<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
-------------- ---------------
Commission File Number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
(State of incorporation) (IRS Employer Identification Number)
959 Maiden Lane,
Ann Arbor, Michigan 48105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 741-5858
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.010 par value Outstanding at August 6, 1998
1,979,142 shares
page 1 of 33 pages
Exhibit index on sequentially numbered page 31
<PAGE> 2
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I - Financial Information
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Summary 10
Results of Operations 11
Liquidity and Capital Resources 22
Item 3. Quantitative and Qualitative Disclosure about Market Risk 24
PART II - Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 5. Other Information 26
Parent Company Condensed
Financial Information 27
Item 6. Exhibits & Reports on Form 8-K 30
Signature 30
Exhibit Index 31
</TABLE>
The information furnished in these interim statements
reflects all adjustments and accruals which are, in the opinion
of management, necessary for a fair statement of the results for
such periods. The results of operations in the interim statements
are not necessarily indicative of the results that may be
expected for the full year.
<PAGE> 3
3
Part 1. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and December 31,1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 2,014,048 $ 2,062,307
Federal funds sold 5,438,572 314,652
-------------------- --------------------
Total cash and cash equivalents 7,452,620 2,376,959
Securities available for sale at market 1,850,358 1,980,327
Loans held for sale 14,054,222 18,156,671
Loans 25,371,338 28,236,183
Allowance for Loan Loss (347,187) (520,953)
-------------------- --------------------
Loans, net 25,024,151 27,715,230
Premises and equipment 1,650,062 1,955,919
Mortgage servicing rights 1,206,806 1,430,190
Investment in and advances to
Michigan BIDCO 893,587 742,669
Other real estate owned 714,361 433,003
Other assets 2,276,265 2,737,815
-------------------- --------------------
Total other assets 6,741,082 7,299,596
-------------------- --------------------
TOTAL ASSETS $ 55,122,433 $ 57,528,783
==================== ====================
</TABLE>
-Continued-
<PAGE> 4
4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and December 31,1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------- -------------------
<S> <C> <C>
Liabilities
Deposits:
Demand - non interest bearing $ 2,140,718 $ 2,458,211
Demand - interest bearing 16,054,489 19,120,122
Savings 149,939 143,604
Time 23,002,170 23,545,234
------------------- -------------------
Total Deposits 41,347,317 45,267,171
FHLB advances 0 0
Mortgage escrow 241,055 86,686
Short term borrowings 0 2,744,188
Long term borrowings 1,579,435 1,749,070
Deferred noncompete income 49,570 67,072
Other liabilities 8,166,370 4,015,003
Minority Interest 201,072 201,149
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
Issued - 0 shares in both 1997 and 1996 - -
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 1,979,142 shares in 1998
and 1,984,396 shares in 1997 13,919 13,919
Treasury Stock - 124,863 shares in 1998
and 103,465 in 1997 (324,163) (302,446)
Additional Paid-in-Capital 3,546,599 3,493,154
Retained earnings 312,722 181,549
Net unrealized gain/(loss) on securities
available for sale, net of tax
of $6,320 in 1997, and
($5,731) in 1998. (11,462) 12,268
------------------- -------------------
Total Stockholders' equity 3,537,614 3,398,444
------------------- -------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 55,122,433 $ 57,528,783
=================== ===================
</TABLE>
<PAGE> 5
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the Periods Ended June 30, 1998, 1997
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended Period Ended
1998 1997 1998 1997
------------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 935,754 $ 1,071,185 $ 1,964,103 $ 2,031,354
Interest on securities:
U.S. Government agencies 15,182 90,178 30,214 184,772
Other securities 16,922 20,793 33,657 41,362
Interest on bank deposits 581 8,155 1,020 15,762
Interest on federal funds 41,762 76,515 69,419 140,662
------------------ ------------------- ------------------ ------------------
Total interest income 1,010,199 1,266,826 2,098,414 2,413,912
------------------ ------------------- ------------------ ------------------
Interest expense:
Interest on deposits:
Demand deposits 179,959 251,197 380,977 480,760
Savings deposits 959 4,266 1,871 10,703
Time certificates of deposit 385,649 425,857 766,167 813,783
Bank and other short term borrowings 28,284 163,037 60,563 324,523
Long Term Notes Payable 22,046 0 42,944 0
------------------ ------------------- ------------------ ------------------
Total interest expense 616,896 844,357 1,252,522 1,629,769
------------------ ------------------- ------------------ ------------------
Net interest income 393,303 422,469 845,891 784,143
Provision for loan losses 15,000 216,500 37,500 239,000
------------------ ------------------- ------------------ ------------------
Net interest income after
provision for loan losses 378,303 205,969 808,391 545,143
------------------ ------------------- ------------------ ------------------
Other income:
Net security gains 5,897 30,066 72,557 7,715
Service charges and fees 12,582 1,465 21,000 5,849
Mortgage banking income 1,098,707 1,225,690 2,224,943 2,672,048
Profit(loss) from equity investment in
Michigan BIDCO 119,924 38,704 160,489 43,522
Other 129,124 23,378 159,158 100,775
------------------ ------------------- ------------------ ------------------
Total other income 1,366,236 1,319,303 2,638,148 2,829,909
------------------ ------------------- ------------------ ------------------
</TABLE>
-Continued-
<PAGE> 6
6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
For the Periods Ended June 30, 1998, 1997
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended Period Ended
1998 1997 1998 1997
------------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Salaries and wages $ 1,016,869 $ 1,220,413 1,882,842 $ 2,074,035
Employee benefits 129,110 158,921 310,648 272,919
Occupancy, net 67,249 96,482 178,798 200,281
Taxes other than income 37,376 8,580 21,796 15,393
Data processing and equipment expense 64,102 99,736 140,265 195,309
Correspondent bank service charges 8,146 4,664 13,264 14,014
Advertising 24,310 27,217 48,502 63,290
Net expense of other real estate owned 29,908 (2,570) 31,070 (6,360)
Legal and audit expense 93,777 45,343 176,731 113,471
Other operating expenses 286,434 419,969 587,339 807,631
------------------ ----------------- ------------------ ------------------
Total other expenses 1,757,281 2,078,755 3,391,255 3,749,983
------------------ ----------------- ------------------ ------------------
Income (Loss) before income taxes (12,742) (553,483) 55,284 (374,931)
------------------ ----------------- ------------------ ------------------
Income taxes (benefit) (37,156) (226,970) (75,889) (173,052)
------------------ ----------------- ------------------ ------------------
Net Income (Loss) $ 24,413 $ (326,513) 131,173 $ (201,879)
================== ================= ================== ==================
Comprehensive Income (Loss) $ 27,573 $ (305,257) 107,443 $ (171,654)
================== ================= ================== ==================
Net Income (loss) per common share
Basic $ 0.01 $ (0.17) 0.07 $ (0.11)
================== ================= ================== ==================
Diluted $ 0.01 $ NA 0.07 $ NA
================== ================= ================== ==================
Weighted average shares outstanding
Basic 1,983,101 1,897,395 1,983,836 1,869,126
================== ================= ================== ==================
Diluted 1,987,275 NA 1,987,675 NA
================== ================= ================== ==================
</TABLE>
<PAGE> 7
7
UNIVERSITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the six-month periods ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------------- ------------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 131,173 $ (201,879)
Adjustments to reconcile net loss to net cash from Operating Activities:
Depreciation and amortization 292,031 201,559
Provision for loan loss 37,500 239,000
Mortgage loans originated for sale (325,194,338) (162,322,413)
Proceeds from sale of loans and mortgage backed trading securities 330,754,470 187,959,745
Net loss/(gain) on loan sales and securitization (1,457,583) (1,756,153)
Market adjustment on loans held for sale (100) 23,061
Net amortization/accretion on securities 5,099 9,198
Loss/(Gain) on sale of securities available for sale (72,557) (7,715)
Gain on Sale of Saline Office 99,903 -
Change in:
Investment in Michigan BIDCO, Inc. (150,918) (42,268)
Purchased Mortgage Servicing Rights - (116,236)
Other real estate (281,358) (331,491)
Increase in other assets 461,550 (843,524)
Increase/(Decrease) in other liabilities 4,146,801 193,597
-------------------- -------------------
Net cash from (used in) operating activities $ 8,771,673 $ 23,004,481
-------------------- -------------------
Cash flow from investing activities:
Purchase of securities available for sale - (1,890,921)
Proceeds from sales of securities available for sale 110,856 5,879,886
Proceeds from maturities and paydowns of securites available for sale 49,825 313,142
Loans granted net of repayments 2,653,579 (7,522,159)
Sale of Saline Office 189,480 -
Premises and equipment expenditures (52,173) (185,238)
-------------------- -------------------
Net cash from (used in) investing activities 2,951,567 (3,405,290)
-------------------- -------------------
Cash flow used in financing activities:
Net increase (decrease) in deposits (3,919,854) (1,246,565)
Net increase(decrease) in mortgage escrow accounts 154,369 (376,826)
Net increase (decrease) in other short term borrowings (2,744,188) (14,677,048)
Principal payment on notes payable (169,635) (25,000)
Issuance of common stock 31,729 549,013
-------------------- -------------------
Net cash from financing activities (6,647,579) (15,776,426)
-------------------- -------------------
Net change in cash and cash equivalents 5,075,661 3,822,765
Cash and cash equivalents:
Beginning of period 2,376,959 12,550,812
-------------------- -------------------
End of period $ 7,452,620 $ 16,373,577
==================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 1,193,516 $ 1,879,692
</TABLE>
<PAGE> 8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See note 1 of Notes to Financial Statements in the Company's 1997
Annual Report on Form 10-K, which should be read in conjunction with this
Report, for a summary of the Company's significant accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's 1997 Annual Report on Form 10-K. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year.
