<PAGE> 1
As filed with the Securities and Exchange Commission on September 28, 2000
Registration No. 333- .
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES EXCHANGE ACT OF 1933
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
38-2929531
(I.R.S. Employer Identification No.)
959 Maiden Lane, Ann Arbor, Michigan 48105
(734) 741-5858
(Address, including zip code, and
telephone number,
including area code, of
registrant's principal
executive offices)
Stephen Lange Ranzini, President, UNIVERSITY BANCORP, INC.
959 Maiden Lane, Ann Arbor, Michigan 48105
(734) 741-5858
Copies to: Leamon Sowell, Lewis & Munday, P.C.
1300 First National Bldg, 660 Woodward Avenue, Detroit, Michigan 48226
----------------------------------------------------------------------
(313) 961-2550
(Address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public is: As soon as
practicable after this registration statement becomes effective
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11 (a)(1)
of this form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462 (d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
Calculation of Registration Fee
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Proposed
Proposed Maximum
maximum offering Aggregate Amount of
Title of each class of Amount to be price Offering Registration
securities to be registered registered per unit Price Fee
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<S> <C> <C> <C> <C>
Common Stock,
$0.01 par value 1,525,000 shares $ 1.00 $ 1,525,000 $ 424
--------------------------------------------------------------------------------------------------------------------------
Rights 2,027,801 rights $ 0.00 $0 $0
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</TABLE>
The registrant hereby amends this registration statement on the date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on the date as the Commission, acting pursuant to said section 8(a),
may determine.
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PROSPECTUS
1,525,000 Shares
UNIVERSITY BANCORP, INC.
Common Stock
University Bancorp, Inc. is offering up to 1,525,000 shares to its
shareholders.
University Bancorp, Inc.'s common stock is listed on the NASDAQ
Small-Cap Market under the symbol "UNIB". University Bancorp, Inc. owns
University Bank, a full service community bank serving Ann Arbor, Michigan and
the surrounding area.
The common stock is offered to shareholders of University Bancorp as of
October 1, 2000 who will each receive rights to purchase the shares. Each
shareholder will receive one right for every share they owned on October 1,
2000. The rights are transferable and any holder of the rights will be entitled
to purchase the shares. Any shareholder that sells the rights sells the right to
purchase the shares. With the rights, a right holder is entitled to purchase
three shares for every four rights they own. To illustrate, for a right holder
holding a total of 1,000 rights, that right holder would be entitled to purchase
750 shares of common stock for $750.
Holders of less than 100 shares of common stock will also received a
non-transferable Step-Up Privilege entitling each shareholder, along with the
rights they receive, to purchase 100 shares of common stock for $1 per share. To
illustrate, for a shareholder holding a total of between 1 and 100 shares, that
shareholder will receive rights to purchase shares, as described in the
preceding paragraph, plus a Step-Up Privilege to purchase additional shares,
with the combination of the rights and the Step-Up Privilege totaling 100
shares. Thus, a shareholder owning 60 shares will receive 60 rights that would
enable the purchase of 45 shares at $1 per share and will receive a Step-Up
Privilege to purchase an additional 55 shares for $1 per share. A shareholder
owning 10 shares will receive 10 rights enabling the purchase of 7 shares for $1
per share and a Step-Up Privilege to purchase an additional 93 shares for $1 per
share.
In addition, subject to availability, shareholders may purchase
additional shares not purchased by other shareholders through over-subscription
rights.
Shareholders must exercise their right to purchase by November 14,
2000. The subscription offer will expire at 5:00 p.m., New York time, on
Tuesday, November 14, 2000. Interest will be paid on amounts tendered for
subscriptions and over-subscriptions from the time these amounts are received by
the subscription agent through November 13, 2000 at 6.50%. See "Subscription
Offer."
It is anticipated that the rights will be traded on the NASDAQ,
although no assurance can be given that a market for the rights or rights will
develop.
The shares of common stock offered through this prospectus are NOT an
obligation of a bank, are not deposits or savings accounts or savings deposits
and are NOT insured or guaranteed by the Federal Deposit Insurance Corporation
or any other governmental agency.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
UNIVERSITY BANCORP HAS NOT HIRED AN UNDERWRITER OR BROKER DEALER TO
CONDUCT THIS OFFERING.
INVESTING IN COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 9.
All references to "us" or "we" or to the "Company" in this offering are intended
to refer to University Bancorp.
<TABLE>
<CAPTION>
Proceeds, before expenses
Subscription Price to Company
------------------ ----------
<S> <C> <C>
Per Share of Common Stock $1.00 $1.00
Underwriting Discount $ 0 $ 0
Total $1,525,000 (1) $1,525,000 (1)
</TABLE>
(1) Represents the amount of common stock which is expected to be sold on
subscription or over-subscription and comprises 75 shares of common stock
for each 100 of University Bancorp's common stock outstanding on October 1,
2000 including an amount estimated to be sufficient to provide common stock
to cover the exercise in full of the Step-Up Privilege if the Basic
Subscription Privilege under the rights is also fully exercised. If the
entire amount is not sold on the exercise of the Basic Subscription
Privilege or pursuant to the Step-Up Privilege or pursuant to the
Over-subscription Privilege, the Total Subscription Price and Total
Proceeds to us would be correspondingly less than the amounts shown.
