will be
calculated solely on average common shares outstanding. Diluted earnings
per share will reflect the potential dilution of stock options and other
common stock equivalents. All prior calculations will be restated to be
comparable to the new methods. As the Company has stock options, in years
with net income, the new calculation methods will increase future basic
earnings per share over what otherwise would have been reported, while
there will be little effect on diluted earnings per share.
Reclassifications
Certain amounts for 1995 and 1994 have been reclassified to conform with
the 1996 presentation.
2. Sale of branches and associated loans
On December 5, 1994 the Bank sold three branches, certain deposits and
associated loans to another bank. In conjunction with the sale, the Bank
signed an agreement not to compete with the buyer in the general banking
business in the Upper Peninsula of Michigan for a period of five years from
the date of the sale. Excluded from the non-compete are the BIDCO and its
current and future affiliates, the Bank's residential mortgage lending
activities, and any pre-existing customer relationships which the buyer did
not assume. In addition, the Bank is free to operate from its branch in
the Upper Peninsula in providing banking services to other areas of the
United States and Canada.
A portion of the sales price, $175,000, was allocated to deferred income
attributable to the non-compete agreement. This is being amortized into
income over the five year term of the agreement. Other income in 1996,
1995 and 1994 includes $35,004, $33,974 and $3,946, respectively, of
amortization income from this non-compete agreement.
- 60 -
<PAGE> 61
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
2. Sale of branches and associated loans (continued)
At the time of the sale, the Bank entered into an agreement with the buyer
to manage the buyer's foreign exchange program for a fee of $35,000 per
year (since reduced to $18,000 per year). The contract is cancellable upon
sixty days notice to the Bank, however, if the contract is terminated, the
Bank would be free to compete with the buyer in the foreign exchange
business in the Upper Peninsula of Michigan.
The following is a condensed summary of the transaction:
<TABLE>
<S> <C>
Assets Sold
-----------
Loans $(22,510,298)
Loan loss reserve transferred to buyer 125,457
Accrued interest on loans (209,524)
Property, and other fixed assets (623,622)
Miscellaneous assets (18,416)
Liabilities Transferred
-----------------------
Deposits & accrued interest $ 46,308,134
Miscellaneous liabilities 69,713
Expenses associated with sale (197,269)
Write-off of goodwill on balance sheet (109,343)
Deferred income attributable to
non-compete agreement (175,000)
Cash delivered to buyer (19,641,424)
------------
Gain on sale, before tax $ 3,018,408
============
</TABLE>
The loans sold by the Bank were without recourse with the exception of
approximately $1,722,891 in loans which were put back to the Bank on
February 28, 1995. No more loans can be put back to the Bank under the
terms of the agreement.
3. Securities available for sale
The following is a summary of the amortized cost and fair value of
securities available for sale at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $5,367 $38 $(30) $5,375
Other agency mortgage-backed 681 - (35) 646
U.S. agency equity 848 - - 848
Other mortgage-backed 367 - (3) 364
Other equity 92 22 - 114
------------------------------------------------------------------
</TABLE>
- 61 -
<PAGE> 62
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
<TABLE>
<S> <C> <C> <C> <C>
Total securities
available for sale $ 7,355 $ 60 $(68) $ 7,347
======= ==== ==== =======
</TABLE>
3. Securities available for sale (continued)
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $10,243 $163 $(63) $10,343
Other agency mortgage-backed 1,680 29 - 1,709
U.S. agency equity 842 13 - 855
Other equity 111 73 - 184
-------------------------------------------------------------------
Total securities
available for sale $12,876 $278 $(63) $13,091
======= ==== ==== =======
</TABLE>
Since mortgage-backed securities have variable payments, they are not
reported by specific maturity grouping.
Investment securities with an amortized cost of approximately $6,356,433 at
December 31, 1996 and $10,733,883 at December 31, 1995 were pledged to
secure certain borrowings.
Proceeds from sales of securities available for sale were $10,888,145
during 1996, with gross gains of $433,222, and gross losses of $33,940.
Proceeds from sales of trading account securities (which related to loan
pooling and are included in mortgage banking income) were $54,376,199
during 1996, with gross gains of $349,414, and gross losses of $110,243.
Proceeds from sales of securities available for sale were $12,181,096
during 1995. Gross gains and gross losses on sales of securities available
for sale were $210,960 and $153,080 in 1995, respectively. Proceeds from
sales of trading account securities were $6,098,191 during 1995, with gross
gains of $60,584 and gross losses of $62,783. Sales of trading account
securities consist of loans pooled into mortgage backed securities in
connection with the Bank's mortgage banking activities.
In 1994, proceeds from sales of securities available for sale were
$2,515,942, with gross gains of $-0-, and gross losses of $6,809.
Proceeds from sales of trading account securities were $34,246,269 during
1994, with gross gains of $263,300 and gross losses of $447,870.
The nontaxable income included in interest income on available for sale
securities was $-, $4,056 and $19,852 for the years ended December 31,
1996, 1995 and 1994, respectively.
4. Secondary mortgage market operations
The Bank, and its subsidiaries Midwest Loan Services, Varsity Mortgage and
Varsity Funding, originate, purchase, sell and service single family
mortgage loans guaranteed by the Federal
- 62 -
<PAGE> 63
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
4. Secondary mortgage market operations (continued)
Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage
Association (FNMA). The following summarizes the secondary market
activities of the Bank, Midwest, Varsity Funding and Varsity Mortgage, for
the years ended:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Origination and other fees $609,499 $59,327 $96,740
Gain (loss) on sale and
securitization of
mortgages 1,180,289 61,695 (184,570)
Loan servicing fees, net 573,292 368,333 260,401
----------- --------- ---------
Mortgage banking income
reflected in statements
of income 2,363,080 489,355 172,571
Gain on sale of servicing
rights 256,840 - -
Market value adjustments
included in other
operating expense - 64,661 (64,661)
Interest income allocation 1,310,062 645,092 530,960
Interest expense allocation (927,578) (382,570) (370,189)
Operating expense allocation (2,625,456) (589,646) (361,423)
----------- --------- ---------
Pretax profit (loss) from
secondary market
activities $376,948 $226,892 $(92,742)
=========== ========= =========
</TABLE>
Certain assumptions were used to calculate the profit and loss from
secondary market activities. Interest income was calculated using the
average annual balance of loans held for sale at the Bank's average yield
on mortgage loans. Interest expense was calculated using the average
annual balance of loans held for sale, net of escrow balances, at the
Bank's average cost of funds rate.
Operating expenses included certain direct costs, but a significant portion
is based upon management's estimates using the best available information.
- 63 -
<PAGE> 64
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
4. Secondary mortgage market operations (continued)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Loans held for sale,
January 1 $7,983,154 $4,129,321 $14,317,493
Origination or acquisition
of loans held for sale 193,356,147 84,528,789 24,044,097
Sale of loans originated
for sale (116,667,699) (74,639,227) (9,148,656)
Securitization of loans (54,137,028) (6,100,390) (25,018,952)
Market value adjustments - 64,661 (64,661)
------------- ------------ ------------
Loans held for sale,
December 31 $30,534,574 $7,983,154 $4,129,321
============= ============ ============
</TABLE>
A reserve of $64,661 was deducted from income for the year ended December
31, 1994 as a lower of cost or market provision for loans held for sale.
The aggregate market value of the loans held for sale exceeded the cost at
December 31, 1996 and 1995, thus no reserve was required.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. Such mortgage loans have been sold without
recourse. The unpaid principal balances of these loans, including loans
acquired from the acquisition of Midwest, were $214,000,000, $269,000,000
and $151,000,000 at December 31, 1996, 1995 and 1994, respectively.
Custodial balances maintained in connection with the foregoing loan
servicing were $1,064,650, $1,055,337 and $1,214,313 at December 31, 1996,
1995 and 1994, respectively.
- 64 -
<PAGE> 65
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
4. Secondary mortgage market operations (continued)
Following is an analysis of the change in the asset balance of mortgage
servicing rights:
<TABLE>
<S> <C>
Balance, January 1, 1994 1,731,340
Additions 65,110
Amortization (170,561)
----------
Balance, December 31, 1994 1,625,889
Additions 534,112
Additions from acquisition of Midwest 906,598
Amortization (129,896)
----------
Balance, December 31, 1995 $2,936,703
----------
Additions 616,436
Bulk sale of servicing (960,112)
Amortization (280,591)
----------
Balance, December 31, 1996 $2,312,436
----------
</TABLE>
There was no valuation allowance necessary at December 31, 1996, 1995 or
1994. The estimated fair value of mortgage servicing rights at December
31, 1996 was $2,466,000. Additions to mortgage servicing rights in 1996
consisted of purchased rights of $319,715 and originated rights capitalized
under FAS 122 (Note 1) of $296,721.
5. Loans
Major classifications of loans are as follows as of December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial $ 7,568,996 $3,320,270
Real estate - mortgage 8,755,737 5,027,952
Real estate - construction 826,028 -
Installment 3,815,529 922,481
----------- ----------
20,966,290 9,270,703
Allowance for loan losses (297,783) (317,185)
----------- ----------
Net loans $20,668,507 $8,953,518
=========== ==========
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ 317,185 $362,559 $ 292,290
Provision charged to
operating expense 190,500 16,800 210,000
Recoveries 14,757 45,617 84,549
Provision sold with loans - - (125,457)
Charge-offs (224,659) (107,791) ( 98,823)
--------- -------- ---------
Balance, end of year $ 297,783 $317,185 362,559
========= ======== =========
</TABLE>
- 65 -
<PAGE> 66
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
5. Loans (continued)
The Bank had a Michigan Strategic Fund reserve balance of $5,598 and $5,212
available at December 31, 1996 and 1995, respectively, to offset loan
losses on a group of commercial loans amounting to $564,000 at December 31,
1996 and 1995. Accordingly, the Corporation does not include in its
allowance for loan loss determination the level of loss associated with the
reserve balance. The Michigan Strategic Fund (the "MSF") is a State of
Michigan sponsored program. Under the terms of the program, the Bank can
assign, at the Bank's sole discretion, business loans to be covered by MSF
guarantees. The funds which are paid to the Bank by the MSF are held at
the Bank in a segregated account to offset such loan losses. If there are
no losses and the loans are all liquidated, the MSF would retain ownership
of the funds in the segregated account.
Past due and non accrual loans are as follows:
<TABLE>
<CAPTION>
At December 31,
1996 1995
-------- -------
<S> <C> <C>
Past due loans
90 days and more and still accruing:
Real estate $226,144 $ 52,401
Installment loans 34,096 34,400
Commercial loans 29,479 9,557
-------- --------
$289,719 $ 96,358
======== ========
Non accrual loans:
Real estate $336,468 $ 85,666
Installment loans 1,968 -
Commercial loans 125,761 326,312
-------- --------
$464,197 $411,978
======== ========
</TABLE>
If the non-accrual loans had performed in accordance with their original
terms, additional interest income would have been recorded for the years
ended December 31, 1996, 1995 and 1994 of $37,866, $4,480 and $6,994,
respectively.
Not included in past due loans 90 days and more and still accruing and non
accrual loans at December 31, 1996 and 1995 were loans to other borrowers
on management's watch list of $93,008 and $358,400, respectively. As of
December 31, 1996 and 1995 the Bank had no loans which would be considered
troubled debt restructurings.
