<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the
transition period from ____________ to ___________
Commission file number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
(State or other jurisdiction of (I.R.S. Employer incorporation)
Identification No.
959 Maiden Lane, Ann Arbor, Michigan 48105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 741-5858
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.010 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the average bid and asked price for the Registrant's
Common Stock on March 15, 1999, as reported by NASDAQ, was approximately
$1,508,285.*
The number of shares outstanding of the Registrant's Common Stock as of
March 15, 1999: 1,989,139 shares.
* For purposes of this calculation shares of the Registrant held by directors
and officers of the Registrant and officers of its subsidiaries and other
affiliates have been excluded.
Documents Incorporated by Reference: Portions of the registrant's
Proxy Statement, to be filed by April 29, 1999 for the 1999 Annual Meeting of
Stockholders, are incorporated by reference into Part III of this Report.
page 1 of 82 pages
Exhibit index on sequentially numbered page 74
<PAGE> 2
PART I.
ITEM 1. - BUSINESS
GENERAL
University Bancorp, Inc. a Delaware corporation (individually and on a
consolidated basis with its subsidiary where the context indicates, the Company"
or the "Corporation"), operates as a bank holding company for its wholly-owned
subsidiary, University Bank. University Bank (the "Bank") is a state chartered
community bank. The Bank was chartered by the state of Michigan in 1908 as
successor to a banking organization organized in 1890. The Bank changed its name
from "The Newberry State Bank" to its current name in July 1995 to more closely
identify the name of the Bank with its current place of business. Ann Arbor, the
home of the University of Michigan, is a university town. The Bank's accounts
are insured by the Federal Deposit Insurance Corporation.
University Bancorp, Inc. is essentially a holding company for the Bank
and it invests available cash resources in marketable equity and debt securities
and interest bearing deposits. At December 31, 1998 University Bancorp, Inc. had
cash on deposit of $33,702 and other investments at fair value of $88,305.
University Bancorp, Inc. changed its name to University Bancorp, Inc. from
Newberry Bancorp, Inc. in June 1996, to more closely identify the bank holding
company with the Bank.
University Bank is headquartered in the town of Ann Arbor, Michigan,
which is the largest city in Washtenaw County, just west of the Detroit
Metropolitan Statistical Area ("Detroit MSA"). Following the closing of its sale
of bank office assets and liabilities relating to its former main office in
Newberry, Michigan and its two branch offices in Sault Ste. Marie, Michigan on
December 5, 1994, more fully described below, during 1995, the Bank relocated
its main office to the former offices of its mortgage operation in Sault Ste.
Marie, Michigan. Sault Ste. Marie is the largest city in the eastern Upper
Peninsula of Michigan and the county seat of Chippewa County. During 1995 the
Bank was primarily engaged in residential mortgage lending and servicing
operations, and the investment of deposits and other bank borrowings in various
investments, including investment securities issued by government agencies and
U.S. Treasury securities. On February 6, 1996, the Bank opened its new Ann Arbor
main office. During the fourth quarter of 1997, the Bank closed its Sault Ste.
Marie office and centralized its accounting function in Ann Arbor.
The Bank conducts its banking business from its headquarters office in
Ann Arbor. The Bank's primary market area is defined as the City of Ann Arbor
and surrounding areas in greater Washtenaw County.
Mortgage Banking. In October 1995, the Bank established a new mortgage
banking subsidiary, Varsity Funding, L.L.C. ("Varsity Funding"). Varsity Funding
specialized in the purchase and origination of impaired credit, or subprime
quality, residential mortgages, for sale to non-U.S. government agency-backed
mortgage
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conduits. Varsity Funding's offices were located in Farmington Hills,
Michigan, which is located on the northwest side of the Detroit MSA. During
early 1997, Varsity Funding also established a retail residential mortgage
operation through an office in Farmington Hills, Michigan. The retail division
was expanded to include an office in Columbus, Ohio in January 1998.
In February 1996, Varsity Funding expanded the scope of its operations
by establishing another subsidiary of the Bank, Varsity Mortgage, L.L.C.
("Varsity Mortgage"). The Varsity Mortgage mortgage banking operation purchases
residential home loans which generally qualify for sale to secondary market
investors under the underwriting criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") from
correspondents in Michigan and in adjacent states. Loans purchased from
correspondents or originated internally by the Bank are then either pooled into
mortgage-backed securities and the securities are sold to investors or they are
sold directly to FHLMC or FNMA. The Bank's mortgage banking operations sell on a
continuous basis the servicing rights to the loans or securities it originates.
In December 1998, the Bank sold the bulk of a small portfolio of owned mortgage
servicing rights.
The Bank itself also originates residential loans from its Ann Arbor
office and sells them to secondary mortgage correspondents including Varsity
Mortgage. The Bank, through its Sault Ste. Marie mortgage banking office,
previously operated in similar fashion to Varsity Mortgage, by purchasing, from
correspondents in Michigan, or by originating, residential home loans which
generally qualify for sale to secondary market investors under the underwriting
criteria of the FHLMC and FNMA. In November 1996, the Bank discontinued its
wholesale operation in Sault Ste. Marie and transferred all pooling and
packaging of residential loans to Varsity Mortgage. The Bank's accounting
department continues to administer the Bank's table funding mortgage broker
lending operation from the Ann Arbor office.
The profit of Varsity Mortgage is subject to an agreement (the "Net
Branch Agreement") with the executives who have organized and supervised the
operation under which profits and/or revenues are shared between the Bank and
the employees of the subsidiaries. In future years, as a result of a profit
sharing agreement, the Bank is entitled to share profits of Varsity Mortgage on
a 50/50 basis with the managers and employees of this subsidiary.
As a result of upheavals in the national secondary market for subprime
quality residential mortgages, in December 1998 Varsity Funding exited the
subprime business. Varsity Mortgage acquired the retail operations of Varsity
Funding, which will be operated as the Retail Division of Varsity Mortgage. As a
result of changes in the types of loans that FNMA and FHMLC are willing to buy,
in early 1999 Varsity Mortgage began purchasing and pooling A- credit quality
residential mortgages.
Mortgage Subservicing. In July 1995 the Bank terminated its mortgage
servicing operation in Sault Ste. Marie by outsourcing its servicing operations
under a contract with Midwest Loan Services,
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Inc., of Houghton, Michigan ("Midwest Loan Services"). In December 1995, the
Bank acquired 80% of the common stock of Midwest Loan Services, which
specializes in subservicing, for the account of credit unions, financial
institutions and mortgage brokers, of residential mortgage loans sold to FNMA,
FHLMC and other private residential mortgage conduits.
Michigan BIDCO. In May 1993, the Company established a Business and
Industrial Development Company (the "BIDCO") called Michigan BIDCO, Inc.
("Michigan BIDCO"). The BIDCO is licensed by the Michigan Financial Institutions
Bureau under the State of Michigan BIDCO program. Michigan BIDCO invests in
businesses in Michigan with the objective of fostering job growth and economic
development. Michigan BIDCO is currently 44.1%-owned by the Bank, and is
accounted for under the equity method. Such percentage is subject to reduction
in the event of conversion of the BIDCO's outstanding convertible bonds. The
BIDCO changed its name to Michigan BIDCO, Inc. from Northern Michigan BIDCO,
Inc. in late 1995 to reflect its strategic plan of seeking investment
opportunities throughout the entire state of Michigan. Originally, the BIDCO
limited its investments to the northern half of Michigan.
Northern Michigan Foundation. In December 1995, the BIDCO donated
$225,000 to capitalize Northern Michigan Foundation (the "Foundation"), and in
early 1996, donated an additional $75,000 to the Foundation. The Foundation is
an IRS-approved 501c(3) non-profit which is an intermediary lender to rural
small businesses under the U.S. Rural Economic Community Development Service
Agency ("U.S. RECDS") Intermediary Relending Program. As a result of its
capitalization by the BIDCO, the Foundation was able to gain the right to borrow
a total of up to $2,000,000 from the U.S. RECDS at 1% interest with a 30 year
term. A portion of the BIDCO's overhead is reimbursed by the Foundation under
the terms of a management services contract. The BIDCO is paid a monthly fee
reflecting reimbursement for expenses incurred. The BIDCO and the Foundation
share administrative staffs and offices, with the Foundation reimbursing the
BIDCO for these management services.
University Insurance & Investment Services. On December 31, 1996, the
Bank established a new insurance and investment sales agency subsidiary, called,
University Insurance & Investment Services, Inc., based in its Ann Arbor main
office. The agency is licensed by the State of Michigan as an insurance agency.
The focus of the insurance agency is life and healthcare insurance brokerage,
and mutual fund and annuity sales. On December 18, 1998, the agency acquired
University Insurance Center, Inc., a fully-licensed but inactive commercial
insurance agency. University Insurance Center, Inc. ("UIC") commenced business
on February 25, 1999 and is a full service property and casualty insurance
agency offering insurance for homes, autos, apartments and businesses.
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EMPLOYEES
The Company employed 67 full-time persons at January 31, 1999,
including the following:
<TABLE>
<S> <C>
Michigan BIDCO 3
Midwest Loan Services 10
University Bank, Ann Arbor 23
University Insurance & Investment 3
Varsity Mortgage 28
</TABLE>
LINES OF BUSINESS
COMMUNITY BANKING, ANN ARBOR
The Bank opened its office in Ann Arbor on February 6, 1996. The retail
savings products and services of the Bank include demand deposit and NOW
interest-bearing checking accounts, money market deposit accounts, regular
savings accounts and term deposit certificates ranging in maturity from three to
three hundred months. The Bank also offers self-directed retirement accounts,
free access to 24-Hour ATM machines, telephone banking, VISA debit cards and
Gold VISA accounts. The Bank also is a member of Mastercard, but currently is
not offering a Mastercard product. The Bank also offers Canadian Dollar foreign
exchange services. From time to time to raise liquidity, the Bank sells CDs
through brokers.
The Bank's community banking operation offers a range of traditional
lending products, including commercial small business loans, residential real
estate mortgage loans and home equity loans, commercial real estate mortgage
loans, consumer installment loans, and land development and construction loans.
MORTGAGE BANKING
The Bank became a seller/servicer of Federal Home Loan Mortgage
Corporation insured mortgages ("FHLMC mortgages") in late 1991 and began to
originate FHLMC mortgages for sale into the secondary market. In late 1994 the
Bank became a seller/servicer of Federal National Mortgage Association insured
mortgages ("FNMA mortgages") and began to originate FNMA mortgages for sale into
the secondary market. Varsity Mortgage utilizes the Bank's seller/servicer
licenses to pool, package and sell both FNMA and FHLMC mortgages.
The Bank is currently, and Varsity Mortgage has since inception been,
selling the servicing right on all mortgages originated. The Bank's accounting
department administers the Bank's table funding of its mortgage banking
subsidiaries from the Ann Arbor office.
Reference is made to the discussion of the mortgage banking business in
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, in the section entitled
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"Non-Interest Income and Non-Interest Expense", under the heading Mortgage
Banking.
MORTGAGE SUBSERVICING
The Bank's 80% owned subsidiary, Midwest Loan Services, specializes in
subservicing, for the account of other financial institutions and mortgage
brokers, residential mortgage loans sold to FNMA and FHLMC and other non-agency
private conduits. Mortgage servicing firms receive monthly payments from loan
customers, aggregate and account for these payments, and send the funds to
mortgage-backed securities holders, such as pension funds and financial
institutions. Mortgage servicers also dun delinquent accounts and foreclose
loans, if required. Midwest is regulated by FHLMC and FNMA. Mortgage servicers
receive a fixed monthly fee for performing this service. As of December 31,
1998, Midwest Loan Services subserviced a total of 4,029 loans, 3,113 for
non-affiliated companies, and 916 loans serviced for the Bank and Midwest Loan
Service's own account.
INVESTMENT SECURITIES
The Bank maintains surplus available funds in investments consisting of
short-term money market instruments, U.S. government bonds, U.S. federal agency
obligations, and mortgage-backed securities backed by federal agency
obligations. The Bank's investments and the Company's cash and equity portfolio
are managed by the President of the Company, subject to the review and approval
of the Board of Directors of the applicable corporate entity. The securities of
the Company and the Bank provide a source of liquidity to meet operating needs.
At December 31, 1998, the Bank's investments had a net unrealized loss of
approximately $183,122 versus a net unrealized loss of approximately $18,880 at
December 31, 1997.
The following table discloses certain information regarding securities
held by the Company, the amortized cost of which exceeded more than 10% of
stockholders' equity as of December 31, 1998:
<TABLE>
<CAPTION>
Final Market Amortized
Issuer Coupon Yield Maturity Value Cost
- ------ ------ ----- -------- ----- ----
<S> <C> <C> <C> <C> <C>
RTC 91-12-A1 (1) FRN 5.86% 01/25/21 424,514 420,737
FNMA CMO92-190F (2) VAR 6.29% 11/25/07 506,400 502,813
FHLBI equity (3) VAR 8.00% None 848,400 848,400
FNMA CMO93-205H (4) PO 4.15% 9/25/23 1,548,925 1,684,616
US Treasury Strip PO 5.33% 2/15/27 442,000 466,824
</TABLE>
- -----------------------
(1) The floating rate Resolution Trust Corporation bond is backed by a portfolio
of single family home mortgages. Due to the structure of the issue, the
expected average life is 2-3 years. Although issued by a government
sponsored agency they are not government guaranteed. The bonds are rated
"AA" by Standard & Poor's and the coupon floats at 100 basis points over the
11th District Cost of Funds Index, adjusted monthly.
(footnotes continued on following page)
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(2) The coupon of these FNMA securities adjusts every month to 1.60% over the
three month T-Bill rate, with a 9% life of security cap.
(3) The rate varies quarterly. The Bank is required to maintain the investment
in Federal Home Loan Bank of Indianapolis (the "FHLBI") common stock in an
amount related to the Bank's single family mortgage related assets and FHLBI
advances. Shares can be redeemed or sold at par value to the FHLBI as
required from time to time.
(4) This Principal Only strip has an expected average life of six years.
MICHIGAN BIDCO
Michigan BIDCO, Inc., which was founded in May 1993, is licensed by the
Michigan Financial Institutions Bureau under the State of Michigan BIDCO Act.
The BIDCO is 44.1%-owned by the Bank, and is accounted for under the equity
method. There are $3,000,000 in convertible bonds outstanding. An initial
investment of $280,000 to buy 280 shares of common stock was made by the Bank in
Michigan BIDCO in 1993.
At the time of establishment, the BIDCO received $3,000,000 in
financing from the Michigan Strategic Fund. This investment was made in the form
of a ten year loan which carries concessionary terms allowing it to be converted
to a grant over time under certain circumstances. The BIDCO earns grants applied
against the $3,000,000 Michigan Strategic Fund financing if there is growth in
the sales and jobs of the businesses the BIDCO invests in. At the time of
establishment, Michigan BIDCO sold in installments $3,000,000 in 9% Senior
Convertible Bonds to match the State of Michigan's commitment, all of which
amount had been issued at December 31, 1998.
The financial statements of the BIDCO are presented using the
investment company method, and, accordingly, investments in stocks, stock
warrants, limited liability companies and loans ("BIDCO Investments") are
reported at fair value. BIDCO typically invests in companies for which current
market quotations are not readily available; therefore management estimates the
fair value of BIDCO Investments on a quarterly basis and the Board of Directors
approves the fair value estimates. In deriving its estimates, management reviews
the financial condition and operating performance of the investee companies, as
well as performance of the company with its contractual arrangements with BIDCO.
The fair value of BIDCO Investments is then estimated by the use of operating
cash flow multiples applicable to a company's industry, discounted cash flow
analyses, and other valuation techniques. Management and the Board of Directors
believe the procedures used and assumptions made are reasonable in the
circumstances; however, the fair value estimates may differ significantly from
the values that would have been used had current market quotations been
available.
The Bank's investment in the BIDCO is accounted for under the equity
method, and $50,301, ($55,499) and $128,219 of income (loss)
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from the BIDCO was included in the results of operations for the years ended
December 31, 1996, 1997, and 1998, respectively. At December 31, 1998, the
Company owned $67,977 in bonds issued by the BIDCO. If there were a conversion
of outstanding convertible bonds, the Bank and the Company would together own
12.17% and 15.61% at December 31, 1998 and 1997. In addition, upon conversion,
certain Corporation officers and directors and their immediate family (two of
whom serve as President and Chairman of the Corporation) would have an ownership
interest in the BIDCO of 29.4%. The conversion may take place, at the election
of the BIDCO, subsequent to any time that the BIDCO's equity pursuant to an
audit performed using generally accepted auditing standards exceeds $1,500,000.
If the bonds are converted and the Company's ownership of the BIDCO at that time
is less than 20%, the net income of the BIDCO may not be included in the
Company's statement of operations under the equity method. There is no assurance
that the Company's ownership of the BIDCO will not drop under 20% in the future.
Michigan BIDCO invests in businesses in Michigan with the objective of
fostering job growth and economic development. The BIDCO has, by general policy
of its board of directors, a loan to one borrower limit of $500,000. In order to
be able to make investments larger than this lending limit, Michigan BIDCO will
leverage its investment with loan guarantees from government agencies, the
guaranteed portion of which is sold in the form of a participation, or if a
government agency loan guarantee is unavailable, a participation may be sold to
one or more investors, including BIDCO management, bondholders and directors. As
of December 31, 1998, the BIDCO had made twenty-seven investments, amounting to
a total of $13,413,600 at original cost. At December 31, 1998, Michigan BIDCO
had total assets of $5,327,697.
Michigan BIDCO makes its investments in the form of loans or direct
equity investments, or a combination thereof. The BIDCO typically receives
warrants or participation rights in the companies in which it invests. As a
matter of policy, the Bank restricts itself from investing or lending to a
business that the BIDCO finances, and related parties which co-invest with the
BIDCO must do so on a basis equal to or less favorable than the BIDCO's. As of
December 31, 1998, investments (at original investment cost) have been made in
the following types of businesses:
-8-
<PAGE> 9
<TABLE>
<CAPTION>
Michigan BIDCO, investments: Total Equity
Industry Investment Participation?
<S> <C> <C>
ABC-TV affiliate $ 1,472,000 repurchased
Adult foster care 40,000 no
Bridal shop 64,000 no
Cable TV 545,000 repurchased
Children's clothing manufacturer 200,000 repurchased
Commercial laundry 180,000 no
Environmental engineering 100,000 repurchased
Fishing supplies 50,000 no
Home health care 20,000 no
Hunting supplies 100,000 no
Industrial supply 85,000 no
Limited service hotels 738,600 yes
Manufacturing 200,000 no
Manufacturing 200,000 no
Manufacturing 200,000 no
Metal manufacturing 80,000 no
Paper converting 2,762,000 yes
Plastic injection molding 2,000,000 repurchased
Plastic mold manufacturing 25,000 no
Railcar parts manufacturing 125,000 no
Railroad boxcar leasing 1,500,000 no
Recreational services 160,000 no
Recycled paper pulp mill 780,000 yes
Residential mortgage subservicing 450,000 repurchased
Secured credit card issuer 540,000 no
Tissue paper mill 700,000 repurchased
Truck maintenance 70,000 no
-----------
Total $13,413,600
===========
</TABLE>
The $1,600,000 80% guaranteed portion of the $2,000,000 loan to the
plastic injection molding firm was sold to Federal Agricultural Mortgage
Corporation and subsequently the loan was paid off. The $1,245,150 guaranteed
portion of the $1,962,000 loan to the paper converting firm was sold to Federal
Agricultural Mortgage Corporation. An $800,000 participation in the railroad
boxcar lease was sold to a private investor group of nine individuals including
Joseph and Stephen Ranzini. This same investor group purchased a $280,000
participation in the recycled paper pulp mill financing, and also purchased a
$28,000 investment in one limited service hotel project to reduce the BIDCO's
net exposure to $500,000. The BIDCO's investment in the recycled paper pulp mill
consisted of an equity investment and a royalty on sales of a new $238,000,000
mixed office waste paper recycling/de-inking pulp mill in Menominee, Michigan.
