<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 November 12, 1999
1,989,139 shares
page 1 of 40 pages
Exhibit index on sequentially numbered page 33
<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 28
Item 5. Other Information
Parent Company Condensed
Financial Information 28
Item 6. Exhibits & Reports on Form 8-K 32
Signature 32
- ---------
Exhibit Index 33
- ------------------------------------------------------------
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 1.- Financial Statements
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
-------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 898,946 $ 703,015
Short term investments 3,378 8,543,000
-------------------- -------------------
Total cash and cash equivalents 902,324 9,246,015
Securities available for sale at market 2,517,764 2,945,832
Federal Home Loan Bank Stock 848,400 848,400
Loans held for sale 8,961,208 11,862,665
Loans 29,563,130 23,652,103
Allowance for Loan Loss (508,647) (459,001)
-------------------- -------------------
Loans, net 29,054,483 23,193,102
Premises and equipment 1,459,383 1,439,440
Mortgage servicing rights 701,244 948,208
Investment in and advances to
Michigan BIDCO - 725,733
Other real estate owned 673,178 707,730
Net tax assets 231,449 377,088
Accounts receivable 1,414,157 1,198,661
Other assets 1,864,234 1,042,684
-------------------- -------------------
TOTAL ASSETS $ 48,627,824 $ 54,535,558
==================== ===================
</TABLE>
-Continued-
<PAGE> 4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 4
Consolidated Balance Sheets (continued)
September 30, 1999 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
-------------------- -------------------
<S> <C> <C>
Liabilities
Deposits:
Demand - non interest bearing $ 2,548,275 $ 1,801,347
Demand - interest bearing 14,125,287 16,373,832
Savings 272,842 177,093
Time 17,786,828 24,867,369
-------------------- -------------------
Total Deposits 34,733,232 43,219,641
Mortgage escrow 47,507 140,673
Short term borrowings 5,067,674 277,000
Long term borrowings 2,725,097 1,196,097
Deferred noncompete income 5,815 32,068
Drafts payable 2,146,306 5,065,281
Accounts payable 840,130 744,928
Accrued interest payable 408,369 415,060
Other Liabilities 121,916 157,081
-------------------- -------------------
Total Liabilities 46,096,046 51,247,829
Minority Interest 460,440 204,949
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) (905,709) (16,500)
Net unrealized gain/(loss) on securities
available for sale, net of tax
of $226,710 in 1999, and
$62,182 in 1998. (439,930) (120,707)
-------------------- -------------------
Total Stockholders' equity 2,071,337 3,082,780
-------------------- -------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 48,627,824 $ 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 Income and Comprehensive Income
For the Periods Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended Period Ended
1999 1998 1999 1998
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 805,277 $ 884,778 2,323,622 $2,848,881
Interest on securities:
U.S. Government agencies 37,114 21,142 93,926 51,356
Other securities 17,108 17,172 50,765 50,829
Interest on bank deposits 60 561 1,149 1,581
Interest on federal funds 1,268 21,913 53,293 91,332
---------- ---------- ---------- ----------
Total interest income 860,826 945,566 2,522,754 3,043,979
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits:
Demand deposits 139,800 184,419 443,365 565,396
Savings deposits 1,269 933 3,494 2,804
Time certificates of deposit 257,331 329,069 825,308 1,095,236
Bank and other short term borrowings 46,549 4,810 79,231 65,373
Long Term Notes Payable 48,064 19,973 125,008 62,917
---------- ---------- ---------- ----------
Total interest expense 493,014 539,204 1,476,407 1,791,726
---------- ---------- ---------- ----------
Net interest income 367,812 406,362 1,046,347 1,252,253
Provision for loan losses 25,148 58,433 70,148 95,933
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 342,664 347,929 976,199 1,156,320
---------- ---------- ---------- ----------
Other income:
Net security gains(losses) 0 13,481 (15,477) 86,038
Service charges and fees 15,257 11,771 45,202 32,771
Mortgage banking income 568,134 962,775 1,790,544 3,187,718
Profit(loss) from equity investment in
Michigan BIDCO 8,409 1,136 11,099 161,625
Insurance and investment fee income 20,949 16,741 68,812 50,336
Other 127,307 99,412 425,779 224,975
---------- ---------- ---------- ----------
Total other income 740,056 1,105,316 2,325,958 3,743,463
---------- ---------- ---------- ----------
</TABLE>
-Continued-
<PAGE> 6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 6
Consolidated Statements of Income and Comprehensive Income (continued)
For the Periods Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended Period Ended
1999 1998 1999 1998
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Salaries and wages $ 583,855 $ 893,858 1,964,059 $ 2,776,700
Employee benefits 88,294 115,084 343,904 425,732
Occupancy, net 122,793 155,441 337,501 334,239
Taxes other than income (5,461) 14,469 64,565 36,265
Data processing and equipment expense 90,184 58,242 252,204 198,507
Correspondent bank service charges 2,759 8,701 9,385 21,965
Advertising 30,010 18,683 99,013 67,185
Net expense of other real estate owned 4,157 8,192 29,749 39,262
Legal and audit expense 214,683 82,167 349,376 258,898
Other operating expenses 248,385 238,581 739,200 825,920
----------- ----------- ----------- -----------
Total other expenses 1,379,659 1,593,418 4,188,956 4,984,673
----------- ----------- ----------- -----------
Income (Loss) before income taxes (296,939) (140,173) (886,799) (84,890)
----------- ----------- ----------- -----------
Income taxes (benefit) 13,910 (24,803) 2,410 (100,692)
----------- ----------- ----------- -----------
Net Income $ (310,849) $ (115,370) (889,209) $ 15,802
=========== =========== =========== ===========
Comprehensive Income $ (325,153) $ (117,281) (1,044,387) $ (9,838)
=========== =========== =========== ===========
Earnings (loss) per common share
Primary $ (0.16) $ (0.06) (0.45) $ 0.01
=========== =========== =========== ===========
Fully Diluted $ (0.16) $ (0.06) (0.45) $ 0.01
=========== =========== =========== ===========
Weighted average shares outstanding
Primary 1,989,139 1,974,703 1,989,139 1,980,758
=========== =========== =========== ===========
Fully Diluted 1,989,139 1,974,703 1,989,139 1,982,946
=========== =========== =========== ===========