- 66 -
<PAGE> 67
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
5. Loans (continued)
Information regarding impaired loans for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Average investment in impaired loans $227,345 $328,731
Interest income recognized on impaired
loans substantially all of which was
recognized on cash basis $ 1,097 $ 44,104
</TABLE>
Information regarding impaired loans at year-end is as follows:
<TABLE>
<CAPTION>
At December 31,
1996 1995
------ ------
<S> <C> <C>
Balance of impaired loans $220,671 $403,599
Less portion for which no allowance
for loan losses is allocated ($ -) ($163,555)
--------- ---------
Portion of impaired loan balance for
which an allowance for credit losses
is allocated $220,671 $240,044
========= =========
Portion of allowance for loan losses
allocated to the impaired loan balance $ 39,539 $ 91,973
</TABLE>
6. Loans to related parties
Related parties include executive officers, directors and significant
shareholders, and their affiliates. A summary of this loan activity of
related parties is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1995 $ 5,000
Additional loans made during the year 2,569,184
Principal payments made during
the year (2,127,430)
-----------
Balance, December 31, 1996 $ 446,754
===========
</TABLE>
7. Premises and equipment
Premises and equipment classifications at December 31, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Land $ 157,575 $ 281,306
Buildings and improvements 1,185,283 730,580
Furniture, fixtures, and equipment 1,341,455 675,795
---------- -----------
2,684,313 1,687,681
Less accumulated depreciation 729,019 327,398
---------- -----------
</TABLE>
- 67 -
<PAGE> 68
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
<TABLE>
<S> <C> <C>
Net $1,955,294 $1,360,283
========== ==========
</TABLE>
7. Premises and equipment (continued)
Depreciation expense amounted to $279,807, $82,725 and $112,375 for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Corporation and Bank lease space for their main office in Sault Ste
Marie, Michigan for $965 per month on a month-to-month basis. Varsity
Funding and Varsity Mortgage lease space for their office for $55,599 per
year, and Midwest leases its space for a nominal amount from the city of
Houghton. Total rental expense for the operating leases was $74,831 in
1996, $17,522 in 1995, and $51,503 in 1994 (including two branch offices
sold in December 1994). As of December 31, 1996, the Corporation and the
Bank had no minimum rental commitments under noncancelable operating
leases. Varsity had an annual minimum rent as of December 31, 1996 of
$55,599, with a total minimum amount of future rent payable over the next
two years of $154,954.
The Bank remains contingently liable in the event that the purchaser of one
of its branch locations in Sault Ste. Marie does not meet its future
obligations to the lessor. As of December 31, 1996 management believes
that the purchaser was in compliance with these lease terms. The annual
base rent for such branch is currently $32,000, and the future minimum rent
due is $218,000.
In May 1995, the Bank purchased a building in Ann Arbor, Michigan. The
Bank leased 58% of the building to the University of Michigan effective
October 1, 1995. The lease calls for minimum payments of $68,000 (adjusted
annually for inflation) plus the pro rata share of the building's expenses.
The initial term of the lease is three years.
8. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more at
December 31, 1996 and 1995, were $20,857,605 and $200,000 respectively.
At year-end 1996, stated maturities of time deposits were:
<TABLE>
<S> <C>
1997 $25,939,762
1998 2,416,723
1999 352,465
2000 345,000
2001 371,834
thereafter 103,266
-----------
$29,529,050
===========
</TABLE>
At December 31, 1996 and 1995, the Bank had issued through brokers
$15,401,000 and $16,240,000 in time deposits with a maturity of 1-60 months
and 6-60 months, respectively.
Related party deposits totalled $1,189,507 and $259,406 at year-end 1996
and 1995.
9. Stock options
- 68 -
<PAGE> 69
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
Director Stock Options
In 1993, the Board of Directors approved the grant of options to purchase
10,000 shares of common stock to each of the four non-executive directors,
in lieu of compensation. The exercise price of options granted was set at
$3.125 per share, which was the then current bid price per share as
reported by the NASDAQ Stock Market. The options are immediately
exercisable and expire July 19, 2003. All 40,000 options originally
granted remain outstanding under this plan at December 31, 1996.
1995 Stock Plan
In 1995, the Corporation adopted a stock option and stock award plan (the
1995 Stock Plan), which provides for the grant of incentive stock options,
as defined in Section 422(b) of the Internal Revenue Code of 1986, as
amended, as well as the grant of non-qualified stock options and other
stock awards. The plan provides for the grant to officers, directors and
key employees of the Corporation, and independent contractors providing
services to the Corporation, of options to purchase and other awards for a
maximum of 350,000 shares of common stock. The exercise price of options
granted under the plan shall be as determined by the Board of Directors, or
a compensation committee thereof. Options shall expire on the date
specified by the Board of Directors or such committee, but not more than 10
years from the date of grant (or five years from the date of grant for
incentive stock options if the grantee owned 10% of the Corporation's
voting stock at the date of grant). Unless amended, the 1995 Stock Plan
will terminate on November 15, 2005.
- 69 -
<PAGE> 70
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
9. Stock options (continued)
The following table summarizes the activity relating to options to purchase
the Corporation's common stock:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Price
Options Per Share
--------- --------------
<S> <C> <C>
Outstanding at December 31,
1995 and 1994 40,000 $3.125
Granted - 1996 ($1.14 Fair Value) 282,541 $4.670
Exercised - 1996 (4,541) $5.530
Forfeited - 1996 (17,500) $5.000
------- ------
Outstanding at December 31,
1996 300,500 $ 4.43
======= ======
At December 31, 1996:
Number of options immediately exercisable 200,500
Weighted average exercise price of immediately
exercisable options $4.30
Range of exercise price of options outstanding $3.13 - $5
Weighted-average remaining life of
options outstanding 4.6 years
</TABLE>
SFAS No. 123, which became effective for 1996, requires pro forma
disclosures for companies that do not adopt its fair value accounting
method for stock-based employee compensation. Accordingly, the following
pro forma information presents net income and earnings per share had the
Standard's fair value method been used to measure compensation cost for
stock options granted in 1996. Compensation cost recognized for stock
options under APB No. 25 was $0 for 1996 and 1995, because options were
granted at exercise prices equal to the underlying stock prices at date of
grant.
<TABLE>
<CAPTION>
1996
----
<S> <C>
Net income (loss) as reported $(536,758)
Pro forma net income (loss) (674,873)
Earnings per share as reported $ (.43)
Pro forma earnings per share $ (.54)
</TABLE>
In future years, the pro forma effect of not applying this standard may
increase as additional options are granted. Stock option plans are used to
reward employees and provide them with an additional equity interest.
Options are typically issued for 5 year periods, with vesting occurring
evenly over the first five years. At year-end 1996, 84,959 shares were
authorized for future grants.
The fair value of options granted during 1996 is estimated using the
following weighted-average information: risk-free interest rate of 6%,
expected life of 3.1 years, expected volatility of stock price of 14%, and
no expected dividends.
- 70 -
<PAGE> 71
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
10. Employee stock ownership plan
The employees allocation of ESOP assets is based on their current
compensation, after 1 year of service and upon reaching the age of twenty
one. The annual contribution to the ESOP is at the discretion of the
Corporation. The assets of the ESOP are held in trust and were valued at
approximately $261,407 and $218,206 as of December 31, 1996 and 1995,
respectively. The assets of the plan are comprised entirely of shares of
the Corporation, 35,445 and 39,228 shares at December 31, 1996 and 1995,
respectively, all of which were fully allocated at December 31, 1996. Upon
retirement from the plan, participants have distributed to them their
allocated shares of the Corporation's stock. The Corporation made an
additional contribution to the plan for the years ended December 31, 1996,
1995 and 1994 of 2,700, 10,000 and 7,147 shares of common stock with an
approximate fair market value at the time of the contribution of $15,056,
$35,000 and $25,008, respectively.
11. Minority Interest
The Bank acquired an 80% ownership interest in the common stock of Midwest
Loan Services in December 1995, with the remaining 20% owned by the
employees of Midwest. The acquisition was accounted for as a purchase with
no goodwill recorded. At December 31, 1996 and 1995, total common
shareholders' equity of Midwest was $1,007,135 and $1,005,671, resulting in
a $201,427 and $201,135 minority interest reflected on the Company's
consolidated balance sheet, respectively. The results of Midwest's
operations are included in the Company's consolidated statement of income
since the date acquired.
In connection with the acquisition, 48,000 shares of common stock of the
Company were given as part consideration by the Bank, subject to repurchase
by the Company at the holders' request at $5.00 per share in October 1996.
Of the 48,000 shares, the BIDCO received 23,000 shares, in exchange for its
ownership interest in Midwest. The remaining 25,000 shares were
repurchased by the Company October 1, 1996.
12. Commitments and contingencies
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans and to sell
loans, letters of credit and unused lines of credit. The Bank's exposure
to credit loss in the event of non-performance is equal to or less than the
contractual amount of these instruments. The Bank follows the same credit
policy to make such commitments as is followed by those loans recorded in
the consolidated financial statements.
- 71 -
<PAGE> 72
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
12. Commitments and contingencies (continued)
The following is a summary of commitments as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to buy loans $14,531,000 $3,037,000
Standby letters of credit - -
Unused lines of credit 3,578,309 729,000
Commitments to sell loans $22,000,000 $6,311,000
Foreign exchange contracts Can$800,000 Can$700,000
</TABLE>
The Bank had loans held for sale of $30,534,574 and commitments to purchase
loans of $14,531,000 at December 31, 1996. The Bank is also a party to
commitments to sell loan pool securities ($22,000,000 at December 31, 1996
with fixed interest rates between 7.50% and 8.50%) to hedge the interest
rate risk of its loans held for sale and purchase commitments.
All unused lines of credit were at variable interest rates.
The Bank is also a party to foreign exchange financial instruments with
off-balance sheet risk for internal hedging of exchange rate risk. At
December 31, 1996, the Bank had commitments to deliver $800,000 of Canadian
denominated dollars in March of 1997.
13. Related party transactions
The Company's Chairman and President also serve as officers and directors
of BIDCO. As such, Chairman and President are actively involved in BIDCO
operations, including investment activity and estimation of the fair value
of investments. In addition, in the ordinary course of business the BIDCO
has invested in several limited liability companies (LLCs), and the
Chairman and President have also personally invested in certain of the same
LLCs.
In connection with the Arbor Street's investment of $1,000,000 in federal
low income housing tax credits through a partnership, the Bank was not
permitted by regulation to guarantee a $950,000 loan from the Michigan
Housing Development Authority to Arbor Street. Such loan was instead
personally guaranteed by the Chairman of the Company, and common stock of
the Company held by a trust for the benefit of the President of the Company
was pledged as additional security for the loan. In exchange, the Chairman
and President of the Company were each granted a 1% membership interest in
Arbor Street and the Bank's ownership reduced to 98%.
See Notes 6 & 8 for a summary of loans to and deposits from related
parties.