In December 1995, the Bank acquired 80% of the common stock of the
residential mortgage servicing business, Midwest Loan Services. In connection
with this acquisition, the BIDCO received 34,500 shares of Common Stock of the
Company, puttable to the Company for $115,000 in December 1996, in exchange for
its ownership of 10% of the common stock of Midwest Loan Services and options to
buy an additional 30% of the common
9
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stock of that company. The consideration the BIDCO received for its stake was on
substantially similar terms to the terms the other selling shareholders of
Midwest Loan Services received from the Bank and the Company.
Reference is made to the discussion of the BIDCO's investments and
operations in Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the section entitled "Non-Interest
Income and Non-Interest Expense", under the heading Michigan BIDCO.
COMPETITION
COMMUNITY BANKING, ANN ARBOR
The Bank's attraction and retention of deposits depend on its ability
to provide investment opportunities that satisfy the requirements of investors
with respect to rate of return, liquidity, risk and other factors. The Bank
competes for these deposits by offering personal service, competitive rates and
fees, and a variety of savings programs including tax-deferred retirement
programs.
The Bank competes for loan originations primarily through the the
quality of services it provides to its loan customers, competitive interest
rates and loan fees, rapid and local decision-making and the range of services
it offers. The Bank's competition in originating loans comes principally from
other commercial banks, credit unions, insurance companies, mortgage banking
companies and savings and loans.
The following table shows market share of deposits for Washtenaw County
by financial institution for June 1998, June 1997 and June 1996 (from the FDIC's
annual branch deposit survey:
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WASHTENAW COUNTY FINANCIAL INSTITUTION DEPOSITS:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Great Lakes Bancorp 16.2% 18.9% 18.2%
National City Bank 14.4% 15.6% 17.0%
Republic Bank 11.1% 5.9% 5.8%
Comerica Bank 9.8% 10.1% 10.3%
Bank One 9.5% 10.2% 10.4%
Key Bank 7.1% 7.4% 9.4%
Standard Federal FSB 4.1% 4.8% 5.0%
Ann Arbor Commerce Bank 3.6% 3.0% 2.3%
Citizens Bank 3.3% 3.6% 3.6%
Chelsea State Bank 3.1% 3.3% 3.0%
University of Michigan CU 2.9% 3.0% 2.8%
Huron River Area CU 2.5% 2.7% 2.5%
Michigan Natl Bank 2.3% 2.5% 2.7%
Bank of Ann Arbor 2.2% 1.2% 0.6%
Flagstar Bank FSB 1.9% 1.4% 0.6%
Midwest Financial CU 1.7% 1.9% 1.9%
Automotive FCU 1.2% 1.3% 1.4%
University Bank 1.0% 1.1% 0.3%
Charter One FSB 0.6% 0.7% 0.9%
Old Kent 0.5% 0.7% 0.6%
5 Credit Unions, 2 Banks 1.0% 0.7% 0.7%
Total Deposits (Bn) $4.060 $3.604 $3.503
</TABLE>
Total deposits in the county increased 12.7% from June 1997 to June
1998 and increased 2.9% from June 1996 to June 1997. In attracting deposits, the
Bank's primary competitors for deposits are mutual funds, other commercial
banks, credit unions, savings and loans and insurance companies.
The Bank's main office is adjacent to the University of Michigan
Hospital Complex. The Complex employs a total of 7,800 persons. In mid-February
1999, the nearest competitor to the Bank's main office, a National City Bank
branch, was permanently closed. The other major competitor in the local deposit
market is Midwest Financial Credit Union, formerly known as Hospital & Health
Services Credit Union. The Bank's main office was formerly the headquarters of
the latter credit union, which moved its office to a new office building three
miles from the Medical Center Complex.
The Ann Arbor banking market is dominated by banks which are owned by
out-of-area holding companies. In the city of Ann Arbor, the University of
Michigan Credit Union is the largest locally-owned financial institution. The
only locally-owned community financial institutions, excluding University Bank,
are Huron River Area Credit Union, Midwest Financial Credit Union, Bank of Ann
Arbor, Automotive Federal Credit Union and several smaller credit unions.
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<PAGE> 12
MORTGAGE BANKING
Origination. The Bank's Ann Arbor community bank, Varsity Mortgage and
to a lesser extent Midwest Loan Services' retail origination division purchase
or originate internally residential home loans which generally qualify for sale
to secondary market investors under the underwriting criteria of the Federal
Home Loan Mortgage Corporation (FHLMC) or the Federal National Mortgage
Association (FNMA) from correspondents in Michigan and Ohio. Loans purchased or
originated internally are either sold directly to FHLMC or FNMA, or are pooled
into mortgage-backed securities and the securities are sold to investors in the
secondary market.
The Bank's retail mortgage origination operations encounter competition
for the origination of residential real estate loans primarily from savings
institutions, commercial banks, insurance companies and other mortgage banking
firms. Many of these firms have a well established customer and/or borrower
client base. Some competitors, primarily savings institutions, insurance
companies and commercial banks, have the ability to create unique loan products
from time to time because they are able to close the loans for their own
portfolio rather than sell into the secondary market. Most loans sold into the
secondary market, however, go to the same sources, those being Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
and Government National Mortgage Association ("GNMA") guaranteed securities.
Most lenders have access to these secondary market sources; therefore,
competition often becomes more a matter of service and pricing than that of
product. As a mortgage loan originator and a purchaser of mortgage loans through
correspondents, the Bank and its affiliates must be able to compete with respect
to the types of loan products offered by competitors to borrowers and
correspondents, including the price of the loan in terms of origination fees or
fee premium or discount, loan processing costs, interest rates, and the service
provided by the Bank's staff. An important element in the Bank's ability to
compete is master purchase agreements negotiated periodically with FNMA and
FHLMC with low and competitive loan guarantee fees, a wide variety of mortgage
programs, and a variety of flexible underwriting criteria. The Bank's ability to
secure these master purchase agreements is dependent upon the performance from a
quality perspective of loans previously sold to the agencies.
During lower interest rate environments, competition for loans is less
intense due to the large number of loans available for origination. As interest
rates rise and the number of loans available for origination diminishes,
competition becomes quite intense and companies with larger investor bases,
flexibility with respect to type of product offered and greater experience in
dealing in these types of markets tend to be the most successful.
The Bank also originates residential loans to be held in portfolio, and
management believes that this product together with the product offerings which
FHLMC and FNMA have is sufficient for its competitive needs. Although the Bank
is currently licensed as a HUD Title 1, Title 2 and Multifamily seller/servicer,
it has no plans at
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<PAGE> 13
this time to expand its utilization of HUD or GNMA programs. However, Varsity
Mortgage's retail division does originate a small number of GNMA single family
residential loans utilizing the Bank's HUD seller/servicer licenses. The Bank
and Varsity Mortgage also are correspondents for several impaired credit
conduits and sell this type of residential mortgage on a non-recourse, servicing
released basis.
Varsity Mortgage's retail origination operation also originates
secondary market conforming loans. Varsity Mortgage competes primarily with
other mortgage banking firms, insurance companies, commercial banks, and savings
and loans.
Mortgage Subservicing and Servicing. Over the last three years, the
Bank has sold its portfolio of mortgage servicing rights, while selling all
newly originated secondary market mortgage loans, servicing released. In
December 1998 the Bank sold the final 1/3 of its retained FHLMC and FNMA
mortgage servicing rights portfolio for a loss of $121,224. In the third quarter
of 1996, the Bank sold 1/3 of its portfolio of accumulated servicing rights to
reduce its investment in this class of asset for a gain of $256,840. In the
third quarter of 1997, the Bank sold an additional 1/3 of its accumulated
portfolio at no significant gain. Servicing competition is somewhat less intense
than the loan origination aspect of mortgage banking. Due to net worth and
management requirements, many mortgage origination companies do not have the
capacity to service loans. Falling interest rates present competitive challenges
for the mortgage servicing operation in that mortgagors are more likely to
refinance existing mortgages. The quality of service and the ability of the
origination operation to compete on price and service is important in retaining
such customers by refinancing them internally, rather than losing the
refinancing transaction to a competitor. Increased refinancing activity as a
result of falling interest rates should decrease profitability of mortgage
servicing by increasing amortization charges on purchased mortgage servicing
rights.
In the subservicing business, Midwest Loan Services competes primarily
with a small group of specialized servicing units of mortgage banking companies,
and a few specialized units owned by banks and savings and loans. Most of these
companies have substantially larger financial resources than Midwest Loan
Services.
Midwest Loan Services is located in Houghton, Michigan in the western
Upper Peninsula of Michigan. Personnel and occupancy costs are the largest costs
in a mortgage servicing operation, and the prevailing wages and occupancy costs
in the Upper Peninsula of Michigan are generally lower than the national
average. As a result, the Company believes that Midwest Loan Services' mortgage
servicing operation potentially offers its mortgage banking operations a
competitive advantage in the future. During 1998, growth in loans serviced for
third parties was offset by payoffs due to record low interest rates, sales of
Bank owned servicing and the end of an agreement to subservice a portfolio of
900 loans that had been sold by University Bank last year under a one year
subservicing agreement, so that the amount of loans serviced by Midwest fell by
approximately 19% during the year. Since the Bank has completed its plan of
selling
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<PAGE> 14
servicing rights, if Midwest Loan Services adds additional subservicing
customers in the future, there may be an increase in overall loans serviced.
Previously, the Bank was selling servicing as Midwest gained additional
customers. At year-end 1998, 916 loans serviced by Midwest Loan Services were
serviced for the Bank or Midwest Loan Services' own account.
MICHIGAN BIDCO AND NORTHERN MICHIGAN FOUNDATION
Michigan BIDCO seeks to invest in businesses located in Michigan. The
BIDCO's objective is to seek profit while fostering job growth and economic
development in its market area. Michigan BIDCO makes its investments directly,
or through investment entities formed with other participants, to make
investments, in the form of loans or direct equity investments, or a combination
thereof. As such, it competes with other specialized lenders and wealthy
investors who make risk-oriented investments in businesses located in Michigan.
The BIDCO assumes more credit risk in a typical investment than commercial banks
generally are willing to assume when they make loans. The BIDCO does not make an
investment in a company unless it can be shown that the funds are not available
from a traditional bank lender; therefore, the BIDCO does not compete with
banks. There is only one other BIDCO in Northern Michigan; the BIDCO is one of
eleven BIDCOs in Michigan. Since year-end 1996, the BIDCO has pursued a strategy
of liquidating its existing investment portfolio to raise cash for for two
purposes: the buyout of some of the original minority investors in the BIDCO,
and two options in expanding its funds under management through other government
agency economic development programs.
The BIDCO's staff manages under a management contract a 501(c)3
IRS-qualified non-profit relending company, Northern Michigan Foundation, which
has received the right to borrow $2,000,000 at 1% interest for 30-years from the
U.S. RECDS under the RECDS-sponsored intermediate relending program. The
Foundation is one of three non-profit, privately-run, U.S. Rural Economic
Community Development Service intermediate relending programs located in
Northern Michigan. U.S. RECDS was formerly the Farmers Home Administration. Each
of these community development loan funds covers six counties as its primary
market area.
-14-
<PAGE> 15
Certain Financial Information
for the years ended December 31, 1998, 1997 and 1996 (in $000s)(1):
<TABLE>
<CAPTION>
Revenues: 1998 1997 1996
<S> <C> <C> <C>
Banking
Mortgage banking 809 882 1,000
Retail banking 2,365 3,467 2,930
Midwest Loan Services 958 713 603
Varsity (2) 5,674 4,802 2,327
Corporate Office 179 61 84
Total 9,985 9,925 6,944
Michigan BIDCO 991 624 1,439
Expenses:
Banking
Mortgage banking 974 759 826
Retail banking 3,148 4,954 4,169
Midwest Loan Services 943 808 601
Varsity (2) 5,073 4,539 2,125
Corporate Office 243 276 209
Total 10,381 11,336 7,890
Michigan BIDCO 634 864 1,389
Pre-tax income:
Banking
Mortgage banking (165) 123 174
Retail banking (783) (1,487) (1,199)
Midwest Loan Services 15 (95) 2
Varsity (2) 601 263 202
Corporate Office (64) (215) (125)
Total (396) (1,411) (896)
Michigan BIDCO (1) 357 (55) 50
Assets, at Dec. 31, 1998, 1997 and 1996:
Banking
Retail banking &
Mortgage banking 40,704 39,084 53,016
Midwest Loan Services 1,387 1,340 2,391
Varsity 12,242 15,902 22,379
Corporate Office 203 1,203 575
Total 54,536 57,529 78,361
Michigan BIDCO 5,327 5,684 6,526
</TABLE>
(table continued on following page)
-15-
<PAGE> 16
Liabilities and Stockholders' Equity,
at Dec. 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<S> <C> <C> <C>
Banking
Retail banking
& Mortgage banking 41,375 39,929 54,360
Midwest Loan Services 363 334 1,286
Varsity 11,942 15,502 21,582
Corporate Office 855 1,764 1,133
Total 54,536 57,529 78,361
Michigan BIDCO 5,327 5,684 6,526
Intersegment Information, at
Dec. 31, 1998, 1997 and 1996:
Assets:
Retail banking
& Mortgage banking (672) (845) (1,344)
Midwest Loan Services 1,024 1,006 1,105
Varsity 300 400 797
Corporate Office (652) (561) (558)
Michigan BIDCO -- -- --
</TABLE>
NOTES TO CERTAIN FINANCIAL INFORMATION TABLE
for the years ended December 31, 1998, 1997 and 1996 (in thousands)
(1) Reflects only the Bank's share of Michigan BIDCO's net income in 1998, 1997
and 1996 under the equity method which was 44.1%.
(2) Includes all Varsity LLCs. Varsity Funding commenced operations in October
1995, and Varsity Mortgage commenced operations in March 1996.
Regulation
The Company and the Bank are extensively regulated under federal law
and state law.
As a bank holding company under the Federal Bank Holding Company Act of
1956, as amended, the Company is required to file semi-annual reports and other
information as required under the rules of the Board of Governors of the Federal
Reserve System (the "FRB") and is also subject to examination by the FRB.
In connection with obtaining the consent of the FRB to a 1989 merger
transaction involving the Bank and University Bancorp, Inc., the Company has
made certain commitments to the Federal Reserve Bank of Minneapolis providing
that the Company will not incur additional debt, and that its Employee Stock
Ownership Plan would not purchase more than 10% of the common stock or 5% of any
other class of voting shares of the Company, without the prior approval of such
Reserve Bank.
Michigan-chartered commercial banks, such as the Bank, are regulated
and supervised by the Michigan Department of Commerce, Financial Institutions
Bureau, Bank and Trust Division (the "FIB"). As an insured bank, the Bank is
also subject to supervision and regulation by the Federal Deposit Insurance
Corporation (the "FDIC") and is required to file quarterly reports and other
information as
-16-
<PAGE> 17
required. As subsidiaries of the Bank, Midwest Loan Services, Varsity Funding,
Varsity Mortgage and University Insurance & Investment Services (the "Agency")
are all also subject to examination by both the FIB and the FDIC. In addition,
the Agency is also subject to examination by the State of Michigan's Financial
Institutions Bureau, Insurance Division. As a FHLMC, FNMA, and HUD Title 1 and
Title 2 and HUD multifamily seller/servicer, the Bank's mortgage banking
operation, and the Bank's mortgage operation subsidiaries, including Midwest
Loan Services and Varsity Mortgage are subject to regulation and examination by
FHLMC, FNMA and HUD.
Michigan BIDCO is also regulated and supervised by the FIB. The BIDCO
is examined annually by the FIB, and is required to make annual filings of
financial statements and to maintain a license from the Bureau. Licensing under
the terms of the Michigan BIDCO Act conveys certain exemptions upon the BIDCO
under Michigan law, which are beneficial to the operations and investment
flexibility of the BIDCO. The BIDCO is also required to permit an observer from
the Michigan Department of Commerce, Michigan Strategic Fund, BIDCO Program to
attend its Board of Directors meetings, and is required to make regular reports
and filings of its activities with this department, as a result of the terms of
the loan agreement between the Michigan Strategic Fund and Michigan BIDCO.
ITEM 2. - PROPERTIES
In May 1995, the Bank purchased a building in Ann Arbor, Michigan for
use as its main office. Beginning October 1, 1995 the Bank has leased a portion
of the building to the University of Michigan. Currently 42% of the building is
leased for approx. $68,000 (adjusted annually for inflation) plus a pro rata
share of the building's expenses. The lease is renewable each year.
In mid-1996, the Bank leased a site which includes a registered
historic landmark building in Ann Arbor, at the corner where Washtenaw Avenue
and Stadium Boulevard merge. The Bank also loaned a limited liability company,
Tuomy, L.L.C. (associated with non-affiliated third-parties), a sum sufficient
to acquire the site, and earned a 1/3 L.L.C. membership interest in the L.L.C.
as additional consideration for making the loan. The Bank uses the historic
building as a multiple ATM drive-through location and an off-site storage
facility.
The Bank leases an ATM location with an adjacent meeting room in
Dexter, Michigan under a three year lease.
The Bank leases its former loan office in Sault Ste. Marie to an
unrelated third-party. Management has listed the property with a local
commercial realtor for sale.
Varsity Mortgage leases an office in Farmington Hills, Michigan under a
one-year agreement. Varsity Mortgage's Retail Division leases a small office for
retail origination branches in Columbus, Ohio under a short term rental
agreement.
-17-
<PAGE> 18
Midwest Loan Services leases an office in Houghton, Michigan under a
year-to-year lease.
Management believes that its office facilities are adequate to support
the anticipated level of future expansion of the Bank's business.
The following table sets forth certain information relating to real
estate owned and leased at December 31, 1998. The Bank believes that the fair
market value of the real estate which it owns exceeds the book value of such
real estate. Based upon a recent appraisal and its assessment of current market
conditions, management believes the 16-acre site where the former loan office is
located has a fair market value substantially more than its carrying cost of
$266,079 as of December 31, 1998. This property is carried as "other real estate
owned" in the Company's financial statements as of December 31, 1998 since it is
surplus to the Bank's requirements.
<TABLE>
<CAPTION>
Year Owned or
Office Location Opened Leased Cost
- --------------- ------ ------ ----
<S> <C> <C> <C>
Corporate Office,
Bank Main Office
959 Maiden Lane
Ann Arbor, MI 48105 1996 Owned $789,564
Former Loan Office
Easterday & I-75
Sault Ste. Marie, Michigan 1991 Owned $266,079
Tuomy ATM Drive-through
Washtenaw & Stadium
Ann Arbor, Michigan 1996 Leased (1) -
Dexter ATM & Meeting Room
Baker Road & Ann Arbor Road
Dexter, Michigan 1998 Leased -
Varsity Mortgage
33493 14 Mile Rd., Ste. 20
Farmington Hills, Michigan 1995 Leased -
Varsity Mortgage Retail Office
2525-C Oak Stone Drive,
Columbus, Ohio 1998 Leased -
Midwest Loan Services
616 Sheldon Ave., Ste. 300
Houghton, Michigan 1991 Leased -
</TABLE>
(1) The Bank owns a 1/3 L.L.C. membership interest in the L.L.C. which owns the
site.
