<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, 1999
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, $0.01 par value Outstanding at August 12, 1999
1,989,139 shares
page 1 of 33 pages
Exhibit index on sequentially numbered page 32
<PAGE> 2
2
Form 10-Q
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements PAGE
Consolidated Balance Sheets 3
Consolidated Statements of operations 5
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Summary 10
Results of Operations 11
Liquidity and Capital Resources 23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 25
PART II - Other Information
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of
Security Holders 26
Item 5. Other Information
Parent Company Condensed
Financial Information 26
Item 6. Exhibits & Reports on Form 8-K 31
Signature 31
Exhibit Index 32
The information furnished in these interim statements reflects all
adjustments and accruals which are, in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
<PAGE> 3
Part 1. - Financial Information 3
Item I.- Financial Statements
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets
June 30,1999 and December 31, 1998
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Cash and due from banks $ 1,658,419 $ 703,015
Short term investments 5,132 8,543,000
------------- ------------
Total cash and cash equivalents 1,663,550 9,246,015
Securities available for sale at market 2,517,737 2,945,832
Federal Home Loan Bank Stock 848,400 848,400
Michigan Bidco equity security investments 0 -
Loans held for sale 13,285,254 11,862,665
Loans 27,720,968 23,652,103
Allowance for Loan Loss (500,111) (459,001)
------------- ------------
Loans, net 27,220,857 23,193,102
Premises and equipment 1,455,031 1,439,440
Mortgage servicing rights 722,053 948,208
investment in and advances to
Michigan BIDCO - 725,733
Other real estate owned 566,022 707,730
Net tax assets 240,187 377,088
Accounts receivable 352,188 1,198,661
Other assets 2,241,097 1,042,684
------------- ------------
TOTAL ASSETS $ 51,112,377 $ 54,535,558
============= ============
</TABLE>
-Continued-
<PAGE> 4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 4
Consolidated Balance Sheets (continued)
June 30, 1999 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand - non interest bearing $ 2,078,102 $ 1,801,347
Demand - interest bearing 13,814,330 16,373,832
Savings 197,596 177,093
Time 19,387,327 24,867,369
------------- -----------
Total Deposits 35,477,355 43,219,641
Mortgage escrow 140,651 140,673
Short term borrowings 4,988,181 277,000
Long term borrowings 1,407,097 1,196,097
Deferred noncompete income 14,566 32,068
Drafts payable 3,277,605 5,065,281
Accounts payable 1,395,467 744,928
Accrued Interest payable 387,844 415,060
Other Liabilities 1,180,479 157,081
------------- -----------
Total Liabilities 48,269,245 51,247,829
Minority Interest 446,589 204,949
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
Issued - 0 shares in both 1999 and 1998 -- --
Common stock, $0.01 par value;
Authorized - 2,500,000 shares:
Issued - 2,104,323 shares in 1999
and 2,104,323 shares in 1998 21,043 21,043
Treasury Stock - 115,184 shares in 1999
and 115,184 in 1998 (340,530) (340,530)
Additional Paid-in-Capital 3,736,463 3,539,474
Retained earnings (deficit) (694,861) (16,500)
Net unrealized gain/(loss) on securities
available for sale, net of tax
of $219,395 in 1999, and
$62,182 in 1998 (425,572) (120,707)
------------- -----------
Total Stockholders' equity 2,396,543 3,082,780
------------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 51,112,377 $ 54,535,558
============= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 5
Consolidated Statements of Operations
For the Periods Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended Period Ended
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 734,751 $ 935,754 1,518,345 $ 1,964,103
Interest on securities:
US Government agencies 23,073 15,182 56,812 30,214
Other securities 15,122 16,922 33,657 33,657
Interest on bank deposits 584 581 1,089 1,020
Interest on federal funds 3,776 41,762 52,025 69,419
----------- ------------ ----------- ------------
Total interest income 777,336 1,010,201 1,661,929 2,098,413
----------- ------------ ----------- ------------
Interest expense:
Interest on deposits:
Demand deposits 139,182 179,959 303,565 380,977
Savings deposits 1,103 959 2,225 1,871
Time certificates of deposit 252,714 385,649 567,977 766,167
Bank and other short term borrowings 30,200 28,284 32,682 60,563
Long Term Notes Payable 59,844 22,046 76,944 42,944
----------- ------------ ----------- ------------
Total interest expense 483,042 616,897 983,393 1,252,522
----------- ------------ ----------- ------------
Net interest income 294,294 393,304 678,536 845,891
Provision for loan losses 22,500 15,000 45,000 37,500
----------- ------------ ----------- ------------
Net interest income after
provision for loan losses 271,794 378,303 633,536 808,391
----------- ------------ ----------- ------------
Other income:
Net security gains(losses) 7,531 5,897 (15,477) 72,557
Service charges and fees 16,426 12,582 29,945 21,000
Mortgage banking income 489,998 1,096,707 1,222,410 2,224,943
Profit(loss) from equity investment in
Michigan BIDCO 0 119,924 2,690 160,489
Insurance and investment fee income 28,476 12,036 47,863 33,595
Other 250,906 117,088 298,471 125,563
----------- ------------ ----------- ------------
Total other income 793,337 1,366,234 1,585,902 2,638,147
----------- ------------ ----------- ------------
</TABLE>
-Continued-
<PAGE> 6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 6
Consolidated Statements of Operations (continued)
For the Periods Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended Period Ended
1999 1998 1999 1998
-------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Salaries and wages $ 654,205 $ 1,016,869 1,380,204 $ 1,882,842
Employee benefits 119,326 129,110 255,610 310,648
Occupancy, net 113,119 67,249 214,708 178,798
Taxes other than income 77,766 37,376 70,026 21,796
Data processing and equipment expense 76,353 64,102 162,020 140,265
Correspondent bank service charges 3,315 8,146 6,626 13,264
Advertising 27,154 24,310 69,003 48,502
Net expense of other real estate owned 17,105 29,908 25,592 31,070
Legal and audit expense 67,905 93,777 134,693 176,731
Other operating expenses 264,486 286,434 490,814 587,339
-------------- ------------ ----------- -----------
Total other expenses 1,420,734 1,757,281 2,809,298 3,391,255
-------------- ------------ ----------- -----------
Income (Loss) before income taxes (355,603) (12,744) (589,860) 55,283
-------------- ------------ ----------- -----------
Income taxes (benefit) (300) (37,156) (11,500) (75,889)
-------------- ------------ ----------- -----------
Net Income (loss) $ (355,303) $ 24,412 (578,360) $ 131,172
============== ============ =========== ===========
Comprehensive Income (loss) $ (540,361) $ 27,573 (719,234) $ 107,443
============== ============ =========== ===========
Earnings (loss) per common share
Primary $ (0.18) $ 0.01 (0.29) $ 0.07
============== ============ =========== ===========
Fully Diluted $ (0.18) $ 0.01 (0.29) $ 0.07
============== ============ =========== ===========
Weighted average shares outstanding
Primary 1,989,139 1,983,101 1,989,139 1,983,836
============== ============ =========== ===========
Fully Diluted 1,989,139 1,987,275 1,989,139 1,987,675
============== ============ =========== ===========
</TABLE>
<PAGE> 7
UNIVERSITY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements Of Cash Flows For the
six-month periods ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income (lose) $ (578,361) $ 131,173
Adjustments to reconcile net loss to net cash from Operating Activities:
Depreciation and amortization 222,802 292,031
Provision for loan loss 45,000 37,500
Mortgage loans originated for sale (176,817,107) (325,194,338)