- 72 -
<PAGE> 73
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
14. Income taxes
The provision for federal income taxes is composed of the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Current expense (benefit) $(329,533) $(186,520) $775,262
Deferred expense (benefit) ( 29,225) 79,571 5,589
--------- --------- --------
Total year $(358,758) $(106,949) $769,673
========= ========= ========
</TABLE>
The net deferred tax asset at December 31, 1996 and 1995 is comprised of
the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Loans available for sale $ - $ 15,133
Core deposit intangible 1,109 3,554
Allowance for loan losses 53,646 60,243
Temporary differences from LLCs 56,085 -
Nonaccrual loan interest income 12,876 3,381
Capital loss 8,611 -
Unrealized loss
on investments available for sale 2,659 -
Other 9,905 457
---------- ----------
Deferred tax assets $ 144,891 $ 82,768
========== ==========
Unrealized gain
on investments available for sale - ( 73,181)
Servicing rights (64,452) ( 36,820)
Other ( 6,413) ( 3,806)
---------- ----------
Deferred tax liabilities $ ( 70,865) $ (113,807)
========== ==========
Net Deferred Tax Asset (Liability) $ 74,026 $ ( 31,039)
========== ==========
</TABLE>
No allowance for deferred tax assets is considered necessary at December
31, 1996 and 1995.
The difference between the financial statement tax expense and amounts
computed by applying the statutory federal tax rate of 34% to pretax income
is reconciled as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Statutory rate applied to
income before taxes $(304,475) $(136,655) $887,595
Add (Deduct)
Effect of tax exempt
interest - ( 1,178) ( 14,701)
Undistributed earnings of
unconsolidated subsidiary (17,102) ( 32,287) ( 59,480)
Other (37,181) 63,171 ( 43,741)
--------- --------- --------
Current year provision
(benefit) for income tax $(358,758) $(106,949) $769,673
========= ========= ========
</TABLE>
Earnings of unconsolidated subsidiary are expected to ultimately be
realized through dividends.
- 73 -
<PAGE> 74
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
15. Short-Term Borrowings
The Corporation has a note payable to North Country Bank & Trust (NCB&T)
secured by the stock of the Bank with a balance of $962,500 and $1,000,000
at December 31, 1996 and 1995. The note has a maturity date of November 1,
1997. Interest is payable quarterly at the prime rate of FNB&T plus .50
percent.
Dividends by the Bank to the holding company in excess of the prior year's
annual net income are not permitted without prior permission from FNB&T
under the terms of the Corporation's credit facility (Note 17).
At year-end 1996, the Bank has a short-term borrowing of $11,978,766 from
FNMA. The advance was due the following business day, carried a rate of
6.85%, and was collateralized by mortgage loans held for sale with a
current market value of $12,223,231, which were committed to be sold to
FNMA the following business day. The obligation under each contract was
fulfilled without loss.
The Bank from time to time enters into agreements to sell securities with
an agreement to repurchase the securities at a later date. Such agreements
generally mature within one to seven days from the transaction date.
Mortgage-backed securities were pledged as collateral towards the
repurchase agreements. No repurchase agreements were outstanding at
December 31, 1996 or 1995.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Average balance during the year $1,335,277
Average interest rate during the year 6.70%
Maximum month-end balance during the year $3,426,000
Year-end balance $1,000,000
</TABLE>
16. Federal Home Loan Bank advances
Advances from the Federal Home Loan Bank (the FHLB) at December 31, 1996
consisted of:
<TABLE>
<CAPTION>
Interest Rate Maturity Advance
-------------------------------- -------------- -----------
<S> <C> <C>
6.15% Fixed rate advance Sept. 24, 1997 $2,500,000
5.50% Adjustable rate advance
(FHLB Overnight Discount
Rate plus 0.30%) May 5, 1997 $3,500,000
----------
Total advances $6,000,000
==========
</TABLE>
- 74 -
<PAGE> 75
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
16. Federal Home Loan Bank advances (continued)
The advances are secured by the pledge of specific mortgage loans held for
investment with unpaid principal balances of $3,213,845 and
available-for-sale securities with a balance of $6,356,433. Interest is
payable in monthly installments through maturity. With payment of a
penalty, prepayments of advances up to 10% of the principal balance will be
accepted by the FHLB if the Bank's notifies the FHLB of its intention to
prepay.
Advances from the FHLB at December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
Interest Rate Maturity Advance
-------------------------------- -------------- -----------
<S> <C> <C>
5.83% Fixed rate advance June 20, 1996 $3,000,000
5.85% Fixed rate advance Oct. 4, 1996 $4,500,000
5.62% Adjustable rate advance
(3 month LIBOR rate less
6 basis points) Sept. 24, 1996 $2,500,000
-----------
Total advances $10,000,000
===========
</TABLE>
17. Dividend restrictions
Federal and state banking laws and regulations place certain restrictions
on the amount of dividends and loans a bank can pay to its parent company.
Under the most restrictive dividend limitations, as described in Note 15,
the Bank may not pay dividends to the parent company without prior approval
from a note holder. Should the Bank receive such approval, it could pay
dividends to the parent company equal to $495,508 in 1997 (before
considering 1997 net income or loss and any changes in risk-based assets).
- 75 -
<PAGE> 76
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
18. University Bancorp (Parent Company Only) Condensed Financial Information
Summarized financial information for University Bancorp, Inc. for 1996 and
1995 is presented below:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
------ ---------- ----------
<S> <C> <C>
Cash in bank $ 41,113 $ 239,868
Securities available for sale 114,070 160,282
Investment in Michigan BIDCO 202,702 203,500
Investment in subsidiary bank 4,529,502 5,023,367
Other assets 216,950 78,175
---------- ----------
Total assets $5,104,337 $5,705,192
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Note payable 962,500 1,000,000
Accounts payable and other liabilities 229,068 54,294
---------- ----------
Total liabilities 1,191,568 1,054,294
Stockholders' equity 3,912,769 4,650,898
---------- ----------
Total liabilities and
stockholders' equity $5,104,337 $5,705,192
========== ==========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income:
Dividends from subsidiary - 1,350,000 1,584,000
Other 83,505 102,182 21,193
--------- ---------- ----------
Total income 83,505 1,452,182 1,605,193
Expense:
Interest 85,867 81,181 181,510
Other 122,468 99,066 369,669
--------- ---------- ----------
Total expense 208,335 180,247 551,179
Income (loss) before
federal income taxes
(benefit) and equity in
undistributed net income
(loss) of subsidiaries (124,830) 1,271,935 2,156,372
Federal income taxes
(benefit) ( 35,000) ( 9,630) (213,819)
--------- ---------- ----------
Income (loss) before
equity in
undistributed net
income of subsidiaries ( 89,830) 1,281,565 2,370,191
Equity in undistributed
net income (loss) of
subsidiaries (446,928) (1,576,541) (529,190)
Net income (loss) $(536,758) $ (294,976) $1,841,001
========= =========== ==========
</TABLE>
- 76 -
<PAGE> 77
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
UNIVERSITY BANCORP, INC. (The Parent)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net income (loss) $ (536,758) $ (294,976) $ 1,841,001
Depreciation 1,743 3,001 3,002
Amortization 78 - 122,060
Contribution to ESOP 15,056 35,000 25,008
Loss (gain) on sale of investments (44,598) (46,243) (13,456)
Decrease (increase) in receivable
from affiliate - 973,211 (973,211)
Decrease (increase) in Other Assets (140,519) (55,839) 31,372
Increase (decrease) in interest payable (14,196) (54,319) 19,068
Increase (decrease) in Other Liabilities 206,192 (704,202) 679,708
Subsidiary net Income (Loss) 446,928 226,542 (2,157,168)
---------- ------------ ------------
Net cash provided by (used in)
operating activities (66,074) 82,175 (422,616)
---------- ------------ ------------
Cash flow from investing activities:
Subsidiary dividends received - 1,350,000 1,564,800
Contributions of capital to subsidiary (66,750) (920,000) -
Purchase of available for sale securities (97,442) (236,418) (14,000)
Proceeds from sale of available for sale securities 138,216 253,268 14,000
Advances to Michigan BIDCO - (203,500) -
---------- ------------ ------------
Net cash provided by (used in)
investing activities: (25,976) 243,350 1,564,800
---------- ------------ ------------
Cash flow from financing activities:
Proceeds from bank financing
Principal payment on notes payable (37,500) - (1,294,000)
Proceeds from sale of common stock 91,870 - 100,000
Purchase of treasury stock (161,075) (139,808) -
---------- ------------ ------------
Net cash provided by (used in)
financing activities: (106,705) (139,808) (1,194,000)
---------- ------------ ------------
Net changes in cash and cash equivalents (198,755) 185,717 (51,816)
Cash:
Beginning of year 239,868 54,151 105,967
---------- ------------ ------------
End of year $ 41,113 $ 239,868 $ 54,151
========== ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest Expense $ 100,062 $ 135,500 $ 162,442
Income tax $ - $ 740,108 $ 18,750
</TABLE>
-77-
<PAGE> 78
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
19. Regulatory matters
The Bank is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications
in certain cases. Failure to meet various capital requirements can
initiate regulatory action that could have a direct material effect on the
financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration are required.
The minimum requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets Tier 1 capital
Total Tier 1 to average assets
-------- -------- -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At year end, consolidated actual capital levels (in millions) and minimum
required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be
Adequately
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ---------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1996
- - ----
Total capital (to risk weighted assets) $4.7 9.4% $4.0 8.0% $4.0 8.0%
Bank Tier 1 capital (to risk weighted assets) $4.4 8.8% $2.0 4.0% $2.0 4.0%
Bank Tier 1 capital (to average assets) $4.4 6.0% $2.9 4.0% $2.9 4.0%
Bank
1995
- - ----
Total capital (to risk weighted assets) $5.5 25.7% $1.7 8.0% $1.7 8.0%
Bank Tier 1 capital (to risk weighted assets) $5.1 23.6% $0.9 4.0% $0.9 4.0%
Bank Tier 1 capital (to average assets) $5.1 14.5% $1.4 4.0% $1.4 4.0%
Bank
</TABLE>
- 79 -
<PAGE> 79
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
19. Regulatory matters (continued)
The Bank at year-end 1996 was categorized as adequately capitalized.
20. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair
value for cash and short-term instruments, demand deposits, short-term
borrowings, accrued interest, and variable rate loans or deposits that
reprice frequently and fully. Securities fair values are based on quoted
market prices or, if no quotes are available, on the rate and term of the
security and on information about the issuer. For fixed rate loans or
deposits and for variable rate loan or deposits with infrequent repricing
or repricing limits, the fair value is estimated by the discounted cash
flow analysis using current market rates for the estimated life and credit
risk. Fair values for impaired loans are estimated using discounted cash
flow analyses or underlying collateral values, where applicable. Fair
value of loans held for sale is based on market estimates. Fair value of
mortgage servicing rights are estimated using discounted cash flows based
on current market interest rates net of estimated costs of servicing loans.
The fair value of debt is based on currently available rates for similar
financing. The fair value of off-balance sheet items is based on the fees
or cost that would normally be charged to enter into or terminate such
agreements.