-18-
<PAGE> 19
ITEM 3. - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party to or to which any of their properties are
subject.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK AND DIVIDEND INFORMATION
The Company's Common Stock trades on The NASDAQ Small-Cap Market under the
symbol UNIB. As of the March 1, 1999 there were approximately 375 stockholders
including approximately 240 beneficial owners of shares held by brokerage firms
or other institutions. The high and low sales prices of the Company's common
stock as quoted by NASDAQ, for each quarter of the two year period ended
December 31, 1998 are listed below. The quotations represent interdealer prices
only, without retail markups, markdowns or commissions, and may not necessarily
represent actual retail transactions:
<TABLE>
High Low
1998
<S> <C> <C>
First Quarter $5 31/64 $2 2/3
Second Quarter 5 1/8 2 3/8
Third Quarter 4 19/32 3 1/16
Fourth Quarter 3 7/16 1 31/32
1997
First Quarter $5 1/3 $4 1/2
Second Quarter 5 1/3 3 2/3
Third Quarter 4 1/2 3 2/3
Fourth Quarter 4 3/16 3
</TABLE>
The Company effected a three for two stock split of its common stock
(effected as a stock dividend) in February 1998 (see "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations, Recent
Events"). All per share and number of share amounts in this Report are adjusted
to reflect the stock split. No cash dividends have been paid on the Company's
Common Stock. The Company does not currently anticipate declaring or paying
dividends.
CERTAIN SALES OF EQUITY SECURITIES
Not applicable.
-19-
<PAGE> 20
ITEM 6. - SELECTED FINANCIAL DATA
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income 4,011 $ 4,736 $ 3,724 $ 2,379 $ 3,987
Interest expense 2,359 3,208 2,733 1,845 2,104
Net interest income 1,652 1,528 991 534 1,883
Provision for loan losses 118 260 191 17 210
Net interest income after
provision for loan losses 1,534 1,268 800 517 1,673
Net gain (loss) on investments 98 8 399 56 (178)
Profit from equity investment
in Michigan BIDCO 128 (55) 50 95 178
Other non-interest income 5,748 5,236 2,770 631 702
Gain: sale, branches & loans (1) -- -- -- -- 3,018
Non-interest expense 7,904 7,868 4,915 1,699 2,782
Income (loss) before income tax (396) (1,411) (896) (402) 2,611
Income tax expense (benefit) (198) (293) (359) (107) 770
Net income (loss) (198) (1,118) (537) (295) 1,841
Selected Year End Balances
Total assets 54,536 57,529 78,366 38,275 31,827
Loans receivable, net 23,193 27,715 20,669 8,954 4,221
Loans held for sale 11,863 18,157 30,534 7,983 4,129
Cash, cash equivalents
and securities 13,040 4,357 19,898 15,028 19,264
Deposits 43,220 45,267 49,941 20,745 13,128
Note payable 826 923 963 1,000 1,000
FHLB advances -- -- -- 10,000 9,800
Minority interest 205 201 201 201 --
Stockholders' equity 3,083 3,398 3,913 4,651 4,096
Shares Outstanding and Per Share
Data (2)
Common shares, year-end 1,989 1,984 1,943 1,914 1,800
Weighted average shares, year 1,991 1,922 1,866 1,802 1,779
Cash dividends -- -- -- -- --
Net income (loss) ($ 0.10) ($ 0.58) ($ 0.29) ($ 0.17) $ 1.03
Book value $ 1.55 $ 1.81 $ 2.01 $ 2.43 $ 2.27
Selected Ratios
Net average interest rate spread 2.96% 3.43% 2.09% 1.09% 3.03%
Net yield on average
earning assets 3.48% 3.07% 2.17% 1.69% 3.42%
Return on average assets (0.35%) (1.76%) (1.08%) (0.84%) 3.02%
Return on average equity (6.22%) (29.23%) (13.85% (6.94%) 54.47%
Avg. equity to asset ratio 5.79% 5.76% 7.77% 12.14% 5.55%
</TABLE>
[See the Note on the following page]
-20-
<PAGE> 21
(1) The Bank sold three branches and associated loans and deposits on December
5, 1994. Income and expense associated with these branches are included up
until the date of the sale. Net income includes a gain from the Branch Sale
of $1.11 per share.
(2) Share and per share data have been retroactively restated to reflect a 3 for
2 stock split in February 1998.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of the following discussion and analysis is to assist the
reader in understanding and evaluating the changes in financial position and
results of operations over the past three years. The discussion should be read
in conjunction with the consolidated financial statements, the related notes
thereto, and statistical information presented elsewhere in this report.
This report contains certain forward looking statements which reflect
the Company's expectation or belief containing 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 money management operations and the nature and adequacy of
allowances for loan losses. The Company can give no assurance that the
expectations reflected in its forward looking statements will prove to be
correct. Various factors could cause results to differ materially from the
Company's expectations.
Without intending to be exhaustive, these factors include:
NEW BUSINESS ENTERPRISE. The Company's Bank subsidiary operations were
relocated to Ann Arbor in 1996, and are not yet profitable and has incurred
substantial operating losses during the start-up phase. There is no assurance
that the Ann Arbor operation will grow to a size that will enable it to become
profitable.
RELIANCE ON KEY PERSONNEL. The success of the Company is dependent upon
the services of certain of the senior executive officers. The loss of the
services of one or more of such individuals could have an adverse affect on the
Company. As the Company expands it will be necessary for the Company to continue
to be able to attract and retain additional qualified senior executives. The
unexpected loss of Stephen Lange Ranzini, President & CEO of the Company and the
Bank or Joseph L. Ranzini, Chairman of the Board of the Company, or any other
key executive of the Company or the inability to attract and retain qualified
personnel in the future could have an adverse affect on the business and
financial results of the Company. The Company does not maintain key man life
insurance on any executive officer nor has it entered into non-compete
agreements with any executive officer.
DIVIDEND HISTORY. The Company has not previously paid any cash
dividends on its Common Stock, and the Company does not intend to pay dividends
in the near future. The payment of any cash dividends by the Company in the
future will depend to a large extent on the
-21-
<PAGE> 22
receipt of dividends from the Bank. The ability of the Bank to pay cash
dividends by the Bank to the Company and by the Company to its stockholders are
both subject to certain statutory and regulatory restrictions.
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS. There is significant
competition among banks and bank holding companies, many of which have far
greater assets and resources than the Company, in the areas in which the Company
operates. The Company also encounters intense competition in its commercial
banking business and mortgage banking business from savings and loan
associations, credit unions, mortgage brokers, insurance companies, commercial
and captive finance companies, and certain other types of financial institutions
many of which are larger in terms of capital, resources and personnel than the
Company. The Company believes that such competition will continue and increase
in the future. In addition, the manner in which and the means by which financial
services are delivered to customers have changed significantly in the past and
can be expected to continue to change in the future. It is not possible to
predict the manner in which existing technology, and changes in existing
technology, will affect the Company. Changes in technology are likely to require
additional capital investments to remain competitive. Although the Company has
invested in new technology in the past, there can be no assurance that the
Company will have sufficient financial resources or access to the proprietary
technology which might be necessary to remain competitive in the future.
CREDIT RISK AND LOAN CONCENTRATIONS. The greatest risk facing lenders
generally is credit risk, that is, the risk of losing principal and interest due
to a borrower's failure to perform according to the terms of the loan agreement.
As of December 31, 1998, the Company's total loan portfolio was $35,055,767, or
64% of total assets. The two largest components of the loan portfolio are
residential mortgages held for sale to the secondary market, and portfolio
loans. The Company's credit risk with respect to its portfolio loans relates
principally to the collateral and the general creditworthiness of individuals
and small businesses in the Ann Arbor area. Management believes that the
allowance for possible loan losses is adequate. See Note 5 to the Company's
consolidated financial statements, incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
CAPITALIZED MORTGAGE SERVICING RIGHTS. At December 31, 1998, the
Company had an investment of $948,208 in capitalized mortgage servicing rights.
Record low interest rates in 1998 were responsible for a surge in refinancing of
mortgages. If interest rates were to drop back down to those levels,
refinancings and payoffs would likely increase over recent experience since a
significant portion of the fixed rate mortgages being serviced by the Company
carry interest rates within 1.0% of the current market rate. 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. If
interest rates were to decline to levels seen during 1998, the portfolio would
experience significant refinancings and payoffs, which would hurt income.
-22-
<PAGE> 23
GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY. The operating income
and net income of the Company depend to a substantial extent on "rate
differentials", i.e., the difference between the income the Company receives
from loans, securities and other earning assets, and the interest expense it
pays to obtain deposits and other liabilities. These rates are highly sensitive
to many factors which are beyond the control of the Company, including general
economic conditions and the policies of various governmental and regulatory
authorities. For example, in an expanding economy, loan demand usually increases
and the interest rates charged on loans increase. Increases in the federal funds
rate by the Federal Reserve System usually lead to rising interest rates, which
affect the Company's interest income, interest expense and investment portfolio.
Competition for deposits at banks can be increased or decreased by the relative
attraction of competitive alternatives such as stocks or bonds, or by tax policy
changes, such as changes in tax deductions for individual retirement accounts.
VOTING CONTROL. The total number of shares of Common Stock held by the
Ranzini Group (Mr. Joseph L. Ranzini, Mr. Stephen Lange Ranzini, Mrs. Mildred
Ranzini, the two Ranzini Family Trusts) and the ESOP shares beneficially owned
by Stephen Lange Ranzini, is 1,313,362, or 66% of the issued and outstanding
shares at December 31, 1998.
GOVERNMENT REGULATION AND SUPERVISION. The Company and the Bank are
subject to extensive federal and state regulation and supervision, which is
intended primarily for the protection of insured depositors and consumers. In
addition, the Company and the Bank are subject to changes in federal and state
law, as well as changes in regulations, governmental policies and accounting
principles. There exist risks that regulatory examiners give negative
examination ratings. The effects are any such potential changes or negative
ratings cannot be predicted, but could adversely affect the business and
operations of the Company and the Bank, or the Bank's subsidiaries.
REGULATION OF CONTROL. Individuals, alone or acting in concert with
others, seeking to acquire more than 10% of any class of voting securities of
the Company must comply with the Change in Bank Control Act. Entities seeking to
acquire 5% or more of any class of voting securities of, or otherwise to
control, the Company must comply with the Bank Holding Company Act. Accordingly,
prospective investors need to be aware of these requirements and to comply with
these requirements, if applicable, in connection with any purchase of shares of
the Common Stock offered hereby.
TRADING MARKET FOR THE COMMON STOCK. Although the Common Stock is
listed for trading on the NASDAQ Small-Cap Market, the trading market in the
Company's Common Stock on such exchange historically has been less active than
the average trading market for companies listed on such exchange. As a result,
the price of the Company's Common Stock has ranged from $1.96875 to $5.484375
during 1998. A public trading market having the desired characteristics of
depth, liquidity and orderliness depends upon the presence in the
-23-
<PAGE> 24
marketplace of willing buyers and sellers of Common Stock at any given time,
which presence is dependent upon the individual decisions of investors and
general economic and market conditions over which the Company has no control.
There can be no assurance that the liquidity or volume of trading in the Common
Stock will increase.
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.
GENERAL
The discussion below must be considered in light of the fundamental
changes resulting from 1) the opening in February 1996 of a new main office of
the Bank in Ann Arbor, and 2) the closing on December 5, 1994 of the sale by the
Bank of assets pertaining to its Newberry, Michigan headquarters office and its
two branches in Sault Ste. Marie, Michigan, which included the sale of deposits
and loan portfolios (the "Branch Sale"). Accordingly, historical results of
operations of the commercial banking division are not indicative of future
operations. In addition, results of operations for 1998, 1997, 1996, and 1995,
were significantly affected by the opening in February 1996 of the Bank's office
in Ann Arbor.
The operations of the Company and the banking industry in general are
significantly influenced by general economic conditions, related monetary and
fiscal policies of the federal government, and policies of financial institution
regulatory authorities, including the Federal Reserve Board (FRB), the Michigan
State Financial Institutions Bureau (FIB), and the Federal Deposit Insurance
Corporation (FDIC). Deposit flows and cost of funds are influenced by interest
rates in competing investments and general market rates of interest. Lending
activities are affected by the demand for loan borrowing, which in turn is
affected by the interest rates at which such financing may be offered and other
factors affecting the economy and the availability of funds.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets of the Company at December 31, 1998 amounted to $54.54
million compared to $57.53 million at December 31, 1997. Loans receivable, net
of reserves, decreased by $4.53 million to $23.19 million from $27.72 million.
Cash and cash equivalents (including Federal Funds sold on an overnight basis)
at the end of 1998 increased by $6.87 million from the prior year, while
securities increased by $1.81 million. Loans held for sale in the Bank's
mortgage banking division decreased by $6.30 million to $11.86 million from
$18.16 million. During 1998, management of the Bank continued to pursue a policy
of decreasing reliance on certain high cost deposits and borrowings and
increasing the rate at which loans held for sale were sold to improve
profitability. This policy has resulted in a reduction in total assets, loans
held for sale and deposits.
University Bank, as an FDIC-insured bank, is subject to certain
regulations which require the maintenance of minimum liquidity
-24-
<PAGE> 25
levels of cash and eligible investments. The Bank has historically exceeded this
minimum as a result of its investments in Federal Funds sold, U.S. Government
and U.S. Agency securities and cash. In addition the bank holding company had
$122,007 in cash and equity securities at the end of 1998 to meet cash needs,
primarily operating expenses and interest and principal reductions on the
holding company's bank loan. The balance of the loan was $826,000 and $922,688
at year end 1998 and 1997. The note was refinanced in late 1997, into a
seven-year fully amortizing loan. 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,
together with 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 holding company's loan.
Total stockholders' equity of the Company at December 31, 1998 was
approximately $3.08 million (or 5.6% of total assets) compared to $3.40 million
(or 5.9% of total assets) the year earlier. The Bank's regulatory capital at
year end was $4.38 million or 8.02% of the Bank's total regulatory assets and
the risk-adjusted capital ratio of 13.1% exceeded the minimum regulatory
risk-based capital requirement of 8% of the risk-adjusted assets for the Bank.
The following table provides additional information about the risk-adjusted
assets of the Bank and the Company's actual capital percentages:
-25-
<PAGE> 26
University Bank
Risk-Based Capital Calculation
December 31, 1998
<TABLE>
<CAPTION>
Balance Risk Weighted
0% RISK CATEGORY Sheet (000) Assets (000)
<S> <C> <C>
U.S. Treasury Securities 467
Mort-Backed Sec Guaran by GNMA 2 --
Currency & Coin 233 --
Federal Reserve Balance 29 --
---------------------
TOTAL 731 --
20% RISK CATEGORY
Interest-bearing Balances 86 17
Fed Funds Sold 8,543 1,709
U.S. Gov't sponsored Agency Sec 2,612 522
Cash Items 161 32
FHLB Stock 848 170
Balances due from depository Inst 397 79
---------------------
TOTAL 12,647 2,529
50% RISK CATEGORY
Qualifying 1st liens on 1-4 family 20,339 10,170
---------------------
TOTAL 20,339 10,170
100% RISK CATEGORY
ALL OTHER ASSETS 20,819 20,819
TOTAL ASSETS 54,536 33,518
=====================
</TABLE>
<TABLE>
<CAPTION>
TIER 1 CAPITAL Balance
<S> <C>
Common Stock 200
Surplus 4,262
Undivided Profits & Capital Reserves (625)
Minority Interest 205
Other identifiable Intangible Assets (95)
Unrealized loss on Securities --
TOTAL TIER 1 CAPITAL 3,947
TIER 2 CAPITAL
Allowance for loans & Lease losses 459
Excess LLR (limited to 1.25% gross risk-
weighted assets (30)
TOTAL TIER 2 CAPITAL 429
TOTAL TIER 1 & TIER 2 CAPITAL 4,376
TIER 1/TOTAL ASSETS 7.24%
TIER 1 & 2/TOTAL ASSETS 8.02%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 11.78%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 13.06%
</TABLE>
-26-
<PAGE> 27
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the notes thereto have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial condition and operating results in terms of
historical dollars (with the exception of the BIDCO, which uses the investment
company method of accounting), without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on operations is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services, since
such prices are affected by inflation. In the current interest rate environment,
where there are rapid increases and decreases of interest rates, liquidity and
the maturity structure of the Bank's assets and liabilities are crucial
determinants of the Bank's profitability.
ASSET/LIABILITY MANAGEMENT
All financial institutions are significantly affected by fluctuations
in interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a 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 opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.
The following table presents the Bank's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities at December 31,
1998. The table is based upon various assumptions of management which may not
necessarily reflect future experience. 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. As a result, certain assets
and liabilities indicated 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 December 31, 1998 was estimated to be
($8,424,000) or -15.46%:
-27-
<PAGE> 28
UNIVERSITY BANK
Asset/Liability Position Analysis
($ in 000's)
Maturing or Repricing in
<TABLE>
<CAPTION>
3 Mos 91 Days to 1 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years OTHERS TOTAL
------ ------- ---------- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Short term investments 8,543 0 0 0 0 8,543
Loans (1) 2,462 3,270 6,765 2,245 0 14,742
Securities Available for Sale 792 0 2 3,000 0 3,794
Securities held for Sale 0 0 0 0 0 0
Loans held for Sale 11,863 0 0 0 0 11,863
Matured Loans 264 0 0 0 0 264
Variable Rate Loans 7,744 0 0 0 0 7,744
------- ------- ------- ------- ------- -------
TOTAL ASSETS 31,668 3,270 6,767 5,245 0 46,950
LIABILITIES
CD's over $100,000 1,882 2,136 740 0 0 4,758
CD's under $100,000 6,932 10,576 2,543 58 0 20,109
MMDA 13,212 0 0 0 0 13,212
NOW 3,162 0 0 0 0 3,162
Demand 1,801 0 0 0 0 1,801
Savings 177 0 0 0 0 177
Other Liabilities 141 1,583 933 512 0 3,169
Drafts Payable 5,065 0 0 0 0 5,065
Borrowings 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
TOTAL LIABILITIES 32,372 14,295 4,216 570 0 51,453
GAP (704) (11,025) 2,551 4,675 0 (4,503)
CUMULATIVE
GAP (704) (11,729) (9,178) (4,503) (4,503)
GAP
PERCENTAGE -1.37% -22.80% -17.84% -8.75% -8.75%
</TABLE>
Notes:
(1) Net of bad debt reserves.
-28-
<PAGE> 29
The following additional information is provided with respect to the
Bank's investment portfolio, at book value, as of December 31, 1998:
Investment Portfolio Maturities (in $000s) and Yield by Type:
<TABLE>
<CAPTION>
Maturity or Repricing Interval
Under 1 Year to 5 Years to More Than
One Year 5 Years 10 Years 10 Years
Treasuries and
Gov't Agencies
<S> <C> <C> <C> <C>
- Amount $1,273 $ 2 $ $ 444
- Yield 7.14% 7.38% --% 5.34%
All Other Securities
- Amount $ 506 $ -0- $ -0- $1,549
- Yield 5.94% --% --% 4.15%
</TABLE>
Additional information regarding the Bank's investments as of December
31, 1998 and 1997 is set forth under note 3 to the Company's consolidated
financial statements included with this report.