The date of this Prospectus is September 27, 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY 5
RISK FACTORS 9
USE OF PROCEEDS 15
DIVIDEND POLICY 15
MARKET FOR COMMON STOCK 16
CAPITALIZATION 17
DILUTION 18
BUSINESS 19
RECENT DEVELOPMENTS 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 30
PRINCIPAL SHAREHOLDERS 65
MANAGEMENT 68
CERTAIN RELATED TRANSACTIONS 71
SUPERVISION AND REGULATION 72
DESCRIPTION OF CAPITAL STOCK 81
PLAN OF DISTRIBUTION 84
LEGAL PROCEEDINGS 89
LEGAL MATTERS 89
EXPERTS 90
FORWARD LOOKING STATEMENTS 90
AVAILABLE INFORMATION 90
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE 92
</TABLE>
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and consolidated financial statements appearing elsewhere in this
prospectus. Except as otherwise specified, financial information and other
references in this prospectus to University Bancorp include University Bank.
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" contain a discussion of some of the factors that
could contribute to those differences.
University Bancorp
We own University Bank, a full service community bank serving Ann
Arbor, Michigan and the surrounding area, which also specializes in mortgage
loan servicing. Our bank operates from its main office in Ann Arbor. In
addition, our bank's mortgage subsidiary has its main office in Houghton. As of
June 30, 2000 we had total assets of $42.3 million, deposits of $35.7 million
and shareholders' equity of $1.4 million.
Products and Services
We are a full service bank offering a wide range of commercial and
personal banking, investment and insurance services. Our services include
checking and savings accounts, certificates of deposit, money orders,
commercial, mortgage and consumer loans, credit cards, investment services and
insurance services.
Our specialized subsidiary services mortgage loans for other financial
institutions.
Market Area
Our market area for our community bank includes the cities of Ann Arbor
and Ypsilanti and the surrounding area in Washtenaw County, Michigan. This area
includes several growing communities and has a stable and diverse economic base.
Ann Arbor has a population of approximately 109,000, Ypsilanti has a population
of approximately 23,000 and Washtenaw County has a population of approximately
300,000. The largest employer in Ann Arbor is the University of Michigan, and
other major employers include the automotive supply, book publishing and
distribution and pharmaceutical industries, and state and local units of
government.
Our mortgage loan servicing subsidiary provides services to financial
institutions nationwide.
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Management
Our board of directors and management team represent a wide range of
business, community, banking and investment knowledge and experience. Many of
our management team have over 10 years of banking experience, and have
demonstrated a past track record of ability in attracting and retaining new
customer relationships while working for substantially larger organizations.
Most of our key management have significant equity or pay incentives tied to
performance of the business unit they manage on a daily basis.
Strategy
Personal service, designed to distinguish us from the large nationwide
banks, who are our primary competitors, and emphasize the LOCAL nature of the
Bank. At University Bank, we offer:
* Local Decision-Making
* Our Customers Receive Personal Service and Attention
* Competitive Pricing
* All Financial Services Products Available
* Low Fees
We solicit retail customers and compete for deposits by offering
customers personal attention, professional service, fair interest rates and low
fees. Our experienced staff provides a superior level of personalized service,
which enables us to generate competitively priced loans and deposits, and to
cross-sell other quality financial services such as investments and insurance.
Investments are offered through an affiliation with a brokerage firm called
Equitas America, LLC and insurance products are offered as an independent agent
for insurance companies.
We utilize our own computers using software licensed from reliable
vendors to provide cost effective services to our customers. Where we do not
have the ability to provide cost effective services in-house, we have entered
into agreements with third-party service providers to provide products and
services using our brand name on the products. Examples of these products are
ATMs and credit cards. Sometimes, we sell products to our customers using the
brand name of a third-party service provider, when we cannot sell our own
product by law. Examples of these products are mutual funds, annuities, and
insurance products.
About Us
We incorporated in Delaware and own University Bank. University Bank
was organized as a Michigan Bank in 1908, and sold most of its operations in
northern Michigan in December 1994. In February 1996, we opened for business in
Ann Arbor where our bank now has its main office. In addition, our bank's
mortgage subsidiary has a main office in Houghton. University Bank's deposit
accounts are insured by the Federal Deposit Insurance Corporation to the extent
permitted by law. Our main office is located at 959 Maiden Lane, Ann Arbor,
Michigan 48105. Our telephone number is (734) 741-5858.
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THE OFFERING
Rights offered: 2,027,801 rights to purchase up to 1,525,000 shares of common
stock. (See " Description of Capital Stock").
Offering price: $1.00 per share of common stock.
Common stock to be outstanding after this Offering: 3,552,801 (assuming all
1,525,000 shares are sold). If all rights are not exercised, we may sell fewer
than 1,525,000 shares in this offering.
How we plan to us the proceeds: To pay off outstanding debt, provide working
capital and for other general corporate purposes. (See "Use of Proceeds").
Plan of distribution: We are offering the rights to purchase shares of common
stock at a price of $1.00 per share to shareholders of record on the October 1,
2000, record date. Our shareholders as of the record date will receive rights
enabling them to purchase 3 shares for every 4 shares owned on the record date.
No fractional shares may be purchased but every 4 rights can be exchanged for 3
shares upon payment of $1.00 per share. For example, a shareholder who owned 702
shares on the record date would be able to purchase up to 526 shares.
We are providing a special benefit to small shareholders through the
Step-Up Privilege. Holders of less than 100 shares of common stock will receive
rights as indicated above plus a non-transferable Step-up Privilege entitling
each such shareholder to purchase 100 shares of common stock through a
combination of the rights and the Step-Up Privilege. For example, a shareholder
who owned 45 shares on the record date would receive 45 rights enabling the
purchase of 33 shares for $1 per share plus a Step-Up Privilege enabling the
purchase of 67 shares for $1 a share. To the extent our shareholders do not
choose to purchase some or all of the shares they are entitled to purchase,
these shares will be offered to the other shareholders who shares in the initial
phase of the offering. To subscribe, you must complete and return to us the
subscription agreement together with payment of $1.00 for each share to be
purchased.