</TABLE>
<PAGE> 7
UNIVERSITY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements of Cash Flows
For the nine-month periods ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (889,209) $ 131,173
Adjustments to reconcile net loss to net cash from Operating Activities:
Depreciation and amortization 403,591 292,031
Provision for loan loss 70,148 37,500
Mortgage loans originated for sale (226,792,187) (325,194,338)
Proceeds from sale of loans and mortgage backed trading securities 230,629,113 330,754,470
Net loss/(gain) on loan sales and securitization (932,538) (1,457,583)
Market adjustment on loans held for sale (2,931) (100)
Net amortization/accretion on securities 65,200 5,099
Loss/(Gain) on sale of securities available for sale (15,477) (72,557)
Gain on Sale of Saline Office 0 99,903
Change in:
Investment in Michigan BIDCO, Inc. 725,733 (150,918)
Purchased Mortgage Servicing Rights 55,099 --
Other real estate 34,552 (281,358)
Increase in other assets (891,407) 461,550
Increase/(Decrease) in other liabilities (2,860,110) 4,146,801
------------- -------------
Net cash from (used in) operating activities $ (400,423) $ 8,771,673
------------- -------------
Cash flow from investing activities:
Purchase of securities available for sale (980,412) --
Proceeds from sales of securities available for sale 578,870 110,856
Proceeds from maturities and paydowns of securites available for sale 428,893 49,825
Loans granted net of repayments (5,931,529) 2,653,579
Sale of Saline Office 0 189,480
Premises and equipment expenditures (231,669) (52,173)
------------- -------------
Net cash from (used in) investing activities (6,135,847) 2,951,567
------------- -------------
Cash flow used in financing activities:
Net increase (decrease) in deposits (8,486,409) (3,919,854)
Net increase(decrease) in mortgage escrow accounts (93,166) 154,369
Net increase (decrease) in other short term borrowings 4,790,674 (2,744,188)
Net increase (decrease) in other long term borrowings 1,529,000 (169,635)
Increase in minority interest 255,491 0
Addition to paid-in-capital 196,989 0
Issuance of common stock 0 31,729
------------- -------------
Net cash from financing activities (1,807,421) (6,647,579)
------------- -------------
Net change in cash and cash equivalents (8,343,691) 5,075,661
Cash and cash equivalents:
Beginning of period 9,246,015 2,376,959
------------- -------------
End of period $ 902,324 $ 7,452,620
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 1,483,098 $ 1,193,516
</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 nine months ended September 30, 1999, and 1,974,703
and 1,980,758 for the three and nine months ended September 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 September 30,
1999 had a net unrealized loss of approximately $667,000 as compared with a net
unrealized loss of approximately $645,000 at June 30, 1999 and $183,000 at
December 31, 1998.
Securities available for sale
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury 474 - (112) 362
U.S. agency mortgage-backed 1,727 - (492) 1,235
U.S. agency note 490 - (19) 471
Municipal 494 (44) 450
- ------------------------------------------------------------------------
Total investment securities
available for sale $3,185 $- $(667) $2,518
====== === ===== ======
</TABLE>
<PAGE> 9
Securities available-for-sale (continued) 9
<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
Municipal 486 - (35) 451
- ----------------------------------------------------------------------
Total investment securities
available for sale $3,163 $- $ (645) $2,518
====== === ====== ======
<CAPTION>
December 31, 1998
-------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 467 $ - $ (25) $ 442
U.S. agency mortgage-backed 2,191 4 (136) 2,059
Other mortgage-backed 421 4 - 425
Other equity 50 (30) 20
- ----------------------------------------------------------------------
Total securities
available for sale $3,129 $ 8 $ (191) $2,946
====== ==== ====== ======
</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 three months ended September 30, 1999, a net loss of $310,849
was realized versus a net loss of $115,370 in the same period in 1998. Net
income in the third quarter of 1999 was negatively impacted by $203,947 related
to the following issues:
* The Company lost a legal dispute which resulted in a charge of
$152,000;
* Varsity Mortgage lost $51,947 in the third quarter of 1999, because
of depressed margins and decreased volume.
For the nine months ended September 30, 1999, a net loss of $889,209
was realized versus net income of $15,802 in the same period in 1998. Net
interest income decreased to $1,046,347 in the 1999 period from $1,252,253 in
the 1998 period, and other income was $2,325,958 in the 1999 period versus
$3,743,463 in the 1998 period. Operating expenses decreased to $4,188,956 in the
1999 period from $4,984,673 in the 1998 period. Basic and diluted net loss per
share in the nine months ended September 30, 1999 was ($0.45), compared to net
income of $0.01 for the nine months ended September 30, 1998.
The loss in 1999 versus the profit in 1998 was principally due to
decreased mortgage banking fee income and decreased net interest income as a
result of decreased profitability from the Bank's mortgage banking activities
and an adverse legal judgment. 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.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the nine months ended September 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
PRE-TAX INCOME (LOSS) SUMMARY
1999 1998
<S> <C> <C>
Banking
Community & mortgage banking $(670) $(646)
Midwest Loan Services 5 0
Varsity Mortgage (175) 423
Michigan BIDCO 133 162
Corporate Office (180) (24)
----- -----
Total $(887) $ (85)
</TABLE>
The net income of the Company for the nine months ended September 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.
<PAGE> 11
11
RECENT DEVELOPMENTS
University Bank has reached an agreement in principle to sell its 80%
interest in Midwest Loan Services for $1,700,000 and a contract to manage the
escrow deposits of Midwest. If a sale is consummated, this would result in a
capital gain of at least $875,000 after-tax.
University Bank has reached an agreement in principle to sell its
interest in Varsity Mortgage, LLC for a nominal sum. If a sale is consummated,
this would result in no gain or loss.
There is no assurance that either the sale of Midwest or Varsity
Mortgage will be completed or that the terms of sale would not change materially
if a sale is consummated.