The following information pertaining to maturities and sensitivities of
the Bank's loan portfolio to changes in interest rates is provided as of
December 31, 1998:
Loan Portfolio Maturities by Type (in $000s):
<TABLE>
<CAPTION>
Maturity
----------------------------
Under 1 Year to After 5
One Year 5 Years Years
<S> <C> <C> <C>
Commercial & Financial $3,050 $2,426 $2,504
Agricultural $ -0- $ -0- $ -0-
Real Estate:
Construction $1,573 $ -0- $ -0-
Mortgage (1) $2,279 $3,678 $4,232
Consumer $ 166 $ 907 $2,837
------ ------ -------
Total $7,068 $7,011 $9,573
<CAPTION>
Maturity Maturity
Under One Year Total
One Year or More Loans
-------- --------- -------
<S> <C> <C> <C>
Total Variable Rate Loans $5,350 $ 4,008 $ 9,358
Total Fixed Rate Loans $1,718 $12,576 $14,294
Total Loans (1) $7,068 $16,584 $23,652
======= ======= =======
</TABLE>
(1) Excludes residential loans held for sale of $11,863, and the allowance for
loan losses.
-29-
<PAGE> 30
SUMMARY OF RESULTS OF OPERATIONS
The net loss from operations of the Company was $198,049 in 1998,
$1,117,924 in 1997 and $536,758 in 1996. Earnings (loss) per share for 1998,
1997 and 1996 were $(0.10), $(0.58) and $(0.29), respectively.
The decreased loss in 1998 versus 1997 was principally due to decreased
losses at the Bank's new Ann Arbor main office. During the year non-interest
expenses at the retail bank division were decreased by $890,139, and certain
aspects of underlying operating results including key indicators such as net
interest income improved so that the Bank acheived a break-even result during
the year from ongoing operations. Unusual or non-recurring expenses exceeded
unusual or non-recurring profits and decreased the Bank's income by $342,000.
The Bank's mortgage banking and other specialized financial subsidiaries had
total increased profits of $581,381 in 1998, a 33% return on average investment
and offset a portion of the losses from the retail banking operations.
The increased loss in 1997 versus 1996 was principally due to increased
losses at the Bank's new Ann Arbor main office. During the year fixed costs were
higher than revenues, and although certain aspects of underlying operating
results including key indicators such as net interest income improved, the
break-even point was only reached from ongoing operations in the fourth quarter.
A change in management at the Bank also led to high severance and other expenses
in the fourth quarter. The Bank's mortgage banking and other specialized
financial subsidiaries had total increased profits of $245,292 in 1997, a 13%
return on average investment and offset a portion of the losses from the
community bank operations.
RECENT EVENTS
The Company recently received permission orally from the Michigan
Financial Institutions Bureau for the BIDCO to repurchase the shares and
convertible bonds held by certain minority shareholders of the BIDCO. Written
permission is expected shortly. The transaction is contemplated to be effective
in the near future. As a result of the transaction it is anticipated that the
Company's ownership of the BIDCO will increase to 80% from 44.1%, and that the
BIDCO will then become 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 sheltered by the
Company's net operating tax loss carryforward. Since the purchase price for the
shares is at a discount to the BIDCO's per share book value, the transaction is
anticipated to generate an immediate gain for the Company of approximately
$70,000.
NET INTEREST INCOME
Net interest income represents the dollar amount by which interest
income generated by interest-earning assets exceeds the cost of funds.
Interest-earning assets consist primarily of loans, short term investments and
investment securities, and the principal cost of
-30-
<PAGE> 31
funds is the interest paid on deposit accounts and other borrowings. Net
interest income is affected by (i) the difference between the average rate of
interest earned on the Bank's interest-earning assets and the average rate paid
on its interest-bearing liabilities ("interest rate spread") and (ii) the
relative amounts of its average interest-earning assets and interest-bearing
liabilities. In order to maintain and increase earnings during periods of
fluctuating interest rates, it is imperative that interest-earning assets and
interest-bearing liabilities be managed effectively. Trends in net interest
income provide a measure of the effectiveness by which a financial institution
manages its interest rate sensitivity.
In each period, net interest income on a consolidated basis was reduced
by interest expense associated with the holding company's bank loan
indebtedness. Such interest expense was $0.09 million in 1998, $0.11 million in
1997 and $0.09 million in 1996.
In the following table, non-accrual loans are included in the average
balances. The table presents, for the periods and dates indicated, the average
balances (all averages are calculated using monthly averages) of, the interest
earned or paid on, and the weighted average yield earned or rate paid on, the
Company's interest-bearing assets and liabilities:
-31-
<PAGE> 32
<TABLE>
<CAPTION>
0 Net Interest Income
At Years Ended December 31,
-----------------------------------------
31-Dec-98 1998 1997 1996
--------------- -----------------------------------------
Average Average Interest Average
Yield Balance Inc(Exp) Yield
Interest Earning Assets:
Loans:
<S> <C> <C> <C> <C>
Commercial 9.01% 9,680,308 1,010,205 10.44%
Real Estate Construction 8.56% 644,430 65,269 10.13%
Real Estate Mortgage 6.76% 28,476,557 2,192,636 7.70%
Installment/Consumer 10.42% 4,590,026 464,041 10.11%
Total Loans 8.69% 43,391,322 3,732,151 8.60%
Investment Securities(1) 5.59% 1,796,853 154,648 8.61%
Federal Funds & Bank Deposits 4.75% 2,255,064 123,810 5.49%
Total Interest Bearing Assets 7.07% 47,443,238 4,010,609 8.45%
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 2.81% 2,956,611 118,622 4.01%
Savings 2.46% 140,501 3,504 2.49%
Canadian Dollar Savings 0.00% 17,849 396 2.22%
Time 5.66% 24,238,176 1,444,236 5.96%
Borrowed Funds 5.78% 1,481,112 85,604 5.78%
Money Markets 4.40% 13,218,519 617,431 4.67%
Total 5.03% 42,052,768 2,269,793 5.40%
Holding Company Debt 9.00% 884,764 88,893 10.05%
Total Interest Bearing
Liabilities 5.17% 42,937,532 2,358,686 5.49%
Net Earning Assets, net interest
income, and interest rate spread 1.90% 4,505,706 1,651,923 2.96%
Net yield on interest-earning assets 3.64%
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------
Average Interest Average Average Interest Yield/
Balance Inc(Exp) Yield Balance Inc(Exp) Rate
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial 12,051,647 1,092,970 9.07% 5,783,396 598,353 10.35%
Real Estate Construction 828,157 65,665 7.93% 145,197 13,134 9.05%
Real Estate Mortgage 24,323,766 2,444,817 10.05% 22,337,028 1,930,956 8.64%
Installment/Consumer 4,786,743 471,542 9.85% 2,647,155 278,564 10.52%
Total Loans 41,990,313 4,074,994 9.70% 30,912,776 2,821,007 9.13%
Investment Securities(1) 2,272,225 305,966 13.47% 9,908,962 623,854 6.30%
Federal Funds & Bank Deposits 5,498,798 355,151 6.46% 4,903,898 278,665 5.68%
Total Interest Bearing Assets 49,761,336 4,736,111 9.52% 45,725,636 3,723,526 8.14%
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 3,360,913 156,902 4.67% 906,551 45,578 5.03%
Savings 126,081 3,113 2.47% 77,600 1,910 2.46%
Canadian Dollar Savings 446,470 10,632 2.38% 989,805 49,948 5.05%
Time 27,885,534 1,672,477 6.00% 25,052,321 1,537,908 6.14%
Borrowed Funds 3,256,164 424,419 13.03% 8,193,989 534,500 6.52%
Money Markets 16,686,401 832,345 4.99% 8,918,471 477,002 5.35%
Total 51,761,563 3,099,888 5.99% 44,138,737 2,646,846 6.00%
Holding Company Debt 937,363 108,195 11.54% 977,500 85,867 8.78%
Total Interest Bearing
Liabilities 52,698,926 3,208,083 6.09% 45,116,237 2,732,713 6.06%
Net Earning Assets, net interest
income, and interest rate spread (2,937,590) 1,528,028 3.43% 609,399 990,813 2.09%
Net yield on interest-earning assets 3.48% 3.07% 2.17%
</TABLE>
(1) Actual yields; not adjusted to take into account tax-equivalent yields
resulting from tax-free municipal income and includes bank deposits.
-32-
<PAGE> 33
The table above does not specify the average level of non-interest
bearing demand deposits, which were $2,626,160, $3,510,337 and $3,377,101 for
the years ended December 31, 1998, 1997 and 1996, respectively, as computed
using month-end balances for such years.
Net interest income of the Bank increased to $1.65 million in 1998 from
$1.53 million in 1997, mainly as a result of a larger decrease in
interest-earning liabilities than the decrease in interest-earning assets, which
was only partially offset by a decline in the yield on interest-earning assets,
which fell faster than the decline in the cost of interest-earning liabilities.
During the year ended December 31, 1998, the Bank's average interest-earning
asset base fell by $2.32 million or 4.7% over 1997, while average
interest-bearing liabilities decreased by $9.71 million or 18.8%. Due to a
restructuring of the interest rate earned on loans held for sale charged to the
Bank's Varsity subsidiaries, the average yield on interest-earning assets
decreased to 8.45% from 9.52% in 1997. Due to the decrease of wholesale deposits
in the mix of interest-earning liabilities, the average cost of deposits
decreased from 5.99% in 1997 to 5.40 in 1998. As a result of the decrease in
yield on interest-earning assets in an amount greater than the decline in the
cost of interest-earning liabilities, which more than offset an expansion in
interest-earning assets relative to interest-earning liabilities, the net
interest margin decreased to 2.96% in 1998 from 3.43% in 1997. Interest rates
were mostly stable until September 1998, and short term interest rates declined
for the balance of the year.
Net interest income of the Bank increased to $1.53 million in 1997 from
$0.99 million in 1996, mainly as a result of an increase in both yield on
interest-earning assets, and an increase in average interest-earning assets,
which was only partially offset by the rise in interest-earning liabilities.
During the year ended December 31, 1997, the Bank's average interest-earning
asset base rose by $4.04 million or 8.8% over 1996, while average
interest-bearing liabilities increased by $7.62 million or 17.3%. Due to the
growth of loans versus securities in the mix of interest-earning assets, the
average yield on interest-earning assets increased to 9.52% from 8.14% in 1996.
Due to the increase of retail deposits versus wholesale funds in the mix of
interest-earning liabilities, the average cost of deposits decreased from 6.00%
in 1996 to 5.99% in 1997. As a result of an expansion in loans and retail
deposits, the net interest margin increased to 3.43% in 1997 from 2.09% in 1996.
Interest rates were mostly stable for the entire year, and had a minor impact on
net interest margins during 1997.
At December 31, 1998, the net yield on the Bank's interest-earning
assets was 3.64% up from the average net spread for the 1998 year of 3.48%,
principally as a result of lower cost retail deposits. Fee income from the
Bank's mortgage banking originations, income from the Bank's portfolio of
mortgage servicing rights and the Bank's investment in its subsidiaries are not
included in these calculations.
The following table presents information regarding fluctuations in
interest income and interest expense of the Company
-33-
<PAGE> 34
for the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to
(1) changes in volume (changes in volume multiplied by old rate); and (2)
changes in rate (changes in rate multiplied by old volume); with the rate/volume
variance allocated to changes in rate:
-34-
<PAGE> 35
<TABLE>
<CAPTION>
Rate / Volume Analysis
Years Ended December 31,
1998 1997
------------------------------------------------
Volume Rate Total Volume
------ ---- ----- ------
<S> <C> <C> <C> <C>
Interest Income
Loans:
Commercial (215,058) 132,293 (82,765) 648,516
Real Estate Construction (14,568) 14,172 (396) 61,778
Real Estate Mortgage 417,403 (669,584) (252,181) 171,746
Installment/Consumer (19,379) 11,877 (7,501) 225,152
---------- ---------- ---------- ----------
Total Loans 168,399 (511,241) (342,843) 1,107,193
Investment Securities (64,011) (87,307) (151,318) (480,798)
Federal Funds (209,503) (21,838) (231,341) 33,805
---------- ---------- ---------- ----------
Total Interest Income (105,116) (620,386) (725,502) 660,200
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now (18,875) (19,406) (38,280) 123,396
Savings 356 35 391 1,193
Canadian Dollar Savings (10,207) (29) (10,236) (27,418)
Time (218,756) (9,485) (228,241) 173,925
Borrowed Funds (231,366) (107,449) (338,815) (322,098)
Money Markets (172,984) (41,930) (214,914) 415,466
---------- ---------- ---------- ----------
Total Deposit Interest Expense (651,831) (178,264) (830,095) 364,464
Holding Company Debt Interest (6,071) (13,231) (19,302) (3,526)
---------- ---------- ---------- ----------
Total Interest Expense (657,902) (191,495) (849,397) 360,938
---------- ---------- ---------- ----------
Net Interest Income 552,787 (428,891) 123,895 299,262
========== ========== ========== ==========
<CAPTION>
Rate / Volume Analysis
Years Ended December 31,
1997 1996
-------------------------------------------------------------
Rate Total Volume Rate Total
---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C>
Interest Income
Loans:
Commercial (153,899) 494,617 (54,781) 55,178 397
Real Estate Construction (9,247) 52,531 (6,179) (2,057) (8,236)
Real Estate Mortgage 342,115 513,861 (123,348) (78,899) (202,247)
Installment/Consumer (32,174) 192,978 (60,079) 95,428 35,349
---------- ---------- ---------- ---------- ----------
Total Loans 146,794 1,253,987 (244,387) 69,650 (174,737)
Investment Securities 162,910 (317,888) 396,094 (113,243) 282,851
Federal Funds 42,681 76,486 470 26,517 26,987
---------- ---------- ---------- ---------- ----------
Total Interest Income 352,385 1,012,585 152,177 (17,076) 135,101
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now (12,072) 111,324 (878) (5,695) (6,573)
Savings 10 1,203 (2,080) (5,347) (7,427)
Canadian Dollar Savings (11,898) (39,316) 48,818 23,222 72,040
Time (39,356) 134,569 (30,237) (42,577) (72,814)
Borrowed Funds 212,017 (110,081) 168,031 91,360 259,391
Money Markets (60,123) 355,343 (36,894) 183,102 146,208
---------- ---------- ---------- ---------- ----------
Total Deposit Interest Expense 88,578 453,042 146,760 244,065 390,825
Holding Company Debt Interest 25,854 22,328 16,937 36,445 53,382
---------- ---------- ---------- ---------- ----------
Total Interest Expense 114,432 475,370 163,697 280,510 444,207
---------- ---------- ---------- ---------- ----------
Net Interest Income 237,953 537,215 (11,520) (297,586) (309,106)
========== ========== ========== ========== ==========
</TABLE>
-35-
<PAGE> 36
LOAN PORTFOLIO
Information regarding the Bank's loan portfolio as of December 31, 1998
and 1997 is set forth under Note 5 to the Company's consolidated financial
statements included with this report.
PROVISION FOR LOAN LOSSES
The Bank charges to operations a provision for possible loan losses
which is intended to create an allowance for future loan losses inherent in the
Bank's portfolio. Each year's provision reflects management's analysis of the
amount necessary to maintain the allowance for possible loan losses at a level
adequate to absorb anticipated losses. In its evaluation, management considers
such factors as historical loan loss experience, specifically identified problem
loans, composition and growth of the loan portfolio, current and projected
economic conditions, and other pertinent factors. A loan is charged-off by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
Non-performing loans are defined as loans which have been placed on
non-accrual status and loans over 90 days past due as to principal or interest
and still in an accrual status. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued. See Notes 5
and 6 of the Consolidated Financial Statements for additional information
regarding impaired and past due loans.
Non-performing loans amounted to $471,832 and $1,121,605 at December
31, 1998 and 1997, respectively. The decrease in non-performing loans during
1998 is the result of an improvement in the Bank's non-residential loan
portfolio, and the transfer to REO of some non-performing residential properties
that were foreclosed on during the year.
The provision for loan losses in 1998 was $118,433, a decrease of
$141,567 from the 1997 level, which in turn was an increase of $69,500 from the
1996 level of $190,500. Loans charged off net of recoveries were $180,385,
$36,830 and $209,432 in 1998, 1997 and 1996, respectively. The allowance for
possible loan losses totaled $459,001, $520,953 and $297,783 at the end of 1998,
1997, and 1996, respectively.
A summary of loan loss expense for the Bank for the years indicated is
presented below:
-36-
<PAGE> 37
Analysis of the Allowance for Loan Losses
($ in thousands)
<TABLE>
<CAPTION>
Years Ending December 31,
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of period $521 $298 $317
Chargeoffs:
Domestic:
Commercial, financial and agricultural 25 55 178
Real estate-construction 0 0 0
Real estate-mortgage 165 0 0
Installment loans to individuals 66 28 47
Lease financing 0 0 0
Foreign 0 0 0
---- ---- ----
256 83 225
---- ---- ----
Recoveries:
Domestic:
Commercial, financial and agricultural 10 3 10
Real estate-construction 0 0 0
Real estate-mortgage 42 24 0
Installment loans to individuals 24 19 5
Lease financing 0 0 0
Foreign 0 0 0
---- ---- ----
76 46 15
---- ---- ----
Net charge-offs 180 37 210
---- ---- ----
Provision for loan losses 118 260 191
---- ---- ----
Balance at end of period 459 $521 $298
==== ==== ====
Ratio of net charge-offs during period
to average loans outstanding during period 0.42% 0.09% 0.68%
==== ==== ====
</TABLE>
-37-
<PAGE> 38
Analysis of the Allowance for Loan Losses
($ in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
PERCENT OF LOANS
BALANCE AT END OF PERIOD IN EACH CATEGORY
APPLICABLE TO: AMOUNT TO TOTAL LOANS
- ---------------- ------ --------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Domestic
Commercial, financial,
agricultural $158 $177 34.4% 34.0%
Real estate-construction 8 3 1.8% 0.6%
Real estate-mortgage 185 163 40.3% 31.3%
Installment loans to
individuals 68 68 14.8% 13.0%
Unallocated 40 110 8.7% 21.1%
---- ---- ------- -------
459 521 100.0% 100.0%
==== ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Total loans (1) 23,652 28,236
Allowance for loan losses 459 521
Allowance/Loans, % (1) 1.94% 1.85%
</TABLE>
(1) Excludes loans held for sale.
The monthly provision for loan loss remained at $7,500 during 1998,
although management added a special provision of $35,933 in the third quarter of
1998 to create a new allowance for loan losses at Varsity Funding and Midwest
Loan Services for portfolio loans at these subsidiaries.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor and the future performance of these loans is dependent upon the
performance of relatively limited geographical areas.
Management believes that the current reserve level is adequate to
absorb losses inherent in the loan portfolio, although the ultimate adequacy of
the allowance for loan losses 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
-38-
<PAGE> 39
difficulties. A general nationwide business expansion could conversely tend to
diminish the severity of any such difficulties.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
There were several one-time, non-recurring losses and gains included in
the retail banking division's 1998 results. For example, the financial results
of the Bank in December 1998 included a one-time, non-recurring loss of $121,224
which was related to the sale a substantial majority of the Bank's mortgage
servicing rights. Management expects this sale of the Bank's mortgage servicing
rights to end a drain (a loss of $286,000 in 1998) on the retail bank division's
profitability. During 1998 the Bank also sold its Newberry and Saline offices at
a profit and consolidated all Bank operations (excluding offsite ATMs) into the
Ann Arbor site.
Non-interest income. Non-interest income in 1998 rose to $5,973,899
from $5,189,104 in 1997, an increase of $784,795, or 15.1%. The increase in 1998
was mainly the result of mortgage banking income, which increased 7.4%, or
$364,807, but all categories increased, including increased gains from
securities sales, gains from the sale of excess property, increased service
charges and fees, and net income from Michigan BIDCO.