Under a new accounting standard, comprehensive income is now reported
for all periods. Comprehensive income includes net income and other
comprehensive income. Other comprehensive income includes the change in net
unrealized gains and losses on securities available for sale, net of tax.
(2) Available-for-sale Securities
The Bank's available-for-sale securities portfolio at June 30, 1998 had
a net unrealized loss of approximately $17,000 as compared with a net unrealized
loss of approximately $22,000 and $19,000 at March 31, 1998 and December 31,
1997. The securities portfolio continues to shrink to provide for increased loan
demand.
Securities available for sale
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $ 508 $ 5 $ -- $ 513
Other agency mortgage-backed 512 -- (22) 490
Other mortgage-backed -- -- -- --
U.S. agency equity 848 -- -- 848
Other equity -- -- -- --
- --------------------------------------------------------------------------------
Total investment securities
available for sale $1,868 $ 5 $(22) $1,851
====== === ==== ======
</TABLE>
<PAGE> 9
Securities available-for-sale (continued) 9
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $ 508 $ 7 $ -- $ 515
Other agency mortgage-backed 539 -- (29) 510
Other mortgage-backed -- -- -- --
U.S. agency equity 848 -- -- 848
Other equity -- -- -- --
- -------------------------------------------------------------------------------
Total investment securities
available for sale $1,895 $ 7 $(29) $1,873
====== === ==== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $ 509 $ 9 $ -- $ 518
Other agency mortgage-backed 561 -- (28) 533
U.S. agency equity 848 -- -- 848
Other equity 44 37 -- 81
- --------------------------------------------------------------------------------
Total securities
available for sale $1,962 $ 46 $(28) $1,980
====== ==== ==== ======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Report contains certain forward-looking statements which reflect
the Company's expectation or belief concerning future events that involves risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
mortgage banking and investment activities, and the nature and adequacy of
allowances for loan losses. The Company can give no assurance that the
expectations reflected in forward looking statements will prove correct. Various
factors could cause results to differ materially from the Company's
expectations. Among these factors are those referred to in the introduction to
the Company's Management Discussion and Analysis of Financial Condition and
Results of Operations which appears at Item 7. of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
<PAGE> 10
10
SUMMARY
For the six months ended June 30, 1998, net income of $131,173 was
realized versus a net loss of $201,879 in the same period in 1997. Net interest
income increased to $845,891 in the 1998 period from $784,143 in the 1997
period, and other income was $2,638,148 in the 1998 period versus $2,829,909 in
the 1997 period. Operating expenses decreased to $3,391,255 in the 1998 period
from $3,749,983 in the 1997 period. Basic and diluted net income per share in
the six months ended June 30, 1998 was $0.07 and $0.07, compared to basic net
loss per share of $0.11 for the six months ended June 30, 1997.
For the three months ended June 30, 1998, net income of $24,413 was
realized versus a net loss of $326,513 in the same period of 1997. Net interest
income decreased to $393,303 in the 1998 period from $422,469 in the 1997
period, and other income was $1,366,236 in the 1998 period versus $1,319,303 in
the 1997 period. Other operating expense decreased to $1,757,281 in the 1998
period from $2,078,755 in the 1997 period. Decreased operating expenses at the
Bank in the 1998 period combined with increased profitability at Varsity
Mortgage was responsible for the increase in net income during the period.
The net income in the 1998 periods was primarily the result of a
management change at the Bank which occurred in mid-November 1997. At the Bank
itself, total other expenses were $900,000 lower in the first half of 1998 than
in the 1997 period, on an annualized basis. Profitability was also assisted by
income and continued growth at the Bank's mortgage banking subsidiary, Varsity
Mortgage, and a profit at Michigan BIDCO.
Profitability at the Bank in the first half of 1998 was restrained by
higher amortization of mortgage servicing rights ($144,800 in the 1998 period)
due to lower long term mortgage interest rates, losses realized upon the sale of
previously foreclosed residential real estate ($30,887 in the 1998 period), and
legal expense associated with a suit the Bank brought against the RTC.
Conversely, results of the Bank in the first half of 1997 were assisted by the
realization of a $395,356 gain on the sale of some residential mortgage loans
purchased in 1995 from the RTC. 1997 results were also negatively impacted by a
$239,000 provision for allowance for loan losses.
During the first half of the year, Michigan BIDCO was able to realize
capital gains on the disposition of several of its portfolio investments, and
had a 42% annualized return on equity, which is unlikely to be repeated in the
second half of 1998.
The results of Midwest Loan Services during the 1998 period were
negatively impacted by higher amortization of its own portfolio of mortgage
servicing rights ($78,545 in the 1998 period) due to lower long term mortgage
interest rates.
<PAGE> 11
11
The following table summarizes the pre-tax income of each profit center
of the Company for the six months ended (in thousands):
<TABLE>
<CAPTION>
PRE-TAX INCOME (LOSS) SUMMARY 1998 1997
<S> <C> <C>
Banking
Community & mortgage banking $(349) (500)
Midwest Loan Services 0 37
Varsity Mortgage & Varsity Funding 295 148
Equity in the earnings of Michigan BIDCO 152 44
Corporate Office ( 43) (104)
---- ----
Total $ 55 $(375)
</TABLE>
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased from $422,469 for the three months ended
June 30, 1997 to $393,303 for the three months ended June 30, 1998. Net interest
income fell from the year ago period because of a decrease in the average yield
of mortgage loans held for sale (as a result of a restructuring of the Bank's
agreement with the management of Varsity Mortgage) which more than offset a
decrease in the percentage cost of interest bearing liabilities, and the average
balance of total interest bearing liabilities. The yield on interest earning
assets decreased to 8.23% in the 1998 period from 9.73% in the 1997 period. The
cost of interest bearing liabilities decreased from 5.89% in the 1997 period to
5.64% in the 1998 period, causing net interest income as a percentage of total
earning assets to increase to 3.26% from 3.20% in the 1997 period.