NASDAQ Small-Cap Symbol: UNIB
For additional details about the offering and how to participate in the
offering, please see pages 84 to 88, which contain additional information about:
- Plan of Distribution
- Payment of Interest on Subscriptions and Oversubscriptions
- Rights to be Issued
- Basic and Step-Up Privileges
- Oversubscription Privilege
- Exercise and Payment
- Certain Federal Income Tax Consequences of the Subscription Offer
- Restrictions on Certain Holders of Common Stock:
- Residents of Florida
- Residents of Texas
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SUMMARY OF FINANCIAL DATA
The following selected consolidated financial and other data are
derived from our financial statements and should be read with the consolidated
financial statements the related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The consolidated
balance sheets as of June 30, 2000 and December 31, 1999 and the consolidated
statements of income for the year ended December 31, 1999 and the six months
ended June 30, 2000 and June 30, 1999 are incorporated by reference in this
prospectus.
(Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
At/For Six Months At/For the
Ended Year Ended
June 30, 2000 December 31, 1999
<S> <C> <C>
Financial Condition:
Total assets $ 42,276 $ 40,823
Loans held for portfolio, net (1) 31,600 30,580
Deposits 35,680 32,051
Loans held for sale 259 305
Securities 2,664 2,626
Shareholders' equity 1,381 1,950
Share Information:
Basic loss per common share from
continuing operations $ (0.27) $ (0.36)
Basic loss per common share $ (0.27) $ (0.46)
Book value per common share $ 0.68 $ 0.97
Weighted average shares outstanding 2,025,658 1,993,607
Shares outstanding at end of period 2,027,801 2,012,801
Operations:
Interest income $ 1,591 $ 3,195
Interest expense 943 1,967
Net interest income 648 1,228
Provision for loan losses(1) 66 93
Net interest income after provision
for loan losses 582 1,135
Total noninterest income 1,051 2,289
Total noninterest expense 2,174 4,116
Net loss from continuing operations (546) (724)
Net loss (546) (915)
</TABLE>
(1) Management has established the allowance for loan losses based on past loan
loss experience, known and inherent risks in its loan portfolio, economic
conditions and other factors.
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RISK FACTORS
The offering involves a high degree of risk. You should carefully
consider the risks and uncertainties described below and the other information
in this prospectus before deciding whether to invest in shares of our common
stock. If any of the following risks actually occur, our business, financial
condition and results of operations could be materially adversely affected. This
could cause the trading price of our common stock to decline, and you may lose
all or part of your investment.
We have described below the material risks of investing in our common
stock. You should carefully consider these prior to purchasing any shares. These
risk factors may not be the only risk factors that relate to our stock.
THE BANK HAS INCURRED SIGNIFICANT START-UP LOSSES
Our Bank's operations were relocated to Ann Arbor in 1996, are not yet
profitable and have incurred substantial operating losses during the start-up
phase. We are subject to the risks inherent in starting a new business. Our
profitability will depend primarily upon our operations and we might never
become profitable. We believe that as the size of portfolio loans and retail
deposits at the Bank increases that the Bank should become profitable, but there
is no assurance that expenses will not rise at a faster rate than expected as
the Bank grows. There is no assurance that the Ann Arbor operation will grow to
a size that will enable it to become profitable. We had a net loss of $915,480
during 1999, and net loss of $546,370 during the first six months of 2000. As of
June 30, 2000, we had a retained deficit of $1,478,350.
OUR FAILURE TO EXPAND AND MANAGE FUTURE GROWTH COULD HAVE ADVERSE EFFECTS
If we don't expand, we will not reach profitability. Our strategy
includes increasing the Bank's portfolio loans and retail deposits, adding
internet banking services, developing our financial services products including
insurance and investment products, and expanding our specialized subsidiary for
mortgage servicing. Our ability to achieve and manage our growth and expansion,
as well as our ability to manage our operations and internal controls, and our
ability to continue to attract and retain capable management and operations
personnel will determine the success of our growth strategy.
WE MAY NEED ADDITIONAL CAPITAL WHICH COULD RESULT IN THE DILUTION OF YOUR
INTERESTS
If we sell all 1,525,000 shares in this offering, we may still need
additional capital in the future to support the Bank's growth or operating
losses. We may need additional capital beyond:
- our present capital
- the capital which will be provided by this offering
- any amounts likely to be generated by our operations over the next
several years
Additional capital may be necessary if we do not sell all 1,525,000 shares in
this offering, continue to lose money, or if we want to expand our operations.
Funds necessary to meet our working capital needs and to finance this expansion
might not be available. If we sell additional equity securities to finance
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future expansion, this sale could result in significant dilution to the
interests of persons purchasing shares in this offering.
GOVERNMENT REGULATION, FISCAL AND MONETARY POLICY COULD LIMIT OUR GROWTH AND
MAKE IT MORE DIFFICULT TO COMPETE AGAINST UN-REGULATED ENTITIES
We are subject to extensive state and federal governmental supervision and
regulation which can negatively impact our financial results and our industry.
Existing state and federal banking laws subject University Bank to substantial
limitations with respect to the size and quality of our loans, purchase of
securities, payment of dividends and many other aspects of our banking business.
These limitations include a requirement that we maintain a ratio of Tier 1
leverage capital to total assets of at least 7% and maintain an adequate loan
loss reserve. We currently maintain a ratio of Tier 1 leverage capital to total
assets in excess of the 7% requirement. Future legislation or government policy
might adversely affect the banking industry or our operations. Federal economic,
monetary and tax policy may affect our ability to attract deposits, make loans
and achieve satisfactory interest spreads. Further, these federal and state
regulations may place banks in general, and us specifically, at a competitive
disadvantage compared to our less regulated competitors.