Proceeds from sale of loans and mortgage trading securities 176,090,056 330,754,470
Net loss (gain) on low sales and securitization (693,226) (1,457,583)
Market adjustment on loans held for Note (3,032) (100)
Net amortization/accretion on securities 32,806 5,099
Loss/(Gain) on sale of securities available for sale 825 (72,557)
Gain on Sale of Saline Office 0 99,903
Change in;
investment in Michigan BIDCO, Inc. 725,733 (160,918)
Purchased Mortgage Servicing Rights 119,019
Other real estate 141,708 (281,368)
Increase In other assets (215,039) 461,550
Increase/(Decrease) In other liabilities (507,164) 4,146,801
------------ ------------
Net cash from (used in) operating activities $ (1,435,460) $ 8,771,673
------------ ------------
Cash flow from investing activities:
Purchase of securities available for sale (494,101) --
Proceeds from sales of securities available for sale 504,098 110,956
Proceeds from maturities and paydowns of securities available for sale 428,509 49,825
Loans granted not of repayments (4,072,755) 2,653,579
Sale of Saline Office 0 189,480
Premises and equipment expenditures (131,257) (52,173)
------------ ------------
Net cash from (used in) investing activities (3,765,506) 2,951,597
------------ ------------
Cash flow used in financing activities:
Net Increase (decrease) In deposits (7,742,288) (3,919,854)
Net Increase (decrease) in mortgage escrow accounts (22) 154,369
Net increase (decrease) in other short term borrowings 4,645,161 (2,744,188)
Net Increase (decrease) in other long term borrowings 277,000 (169,635)
Increase in minority Interest 241,640 0
Addition to paid-in-capital 196,989 0
Issuance of common stock 0 31,729
------------ ------------
Net cash from financing activities (2,381,498) (6,647,579)
------------ ------------
Net change in cash and cash equivalents (7,582,464) 6,075,661
Cash and cash equivalents:
Beginning of period 9,246,015 2,376,969
------------ ------------
End of period $ 1,663,551 $ 7,452,620
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 908,687 $ 1,193,518
</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 incorporated by reference in
the Company's 1998 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from the
books of the Company in accordance with generally accepted accounting principles
and reflect all adjustments which are, in the opinion of management, necessary
to provide a fair statement of the results of operations and financial position
for the interim periods. Such financial statements generally conform to the
presentation reflected in the Company's 1998 Annual Report on Form 10-K. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year.
Earnings per share are calculated based on the weighted average number of
common shares outstanding during each period as follows: 1,989,139 and 1,989,139
for the three and six months ended June 30, 1999, and 1,983,101 and 1,983,836
for the three and six months ended June 30, 1998, respectively, Stock options
are considered not dilutive for the 1999 period and, therefore, are not included
in earnings per share calculations.
(2) Available-for-sale Securities
The Bank's available-for-sale securities portfolio at June 30, 1999 had a
net unrealized loss of approximately $645,000 as compared with a net unrealized
loss of approximately $365,000 at March 31, 1999 and $183,000 at December 31,
1998.
Securities available for sale
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury 467 - (92) 375
U.S. agency mortgage-backed 2,210 - (518) 1,692
U.S. agency equity 848 - - 846
Municipal 486 - (35) 451
- ----------------------------------------------------------------------------------------------
Total investment securities
available for sale $4,011 $ - $(645) $3,366
====== === ===== ======
</TABLE>
<PAGE> 9
Securities available-for-sale (continued) 9
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury 480 - (84) 396
U.S. agency mortgage-backed 2,197 7 (306) 1,898
Other agency mortgage-backed 387 18 - 405
U.S. agency equity 848 - - 848
- -----------------------------------------------------------------------------------------------
Total investment securities
available for sale $ 3,912 $25 $ (390) $3,547
======= === ====== ======
December 31, 1998
-------------------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
U.S. Treasury $ 467 $ - $ (25) $ 442
U.S. agency mortgage-backed 2,191 4 (136) 2,059
Other mortgage-backed 421 4 - 425
U.S. agency equity 848 - - 848
Other equity 50 (30) 20
- -----------------------------------------------------------------------------------------------
Total securities
available for sale $ 3,977 $ 8 $(191) $3,794
======== ===== ===== ======
</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 involve 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, 1998, 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, 1999, a net loss of $578,360 was realized
versus net income of $131,172 in the same period in 1998. Net interest income
decreased to $678,536 in the 1999 period from $845,891 in the 1996 period, and
other income was $1,585,902 in the 1999 period versus $2,638,147 in the 1998
period. Operating expenses decreased to $2,809,298 in the 1999 period from
$3,391,255 in the 1998 period. Primary and fully diluted net loss per share in
the six months ended June 30, 1999 was ($0.29), compared to net income of $0.07
for the six months ended June 30, 1998.
The loss in 1999 versus the profit in 1998 was principally due to decreased
fee based income and decreased net interest income as a result of decreased
profitability from the Bank's mortgage banking activities. of note, the
Company's paid in capital increased by $196,989 during the 1999 period as a
result of the buy-out of certain minority shareholders of Michigan BIDCO on
March 31, 1999 at a discount to current book value. Pursuant to the GAAP
accounting treatment of this transaction, the Company booked an after tax loss
of $13,427 and did not book the $196,989 as income.
For the three months ended June 30, 1999, a net loss of $355,303 was
realized versus $24,412 in net income in the same period in 1998. Net income was
negatively impacted by the following issues:
* Varsity Mortgage lost approximately $225,000 in the second quarter of
1999, because of the sharp increase in long term interest rates during
the quarter which temporarily depressed margins and has decreased volume.
* The Bank's net interest margin was also negatively impacted by the
decreased activity at Varsity Mortgage and a $23,000 decrease in net
interest income due to rescheduling the accretion of certain zero
interest mortgage-backed securities (due to an increase in projected
average life of the securities) held by the Bank to diminish the overall
risk of its servicing rights held in portfolio in the Bank's overall
asset/liability mix.
* The Bank's results were negatively impacted by a $51,000 loss resulting
from a final calculation of early payoffs in the portfolio of servicing
rights sold by the Bank in December 1998.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the six months ended June 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 PRE-TAX INCOME (LOSS) SUMMARY
<S> <C>
Banking
Community & mortgage banking $(517)
Midwest Loan Services (17)
Varsity Mortgage (123)
Michigan BIDCO 146
Corporate Office (79)
-----
Total $(590)
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 PRE-TAX INCOME (LOSS) SUMMARY
<S> <C>
Banking
Community & mortgage banking $(357)
Midwest Loan Services (0)
Varsity Mortgage & Varsity Funding 295
Equity in the earnings of Michigan BIDCO 160
Corporate Office (43)
----
Total $ 55
</TABLE>
The net income of the Company for the six months ended June 30, 1998 was
principally a result of profits from the Bank's mortgage subsidiaries Varsity
Mortgage and Varsity Funding and the equity in the earnings of Michigan BIDCO.