For the six month period ended June 30, 1998, net interest income
increased to $845,891 from $784,143 in the 1997 period. The yield on interest
earning assets decreased from 9.43% in the 1997 period to 8.57% in the 1997
period. The cost of interest bearing liabilities decreased from 5.90% in the
1997 period to 5.69% in 1998 period, resulting in an increase in net interest
income as a percent of total average earning assets from 3.09% to 3.46%.
Interest income
Interest income decreased to $1,010,199 in the quarter ended June 30,
1998 from $1,266,826 in the quarter ended June 30, 1997. The average volume of
interest earning assets decreased from $52,054,913 in the 1997 period to
$49,221,909 in the 1997 period, an decrease of 5.4%. The decreased volume of
earning assets was due to a 54.9% decline in investment securities, which more
than offset a 7.9% increase in loans. Interest income decreased as a result of
an decrease in earning assets and the yield on earning assets. The overall yield
on earning assets decreased from 9.73% to 8.23%, as more earning assets were
invested in loans, and the yield on real estate mortgages held for sale
decreased due to a restructuring of the Varsity Mortgage agreement in mid-1997.
<PAGE> 12
12
Interest income decreased in the six months ended June 30, 1998 to
$2,098,414 from $2,413,912 in the six months ended June 30, 1997. The average
volume of interest earning assets decreased to $49,350,711 in the 1998 period
from $51,221,509 in the 1997 period, a decrease of 3.7%. The decrease in
interest income was attributable to the decrease in the volume of earning assets
and a decrease in the average yield on earning assets. The overall yield on
earning assets decreased to 8.57% from 9.43%, as more earning assets were
invested in loans, and the yield on real estate mortgages held for sale
decreased due to a restructuring of the Varsity Mortgage agreement in mid-1997.
The average volume of investment securities in the three months ended
June 30, 1998 decreased 54.9% over the same periods in 1997, as the Bank's
portfolio, which consists of adjustable rate agency backed mortgage securities,
was liquidated and the funds used to repay higher cost wholesale borrowings. In
the six month period, the average volume of securities and investments decreased
63.0% over the same period in 1997, as the Bank sold investment securities to
repay higher cost wholesale borrowings. The yield on the securities portfolio
decreased to 6.84% in the three month period ended June 30, 1998 from 8.49% in
the 1997 period. The yield on the securities portfolio decreased to 6.79% in the
six month period ended June 30, 1998 from 7.05% in the 1997 period. The decrease
in yields in both periods was the result of a higher amortization rate on the
portfolio's mortgage-backed securities as a result of higher prepayment activity
due to lower long term interest rates.
Interest Expense
Interest expense decreased from $844,357 in the three months ended June
30, 1998 to $616,896 in the 1997 period. The decrease was due to a decrease in
interest bearing liabilities as a result of a decrease in wholesale funds and
borrowings, and to a lesser extent, the discontinuation of the Canadian Dollar
savings accounts, a decrease in money market deposit accounts, and a decrease in
the cost of funds. The cost of funds decreased from 5.89% in the 1997 period to
5.64% in the 1998 period. The decrease in rates was due to a relative increase
in retail deposits versus wholesale deposits. The average volume of interest
bearing liabilities decreased 23.3% in the 1998 period versus the 1997 period.
In the six month periods ending June 30, 1998 and 1997, interest
expense decreased from $1,629,769 in 1997 to $1,252,522 in the 1998 period. The
decrease was due to the same factors as in the three months periods discussed
above. The cost of funds decreased from 5.90% in the 1997 period to 5.69% in the
1998 period. The average volume of interest bearing liabilities decreased 20.3%
in the 1998 period versus the 1997 period.
<PAGE> 13
13
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------- -----------
1998 1997
--------------------------------------------------------------- -----------
Interest Average
Average Income/ Yield/ Average
Balance Expense Rate Balance
<S> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits $ 28,917 $ 581 8.05% $ 672,605
Federal Funds Sold 3,093,405 41,761 5.41% 4,535,797
Securities:
Non-taxable (1) - - - -
Taxable 1,881,386 32,104 6.84% 5,875,726
--------- ---------- ----- ------------
Total Securities & S. T. Investments 5,003,708 74,445 5.97% 11,084,128
--------- ---------- ----- ------------
Loans:
Commercial 10,321,293 266,102 10.34% 12,821,639
Real Estate Mortgage 29,161,304 552,377 7.60% 23,567,143
Installment/Consumer 4,735,604 117,275 9.93% 4,582,003
--------- ---------- ----- ------------
Total Loans 44,218,201 935,754 8.49% 40,970,785
---------- ---------- ----- ------------
Total Interest Bearing Assets 49,221,909 1,010,199 8.23% 52,054,913
---------- ---------- ----- ------------
Less allowance for possible
loan losses & deferred fees (493,190) (333,842)
-------- ------------
48,728,719 51,721,071
Mortgage servicing rights 1,280,697 2,412,980
Non earning assets 8,514,488 6,553,457
--------- ------------
Total Assets $ 58,523,903 $ 60,687,508
=============== ============
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 2,810,869 $ 28,939 4.13% $ 2,978,844
Savings 125,537 786 2.51% 110,009
Canadian Dollar Savings 30,535 172 2.26% 605,963
Time 25,689,394 385,649 6.02% 26,752,691
Borrowed Funds 1,828,123 28,284 6.21% 8,791,209
Money Market Accounts 12,444,507 151,020 4.87% 16,951,616
Holding Company Debt 905,644 22,046 9.76% 940,000
------- ---------- ----- ------------
Total interest bearing
liabilities $ 43,834,608 616,896 5.64% $ 57,130,332
=============== ========== ===== ============
Net interest income $ 393,303
==========
Weighted average rate spread 2.59%
=====
Net yield on average earning
assets 3.20%
<CAPTION>
Three Months Ended June 30,
-----------------------------
1997
-----------------------------
Interest Average
Income/ Yield/
Expense Rate
<S> <C> <C>
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits $ 8,155 4.85%
Federal Funds Sold 62,823 5.54%
Securities:
Non-taxable (1) - -
Taxable 124,663 8.49%
------- -----
Total Securities & S. T. Investments 195,641 7.06%
------- -----
Loans:
Commercial 267,756 8.35%
Real Estate Mortgage 688,784 11.69%
Installment/Consumer 114,645 10.01%
------- -----
Total Loans 1,071,185 10.46%
--------- -----
Total Interest Bearing Assets 1,266,826 9.73%
--------- -----
Less allowance for possible
loan losses & deferred fees
Mortgage servicing rights
Non earning assets
Total Assets
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 36,167 4.87%
Savings 690 2.52%
Canadian Dollar Savings 3,576 2.37%
Time 425,857 6.38%
Borrowed Funds 139,710 6.37%
Money Market Accounts 215,030 5.09%
Holding Company Debt 23,327 9.95%
------ ----
Total interest bearing
liabilities 844,357 5.89%
======= ====
Net interest income $ 422,469
=========
Weighted average rate spread 3.84%
====
Net yield on average earning
assets 3.26%
</TABLE>
(1) Actual yields; not adjusted for tax-equivalent yields
(2) For purposes of computing average yields on the loan portfolio as presented
in the above analysis, loans on non-accrual status are included in the
average loan balances.