WE DO NOT CURRENTLY PAY ANY DIVIDENDS WHICH COULD ADVERSELY AFFECT OUR SHARE
PRICE
A stock which pays a dividend has a less volatile share price and attracts
a wider base of potential investors. Investors in our common stock must rely
upon capital gains for a return on their investment for at least the next two
years because we have never paid a dividend, and do not anticipate paying
dividends for at least the next two years. Our future earnings may not be
sufficient to permit the legal payment of dividends to our shareholders at any
time in the future. Even if we may legally declare dividends, the amount and
timing of any dividends will be at the discretion of our board of directors. Our
payment of any cash dividends in the future will depend to a large extent on the
receipt of dividends from the Bank. The ability of the Bank to pay cash
dividends to us and by us to our stockholders are both subject to certain
statutory and regulatory restrictions.
WE ARE SIGNIFICANTLY SMALLER THAN THE MAJORITY OF OUR NATIONAL COMPETITORS AND
FACE INTENSE COMPETITION FOR FINANCIAL SERVICES WHICH COULD IMPAIR OUR
PROFITABILITY
We face strong competition for deposits, loans and other financial services
from numerous Michigan and out-of-state banks, thrifts, credit unions and other
financial institutions as well as other entities which provide financial
services. Some of the financial institutions and financial services
organizations with which we compete are not subject to the same degree of
regulation as we are. Many of these financial institutions aggressively compete
for business in our market area. Most of our competitors have been in business
for many years, have established customer bases, are larger, have substantially
higher lending limits than we do and offer certain services, including numerous
branches and international banking services that we do not provide. The dominant
competitors in our market area are Great Lakes Bank, National City Bank,
Comerica Bank, Bank One, Key Bank and Republic Bank.
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WE MAY NOT BE ABLE TO KEEP UP WITH TECHNOLOGICAL CHANGE WHICH IS INCREASINGLY
IMPORTANT IN OUR INDUSTRY
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Changes in
technology are likely to require additional capital investments to remain
competitive. Although we have invested in new technology in the past, there can
be no assurance that we will have sufficient financial resources or access to
the proprietary technology which might be necessary to remain competitive in the
future. Many of our competitors have substantially greater resources to invest
in technological improvements. We might not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to our customers.
WE MUST RETAIN KEY EXECUTIVES AND PERSONNEL
We are and will continue to be dependent upon the services of our
management team, including our Chief Executive Officer, Stephen Lange Ranzini,
and our other senior managers. While we do maintain key man life insurance on
Stephen Lange Ranzini, losing one or more key members of the management team
could adversely affect our operations if we are unable to maintain or attract
new senior managers due to our history of unprofitability.
BANKS ARE BY THEIR NATURE HIGHLY LEVERAGED AND DETRIMENTAL LENDING DECISIONS CAN
HAVE A LARGE AND NEGATIVE IMPACT ON PROFITABILITY
We are in the business of making loans, and there is an inherent risk that
loans might not be repaid. If our customers fail to repay their loans, this
could materially adversely affect our earnings and overall financial condition,
as well as the price of our common stock. We also focus on loans to individuals
and loans to small-to-medium sized businesses that may be riskier than loans to
larger companies. We attempt to manage our credit exposure by monitoring the
concentration of loans within specific industries and through specified loan
application and approval procedures. However, we can not guarantee that our
monitoring and procedures will reduce our lending risks sufficiently to avoid
material losses. Typically banks have five to ten times as many loans as equity
capital. Therefore, poor lending can quickly deplete a bank's capital base.
OUR LOW LENDING LIMIT RESTRICTS OUR ABILITY TO COMPETE FOR LOANS TO LARGER
COMPANIES
Our legal lending limit is currently approximately $800,000. The board of
directors has established an internal limit of $500,000. Accordingly, the size
of the loans which the Bank can offer to potential customers is less than the
size of loans that many of our competitors are able to offer. These limits
affect to some degree our ability to seek relationships with the area's larger
businesses. We can accommodate loan volumes in excess of our lending limit
through the sale of participations in these loans to other banks. However, we
might not be successful in attracting or maintaining customers seeking larger
loans. In addition, we might not be able to sell participations in these loans
on terms favorable to us.
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INTEREST RATES AND ECONOMIC CONDITIONS CAN CHANGE DRAMATICALLY AND THESE CHANGES
CAN HAVE A NEGATIVE IMPACT ON US
The results of operations for financial institutions, including our Bank,
may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate market values, rapid changes in
interest rates and the monetary and fiscal policies of the federal government.
Our profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities. In the early 1990s, many banking
organizations experienced historically high interest rate spreads. More
recently, interest rate spreads have generally narrowed due to changing market
conditions and competitive pricing pressure, and there can be no assurance that
these factors will not continue to exert this pressure or that these high
interest rate spreads will return. Substantially all our loans are to businesses
and individuals in southeastern Michigan and any decline in the economy of this
area could adversely affect us.
Like most banking institutions, our net interest spread and margin will
be affected by general economic conditions and other factors that influence
market interest rates and our ability to respond to changes in these rates. At
any given time, our assets and liabilities will be affected differently by a
given change in interest rates. As a result, an increase or decrease in rates,
the length of loan terms or the mix of adjustable and fixed rate loans in our
portfolio could have a positive or negative effect on our net income or loss,
capital and liquidity. The positive trends or developments discussed in this
prospectus might not continue. Negative trends or developments might have a
material adverse effect on us.