Results at the community banking division in 1998 were assisted by a $100,000
capital gain on the sale of excess property and a $100,000 gain from the sale of
participation certificates related to certain loans purchased from the RTC in
1995.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased to $294,294 for the three months ended June
30, 1999 from $393,304 for the three months ended June 30, 1998. Net interest
income fell from the year ago period because of a decrease in mortgage
banking loans held for sale due to lower mortgage banking activity. The yield on
interest earning assets decreased from 8.23% in the 1998 period to 8.22% in the
1999 period. The cost of interest bearing liabilities decreased from 5.64% in
the 1998 period to 5.11% in the 1999 period. Net interest income as a percentage
of total earning assets decreased from 3.20% to 3.11%, because of the decrease
in interest spread.
Net interest income decreased to $678,536 for the six months ended June 30,
1999 from $845,891 for the six months ended June 30, 1998. Net interest income
fell from the year ago period because of the same factors as in the three month
periods. The yield on interest earning assets decreased from 8.57% in the 1998
period to 8.27 in the 1999 period. The cost of interest bearing liabilities
decreased from 5.69% in the 1998 period to 5.11% in the 1999 period. Net
interest income as a percentage of total earning assets decreased from 3.46% to
3.38%, because of the decrease in interest spread.
Interest income
Interest income decreased to $777,336 in the quarter ended June 30, 1999
from $1,010,201 in the quarter ended June 30, 1998. The average volume of
interest earning assets decreased to $37,941,148 in the 1999 period from
$49,221,909 in the 1998 period, a decrease of 22.9%. The decreased volume of
earning assets was due to a decrease in loans held for sale generated by Varsity
Mortgage. Interest income decreased despite an increase in the balance of the
Bank's portfolio loans which boosted the overall yield on total loans to 8.67%
from 8.49%.
<PAGE> 12
12
The average volume of investment securities in the three months ended June
30, 1999 increased 89.8% over the same period in 1998, as the Bank took a
position in long term bonds to shift its overall interest rate exposure to
increase the duration of assets. The yield on the securities portfolio decreased
to 4.29% in the three month period ended June 30, 1999 from 6.84% in the 1998
period. In the three months ended June 30, 1999, the Bank's yield on the
securities portfolio was negatively impacted by a $23,000 charge from
rescheduling the accretion of certain zero interest mortgage backed securities
(due to an increase in projected average life of the securities) held by the
Bank to diminish the overall risk of its servicing rights held in portfolio in
the Bank's overall asset/liability mix. As the average life of these
available-for-sale securities changes this will negatively or positively impact
interest income in the future.
Management is pleased at the 12.5% increase in portfolio loans at the Bank
during the second quarter of 1999 and believes that the Bank's "No More Big Bank
Blues" ongoing marketing program which was launched on January 31, 1999 is
responsible for the increased loan balances.
Interest income decreased to $1,661,929 in the six months ended June 30,
1999 from $2,098,413 in the six months ended June 30, 1998. The average volume
of interest earning assets decreased to $40,529,584 in the 1999 period from
$49,350,711 in the 1998 period, a decrease of 17.9%. The decreased volume of
earning assets and interest income was due to the same factors as during the
three month period. The yield on total loans decreased to 8.76% from 8.81%.
The average volume of investment securities in the six months ended June
30, 1999 increased 73.7% over the same period in 1998, as the Bank took a
position in long term bonds to shift its overall interest rate exposure to
increase the duration of assets. The yield on the securities portfolio decreased
to 5.54% in the six month period ended June 30, 1999 from 6.79% in the 1998
period.
Interest Expense
Interest expense decreased to $483,042 in the three months ended June 30,
1999 from $616,897 in the 1998 period. The decrease was due to a decrease in
interest bearing liabilities as a result of decreased total deposits and a
decrease in rates paid on deposits and borrowed funds. The decrease in rates was
due to decreased time deposits (which have higher rates) offset partially by
increased other retail deposits (which have lower rates). Long term debt
increased as a result of the BIDCO's buyout of some of its minority shareholders
and the resulting consolidation of the BIDCO into the Company's financial
statements (see "Non-Interest Income, Michigan BIDCO." below). The cost of funds
decreased to 5.11% in the 1999 period from 5.64% in the 1998 period. The average
volume of interest bearing liabilities decreased 13.5% in the 1999 period versus
the 1998 period.
Interest expense decreased to $983,393 in the six months ended June 30,
1999 from $1,252,522 in the 1998 period. The decrease was due to a decrease in
interest bearing liabilities as a result of decreased total deposits and
decreased borrowed funds and a decrease in rates paid on deposits and borrowed
funds. The decrease in rates was due to
<PAGE> 13
13
decreased time deposits and decreased wholesale deposits (which have higher
rates) partially offset by increased other retail deposits (which have lower
rates). The cost of funds decreased to 5.11% in the 1999 period from 5.69% in
the 1998 period. The average volume of interest bearing liabilities decreased
12.5% in the 1999 period versus the 1998 period.
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, 1999 and 1998.
<PAGE> 14
14
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits $ 80,527 $ 584 2.91% 28,917 581 8.06%
Federal Funds Sold 299,856 3,776 5.05% 3,093,405 41,762 5.41%
Securities:
Non-taxable (1) -- -- -- -- -- --
Taxable 3,570,868 38,194 4.29% 1,881,386 32,104 6.84%
----------- ----------- ------- ----------- ---------- ------
Total Securities & S. T. Investments 3,951,251 42,555 4.32% 5,003,708 74,447 5.97%
----------- ----------- ------- ----------- ---------- ------
Loans:
Commercial 12,729,689 325,196 10.25% 10,321,293 266,102 10.34%
Real Estate Mortgage 20,173,496 378,929 7.53% 29,161,304 552,377 7.60%
Installment/Consumer 1,086,710 30,655 11.31% 4,735,604 117,275 9.93%
----------- ----------- ------- ----------- ---------- ------
Total Loans 33,989,897 734,781 8.67% 44,218,201 935,754 8.49%
----------- ----------- ------- ----------- ---------- ------
Total Interest Bearing Assets 37,941,148 777,336 8.22% 49,221,909 1,010,201 8.23%
----------- ----------- ------- ----------- ---------- ------
Less allowance for possible
loan losses & deferred fees (475,274) (493,190)
----------- -----------
37,465,874 48,728,719
Mortgage servicing rights 774,974 1,280,697
Non earning assets 12,217,146 8,514,488
----------- -----------
Total Assets $ 50,457,994 $ 58,523,903
=========== ===========
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 3,225,075 $ 25,207 3.13% $ 2,810,869 $ 28,939 4.13%
Savings 206,300 1,103 2.14% 125,537 787 2.51%
Canadian Dollar Savings 0 0 0.00% 30,535 172 2.26%
Time 18,147,998 252,714 5.59% 25,689,394 385,649 6.02%
Short Term Borrowed Funds 2,094,786 30,200 5.76% 1,826,123 28,284 6.21%
Money Market Accounts 11,561,539 113,974 3.95% 12,444,507 151,020 4.87%
Long Term Debt 2,693,413 59,844 8.91% 905,644 22,046 9.76%
----------- ----------- ------- ----------- --------- -----
Total interest bearing
liabilities $ 37,929,111 483,042 5.11% $ 43,834,608 616,897 5.64%
----------- ----------- ------- ----------- --------- -----
Net interest income 294,294 $ 393,304