- 80 -
<PAGE> 80
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
20. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments
were as follows (in $000s):
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------
Carrying Fair
Amount Value
------------- -------
<S> <C> <C>
Financial Assets
--------------------
Cash and short term investments $12,551 $12,551
Securities Available for sale 7,347 7,347
Loans held for sale 30,535 30,865
Loans, net 20,669 21,702
Mortgage servicing rights 2,312 2,466
Accrued interest receivable 302 302
Financial Liabilities
------------------------------------------
Deposits 53,106 53,222
FHLB advances 6,000 6,005
Mortgage escrow 1,065 1,065
Short term borrowings 12,941 12,941
Accrued interest payable 356 356
Unrecognized financial instruments
------------------------------------------
The fair value of commitments to extend
credit, futures contracts to deliver
Canadian currency and the fair value
of letters of credit are considered
immaterial. - -
<CAPTION>
December 31, 1995
---------------------------------
Carrying Fair
Amount Value
------------- -------
<S> <C> <C>
Financial Assets
--------------------
Cash and short term investments $ 1,938 $ 1,938
Securities Available for sale 13,091 13,091
Loans held for sale 7,983 7,983
Loans, net 8,959 9,455
Mortgage servicing rights 2,937 3,219
Accrued interest receivable 206 206
Financial Liabilities
------------------------------------------
Deposits 20,745 20,849
FHLB advances 10,000 10,017
Mortgage escrow 1,055 1,055
Short term borrowings 1,000 1,000
Accrued interest payable 198 198
Unrecognized financial instruments
------------------------------------------
The fair value of commitments to extend
credit, futures contracts to deliver
Canadian currency and the fair value
of letters of credit are considered
immaterial. - -
</TABLE>
- 81 -
<PAGE> 81
PART III.
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference herein
from the portions of the Company's Proxy Statement for its 1997 Annual Meeting
(the "Proxy Statement") to be under the captions:
Election of Directors
Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance
ITEM 11. - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference herein
from the portions of the Company's Proxy Statement to be under the captions:
Executive Compensation
Compensation Plans
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference herein
from the portion of the Company's Proxy Statement to be under the caption:
Security Ownership of Certain Beneficial Owners and
Management
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference herein
from the portion of the Company's Proxy Statement to be under the caption:
Certain Relationships and Related Transactions
PART IV.
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) (1) Index of Financial Statements: The following financial statements
are filed as part of this Report:
Audited consolidated balance sheets as of December 31, 1996 and December
31, 1995, and consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 1996, 1995 and 1994, of the Company.
(b) Reports on Form 8-K. None.
- 82 -
<PAGE> 82
(c) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (the "June 30, 1996 10-Q")).
3.2 Composite By-laws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Annual Report on Form 10-K for the year ended December 31,
1989 (the "1989 10-K")).
(10) Material Contracts.
10.1 Promissory Note dated November 21, 1996 issued to North Country Bank
& Trust.
10.2 University Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"),
as amended November 27, 1990 (incorporated by reference to Exhibit 10.2 to the
1990 10-K). *
10.2.1 Amendment to the ESOP, effective as of December 31, 1991
(incorporated by reference to Exhibit 10.2.A to the 1991 10-K). *
10.3 University Bank 401(k) Profit Sharing Plan, adopted August 1, 1996,
effective as of January 1, 1996. *
10.4 Letter regarding grant of options to outside directors, dated as of
July 20, 1993 (incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993
10-K")). *
10.5 1995 Stock Plan of the Company (incorporated by reference to Exhibit
A to the definitive Proxy Statement of the Company for 1996 Annual Meeting of
Stockholders (the "1996 Proxy")). *
10.5.1 Form of Stock Option Agreement related to the 1995 Stock Plan
(incorporated by reference to Exhibit 10.7.1 to the Annual Report on Form 10-K
for the year ended December 31, 1995 (the "1995 10-K")). *
10.6 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989 10-K).
10.7 Lease Agreement (the "Cascade Lease Agreement") between RG
Properties, Inc., as agent for Sault Associates, a Michigan Limited
Partnership, and University Bank, dated September 30, 1992 (incorporated by
reference to exhibit 10.9 to the 1992 10-K).
10.7.1 First Amendment to the Cascade Lease Agreement, dated January 5,
1993 (incorporated by reference exhibit 10.9.1 to the 1992 10-K).
- 83 -
<PAGE> 83
10.8 Federal Income Tax Allocation Agreement Between Newberry State Bank
and Newberry Holding Inc. dated March 21, 1992 (incorporated by reference to
Exhibit 10.11 to the 1991 10-K).
10.8.1 Federal Income Tax Allocation Agreement Between Newberry Holding
Inc. and University Bancorp, Inc. dated May 21, 1991 (incorporated by reference
to Exhibit 10.11.1 to the 1991 10-K).
10.9 Purchase and Assumption Agreement Between First Northern Bank & Trust
and University Bank dated May 5, 1994 (incorporated by reference to Exhibit 10
to the Company's Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1994).
10.10.1 First Amendment dated July 1, 1994 to Purchase and Assumption
Agreement Between First Northern Bank & Trust and University Bank dated May 5,
1994 (incorporated by reference to Exhibit 10.12.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 (the "1994 10-K")).
10.10.2 Second Amendment dated February 3, 1995 to Purchase and Assumption
Agreement Between First Northern Bank & Trust and University Bank dated May 5,
1994 (incorporated by reference to Exhibit 10.12.2 to the 1994 10-K).
10.10.3 Order of the Commissioner of the Michigan Financial Institutions
Bureau Approving the Relocation of the Bank's Main Office from Newberry to
Sault Ste. Marie, Michigan, containing certain post-closing conditions
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1994).
10.10.4 Noncompetition Agreement Between First Northern Bank & Trust and
University Bank dated December 3, 1994 (incorporated by reference to Exhibit
10.12.4 to the 1994 10-K).
10.10.5 Mortgage Origination Agreement Between First Northern Bank & Trust
and University Bank dated December 3, 1994 (incorporated by reference to
Exhibit 10.12.5 to the 1994 10-K).
10.10.6 Branch Services Agreement Between First Northern Bank & Trust and
University Bank dated December 5, 1994 (incorporated by reference to Exhibit
10.12.6 to the 1994 10-K).
10.11 Employment Agreement, between Mark Ouimet and University Bank and
Newberry Bancorp, Inc., as amended (incorporated by reference to Exhibit 10.13
to the 1995 10-K). *
10.11.1 Stock Option Agreement, dated as of December 15, 1995, between
Mark Ouimet and Newberry Bancorp, Inc. (incorporated by reference to Exhibit
10.13.1 to the 1995 10-K). *
10.12 Net Branch Agreement, dated September 15, 1995, establishing Varsity
Funding Services, L.L.C. among University Bank, Jess Monticello and William
Cook (incorporated by reference to Exhibit 10.16 of the 3rd Quarter 1995 10-Q).*
- 84 -
<PAGE> 84
10.13 Net Branch Agreement, dated January 12, 1996, establishing Varsity
Mortgage, L.L.C. among University Bank, Jess Monticello, William Cook and
Marianne Opt Thompson (incorporated by reference to Exhibit 10.15 of the 1995
10-K). *
10.14 Purchase and Sale Agreement, dated November 1, 1995, concerning
Common Stock of Midwest Loan Services, Inc., among its shareholders and
University Bank and Newberry Bancorp, Inc (incorporated by reference to Exhibit
10.16 of the 1995 10-K).
* Each of the exhibits noted by an "*" is a management compensatory plan or
arrangement.
(21) Subsidiaries of Registrant: List of subsidiaries filed herewith.
- 85 -
<PAGE> 85
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UNIVERSITY BANCORP, INC.
By: /s/Thomas J. Vandermus
-----------------------
Thomas J. Vandermus,
Chief Financial Officer
Date: March 30, 1997
-----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- - ------------------------ ------------------------ --------------
/s/Stephen Lange Ranzini Director, President, March 30, 1997
- - ------------------------ Chief Executive Officer,
Stephen Lange Ranzini
/s/Thomas J. Vandermus Director, President, March 30, 1997
- - ------------------------ Chief Financial Officer,
Thomas J. Vandermus
/s/Joseph L. Ranzini Director, Secretary, March 30, 1997
- - -------------------------- Chairman
Joseph L. Ranzini
/s/Keith Brenner Director March 30, 1997
- - ------------------------
Keith E. Brenner
/s/Robert Goldthorpe Director March 30, 1997
- - ------------------------
Robert Goldthorpe
/s/Mark Ouimet Director March 30, 1997
- - ------------------------
Mark Ouimet
/s/Dr. Joseph L. Ranzini Director March 30, 1997
- - ------------------------
Dr. Joseph Lange Ranzini
/s/Mildred Lange Ranzini Director March 30, 1997
- - ------------------------
Mildred Lange Ranzini
/s/Paul Lange Ranzini Director March 30, 1997
- - ------------------------
Paul Lange Ranzini
/s/Michael Talley Director March 30, 1997
- - ------------------------
Michael Talley
- 86 -
<PAGE> 86
Index of Exhibits
Sequentially
Exhibit No. and Description Numbered Page
- - --------------------------- -------------
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 (the "June 30, 1996 10-Q")).
3.2 Composite By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the 1989 10-K).
(10) Material Contracts.
10.1 Promissory Note dated November 21, 1996 issued to North
Country Bank & Trust. 90
10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated
by reference to Exhibit 10.2 to the 1990 10-K).
10.2.1 Amendment to the ESOP, effective as of December 31, 1991
(incorporated by reference to Exhibit 10.2.A to the 1991
10-K.
10.3 University Bank 401(k) Profit Sharing Plan, adopted August
1, 1996, effective as of January 1, 1996. 96
10.4 Letter regarding grant of options to outside directors,
dated as of July 20, 1993 (incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 (the "1993 10-K")).
10.5 1995 Stock Plan of the Company (incorporated by reference
to Exhibit A to the definitive Proxy Statement of the
Company for the 1996 Annual Meeting of Stockholders (the
"1996 Proxy").
10.5.1 Form of Stock Option Agreement related to the 1995 Stock
Plan (incorporated by reference to Exhibit 10.7.1 to the
1995 10-K).
10.6 Letter, dated December 1, 1989, from Federal Reserve Bank
of Minneapolis (incorporated by reference to Exhibit 10.9
to the 1989 10-K).
-87-
<PAGE> 87
10.7 Lease Agreement (the "Cascade Lease Agreement") between RG
Properties, Inc., as agent for Sault Associates, a Michigan
Limited Partnership, and University Bank, dated September
30, 1992 (incorporated by reference to exhibit 10.9 to the
1992 10-K).
10.7.1 First Amendment to the Cascade Lease Agreement, dated
January 5, 1993 (incorporated by reference exhibit 10.9.1
to the 1992 10-K).
10.8 Federal Income Tax Allocation Agreement Between Newberry
State Bank and Newberry Holding Inc. dated March 21, 1992
(incorporated by reference to Exhibit 10.11 to the 1991
10-K).
10.8.1 Federal Income Tax Allocation Agreement Between Newberry
Holding Inc. and University Bancorp, Inc. dated May 21,
1991 (incorporated by reference to Exhibit 10.11.1 to the
1991 10-K).
10.9 Purchase and Assumption Agreement Between First Northern
Bank & Trust and University Bank dated May 5, 1994
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the Quarter Ended March
31, 1994).
10.10.1 First Amendment dated July 1, 1994 to Purchase and
Assumption Agreement Between First Northern Bank & Trust
and University Bank dated May 5, 1994 (incorporated by
reference to Exhibit 10.12.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 (the
"1994 10-K")).