Last year Michigan BIDCO entered into a contract with a cable tv
company which it had originally financed several years ago which entitles it to
a contingent payment in the event of a change in control of the cable tv firm
prior to November 2000. Subsequent to quarter-end a change in control under the
contract was triggered. The amount of the payment now due BIDCO has not been
determined, but it is based on fair market value of the firm on the date of the
triggering event. Management estimates that the payment will be between
approximately $66,000 and $300,000, and is most likely to be in the middle of
that range. The payment will be immediately due upon determination of the fair
market value of the firm and will result in income to the BIDCO in the amount of
the payment.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased to $367,812 for the three months ended
September 30, 1999 from $406,362 for the three months ended September 30, 1998.
Net interest income increased $73,518 (+25%) from the $294,294 earned in the
three months ended June 30, 1999. Net interest income fell from the year ago
period because of a decrease in in mortgage banking loans held for sale due to
lower mortgage banking activity. The yield on interest earning assets decreased
from 8.54% in the 1998 period to 8.15% in the 1999 period. The cost of interest
bearing liabilities decreased from 5.53% in the 1998 period to 5.21% in the 1999
period. Net interest income as a percentage of total earning assets decreased
from 3.67% to 3.48%, because of the decrease in interest spread.
Net interest income decreased to $1,046,347 for the nine months ended
September 30, 1999 from $1,252,253 for the nine months ended September 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
8.67% in the 1998 period to 8.23% in the 1999 period. The cost of interest
bearing liabilities decreased from 5.58% in the 1998 period to 5.14% in the 1999
period. Net interest income as a percentage of total earning assets decreased
from 3.57% to 3.41%, because of the decrease in interest spread.
<PAGE> 12
12
Interest income
Interest income decreased to $860,826 in the quarter ended September
30, 1999 from $945,566 in the quarter ended September 30, 1998. The average
volume of interest earning assets increased to $46,388,121 in the 1999 period
from $44,271,772 in the 1998 period, an increase of 4.8%. The increased volume
of earning assets was due to a increase in portfolio loans held by the Bank
which was partially offset by a decrease in loans held for sale generated by
Varsity Mortgage. The overall yield on total loans decreased to 8.31% from
8.64%.
The average volume of investment securities in the three months ended
September 30, 1999 increased 98.7% 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 6.47% in the three month period ended September 30, 1999 from 9.16%
in the 1998 period.
Management is pleased at the 22.8% increase in portfolio loans at the
Bank since March 31, 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 $2,522,754 in the nine months ended
September 30, 1999 from $3,043,979 in the nine months ended September 30, 1998.
The average volume of interest earning assets decreased to $42,503,890 in the
1999 period from $46,933,778 in the 1998 period, a decrease of 9.4%. 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
8.60% from 8.79%.
The average volume of investment securities in the nine months ended
September 30, 1999 increased 134.5% 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 5.86% in the nine month period ended September 30, 1999 from 9.70%
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.
Interest Expense
Interest expense decreased to $493,014 in the three months ended
September 30, 1999 from $539,204 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
<PAGE> 13
13
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 5.21% in the 1999 period from 5.53% in the 1998 period. The average volume of
interest bearing liabilities decreased 3.9% in the 1999 period versus the 1998
period.
Interest expense decreased to $1,476,407 in the nine months ended
September 30, 1999 from $1,791,726 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 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 5.14% in the 1999 period from 5.58% in the 1998 period. The average
volume of interest bearing liabilities decreased 10.6% 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 nine months ended
September 30, 1999 and 1998.
<PAGE> 14
<TABLE>
<CAPTION>
Three Months Ended September 30, 14
----------------------------------------------------------------
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 $ 8,474 $ 60 2.80% $ 89,018 $ 561 2.52%
Federal Funds Sold 102,003 1,268 4.93% 1,559,390 21,913 5.62%
Securities:
Non-taxable (1) - - - - - -
Taxable 3,322,992 54,221 6.47% 1,672,241 38,314 9.16%
----------- -------- ----- ----------- --------- ------
Total Securities & S.T. Investments 3,433,469 55,549 6.42% 3,320,649 60,788 7.32%
----------- -------- ----- ----------- --------- ------
Loans:
Commercial 12,793,883 315,587 9.79% 9,773,604 239,256 9.79%
Real Estate Mortgage 24,557,209 459,191 7.42% 26,752,149 530,790 7.94%
Installment/Consumer 1,114,419 30,499 10.86% 4,425,370 114,732 10.37%
----------- -------- ------ ----------- --------- ------
Total Loans 38,465,511 805,277 8.31% 40,951,123 884,778 8.64%
----------- -------- ------ ----------- --------- ------
Total Interest Bearing Assets 41,898,980 860,826 8.15% 44,271,772 945,566 8.54%
----------- -------- ------ ----------- --------- ------
Less allowance for possible
loan losses & deferred fees (472,665) (361,814)
----------- -----------
41,426,315 43,909,958
Mortgage servicing rights 713,826 1,168,581
Non earning assets 6,721,303 7,033,242
----------- -----------
Total Assets $48,861,444 $52,111,781
----------- -----------
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 3,135,899 $ 25,095 3.17% $ 2,825,162 $ 26,433 3.74%
Savings 251,650 1,269 2.00% 150,190 933 2.48%
Time 18,753,823 257,331 5.44% 21,934,872 329,069 6.00%
Short Term Borrowed Funds 2,482,091 46,549 7.44% 326,975 4,810 5.88%
Money Market Accounts 11,022,404 114,706 4.13% 12,918,552 157,986 4.89%
Long Term Debt 1,866,500 48,064 10.22% 872,470 19,973 9.16%
----------- -------- ------ ----------- -------- ------
Total interest bearing
liabilities $37,512,367 493,014 5.21% $39,028,221 539,204 5.53%
=========== -------- ------ =========== -------- ------
Net interest income $367,812 $406,362
======== ========
Weighted average rate spread 2.94% 3.02%
====== ======