=========== =========
Weighted average rate spread 3.11% 2.59%
======= =====
Net yield on average earning
assets 3.11% 3.20%
</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
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits 84,642 1,089 2.60% $ 28,551 1,020 7.21%
Federal Funds Sold 2,217,311 52,025 4.73% 2,448,922 69,419 5.72%
Securities:
Non-taxable (1) - - - - - -
Taxable 3,294,234 90,469 5.54% 1,896,315 63,871 6.79%
----------- --------- ------ ---------- --------- ------
Total Securities & S. T. Investments 5,596,187 143,584 5.17% 4,373,788 134,310 6.19%
=========== ========= ====== ========== ========= ======
Loans:
Commercial 11,264,617 557,775 9.99% 11,447,870 615,832 10.85%
Real Estate Mortgage 22,519,444 896,109 8.04% 28,812,193 1,109,964 7.77%
Installment/Consumer 1,149,336 62,460 10.96% 4,716,870 238,307 10.19%
----------- --------- ------ ---------- --------- ------
Total Loans 34,933,396 1,518,345 8.76% 44,976,923 1,964,103 8.81%
----------- --------- ------ ---------- --------- ------
Total Interest Bearing Assets 40,529,584 1,661,929 8.27% 49,350,711 2,098,413 8.57%
=========== ========= ====== ========== ========= ======
Less allowance for possible
loan losses & deferred fees (457,925) (510,180)
----------- ----------
40,071,659 46,840,531
Mortgage servicing rights $ 828,134 1,333,518
Non earning assets 10,606,991 7,853,130
=========== ==========
Total Assets $ 51,506,784 $58,027,179
=========== ==========
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 3,256,967 $ 50,666 3.14% $ 2,700,019 $ 62,258 4.65%
Savings 194,967 2,226 2.30% 119,568 1,490 2.51%
Canadian Dollar Savings 0 0 0.00% 34,704 381 2.21%
Time 20,089,364 567,977 5.70% 25,558,611 766,167 6.05%
Short Term Borrowed Funds 1,194,181 32,682 5.52% 1,903,090 60,563 6.42%
Money Market Accounts 12,338,221 252,899 4.13% 13,158,365 318,719 4.88%
Long Term Debt 1,751,640 76,944 8.86% 914,118 42,944 9.47%
----------- -------- ------ ---------- --------- ------
Total interest bearing
liabilities $ 38,825,360 983,393 5.11% $44,388,475 1,252,522 5.69%
============ -------- ------ =========== --------- ------
Net interest Income $678,536 $ 845,891
======== =========
Weighted average rate spread 3.16% 2.88%
====== ======
Net yield on average earning
assets 3.38% 3.46%
</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> 16
16
Allowance for Loan Losses
The monthly allowance for loan loss remained at a rate of $7,500 in the
first half of 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for loan losses $ 22,500 $ 15,000 $ 45,000 $ 37,500
Loan charge-offs (15,904) (219,472) (15,904) (225,028)
Recoveries 9,809 4,354 25,014 13,761
--------- --------- --------- ---------
Net increase (decrease)
in allowance $ 16,405 $(200,118) $ 54,110 $(173,767)
========= ========= ========= =========
<CAPTION>
At At At
June 30, March 31, December 31,
1999 1998 1998
-------------------------------------------------------
<S> <C> <C> <C>
Total loans (1) $25,497,951 $22,755,421 $23,652,103
Allowance for loan losses 500,111 496,706 459,001
Allowance/Loans, % (1) 1.96% 2.18% 1.94%
</TABLE>
(1) Excludes loans held for sale and Michigan BIDCO loans which are valued at
fair market value net of specific required reserves.
<PAGE> 17
17
The following schedule summarizes the Company's nonperforming loans for the
periods indicated (1):
<TABLE>
<CAPTION>
At At At
June 30, March 31, December 31,
1999 1999 1998
---------------------------------------------------------
<S> <C> <C> <C>
Past due 90 days and over
and still accruing:
Real estate 778 8,065 4,430
Installment 1,136 - -
Commercial 18,809 - -
--------- -------- ---------
Subtotal 20,723 8,065 4,430
Nonaccrual loans:
Real estate 465,669 466,527 467,402
Installment - - -
Commercial - - -
--------- --------- ---------
Subtotal 465,669 466,527 467,402
Other real estate
owned (2) 566,022 582,671 707,730
--------- --------- ---------
Total 1,052,414 1,057,263 1,179,562
As % of loans (1) 4.13% 4.20% 4.99%
Ratio of reserve for loan
losses to all loans
90 days and over 102.8% 104.7% 97.3%
</TABLE>
(1) Excludes loans held for sale and Michigan BIDCO loans which are
valued at fair market value net of specific required reserves.
Other real estate owned at June 30, 1999, March 31, 1999 and December 31,
1998 includes a commercial development site in Sault Ste. Marie, Michigan. Based
upon a recent appraisal, management believes the 16-acre site where a former
loan office is located has a fair market value substantially more than its
carrying cost as of June 30, 1999 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. There is no assurance that a sale of the property will
be consummated.
Other real estate at June 30, 1999 and March 31, 1999 includes a home sold
with financing in the amount of $75,830 which sale does not qualify for sale
accounting under GAAP since the buyer did not contribute equity of 15% of the
purchase price at the time of sale.
Subsequent to June 30, 1999, a commercial loan past due over 90 days and
still accruing in the amount of $18,809 was paid in full and a contract was
entered into to sell a home carried as other real estate owned for a net amount
of $90,000 versus the carrying value of $81,000.
The Bank's loan portfolio continues to have very low delinquencies other
than residential real estate properties. With the exception of
<PAGE> 18
18
one commercial real estate building carried at $3,000, the other real estate
owned, other than the one real estate parcel mentioned above, is residential
single family properties. Based upon management's review of appraisal
information and current broker price opinions, management believes that, for the
most part, the Bank is well secured with respect to these loans and the other
real estate owned which is carried at cost.
Economic conditions in the Bank's primary market area in Ann Arbor were
strong in the period. Management believes that the current reserve level and the
ongoing reserve for loan losses is adequate to absorb losses inherent in the
loan portfolio, although the ultimate adequacy of the reserve is dependent upon
future economic factors beyond the Company's control. A downturn in the general
nationwide economy will tend to aggravate, for example, the problems of local
loan customers currently facing some difficulties, and could decrease
residential home prices. A general nationwide business expansion could
conversely tend to diminish the severity of any such difficulties.
Non-Interest Income
Total non-interest income decreased to $793,337 for the three months ended
June 30, 1999 from $1,366,234 for the three months ended June 30, 1998. The
decrease was principally a result of a $608,709 decrease in the Bank's mortgage
banking income.
Total non-interest income decreased to $1,585,902 for the six months ended
June 30, 1999 from $2,638,147 for the six months ended June 30, 1998. The
decrease was principally a result of a $1,002,533 increase in the Bank's
mortgage banking income.
Securities. During the three and six months ended June 30, 1999, $625 was
realized on the sale of $504,098 in securities from the Bank's
available-for-sale securities portfolio. There were no losses on sales of
securities from the Bank's available-for-sale securities portfolio. During the
first quarter of 1999, the Company realized a $23,009 loss on the sale of the
Company's investment in AmTec (AMEX-ATC) to raise working capital. Gross
proceeds from this sale were $32,049. During the second quarter of 1999, the
Company realized a $6,906 gain on the sale of a portion of the Company's
investment in Michigan BIDCO senior convertible bonds. Gross proceeds from this
sale were $43,461. The remainder of the Michigan BIDCO bonds held by the Company
were converted into Michigan BIDCO common stock during the second quarter of
1999 (see "Michigan BIDCO." below).