Non-interest income in 1997 rose to $5,189,104 from $3,219,520 in 1996,
an increase of $1,969,584, or 61.2%. The increase in 1997 was mainly the result
of mortgage banking income, which increased 108%, or $2,563,735, partially
offset by decreased gains from securities sales and sales of portfolio mortgage
servicing rights.
Mortgage Banking. Mortgage banking, servicing and origination fees
increased to $5,291,622 in 1998 from $4,926,815 in 1997. The increase in
mortgage banking fee income was the result of a 31% increase in loan purchase
and origination volumes during 1998 and profits from the Bank's mortgage banking
subsidiaries, Varsity Mortgage and Midwest Loan Services.
The servicing rights portfolio totaled $95,588,808 of FHLMC and FNMA
mortgages for others at December 31, 1998, versus $124,719,166 at December 31,
1997. All servicing done in 1998 was done by Midwest Loan Services. The amount
decreased as a result of a portfolio sale of servicing rights by the Bank in
December 1998, and payoff and refinancing of existing rights throughout the
year. The following table summarizes the portfolio by type and mortgage note
rate:
-39-
<PAGE> 40
Interest Rate Stratification of the Bank's Servicing
<TABLE>
<CAPTION>
($ thousands) FIXED RATE - BY MATURITY (in years)
-----------------------------------
Mortgage Rate (%) ARMs UNDER 10 10-25 OVER 25
<S> <C> <C> <C> <C>
9.00 and up 267 -- 105 1,581
8.50 - 8.99 1,564 -- 470 3,401
8.00 - 8.49 6,285 -- 785 9,924
7.50 - 7.99 1,507 63 2,840 30,955
7.00 - 7.49 116 -- 7,385 16,295
6.50 - 6.99 285 -- 4,897 5,518
6.00 - 6.49 -- -- 934 405
under 6.00 -- -- -- 7
------ ------ ------ ------
10,024 63 17,416 68,086
Current market
interest rates 6.25% 6.88% 7.00% 7.38%
Average annual
servicing fee 0.38% 0.38% 0.26% 0.27%
</TABLE>
Mortgage interest rates declined during late 1998 to levels briefly
seen during the Summer of 1993 and the Winter of 1995, and as a result, the
portfolio experienced increased refinancings and payoffs. The Bank in particular
amortized $286,000 in 1998 of servicing rights, in addition to a $121,224 loss
on the sale of the bulk of the Bank's remaining portfolio of servicing rights in
December 1998.
Based on recent comparable sales and indications of market value from
industry brokers, management believes that the current market value of the
Bank's portfolio of mortgage servicing rights 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.
<TABLE>
<CAPTION>
Servicing Rights Held by University Bank
(amounts in $ thousands) December 31, December 31,
1998 1997
-----------------------------
<S> <C> <C>
Total servicing 95,589 124,719
Book value of servicing 948 1,430
Estimated market value of servicing:
Management estimate (1) 950 1,440
Discounted cash flow (2) 1,066 1,583
Estimated excess of market
over book value (3) 118- 2 153- 10
</TABLE>
(1) Assumes a price based upon market transactions at December 31, 1998 of 4.3x
(4.3 times the servicing fee) for 30-year servicing, 3.6x for 15-year servicing,
2.6x for Balloon servicing and 1.8x for ARM servicing. The market value of
servicing at December 31, 1997 [Footnotes continued on following page]
-40-
<PAGE> 41
was based on a price of 4.6x for 30-year servicing, 3.5x for 15-year servicing,
1.9x for Balloon servicing and 2.0x for ARM servicing. Excess servicing is
discounted from these amounts at a multiple of one times the servicing fee.
(2) Uses net present value analysis of future cash flows, discounted back at
rates ranging from 10 to 12% in 1998 and 1997.
(3) Range based upon the two methods used in (1) and (2), above. During 1998
purchases and sales of mortgage servicing rights by third-parties evidenced
a declining trend in price as long term interest rates declined in towards
the end of the year.
Additional information regarding the Bank's mortgage banking activities
for the past three years is set forth in Note 4 to the Company's consolidated
financial statements.
Michigan BIDCO. Michigan BIDCO (the "BIDCO"), an equity affiliate,
invests in businesses in Michigan with the objective of fostering job growth and
economic development. As of December 31, 1998, the BIDCO had made twenty-seven
such investments, amounting to a total of $13,413,600 at original cost (before
repayments or participations sold). At December 31, 1998, Michigan BIDCO had
total assets of $5,327,697 versus $5,683,808 at December 31, 1997. As discussed
above under "ITEM 1.- Business, Lines of Business, Michigan BIDCO", the
financial statements of the BIDCO are presented using the investment company
method, and, accordingly, investments in stocks, stock warrants, limited
liability companies and loans ("BIDCO Investments") are reported at fair value.
The BIDCO's financial results for 1998 reflect net income in the amount
of $259,238 versus a net loss of 163,539 in 1997. Operating expenses declined
$167,637 or 38.9%, as expenses were well controlled and the expense
reimbursement from Northern Michigan Foundation increased $80,000 to $190,000.
Net interest income recovered to $13,310, an increase of $233,698 from the prior
year. Realized gains on the sale of two major investments in the amount of
$720,000 had no impact on income as the valuations had been taken into account
in the year-end 1997 valuation. Additional market value provisions were recorded
on the mixed office recycled paper pulp mill investment, because continued
record low paper prices decreased the revenue that had been anticipated from a
royalty on sales.
The BIDCO's financial results for 1997 reflect a loss in the amount of
$163,539 as a result of a negative market value adjustment on securities and
loans of $309,144 for the year and a write-off of accrued but unpaid interest
that resulting in negative net interest income for the year of ($220,388). Two
BIDCO investments run into financial difficuly during 1997 and the carrying
value was decreased. One was restructured during 1997, with the BIDCO's
investment reduced in value by approximately half. The second was still in the
process of being restructured, and the BIDCO took a substantial write-down on
its investment there.
At December 31, 1998, the BIDCO had no outstanding conditional
commitments to lend.
-41-
<PAGE> 42
Securities. Proceeds from sales of marketable equity securities
(included in proceeds from sales of investment securities) were $121,037,
$166,498 and $631,278 for the years ended December 31, 1998, 1997 and 1996,
respectively. Gross gains of approximately $97,993, $41,155 and $346,495 and no
gross losses were realized on 1998, 1997 and 1996 sales, respectively.
Proceeds from sales of available for sale securities were $140,449,
$5,740,991 and $10,888,145 for the years ended December 31, 1998, 1997 and 1996,
respectively (including sales of marketable equity securities and excluding
sales associated with the Bank's mortgage banking operation). There was no gain
or loss on 1998 sales. Gross gains of approximately $29,726 and gross losses of
approximately $63,166 were realized on 1997 sales. Gross gains of approximately
$433,222 and gross losses of approximately $33,940 were realized on 1996 sales.
At December 31, 1998, gross unrealized losses in the Bank's
available-for-sale securities were $156,993 and gross unrealized gains were
$3,776. At December 31, 1997 gross unrealized losses in the Company's
available-for-sale securities were $27,961 and gross unrealized gains were
$46,549. At December 31, 1996 gross unrealized losses in the Company's
available-for-sale securities were $68,000 and gross unrealized gains were
$60,000. Sales of loans pooled into mortgage backed securities in connection
with the Bank's mortgage banking activities were $48,236,448 in 1998,
171,639,196 in 1997 and $54,137,028 in 1996.
Non-interest expense. Non-interest expense for the Company increased by
$36,156 or 0.5% in 1998. During the year non-interest expenses at the retail
bank division were decreased by $890,139 as a result of a variety of cost
cutbacks in an effort to streamline the operation. During the year, the Newberry
and Saline operation centers were sold and all operations centralized in the Ann
Arbor main office. Excess personnel costs were reduced, and a variety of other
efficiencies realized. This decrease was offset by ongoing growth at the Bank's
mortgage subsidiaries, Varsity and Midwest Loan Services. In addition, legal and
audit expenses remained high as a result of various projects including
approximately $75,000 spent on the unsuccessful litigation against the RTC, and
a variety of Year 2000 expenses were incurred and expensed. Holding company
total expense decreased $13,963 primarily as a result of decreases in public
listing expense and audit and legal expense as certain projects finished in
1997. Partially offsetting this decrease at the holding company was an increase
in ESOP benefits expense and salary and expenses reimbursed to a consultant in
connection with a special project.
Non-interest expense for the Company increased by $2,952,525 or 60.0%
in 1997 to $7,867,874 from $4,915,349 in 1996. Increased personnel, occupancy
and state income tax expense resulting from the development of the Bank's new
full-service branch office in Ann Arbor and the Varsity Funding and Varsity
Mortgage mortgage banking subsidiaries during 1997 was the major factor in the
increase. Legal and audit expense remained unusually high as a result of various
projects and loan collection legal expense. Bonuses and severance pay
-42-
<PAGE> 43
to the Bank's former President added $405,000 in salary expense. As a result of
a variety of actions, in late 1997 and January 1998, management reduced the
Bank's ongoing non-interest expenses by a total of $850,000 per year, when
compared to the annualized rate during the first nine months of 1997. Holding
company total expense increased $45,470 primarily as a result of increases in
public listing expense and legal expense associated with various projects.
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 certified and 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 and certified 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 and certified 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 and certified as Year 2000 compliant. All PC systems
and PC software at the Bank and its subsidiaries have been tested and certified
as Year 2000 compliant.
Approximately 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
-43-
<PAGE> 44
in 1998. At this point in time, the Company and its subsidiaries have renovated,
tested and certified 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 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.
-44-
<PAGE> 45
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
certified and 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 is
currently planned to occur in April. 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.
INCOME TAXES
Income tax expense (benefit) in 1998 was $(198,592) versus $(292,818)
in 1997 and $(358,758) in 1996. The effective tax (benefit) rate was (50.1)% in
1998, (33.9)% in 1997 and (40.1)% in 1996. A tax benefit was realized in 1998,
1997 and 1996 for net operating loss carryforwards as a result of the net losses
from operations.
In February 1996, the Bank, through its 98%-owned subsidiary, Arbor
Street LLC, purchased $1,000,000 in federal low income housing tax credits
through a partnership investment in Michigan Capital Fund for Housing Limited
Partnership I, a Michigan limited partnership (the "Partnership"). The initial
investment consisted of a $50,000 equity purchase and the execution by Arbor
Street LLC of a $950,000 promissory note held by the Partnership (the "Note").
Additional capital contributions are made over time. The purchase of the tax
credits increased the Company's deferred federal income tax assets in 1998, 1997
and 1996 and is expected to decrease the amount of federal income taxes the
Company would otherwise pay annually through 2005.
At December 31, 1998, the Company had available federal income tax loss
carryforwards that could be utilized to shelter approximately $2,100,000 in
taxable income, and carried a deferred tax asset on its books of $377,088, net
of a deferred tax asset reserve of $360,000. If the Company is able to generate
sufficient taxable income in future years, the reserve against the Company's
deferred tax asset could be reversed, resulting in an increase in future net
income. However, if the Company does not generate income in the future to
utilize the existing deferred tax assets, the amount of the reserve could be
increased, resulting in a decrease in future net income. See above, "Recent
Events".
-45-
<PAGE> 46
UNIVERSITY BANCORP, INC.
-------------------
CONSOLIDATED FINANCIAL STATEMENTS
-------------------
DECEMBER 31, 1998, 1997, 1996
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
Board of Directors And Shareholders
University Bancorp, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of University
Bancorp, Inc. as of December 31, 1998, and 1997 and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to the above
present fairly, in all material respects, the financial position of University
Bancorp, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Crowe Chizek and Company LLP
Crowe Chizek and Company LLP
Grand Rapids, Michigan
March 18, 1999
47
<PAGE> 48
Part 1. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets
December 31,1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
--------------- ---------------
<S> <C> <C>
Cash and due from banks $ 703,015 $ 2,062,307
Short term investments 8,543,000 314,652
--------------- ---------------
Total cash and cash equivalents 9,246,015 2,376,959
Securities available for sale at market 2,945,832 1,131,927
Federal Home Loan Bank Stock 848,400 848,400
Loans held for sale 11,862,665 18,156,671
Loans 23,652,103 28,236,183
Allowance for Loan Loss (459,001) (520,953)
--------------- ---------------
Loans, net 23,193,102 27,715,230
Premises and equipment 1,439,440 1,955,919
Mortgage servicing rights 948,208 1,430,190
Investment in and advances to
Michigan BIDCO 725,733 742,669
Other real estate owned 707,730 433,003
Net tax assets 377,088 100,217
Accounts receivable 1,198,661 1,198,259
Other assets 1,042,684 1,439,341
--------------- ---------------
TOTAL ASSETS $ 54,535,558 $ 57,528,785
=============== ===============
</TABLE>
-Continued-
-48-
<PAGE> 49
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31,1998 and 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
--------------- ---------------
<S> <C> <C>
Liabilities
Deposits:
Demand - non interest bearing $ 1,801,347 $ 2,458,211
Demand - interest bearing 16,373,832 19,120,122
Savings 177,093 143,604
Time 24,867,369 23,545,234
--------------- ---------------
Total Deposits 43,219,641 45,267,171
Mortgage escrow 140,673 86,686
Short term borrowings 277,000 2,744,188
Long term borrowings 1,196,097 1,749,070
Deferred noncompete income 32,068 67,072
Drafts payable 5,065,281 3,555,565
Accounts payable 744,928 66,636
Accrued interest payable 415,060 207,432
Other Liabilities 157,081 185,372
--------------- ---------------
Total Liabilities 51,247,829 53,929,192
Minority Interest 204,949 201,149
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
Issued - 0 shares in both 1998 and 1997 - -
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
Issued - 2,104,323 shares in 1998
and 1,391,907 shares in 1997 21,043 13,919
Treasury Stock - 115,184 shares in 1998
and 68,977 in 1997 (340,530) (302,446)
Additional Paid-in-Capital 3,539,474 3,493,154
Retained earnings (deficit) (16,500) 181,549
Net unrealized gain/(loss) on securities
available for sale, net of tax
of $62,182 in 1998, and
$6,320 in 1997. (120,707) 12,268
--------------- ---------------
Total Stockholders' equity 3,082,780 3,398,444
--------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 54,535,558 $ 57,528,785
=============== ===============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-49-
<PAGE> 50
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 3,732,151 $ 4,074,994 $ 2,821,007
Interest on securities:
U.S. Treasury Securities - - 34,310
U.S. Government agencies 85,482 238,190 568,141
Other securities 67,936 67,776 21,403
Interest on bank deposits 1,230 50,458 41,212
Interest on short term investments 123,810 304,693 237,453
---------------- ---------------- ----------------
Total interest income 4,010,609 4,736,111 3,723,526
---------------- ---------------- ----------------
Interest expense:
Interest on deposits:
Demand deposits 736,053 989,247 522,580
Savings deposits 3,900 13,745 51,858
Time certificates of deposit 1,444,236 1,672,477 1,537,908
Bank and other short term borrowings 85,604 424,419 480,189
Long Term Notes Payable 88,893 108,195 140,178
---------------- ---------------- ----------------
Total interest expense 2,358,686 3,208,083 2,732,713
---------------- ---------------- ----------------
Net interest income 1,651,923 1,528,028 990,813
Provision for loan losses 118,433 260,000 190,500
---------------- ---------------- ----------------
Net interest income after
provision for loan losses 1,533,490 1,268,028 800,313
---------------- ---------------- ----------------
Other income:
Net security gains 97,993 7,715 399,282
Service charges and fees 43,082 17,910 9,428
Mortgage banking income 5,291,622 4,926,815 2,363,080
Gain on sale of servicing rights - - 256,840
Profit(loss) from equity investment in
Michigan BIDCO 128,219 (55,499) 50,301
Other 412,983 292,163 140,589
---------------- ---------------- ----------------
Total other income 5,973,899 5,189,104 3,219,520
---------------- ---------------- ----------------
</TABLE>
-Continued-
-50-
<PAGE> 51
UNIVERSITY BANCORP, INC.
Consolidated Statements of Operations (continued)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Other expenses:
Salaries and wages $ 3,955,812 $ 4,228,467 $ 2,431,561
Employee benefits 561,288 523,771 346,059
Occupancy, net 558,858 499,838 355,950
Taxes other than income 39,740 96,009 26,475
Data processing and equipment expense 284,000 269,820 351,796
Correspondent bank service charges 26,270 44,133 20,756
Advertising 93,845 103,332 138,957
Net expense of other real estate owned 44,281 (782) 7,016
Legal and audit expense 364,969 274,093 293,862
Other operating expenses 1,974,967 1,829,193 942,917
---------------- ---------------- ----------------
Total other expenses 7,904,030 7,867,874 4,915,349
---------------- ---------------- ----------------
Income (Loss) before income taxes (396,641) (1,410,742) (895,516)
---------------- ---------------- ----------------
Income taxes (benefit) (198,592) (292,818) (358,758)
---------------- ---------------- ----------------
Net Income (Loss) $ (198,049) $ (1,117,924) $ (536,758)
================ ================ ================
Basic and diluted (loss) per common share $ (0.10) $ (0.58) $ (0.29)
================ ================ ================
Weighted average shares outstanding 1,990,509 1,921,721 1,866,519
================ ================ ================
</TABLE>
UNIVERSITY BANCORP, INC.
Statement of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Loss ($198,049) ($1,117,924) ($536,758)
Other comprehensive income:
Unrealized gains/(losses) arising
during period (201,477) 26,411 (223,062)
Less: reclassification adjustment
for accumulated gains/(losses)
included in net income (97,993) (7,715) (399,282)
------------------------------------------------------
Other comprehenisve income/(loss),
before tax effect (299,470) 18,696 (622,344)
Income tax effect on unrealized
gains/(losses) arising during period 68,502 (8,979) 75,840
Income tax effect on reclassification
adjustments 33,318 2,623 135,756
------------------------------------------------------
Other comprehensive income/(loss),
net of tax (197,650) 12,340 (410,748)
------------------------------------------------------
Comprehensive loss (395,699) (1,105,584) (947,506)
======================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-51-
<PAGE> 52
UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Common Stock $.01 Treasury Stock
Par Value
------------------------------------------------------------------- Additional
Number of Par Number of Paid In
Shares Value Shares Cost Capital
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1996 1,276,125 $ 12,761 (37,282) $ (139,808.00) $ 2,799,656
Issuance of Shares at $5.56 per share 19,241 193 - - 106,733
Purchase of shares at $5.12 per share - - (31,483) (161,075) -
Net change in unrealized
gain(loss) on securities - - - - -
available for sale, net of tax
Net Income (Loss) - - - - -
------------------------------------------------------------------------------------
Balance December 31, 1996 1,295,366 12,954 (68,765) (300,883) 2,906,389
Issuance of shares weighted
average at $6.43 per share 86,541 865 - - 555,615
Exercised option shares at $3.13 per share 10,000 100 31,150
Purchase of shares at $7.37 per share - - (212) (1,563) -
Net change in unrealized - - - - -
gain(loss) on securities
available for sale, net of tax
Net Income (Loss) - - - - -
------------------------------------------------------------------------------------
Balance December 31, 1997 1,391,907 13,919 (68,977) (302,446) 3,493,154
3 for 2 stock split 695,972 6,960 (34,489) (6,960)
Issuance of shares weighted
average at $3.25 per share 16,444 164 - - 53,280
Purchase of shares at $3.25 per share - - (11,718) (38,084) -
Net change in unrealized
gain(loss) on securities - - - - -
available for sale, net of tax
Net Income (Loss) - - - - -
------------------------------------------------------------------------------------
Balance December 31, 1998 2,104,323 $ 21,043 (115,184) $ (340,530) $ 3,539,474
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
gain/(loss)
on securities Total
Retained available Stockholders'
Earnings for sale Equity
------------------------------------------
<S> <C> <C> <C>
Balance January 1, 1996 $ 1,836,231 $ 142,058 $ 4,650,898
Issuance of Shares at $5.56 per share - - 106,926
Purchase of shares at $5.12 per share - - (161,075)
Net change in unrealized
gain(loss) on securities - (147,222) (147,222)
available for sale, net of tax
Net Income (Loss) (536,758) - (536,758)
------------------------------------------
Balance December 31, 1996 1,299,473 (5,164) 3,912,769
Issuance of shares weighted
average at $6.43 per share - - 556,480
Exercised option shares at $3.13 per share 31,250
Purchase of shares at $7.37 per share - - (1,563)
Net change in unrealized - 17,432 17,432
gain(loss) on securities
available for sale, net of tax
Net Income (Loss) (1,117,924) - (1,117,924)
------------------------------------------
Balance December 31, 1997 181,549 12,268 3,398,444
3 for 2 stock split
Issuance of shares weighted
average at $3.25 per share - - 53,444
Purchase of shares at $3.25 per share - - (38,084)
Net change in unrealized
gain(loss) on securities - (132,975) (132,975)
available for sale, net of tax
Net Income (Loss) (198,049) - (198,049)
------------------------------------------
Balance December 31, 1998 $ (16,500) $ (120,707) $ 3,082,780
==========================================
</TABLE>
-52-
<PAGE> 53
UNIVERSITY BANCORP, INC.