Net yield on average earning 3.48% 3.67%
assets
</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>
Nine Months Ended September 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 $ 58,974 $ 1,149 2.60% $ 48,929 $ 1,581 4.32%
Federal Funds Sold 1,504,460 53,293 4.74% 2,149,153 91,332 5.68%
Securities:
Non-taxable (1) - - - - - -
Taxable 3,303,925 144,690 5.86% 1,409,098 102,185 9.70%
---------- ---------- ------- ---------- --------- -----
Total Securities & S.T. Investments 4,867,359 199,132 5.47% 3,607,180 195,098 7.23%
---------- ---------- ------- ---------- --------- -----
Loans:
Commercial 11,779,974 873,362 9.91% 10,921,888 855,087 10.47%
Real Estate Mortgage 23,206,163 1,357,301 7.82% 27,786,074 1,640,755 7.89%
Installment/Consumer 1,137,569 92,959 10.93% 4,618,636 353,039 10.22%
---------- ---------- ------- ---------- --------- -----
Total Loans 36,123,706 2,323,622 8.60% 43,326,598 2,848,881 8.79%
---------- ---------- ------- ---------- --------- -----
Total Interest Bearing Assets 40,991,065 2,522,754 8.23% 46,933,778 3,043,979 8.67%
---------- ---------- ------- ---------- --------- -----
Less allowance for possible
loan losses & deferred fees (462,892) (460,181)
----------- ----------
40,528,173 46,473,597
Mortgage servicing rights 789,613 1,168,581
Non earning assets 9,297,528 5,336,202
---------- ----------
Total Assets $ 50,615,314 $ 52,978,380
========== ==========
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 3,216,181 $ 75,761 3.15% $ 2,994,869 $ 88,691 3.96%
Savings 214,069 3,494 2.18% 152,896 2,804 2.45%
Time 19,639,292 825,308 5.62% 24,337,424 1,095,236 6.02%
Short Term Borrowed Funds 1,628,202 79,231 6.51% 1,453,015 65,373 6.02%
Money Market Accounts 11,893,053 367,605 4.13% 13,091,531 476,705 4.87%
Long Term Debt 1,790,347 125,008 9.34% 900,083 62,917 9.35%
---------- ---------- ------ ---------- ---------- -----
Total interest bearing
liabilities $ 38,381,144 1,476,407 5.14% $ 42,929,818 1,791,726 5.58%
========== ------------ ----- ========== ---------- -----
Net interest income $ 1,046,347 $ 1,252,253
============ ==========
Weighted average rate spread 3.09% 3.09%
====== =====
Net yield on average earning
assets 3.41% 3.57%
</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 provision for loan loss remained at a rate of $7,500 in the
first nine months of 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for loan losses $ 25,148 $ 58,433 $ 70,148 $ 95,933
Loan charge-offs (26,596) (28,115) (55,500) (253,142)
Recoveries 9,984 10,354 34,998 24,247
--------- --------- -------- ---------
Net increase (decrease)
in allowance $ 8,536 $ 40,804 $ 49,646 $(132,962)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At At At
Sept. 30, June 30, December 31,
1999 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Total loans (1) $27,351,270 $25,497,951 $23,652,103
Allowance for loan losses 508,647 500,111 459,001
Allowance/Loans, % (1) 1.86% 1.96% 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
Sept. 30, June 30, December 31,
1999 1999 1998
---------------------------------------
<S> <C> <C> <C>
Past due 90 days and over
and still accruing:
Real estate 108,085 778 4,430
Installment 6,952 1,136 --
Commercial -- 18,809 --
--------- --------- ---------
Subtotal 115,037 20,723 4,430
Nonaccrual loans:
Real estate 272,002 465,669 467,402
Installment -- -- --
Commercial -- -- --
--------- --------- ---------
Subtotal 272,002 465,669 467,402
Other real estate
owned (2) 673,178 566,022 707,730
--------- --------- ---------
Total 1,060,217 1,052,414 1,179,562
As % of loans (1) 3.88% 4.13% 4.99%
Ratio of reserve for loan
losses to all loans
90 days and over 131.4% 102.8% 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 September 30, 1999, June 30, 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 September 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 September 30, 1999 and June 30, 1999 includes a
home sold with financing in the amount of $75,656 and $75,830, respectively,
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.
The Bank's loan portfolio continues to have very low delinquencies
other than residential real estate properties.
<PAGE> 18
18
All of the other real estate owned 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 $740,056 for the three months
ended September 30, 1999 from $1,105,316 for the three months ended September
30, 1998. The decrease was principally a result of a $400,724 decrease in the
Bank's mortgage banking income.
Total non-interest income decreased to $2,325,958 for the nine months
ended September 30, 1999 from $3,743,463 for the nine months ended September 30,
1998. The decrease was principally a result of a $1,403,257 decrease in the
Bank's mortgage banking income.
Securities. During nine months ended September 30, 1999, a gain of $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). The Company made no securities transactions
during the third quarter of 1999.
Mortgage Banking. Total mortgage banking income decreased to $568,134
for the three months ended September 30, 1999 from $962,775 for the three months
ended September 30, 1998, and decreased to $1,790,544 for the nine months ended
September 30, 1999 from $3,187,718 for the nine months ended September 30, 1998.
Sharply decreased loan purchase and origination volumes during the 1999 periods
were responsible for the decline. 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 62.5% of the total equity
interest in Varsity Mortgage, LLC. During the third quarter of 1999, the Bank
acquired 12.5% of the total equity interest in Varsity Mortgage for a nominal
sum. As a result of the manner in which Varsity Mortgage's operating agreement
is structured, the Bank is now entitled to 5/12ths 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. See "Recent Developments",
above for a discussion about the possible sale of Varsiity Mortgage and Midwest
Loan Services.
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
$79,000 in the seven months ended July 31, 1999. During the third quarter of
1999, the Bank and Varsity Mortgage sold the MortgageQuest operations to a
substantially larger local retail mortgage firm. In connection with this sale,
the Bank entered into a strategic partnership with that firm which is now
contributing additional revenue to the Bank. In addition, the Bank received 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.
At September 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
$701,244. 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 approximates 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.