MANAGEMENT CONTROLS US THROUGH ITS OWNERSHIP OF MORE THAN A MAJORITY OF THE
COMMON STOCK OUTSTANDING
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 1,395,863, or 69% of the issued and outstanding shares at June 30,
2000. These individuals are able to exert a significant measure of control over
our affairs and policies. This control could be used, for example, to help
prevent an acquisition of University Bancorp, precluding shareholders from
possibly realizing any premium which may be offered for the common stock by a
potential acquirer.
THE GOVERNMENT REGULATES CONTROL OF US AND CONTROL CANNOT CHANGE WITHOUT
GOVERNMENT APPROVAL
Individuals, alone or together with others, who seek to acquire more
than 10% of our common stock must comply with the Change in Bank Control Act.
Anyone who seeks to acquire 5% or more of our common stock 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 we are offering.
WE HAVE PROVIDED COMPLETE INDEMNIFICATION TO ALL OF OUR DIRECTORS AND OFFICERS
FOR OFFICIAL ACTS
Our Articles of Incorporation provide for the indemnification of our
officers and directors and insulate our officers and directors from liability
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for certain breaches of the duty of care. The shareholders bear these risks
instead of those individuals. It is possible that the indemnification
obligations imposed under these provisions could reduce our earnings and
adversely affect our ability to pay dividends causing the share price to suffer.
The Articles of Incorporation of University Bank contain similar provisions.
THE OFFERING PRICE WAS SET BY US
The offering price of $1.00 per share for this offering was set arbitrarily
by our board of directors. The present or future value of the common stock could
be more or less. When determining the offering price, we considered the recent
market price of the common stock, the impact of this offering on the price of
the common stock and the Board's desire that shareholders be permitted to buy
additional shares at a price below the market price at the end of August 2000.
The common stock is traded on the NASDAQ Small-Cap Market. The market price of
the common stock following the offering may be greater or less than the offering
price.
OUR STOCK MAY BE DELISTED FROM THE NASDAQ SMALL-CAP MARKET
If our stock is delisted from the NASDAQ Small-Cap Market, the shares
will be less marketable in the future and there will be a smaller potential pool
of investors in our stock.
NASDAQ has informed us that our stock will be delisted from the NASDAQ
Small Cap Market on November 30, 2000, unless the market value of the shares not
held by insiders of the Company valued at the current bid price of the stock
increases to at least $1,000,000 from the current level of $843,821, based on
the current share price bid of $1.50 per share. Management hopes that the rights
offering will be subscribed to by non-insiders of the Company in an amount
sufficient to fix this problem.
NASDAQ has informed us that our stock will be delisted from the NASDAQ
Small-Cap Market in the near future, unless our shareholders' equity increases
to at least $2,000,000 from $1,381,175 as of June 30, 2000. Stephen and Joseph
Ranzini and their affiliates currently hold 69% of our common stock, and have
indicated to NASDAQ their intent to exercise all of the rights they will receive
as part of the offering as soon as the Securities Exchange Commission allows the
offering to be registered. If they exercise these rights, it will raise a total
of $1,052,250 of additional shareholders' equity before expenses of the
offering. If we do not make profits in future periods, our shareholders' equity
could again fall below NASDAQ's required level of $2,000,000 despite the new
shareholders' equity that is raised under this offering.
If the stock is delisted from the NASDAQ Small-Cap Stock Market, we
intend to list our common stock on the NASDAQ Bulletin Board.
THERE IS ONLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK
Although the common stock is listed for trading on the NASDAQ Small-Cap
Market, the trading market in our common stock on the exchange historically has
been less active than the average trading market for companies listed on the
exchange. Our share price has been volatile. The price of our common stock in
the past year has ranged from $0.25 to $2.75. A public trading market having the
positive characteristics of depth, liquidity and orderliness depends upon the
presence in the marketplace of willing buyers and sellers of common stock at any
given time, which presence is dependent upon the individual decisions of
13
<PAGE> 14
investors and general economic and market conditions over which we have no
control.
Even with market makers, factors such as the limited number of shares
outstanding, the lack of earnings history and the absence of a reasonable
expectation of dividends within the near future mean that there might not be an
active and liquid market for the common stock. Even if an active market
develops, there can be no assurance that a market will continue, or that
shareholders will be able to sell their shares at or above the offering price.
Purchasers of common stock should carefully consider the potentially illiquid
and long-term nature of their investment in the shares being offered.
14
<PAGE> 15
USE OF PROCEEDS
The net proceeds we receive from the sale of the common stock in this
offering will be used to pay off outstanding debt, to provide working capital
and for other general corporate purposes. Until we use the proceeds for any or
all of these purposes, we will invest the net proceeds in bank deposits,
marketable equity securities, or other investment grade financial instruments.
Assuming all 1,525,000 shares of common stock are sold in this offering and that
the expenses of this offering are $50,000, we will receive net proceeds of
$1,475,000.
DIVIDEND POLICY
We have not previously paid any cash dividends on our common stock, and
we do not intend to pay dividends in the near future. We expect that all our
earnings, if any, will be retained to finance our growth and the growth of the
Bank. If and when dividends are declared, we will be primarily dependent upon
dividends paid by the Bank for funds to pay dividends on the common stock. It is
also possible, but not anticipated, that we could pay dividends in the future
generated from our investment income and other activities, if any, outside of
the Bank.