Consolidated Statements of Cash Flows For the years ended
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (198,049) $ (1,117,924) $ (536,758)
Adjustments to reconcile net loss to net cash from Operating
Activities:
Depreciation and amortization 321,275 663,076 562,141
Compensation Expense 53,455 36,322 15,056
Provision for loan loss 118,433 260,000 190,500
Gain on sale of mortgage servicing rights - - (256,840)
Mortgage loans originated for sale and securitization (525,438,872) (396,723,436) (193,356,147)
Proceeds from sale of loans and mortgage backed trading
securities 534,353,849 413,672,875 171,985,016
Net loss/(gain) on loan sales and securitization (2,620,971) (2,564,188) (1,180,289)
Gain on sale of home equity loans - (429,260) -
Gain on disposal of fixed assets (114,199) - -
Net amortization/accretion on securities (23,718) 14,856 (18,932)
Loss/(Gain) on sale of securities available for sale (97,993) (7,715) (399,282)
Change in:
Investment in Michigan BIDCO, Inc. 16,936 73,121 (50,301)
Other real estate (274,727) (166,924) (135,483)
Increase/(Decrease) in other assets 187,886 (2,736,723) (717,937)
Increase/(Decrease) in other liabilities 2,282,686 (1,204,317) 512,506
---------------- --------------- ---------------
Net cash from (used in) operating activities $ 8,565,991 $ 9,769,763 $ (23,386,750)
---------------- --------------- ---------------
Cash flow from investing activities:
Purchase of securities available for sale (2,175,534) (1,890,921) (11,701,033)
Proceeds from sales of securities available for sale 142,088 5,879,886 10,888,145
Proceeds from maturities and paydowns of securites
available for sale 139,775 1,396,835 6,751,784
Capitalized mortgage servicing rights (48,484) (275,680) (616,436)
Proceeds from sale of servicing rights 530,466 835,396 1,216,952
Loans granted net of repayments 4,403,695 (6,877,463) (11,905,489)
Proceeds from disposal of assets 390,012 - -
Premises and equipment expenditures (80,609) (439,280) (876,561)
---------------- --------------- ---------------
Net cash from (used in) investing activities 3,301,409 (1,371,227) (6,242,638)
---------------- --------------- ---------------
Cash flow used in financing activities:
Net increase (decrease) in deposits (2,047,530) (4,673,360) 32,361,195
Proceeds from FHLB advances - 7,000,000
Payments of FHLB advances - (6,000,000) (11,000,000)
Net increase(decrease) in mortgage escrow accounts 53,987 (866) 9,313
Net increase (decrease) in other short term borrowings (2,467,188) (9,234,578) 11,978,766
Principal payment/borrowings on notes payable (552,973) 786,570 (37,500)
Issuance of common stock 53,444 551,408 91,870
Purchase of treasury stock (38,084) (1,563) (161,075)
---------------- --------------- ---------------
Net cash from financing activities (4,998,344) (18,572,389) 40,242,569
---------------- --------------- ---------------
Net change in cash and cash equivalents 6,869,056 (10,173,853) 10,613,181
Cash and cash equivalents:
Beginning of period 2,376,959 12,550,812 1,937,631
---------------- --------------- ---------------
End of period $ 9,246,015 $ 2,376,959 $ 12,550,812
================ =============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 2,151,058 $ 3,356,692 $ 2,599,547
Supplemental disclosure of noncash investing activities:
Par value of mortgage loans securitized $ 48,236,448 $ 171,639,196 $ 54,137,028
</TABLE>
The accompanying notes are an integral part of the financial statements.
-53-
<PAGE> 54
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations The consolidated
financial statements of University Bancorp, Inc. (the Company) include
the operations of its wholly-owned subsidiary, University Bank (the
Bank), the Bank's wholly-owned subsidiaries, Varsity Funding Services,
L.L.C. (Varsity Funding), Varsity Mortgage, L.L.C. (Varsity Mortgage),
and University Insurance & Investment Services, Inc. (Agency), 98% owned
subsidiary, Arbor Street, L.L.C. (Arbor) and 80% owned subsidiary,
Midwest Loan Services, Inc. (Midwest). The accounts are maintained on an
accrual basis in accordance with generally accepted accounting
principles and predominant practices within the banking industry. All
significant intercompany balances and transactions have been eliminated
in preparing the consolidated financial statements.
The Company is a bank holding company. The subsidiary Bank, which is
located in Michigan, is a full service community bank, which offers all
customary banking services, including the acceptance of checking,
savings and time deposits. The Bank also makes commercial, real estate,
personal, home improvement, automotive and other installment, credit
card and consumer loans, and provides fee based services such as annuity
and mutual fund sales, life insurance and foreign currency exchange. The
Bank considers its customer base to be primarily located in the Ann
Arbor, Michigan area. The Bank established its main office in Ann Arbor
in February 1996, by relocating from the eastern Upper Peninsula of
Michigan. The Ann Arbor office is the focus of the Bank's future
business development plan. The consolidated assets of the Company of
$54,535,558 as of December 31, 1998, primarily represent commercial and
retail banking activity. Mortgage loans which were sold into the
secondary market and are being serviced by the Bank and Midwest for
others of $95,000,000 as of December 31, 1998, are not included in the
Company's consolidated balance sheet. The Bank uses brokers to arrange
time deposits, and during 1998, a significant portion of the Bank's time
deposits were brokered deposits (See Note 8).
The Bank's operating subsidiaries, Midwest, Varsity Funding and Varsity
Mortgage, are engaged in the residential home "mortgage banking"
business. Midwest Loans Services began operations in 1992 and was
acquired by University Bank in December, 1995. Midwest Loan Services is
based in Houghton, Michigan, and is a specialist in servicing
residential mortgage loans for itself and other financial institutions,
including the Bank (See Note 4.) Varsity Funding commenced operations in
October 1995 and Varsity Mortgage commenced operations in March 1996
(See Note 4). Varsity Funding and Varsity Mortgage which are based in
Farmington Hills, Michigan, specialize in the purchase, from
correspondents, and the sale to the secondary market, of nonconforming
and conforming residential loans, respectively.
The consolidated financial statements include operating results of the
Agency since its acquisition on December 31, 1996. The Agency is engaged
in the sale of insurance products including life and health, and
investment products including annuities and mutual funds. The Agency is
located in the Bank's Ann Arbor main office.
The Bank's 98%-owned subsidiary, Arbor Street LLC, has purchased
$1,000,000 in low income housing tax credits through Michigan Capital
Fund for Housing Limited Partnership I with the assistance of $950,000
in initial financing in the form of a loan from the Michigan Housing
Development Authority.
The Company's loan portfolio is concentrated in Ann Arbor and Washtenaw
County, Michigan. While the loan portfolio is diversified, the
customers' ability to honor their debts is partially dependent on the
local economy. The Ann Arbor area is primarily dependent on the
education, healthcare, services, and manufacturing (automotive and
other) industries. Most real estate loans are secured by federal agency
guarantees and residential or commercial real estate and most business
loans are secured by business assets. Generally, installment loans are
secured by various items of personal property. A large portion of time
deposits consist of certificates of deposit obtained through brokers and
are subject to withdrawal (with penalties for early withdrawal) should
the Company's credit worthiness downgrade.
-54-
<PAGE> 55
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
1. Summary of significant accounting policies (continued)
Michigan BIDCO, Inc.
The Bank's investment in Michigan BIDCO, Inc. (the BIDCO) is accounted
for under the equity method of accounting. The Bank owns 44.1% of the
outstanding shares of the BIDCO at December 31, 1998, which began
operations in May, 1993. At December 31, 1998, the Company owned $67,977
in bonds issued by the BIDCO. If there were a conversion of outstanding
convertible bonds, the Bank and the Company would together own 12.17%
and 15.61% at December 31, 1998 and 1997. In addition, upon conversion,
certain Corporation officers and directors and their immediate family
(two of whom serve as President and Chairman of the Corporation) would
have an ownership interest in the BIDCO of 29.4%. The conversion may
take place, at the election of the BIDCO, subsequent to any time that
the BIDCO's equity pursuant to an audit performed using generally
accepted auditing standards exceeds $1,500,000. The financial statements
of Michigan BIDCO, Inc. are stated using the prescribed accounting
practices of investment companies. As a result, investments made by the
BIDCO are evaluated by management and carried at estimated fair value.
Total equity of the BIDCO was $1,486,239 at December 31, 1998.
Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions based
upon available information. These estimates and assumptions affect the
reported amounts and disclosures. Actual results could differ from those
estimates.
The significant estimates incorporated into these consolidated financial
statements which are more susceptible to change in the near term include
the value of mortgage servicing rights, the allowance for loan losses,
the identification and valuation of impaired loans, the equity interest
in the fair value and the change in the fair value of investments made
by the BIDCO, the fair value of financial instruments, and the valuation
of deferred tax assets.
Cash flow reporting
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents is defined to include the cash on hand, non-interest bearing
deposits in other institutions, federal funds sold and other investments
with a maturity of three months or less when purchased. Net cash flows
are reported for customer loan and deposit transactions and interest
bearing deposits with other banks.
Securities
Securities are classified as held to maturity and carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities are classified as available for sale when they
might be sold before maturity. Securities available for sale are carried
at fair value, with unrealized holding gains and losses reported
separately in stockholders' equity, net of tax. Realized gains are based
on specific identification of amortized cost. Securities are written
down to fair value when a decline in fair value is not temporary.
Interest income includes amortization of purchase premium or discount.
Trading securities are carried at fair value, with changes in unrealized
holding gains and losses included in income. Other securities such as
Federal Home Loan Bank stock are carried at cost.
Loans
Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on
such loans are reported as principal reductions, unless all interest and
principal payments in arrears are paid in full.
-55-
<PAGE> 56
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
1. Summary of significant accounting policies (continued)
Mortgage banking activities
Mortgage banking activities include the purchase of loans from
correspondents. The agreements with the correspondents and the degree of
underwriting the Bank performs on the loans determine whether the loans
are purchased with or without recourse. Mortgage loans held for sale as
part of the Bank's mortgage banking activities are valued at the lower
of cost or market as determined by bid prices for loans in the secondary
market. Certain loans are securitized into mortgage backed trading
securities. Upon securitization, the loans are transferred at market
value to trading securities, and a gain or loss on securitization of
loans is recorded.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable
credit losses, increased by the provision for loan losses and decreased
by charge-offs less recoveries. Management estimates the allowance
balance required based on past loan loss experience, known and inherent
risks in the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's
judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage, consumer, and credit
card loans, and on an individual loan basis for other loans. If a loan
is impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using
the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or when
it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Provisions for depreciation are computed primarily on the
straight-line method for bank premises and the accelerated methods for
equipment and land improvements over their estimated useful lives. These
assets are reviewed for impairment when events indicate the carrying
amount may not be recoverable.
Other real estate owned
Real estate properties acquired in collection of a loan are recorded at
fair value at the acquisition. Any reduction to fair value from the
carrying value of the related loan is accounted for as a loan loss.
After acquisition, a valuation allowance reduces the reported amount to
the lower of the initial amount or fair value less costs to sell.
Expenses, gains and losses on disposition, and changes in the valuation
allowance are reported in other expenses.
Servicing rights
Servicing rights represent both purchased rights and the allocated value
of servicing rights retained on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of
the rights, using grouping of the underlying loans as to type, term and
interest rates. Any impairment of a grouping is reported as a valuation
allowance.
Income taxes
Income tax expense is the sum of the current year estimated tax
obligation or refund per the income tax return, and the change in the
estimated future tax effects of temporary differences and carryforwards.
Deferred tax assets or liabilities are computed by applying enacted
income tax rates to the expected reversals of temporary differences
between financial reporting and income tax reporting, and by considering
carryforwards for operating losses and tax credits. A valuation
allowance, if needed, adjusts deferred tax assets to the net amount that
is more likely than not to be realized.
-56-
<PAGE> 57
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
1. Summary of significant accounting policies (continued)
Retirement plan
The Bank replaced a SEP IRA plan with a 401-K Plan, effective January 1,
1996, which allows an employee to contribute up to 15% of salary
pre-tax, to the allowable limit prescribed by the Internal Revenue
Service. Management has discretion to make matching contributions to the
Plan. However, no matching contributions were made by the Bank for the
years ended December 31, 1998, 1997 and 1996.
Employees Stock Ownership Plan (ESOP)
The Corporation has a noncontributory ESOP covering all full-time
employees who have met certain service requirements. The employees'
share in the Corporation's contribution is based on their current
compensation as a percentage of the total employee compensation. As
shares are contributed to the plan they are allocated to employees and
compensation expense is recorded at the shares' fair value.
Stock options
No expense for stock options is recorded, as the grant price equals the
market price of the stock at grant date. Pro-forma disclosures show the
effect on income and earnings per share had the options' fair value been
recorded using an option pricing model. The pro-forma effect is expected
to increase in the future.
Dividend restriction
Banking regulations require the maintenance of certain capital levels
and may limit the amount of dividends which may be paid by the bank to
the holding company or by the holding company to shareholders. In
addition, the Bank cannot pay a dividend until it has net retained
earnings. The retained earnings deficit of the Bank at December 31,1998
and 1997 was $624,615 and $490,509 respectively.
Earnings per share
Basic earnings per share is based on weighted-average common shares
outstanding. Diluted earnings per share further assumes issue of any
dilutive potential common shares. The accounting standard for computing
earnings per share was revised for 1997, and all earnings per share
previously reported are restated to follow the new standard. Earnings
per share and share amounts are restated for all subsequent stock
dividends and splits.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments,
and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Comprehensive Income (Loss):
Under a new accounting standard, comprehensive income is now reported
for all periods. Comprehensive income (loss) includes both net income
and other comprehensive income. Other comprehensive income includes the
change in unrealized gains and losses on securities available for sale.
Reclassifications
Certain amounts for 1997 and 1996 have been reclassified to conform with
the 1998 presentation.
Segment Reporting
The Corporation's segments are determined by the products and services
offered, primarily distinguished between banking and mortgage banking
operations. Loans, investments, and deposits provide the revenues in the
banking operation, and servicing fees, underwriting fees and loan sales
provide the revenues in mortgage banking. All operations are domestic.
-57-
<PAGE> 58
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
2. Sale of branches and associated loans
On December 5, 1994 the Bank sold three branches, certain deposits and
associated loans to another bank. A portion of the sales price,
$175,000, was allocated to deferred income attributable to the
non-compete agreement. This deferred income is being amortized into
income over the five year term of the agreement.
3. Securities available for sale
The following is a summary of the amortized cost and fair value of
securities available for sale at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $2,191,000 4,000 $ (136,000) $2,059,000
Other mortgage-backed 421,000 4,000 -- 425,000
U.S. Treasury 467,000 -- (25,000) 442,000
U.S. agency equity 848,000 -- 848,000
Other equity 50,000 -- (30,000) 20,000
- ----------------------------------------------------------------------------------------
Total securities
available for sale $3,977,000 $ 8,000 $ (191,000) $3,794,000
========== ========== ========== ==========
<CAPTION>
December 31, 1997
-----------------
Amortized Gross Unrealized Fair
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $509,000 $ 9,000 $ -- $ 518,000
Other mortgage-backed 561,000 -- (28,000) 533,000
U.S. agency equity 848,000 -- -- 848,000
Other equity 44,000 37,000 -- 81,000
- ----------------------------------------------------------------------------------------
Total securities
available for sale $1,962,000 $ 46,000 $ (28,000) $1,980,000
========== ========== ========== ==========
</TABLE>
Investment securities with an amortized cost of approximately $3,077,000
at December 31, 1998 and $1,068,000 at December 31, 1997 were pledged to
secure certain borrowings.
<TABLE>
<CAPTION>
Sales of available for sale securities 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Proceeds $ 142,088 $5,907,489 $10,888,145
Realized gains 97,993 70,881 433,222
Realized losses - 63,166 33,940
</TABLE>
The scheduled maturity date of the securities available for sale at
December 31, 1998 is:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
1999 $ 0 $ 0
2000-2003 2,000 2,000
2004-2008 503,000 506,000
After 2008 3,472,000 3,794,000
------------ ------------
$ 3,977,000 $ 3,794,000
</TABLE>
Since mortgage-backed securities have variable payments, they are not
reported by specific maturity grouping.
-58-
<PAGE> 59
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
4. Secondary mortgage market operations
The Bank, and its subsidiaries Midwest Loan Services, Varsity Mortgage
and Varsity Funding, originate, purchase, sell and service single family
mortgage loans. The following summarizes the secondary market activities
of the Bank, Midwest, Varsity Funding and Varsity Mortgage, for the
years ended:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Origination and other fees $ 2,154,871 $ 1,521,292 $ 609,499
Gain on sale and securitization of
mortgages 2,620,971 2,993,448 1,180,289
Loan servicing and subservicing fees, net 515,780 412,075 573,292
----------- ----------- -----------
Mortgage banking income reflected in statements
of operations 5,291,622 4,926,815 2,363,080
Gain on sale of servicing rights - - 256,840
Market value adjustments included in other
operating expense 983 - -
Interest income allocation 2,020,265 1,699,400 1,310,062
Interest expense allocation (1,269,149)
(1,332,100) (927,578)
Operating expense allocation (5,590,558) (5,003,798) (2,625,456)
----------- ----------- -----------
Pretax profit (loss) from secondary
market activities $ 453,162 $ 290,317 $ 376,948
=========== =========== ===========
</TABLE>
Certain assumptions were used to calculate the profit and loss from
secondary market activities. Interest income was calculated using the
average annual balance of loans held for sale at the Bank's average
yield on mortgage loans. Interest expense was calculated using the
average annual balance of loans held for sale, net of escrow balances,
at the Bank's average cost of funds rate.