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 September 30, 1999, the Bank had outstanding purchase commitments to
buy single family FNMA and FHLMC qualifying mortgage loans of $15,073,298 and
outstanding forward commitments to deliver FNMA and FHLMC loans of $10,291,850,
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
<PAGE> 20
20
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 $99,709 in income from the BIDCO in the third quarter of 1999,
$143,757 in income from the BIDCO in the second quarter of 1999 and $2,690 in
income from the BIDCO in the first quarter of 1999. In the three and nine months
ended 1998, the Bank included $1,136 and $161,625 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
26.6%, 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 has since improved the BIDCO's net interest margin at the
rate of $7,500 per month.
During the nine months ended September 30, 1999, the BIDCO made one new
loan financing arrangement, a $50,000 participation in a loan to a railroad
which is a previous customer. Several investments were sold or paid off,
including the BIDCO's equity interest in the Tissue Paper Mill which 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 September 30, 1999, the BIDCO had no
new investments pending. See "Recent Developments", above.
Non-Interest Expense
Non-interest expense decreased to $1,379,659 in the three months ended
September 30, 1999 from $1,593,418 for the three months ended September 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 $4,188,956 in the nine months ended
September 30, 1999 from $4,984,673 for the nine months ended
<PAGE> 21
21
September 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 $349,376 in the 1999 period included
$195,000 in legal expense related to a dispute which has now been finalized (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 increased to
$166,906 and $198,506 for the three and nine month 1999 periods from $37,022 and
$126,898 for the three and nine month 1998 periods. Expenses for the 1998 nine
month period included a $53,479 expense for the 1998 ESOP contribution. The 1999
ESOP expense will be booked in the fourth 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 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 and Varsity Mortgage 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
as Year 2000 compliant.
<PAGE> 22
22
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.
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. No additional Year 2000 are
anticipated.
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 (NYCE), 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 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
<PAGE> 23
23
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. The Bank ran for a full day in the
fourth quarter of 1999 without computers as a test of its full scale live
contingency plan. 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 begun a
project to offer transactional internet banking for all bank products. The
internet banking product is expected to be available in production mode during
the fourth 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 September 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 September 30, 1999, the bank had cash and due from banks and fed funds
on hand of $898,946. The Bank has a $7,500,000 line of credit secured by
investment securities and portfolio mortgage loans, of which $5,067,674 was
drawn at September 30, 1999. In order to bolster liquidity, the Bank has also
sold brokered CDs from time to time.
The decline in time deposits during the nine month period ended
September 30, 1999 from $24,867,369 to $17,786,828 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.
<PAGE> 24
University Bank 24
Risk Adjusted Assets & Risk Adjusted Capital Ratio
30-Sep-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 297 --
US Treasury Strip 474 --
Federal Reserve Balance 25 --
------------------------------
TOTAL 797 --
20% RISK CATEGORY
Interest-bearing Balances 10 2
Fed Funds Sold 3 1
U.S. Gov't sponsored Agency Sec 2,216 443
Other Mortgage-Back Securities -- --
Cash Items 367 73
FHLB Stock 848 170
Balances due from depository Inst 250 50
------------------------------
TOTAL 3,694 739
50% RISK CATEGORY
Revenue Oblig Sec issued by state 494 247
Qualifying 1st liens on 1-4 family 19,304 9,652
------------------------------
TOTAL 19,798 9,899
100% RISK CATEGORY
ALL OTHER ASSETS 24,232 24,232
ON BALANCE SHEET ITEMS EXCLUDED FROM CALCULATION 70
TOTAL ASSETS 48,591 34,870
==============================
</TABLE>
<TABLE>
<CAPTION>
TIER 1 CAPITAL BALANCE
<S> <C>
Common Stock 200
Surplus 4,433
Undivided Profits & Capital Reserves (1,255)
Minority Interest 522
Other identifiable Intangible Assets (70)
TOTAL TIER 1 CAPITAL 3,830
TIER 2 CAPITAL
Allowance for loans & Lease losses 508
Excess LLR (limited to 1.25% gross risk-weighted assets (72)
TOTAL TIER 2 CAPITAL 436
TOTAL TIER 1 & TIER 2 CAPITAL 4,266
TIER 1/TOTAL ASSETS 7.88%
TIER 1 & 2/TOTAL ASSETS 8.78%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 10.98%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 12.23%
</TABLE>
<PAGE> 25
25
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 $36,833 to $1,049 at September 30, 1999. During
the nine months ended September 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 or
advances in anticipation of stock issues (see below) 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 $727,000 and $826,000 at September 30,
1999 and at December 31, 1998, respectively.
During the third quarter of 1999, the Company borrowed $228,000 from
various individuals and trusts related to the Company's CEO and Chairman
(Ranzini Noteholders) in the form of equity conversion notes. The notes accrue
interest at the rate of 8.25% and are mandatorily convertible into common stock
of the Company at the Company's option at the rate of $3 per share of common
stock. All interest is accrued and any accrued interest would also be
convertible on the same terms. In addition, the Ranzini Noteholders have
committed to purchase a total of at least $304,000 of notes by December 1, 1999
and at least $234,000 in common stock of the Company under any New Stock Issue
prior to March 31, 2000.
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
<PAGE> 26
26
earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the 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 September 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 September 30, 1999 was estimated to
be ($8,716,000) or -17.94%:
<PAGE> 27
UNIVERSITY BANK 27
Asset/Liability Position Analysis 30-Sep-99
($ in 000's)
Maturing or Repricing in
<TABLE>
<CAPTION>
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years Years OTHERS TOTAL
------ ------- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fed Funds 3 0 0 0 0 0 3
Loans (1) 16,191 6,686 5,484 2,922 6,023 0 37,306
Non-Accrual Loans 0 0 0 0 0 711 711
Securities 0 0 0 2,080 1,286 0 3,366
Other Assets 0 0 0 0 701 5,605 6,306
Cash and Due from Banks 0 0 0 0 0 899 899
------- ------- ------ ------ ----- ------ ------
TOTAL ASSETS 16,194 6,686 5,484 5,002 8,010 7,215 48,591
LIABILITIES
CD's over $100,000 754 636 625 100 0 0 2,115
CD's under $100,000 10,076 3,996 912 0 688 0 15,672
MMDA 5,452 5,452 0 0 0 0 10,904
NOW 0 0 3,222 0 0 0 3,222
Demand and Escrow 0 0 0 0 0 2,596 2,596
Savings 0 0 273 0 0 0 273
Other Borrowings 5,068 0 0 0 0 0 5,068
Other Liabilities 0 162 1,447 161 0 4,033 5,803
Equity 0 0 0 0 0 2,938 2,938
------- ------- ------ ------ ----- ------ ------
TOTAL LIABILITIES 21,350 10,246 6,479 261 688 9,567 48,591
GAP (5,156) (3,560) (995) 4,741 7,322 (2,352)
CUMULATIVE
GAP (5,156) (8,716) (9,711) (4,970) 2,352 0
GAP
PERCENTAGE -10.61% -17.94% -19.99% -10.23% 4.84% 0.00%
</TABLE>
Notes:
(1) Net of bad debt reserves.