Mortgage Banking. Total non-interest income decreased to $793,337 for the
three months ended June 30, 1999 from $1,366,234 for the three months ended June
30, 1998, and decreased to $1,585,902 for the six months ended June 30, 1999
from $2,638,147 for the six months ended June 30, 1998. Sharply decreased loan
purchase and origination volumes during the 1999 periods were responsible for
the drop. Results for the first quarter of 1998 were also assisted by a $100,000
gain on sale of participation certificates in sub-performing home equity loans
previously purchased from the RTC.
<PAGE> 19
19
The Bank owns 100% of the voting interest and 50% of the total equity
interest in Varsity Mortgage, LLC. As a result of the manner in which Varsity
Mortgage's operating agreement is structured, the Bank is entitled to 1/3 of the
operating profit (after reimbursement to the Bank for various expenses) but
responsible for 100% of the first $300,000 in losses, if any, of Varsity
Mortgage. After operating profitably since inception, during the second quarter
of 1999, Varsity Mortgage sustained losses from operations of $225,000. If
Varsity Mortgage returns to profitability, the Bank would be entitled to 100% of
Varsity Mortgage's profits until the previous $225,000 in losses is recovered.
A contributing factor to the decreased profitability at Varsity Mortgage in
1999 has been start-up expenses at MortgageQuest, Varsity Mortgage's retail
lending division, which was founded January 1, 1999. MortgageQuest lost $62,000
in the six months ended June 30, 1999 including a profit of $8,500 in June 1999,
and lost $17,000 in July 1999. Excluding the loss from MortgageQuest, Varsity
Mortgage earned $4,000 in July 1999. The Bank and Varsity Mortgage recently
reached an agreement in principle with a substantially larger local retail
mortgage firm to have MortgageQuest's operations and personnel transferred into
the local retail mortgage firm. That firm would relocate its operations into
MortgageQuest's facility, which is in the same building as Varsity Mortgage. If
the agreement is consummated the Bank and Varsity mortgage will enter into a
strategic partnership with that firm which will decrease costs of both the
combined firm and Varsity Mortgage and bring Varsity Mortgage and the Bank
additional revenue. In addition, the Bank will receive a three year option to
buy that firm for a cash payment equal to that firm's shareholders equity as
calculated using Generally Accepted Accounting Principles (GAAP) and an
additional fixed payment in shares of common stock of the Company. There is no
assurance that an agreement will be consummated, that the terms will be
favorable to the Bank or that any future projected revenues or cost savings will
materialize.
At June 30, 1999, the Bank and its subsidiaries owned the right to service
mortgages for FHLMC, FNMA and others, most of which was owned by Midwest Loan
Services, and the remainder by the Bank. The carrying value is currently
$722,053, including $36,243 receivable from the Bank's sale of the remainder of
its servicing rights. Based on recent comparable sales and indications of market
value from industry brokers, management believes that the current market value
of the Midwest's portfolio of mortgage servicing rights exceeds cost by between
$215,000 and $453,000. 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.
The Bank's mortgage banking income in the second quarter of 1999 included a
$51,000 loss resulting from a final calculation of early payoffs in the
portfolio of servicing rights sold by the Bank in December 1998.
At June 30, 1999, the Bank had outstanding purchase commitments to buy
single family FNMA and FHLMC qualifying mortgage loans of $28,950,500 and
outstanding forward commitments to deliver FNMA and
<PAGE> 20
20
FHLMC loans of $23,181,800, all of which commitments were for delivery within
three months or less.
Michigan BIDCO. The Company received permission from the Michigan Financial
Institutions Bureau for the BIDCO to repurchase the shares and convertible bonds
held by certain minority shareholders of the BIDCO. The shares were repurchased
on March 31, 1999 and the bonds in mid-April. As a result of the transaction,
the Company's ownership of the BIDCO increased to 80.1% from 44.1%, and the
BIDCO became part of the Company's tax filing group for federal income tax
purposes. As a result, certain deferred tax assets are expected to be realized
during 1999, as the BIDCO's taxable income is offset by the Company's net
operating tax loss carryforward. Since the purchase price for the shares was at
a discount to the BIDCO's per share book value, the transaction generated an
immediate increase in the Company's paid-in-capital of $196,989 during the 1999
period. However, pursuant to the GAAP accounting treatment of this transaction,
the Company booked an after-tax loss of $13,427 and did not book the $196,989 as
income.
Until March 31, 1999, the Bank reported its 44.1% equity share in the
earnings of the BIDCO's reported net income. Subsequent to March 31, 1999, the
Bank reports the BIDCO's results on a consolidated basis. The Company included
net income of $143,757 in net income from the BIDCO in the second quarter of
1999 and the Bank included $2,690 in income from the BIDCO in the first quarter
of 1999. in the three and six months ended 1998, the Bank included $119,924 and
$160,489 in income from the BIDCO, respectively. Income for the 1999 first
quarter was negatively impacted by the charge noted above as a result of the
buy-out of the minority shareholders.
As part of the overall transaction, the Company converted $27,000 of
Michigan BIDCO convertible bonds into 18 shares of Michigan BIDCO common stock,
pursuant to the terms of the bonds. Effective March 31, 1999, the Company owns
298 shares of common stock in the BIDCO, currently representing a 80.1% equity
interest. The Company's consolidated fully diluted ownership in the BIDCO is
28.6%, after considering the impact of convertible bonds. As a result of the
buy-out of the minority shareholders, a total of $1,850,000 in 9% convertible
bonds were retired by the BIDCO from cash on hand which had been on deposit at
the Bank earning an average rate of 4%. The elimination of this negative
interest rate spread is expected to improve the BIDCO's net interest margin by
over $90,000 per year going forward, although there is no assurance that the
BIDCO will have such increased earnings.
During the six months ended June 30, 1999, the BIDCO made no new
investments, although its equity interest in the Tissue Paper Mill was sold in
exchange for a fully amortizing 15 month loan for $750,000, resulting in a
realized gain of $500,000. This transaction did not result in a gain or loss for
GAAP accounting purposes since the Company was carrying the stock at 12/31/98 at
the estimated fair value of $750,000. At June 30, 1999, the BIDCO had pending a
$50,000 participation in a new loan financing arrangement with an existing
railroad customer.
<PAGE> 21
21
Non-Interest Expense
Non-interest expense decreased to $1,420,734 in the three months ended June
30, 1999 from $1,757,281 for the three months ended June 30, 1998. The decrease
was primarily the result of expense control at the Bank and decreased profit
sharing wages due to the lower profits at Varsity Mortgage.
Non-interest expense decreased to $2,809,298 in the six months ended June
30, 1999 from $3,391,255 for the six months ended June 30, 1998. The decrease
was primarily the result of expense control at the Bank and decreased profit
sharing wages due to the lower profits at Varsity Mortgage. The legal and audit
expense of $134,693 in the 1999 period included $40,000 in legal expense related
to a dispute which has now been finalized through mediation (see below "Item 1.
Legal Proceedings"). Employee headcount was reduced during 1999 at both the Bank
and Varsity Mortgage.