<PAGE> 14
14
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------
Interest Average
Average Income/ Yield/ Average
Balance Expense Rate Balance
<S> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits $ 28,551 1,020 7.21% $ 669,191
Federal Funds Sold 2,448,922 69,419 5.72% 4,736,243
Securities:
Non-taxable (1) - - - -
Taxable 1,896,315 63,872 6.79% 6,415,145
------------ ------------ ----- -----------
Total Securities & S. T. Investments 4,373,788 134,311 6.19% 11,820,579
------------ ------------ ----- -----------
Loans:
Commercial 11,447,870 615,832 10.85% 11,876,210
Real Estate Mortgage 28,812,183 1,109,965 7.77% 23,321,137
Installment/Consumer 4,716,870 238,306 10.19% 4,203,583
------------ ------------ ----- -----------
Total Loans 44,976,923 1,964,103 8.81% 39,400,930
------------ ------------ ----- -----------
Total Interest Bearing Assets 49,350,711 2,098,414 8.57% 51,221,509
------------ ------------ ----- -----------
Less allowance for possible
loan losses & deferred fees (510,180) (273,879)
------------ -----------
48,840,531 50,947,630
Mortgage servicing rights 1,333,518 2,403,974
Non earning assets 7,853,130 6,010,802
------------ -----------
Total Assets $ 58,027,179 $59,362,406
============ ===========
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 2,700,019 $ 62,258 4.65% $ 2,820,842
Savings 119,568 1,490 2.51% 111,064
Canadian Dollar Savings 34,704 381 2.21% 783,683
Time 25,558,611 766,167 6.05% 26,044,926
Borrowed Funds 1,903,090 60,563 6.42% 8,959,182
Money Market Accounts 13,158,365 318,719 4.88% 16,050,196
Holding Company Debt 914,118 42,944 9.47% 937,500
------------ ------------ ----- -----------
Total interest bearing
liabilities $ 44,388,475 1,252,522 5.69% $55,707,393
============ ------------ ===== ===========
Net interest income $ 845,891
Weighted average rate spread ============ 2.88%
Net yield on average earning =====
assets 3.46%
<CAPTION>
Six Months Ended June 30,
-----------------------------
1997
-----------------------------
Interest Average
Income/ Yield/
Expense Rate
<S> <C> <C>
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits 15,762 4.71%
Federal Funds Sold 140,662 5.94%
Securities:
Non-taxable (1) - -
Taxable 226,134 7.05%
---------- -----
Total Securities & S. T. Investments 382,558 6.47%
---------- -----
Loans:
Commercial 530,920 8.94%
Real Estate Mortgage 1,291,963 11.08%
Installment/Consumer 208,471 9.92%
---------- -----
Total Loans 2,031,354 10.31%
---------- -----
Total Interest Bearing Assets 2,413,912 9.43%
---------- -----
Less allowance for possible
loan losses & deferred fees
Mortgage servicing rights
Non earning assets
Total Assets
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 68,643 4.91%
Savings 1,384 2.51%
Canadian Dollar Savings 9,319 2.40%
Time 813,783 6.30%
Borrowed Funds 277,788 6.25%
Money Market Accounts 412,117 5.18%
Holding Company Debt 46,735 10.05%
---------- ------
Total interest bearing
liabilities 1,629,769 5.90%
---------- ------
Net interest income $ 784,143
==========
Weighted average rate spread 3.58%
Net yield on average earning =====
assets 3.09%
</TABLE>
(1) Actual yields; not adjusted for tax-equivalent yields
(2) For purposes of computing average yields on the loan portfolio as presented
in the above analysis, loans on non-accrual status are included in the
average loan balances.
<PAGE> 15
15
MONTHLY AVERAGE BALANCE SHEET AND
INTEREST MARGIN ANALYSIS
The following tables summarize monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated yield
or cost and the net return on earning assets for the three and six months ended
June 30, 1998 and 1997.
Allowance for Loan Losses
The monthly allowance for loan loss remained at a rate of $7,500 in the
second quarter of 1998, although the May monthly allowance was not accrued by
management as a result of favorable trends in the non-performing loans, the
loans closely monitored by management and the overall loan portfolio of the
Bank.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses $ 15,000 $ 216,500 $ 37,500 $ 239,000
Loan charge-offs (219,472) (16,731) (225,028) (17,772)
Recoveries 4,354 19,427 13,761 23,045
--------- --------- --------- ---------
Net increase (decrease)
in allowance ($200,118) $ 219,196 $(173,767) $ 244,273
========= ========= ========= =========
At At At
June 30, March 31, December 31,
1998 1998 1997
-------------------------------------------------
Total loans (1) $25,371,449 $27,137,300 $28,236,184
Reserve for loan losses 347,187 547,304 520,953
Reserve/Loans, % (1) 1.37% 2.02% 1.84%
</TABLE>
(1) Excludes loans held for sale.
Economic conditions in the Bank's primary market area in Ann Arbor were
strong in the period. The Sault Ste. Marie and Newberry areas appear not to be
growing. Less than 5.5% of the Bank's loans now relate to credits located in the
Upper Peninsula of Michigan.
Management believes that the current reserve level and the ongoing
reserve for loan losses is adequate to absorb losses inherent in the loan
portfolio, although the ultimate adequacy of the reserve is dependent upon
future economic factors beyond the Company's control. A downturn in the general
nationwide economy will tend to aggravate, for example, the problems of local
loan customers currently facing some difficulties, and could decrease
residential home prices. A general nationwide business expansion could
conversely tend to diminish the severity of any such difficulties. Since most of
the Bank's non-performing assets relate to homes, the future value of homes in
the Bank's primary market area, and to a lesser extent in other areas
<PAGE> 16
16
nationwide where the non-performing assets are located, will also be a major
factor in determining the ultimate adequacy of the reserve.
The following schedule summarizes the Company's nonperforming loans for
the periods indicated:
<TABLE>
<CAPTION>
At At At
June 30, March 31, December 31,
1998 1998 1997
-----------------------------------
<S> <C> <C> <C>
Past due 90 days and over
and still accruing:
Real estate 118,350 45,140 233,697
Installment 29,260 55,531 5,556
Commercial 52,071 43,699 295,643
------- ------- -------
Subtotal 199,681 144,370 534,896
Nonaccrual loans:
Real estate 343,808 397,381 532,821
Installment - - 44,409
Commercial - 34,255 9,479
------- ------- -------
Subtotal 343,808 431,636 586,709
Other real estate
owned (2) 714,361 1,002,903 433,003
-- ------- --------- -------
Total 1,257,850 1,578,909 1,554,608
As % of loans (1) 4.96% 5.82% 5.51%
Ratio of reserve for loan
losses to all loans
90 days and over 60.3% 95.0% 46.5%
</TABLE>
(1) Excluding loans held for sale.
Other real estate owned at June 30, 1998, March 31, 1998 and December
31, 1997 includes a commercial development site in Sault Ste. Marie, Michigan.
Based upon its assessment of current market conditions, management believes the
16-acre site where a former loan office is located has a fair market value
substantially more than its carrying cost of $266,079. This property is carried
as other real estate owned in the Company's financial statements since it is
surplus to the Bank's requirements. While it is management's goal to sell this
site, there is no assurance that a sale will be consummated.
With the exception of one commercial real estate building carried at
$35,000 and sold subsequent to June 30, 1998, and an interest in a second
commercial building carried at less than $3,000, all of the other real estate
owned, other than the property mentioned above, consists of residential single
family properties. The non-performing residential single family properties and
loans mainly relate to single family residential loans originated for the
secondary market which have become delinquent and are either under modification
agreements to bring the loans current or in the process of foreclosure. Based
upon
<PAGE> 17
17
management's review of appraisal information and current broker price opinions,
management believes that the Bank is well secured with respect to these loans
and the other real estate owned. Other real estate owned is carried at
the lower of cost or fair value less estimated costs to sell. During the
quarter ended June 30, 1998, the Bank accepted offers to sell nearly all of its
remaining other real estate owned in the Upper Peninsula as part of an overall
effort to wind-down the Bank's activities there, resulting in charge-offs of
approximately $20,000. If the Bank is successful in winding up its loan
servicing activities in the Upper Peninsula, the Bank may be able to reduce or
offset all or a portfio of the operating expenses of its Newberry loan
servicing office, which are currently approximately $70,000 per year.