<PAGE> 28
28
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. During the third quarter of 1999, the Company
received an adverse judgment 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-advised opinion is practical. As a result, $152,000 was charged as an
expense during the third quarter of 1999.
Item 5. Other information
Parent Company Financial Information
Certain condensed financial information with respect to
University Bancorp, Inc. follows:
<PAGE> 29
UNIVERSITY BANCORP, INC. (The Parent) 29
Condensed Balance Sheets
September 30, 1999 and December 31,1998
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,049 $ 33,702
Securities available for sale 233 20,328
Michigan BIDCO senior debentures 0 67,977
Michigan BIDCO common stock 61,850 -
Investment in subsidiary Bank 2,938,100 3,736,157
Tax Assets 38,659 78,890
Other Assets 5,575 2,458
---------- ----------
Total Assets $3,045,467 $3,939,512
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Note payable $ 727,000 $ 826,000
Accrued interest payable 19,050 15,654
Accounts payable 0 13,325
Deferred Taxes 79 0
Equity Conversion Notes 228,000 0
---------- ----------
Total Liabilities 974,130 854,979
Stockholder's Equity 2,071,337 3,084,533
---------- ----------
Total Liabilities and Stockholder's Equity $3,045,467 $3,939,512
========== ==========
</TABLE>
<PAGE> 30
UNIVERSITY BANCORP, INC. (The Parent) 30
Condensed Statements of Operations
For the Periods Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
For Three Month For Nine Month
Period Ended Period Ended
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ - $ - - $ -
Interest & dividends on investments 29 2,130 2,491 19,875
Equity earnings from Michigan BIDCO 8,409 - 8,409 -
Net security gains - 13,481 (16,102) 86,038
Other $ 4 59,743 4 59,743
----------- ----------- ----------- -----------
Total Income 8,441 75,354 (5,199) 165,656
Expense:
Interest 21,625 19,973 55,535 62,917
Salaries & benefits 0 24,442 1,083 78,330
ESOP contributions 0 0 0 0
Public listing 3,661 3,505 16,664 21,181
Legal & audit 160,117 8,016 174,835 14,689
Other taxes 0 0 1,986 2,634
Occupancy & other miscellaneous 3,129 1,058 3,939 10,064
----------- ----------- ----------- -----------
Total Expense 188,531 56,994 254,041 189,815
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (180,091) 18,360 (259,241) (24,159)
Federal income taxes (benefit) 0 0 0 0
----------- ----------- ----------- -----------
Income (loss) before equity in
undistributed net income of subsidiaries (180,091) 18,360 (259,241) (24,159)
Equity in undistributed net income (loss)
of subsidiaries (130,758) (133,731) (629,968) 39,960
----------- ----------- ----------- -----------
Net Income $ (310,849) $(115,371) (889,209) $ 15,801
=========== =========== =========== ===========
Comprehensive Income $ 27,573 1 (117,282) 107,443 $ (9,839)
=========== =========== =========== ===========
Net Income per Common Share
Primary $ (0.16) $ (0.06) (0.45) $ 0.01
=========== =========== =========== ===========
Fully Diluted $ NA NA NA 0.01
=========== =========== =========== ===========
</TABLE>
<PAGE> 31
UNIVERSITY BANCORP, INC. (The Parent) 31
Condensed Statement of Cash Flows
For the Nine Month Periods Ended September 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 (Loss) $(889,209) $ 15,801
Loss(gain) on sale of investments 16,102 (86,038)
Net amortization/accretion on securities 0 0
Decrease/(increase) in receivable from affiliate (8,409) 21,300
Decrease/(increase) in Other Assets (3,117) 0
Increase(Decrease) in interest payable 3,396 (47,361)
Increase(Decrease) in other liabilities (13,246) (19,179)
Decrease(Increase) investment in subsidiaries 432,979 (39,960)
Decrease(Increase) income tax receivable 31,581 0
--------- ---------
Net cash provided by (used in) operating activities (429,923) (155,437)
--------- ---------
Cash flow from investing activities:
Subsidiary dividends received 0 0
Contributions of capital to subsidiary 0 0
Advances to Michigan BIDCO 0 0
Purchase of available for sale securities 0 (25,845)
Proceeds from sale of available for sale securities 75,432 216,927
--------- ---------
Net cash provided by (used in) investing activities 75,432 191,082
--------- ---------
Cash flow from financing activities:
Principal payment on notes payable (99,000) (66,000)
Borrowings under equity conversion notes 228,000 0
Addition to paid-in-capital 196,989 0
Proceeds from sale of common stock 0 53,445
Purchase of treasury stock 0 (37,424)
--------- ---------
Net cash provided by (used in) financing activities 325,989 (49,979)
--------- ---------
Net changes in cash and cash equivalents (28,502) (14,334)
Cash and cash equivalents:
Beginning of year 33,702 41,676
--------- ---------
End of period $ 5,200 $ 27,342
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 52,139 $ 54,318
</TABLE>
<PAGE> 32
32
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.15 Equity Conversion Notes
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: November 12, 1999 /s/ Stephen Lange Ranzini
----------------------------
Stephen Lange Ranzini
President & CEO and
Principal Financial Officer)
<PAGE> 33
33
Exhibit Index Sequentially
------------- Numbered
Page
-------------
10.15 Equity Conversion Notes
27. Financial Data Schedule
<PAGE> 1
EXHIBIT 10.15
959 Maiden Lane
Ann Arbor, MI 48105
August 16, 1999
NOTE
For value received, University Bancorp, Inc. (the ("Obligor") promises
to pay to Ranzini Family Trust (the "Holder or "Lender"), on your order, at the
address above, the principal sum of: FOURTY-NINE THOUSAND NINE HUNDRED
EIGHTY-SEVEN AND 98/100 Dollars ($ 49,987.98).