Under Michigan law, the Bank is restricted as to the maximum amount of
dividends it may pay on its common stock. The Bank may not pay dividends except
out of net profits after deducting its losses and bad debts. A Michigan state
bank may not declare or pay a dividend unless the bank will have a surplus
amounting to at least 20% of its capital after the payment of the dividend. If
the Bank has a surplus less than the amount of its capital, it may not declare
or pay any dividend until an amount equal to at least 10% of net profits for the
preceding one-half year (in the case of quarterly or semi-annual dividends) or
full-year (in the case of annual dividends) has been transferred to surplus. At
June 30, 2000 the Bank's surplus was $1,643,977 less than the amount of its
capital. Our ability and the ability of the Bank to pay dividends is also
affected by various regulatory requirements and policies, including the
requirement to maintain adequate capital above regulatory guidelines. See
"Supervision and Regulation." These requirements and policies may limit our
ability to obtain dividends from the Bank for our working capital needs,
including funds for expansion of operating activities outside of the Bank, our
payment of dividends and the payment of our operating expenses.
15
<PAGE> 16
MARKET FOR COMMON STOCK
Our common stock trades on the NASDAQ Small-Cap Market under the symbol
UNIB. The high and low sales prices of our common stock as quoted by NASDAQ, for
the each quarter since January 1, 1997 are listed below:
<TABLE>
<CAPTION>
2000 High Low
---- ---- ---
<S> <C> <C>
First Quarter $2 5/8 $1 3/4
Second Quarter 1 7/8 1
Third Quarter 1 13/16 0 1/4
1999
First Quarter $3 3/8 $2 1/8
Second Quarter 4 3/16 2
Third Quarter 3 1/2 2 9/16
Fourth Quarter 2 3/4 1 1/4
1998
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>
These quotations represent inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions. As of June
30, 2000 we had approximately 375 stockholders including approximately 240
beneficial owners of shares held by brokerage firms or other institutions. As of
September 15, 2000, the high and low sales prices of our common stock were both
$1.8125.
We effected a three for two stock split of our common stock (effected as a
stock dividend) in February 1998. All per share and number of share amounts in
this prospectus are adjusted to reflect the stock split. No cash dividends have
been paid on our common stock. We do not currently anticipate declaring or
paying dividends. See "Dividend Policy".
16
<PAGE> 17
CAPITALIZATION
The following table sets forth University Bancorp's capitalization as
of June 30, 2000, and as adjusted to reflect the sale of the shares of common
stock we are offering (amounts in thousands):
<TABLE>
<CAPTION>
June 30, 2000 June 30, 2000
Actual As Adjusted
<S> <C> <C>
Debt (1):
Short-term Debt $ 3,097 $ 3,097
Long-term Debt 1,559 1,134
Minority Interest 138 138
Stockholder's Equity:
Preferred Stock, $.001 par value;
500,000 shares authorized; 0 issued 0 0
Common stock, $.01 par value;
5,000,000 shares authorized;
2,142,985 shares issued;
3,667,985 as adjusted if 1,525,000
shares are sold (2) 3,839 5,314
Treasury Stock, at cost (115,184
shares) (341) (341)
Net unrealized gain (loss) on
Securities available-for-sale, net
of tax (639) (639)
Retained earnings (deficit) (1,478) (1,478)
Total Stockholders' Equity 1,381 2,856
Total Capitalization 6,175 7,225
</TABLE>
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity"; "Interest Rate Sensitivity"; and
Notes 15 & 16 to the Notes to consolidated financial statements for
additional information regarding short-term and long-term debt.
(2) Adjusted to reflect the estimated net proceeds if 1,525,000 shares are
sold. See "Use of Proceeds". Does not include a total of 45,000 shares
that can be issued under University Bancorp's Directors Stock Options
or a total of 225,659 shares that can be issued under our 1995 Stock
Plan. See Note 9 to the Notes to consolidated financial statements for
additional information regarding stock options.
The information set forth above should be read in conjunction with the
consolidated financial statements incorporated by reference in this prospectus.
The share offering is dilutive to shareholders who exercise their right to
buy additional shares of common stock because we are offering to sell shares at
$1.00 per share, and the book value per share of our common stock as of June 30,
2000 was $0.68 per share.
17
<PAGE> 18
DILUTION
Net Tangible Book Value. The net tangible book value (total assets minus total
liabilities) of the Company as of June 30, 2000, was $1,381,175, or $0.68 per
share of common stock outstanding on such date.
If 1,525,000 Shares are Sold. Assuming the sale of 1,525,000 of the shares of
common stock offered hereby (at the public offering price of $1.00 per share)
and the application of the net proceeds therefrom (after deducting the estimated
offering expenses of $50,000), the pro-forma net tangible book value of the
company as of June 30, 2000, would have been $2,856,175 or $0.80 per share of
common stock outstanding on such date.
This represents an immediate increase in pro forma net tangible book value per
share of $0.12 as compared to the net tangible book value per share for all
shares outstanding prior to this offering.
The following table illustrates the per share dilution:
<TABLE>
<CAPTION>
If
1,525,000
Shares are
sold
<S> <C>
Offering price per share: $1.00
Net tangible book value per share
before the offering $0.68
Increase per share attributable to
the new shares $0.12
-----
Pro-forma net tangible book value per share after the offering $0.80
-----
Dilution per share to shareholders purchasing shares $0.20
=====
</TABLE>
(1) Does not include the 151,065 shares of common stock which may be issued
upon the exercise of stock options outstanding as of June 30, 2000,
which have exercise prices ranging from $2.00-$3.33. Nor does it
include shares of common stock to be contributed to the Employee's
Stock Ownership Plan in any future period.
18
<PAGE> 19
BUSINESS
General Business Description
We are a Delaware corporation which operates as a bank holding company
for its wholly-owned subsidiary, University Bank. The Bank is a state chartered
community bank. The Bank was chartered by the state of Michigan in 1908 and
began business 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. Ann Arbor is a university town,
the home of the University of Michigan. The Bank's accounts are insured by the
Federal Deposit Insurance Corporation.