Operating expenses included certain direct costs, but a significant
portion is based upon management's estimates using the best available
information.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loans held for sale,
January 1 18,156,671 $ 30,534,574 $ 7,983,154
Origination or acquisition
of loans held for sale 525,438,872 401,294,972 193,356,147
Sale of loans originated
for sale (483,496,430) (242,033,679) (116,667,699)
Securitization of loans (48,236,448) (171,639,196) (54,137,028)
------------- ------------- -------------
Loans held for sale,
December 31 $ 11,862,665 $ 18,156,671 $ 30,534,574
============= ============= =============
</TABLE>
The bank and third parties will alternatively provide funding sources
for the mortgage banking pipeline. Included within other liabilities at
December 31, 1998 and 1997 are $5,065,281 and $3,300,000 of recently
closed loans which the Bank is funding internally.
-59-
<PAGE> 60
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
4. Secondary mortgage market operations (continued)
The aggregate market value of the loans held for sale exceeded the cost
at December 31, 1998, 1997 and 1996, thus no reserve was required.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. Such mortgage loans have been sold
predominately without recourse or with limited recourse. The unpaid
principal balances of these loans, including loans acquired from the
acquisition of Midwest, were $95,000,000, $125,000,000, and $214,000,000
at December 31, 1998, 1997 and 1996, respectively.
Midwest also provides sub-servicing of loans for other financial
institutions. At December 31, the principal balance of loans for which
sub-servicing was provided was $116,179,291 in 1998 and $321,896,000 in
1997.
Custodial balances maintained in connection with the foregoing loan
servicing were $1,670,138, $425,756, and $1,064,650 at December 31,
1998, 1997 and 1996, respectively.
Following is an analysis of the change in the asset balance of mortgage
servicing rights:
<TABLE>
<S> <C>
Balance, January 1, 1996 2,936,703
Additions 616,436
Bulk sale of servicing (960,112)
Amortization (280,591)
-----------
Balance, December 31, 1996 2,312,436
Additions 275,680
Bulk sale of servicing (835,396)
Amortization (322,530)
-----------
Balance, December 31, 1997 $ 1,430,190
Additions 48,484
Bulk sale of servicing 0
Amortization (530,466)
-----------
Balance, December 31, 1998 $ 948,208
===========
</TABLE>
There was no valuation allowance necessary at December 31, 1998, 1997 or
1996. Additions to mortgage servicing rights in 1998 consisted of
purchased rights of $0 and originated rights of $48,484. Additions to
mortgage servicing rights in 1997 consisted of purchased rights of
$113,905 and originated rights capitalized of $161,775. Additions to
mortgage servicing rights in 1996 consisted of purchased rights of
$319,715 and originated rights capitalized of $296,721.
5. Loans
Major classifications of loans are as follows as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial $ 7,931,824 $ 11,056,374
Real estate - mortgage 8,658,285 8,836,241
Real estate - construction 1,572,522 1,584,390
Installment 5,489,472 6,759,178
------------ ------------
23,652,103 28,236,183
Allowance for loan losses (459,001) (520,953)
------------ ------------
Net loans $ 23,193,102 $ 27,715,230
============ ============
</TABLE>
-60-
<PAGE> 61
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
5. Loans (continued)
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ 520,953 $ 297,783 $ 317,185
Provision charged to operating expense 118,433 260,000 190,500
Recoveries 76,283 46,435 14,757
Charge-offs (256,668) (83,265) (224,659)
--------- --------- ---------
Balance, end of year $ 459,001 $ 520,953 $ 297,783
========= ========= =========
</TABLE>
Past due and non accrual loans are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Past due loans
90 days and more and still accruing:
Real estate $ 4,430 $233,697
Installment loans -- 5,556
Commercial loans $ -- 95,643
-------- --------
$ 4,430 $534,896
======== ========
Non accrual loans:
Real estate $467,402 $532,821
Installment loans -- 44,409
Commercial loans -- 9,479
-------- --------
$467,402 $586,709
======== ========
</TABLE>
6. Impaired Loans
Information regarding impaired loans for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Impaired loans:
Loans with no allowance allocated $ - $ 34,255
Loans with allowance allocated - 314,201
Amount of allowance for loan losses allocated - 10,085
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Impaired loans:
Average balance during the year $ 92,687 $227,345
Interest Income recognized thereon 7,079 1,097
Cash-basis interest income recognized 7,079 1,097
</TABLE>
7. Premises and equipment
Premises and equipment classifications at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 133,290 $ 163,290
Buildings and improvements 991,007 1,184,292
Furniture, fixtures, and equipment 1,272,126 1,407,928
2,396,423 2,755,510
Less accumulated depreciation (956,983) (916,315)
----------- -----------
Net $ 1,439,440 $ 1,955,919
=========== ===========
</TABLE>
Depreciation expense amounted to $269,698, $242,376, and $279,807 for
the years ended December 31, 1998, 1997 and 1996, respectively.
-61-
<PAGE> 62
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
7. Premises and equipment (continued)
The Bank leases its ATM Drive-thru location in Ann Arbor for $24,000 per
year. Varsity Funding and Varsity Mortgage lease space for their offices
for $44,771 and $61,533 per year, respectively, and Midwest leases its
space for a nominal amount from the city of Houghton. Total rental
expense for the operating leases was $156,633 in 1998, $131,774 in 1997,
and $74,831 in 1996. As of December 31, 1998, the Corporation had no
minimum rental commitments under noncancelable operating leases. The
Bank had an annual minimum rent as of December 31, 1998 of $24,000, with
a total minimum amount of future rent payable over the next 7 years of
$168,000. Varsity had an annual minimum rent as of December 31, 1998 of
$106,304, with a total minimum amount of future rent payable over the
next two years of $174,182.
The Bank remains contingently liable in the event that the purchaser of
one of its branch locations in Sault Ste. Marie does not meet its future
obligations to the lessor. As of December 31, 1998, management believes
that the purchaser was in compliance with these lease terms. The annual
base rent for such branch is currently $32,000, and the future minimum
rent due is $154,000.
In May 1995, the Bank purchased a building in Ann Arbor, Michigan. The
Bank leases 42% of the building to the University of Michigan. The lease
calls for minimum payments of $68,000 (adjusted annually for inflation)
plus the pro rata share of the building's expenses. The lease was
renewed in 1998 for another three years.
8. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more at
December 31, 1998 and 1997, were $15,445,336 and $12,208,952,
respectively.
At year-end 1998, stated maturities of time deposits were:
<TABLE>
<S> <C>
1999 $21,526,094
2000 2,493,084
2001 438,550
2002 346,137
2003 5,204
thereafter 58,300
-----------
$24,867,369
===========
</TABLE>
At December 31, 1998 and 1997, the Bank had issued through brokers
$10,687,000 and $5,334,000 of time deposits with a maturity of 1-60
months which are included in the table above.
Related party deposits totaled $278,003 and $473,978 at year-end 1998
and 1997.
9. Stock options
Director Stock Options
In 1993, the Board of Directors approved the grant of options to
purchase 15,000 shares of common stock to each of the four non-executive
directors, in lieu of compensation. The exercise price of options
granted was set at $2.08 per share, which was the then current bid price
per share as reported by NASDAQ. The options are immediately exercisable
and expire July 19, 2003. No options were exercised in 1998. Options
covering 15,000 shares were exercised during 1997. Options granted on
45,000 shares remain outstanding under this plan at December 31, 1998.
-62-
<PAGE> 63
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
1995 Stock Plan
In 1995, the Corporation adopted a stock option and stock award plan
(the 1995 Stock Plan), which provides for the grant of incentive stock
options, as defined in Section 422(b) of the Internal Revenue Code of
1986, as amended, as well as the grant of non-qualified stock options
and other stock awards. The plan provides for the grant to officers,
directors and key employees of the Corporation, and independent
contractors providing services to the Corporation, of options to
purchase and other awards of common stock. The exercise price of options
granted under the plan shall be as determined by the Board of Directors,
or a compensation committee thereof. Options shall expire on the date
specified by the Board of Directors or such committee, but not more than
10 years from the date of grant (or five years from the date of grant
for incentive stock options if the grantee owned 10% of the
Corporation's voting stock at the date of grant). Unless amended, the
1995 Stock Plan will terminate on November 15, 2005.
The following table summarizes the activity relating to options to
purchase the Corporation's common stock:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Options Per Share
------- ---------
<S> <C> <C>
Outstanding at December 31, 1995 and 1994 60,000 $ 2.08
Granted - 1996 ($0.76 Fair Value) 423,812 3.11
Exercised - 1996 (6,812) 3.69
Forfeited - 1996 (26,250) 3.33
---------- --------
Outstanding at December 31, 1996 450,750 2.95
---------- --------
Granted - 1997 ($0.21 Fair Value) 140,700 3.67
Exercised - 1997 (37,753) 3.03
Forfeited - 1997 (93,750) 3.67
---------- --------
Outstanding at December 31, 1997 459,947 $ 3.05
---------- --------
Granted - 1998 ($0.47 Fair Value) 67,500 3.00
Exercised - 1998 -- --
Forfeited - 1998 (346,697) 3.16
---------- --------
Outstanding at December 31, 1998 180,750 $ 2.83
========== ========
</TABLE>
Options outstanding have been restated for a 3 for 2 stock split in
1998. Options allowable for grant under the plan are not adjusted
without shareholder approval. Due to forfeitures in 1998 prior to the
split, the number of shares allowable for grant did not require
adjustment, and the number of options has remained within allowable
amounts.
<TABLE>
<S> <C>
At December 31, 1998
Number of options immediately exercisable 119,250
Weighted average exercise price of immediately
exercisable options $2.72
Range of exercise price of options outstanding $2.08 - $3.33
Weighted-average remaining life of options outstanding 3.5 years
</TABLE>
-63-
<PAGE> 64
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
9. Stock options (continued)
SFAS No. 123, which became effective for 1996, requires pro forma
disclosures for companies that do not adopt its fair value accounting
method for stock-based employee compensation. Accordingly, the following
pro forma information presents net income and earnings per share had the
Standard's fair value method been used to measure compensation cost for
stock options granted in 1996. Compensation cost recognized for stock
options under APB No. 25 was $0 for 1998 and 1997, because options were
granted at exercise prices equal to the underlying stock prices at date
of grant. At year-end 1998, 169,370 shares were authorized for future
grants.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Estimated fair value stock options granted:
Assumptions used:
Risk-free interest rate 4.55% 5.7%
Expected option life 3.5 years 2 years
Expected stock price volatility 3.6% 14%
Expected dividends $0 $0
Pro-forma net loss and loss earnings per share,
assuming FAS 123 fair value method was used
for stock options:
Net Loss (210,799) (1,154,765)
Loss per share $(0.11) $(0.60)
</TABLE>
10. Employee stock ownership plan
The employees allocation of ESOP assets is based on their current
compensation, after 1 year of service and upon reaching the age of
twenty one. The annual contribution to the ESOP is at the discretion of
the Corporation. The assets of the ESOP are held in trust and were
valued at approximately $144,000 and $205,000 as of December 31, 1998
and 1997, respectively. The assets of the plan are comprised entirely of
shares of the Corporation, 67,800 and 63,074 shares at December 31, 1998
and 1997, respectively, all of which were fully allocated at December
31, 1998. Upon retirement from the plan, participants have distributed
to them their allocated shares of the Corporation's stock. The
Corporation made an additional contribution to the plan for the years
ended December 31, 1998, 1997 and 1996 of 16,445, 9,906, and 4,050
shares of common stock with an approximate fair market value at the time
of the contribution of $53,445, $36,322, and $15,056, respectively.
11. Commitments and contingencies
The Bank and Varsity Mortgage are a party to financial instruments with
off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to make loans and to sell loans, letters of credit and
unused lines of credit. The Bank and Varsity Mortgage's exposure to
credit loss in the event of non-performance is equal to or less than the
contractual amount of these instruments. The Bank follows the same
credit policy to make such commitments as is followed by those loans
recorded in the consolidated financial statements.
The following is a summary of commitments as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to buy loans $31,111,200 $35,356,400
Unused lines of credit 7,010,000 5,364,049
Commitments to sell loans $22,861,600 $21,184,400
</TABLE>
-64-
<PAGE> 65
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
12. Related party transactions
The Company's Chairman and President also serve as officers and
directors of BIDCO. As such, the Chairman and President are actively
involved in BIDCO operations, including investment activity and
estimation of the fair value of investments. In addition, in the
ordinary course of business the BIDCO has invested in several limited
liability companies (LLCs), and the Chairman and President have also
personally purchased participations from the BIDCO and invested in
certain of the same LLCs.
In connection with the Arbor Street investment of $1,000,000 in federal
low income housing tax credits through a partnership, the Bank was not
permitted by regulation to guarantee a $950,000 loan from the Michigan
Housing Development Authority to Arbor Street. Such loan was instead
personally guaranteed by the Chairman of the Company, and common stock
of the Company held by a trust for the benefit of the President of the
Company was pledged as additional security for the loan. In exchange,
the Chairman and President of the Company were each granted a 1%
membership interest in Arbor Street and the Bank's ownership reduced to
98%.
13. Income taxes
The provision for federal income taxes is composed of the following
amounts:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Current expense (benefit) $ 71,691 $(257,738) $(329,533)
Deferred expense (benefit) (270,283) (35,080) (29,225)
Total year $(198,592) $(292,818) $(358,758)
</TABLE>
The net deferred tax asset at December 31, 1998 and 1997 is comprised of
the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Loans available for sale $ 358 $ 8,134
Core deposit intangible -- 190
Allowance for loan losses 92,042 121,232
Temporary differences from LLCs 32,582 6,450
Nonaccrual loan interest income 12,164 7,395
Net Operating Loss Carryforward 222,092 172,417
Tax Credit Carryforward 400,511 278,197
Unrealized loss on investment available for sale 62,216 -
--------- ---------
Deferred tax assets 821,965 594,015
========= =========
Unrealized gain on investments available for sale - (6,320)
Servicing rights (65,971) (153,886)
Other (18,906) (8,682)
--------- ---------
Deferred tax liabilities (84,877) (168,798)
========= =========
Net deferred tax asset 737,088 426,217
Valuation allowance for deferred tax assets (360,000) (325,000)
Net Deferred Tax Asset $ 377,088 $ 100,217
========= =========
</TABLE>
The Company has net operating loss carryforwards of approximately
$620,000 which expire 2017; and general business credit carryforwards of
approximately $320,000 which expire in 2017. In addition, the Company
has an alternative minimum tax (AMT) credit carryforward of
approximately $83,000. Under current tax regulations, the AMT credit can
be carried forward indefinitely. Management has established an allowance
for deferred tax assets that are not considered realizable at both
December 31, 1997 and 1998.
-65-
<PAGE> 66
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
The difference between the financial statement tax expense and amounts
computed by applying the statutory federal tax rate of 34% to pretax
income is reconciled as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate applied to income before taxes $(134,858) $(479,652) $(304,475)
Add (Deduct)
Undistributed earnings of
unconsolidated subsidiary (38,837) 24,495 (17,102)
Tax Credits (122,314) (118,742) -
Change in valuation allowance 35,000 185,000 -
Other 62,416 96,081 (37,181)
--------- --------- ---------
Current year provision (benefit) for income tax $(198,592) $(292,818) $(358,758)
========= ========= =========
</TABLE>
14. Short and Long-Term Borrowings
The Corporation has a note payable to North Country Bank & Trust (NCB&T)
secured by the stock of the Bank with a balance of $826,000 and $922,688
at December 31, 1998 and 1997. The note has a maturity date of February
15, 2005. Interest is payable quarterly at the prime rate of NCB&T plus
1.00 percent. Required principal payments under the loan for the next
five years are:
<TABLE>
<S> <C>
1999 $132,000
2000 $132,000
2001 $132,000
2002 $132,000
2003 $132,000
Thereafter $166,000
--------
Total $826,000
</TABLE>
Dividends by the Bank to the holding company in excess of the prior
year's annual net income are not permitted without prior permission from
NCB&T under the terms of the Corporation's credit facility.
Arbor Street, LLC has an obligation of $647,097 at December 31, 1998
payable to the Michigan Housing Development Authority in connection with
its investment in a low income housing limited partnership. Payments are
due on demand, but are expected to be funded as follows:
<TABLE>
<S> <C>
1999 $ 145,000
2000 $142,000
2001 $140,000
2002 $137,000
2003 $ 85,097
----------
Total $647,097
</TABLE>
15. Federal Home Loan Bank advances
At December 31, 1998, the Bank has a line of credit from the Federal
Home Loan Bank (the FHLB) in the amount of $6,500,000. There were no
outstanding advances from the FHLB at December 31, 1998.
Advances are secured by the pledge of specific mortgage loans held for
investment with unpaid principal balances of $4,880,656 and
available-for-sale securities with a balance of $3,076,709.
16. Earnings per share
Due to the net losses in 1998, 1997, and 1996, the stock options
outstanding were considered anti-dilutive and are not included in
earnings per share calculations. As a result, both basic and diluted
earnings per share are equal to net loss divided by weighted average
common shares outstanding.
In February of 1998, the Company declared a 3 for 2 share stock split in
the form of a dividend. Calculated fractional shares were paid in whole
share amounts. All weighted average share numbers have been adjusted for
this stock split.
-66-
<PAGE> 67
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
17. Regulatory matters
The Bank is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components,
risk weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized,
although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to
accept brokered deposits. If undercapitalized, capital distributions are
limited, as is asset growth and expansion, and plans for capital
restoration are required. The minimum requirements are:
<TABLE>
<CAPTION>
Capital to risk-weighted assets Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
The Bank presently has an agreement with its regulators that no
dividends will be declared without prior regulatory approval, and the
tier 1 to average assets be at 7% or more.
At year end, actual capital levels of the bank (in millions) and minimum
required levels were:
<TABLE>
<CAPTION>
Total Cap to Risk-Weight Assets Tier 1 Cap to Risk-Weight Assets Tier 1 Cap to Avg Assets
Regulatory Actual Regulatory Actual Regulatory Actual
Minimum Ratio Amount Minimum Ratio Amount Minimum Ratio Amount
------- ----- ------ ------- ----- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 10% 13.1% $ 4.4 6% 11.8% $ 3.9 5% 7.2% $ 3.9
1997 10% 11.3% $ 4.5 6% 10.0% $ 4.0 5% 7.1% $ 4.0
</TABLE>
At year-end 1998, the Bank was categorized as well capitalized.
18. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair values
for financial instruments. The carrying amount is considered to estimate
fair value for cash and short-term instruments, demand deposits,
short-term borrowings, accrued interest, and variable rate loans or
deposits that reprice frequently and fully. Securities fair values are
based on quoted market prices or, if no quotes are available, on the
rate and term of the security and on information about the issuer. For
fixed rate loans or deposits and for variable rate loan or deposits with
infrequent repricing or repricing limits, the fair value is estimated by
the discounted cash flow analysis using current market rates for the
estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable. Fair value of loans held for sale is based on
market estimates. Fair value of mortgage servicing rights are estimated
using discounted cash flows based on current market interest rates net
of estimated costs of servicing loans. The fair value of debt is based
on currently available rates for similar financing. The fair value of
off-balance sheet items is based on the fees or cost that would normally
be charged to enter into or terminate such agreements.
Unrecognized financial instruments: The fair value of commitments to
extend credit and the fair value of letters of credit are considered
immaterial.