Non-interest operating expense for the parent company only decreased to
$19,307 and $31,600 for the three and six month 1999 periods from $23,319 and
$89,877 for the three and six month 1998 periods. Expenses for the 1998 period
included a $53,479 expense for the 1998 ESOP contribution. The 1999 ESOP expense
will be booked in the third quarter this year, since the calculations of the
plan administrator are not yet completed.
Year 2000 Readiness. The following statements are YEAR 2000 READINESS
DISCLOSURES for purposes of the Federal Year 2000 Information and Readiness
Disclosure Act, and you are entitled to protection in accordance with that act.
The Year 2000 issue concerns the potential impact of computer software code that
only utilizes two digits to represent the calendar year (e.g. "99" for
"1999"). Software of this type, if not corrected, could produce inaccurate or
unpredictable results at any time, and especially after January 1, 2000, when
current and future dates have a lower two digit year number than dates in this
century. The Company, similar to most financial services providers, is
significantly subject to the potential of the Year 2000 issue due, among other
matters, to the nature of financial information. Potential impacts to the
Company may arise from software, computer hardware, and other equipment both
within the Company's direct control and outside of the Company's ownership, yet
with which the Company electronically or operationally interfaces. Financial
institution regulators have focused intensively on Year 2000 exposures in the
institutions they regulate, issuing guidance concerning the responsibilities of
senior management and directors. Year 2000 testing and certification is being
addressed as a key safety and soundness issue in conjunction with regulatory
exams. The failure to implement an adequate Year 2000 program can be identified
as an unsafe and unsound banking practice.
In order to address the Year 2000 issue, the Bank has formed a Year 2000
coordination committee with key members of management from the Bank and each
operating subsidiary and appointed its Compliance Officer as Year 2000
Coordinator. The Bank and Midwest rely on mainframe computers, which are IBM A/S
400s, and are tested as Year 2000 compliant. The Bank's main bank software
application is a product of Peerless Group, which has also been upgraded to a
Year 2000 compliant
<PAGE> 22
22
version which has been tested as Year 2000 compliant. Midwest's main application
software is LSAMS servicing software which has been upgraded to a Year 2000
compliant version which has been tested as Year 2000 compliant. The Bank,
Varsity Mortgage and Varsity Funding also rely on Novell Local Area Networks,
which have been upgraded to a Year 2000 certified version of Novell Local Area
Network software, which has also been tested as Year 2000 compliant. All PC
systems and PC software at the Bank and its subsidiaries have been tested and as
Year 2000 compliant.
All of the $93,000 Year 2000 readiness budget has been spent in the
process of upgrading and certifying the systems as being Year 2000 compliant.
The bulk of the Year 2000 budget was allocated to capital expenditures for
software upgrades for software updates and hardware updates and Year 2000
testing which was expensed in 1998. At this point in time, the Company and its
subsidiaries have renovated and tested as Year 2000 compliant all systems
identified as mission critical. The focus of the Company's Year 2000 effort is
now shifting towards less critical systems and contingency planning to deal with
unforseen events external to the Company.
Actual and budgeted Year 2000 readiness costs do not include the implicit
costs associated with the reallocation of internal staff hours to Year 2000
readiness related efforts. These costs are not included because the Bank does
not separately track those expenses. Budgeted costs also do not include normal
ongoing costs for computer hardware and software that would be replaced even
without the presence of the Year 2000 issue in conjunction with the Company's
ongoing programs for updating its infrastructure. Additional Year 2000 costs may
be incurred as the Company progresses in its Year 2000 program and obtains
additional information and conducts further testing regarding the Year 2000
readiness of third parties.
The Company has communicated and will continue to communicate with various
significant suppliers and major borrowers and customers to determine the extent
to which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company is requesting that such third party
vendors indicate whether their products and services are Year 2000 compliant,
whether they have a program to test for that compliance, and the status of the
program. However, the activities of third parties in responding to the Year 2000
issue is beyond the control of the Company.
Despite the Company's activities to address the Year 2000 issue, there is
no assurance that certain mission critical vendors such as the Federal Reserve
Bank of Chicago, the Bank's correspondent banks (Bank One, the Federal Home Loan
Bank of Indianapolis and Associated Bank), the Bank's credit card processor
(Equifax), the Bank's ATM processor (Magic Line), or local power (Detroit Edison
Electric) and phone utilities (Ameritech and ATT) will be Year 2000 compliant by
year-end 1999, and if not this could have a material adverse effect on the
Company's operations, and the Company's borrowers and customers. There can also
be no assurance that partial or total systems interruptions or the costs
necessary to implement contingency plans, or Year 2000 systems failures
affecting borrowers, customers or third party vendors would not have a material
adverse effect on the Company's operations
<PAGE> 23
23
and business prospects. Further, the Company cannot estimate the additional
cost, if any, of implementing any such contingency plan.
The Bank has evaluated the Year 2000 readiness of its major borrowers and
determined that it has a below average risk (relative to its peer group) from
Year 2000 related potential loan losses, due to its primary focus on real estate
secured lending. All business loans and loan renewals by the Bank are being
evaluated in the context of the Year 2000 readiness of each business. However,
it is impossible for the Company to know with any certainty that the Bank or its
subsidiaries will not sustain Year 2000 related credit losses, and whether or
not such losses would be material.
The Bank and its subsidiaries have established back-up contingency plans to
continue operations in the event of a Year 2000 systems failure, based on the
assumption that all mission critical computer systems are Year 2000 tested but
that non-traditional power sources may be required for a short period of time.
In addition, a final contingency plan has been established to conduct manual
operations using paper forms until such time as a systems failure can be
corrected. A full scale live contingency plan test was performed during the
second quarter of 1999. Management believes that as a temporary measure, it is
feasible with the volume of current activity to continue operations in this
manner, but there is no assurance that it is possible or that the cost would not
be material.
Internet Banking. With the substantial progress which has been made towards
preparing the Bank for the Year 2000 issue, management has set in motion a
project to add transactional internet banking for all bank products. The
internet banking product is expected to be available in production mode during
the third quarter of 1999. Implementation of the project, which has a capital
budget of approximately $100,000, will add ongoing depreciation and operating
expenses which are expected to be more than offset by the transfer to the Bank
of approximately $2,300,000 in mortgage servicing escrow accounts controlled by
Midwest Loan Services. These escrow deposit accounts are currently held at
another bank due to the inability of the Bank currently to offer PC banking to
Midwest to facilitate Midwest's daily operational needs.
Liquidity and Capital Resources
Capital Resources. The table on the following page sets forth the Bank's
risk based assets, and the capital ratios and risk based capital ratios of the
Bank and Company. At June 30, 1999, the Bank was "well capitalized" (the
required ratio for "well-capitalized" was 10% of total risk-based assets).