University Bancorp, Inc. is essentially a holding company for the Bank.
Our holding company invests available cash resources in marketable equity and
debt securities and interest bearing deposits. At June 30, 2000 our holding
company had cash on deposit of $581 and other investments at fair value of
$144,890, including an investment in Michigan BIDCO. We changed our holding
company's name in June 1996 from Newberry Bancorp, Inc., because we wanted to
more closely identify our name 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. On December 5, 1994 we sold the bank's offices,
assets and liabilities at its former main office in Newberry, Michigan and its
two branch offices in Sault Ste. Marie, Michigan. As a result, during 1995, we
relocated the Bank's 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 we were 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, our Bank opened its
new Ann Arbor main office. During the fourth quarter of 1997, we closed the
Bank's Sault Ste. Marie office and centralized our accounting functions in Ann
Arbor.
We conduct our banking business from the Bank's headquarters office in
Ann Arbor. Our primary market area is defined as the City of Ann Arbor and
surrounding areas in greater Washtenaw County.
Mortgage Banking. In October 1995, we established a mortgage-banking
subsidiary of the Bank, Varsity Funding, L.L.C. to specialize in the purchase
and origination of impaired credit, or subprime quality, residential mortgages,
for sale to non-U.S. government agency-backed mortgage conduits. At the end of
1998, Varsity Funding discontinued its purchase of subprime mortgage loans from
correspondents as a result of upheavals in the national secondary market for
subprime quality residential mortgages, and transferred its Michigan remaining
retail operations to our subsidiary Varsity Mortgage. In September 1999, the
retail division, then called MortgageQuest was sold to another retail mortgage
company. As a result of that sale, the Bank received a three year option to buy
that firm for a cash payment equal to that firm's shareholders equity as
calculated using generally accepted accounting principles and an additional
fixed payment in shares of our common stock.
19
<PAGE> 20
In February 1996, we established Varsity Mortgage, L.L.C. to purchase
residential home loans which generally qualify for sale to secondary market
investors under the underwriting criteria of the Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association from correspondents in
Michigan and in adjacent states. In November 1999, we sold Varsity Mortgage.
The Bank continues to originate mortgage loans and sell on a continuous
basis the servicing rights to the loans or securities we originate. In December
1998, we sold the bulk of a small portfolio of mortgage servicing rights owned
by the Bank.
We also originate residential loans from the Bank's Ann Arbor office
and sell them to secondary mortgage correspondents including Varsity Mortgage.
Through the Bank's Sault Ste. Marie mortgage banking office, we 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, we discontinued the Bank's
wholesale operation in Sault Ste. Marie and transferred all pooling and
packaging of residential loans to Varsity Mortgage which we sold in November
1999.
Mortgage Subservicing. In December 1995, we acquired 80% of the common
stock of Midwest Loan Services. Midwest specializes in subservicing, for the
accounts 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, we founded a BIDCO, which is a Business
and Industrial Development Company, called Michigan BIDCO, Inc. The BIDCO is
licensed by the Michigan Financial Institutions Bureau under the State of
Michigan BIDCO program. Michigan BIDCO (formerly known as Northern Michigan
BIDCO) invests in businesses in Michigan with the objective of fostering job
growth and economic development. We currently own 28.82% of the BIDCO. We hold
1.74% directly, and the remaining 27.08% is held by the Bank.
Northern Michigan Foundation. In December 1995, the BIDCO donated
$225,000 to capitalize Northern Michigan 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. Department of Agriculture's Intermediary Re-lending Program. The
Foundation has the right to borrow a total of up to $2,012,801 from the U.S.
Rural Economic Community Development at 1% interest with a 30 year term because
the BIDCO donated the $300,000. Pursuant to a management services agreement with
the BIDCO, the BIDCO and the Foundation share administrative staffs and offices,
with the Foundation reimbursing the BIDCO at the current rate of $4,000 a month
for these management services.
University Insurance & Investment Services. On December 31, 1996, we
established an insurance and investment sales agency subsidiary of the Bank,
called, University Insurance & Investment Services, Inc., based in our Ann Arbor
main office. Our insurance agency is licensed by the State of Michigan to sell
insurance as agent for licensed insurance companies. 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. commenced business on February 25, 1999 and is a full
20
<PAGE> 21
service property and casualty insurance agency offering insurance for homes,
autos, apartments and businesses.
Employees
We employed 52 full-time equivalents as of September 25, 2000:
<TABLE>
<S> <C>
University Bank, Ann Arbor 22
Midwest Loan Services 27
University Insurance & Investment 3
</TABLE>
Properties
In May 1995, we purchased a building in Ann Arbor, Michigan for use as
the Bank's main office. Currently 42% of the building is leased to the
University of Michigan for approximately $68,000, adjusted annually for
inflation, plus a pro rata share of the building's expenses. The lease is
renewable each year.
We lease a site which includes a registered historic landmark building
in Ann Arbor, at the corner of Washtenaw Avenue and Stadium Boulevard as a
multiple ATM drive-through location, a BIDCO office and an off-site storage
facility. We 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.
We lease an ATM location with an adjacent meeting room in Dexter,
Michigan under a three year lease.
We continue to own the Bank's former loan office in Sault Ste. Marie
and we lease such space to an unrelated third-party. Management has listed the
property with a local commercial realtor for sale.
Midwest Loan Services leases an office in Houghton, Michigan under a
year-to-year lease.
We believe that our office facilities are adequate to support the
anticipated level of future expansion of our business.