10.10.2 Second Amendment dated February 3, 1995 to Purchase and
Assumption Agreement Between First Northern Bank & Trust
and University Bank dated May 5, 1994 (incorporated by
reference to Exhibit 10.12.2 to the 1994 10-K).
10.10.3 Order of the Commissioner of the Michigan Financial
Institutions Bureau Approving the Relocation of the Bank's
Main Office from Newberry to Sault Ste. Marie, Michigan,
containing certain post-closing conditions (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the Quarter Ended September 30,
1994).
10.10.4 Noncompetition Agreement Between First Northern Bank &
Trust and University Bank
-88-
<PAGE> 88
dated December 3, 1994 (incorporated by reference to
Exhibit 10.12.4 to the 1994 10-K).
10.10.5 Mortgage Origination Agreement Between First Northern
Bank & Trust and University Bank dated December 3, 1994
(incorporated by reference to Exhibit 10.12.5 to the 1994
10-K).
10.10.6 Branch Services Agreement Between First Northern Bank &
Trust and University Bank dated December 5, 1994
(incorporated by reference to Exhibit 10.12.6 to the 1994
10-K).
10.11 Employment Agreement, between Mark Ouimet and University
Bank and Newberry Bancorp, Inc., as amended (incorporated
by reference to Exhibit 10.13 to the 1995 10-K).
10.11.1 Stock Option Agreement, dated as of December 15, 1995,
between Mark Ouimet and Newberry Bancorp, Inc.
(incorporated by reference to Exhibit 10.13.1 to the 1995
10-K).
10.12 Net Branch Agreement, dated September 15, 1995,
establishing Varsity Funding Services, L.L.C. among
University Bank, Jess Monticello and William Cook
(incorporated by reference to Exhibit 10.16 of the 3rd
Quarter 1995 10-Q).
10.13 Net Branch Agreement, dated January 12, 1996,
establishing Varsity Mortgage, L.L.C. among University
Bank, Jess Monticello, William Cook and Marianne Opt
Thompson (incorporated by reference to Exhibit 10.15 of the
1995 10-K).
10.14 Purchase and Sale Agreement, dated November 1, 1995,
concerning Common Stock of Midwest Loan Services, Inc.,
among its shareholders and University Bank and Newberry
Bancorp, Inc (incorporated by reference to Exhibit 10.16 of
the 1995 10-K).
(21) Subsidiaries of Registrant.
(27) Financial Data Schedule 120
-89-
<PAGE> 89
Exhibit 21. Subsidiaries of Registrant.
University Bank, a Michigan state chartered bank.
Midwest Loan Services, Inc., a Michigan Corporation (80% owned by
Bank)
Varsity Funding Services, L.L.C., a Michigan Limited Liability
Company (99% owned by Bank and 1% owned by Company)
Varsity Mortgage, L.L.C., a Michigan Limited Liability Company (99%
owned by Bank and 1% owned by Company)
Arbor Street, L.L.C, a Michigan Limited Liability
Company (98% owned by Bank)
University Insurance & Investment Services, Inc., a Michigan
Corporation (100% owned by Bank)
-90-
<PAGE> 1
EXHIBIT 10.1
LOAN MODIFICATION AGREEMENT
BORROWER LENDER
Name: NEWBERRY BANCORP, INC. North Country Bank & Trust
f/k/a First Northern Bank & Trust
Address: 209 East Portage Avenue
Sault Ste. Marie, MI 49783 130 South Cedar Street
Manistique, MI 49854
THIS AGREEMENT made this 21st day of November, 1996, between Lender and
Borrower.
WHEREAS, Borrower is currently indebted to Lender under the terms of a
Promissory NOTE #28285 (herein called "NOTE") as follows:
Promissory NOTE Dated: September 28, 1995
Promissory NOTE Original Sum: $1,000,000.00
Current NOTE Balance: $ 962,500.00
WHEREAS, as security for the payment of the NOTE, Borrower executed a
Pledge Agreement (herein called "Pledge Agreement") to Lender pledging 100
percent of Pledgor's stock of University Bank, Ann Arbor, Michigan, pursuant to
a Pledge Agreement dated September 28, 1995.
WHEREAS, the NOTE and Pledge Agreement were made pursuant to a Loan
Agreement between Borrower and Lender dated September 28, 1995.
WHEREAS, the entire of the indebtedness evidenced by said NOTE became due
and payable on November 1, 1996, and Borrower has requested that the due date
for payment of the indebtedness evidenced by said NOTE be extended. Pursuant
to the terms of the Loan Agreement, Lender has agreed to renew the loan for a
period of one (1) year on the same terms and subject to the same conditions as
the original loan, less the principal required to be paid from the date of the
original loan to date of maturity of the note. However, regardless of the
agreement made in Section 2.4 of said Loan Agreement, Borrower and Lender have
agreed to extend the loan for the one (1) year period according to the terms
set out in this Loan Modification Agreement.
WHEREAS, by entering into this Loan Modification it is not the intention
of the parties to consider the NOTE paid or discharged and replaced by this
agreement but, instead, to extend the time in which to pay the NOTE.
NOW THEREFORE, in consideration of $1.00 paid by Lender to Borrower and
other valuable consideration for modification of the obligations of Lender in
section 2.4 of the Loan Agreement, the Borrower and Lender covenant and agree
as follows:
1. All interest accrued and unpaid under said NOTE as of the date hereof
shall be paid by Borrower to Lender forthwith, concurrently with the
execution of this agreement.
2. That said NOTE shall be, and the same is hereby, modified and
amended to provide as follows:
91
<PAGE> 2
A. The unpaid principal balance of said NOTE, as of the date of this
agreement, shall remain Nine Hundred Sixty-two Thousand Five Hundred
and 00/100 Dollars ($962,500.00).
B. Commencing as of the date of this agreement, the interest rate
applicable to said NOTE shall be equal to the North Country Bank &
Trust prime rate plus one (1%) percent with the interest rate
changing daily or as changes in the Lender's prime rate changes. The
prime rate of Lender on the date of this agreement if 8.75 percent;
the initial interest rate for the NOTE on the date hereof shall be
9.75 percent.
C. From and after the date hereof, the indebtedness evidenced by said
NOTE (principal and interest) shall continue to be payable as
follows: Accrued interest and $12,500.00 shall be paid on February 1,
1997, and on the first day of each of May and August, 1997. A final
payment of all outstanding principal and accrued interest shall be
due and payable on November 1, 1997.
3. The Loan Agreement and related documents shall be, and the same
hereby, modified and amended to provide that the Pledge Agreement shall secure
payment of the NOTE, as modified and amended in paragraph 2 above.
4. Except as expressly modified or amended herein, all the term and
provisions of the NOTE, Loan Agreement, and Pledge Agreement shall remain
unmodified and in full force and effect.
5. The modifications and amendments affected by this agreement shall be
without prejudice to or diminution of the present lien and all other rights and
Lender has or may have under or by virtue of the NOTE and Pledge Agreement under
applicable law.
IN WITNESS WHEREOF, the said Newberry Bancorp, Inc. has caused these
presents to be signed in its name by its President and Secretary on the
21st day of November, 1996.
In presence of NEWBERRY BANCORP, INC.
/s/ L. Jane Finkbeiner By: /s/ Stephen L. Ranzini
- - ---------------------- --------------------------
L. Jane Finkbeiner
92
<PAGE> 3
Its: President
/s/ Marcy Brown ---------------
- - -----------------------
Marcy Brown By: /s/ Joseph L. Ranzini
------------------------
Its: Secretary
---------------
STATE OF MICHIGAN
COUNTY OF WASHTENAW
The foregoing instrument was acknowledged before me this 21st day of
November, 1996, by Stephen Lange Ranzini and Joseph L. Ranzini, the
President and Secretary of Newberry Bancorp, Inc., on behalf of Newberry
Bancorp, Inc.
/s/ Lennie Jane Finkbeiner
-------------------------------------
Lennie Jane Finkbeiner, Notary Public
Washtenaw, County, Michigan
My commission expires: 07-9-99
IN WITNESS WHEREOF, the said North Country Bank & Trust has caused these
presents to be signed in its name by its Commercial Loan Office on the 2nd
day of December, 1996.
In Presence of: NORTH COUNTRY BANK & TRUST
/s/ Jane K. Lauz By: /s/ Greg Garver
- - ----------------------- ---------------------------
/s/ Lisa A. Demers Title: Commercial Loan Officer
- - ----------------------- -----------------------
STATE OF MICHIGAN )
)ss.
COUNTY OF SCHOOLCRAFT )
The foregoing instrument was acknowledged before me this 2nd day of
December, 1996, by Gregg Graver, the Commercial Loan Office of North
Country Bank & Trust, on behalf of North Country Bank & Trust.
/s/ Jane K. Laux
Jane K. Laux, Notary Public
Delta Acting in Schoolcraft County, Michigan
My commission expires:______________________
93
<PAGE> 1
EXHIBIT 10.3
UNIVERSITY BANK
401(k) PROFIT SHARING PLAN
-94-
<PAGE> 2
VOLUME SUBMITTER ADOPTION AGREEMENT
SALARY REDUCTION/401(k) PROFIT SHARING RETIREMENT PLAN AND TRUST
<TABLE>
<CAPTION>
PLAN
---------
SECTION
---------
INSTRUCTIONS REFERENCE PLAN PROVISION
- - -------------------- --------- ---------------------------------------------
<S> <C> <C>
1A. Insert the name to be used in 1.39 1. A. Name of the Plan
the title of the Plan.
The name of the Plan is University Bank 401(k)
Profit Sharing Plan.
B. Insert the three-digit number
used to identify the Plan. B. The Plan number is 001.
2A. Fill in the exact legal name 1.46 2. Sponsor
of the Sponsor. If the Sponsor
is a proprietorship, fill in A. The Sponsor is University Bank.
the name of the individual.
B. The address of the Sponsor is:
959 Maiden Lane
Ann Arbor, MI 48105
C. The telephone number of the Sponsor is (313) 741-5858.
D. The Employer Identification Number of the Sponsor is
38-0875820.
E. The Nature of the Sponsor's business is Bank.
F. The Sponsor's fiscal year is the 12-month period
ending on December 31.
G. The Sponsor is
(1) /X/ a C corporation
(2) / / an S corporation
(3) / / a partnership
(4) / / a proprietorship
3A. Insert the effective date of 1.13 3. Effective Date
the Plan. (Generally the
effective date should be the A. The Effective Date of the Plan is January 1, 1996.
first day of the first plan
year beginning after December 31,
1988.)
</TABLE>
<PAGE> 3
B. Insert the B. The original effective date of the Plan is
effective date of N/A.
the earliest ----
predecessor of the
Plan, if any. If
there is no
predecessor, insert
"N/A".
4. Insert the name, 1.49 4. Trustee
address and
telephone number of A. The Trustee is Jodi L. Geeting.
the Trustee.
B. The address of the Trustee is:
University Bank
959 Maiden Lane
Ann Arbor, MI 48105
C. The telephone number of the Trustee is
(313) 741-5858.