1. Payment. Obligor will make no periodic payments under this note,
with a Final Payment in the amount of the principal plus all accrued interest at
maturity. The amount of the Final Payment shall be paid solely through the sale
of common stock of University Bancorp, Inc. by the Obligor (subject to
completion of a separate private placement agreement in accordance with the
rules of the Securities & Exchange Commission), in the event that an anticipated
rights offering of University Bancorp, Inc. common stock is not completed prior
to maturity.
2. Interest. Interest accrues on a Actual/365 basis. Post-maturity
interest will accrue at the same rate as prior to maturity on the balance of
this note not paid at maturity, including maturity, including maturity by
acceleration. Interest shall be accrued but not paid until maturity from August
16, 1999 at the Wall Street Journal Prime Rate of 8.25% until maturity.
3. Purpose. The purpose of this loan is to fund working capital
requirements of the Obligor.
4. Security. This note is unsecured.
5. Prepayment. If Obligor pays off this Note early, it will not have to
pay a penalty.
6. Signatures. Obligor agrees to the terms set out on page 1 and page 2
of this agreement. Obligor has received a copy of this document on today's date.
Signature: University Bancorp, Inc.
By: /s/Stephen Lange Ranzini
--------------------------------
Its: President & CEO
Ranzini Family Trust dated 12/20/89
By: /s/Stephen Lange Ranzini
--------------------------------
Its: Trustee
<PAGE> 2
959 Maiden Lane
Ann Arbor, MI 48105
August 18, 1999
NOTE
For value received, University Bancorp, Inc. (the ("Obligor") promises
to pay to Ranzini Family Trust (the "Holder or "Lender"), on your order, at the
address above, the principal sum of: THIRTY-SEVEN THOUSAND TWELVE AND 2/100
Dollars ($37,012.02).
1. Payment. Obligor will make no periodic payments under this note,
with a Final Payment in the amount of the principal plus all accrued interest at
maturity. The amount of the Final Payment shall be paid solely through the sale
of common stock of University Bancorp, Inc. by the Obligor (subject to
completion of a separate private placement agreement in accordance with the
rules of the Securities & Exchange Commission), in the event that an anticipated
rights offering of University Bancorp, Inc. common stock is not completed prior
to maturity.
2. Interest. Interest accrues on a Actual/365 basis. Post-maturity
interest will accrue at the same rate as prior to maturity on the balance of
this note not paid at maturity, including maturity, including maturity by
acceleration. Interest shall be accrued but not paid until maturity from August
18, 1999 at the Wall Street Journal Prime Rate of 8.25% until maturity.
3. Purpose. The purpose of this loan is to fund working capital
requirements of the Obligor.
4. Security. This note is unsecured.
5. Prepayment. If Obligor pays off this Note early, it will not have to
pay a penalty.
6. Signatures. Obligor agrees to the terms set out on page 1 and page 2
of this agreement. Obligor has received a copy of this document on today's date.
Signature: University Bancorp, Inc.
By: /s/Stephen Lange Ranzini
--------------------------------
Its: President & CEO
Ranzini Family Trust dated 12/20/89
By: /s/Stephen Lange Ranzini
--------------------------------
Its: Trustee
<PAGE> 3
959 Maiden Lane
Ann Arbor, MI 48105
August 18, 1999
NOTE
For value received, University Bancorp, Inc. (the ("Obligor") promises
to pay to Mildred Ranzini Trust (the "Holder or "Lender"), on your order, at the
address above, the principal sum of: NINE THOUSAND AND NO/100 Dollars
($9,000.00).
1. Payment. Obligor will make no periodic payments under this note,
with a Final Payment in the amount of the principal plus all accrued interest at
maturity. The amount of the Final Payment shall be paid solely through the sale
of common stock of University Bancorp, Inc. by the Obligor (subject to
completion of a separate private placement agreement in accordance with the
rules of the Securities & Exchange Commission), in the event that an anticipated
rights offering of University Bancorp, Inc. common stock is not completed prior
to maturity.
2. Interest. Interest accrues on a Actual/365 basis. Post-maturity
interest will accrue at the same rate as prior to maturity on the balance of
this note not paid at maturity, including maturity, including maturity by
acceleration. Interest shall be accrued but not paid until maturity from August
18, 1999 at the Wall Street Journal Prime Rate of 8.25% until maturity.
3. Purpose. The purpose of this loan is to fund working capital
requirements of the Obligor.
4. Security. This note is unsecured.
5. Prepayment. If Obligor pays off this Note early, it will not have to
pay a penalty.
6. Signatures. Obligor agrees to the terms set out on page 1 and page 2
of this agreement. Obligor has received a copy of this document on today's date.
Signature: University Bancorp, Inc.
By: /s/Stephen Lange Ranzini
--------------------------------
Its: President & CEO
Mildred Ranzini Trust
By: /s/Stephen Lange Ranzini
--------------------------------
Its: Trustee
<PAGE> 4
959 Maiden Lane
Ann Arbor, MI 48105
August 18, 1999
NOTE
For value received, University Bancorp, Inc. (the ("Obligor") promises
to pay to Stephen Lange Ranzini (the "Holder or "Lender"), on your order, at the
address above, the principal sum of: FIFTY-ONE THOUSAND AND NO/100 Dollars
($51,000.00).
1. Payment. Obligor will make no periodic payments under this note,
with a Final Payment in the amount of the principal plus all accrued interest at
maturity. The amount of the Final Payment shall be paid solely through the sale
of common stock of University Bancorp, Inc. by the Obligor (subject to
completion of a separate private placement agreement in accordance with the
rules of the Securities & Exchange Commission), in the event that an anticipated
rights offering of University Bancorp, Inc. common stock is not completed prior
to maturity.