Non-Interest Income
Total non-interest income increased to $1,366,236 for the three months
ended June 30, 1998 from $1,319,303 for the three months ended June 30, 1997.
The increase was principally a result of an increase in profit from Michigan
BIDCO and a gain on sale of surplus real estate, which offset a decrease in
mortgage banking income. Mortgage banking income in the 1997 period was
increased by the realization of a $395,356 gain on the sale of some residential
mortgage loans purchased in 1995 from the RTC.
Total non-interest income decreased from $2,829,909 for the six months
ended June 30, 1997 to $2,638,148 for the six months ended June 30, 1998. The
decrease was principally a result of the same factors which increased
non-interest income as in the three month periods discussed above.
Securities. Taking into account realized and unrealized gains and
losses on the securities portfolio, during the first half of 1998, the yield on
the Company's investment securities portfolio was 10.62%. During the three and
six months ended June 30, 1998, there were no securities sales from the Bank's
available-for-sale securities portfolio. During the three months ended June 30,
1998, the Company realized a $5,897 gain on a final liquidating distribution.
In the six months ended June 30, 1998, gains of $72,557 were realized by the
Company. Gross proceeds from these sales were $116,652.
Mortgage Banking. Mortgage banking income decreased to $1,098,707 in
the three months ended June 30, 1998 from $1,225,690 in the three months ended
June 30, 1997. Increased income from mortgage banking activity from higher
origination volume was more than offset by increased amortization of the
Company's mortgage servicing rights portfolio as a result of increased
refinancing activity due to lower long term interest rates.
Mortgage banking income decreased to $2,224,943 in the six months ended
June 30, 1998 from $2,672,048 in the six months ended June 30,
<PAGE> 18
18
1997. The decrease in mortgage banking income during the 1998 period versus the
1997 period was principally a result of the same factors as in the three month
periods discussed above. In addition, mortgage banking income in the 1997 period
was increased by the realization of a $395,356 gain on the sale of some
residential mortgage loans purchased in 1995 from the RTC.
At June 30, 1998, the Bank and its subsidiaries owned the right to
service $106,652,178 of FHLMC mortgages for others, of which approximately 60%
was owned by Midwest Loan Services, and the remainder by the Bank. The following
table summarizes the portfolio by type and mortgage note rate:
Interest Rate Stratification of the Company's Servicing
($ in 000s) FIXED RATE - BY MATURITY
----------------------------------
Mortgage Rate (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 267 -- 215 1,740
8.50 - 8.99 4,865 -- 481 3,921
8.00 - 8.49 4,814 -- 940 12,733
7.50 - 7.99 1,332 63 3,560 34,368
7.00 - 7.49 668 -- 7,213 16,351
6.50 - 6.99 -- 174 4,680 6,419
6.00 - 6.49 -- -- 885 964
under 6.00 -- -- -- --
------ ------ ------ ------
11,946 237 17,974 76,496
Current market
interest rates 6.50% 7.00% 7.00% 7.13%
Average annual
servicing fee 0.39% 0.28% 0.26% 0.26%
Short term interest rates have been very stable for nearly twenty-nine
months, a record in the post-war period. Long term interest rates fell to levels
in the first quarter of 1998 which have prompted increased refinancing activity.
As a result, the portfolio is experiencing increased refinancings and payoffs,
which hurts income. In the three and six months ended June 30, 1998, $144,611
and $223,345, respectively, was charged to income to amortize the Company's
servicing rights. 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 is slightly above cost.
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.
<PAGE> 19
19
At June 30, 1998, the Bank had outstanding purchase commitments to buy
single family secondary market qualifying mortgage loans of $39,917,850 and
outstanding forward commitments to deliver secondary mortgage qualifying loans
of $27,873,300, substantially all of which commitments were for delivery within
three months or less.
Servicing Rights Held by the Company
<TABLE>
<CAPTION>
(amounts in $000s) June 30, March 31, December 31,
1998 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Total servicing 106,652 116,795 124,719
Book value of servicing 1,207 1,351 1,430
Estimated market value
of servicing:
Management estimate (1) 1,237 1,354 1,440
Discounted cash flow (2) 1,346 1,465 1,583
Estimated excess of market
over book value (3) 139- 31 114- 3 153- 10
</TABLE>
(1) Assumes a price based upon market transactions at June 30, 1998, March 31,
1998 and December 31, 1997 of 4.6x (4.6 times the servicing fee) for 30-year
servicing, 3.5x for 15-year servicing, 1.9x for Balloon servicing and 2.0x
for ARM servicing. Excess servicing is discounted from these amounts at a
multiple of one times the servicing fee.
(2) Uses net present value analysis of future cash flows, discounted back at
rates ranging from 10 to 12%.
(3) Range based upon the two methods used in (1) and (2), above.
During the six month period ended June 30, 1998 purchases and sales of
mortgage servicing rights by third-parties evidenced a slight decrease in price
because of a decrease in long term interest rates.
RTC Loan Pool. In mid-March 1995, the Bank purchased four Participation
Certificates in sub-performing home equity loans with approximately $6,600,000
in unpaid principal balance and $1,000,000 of unpaid accrued interest from a
private investor group (which had purchased them from the Resolution Trust
Corporation (RTC)) for approximately $1,903,000 (the "RTC Loan Pool"). In
September 1996 an additional $700,000 in home equity loans purchased from a home
equity loan originator were added to the RTC Loan Pool as a fifth Participation
Certificate at a cost of $115,000.
Substantially all of the remaining loans underlying the first four
Participation Certificates were sold as of March 28, 1997 for $1,725,000. As a
result the Bank's investment in the RTC Loan Pool was reduced to zero, and the
balance of the proceeds from the sale, per the terms of the RTC Loan Pool
acquisition agreement, was split 50/50 with the servicer of the RTC Loan Pool.
In addition, in March 1998, the Bank sold all the remaining loans underlying the
five Participation Certificates for $200,000, generating a gain for the Bank of
$100,000.
In mid-1996, the servicer submitted a request to the RTC for a $650,000
refund of loans that had previously been paid off, but were
<PAGE> 20
20
included in the RTC Loan Pool, pursuant to the original purchase agreement. If
received, this amount would be split 50/50 with the RTC servicer of the RTC Loan
Pool. In April 1997, the servicer was notified that the RTC had accepted the
refund request in the amount of $300,000 with a request for additional
information regarding the remaining $350,000. After the additional information
was submitted, the RTC rejected the claim entirely. As a result, the Bank filed
a lawsuit in late October 1997 against the RTC in the U.S. District Court for
the District of Columbia seeking recovery of the requested $650,000 refund. In
March 1998, the Bank filed an amended and reduced refund request in the amount
of $505,000, plus interest from mid-March 1995 at the applicable statutory rate
of 12%. If additional proceeds are realized from the RTC, any of the amounts
received would also be split 50/50 with the former servicer of the RTC Loan
Pool, and any amount received by the Bank would be income. Both sides recently
submitted summary judgement briefs in the matter, and a decision from the U.S.
District Court is anticipated in the near future.
Michigan BIDCO. Michigan BIDCO (the "BIDCO") invests in businesses in
Michigan with the objective of fostering job growth and economic development.
The Bank owns 280 shares of common stock in the BIDCO, currently representing a
44.1% equity interest. The Company's consolidated fully diluted ownership in the
BIDCO is 15.6%, after considering the impact of convertible bonds.
As of June 30, 1998, the BIDCO had made investments in twenty-seven
unrelated entities, amounting to a total of $13,413,600 at original cost (before
repayments or participations sold). At June 30, 1998, the BIDCO had total
unaudited assets of $5,658,100.
For the three and six months ended June 30, 1998 and 1997, the Bank's
44.1% equity share in the BIDCO's reported net income was $119,924 and $160,489
and $38,704 and $43,522, respectively. The BIDCO's income in the 1998 periods
was increased by the realization of capital gains in several BIDCO equity
investments, including the sale of an interest in an ABC-TV affiliate and a
Railroad boxcar leasing entity.