5. Choose A, B or 1.41 5. The Plan Year is the twelve consecutive
C. If you choose month period (or shorter period in the event
C, fill in the of a change in the Plan Year) ending on --
applicable month
and day. A. / / The last day of the Sponsor's fiscal
year
B. /X/ December 31
C. Other:__________________.
1.07 6. Compensation: For the purpose of
allocating Employer Contributions to a
Participant's Individual Account, the
definition of Compensation shall be modified
as follows:
6A. Choose as many A. Compensation is modified as follows:
of the modifications as
you desire. If you (1) / / Compensation shall not exceed ____.
choose (1), complete the
blank. If you choose (2), (2) / / Compensation excludes:
select (a), (b) or
(c) or any (a) bonuses
combination.
(b) all commissions
(c) overtime pay
B. Choose (1) or (2). B. Compensation includes Compensation --
(1) / / For the whole Plan Year whether or
not
<PAGE> 4
<TABLE>
<S> <C> <C>
* FOR EMPLOYEES the Employee is a Participant for
BECOMING PARTICIPANTS the whole year.
ON AUGUST 1, 1996,
COMPENSATION (2) /X/ Only for that part of the Plan
INCLUDES THAT Year during which the Employee is
WHICH IS EARNED a participant.*
DURING THE ENTIRE
1996 PLAN YEAR.
C. Choose (1) or (2). C. Compensation shall include contributions
made pursuant to a salary reduction
agreement which are not includable in the
gross income of the Employee under
Sections 125, 402(a)(8), 402(h), or
403(b) of the Internal Revenue Code.
(1) /X/ Yes
(2) / / No
7. Choose A or B. 1.16 7. Employee -- The term Employee includes a
Leased Employee of the Employer.
A. / / Yes
B. /X/ No
8. Choose A or B. 1.11 8. Early Retirement Age
If you choose B, A. /X/ There is no Early Retirement
select the Age.
appropriate
requirement and B. / / There is an Early Retirement Age,
complete its and it requires one of the
blanks. following
(1) / / Age .
(2) / / Age and Years of Service.
(3) / / Other: .
9. Choose A, B or C. 1.36 9. Normal Retirement Age
A. /X/ Age 65.
B. / / Age and Years of Service.
C. / / Other:.
10. If you do not want 1.10 10. Disabled
to automatically
provide a fully-vested A. / / The Plan makes no special
benefit to a Disabled provision for
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
Participant, check A, and Disabled Disabled Participants.
Participants will be treated as any
other terminated Participant. If B. / / The Plan makes special provision for Disabled Participants.
you want to automatically provide a A Participant is Disabled if he is determined by the Plan
fully-vested benefit to a Disabled Administrator to meet one or more of the following requirements:
Participant, choose B. If you choose
B, select (1), (2), (3), (4) or any (1) /X/ The Participant is receiving disability benefits under the
combination. If you select (4), Social Security Act as the result of total and permanent
complete the blank. disability.
(2) /X/ The Participant is receiving benefits under a disability
income plan maintained by the Employer as a result of
total and permanent disability.
(3) /X/ The Participant is determined by a physician chosen by the
Plan Administrator to be totally and permanently disabled.
(4) / / Other: _______.
<CAPTION>
COUNTING SERVICE
<S> <C> <C>
11. Choose A or B. If you choose A, 1.54 11. How Years of Service Will be Determined
Service is based on actual time spent
at work (or paid). If you choose B, A. /X/ Completed Hours of Service Method
Employees receive credit whenever
they are on the payroll, regardless of B. / / Elapsed Time Method
the actual amount of service performed.
12. Complete this Section if you count 1.08 12. Computation Periods
Hours of Service under the Completed
Hours of Service method. A. Eligibility Computation Period
A. Choose (1) or (2). If you choose The Computation Period for determining when an Employee becomes
(2), then you eliminate multiple an Eligible Employee begins on the Employee's Employment Date.
Computation Periods after the first Subsequent Computation Periods shall begin --
Computation Period, but Employees
can accumulate 2 (1) / / On the anniversary of the Employment
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C>
Years of Service for Date.
eligibility purposes
without the necessity (2) /X/ On the first day of the Plan Year,
of working 24 months. starting with the Plan Year that
includes the first anniversary of
the Employment Date.
B. Choose (1) or (2). B. Vesting Computation Period
If you choose (1),
each Employee has an The Computation Period that will be used
individual Computation to determine Years of Service for vesting
Period. purposes begins --
(1) / / On an Employee's Employment Date and
anniversaries of that date.
(2) /X/ On the first day of the Plan Year.
</TABLE>
ELIGIBILITY TO BECOME A PARTICIPANT
<TABLE>
<S> <C> <C>
13. Choose A or B. 1.15 13. Eligible Employee
A. An Eligible Employee is:
(1) / / Any Employee of the Employer.
(2) /X/ An Employee of the Employer
who meets all of the
requirements checked in (B)
and all of the requirements
checked in (C).
13B. Do not select an B. Age and Service Requirements *
Age requirement older
than 21. (1) /X/ Age 18.
Effect on Entry Date: (2) / / __ Year(s) of Service
If you choose anything
other than Age 20-1/2 (3) / / __ Month(s) of service
or younger and/or 6 (regardless of the number of Hours
months of service or of Service performed)
less, you must choose
at least two Entry (4) /X/ Other: 1,000 Hours of Service.
Dates in Sec. 14.
* EMPLOYEES EMPLOYED BY
THE EMPLOYER AS OF
AUGUST 1, 1996 SHALL
ENTER THE PLAN AS OF
THAT DATE.
C. Employment Status Requirements
(1) / / Paid on an hourly basis
</TABLE>
<PAGE> 7
(2) / / Not paid on an hourly basis
(3) / / Paid on a salaried basis
(4) / / Not paid on a salaried basis
(5) / / Represented for collective
bargaining purposes by any bargaining
unit for which retirement benefits have
been the subject of good faith
bargaining between any Employer and
employee representatives
(6) / / Not represented for collective
bargaining purposes by any bargaining
unit for which retirement benefits have
been the subject of good faith
bargaining between any Employer and
employee representatives
(7) If you choose (7), (7) / / Not covered under any other qualified --
select either (a),
(b) or both. (a) / / profit sharing plan to which
any Employer contributes
(b) / / pension plan to which any
Employer contributes
(8) / / Renders services at the
following location or division or
in the following positions:
_________.
14. Choose A, B, 1.21 14. Entry Date
C, or D.
A. / / The first day of the Plan Year
coinciding with or immediately following
the date on which an Employee becomes an
Eligible Employee.
B. / / The first day of the Plan Year
or the first day of the seventh month of
the Plan Year which coincides with or
immediately follows the date on which an
Employee becomes an Eligible Employee.
<PAGE> 8
<TABLE>
<S> <C> <C>
C. / / The first day of the Plan Year nearest the date on which
an Employee becomes an Eligible Employee.
D. /X/ Other: The January 1, April 1, July 1 or October 1 which
immediately follows the date on which an Employee becomes
an Eligible Employee.
15A Choose (1), (2) or (3). If you 3.02 15. Employee Deferral Contributions
chose (1), fill in the maximum
percentage (not exceeding 25%). A. A Participant may elect to make Employee Deferral Contributions
If you choose (2), fill in a to the Plan as follows:
dollar amount (not exceeding the
limit imposed by Section 402(g) (1) /X/ Up to 12% of the Member's Compensation.
of the Internal Revenue Code).
Note: Even if you do not choose (2) / / Up to $_____ per Plan Year.
(3), Before-Tax Contributions
are still subject to the limits (3) / / Up to the maximum amount permitted under the Plan.
contained in the Plan.
B. Specify the Election Period to which 1.14 B. Election Period means
a Participant's election of Employee
Deferral Contribution applies. If (1) / / The Plan Year
you choose (2) or (3), complete the
blanks. (2) / / The __ month period beginning on the first day of
each _____________.
(3) /X/ Other: The election period means the Plan Year.
However, changes in deferral elections may
also be made effective as of the beginning of each
quarter (January 1, April 1, July 1 or October 1).
<CAPTION>
EMPLOYER NON-ELECTIVE AND MATCHING CONTRIBUTIONS
<S> <C> <C>
16. A. and B. Choose one of the schedules 7.01 16. Vesting
listed in (1) through (7). If you
required more than 1 Year of Service A. Non-elective Employer Contributions: The following vesting
to participate, you must choose (1) schedule applies to the portion of a Participant's
or (2). If you choose (7), complete Individual Account attributable to Non-Elective Employer
the schedule using the percentages Contributions.
not less generous than (5) or (6).
Percentage Vested *
</TABLE>
<PAGE> 9
<TABLE>
<S> <C> <C>
* EMPLOYEES EMPLOYED BY THE Years of (1) (2) (3) (4) (5) (6) (7)
EMPLOYER AS OF AUGUST 1, 1996 Service / / / / / / / / / / / / /X/
SHALL BE IMMEDIATELY 100% VESTED
IN ALL BENEFITS UNDER THE PLAN. Less than 1 100% 0 0 0 0 0 0%
1 0 0 0 0 0 20%
2 100% 0 20 0 0 40%
3 100% 40 20 0 60%
4 60 40 0 80%
5 80 60 100% 100%
6 100% 80 100%
7 OR MORE 100% 100%
B. Matching Contributions: The following vesting schedule applies
to the portion of a Participant's Individual Account attributable
to Matching Contributions.
Percentage Vested *
Years of (1) (2) (3) (4) (5) (6) (7)
Service / / / / / / / / / / / / /X/
Less than 1 100% 0 0 0 0 0 0%
1 0 0 0 0 0 20%
2 100% 0 20 0 0 40%
3 100% 40 20 0 60%
4 60 40 0 80%
5 80 60 100% 100%
6 100% 80 100%
7 OR MORE 100% 100%
16C. Choose (1) or (2). C. In determining a Participant's nonforfeitable Individual Account
balance, Years of Service prior to the existence of the Plan
shall be disregarded.
(1) / / Yes
(2) /X/ No.
17. Choose either A or B. If you 17. The following vesting schedule applies to the Plan for any
choose A, complete the blank with Plan Year in which it is a Top-Heavy Plan:
the appropriate number of Years
of Service; this may not exceed A. / / 100% vesting after ___ (not to exceed 3)
3. If you choose B, complete all Years of Services.
of the blanks with the
appropriate B. / / ___% (not less than 20%) vesting after 2
</TABLE>
<PAGE> 10
Years of Service.
percentages; do not exceed
the percentages indicated. ___% (not less than 40%)
vesting after 3 Years
of Service.
THE REGULAR VESTING SCHEDULES
INDICATED ABOVE WILL ALSO BE IN ___% (not less than 60%)
EFFECT FOR PLAN YEARS DURING vesting after 4 Years
WHICH THE PLAN IS TOP HEAVY. of Service.
___% (not less than 80%)
vesting after 5 Years
of Service.
___% vesting after 6
Years of Service.
18. Choose A or B. If you 3.04 18. Matching Contributions
choose A, go to 19.
A. / / The Plan does not
provide for Matching
Contributions (go to
19).
If you choose B, choose a formula B. /X/ The Plan permits
in (1), (2) or (3). If you Matching
choose (2), specify the Contributions. The
percentage of Employee Deferral Matching Employer
Contributions which will be Contribution is:
matched. If you choose (3), specify
the percentages and amounts of the (1) /X/ An amount
Employee Deferral Contributions determined by the
which will be matched. Employer.