-67-
<PAGE> 68
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
18. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial Assets
Cash and short term investments $ 9,246,000 $ 9,246,000
Securities Available for sale 2,946,000 2,946,000
Federal Home Loan Bank stock 848,000 848,000
Loans held for sale 11,863,000 12,007,000
Loans, net 23,193,000 23,452,000
Mortgage servicing rights 948,000 950,000
Accrued interest receivable 116,000 116,000
Financial Liabilities
Deposits 43,220,000 43,364,000
Mortgage escrow 141,000 141,000
Short term borrowings 277,000 277,000
Long term borrowings 1,239,000 1,239,000
Drafts Payable 5,065,000 5,065,000
Accrued interest payable 415,000 415,000
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial Assets
Cash and short term investments $ 2,377,000 $ 2,377,000
Securities Available for sale 1,980,000 1,980,000
Loans held for sale 18,157,000 18,246,000
Loans, net 27,715,000 27,835,000
Mortgage servicing rights 1,430,000 1,583,000
Accrued interest receivable 184,000 184,000
Financial Liabilities
Deposits 45,267,000 45,404,000
Mortgage escrow 87,000 87,000
Short term borrowings 2,744,000 2,744,000
Long term borrowings 1,749,000 1,749,000
Drafts Payable 3,556,000 3,556,000
Accrued interest payable 211,000 211,000
</TABLE>
19. Segment Reporting
The Corporation's operations include two primary segments: banking and
mortgage banking. Through its banking subsidiary's branch in Ann Arbor,
the Corporation provides traditional community banking services such as
accepting deposits, making loans, and providing cash management services
to individuals and local businesses. Mortgage banking activities include
the origination and purchase of residential mortgage loans for sale to
various investors as well as providing servicing of mortgage loans for
others.
-68-
<PAGE> 69
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
19. Segment Reporting (continued)
The Corporation's two reportable segments are strategic business units
that are separately managed as they offer different products and
services and have different marketing strategies. In addition, the
mortgage banking segment services a different customer base than the
banking segment.
The segment financial information provided below has been derived from
the internal profitability reporting system used by management to
monitor and manage the financial performance of the Corporation. The
accounting policies of the two segments are the same as those described
in the summary of significant accounting principles. The Corporation
evaluates segment performance based on profit or loss before income
taxes, not including nonrecurring gains and losses. Certain indirect
expenses have been allocated based on actual volume measurements and
other criteria, as appropriate. The Corporation accounts for
intersegment revenue and transfers at current market prices.
Operating Segment Data
Information about reportable segments follows.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Mortgage
Banking Banking Other Totals
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest revenue $1,990,345 $2,020,265 $0 $4,010,610
Other revenue --- external 7,185,638 2,670,651 128,219 9,984,508
customers
Interest expense 1,089,537 1,269,149 0 2,358,686
Depreciation and amortization 225,618 95,657 0 321,275
Other significant noncash items:
Provision for loan losses 423,068 35,932 0 459,000
Net gain on sale of loans 0 2,620,971 2,620,971
Impairment of mortgage
servicing rights
Income tax expense (88.592) 0 (88,592)
Segment profit (779,430) 453,162 128,219 (198,049)
Segment assets 23,789,544 30,033,543 657,756 54,480,843
Expenditures for additions to 51,437 29,172 0 80,609
premises
- ------------------------------------------------------------------------------------------------------
</TABLE>
Amounts presented in the "other" column reflect the Corporation's investment in
Michigan BIDCO. Segment profit is measured before allocation of corporate
overhead and income tax expense. Transactions between segments are reported at
cost (fair value.) Refer to note 4 for mortgage banking segment information
provided for prior periods.
-69-
<PAGE> 70
20. University Bancorp (Parent Company Only) Condensed Financial
Information
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 33,702 $ 41,676
Securities available for sale (Note 2) 20,328 81,504
Michigan BIDCO senior convertible debentures 67,977 200,916
Investment in subsidiary Bank 3,736,157 3,958,927
Tax Assets 78,890 869,462
Other Assets 2,458 9,866
--------------- ---------------
Total Assets $ 3,939,512 $ 5,162,351
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 826,000 $ 922,688
Accounts payable 13,325 57,216
Accrued interest payable 15,654 15,459
Tax Liabilities 0 768,544
--------------- ---------------
Total Liabilities 854,979 1,763,907
Stockholders Equity 3,084,533 3,398,444
--------------- ---------------
Total Liabilities and Stockholders Equity $ 3,939,512 $ 5,162,351
=============== ===============
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary - - -
Interest & dividends on investments 21,190 20,048 19,635
Net security gains 97,993 41,155 44,598
Other income $ 59,743 $ 88 $ 19,272
---------------- --------------- ---------------
Total Income 178,926 61,291 83,505
Expense:
Interest 88,894 108,195 85,867
Salaries & benefits 35,509 1,866 0
ESOP contributions 53,595 37,818 15,056
Public listing 23,806 59,123 33,498
Audit & legal 23,749 47,519 52,321
Other taxes 2,634 2,507 3,020
Occupancy & other miscellaneous 14,682 19,106 18,574
---------------- --------------- ---------------
Total Expense 242,869 276,133 208,335
</TABLE>
-70-
<PAGE> 71
20. University Bancorp (Parent Company Only) Condensed Financial
Information (continued)
<TABLE>
<S> <C> <C> <C>
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (63,943) (214,842) (124,830)
Federal income taxes (benefit) 0 (70,472) (35,000)
---------------- --------------- ---------------
Income (loss) before equity in
undistributed net income of subsidiaries (63,943) (144,370) (89,830)
Equity in undistributed net income (loss)
of subsidiaries. (134,106) (973,554) (446,928)
---------------- --------------- ---------------
Net Loss $ (198,049) $ (1,117,924) $ (536,758)
================ =============== ===============
</TABLE>
-71-
<PAGE> 72
UNIVERSITY BANCORP, INC. (The Parent)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For Year Ended
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Reconciliation of net income (loss) to net cash used in
operating activities:
Net Income (Loss) $ (198,049) $ (1,117,924) $ (536,758)
Contribution to ESOP 53,595 37,818 15,056
Loss(gain) on sale of investments (97,993) (41,155) (44,598)
Decrease/(Increase) in receivable from affiliate 790,572 675,465 0
Decrease/(Increase) in Other Assets 7,408 (660,594) (138,698)
Increase(Decrease) in interest payable 195 5,175 (14,196)
Increase(Decrease) in other liabilities (938,635) (90,022) 206,192
Decrease(Increase) investment in subsidiaries 222,771 920,576 446,928
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (160,136) (270,661) (66,074)
--------------- --------------- ---------------
Cash flow from investing activities:
Subsidiary dividends received 0 0 0
Contributions of capital to subsidiary 0 (350,000) (66,750)
Advances to Michigan BIDCO 157,436 0 0
Purchase of available for sale securities (50,000) (55,309) (97,442)
Proceeds from sale of available for sale securities 179,497 166,498 138,216
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 286,933 (238,811) (25,976)
--------------- --------------- ---------------
Cash flow from financing activities:
Principal payment on notes payable (96,687) (39,812) (37,500)
Proceeds from sale of common stock 0 551,410 91,870
Purchase of treasury stock (38,084) (1,563) (161,075)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities (134,771) 510,035 (106,705)
--------------- --------------- ---------------
Net changes in cash and cash equivalents (7,974) 563 (198,755)
Cash and cash equivalents:
Beginning of year 41,676 41,113 239,868
--------------- --------------- ---------------
End of period $ 33,702 $ 41,676 $ 41,113
=============== =============== ===============
Supplemental disclosure of cash flow information: Cash paid during the
year for:
Interest $ 88,699 $ 92,736 $ 100,062
Income Tax 0 0 0
</TABLE>
-72-
<PAGE> 73
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements provided pursuant to this item are listed
under Item 14(a) below and appear beginning on page 43.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III.
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement for its 1999 Annual
Meeting (the "Proxy Statement") to be under the captions:
Election of Directors
Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance
ITEM 11. - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement to be under the
captions:
Executive Compensation
Compensation Plans
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Security Ownership of Certain Beneficial Owners and
Management
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Certain Relationships and Related Transactions
-73-
<PAGE> 74
PART IV.
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) (1) Index of Financial Statements: The following financial
statements are filed as part of this Report:
Audited consolidated balance sheets as of December 31, 1998
and December 31, 1997, and consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996, of
the Company.
(b) Reports on Form 8-K. None.
(c) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996 (the "June 30, 1996
10-Q")).
3.1.1 Certificate of Amendment, dated June 10, 1998, of the
Company's Certificate of Incorporation (incorporated by reference to Exhibit
3.1.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 (the "June 30, 1998 10-Q"))
3.2 Composite By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989 (the "1989 10-K")).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31,
1997 issued to North Country Bank & Trust (incorporated by reference to Exhibit
10.1 to the Company's Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 10-K")).
10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated by reference to Exhibit
10.2 to the Company's Annual Report on Form 10-K for the year ended December 31,
1990 10-K). *
10.2.1 Amendment to the ESOP, effective as of December 31,
1991 (incorporated by reference to Exhibit 10.2.A to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991 10-K. *
10.3 University Bank 401(k) Profit Sharing Plan, adopted
August 1, 1996, effective as of January 1, 1996 (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 10-K")). *
-74-
<PAGE> 75
10.4 Letter regarding grant of options to outside directors,
dated as of July 20, 1993 (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1993 (the
"1993 10-K")). *
10.5 1995 Stock Plan of the Company (incorporated by reference
to Exhibit A to the definitive Proxy Statement of the Company for 1996 Annual
Meeting of Stockholders (the "1996 Proxy")). *
10.5.1 Form of Stock Option Agreement related to the 1995
Stock Plan (incorporated by reference to Exhibit 10.7.1 to the Annual Report on
Form 10-K for the year ended December 31, 1995 (the "1995 10-K")). *
10.6 Letter, dated December 1, 1989, from Federal Reserve Bank
of Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989 10-K).
10.7 Lease Agreement (the "Cascade Lease Agreement") between
RG Properties, Inc., as agent for Sault Associates, a Michigan Limited
Partnership, and University Bank, dated September 30, 1992 (incorporated by
reference to exhibit 10.9 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992 (the "1992 10-K").
10.7.1 First Amendment to the Cascade Lease Agreement, dated
January 5, 1993 (incorporated by reference exhibit 10.9.1 to the 1992 10-K).
10.8 Federal Income Tax Allocation Agreement Between Newberry
State Bank and Newberry Holding Inc. dated March 21, 1992 (incorporated by
reference to Exhibit 10.11 to the 1991 10-K).
10.8.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc. dated May 21, 1991
(incorporated by reference to Exhibit 10.11.1 to the 1991 10-K).
10.9 Noncompetition Agreement Between First Northern Bank &
Trust and University Bank dated December 3, 1994 (incorporated by reference to
Exhibit 10.12.4 to the 1994 10-K).
10.9.1 Mortgage Origination Agreement Between First Northern
Bank & Trust and University Bank dated December 3, 1994 (incorporated by
reference to Exhibit 10.12.5 to the 1994 10-K).
10.9.2 Branch Services Agreement Between First Northern Bank &
Trust and University Bank dated December 5, 1994 (incorporated by reference to
Exhibit 10.12.6 to the 1994 10-K).
10.10 Employment Agreement, between Mark Ouimet and University
Bank and Newberry Bancorp, Inc., as amended (incorporated by reference to
Exhibit 10.13 to the 1995 10-K). *
-75-
<PAGE> 76
10.10.1 Stock Option Agreement, dated as of December 15, 1995,
between Mark Ouimet and Newberry Bancorp, Inc. (incorporated by reference to
Exhibit 10.13.1 to the 1995 10-K). *
10.11 Revised Net Branch Agreement, dated October 1, 1997,
regarding Varsity Funding Services, L.L.C., among University Bank, Jess
Monticello and William Cook (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the
"1997 10-K")). *
10.12 Revised Operating Agreement for Varsity Mortgage LLC and
related Net Branch Agreement Modification, dated as of April 1, 1997, among
University Bank and the LLC Managers (incorporated by reference to Exhibit 10.13
to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997 (the "June 30, 1997 10-Q"). *
10.13 Purchase and Sale Agreement, dated November 1, 1995,
concerning Common Stock of Midwest Loan Services, Inc., among its shareholders
and University Bank and Newberry Bancorp, Inc (incorporated by reference to
Exhibit 10.16 of the 1995 10-K).
* Each of the exhibits noted by an "*" is a management compensatory plan or
arrangement.
(21) Subsidiaries of Registrant: List of subsidiaries filed herewith.
(27) Financial Data Schedule (EDGAR version only)
-76-
<PAGE> 77
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIVERSITY BANCORP, INC.
By: /s/Stephen Lange Ranzini
-----------------------------------
Stephen Lange Ranzini,
President, Chief Executive
Officer and
Chief Accounting Officer
Date: March 30, 1999
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Stephen Lange Ranzini Director, President, March 30, 1999
- -------------------------- Chief Executive Officer,
Stephen Lange Ranzini Chief Accounting Officer
/s/Joseph L. Ranzini Director, Secretary, March 30, 1999
- --------------------------
Joseph L. Ranzini Chairman
/s/Keith Brenner Director March 30, 1999
- --------------------------
Keith E. Brenner
/s/Mildred Lange Ranzini Director March 30, 1999
- --------------------------
Mildred Lange Ranzini
/s/Michael Talley Director March 30, 1999
- --------------------------
Michael Talley
/s/Robert Goldthorpe Director March 30, 1999
- --------------------------
Robert Goldthorpe
/s/Dr. Joseph L. Ranzini Director March 30, 1999
- --------------------------
Dr. Joseph Lange Ranzini
/s/Paul Lange Ranzini Director March 30, 1999
- --------------------------
Paul Lange Ranzini
</TABLE>
-77-
<PAGE> 78
Index of Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit No. and Description Numbered Page
--------------------------- -------------
<S> <C> <C>
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the June 30, 1996 10-Q").
3.1.1 Certificate of Amendment, dated June 10, 1998, of the Company's
Certificate of Incorporation (incorporated by reference to Exhibit
3.1.1 to the June 30, 1998 10-Q").
3.2 Composite By-laws of the Company (incorporated by reference to Exhibit
3.2 to the 1989 10-K).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997 issued to
North Country Bank & Trust (incorporated by reference to Exhibit 10.1
to the 1997 10-K"))
10.2 University Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"), as
amended November 27, 1990 (incorporated by reference to Exhibit 10.2 to
the 1990 10-K).
10.2.1 Amendment to the ESOP, effective as of December 31, 1991 (incorporated
by reference to Exhibit 10.2.A to the 1991 10-K).
10.3 University Bank 401(k) Profit Sharing Plan, adopted August 1, 1996,
effective as of January 1, 1996 (incorporated by reference to Exhibit
10.3 to the 1996 10-K).
10.4 Letter regarding grant of options to outside directors, dated as of
July 20, 1993 (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 (the "1993 10-K")).
10.5 1995 Stock Plan of the Company (incorporated by reference to Exhibit A
to the definitive Proxy Statement of the Company for the 1996 Annual
Meeting of Stockholders (the "1996 Proxy).
10.5.1 Form of Stock Option Agreement related to the 1995 Stock Plan
(incorporated by reference to Exhibit 10.7.1 to the the 1995 10-K).
</TABLE>
-78-
<PAGE> 79
<TABLE>
<S> <C>
10.6 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989
10-K).
10.7 Lease Agreement (the "Cascade Lease Agreement") between RG Properties,
Inc., as agent for Sault Associates, a Michigan Limited Partnership,
and University Bank, dated September 30, 1992 (incorporated by
reference to exhibit 10.9 to the 1992 10-K).
10.7.1 First Amendment to the Cascade Lease Agreement, dated January 5, 1993
(incorporated by reference exhibit 10.9.1 to the 1992 10-K).
10.8 Federal Income Tax Allocation Agreement Between
Newberry State Bank and Newberry Holding Inc. dated
March 21, 1992 (incorporated by reference to
Exhibit 10.11 to the 1991 10-K).
10.8.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc.
dated May 21, 1991 (incorporated by reference to
Exhibit 10.11.1 to the 1991 10-K).
10.9 Noncompetition Agreement Between First Northern Bank & Trust and
University Bank dated December 3, 1994 (incorporated by reference to
Exhibit 10.12.4 to the 1994 10-K).
10.9.1 Mortgage Origination Agreement Between First Northern Bank & Trust and
University Bank dated December 3, 1994 (incorporated by reference to
Exhibit 10.12.5 to the 1994 10-K).
10.9.2 Branch Services Agreement Between First Northern Bank & Trust and
University Bank dated December 5, 1994 (incorporated by reference to
Exhibit 10.12.6 to the 1994 10-K).
10.10 Employment Agreement, between Mark Ouimet and University Bank and
Newberry Bancorp, Inc., as amended (incorporated by reference to
Exhibit 10.13 to the 1995 10-K).
10.10.1 Stock Option Agreement, dated as of December 15, 1995, between Mark
Ouimet and Newberry Bancorp, Inc. (incorporated by reference to Exhibit
10.13.1 to the 1995 10-K).
10.11 Revised Net Branch Agreement, dated October 1, 1997, regarding Varsity
Funding Services, L.L.C., among University Bank, Jess Monticello and
William Cook (incorporated by reference to Exhibit 10.12 to the 1997
10-K")).
</TABLE>
-79-
<PAGE> 80
<TABLE>
<S> <C> <C>
10.12 Revised Operating Agreement for Varsity Mortgage LLC and related Net
Branch Agreement Modification, dated as of April 1, 1997, among
University Bank and the LLC Managers (incorporated by reference to
Exhibit 10.13 to the June 30, 1997 10-Q).
10.13 Purchase and Sale Agreement, dated November 1, 1995, concerning Common
Stock of Midwest Loan Services, Inc., among its shareholders and
University Bank and Newberry Bancorp, Inc (incorporated by reference to
Exhibit 10.16 of the 1995 10-K).
(21) Subsidiaries of Registrant. 81
(27) Financial Data Schedule 82
</TABLE>
-80-
<PAGE> 1
Exhibit 21. Subsidiaries of Registrant.
University Bank, a Michigan state chartered bank.
Midwest Loan Services, Inc., a Michigan Corporation (80% owned by Bank)
Varsity Funding Services, L.L.C., a Michigan Limited Liability Company
(99% owned by Bank and 1% owned by Company)
Varsity Mortgage, L.L.C., a Michigan Limited Liability Company (100% of
the voting Interests owned by Bank and 100% of the non-voting Interests
owned by three employees)
Arbor Street, L.L.C, a Michigan Limited Liability Company (98% owned by
Bank)
University Insurance & Investment Services, Inc., a Michigan Corporation
(100% owned by Bank)
University Insurance Center, Inc., a Michigan Corporation (100% owned by
University Insurance & Investment Services, Inc.)
-81-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 703,015
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,543,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,794,232
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 35,514,768
<ALLOWANCE> (459,001)
<TOTAL-ASSETS> 54,535,558
<DEPOSITS> 43,219,641
<SHORT-TERM> 277,000
<LIABILITIES-OTHER> 6,832,091
<LONG-TERM> 1,196,097
21,043
0
<COMMON> 0
<OTHER-SE> 3,061,737
<TOTAL-LIABILITIES-AND-EQUITY> 54,535,558
<INTEREST-LOAN> 3,732,151
<INTEREST-INVEST> 278,458
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,010,609
<INTEREST-DEPOSIT> 2,184,189
<INTEREST-EXPENSE> 2,358,686
<INTEREST-INCOME-NET> 1,651,923
<LOAN-LOSSES> 118,433
<SECURITIES-GAINS> 97,993
<EXPENSE-OTHER> 7,904,030
<INCOME-PRETAX> (198,049)
<INCOME-PRE-EXTRAORDINARY> (198,049)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (198,049)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<YIELD-ACTUAL> 3.48
<LOANS-NON> 467,402
<LOANS-PAST> 4,430
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 467,402
<ALLOWANCE-OPEN> 520,953
<CHARGE-OFFS> 256,668
<RECOVERIES> 76,283
<ALLOWANCE-CLOSE> 459,001
<ALLOWANCE-DOMESTIC> 459,001
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 40,000
</TABLE>