Michigan BIDCO makes its investments in the form of loans or direct
equity investments, or a combination thereof. The BIDCO's limit on its
investment in one borrower is currently $500,000, and the BIDCO arranges
participations for investments in excess of this amount. By management policy,
the Bank is restricted from investing or lending to a business that the BIDCO
finances. The BIDCO typically receives warrants or participation rights in the
companies in which it invests. To date, investments (at original investment
cost) have been made in the following types of businesses:
<PAGE> 21
21
Michigan BIDCO, investments:
Total Equity
Industry Investment Participation?
#1 ABC-TV affiliate $1,472,000 repurchased
#2 Adult foster care 40,000 no
#3 Bridal shop 64,000 no
#4 Cable TV 545,000 yes
#5 Children's clothing manufacturer 200,000 repurchased
#6 Commercial laundry 180,000 no
#7 Environmental engineering 100,000 repurchased
#8 Fishing supplies 50,000 no
#9 Home health care 20,000 no
#10 Hunting supplies 100,000 no
#11 Industrial supply 85,000 no
#12 Limited service hotels 738,600 yes
#13 Manufacturing 200,000 no
#14 Manufacturing 200,000 no
#15 Manufacturing 200,000 no
#16 Metal manufacturing 80,000 no
#17 Paper converting 2,762,000 yes
#18 Plastic injection molding 2,000,000 repurchased
#19 Plastic mold manufacturing 25,000 no
#20 Railcar parts manufacturing 125,000 no
#21 Railroad boxcar leasing 1,500,000 no
#22 Recreational services 160,000 no
#23 Recycled paper pulp mill 780,000 yes
#24 Residential mortgage subservicing 450,000 repurchased
#25 Secured credit card issuer 540,000 no
#26 Tissue paper mill 700,000 yes
#27 Truck maintenance 70,000 no
-----------
Total $13,413,600
===========
The loans associated with investments #1, 2, 5, 6, 7, 9, 13, 18, 19, 21
and 24 have been repaid in full. Loan participations have been sold in loans
associated with investments #1, 3, 4, 6, 10, 11, 17, 18, 21, 23 and 27. At June
30, 1998, the BIDCO had no outstanding conditional commitments to lend.
Northern Michigan Foundation. In 1995 and 1996, the BIDCO donated
$300,000 to capitalize Northern Michigan Foundation (the "Foundation"). The
BIDCO and the Foundation share administrative staffs and offices, with the
Foundation reimbursing the BIDCO for these services. The monthly management fee
paid by the Foundation to the BIDCO is currently approximately $16,000. As a
result of its capitalization by the BIDCO, the Foundation was able to borrow a
total of $2,000,000 from the U.S. Department of Agriculture's Rural Development
Service ("USDA RDS") at 1% interest with a 30 year term. As of June 30, 1998,
the Foundation had a portfolio of $1,083,000 of loans to thirteen borrowers,
with $338,750 undrawn and available for lending from the USDA RDS loan, and cash
available for relending from paid off loans and the Foundation's initial equity
capital of $842,000.
<PAGE> 22
22
Non-Interest Expense
Non-interest expense decreased from $2,078,755 in the three months
ended June 30, 1997 to $1,757,281 for the three months ended June 30, 1998. The
increase was the result of an annualized $900,000 decrease in expenses at the
Bank as a result of cost-control measures implemented by new management, which
was only partially offset by ongoing expansion of business at Varsity Mortgage,
Varsity Funding and Midwest Loan Services. Non-interest expense in the 1997
second quarter also reflects $145,000 in one-time additional profit-sharing
expense at Varsity Mortgage resulting from a restructuring of the Varsity
Mortgage operating agreement.
Non-interest expense decreased from $3,749,983 in the six months ended
June 30, 1997 to $3,391,255 for the six months ended June 30, 1998. The decrease
was principally a result of the same factors as in the three month periods
discussed above.
Non-interest operating expense for only the parent company decreased to
$23,319, for the three month 1998 period from $95,486 for the 1997 period.
Legal, public listing and ESOP benefit expenses were lower in the 1998 period.
Non-interest operating expense for only the parent company decreased from
$131,577 for the six month 1997 period to $89,876 for the 1998 period. Legal,
audit, public listing and other expenses were lower in the 1998 period. The
annual ESOP benefit expense was expensed in the first quarter of 1998 and not
the second quarter as it was in 1997, because the Company completed its annual
ESOP analysis earlier in 1998 than in 1997.
Year 2000 Readiness. Reference is made to the discussion under
"Non-Interest Income and Non-Interest Expense - Year 2000 Readiness" under Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operation, in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, for a discussion of matters pertaining to Year 2000 Issues
affecting the Company and the Bank. Peerless Group is ready to ship to the Bank
a fully Year 2000 compliant software update and testing module. The Bank intends
to perform the update procedure and testing in the third quarter of 1998. The
Bank's total budget for Year 2000 readiness is approximately $53,000, of which
approximately one quarter is now spent, and the bulk is projected to be spent by
year-end 1998. The Bank is currently scheduling testing with outside vendors and
expects to complete testing in early 1999. There is no assurance that certain
mission critical vendors such as the Federal Reserve Bank, local power and phone
utilities will be Year 2000 compliant by year-end 1999, and if they are not this
could have a material adverse effect on the Company's operations, and the
Company's borrowers and customers.
Liquidity and Capital Resources
Capital Resources. The table on the following page sets forth the
Bank's risk based assets, and the capital ratios and risk based capital ratios
of the Bank. At June 30, 1998, the Bank was well capitalized (the required ratio
for "well capitalized" was 5% of total assets (Leverage), 6% (Tier 1) of
risk-based assets, and 10% (Tier 1 and 2) of
<PAGE> 23
23
University Bank
Risk Adjusted Assets & Risk Adjusted Capital Ratio
June 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Balance Risk Weighted
0% RISK CATEGORY Sheet (000) Assets (000)
Mort-Backed Sec Guaran by GNMA 2 -
Currency & Coin 132 -
Federal Reserve Balance 52 -
----------------------------------
TOTAL 186 -
20% RISK CATEGORY
Interest-bearing Balances 87 17
Fed Funds Sold 5,439 1,088
U.S. Gov't sponsored Agency Sec 1,000 200
Other Mortgage-Back Securities - -
Cash Items 243 49
FHLB Stock 848 170
Balances due from depository Inst 1,500 300
----------------------------------
TOTAL 9,117 1,823
50% RISK CATEGORY
Qualifying 1st liens on 1-4 family 25,508 12,754
----------------------------------
TOTAL 25,508 12,754
100% RISK CATEGORY
ALL OTHER ASSETS 20,235 20,235
ON BALANCE SHEET ITEMS EXCLUDED FROM CALCULATION 121
TOTAL ASSETS 55,167 34,812
==================================
TIER 1 CAPITAL Balance
Common Stock 200
Surplus 4,262
Undivided Profits & Capital Reserves (317)
Minority Interest 201
Other identifiable Intangible Assets (121)
Total Tier 1 Capital 4,225
TIER 2 CAPITAL
Allowance for loans & Lease losses 347
Excess LLR (limited to 1.25% gross risk-weighted assets -
TOTAL TIER 2 CAPITAL 347
TOTAL TIER 1 & TIER 2 CAPITAL 4,572
TIER 1/TOTAL ASSETS 7.66%
TIER 1 & 2/TOTAL ASSETS 8.29%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 12.14%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 13.13%
</TABLE>
<PAGE> 24
24
risk-based assets).