(2) / / ___% of the sum
of the employee
Deferral
Contributions made
for Participants
during the Plan
Year.
(3) / / ___% of the sum
of the first ___% of
Compensation
contributed by each
Participant as an
Employee Deferral
Contribution for the
Plan Year, plus ___%
of the next ___%
of Compensation
contributed by each
Participant as an
Employee Deferral
Contribution for the
Plan Year.
C. If you choose B, also choose C. In applying the formula
(1), (2) or (3) (you may choose described in B for a
both (2) and (3) as applicable). Plan Year, the
If you choose (3), fill in the following Employee
percentage. Deferral Contributions
made for the Plan Year
shall be considered:
(1) / / All Employee
Deferral
Contributions.
(2) / / All Employee
Deferral
Contributions
not withdrawn or
distributed
during the Plan
Year.
<PAGE> 11
<TABLE>
<S> <C>
(3) /X/ All Employee Deferral
Contributions which do
not exceed 6% of the
contributing Participant's
Compensation.
D. If you choose B, Choose (1), D. Matching Contributions will be
(2), (3) or (4). If you choose allocated to the following
(3) or (4), specify the Hours of Participants
Service necessary (not to
exceed 1000) to receive an (1) / / Each Participant who made
allocation of Matching Employee Deferral
Contributions for the Plan Year. Contributions for the Plan
In addition, you may also Year.
choose (5), if applicable.
(2) / / Each Participant described
in (1) who is in the
service of the Employer
on the last day of the
Plan Year.
(3) / / Each Participant described
in (1) who earned _____ or
more Hours of Service
during the Plan Year.
(4) /X/ Each Participant described
in (1) who is in the
service of the Employer on
the last day of the Plan
Year and who completes
1,000 or more Hours of
Service during the Plan
Year.
(5) /X/ Each Participant described
in (1) who dies, retires
or becomes disabled during
the Plan Year.
19. Complete A and if applicable, 3.03 19. Non-elective Employer Contributions
B, C and D.
A. The Plan provides for Non-
elective Employer Contributions
(1) / / No (go to 26)
(2) /X/ Yes (go to B)
B. Participants for Whom Non-
Elective employer Contributions
are Made
(1) Choose (a), (b) or (c). If (1) /X/ Basic Rules
you choose (b) or (c), insert the
number of Hours of Service that Non-Elective Employer
must be completed (not more than Contributions will be
1000). made for these
Participants:
(a) Each Participant who
is in the
</TABLE>
<PAGE> 12
<TABLE>
<S> <C>
service of the Employer on the
last day of the Plan Year.
(b) /X/ Each Participant who is in
the service of the Employer
on the last day of the Plan
Year and who completed
1,000 Hours of Service
during the Plan Year.
(c) / / Each Participant who completed
_____, Hours of Service during
the Plan Year.
(2) If you wish to make (2) Non-elective Employer Contributions will
Non-elective Employer also be made for each Participant whose
Contributions for service ended before the last day of the
Participants described Plan Year because of death, disability
in (a) and/or (b), or retirement.
then check the
appropriate box. (a) Yes
(b) No
19C. Choose a formula C. Non-elective Employer Contribution
based on Net Formulas
Profit in (1), a
discretionary formula The Non-elective Employer Contribution
in (2), or choose for each Plan Year is:
(3) and design your
own formula.
(1) Choose (a) or (b); (1) / / Net Profit Formula: an amount,
complete any blanks. not more than Net Profit, equal
to $__________.
(a) / / ___% of the Employer's
current Net Profit for
the Plan Year.
(b) / / ___ of the Employer's
current Net Profit for the
Plan Year above $__________.
(2) /X/ Discretionary Formula. The
amount determined by the
Employer.
(3) / / Other: ______________.
19D Choose a formula D. Allocation Formulas
based on Compensation
in (1) or choose (2) As of the last day of the Plan Year, the
and design your Non-elective Employer Contribution for
own formula. the Plan Year is allocated among the
Individual Accounts
</TABLE>
<PAGE> 13
of the Participants
described in A in this
amount:
(1) If Non-elective Employer (1) Proportion Based on
Contributions will be integrated Compensation
with Social Security, choose (b).
(a) /X/ Compensation
(not Integrated)
A fraction of
the Non-elective
Employer
Contribution
based upon the
Participant's
total
Compensation.
(b) Choose (i), (ii) or (iii) and (b) / / Compensation
fill in the applicable percentage (Integrated)
or dollar amount. (May not Choose the
exceed the Taxable Wage Base). Plan's
integration level
(i) / /the Taxable
Wage Base
(ii) / /___% (not
more than
100%) of
the Taxable
Wage Base
(iii) / /Compensation
in excess of
$_______ or
the Taxable
Wage Base,
whichever is
less
20. Choose A,B,C or D. (Choose D 3.09 20. Forfeitures
only if all Individual Accounts
are 100% vested at all times.) Forfeitures will be:
A. /X/ Allocated among
Participants'
Individual
Accounts in the
same way as an
Non-Elective
Employer
Contribution
B. / / Applied to reduce
Non-Elective
Employer
Contributions
C. / / Allocated among
the Individual
accounts of the
Participants in
proportion to
their
Compensation
D. / / Not applicable
21. Choose A or B. If you choose 3.02 21. Hardship Distributions
B, complete (1) and (2).
Hardship distributions
of Employee Deferral
Contributions:
A. / / Are not permitted
B. /X/ Are permitted
<PAGE> 14
(1) Choose (a) or (b). (1) The determination
of eligibility for a
distribution shall
be based
(a) /X/ only on the
safe harbor
condition
specified
in Section
3.2(h).
(b) / / on the safe
harbor
conditions
specified
in 3.2(h),
or on the
Plan
Administra-
tor's
determina-
tion that a
hardship
exists.
(2) Choose (a) or (b). If you (2) A distribution
choose (a), complete the dollar based on hardship
amount. must be at least
equal to:
(a) / / the lesser
of $____ or
100% of a
Partici-
pant's
Individual
Account
attribu-
table to
Employee
Deferral
Contribu-
tions.
(b) /X/ there is no
minimum
distribu-
tion amount.
22. Choose A or B. If you choose Article X 22. Loans
A, complete the applicable
portions of Appendix A. A. /X/ Loans are
permitted as
provided in
Article X of the
Plan and the loan
policies set
forth on Appendix
A.
B. / / Loans are not
permitted.
23. Fill in the applicable 1.51 23. Extra Valuation Dates
date(s).
In addition to the last
day of each Plan Year
and any other dates the
Plan Administrator
designates, each of the
following shall be a
Valuation Date: Daily.
24. Choose A or B. 5.01 24. When Benefit Payments
begin for Disabled
Participants
Benefits payable to a
Disabled Participant
will begin as soon as
practicable after the
first day of the month
following:
A. / / The date the
Participant
becomes a
Disabled
Participant.
<PAGE> 15
<TABLE>
<S> <C> <C>
B. /X/ The expiration of
other employer-
provided
disability benefit
payments (to the
extent that such
other benefits
provide for an
offset based upon
any benefits payable
from the Plan).
25. Choose A or B. 5.03, 6.02, 25. Immediate Distribution
7.03(a)
Participant who retires or
otherwise terminates
employment, or the
Beneficiary of a deceased
Participant, may elect to
receive the distributable
portion of the Individual
Account Balance as soon as
practicable following the
date of termination.
A. /X/ Yes
B. / / No
</TABLE>
ADDITIONAL ADOPTING EMPLOYERS
<TABLE>
<S> <C>
26. Any entities names shall be 26. In addition to the sponsor
considered an employer under named in 2, the following
the terms of the Plan, as of entities also adopt the Plan
the Effective Date noted for and Trust as of the Effective
such entity. Hours of Service Date noted for each such
for such entity and Compensation adopting entity:
received from such entity on or
after the Effective Date for A. Name of entity
such entity will be considered Midwest Loan Services,
Hours of Service and Compensation Inc.
under the terms of the Plan.
Address of entity
616 Sheldon Avenue
Houghton, MI 49931
Telephone (area code)
(906) 487-5870
Employer Identification
Number
38-3024363
Fiscal Year Ends on the
last day of December each
year.
Nature of business
Mortgage Servicing --
payments and collections
Form of Organization
(1) /X/ Corporation
</TABLE>
<PAGE> 16
<TABLE>
<S> <C>
(a) /X/ C Corporation
(b) / / S Corporation
(2) / / a Partnership
(3) / / a Sole Proprietorship
The Effective Date of this
Adoption Agreement and the Plan
and Trust Agreement (Plan) with
respect to this entity shall be
January 1, 1996.
If the Plan is a restatement,
the original Effective Date
with respect to this entity
was N/A.
B. Name of entity
Varsity Funding Services LLC
Address of entity
33493 14 Mile Road
Suite 20
Farmington Hills, MI 48331
Telephone (area code)
(810) 661-9036
Employer Identification Number
38-3256452
Fiscal Year Ends on the last
day of December each year.
Nature of business
Buy and Sell Mortgages
Form of Organization
(1) /X/ Corporation
(a) /X/ C Corporation
(b) / / S Corporation
(2) /X/ a Partnership
(3) / / a Sole Proprietorship
The Effective Date of this
Adoption Agreement and the
Plan and Trust Agreement
(Plan) with
</TABLE>
<PAGE> 17
<TABLE>
<S> <C>
respect to this entity shall be January 1, 1996.
---------------
If the Plan is a restatement, the original
Effective Date with respect to this entity
was N/A.
---
C. Name of entity
Varsity Mortgage LLC
--------------------
Address of entity
33493 14 Mile Road
------------------
Suite 20
--------
Farmington Hills, MI 48331
--------------------------
Telephone (area code)
(810) 661-9036
--------------
Employer Identification Number
38-3276419.
----------
Fiscal Year Ends on the last
day of December each year.
--------
Nature of business
Buy and Sell Mortgages
----------------------
Form of Organization
(1) /X/ Corporation
(a) /X/ C Corporation
(b) / / S Corporation
(2) / / a Partnership
(3) / / a Sole Proprietorship
The Effective Date of this
Adoption Agreement and the
Plan and Trust Agreement
(Plan) with respect to this
entity shall be January 1, 1996.
---------------
If the Plan is a restatement,
the original Effective Date
with respect to this entity was
N/A.
---
</TABLE>
<PAGE> 18
ADOPTION
By executing this Adoption Agreement, the Sponsor hereby establishes a salary
reduction 401(k) profit sharing retirement plan and trust, and the Sponsor and
each adopting Employer, now certify to the Trustee that it has secured legal
and tax advice as to the effect of this Adoption Agreement and the Plan and
Trust.
The Sponsor and each adopting Employer understand an application for a
determination letter approving this Adoption Agreement and the Plan and Trust
must be submitted to the appropriate District Director of the Internal Revenue
Service.
<PAGE> 19
SIGNATURE AND DATE
The Sponsor hereby agrees to be bound by all the terms and conditions of the
Adoption Agreement and the Plan and Trust this 1st day of August, 1996.
UNIVERSITY BANK
By: /s/ Mark Ouimet
--------------------------------------------------
(Signature of Sponsor's Authorized Representative)
Title: President - University Bank
The Trustee hereby accepts the Adoption Agreement and the Plan and Trust and
agrees to act as Trustee this 1st day of August, 1996.