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, the sale of loans held for
sale, borrowings from correspondent lenders secured by securities and/or
residential mortgage loans. In addition, the Bank invests in overnight Federal
Funds. At
<PAGE> 24
UNIVERSITY BANK 24
Asset/Liability Position Analysis 6/30/99
($ in 000's)
Maturing or Repricing in
<TABLE>
<CAPTION>
3 Mos 91 Days 1-5 Over 5 ALL
ASSETS or Less 1 Year Years Years OTHERS TOTAL
------- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Fed Funds 5 0 0 0 0 5
Loans (1) 2,312 4,182 8,095 2,586 0 17,175
Canadian Investments 0 0 0 0 0 0
Securities Available for Sale 0 0 1 4,010 0 4,011
Securities held for Sale 0 0 0 0 0 0
Loans held for Sale 13,285 0 0 0 0 13,285
Matured Loans 1,297 0 0 0 0 1,297
Variable Rate Loans 7,809 0 0 0 0 7,809
Other Assets 2,691 0 0 1,064 0 3,755
Fixed Assets 33 98 235 1,089 0 1,455
Cash and Due from Banks 0 0 0 1,654 0 1,654
Overdrafts 13 0 0 0 0 13
Non-Accrual Loans 0 0 0 876 0 876
Escrow Advances 51 0 0 0 0 51
Valuation Adjustment 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
TOTAL ASSETS 27,496 4,280 8,331 11,279 0 51,386
LIABILITIES
CD's over $100,000 3,497 6,787 426 0 0 10,710
CD's under $100,000 2,380 3,430 2,098 769 0 8,677
MMDA 10,560 0 0 0 0 10,560
NOW 3,259 0 0 0 0 3,259
Demand 296 0 0 1,923 0 2,219
Savings 0 198 0 0 0 198
Canadian Savings 0 0 0 0 0 0
Other Liabilities 0 1,694 1,694 379 0 3,767
Drafts Payable 3,278 0 0 0 0 3,278
Borrowings 5,635 0 0 0 0 5,635
Equity 0 0 0 3,083 0 3,083
------- ------- ------- ------- ------- -------
TOTAL LIABILITIES 28,905 12,109 4,218 6,154 0 51,386
GAP (1,409) (7,829) 4,113 5,125 0
CUMULATIVE
GAP (1,409) (9,238) (5,125) 0 0
GAP
PERCENTAGE -2.74% -17.98% -9.97% 0.00% 0.00%
</TABLE>
Notes:
(1) Net of bad debt reserves.
<PAGE> 25
25
June 30, 1999, the bank had cash and due from banks and fed funds on hand of
$1,663,550. The Bank has a $6,500,000 line of credit secured by investment
securities and portfolio mortgage loans. In order to bolster liquidity, the Bank
has also sold brokered CDs from time to time.
The decline in time deposits during the six month period ended June 30,
1999 from $24,867,369 to $19,387,327 was the result of a decrease of approx.
$2,300,000 in brokered time deposits and an overall decrease in retail time
deposits. Management is de-emphasizing brokered time deposits to decrease the
cost of interest-earning liabilities. In addition, management has lowered retail
CD rates to reduce the overall cost of funds.
Parent Company Liquidity. At year-end 1998, University Bancorp, Inc. held
cash and marketable equity securities of $37,882 (excluding Michigan BIDCO
common stock). This decreased by $32,682 to $5,200 at June 30, 1999. During the
six months ended June 30, 1999 no dividends were paid from the Bank, as a result
of low profitability at the Bank. In an effort to maintain the Bank's Tier 1
capital to assets ratio above 7% and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during 1999. Management intends that the cash and securities on hand,
federal tax refunds receivable, and cash from the sale of common stock and the
exercise of stock options to be sufficient to cover the required principal
reductions during 1999 on the parent company's indebtedness owing to North
Country Bank & Trust ("NCB&T") The NCB&T loans amounted to $760,000 and $826,000
at June 30, 1999 and at December 31, 1998, respectively.
Impact of Inflation
The primary impact of inflation on the Company's operations is reflected in
increased operating costs. Since the assets and liabilities of the Company are
primarily monetary in nature, changes in interest rates have a more significant
impact on the Company's performance than the general effects of inflation.
However, to the extent that inflation affects interest rates, it also affects
the net income of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the
<PAGE> 26
26
opposite effect on earnings is true, with earnings rising due to long-term
assets repricing downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the value
of Midwest Loan Services' investment in mortgage servicing rights and improve
Midwest Loan Services' current return on such rights by lowering required
amortization rates on the rights. Rising interest rates tends to decrease new
mortgage origination activity, negatively impacting current income from the
Bank's retail mortgage banking operations and Varsity Mortgage's operations.
Rising interest rates also slow Midwest Loan Services' rate of growth, but
increases the duration of its existing subservicing contracts.
The Bank performs a static gap analysis which has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on page 27 details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at June 30, 1999. The table is based upon various assumptions of management
which may not necessarily reflect future experience. As a result, certain assets
and liabilities indicated in the table as maturing or re-pricing within a stated
period may, in fact, mature or re-price in other periods or at different
volumes. The one-year static gap position at June 30, 1999 was estimated to be
($9,238,000) or -17.98%:
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From December 1995, the Company was engaged in a dispute over a $30,000
amount owed to it, and refused to pay $45,000 which it owed to the same party
until the $30,000 was paid to it. Subsequent to June 30, 1999, the Company
received an adverse judgement in a mediation covering this dispute. The mediator
awarded the plaintiff a sum of $167,000, including interest, legal fees, and the
sum of $80,000, which related to another matter which was not originally in
dispute and subject to a separate agreement, which the mediator voided. The
Company did not dispute a net amount payable of $15,000, and had included this
amount in accounts payable at June 30, 1999. In the opinion of the Company's
legal counsel, the mediator acted contrary to Michigan law, however, no appeal
of the ill-considered opinion is practical. As a result, $152,000 will be
charged as an expense during the third quarter of 1999.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on June 21,
1999. At the meeting, the following persons were re-elected as the directors of
the Company with the following number of votes "for" or "withheld" with respect
to the election of such persons, there having been no abstentions or broker
non-votes reflected in the votes tabulated:
<TABLE>
<CAPTION>
Nominee Elected Votes For Votes Withheld
- --------------- --------- --------------
<S> <C> <C>
Keith F. Brenner 1,382,154 0
Robert Goldthorpe 1,382,154 0
Joseph Lange Ranzini 1,382,154 0
Joseph Louis Ranzini 1,382,154 0
Mildred Lange Ranzini 1,382,154 0
Paul Lange Ranzini 1,382,154 0
Stephen Lange Ranzini 1,382,154 0
Michael Talley 1,382,154 0
</TABLE>
Item 5. Other information
Parent Company Financial Information
Certain condensed financial information with respect to University
Bancorp, Inc. follows:
<PAGE> 27
University Bank 27
Risk Adjusted Assets & Risk Adjusted Capital Ratio
30-Jun-99
<TABLE>
<CAPTION>
Balance Risk Weighted
0% RISK CATEGORY Sheet (000) Assets (000)