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, the sale of loans held for
sale, and borrowings from correspondent lenders secured by securities and/or
residential mortgage loans. In addition, the Bank invests in overnight Federal
Funds. At June 30, 1998, the Bank had cash and due from banks and fed funds on
hand of $7,452,620. The Bank has an unused $5,000,000 line of credit secured by
investment securities and portfolio residential mortgage loans and a line of
credit from a correspondent secured by mortgage loans for sale to the secondary
market. In order to bolster liquidity, the Bank has also sold brokered CDs from
time to time.
Parent Company Liquidity. At year-end 1997, University Bancorp, Inc.
held cash and marketable equity securities of $123,180. This decreased by
$36,251 to $86,929 at June 30, 1998. The decrease in cash and marketable equity
securities was due to the amortization of the Company's indebtedness, which was
only partially offset by the realization of capital gains on the Company's
securities available for sale.
During the six months ended June 30, 1998 no dividends were paid from
the Bank, as a result of low profitability at the Bank. Dividends from the
Company's bank subsidiary together with earnings from the cash and marketable
equity securities held by the parent company are the principal sources of cash
used to fund the parent company's indebtedness owing to North Country Bank &
Trust ("NCB&T"), which amounted to $889,688 at June 30, 1998 and $922,688 at
December 31, 1997. The NCB&T note calls for fully amortizing principal payments
of $33,000 per quarter beginning May 15, 1998 through maturity in 2004.
Management believes that the cash and securities on hand and federal tax refunds
receivable are currently sufficient to cover expected required principal
reductions during 1998 on the holding company's loan.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market Risk
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
Falling long term and short term interest rates tend to decrease the
value of the Bank's and Midwest Loan Services' investment in mortgage servicing
rights and decrease the Bank's and Midwest Loan Services' current return on such
rights by increasing required amortization rates on the rights. Falling long and
short term interest rates also decreases origination activity at Varsity Funding
as residential lenders focus on refinancing activity rather than borrowers
<PAGE> 25
UNIVERSITY BANK 25
Asset/Liability Position Analysis 06/30/98
($ 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 5,439 0 0 0 0 5,439
Loans (1) 2,544 3,786 6,436 2,633 0 15,399
Canadian Investments 0 0 0 0 0 0
Securities Available for Sale 1,015 0 2 850 0 1,867
Securities held for Sale 0 0 0 0 0 0
Loans held for Sale 14,054 0 0 0 0 14,054
Matured Loans 700 0 0 0 0 700
Variable Rate Loans 8,571 0 0 0 0 8,571
Other Assets 0 1,287 0 3,336 0 4,623
Fixed Assets 0 0 0 1,650 0 1,650
Cash and Due from Banks 0 762 0 1,200 0 1,962
Overdrafts 10 0 0 0 0 10
Non-Accrual Loans 0 0 0 344 0 344
Discount FHA Title 1 0 0 0 0 0 0
Valuation Adjustment 0 0 0 0 0 0
---- ---- ---- ---- ---- ----
TOTAL ASSETS 32,333 5,835 6,438 10,013 0 54,619
LIABILITIES
CD's over $100,000 1,947 8,153 769 0 0 10,869
CD's under $100,000 4,209 6,147 1,721 56 0 12,133
MMDA 13,125 0 0 0 0 13,125
NOW 2,965 0 0 0 0 2,965
Demand 0 413 0 2,021 0 2,434
Savings 0 137 0 0 0 137
Canadian Savings 0 13 0 0 0 13
Other Liabilities 0 8,446 0 363 0 8,809
Borrowings 0 0 0 0 0 0
Equity 0 0 0 4,134 0 4,134
---- ---- ---- ---- ---- ----
TOTAL LIABILITIES 22,246 23,309 2,490 6,574 0 54,619
GAP 10,087 (17,474) 3,948 3,439 0 0
CUMULATIVE
GAP 10,087 (7,387) (3,439) 0 0
GAP
PERCENTAGE 18.47% -13.52% -6.30% 0.00% 0.00%
</TABLE>
Notes:
(1) Net of bad debt reserves.
<PAGE> 26
26
who need alternative sources of funding outside of traditional secondary market
loans. However, falling interest rates tends to increase new mortgage
origination activity, positively impacting current income from the Bank's retail
mortgage banking operations and Varsity Mortgage's operations. Falling interest
rates also increases Midwest Loan Services' rate of growth, but decreases the
duration of its existing subservicing contracts. The table on the preceeding
page details the Bank's asset/liability sensitivity as of June 30, 1998.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties are
subject.
Item 5. Other information
Annual Meeting Shareholder Proposals
Under SEC Rule 14a-4(c)(1), if a proposal is to be submitted for a vote at the
Company's next annual meeting of stockholders and the proposal is not submitted
for inclusion in the Company's proxy statement and proxy card in compliance with
the processes of SEC Rule 14a-8, then, if the Company does not have notice of
the proposal at least 45 days before the date on which the Company first mailed
its proxy materials for the prior year's annual meeting (or any earlier or later
date specified in any overriding advance notice provision in the Company's
certificate of incorporation or by-laws), proxies solicited by the Company may
confer discretionary authority to vote on the proposal. Therefore, the date
after which a notice of a proposal submitted outside the processes of Rule 14a-8
will be considered untimely with respect to the Company's 1999 annual meeting of
stockholders is March 1, 1999.
Parent Company Condensed Financial Information
Certain condensed financial information with respect to
University Bancorp, Inc. follows:
<PAGE> 27
27
UNIVERSITY BANCORP, INC. (The Parent)
Condensed Balance Sheets
June 30, 1998 and December 31,1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------------- ----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 86,929 $ 41,676
Securities available for sale 0 81,504
Michigan BIDCO senior debentures 200,470 200,916
Investment in subsidiary Bank 4,133,615 3,958,927
Other Assets 858,114 879,328
--------------------- ----------------------
Total Assets $ 5,279,128 $ 5,162,351
===================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 889,688 $ 922,688
Accounts payable and other liabilities 851,825 841,219
--------------------- ----------------------
Total Liabilities 1,741,513 1,763,907
Stockholders Equity 3,537,614 3,398,444
--------------------- ----------------------
Total Liabilities and Stockholders Equity $ 5,279,127 $ 5,162,351
===================== ======================
</TABLE>
<PAGE> 28
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 28
Condensed Statements of Operations and Comprehensive Income
For the Periods Ended June 30, 1998, 1997
(Unaudited)
<TABLE>
<CAPTION>
For Three Month For Three Month For Six Month
Period Ended Period Ended Period Ended
1998 1997 1998
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary - $ - -
Securities Gain 5,897 18,089 72,557
Other $ 17,845 6,730 $ 17,745
--------------------- --------------------- ----------------------
Total Income 23,742 24,819 90,302
Expense:
Interest 22,046 23,327 42,944
Public Listing Expense 9,770 40,452 17,676
Benefits (1,030) 36,322 53,665
Legal/Accounting 4,125 16,576 6,673
Other 10,454 2,136 11,862
--------------------- --------------------- ----------------------
Total Expense 45,365 118,813 132,820
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (21,623) (93,994) (42,518)
Federal income taxes (benefit) 0 (12,882) 0
--------------------- --------------------- ----------------------
Income (loss) before equity in
undistributed net income of subsidiaries (21,623) (81,112) (42,518)
Equity in undistributed net income (loss)
of subsidiaries. 46,036 (245,401) 173,691
--------------------- --------------------- ----------------------
Net Income $ 24,413 $ (326,513) $ 131,173
===================== ===================== ======================
Comprehensive Income $ 27,573 $ (305,257) $ 107,443
===================== ===================== ======================
Net Income per Common Share
Basic $ 0.01 $ (0.18) $ 0.07
===================== ===================== ======================
Diluted $ 0.01 $ NA $ 0.07
===================== ===================== ======================
</TABLE>
<TABLE>
<CAPTION>
For Six Month
Period Ended
1997
---------------------
<S> <C>
Income:
Dividends from subsidiary $ -
Securities Gain 41,155
Other 11,302
---------------------
Total Income 52,457
Expense:
Interest 46,735
Public Listing Expense 42,905