By: /s/ Mark Ouimet
---------------------------------------------------
Title: President - University Bank
If additional adopting Employers are named in Section 26 such Employers agree
to be bound by all the terms and conditions of the Adoption Agreement and the
Plan and Trust, as evidenced by the signatures of such Employers' authorized
representative(s) below:
MIDWEST LOAN SERVICES, INC.
By: /s/ Mark Ouimet
---------------------------------------------------
Title: President - University Bank
Date: August 1, 1996
VARSITY FUNDING SERVICES LLC
By: /s/ Mark Ouimet
---------------------------------------------------
Title: President - University Bank
Date: August 1, 1996
VARSITY MORTGAGE LLC
By: /s/ Mark Ouimet
---------------------------------------------------
Title: President - University Bank
Date: August 1, 1996
<PAGE> 20
APPENDIX A
SPECIFIC LOAN PROVISIONS
The following provisions shall supplement or modify the provisions governing
Participant loans in Article X of the Plan (attach additional pages, if
necessary). To the extent not modified by this Appendix A, and to the extent
any of the following items are left blank, the provisions of Article X shall
continue to govern Participant loans. (Item 1 must be completed. Items 2
through 8 need to be completed only if the employer desires to supplement or
modify provisions contained in Article X of the Plan.)
1. Person or positions authorized to administer the Participant loan
program:
Mark Ouimet
2. Procedures for applying for loans:
___________________________________________________________________________
___________________________________________________________________________
3. Basis on which loans will be approved or denied:
___________________________________________________________________________
___________________________________________________________________________
4. Limitations (if any) in addition to limits in Article X on the types
and amounts of loans offered:
Loans are only permitted for educational, housing or medical purposes.
The Plan Administrator will determine whether a loan qualifies under
this provision and his determination shall be final.
5. Procedures for determining reasonable rate of interest:
___________________________________________________________________________
___________________________________________________________________________
6. Types of collateral (in addition to the maximum 50% of the Participant
vested Accrued Benefit) which may secure a participant loan:
___________________________________________________________________________
___________________________________________________________________________
7. Additional events constituting default:
___________________________________________________________________________
8. Additional steps that will be taken to preserve plan assets in the
event of such default:
___________________________________________________________________________
<PAGE> 21
FIRST AMENDMENT TO THE
UNIVERSITY BANK
401(k) PROFIT SHARING PLAN
WHEREAS, effective January 1, 1996, University Bank, Midwest Loan
Services, Inc., Varsity Funding Services LLC and Varsity Mortgage LLC
(hereinafter collectively referred to as the Employer") established the
University Bank 401(k) Profit Sharing Plan (hereinafter referred to as the
"Plan"); and
WHEREAS, the Employer wishes to amend the Plan to comply with Section
401(a)(17) of the Internal Revenue Code as amended by the Omnibus Budget
Reconciliation Act of 1993 (OBRA '93), to comply with Section 401(a)(31) of the
Internal Revenue Code and for other desired provision changes; and
WHEREAS, to accomplish this, the Employer now wishes to adopt the
provisions of the amendments contained in Revenue Procedures 94-13 and 93-12, as
published by the Internal Revenue Service;
NOW THEREFORE, effective January 1, 1996, the Employer hereby amends the
Plan as follows:
I. Section 1.07(c) shall be added to the Plan to read as follows:
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for
Plan Years beginning on or after January 1, 1994, the annual
Compensation of each Employee taken into account under the Plan shall
not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual
compensation limit is $150,000, as adjusted by the Commissioner for
increases in the cost of living in accordance with section 401(a)(17)(B)
of the Internal Revenue Code. The cost-of-living adjustment in effect
for a calendar year applies to any period, not exceeding 12 months, over
which Compensation is determined (Determination Period) beginning in
such calendar year. If a Determination Period consists of fewer than 12
months, the OBRA '93 annual compensation limit will be multiplied by a
fraction, the numerator of which is the number of months in the
Determination Period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under section 401(a)(17) of the Code shall
mean the OBRA '93 annual compensation limit set forth in this provision.
If Compensation for any prior Determination Period is taken into account
in determining an employee's benefits accruing in the current Plan Year,
the Compensation for that prior Determination Period is subject to the
OBRA '93 annual compensation limit in effect for that prior
Determination Period. For this purpose, for Determination Periods
beginning before the first day of the first Plan Year beginning on or
after January 1, 1994, the OBRA '93 annual compensation limit is
$150,000.
II. Section 4.01(a)(1) of the Plan shall be amended with the addition
of the following at the end of the section:
(C) "ADP" contributions shall not include Employee Deferral
Contributions distributed pursuant to Section 4.07(a) of the Plan.
III. Section 4.07(a) of the Plan shall be amended in its entirety to
read as follows:
(a) If, for any Limitation Year, an Excess Amount arises with respect
to a Participant as a result of (i) a reasonable error in
determining the amount of Employee Deferral Contributions, (ii) a
reasonable error in estimating a Participant's annual Compensation,
or (iii) through an allocation of forfeitures, or under such other
facts and circumstances as the Secretary of the Treasury or his
delegate finds justifies the availability of relief, any such
Excess Amount will be disposed of as follows.
<PAGE> 22
(1) Any nondeductible voluntary employee contributions and
any Net Gain thereon, to the extent they would reduce the Excess
Amount, will be returned to the Participant.
(2) Any Employee Deferral Contributions and any Net Gain
thereon, to the extent that they would reduce the Excess Amount,
will be returned to the Participant.
(3) If, after the application of paragraphs (1) and (2), an
Excess Amount still exists, and the Participant is covered by the
Plan at the end of the Limitation Year, the Excess Amount in the
Participant's Individual Account will be used to reduce Employer
Contributions (including any allocation of forfeitures) for such
Participant in the next Limitation Year, and each succeeding
Limitation Year if necessary.
(4) If, after the application of paragraphs (1), (2) and
(3), an Excess Amount still exists, and the Participant is not
covered by the Plan at the end of a Limitation Year, the Excess
Amount will be held unallocated in a suspense account. The
suspense account will be applied to reduce future Employer
Contributions for all remaining Participants in the next
Limitation Year, and each succeeding Limitation Year if
necessary.
(5) If a suspense account is in existence at any time
during a Limitation Year pursuant to the Section, it will not
participate in the allocation of Net Gain or Net Loss for the
Plan Year. If a suspense account is in existence at any time
during a particular Limitation Year, all amounts in the suspense
account must be allocated and reallocated to Participants'
Individual Accounts before any Employer Contributions may be made
to the Plan for that Limitation Year. Except to the extent
provided under paragraphs (1) and (2). Excess Amounts may not be
distributed to Participants or former Participants.
116
<PAGE> 23
IV. Section 9.08 shall be added to the Plan to read as follows:
(a) This Section 9.08 applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the Plan to the
contrary that would otherwise limit a Distributees' election under
this Section, a Distributee may elect, at the time and in the manner
prescribed by the Plan Administrator, to have any portion of an
Eligible Rollover Distribution paid directly to an Eligible
Retirement Plan specified by the Distributee in a Direct Rollover.
(b) Definitions:
(1) Eligible Rollover Distribution:
An Eligible Rollover Distribution is any distribution of all or
any portion of the balance to the credit of the Distributee,
except that an Eligible Rollover Distribution does not include:
any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the Distributee or the joint
lives (or joint life expectancies) of the Distributee and the
Distributee's designated Beneficiary, or for a specified period
of ten years or more; any distribution to the extent such
distribution is required under Section 401(a)(9) of the Code;
and the portion of any distribution that is not includible in
gross income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(2) Eligible Retirement Plan:
An Eligible Retirement Plan is an individual retirement account
described in section 408(a) of the Code, an individual
retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a
qualified trust described in section 401(a) of the Code, that
accepts the Distributees' Eligible Rollover Distribution.
However, in the case of an Eligible Rollover Distribution to the
Surviving Spouse, an Eligible Retirement Plan is an individual
retirement account or individual retirement annuity.
(3) Distributee:
A Distributee includes an Employee or former Employee. In
addition, the Employee's or former Employee's Surviving Spouse
and the Employee's or former Employee's Spouse or former Spouse
who is the alternate payee under a qualified domestic relations
order, as defined in section 414(p) of the Code, are
Distributees with regard to the interest of the Spouse or former
Spouse.
(4) Direct Rollover:
A Direct Rollover is a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee.
117
<PAGE> 24
(c) If a distribution is one to which sections 401(a)(11) and 417
of the Internal Revenue Code do not apply, such distribution may
commence less than 30 days after the notice required under section
1.411(a)-11(c) of the Income Tax Regulations is given, provided
that:
(1) The Plan Administrator clearly informs the Participant
that the Participant has a right to a period of at least 30 days
after receiving the notice to consider the decision of whether
or not to elect a distribution (and, if applicable, a particular
distribution option), and
(2) The Participant, after receiving the notice,
affirmatively elects a distribution.
V. In all other respects, the Plan shall remain unchanged.
118
<PAGE> 25
IN WITNESS WHEREOF, the Employer and the Trustee affix their signatures on
this 1st day of August, 1996.
UNIVERSITY BANK (EMPLOYER)
By: /s/ Mark Ouimet
----------------------------------
Title: President - University Bank
MIDWEST LOAN SERVICES, INC. (EMPLOYER)
By: /s/ Mark Ouimet
----------------------------------
Title: President - University Bank
VARSITY FUNDING SERVICES LLC (EMPLOYER)
By: /s/ Mark Ouimet
----------------------------------
Title: President - University Bank
VARSITY MORTGAGE LLC (EMPLOYER)
By: /s/ Mark Ouimet
----------------------------------
Title: President - University Bank
(TRUSTEE)
/s/ Jodi Getting
-------------------------------------
Corporate Secretary
University Bank
119
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,641,244
<INT-BEARING-DEPOSITS> 225,673
<FED-FUNDS-SOLD> 10,683,895
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,346,856
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 51,203,081
<ALLOWANCE> (297,783)
<TOTAL-ASSETS> 78,360,679
<DEPOSITS> 54,171,011
<SHORT-TERM> 18,941,266
<LIABILITIES-OTHER> 1,134,206
<LONG-TERM> 0
0
0
<COMMON> 12,954
<OTHER-SE> 4,101,242
<TOTAL-LIABILITIES-AND-EQUITY> 78,360,679
<INTEREST-LOAN> 2,821,007
<INTEREST-INVEST> 902,519
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,723,526
<INTEREST-DEPOSIT> 2,112,346
<INTEREST-EXPENSE> 2,732,713
<INTEREST-INCOME-NET> 990,813
<LOAN-LOSSES> 190,500
<SECURITIES-GAINS> 399,282
<EXPENSE-OTHER> 4,915,349
<INCOME-PRETAX> (895,516)
<INCOME-PRE-EXTRAORDINARY> (536,758)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (536,758)
<EPS-PRIMARY> (0.430)
<EPS-DILUTED> (0.480)
<YIELD-ACTUAL> 8.14
<LOANS-NON> 464,197
<LOANS-PAST> 289,719
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 317,185
<CHARGE-OFFS> 224,659
<RECOVERIES> 14,757
<ALLOWANCE-CLOSE> 297,783
<ALLOWANCE-DOMESTIC> 297,783
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