<S> <C> <C>
Mort-Backed Sec Guaran by GNMA 1 -
Currency & Coin 260 -
US Treasury Strip 467 -
Federal Reserve Balance 25 -
-------------------------
Total 765 -
20% RISK CATEGORY
Interest-bearing Balances 5 1
Fed Funds Sold 6 1
U.S. Gov't sponsored Agency Sec 2,209 442
Other Mortgage-Back Securities - -
Cash Items 240 48
FHLB Stock 848 170
Balances due from depository Inst 1,179 236
-------------------------
Total 4,486 897
50% RISK CATEGORY
Revenue Oblig Sec issued by state 486 243
Qualifying 1st liens on 1-4 family 22,760 11,380
-------------------------
Total 22,760 11,380
100% RISK CATEGORY
All other Assets 23,271 23,271
On Balance Sheet Items Excluded from Calculation 72
Total Assets 51,342 35,548
========================
</TABLE>
<TABLE>
<CAPTION>
TIER I CAPITAL Balance
<S> <C>
Common Stock 200
Surplus 4,433
Undivided Profits & Capital Reserves (1,124)
Minority Interest 500
Other identifiable Intangible Assets (72)
Total Tier 1 Capital 3,937
TIER 2 CAPITAL
Allowance for loans & Lease losses 445
Excess LLR (limited to 1.25% gross risk- 55
weighted assets
Total Tier 2 Capital 500
Total Tier 1 & Tier 2 Capital 4,437
Tier 1/Total Assets 7.67%
Tier 1 & 2/Total Assets 8.64%
Tier 1/Total Risk-Weighted Assets 11.08%
Tier 1 & 2/Total Risk-Weighted Assets 12.48%
</TABLE>
<PAGE> 28
UNIVERSITY BANCORP, INC. (The Parent) 28
Condensed Balance Sheets
June 30,1999 and December 31,1998
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,200 $ 33,702
Securities available for sale 233 20,328
Michigan BIDCO senior debentures 0 67,977
Michigan BIDCO common stock 53,442 --
Investment in subsidiary Bank 3,083,057 3,736,157
Tax Assets 38,659 78,890
Other Assets 3,690 2,458
---------- ----------
Total Assets $3,184,282 $3,939,512
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Note payable $ 760,000 $ 826,000
Accounts payable 13,325 13,325
Accrued interest payable 14,413 15,654
Tax liabilities 0 0
---------- ----------
Total Liabilities 787,738 854,979
Stockholder's Equity 2,396,544 3,084,533
---------- ----------
Total Liabilities and Stockholder's Equity $3,184,282 $3,939,512
========== ==========
</TABLE>
<PAGE> 29
UNIVERSITY BANCORP, INC. (The Parent) 29
Condensed Statements of Operations
For the Periods Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
For Three Month For Six Month
Period Ended Period Ended
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Dividends from subsidiary $ -- $ -- $ -- $ --
Interest & dividends on investments 426 -- 2,463 --
Net security gains 6,906 5,897 (16,102) 72,557
Other $ 0 17,845 0 17,745
--------- --------- --------- ---------
Total Income 7,331 23,742 (13,640) 90,302
Expense:
Interest 16,610 22,046 33,910 42,944
Salaries & benefits (2) (1,030) 1,083 53,665
ESOP contributions 0 0 0 0
Public listing 10,623 9,770 13,003 17,676
Audit & legal 7,656 4,125 14,718 6,673
Other taxes 716 0 1,986 0
Occupancy & other miscellaneous 312 10,454 810 11,862
--------- -------- --------- ---------
Total Expense 36,117 45,365 65,510 132,820
Income loss before federal Income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (28,786) (21,623) (79,150) (42,518)
Federal income taxes (benefit) 0 0 0 0
--------- --------- --------- ---------
Income (loss) before equity in
undistributed net income of subsidiaries (28,786) (21,623) (79,150) (42,518)
Equity in undistributed net income (loss)
of subsidiaries (326,517) 46,036 (499,210) 173,691
--------- --------- --------- ---------
Net Income $(355,303) $ 24,413 (578,360) $ 131,173
========= ========= ========= =========
Comprehensive Income $(540,361) $ 27,573 (719,234) $ 107,443
========= ========= ========= =========
Net Income per Common Share
Primary $ (0.18) $ 0.01 (0.29) $ 0.07
========= ========= ========= =========
Fully Diluted $ (0.18) $ 0.01 (0.29) $ 0.07
========= ========= ========= =========
</TABLE>
<PAGE> 30
UNIVERSITY BANCORP, INC. (The Parent) 30
Condensed Statement of Cash Flows
For the Six Month Periods Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Reconciliation of net income (loss) to net cash used in
operating activities:
Net Income (Lose) $(578,360) $ 131,172
Loss (gain) on sale of investments 16,102 (72,557)
Net amortization/accretion on securities (883) 0
Decrease/(increase) in receivable from affiliate 0 21,215
Decrease/(increase) in Other Assets (1,232) 0
Increase(Decrease) in interest payable (1,241) (31,770)
Increase(Decrease) in other liabilities 0 61,851
Decrease(Increase) investment in subsidiaries 323,117 (174,242)
Decrease(Increase) income tax receivable 28,470 0
--------- ---------
Net cash provided by (used in) operating activities (214,027) (64,331)
--------- ---------
Cash flow from investing activities:
Subsidiary dividends received 0 0
Contributions of capital to subsidiary 0 0
Advances to Michigan BIDCO (20,896) 0
Purchase of available for sale securities 0 0
Proceeds from sale of available for sale securities 75,432 110,856
--------- ---------
Net cash provided by (used in) investing activities 54,536 110,856
--------- ---------
Cash flow from financing activities:
Principal payment an notes payable (66,000) (33,000)
Addition to paid-in-capital 196,989 0
Proceeds from sale of common stock 0 0
Purchase of treasury stock 0 63,445
Net cash provided by (used in) financing activities 0 (21,717)
--------- ---------
130,989 (1,272)
--------- ---------
Net changes in cash and cash equivalents
(28,502) 45,253
Cash and cash equivalents:
Beginning of year
33,702 41,676
--------- ---------
End of period
$ 5,200 $ 86,929
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for
Interest
$ 35,151 $ 32,960
</TABLE>
<PAGE> 31
31
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: August 14, 1999 /s/ Stephen Lange Ranzini
----------------------------------------
Stephen Lange Ranzini
President & CEO and
Principal Financial Officer)
<PAGE> 32
32
Exhibit Index
-------------
Sequentially
Numbered
Page
-----------------
27. Financial Data Schedule 33
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,653,932
<INT-BEARING-DEPOSITS> 4,487
<FED-FUNDS-SOLD> 5,132
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,366,137
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 27,720,968
<ALLOWANCE> 500,111
<TOTAL-ASSETS> 50,904,728
<DEPOSITS> 35,477,355
<SHORT-TERM> 4,437,496
<LIABILITIES-OTHER> 5,216,133
<LONG-TERM> 1,407,097
0
0
<COMMON> 21,043
<OTHER-SE> 2,375,501
<TOTAL-LIABILITIES-AND-EQUITY> 50,904,728
<INTEREST-LOAN> 1,623,085
<INTEREST-INVEST> 141,784
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,764,869
<INTEREST-DEPOSIT> 874,005
<INTEREST-EXPENSE> 906,687
<INTEREST-INCOME-NET> 858,182
<LOAN-LOSSES> (54,860)
<SECURITIES-GAINS> 7,531
<EXPENSE-OTHER> 2,798,979
<INCOME-PRETAX> (372,516)
<INCOME-PRE-EXTRAORDINARY> (372,516)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (361,016)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
<YIELD-ACTUAL> 3.38
<LOANS-NON> 875,856
<LOANS-PAST> 20,723
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 896,579
<ALLOWANCE-OPEN> 459,001
<CHARGE-OFFS> 28,904
<RECOVERIES> 25,014
<ALLOWANCE-CLOSE> 500,111
<ALLOWANCE-DOMESTIC> 500,111
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 56,521
</TABLE>