Benefits 36,322
Legal/Accounting 32,254
Other 20,096
---------------------
Total Expense 178,312
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (125,855)
Federal income taxes (benefit) (21,682)
---------------------
Income (loss) before equity in
undistributed net income of subsidiaries (104,173)
Equity in undistributed net income (loss)
of subsidiaries. (97,706)
---------------------
Net Income $ (201,879)
=====================
Comprehensive Income $ (171,654)
=====================
Net Income per Common Share
Basic $ (0.11)
=====================
Diluted $ NA
=====================
</TABLE>
<PAGE> 29
UNIVERSITY BANCORP, INC. (The Parent) 29
Condensed Statement of Cash Flows
For the Three Month Periods Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Reconciliation of net income (loss) to net cash used in
operating activities:
Net Income (Loss) $ 131,172 $ (201,879)
Loss(gain) on sale of investments (72,557) (41,155)
Decrease/(increase) in receivable from affiliate 21,215 607,353
Decrease/(increase) in Other Assets 0 (566,284)
Increase(Decrease) in interest payable (31,770) 5,384
Increase(Decrease) in other liabilities 61,851 (113,078)
Decrease(Increase) investment in subsidiaries (174,242) 97,706
------------------- -------------------
Net cash provided by (used in) operating activities (64,331) (211,953)
------------------- -------------------
Cash flow from investing activities:
Subsidiary dividends received 0 0
Contributions of capital to subsidiary 0 (350,000)
Advances to Michigan BIDCO 0 0
Purchase of available for sale securities 0 (55,309)
Proceeds from sale of available for sale securities 110,856 138,895
------------------- -------------------
Net cash provided by (used in) investing activities 110,856 (266,414)
------------------- -------------------
Cash flow from financing activities:
Principal payment on notes payable (33,000) (25,000)
Proceeds from sale of common stock 53,445 512,691
Purchase of treasury stock (21,717) 0
------------------- -------------------
Net cash provided by (used in) financing activities (1,272) 487,691
------------------- -------------------
Net changes in cash and cash equivalents 45,253 9,324
Cash and cash equivalents:
Beginning of year 41,676 41,113
------------------- -------------------
End of period $ 86,929 $ 50,437
=================== ===================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 32,960 $ 29,629
</TABLE>
<PAGE> 30
30
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1.1 Certificate of Amendment, dated June 10, 1998, of the
Company's Certificate of Incorporation.
11. Computation of Per Share Earnings.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: August 14, 1998 /s/ Donald F. Rositano
-------------------------
Donald F. Rositano
Chief Financial Officer
(On behalf of the registrant
and as
Principal Financial Officer)
<PAGE> 31
31
Exhibit Index
------------- Sequentially
Numbered
Page
------------
3.1.1 Certificate of Amendment, dated
June 10, 1998, of the Company's
Certificate of Incorporation. 32
11. Computation of per share earnings 35
27. Financial Data Schedule 36
<PAGE> 1
EXHIBIT 3.1.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
UNIVERSITY BANCORP, INC.
The undersigned, being the President and Secretary of
University Bancorp, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), do hereby certify as follows:
1. The name of the Corporation is University Bancorp, Inc.
2. The date of filing of the original Certificate of
Incorporation of the Corporation is December 19, 1986.
3. The Certificate of Incorporation of the Corporation is
hereby amended by amending and restating Article FOURTH thereof to read in its
entirety as follows:
FOURTH. The Corporation shall be authorized to issue two
classes of capital stock to be designated, respectively,
"Common Stock" and "Preferred Stock"; the total number of
shares which the Corporation shall have the authority to issue
is Five Million Five Hundred Thousand (5,500,000); the total
number of shares of Common Stock shall be Five Million
(5,000,000) and each such share shall have a par value of
$0.01; and the total number of shares of Preferred Stock shall
be Five Hundred Thousand (500,000) and each such share shall
have a par value of $0.001. Any shares of the Preferred Stock
may be issued from time to time in one or more series for such
consideration as may be fixed from time to time by the Board
of Directors of the Corporation. Before any shares of
Preferred Stock of any particular series will be issued, a
certificate will be filed with the Secretary of State of
Delaware setting forth the designation, rights, privileges,
restrictions, and conditions to be attached to the Preferred
Stock of such series and such other matters as may be
required, and the Board of Directors will fix and determine,
in the manner
<PAGE> 2
provided by law, the particulars of the shares of such series,
including, but not limited to, the number of shares of such
series, the dividends payable on shares of such series,
whether shares of such series shall have voting rights,
whether shares of such series shall have conversion
privileges, whether or not the shares of such series shall be
redeemable, whether such series shall have a sinking fund for
the redemption or purchase of shares of that series, the
rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of
payment of shares of that series; and any other relative
rights, preferences and limitations of such series.
4. The amendment of the Certificate of Incorporation of the
Corporation herein certified has been approved and adopted pursuant to Section
242 of the General Corporation Law of the State of Delaware.
5. The capital of the Corporation will not be reduced under or
by reason of any amendment herein certified.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this certificate as
of the 10th day of June, 1998.
Stephen Lange Ranzini
--------------------------------
Stephen Lange Ranzini, President
ATTEST:
Joseph Lange Ranzini
- ----------------------------
Joseph L. Ranzini, Secretary
<PAGE> 1
Exhibit 11. Reconciliation of Basic and Diluted Earnings Per Share 35
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED JUNE 30, FOR SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
EARNINGS PER SHARE
Net Income available to common shareholders 24,413 (326,513) 131,173 (201,879)
========= ========= ========= =========
Weighted average common shares outstanding 1,983,101 1,897,395 1,983,836 1,869,126
========= ========= ========= =========
EARNINGS PER SHARE $ 0.01 $ (0.17) $ 0.07 $ (0.11)
========= ========= ========= =========
EARNINGS PER SHARE ASSUMING DILUTION
Net Income available to common shareholders 24,413 NA 131,173 NA
========= ========= ========= =========
Weighted average common shares outstanding 1,983,101 NA 1,983,836 NA
========= =========
Add: dilutive effects of assumed exercises:
Incentive Stock Options 4,174 NA 3,839 NA
--------- ========= --------- =========
Weighted average common and dilutive potential common
shares outstanding 1,987,275 NA 1,987,675 NA
========= ========= ========= =========
EARNINGS PER SHARE ASSUMING DILUTION $ 0.01 NA $ 0.07 NA
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,926,845
<INT-BEARING-DEPOSITS> 87,202
<FED-FUNDS-SOLD> 5,438,572
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,850,358
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 39,425,560
<ALLOWANCE> (347,187)
<TOTAL-ASSETS> 55,122,433
<DEPOSITS> 41,347,317
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,795,375
<LONG-TERM> 1,579,435
13,919
0
<COMMON> 0
<OTHER-SE> 3,523,695
<TOTAL-LIABILITIES-AND-EQUITY> 55,122,433
<INTEREST-LOAN> 1,964,103
<INTEREST-INVEST> 134,311
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,098,414
<INTEREST-DEPOSIT> 1,149,016
<INTEREST-EXPENSE> 1,252,522
<INTEREST-INCOME-NET> 845,892
<LOAN-LOSSES> 37,500
<SECURITIES-GAINS> 72,577
<EXPENSE-OTHER> 3,391,254
<INCOME-PRETAX> 55,284
<INCOME-PRE-EXTRAORDINARY> 55,284
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131,173
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<YIELD-ACTUAL> 3.46
<LOANS-NON> 343,808
<LOANS-PAST> 199,681
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,027,172
<ALLOWANCE-OPEN> 520,953
<CHARGE-OFFS> 225,027
<RECOVERIES> 13,761
<ALLOWANCE-CLOSE> 347,187
<ALLOWANCE-DOMESTIC> 347,187
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 59,660
</TABLE>