2. Interest. Interest accrues on a Actual/365 basis. Post-maturity
interest will accrue at the same rate as prior to maturity on the balance of
this note not paid at maturity, including maturity, including maturity by
acceleration. Interest shall be accrued but not paid until maturity from August
18, 1999 at the Wall Street Journal Prime Rate of 8.25% until maturity.
3. Purpose. The purpose of this loan is to fund working capital
requirements of the Obligor.
4. Security. This note is unsecured.
5. Prepayment. If Obligor pays off this Note early, it will not have to
pay a penalty.
6. Signatures. Obligor agrees to the terms set out on page 1 and page 2
of this agreement. Obligor has received a copy of this document on today's date.
Signature: University Bancorp, Inc.
By: /s/Stephen Lange Ranzini
--------------------------------
Its: President & CEO
Stephen Lange Ranzini
By: /s/Stephen Lange Ranzini
--------------------------------
<PAGE> 5
959 Maiden Lane
Ann Arbor, MI 48105
August 18, 1999
NOTE
For value received, University Bancorp, Inc. (the ("Obligor") promises
to pay to Clare Family Trust (the "Holder or "Lender"), on your order, at the
address above, the principal sum of: EIGHTY-ONE THOUSAND AND NO/100 Dollars
($81,000.00).
1. Payment. Obligor will make no periodic payments under this note,
with a Final Payment in the amount of the principal plus all accrued interest at
maturity. The amount of the Final Payment shall be paid solely through the sale
of common stock of University Bancorp, Inc. by the Obligor (subject to
completion of a separate private placement agreement in accordance with the
rules of the Securities & Exchange Commission), in the event that an anticipated
rights offering of University Bancorp, Inc. common stock is not completed prior
to maturity.
2. Interest. Interest accrues on a Actual/365 basis. Post-maturity
interest will accrue at the same rate as prior to maturity on the balance of
this note not paid at maturity, including maturity, including maturity by
acceleration. Interest shall be accrued but not paid until maturity from August
18, 1999 at the Wall Street Journal Prime Rate of 8.25% until maturity.
3. Purpose. The purpose of this loan is to fund working capital
requirements of the Obligor.
4. Security. This note is unsecured.
5. Prepayment. If Obligor pays off this Note early, it will not have to
pay a penalty.
6. Signatures. Obligor agrees to the terms set out on page 1 and page 2
of this agreement. Obligor has received a copy of this document on today's date.
Signature: University Bancorp, Inc.
By: /s/Stephen Lange Ranzini
--------------------------------
Its: President & CEO
Clare Family Trust
By: /s/Stephen Lange Ranzini
--------------------------------
Its: Trustee
<PAGE> 6
959 Maiden Lane
Ann Arbor, MI 48105
November 12, 1999
NOTE
For value received, University Bancorp, Inc. (the ("Obligor") promises
to pay to Mildred Lange Ranzini (the "Holder or "Lender"), on your order, at the
address above, the principal sum of: SIXTY-NINE THOUSAND NINE HUNDRED NINTY-NINE
AND NO/100 Dollars ($69,999.00).
1. Payment. Obligor will make no periodic payments under this note,
with a Final Payment in the amount of the principal plus all accrued interest at
maturity. The amount of the Final Payment shall be paid solely through the sale
of common stock of University Bancorp, Inc. by the Obligor (subject to
completion of a separate private placement agreement in accordance with the
rules of the Securities & Exchange Commission), in the event that an anticipated
rights offering of University Bancorp, Inc. common stock is not completed prior
to maturity.
2. Interest. Interest accrues on a Actual/365 basis. Post-maturity
interest will accrue at the same rate as prior to maturity on the balance of
this note not paid at maturity, including maturity, including maturity by
acceleration. Interest shall be accrued but not paid until maturity from
November 12, 1999 at the Wall Street Journal Prime Rate of 8.25% until maturity.
3. Purpose. The purpose of this loan is to fund working capital
requirements of the Obligor.
4. Security. This note is unsecured.
5. Prepayment. If Obligor pays off this Note early, it will not have to
pay a penalty.
6. Signatures. Obligor agrees to the terms set out on page 1 and page 2
of this agreement. Obligor has received a copy of this document on today's date.
Signature: University Bancorp, Inc.
By: /s/Stephen Lange Ranzini
--------------------------------
Its: President & CEO
Mildred Lange Ranzini
By: /s/Mildred Lange Ranzini
--------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 889,104
<INT-BEARING-DEPOSITS> 9,842
<FED-FUNDS-SOLD> 3,378
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,366,164
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 29,054,483
<ALLOWANCE> (508,647)
<TOTAL-ASSETS> 48,627,824
<DEPOSITS> 34,733,232
<SHORT-TERM> 5,115,181
<LIABILITIES-OTHER> 3,522,536
<LONG-TERM> 2,725,097
0
0
<COMMON> 21,043
<OTHER-SE> 2,050,294
<TOTAL-LIABILITIES-AND-EQUITY> 48,627,824
<INTEREST-LOAN> 2,323,622
<INTEREST-INVEST> 144,690
<INTEREST-OTHER> 54,442
<INTEREST-TOTAL> 2,522,754
<INTEREST-DEPOSIT> 1,272,168
<INTEREST-EXPENSE> 1,476,407
<INTEREST-INCOME-NET> 1,046,347
<LOAN-LOSSES> 70,148
<SECURITIES-GAINS> (15,477)
<EXPENSE-OTHER> 4,188,956
<INCOME-PRETAX> (886,799)
<INCOME-PRE-EXTRAORDINARY> (886,799)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (889,209)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
<YIELD-ACTUAL> 3.41
<LOANS-NON> 272,002
<LOANS-PAST> 115,037
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 387,039
<ALLOWANCE-OPEN> 459,001
<CHARGE-OFFS> 55,500
<RECOVERIES> 34,998
<ALLOWANCE-CLOSE> 508,647
<ALLOWANCE-DOMESTIC> 508,647
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 18,632
</TABLE>