Lines of Business
COMMUNITY BANKING, ANN ARBOR
Our retail savings products and services 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. We also offer self-directed retirement accounts, free
access to 24-Hour ATM machines, telephone banking, VISA debit cards and Gold
VISA accounts. This month we began to offer a full internet banking package,
including business cash management functions. We added about $100,000 to our
premises and equipment for the internet banking system software and associated
hardware that we purchased in late 1999 and we have dedicated a significant
portion of our technology staff's time during 2000 to get it on-line. Within the
next 60 days our technology staff will set up the bill payment function of the
internet banking package, which was part of the original cost of the
21
<PAGE> 22
internet banking software. The expansion of our internet banking utility is not
dependent upon completion of our stock offering. We are also a member of
MasterCard, but currently are not offering a MasterCard product. We also offer
Canadian Dollar foreign exchange services. From time to time to raise liquidity,
we rely on brokers to sell CDs. At June 30, 2000, we had outstanding $5,037,000
in CDs that were issued through brokers.
Our 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
We became a seller/servicer of Federal Home Loan Mortgage Corporation
insured mortgages in late 1991 and began to originate FHLMC mortgages for sale
into the secondary market. In late 1994 we became a seller/servicer of Federal
National Mortgage Association insured mortgages and began to originate FNMA
mortgages for sale into the secondary market. We have been approved as a
seller/servicer of Government National Mortgage Association mortgages for many
years but only began using our license in 1999 to originate and sell these loans
without retaining the servicing rights.
With the exception of Midwest Loan Services, we are currently selling
the servicing right on all mortgages originated.
Please also refer to the discussion of the mortgage banking business in
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations, in the section entitled "Non-Interest Income and
Non-Interest Expense", under the heading Mortgage Banking for additional
information.
MORTGAGE SUBSERVICING
Mortgage servicing firms receive monthly payments from loan customers,
aggregate and account for these payments, and send the funds to mortgage-backed
securities holders, including pension funds and financial institutions. Mortgage
servicers also dun delinquent accounts and foreclose loans, if required.
Mortgage servicers receive a fixed monthly fee for performing this service. When
these services are performed for ourselves, it is called servicing. When these
services are performed for others, the activity is called subservicing. Our
80%-owned subsidiary, Midwest Loan Services, specializes in subservicing
residential mortgage loans sold to FNMA and FHLMC and other non-agency private
conduits for the account of credit unions, other financial institutions and
mortgage brokers. Midwest is regulated by FHLMC and FNMA.
Over the last three years, we sold the Bank's portfolio of mortgage
servicing rights to reduce our investment in this class of asset, while selling
all newly originated secondary market mortgage loans, servicing released. In the
third quarter of 1996, we sold 1/3 of the Bank's portfolio of accumulated
servicing rights for a gain of $256,840. In the third quarter of 1997, we sold
an additional 1/3 of the accumulated portfolio at cost. In December 1998 we sold
the final 1/3 of the portfolio for a loss of $121,224. In computing the loss on
the sale, certain contingencies were reserved via a charge against income. Under
the terms of the sale we had to refund certain amounts to the
22
<PAGE> 23
purchaser for any loans that were paid off within 90 days of the sale. In June
1999, a final calculation of the early payoffs on the loans sold was provided to
us and because payoffs in early 1999 were much higher on the portfolio than had
been originally anticipated when the portfolio was sold in late 1998, an
additional $54,531 was charged against income for the rebate amount owed to the
purchaser under the terms of the sale.
Subsequent to quarter-end, Midwest Loan Services again increased its
mortgage subservicing contracts by over 50% in a single month (from $750 million
to $1.1 billion) as a result of continued increases in business with the
mortgage banking subsidiary of a major Wall Street firm. Although there is no
assurance that further increases will occur, management of Midwest has been told
by this firm to expect substantial additional increases over the next several
months and on an ongoing basis into the future as this firm shifts additional
existing business to Midwest from its former primary subservicing firm. Midwest
currently is receiving between 5% and 10% of the monthly volume of this firm's
subservicing business.
INVESTMENT SECURITIES
We maintain surplus available funds in investments consisting of
short-term money market instruments, U.S. government bonds, U.S. federal agency
obligations, mortgage-backed securities backed by federal agency obligations and
obligations of local units of government. Our investments are managed by our
President, subject to the review and approval of the board of directors of each
firm. Our securities portfolio provides a source of liquidity to meet operating
needs. At June 30, 2000, our investments had a net unrealized loss of
approximately $638,983 versus a net unrealized loss of approximately $584,898 at
December 31, 1999, $183,122 at December 31, 1998 and $18,880 at December 31,
1997.
The following table discloses certain information regarding securities
we hold, the amortized cost of which exceeded more than 10% of stockholders'
equity as of June 30, 2000:
<TABLE>
<CAPTION>
Final Market Amortized
Issuer Coupon Yield Maturity Value Cost
------ ------ ----- --------- ------ -----
<S> <C> <C> <C> <C> <C>
FHLBI equity (1) VAR 10.00% None $ 848,400 $ 848,400
FNMA CMO 93-205H (2) PO 4.15% 9/25/23 1,237,982 1,759,465
US Treasury Strip PO 5.33% 2/15/27 407,180 492,786
FHLMC Note 6.60% 6.89% 4/20/09 468,360 490,715
Toll Road (3) 0% 6.91% 2/15/10 480,530 520,825
</TABLE>
(1) The rate varies quarterly. The Bank is required to maintain the
investment in Federal Home Loan Bank of Indianapolis 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.
(2) This Principal Only strip has an expected average life of eleven
years. The decrease in market value is due to interest rate movements
which have extended the average life and not any credit issues.
Accrued net interest income on this zero coupon bond was decreased in
1998 and 1999 to reflect the increased average life. The bond is
rated AAA.
(3) The bond is guaranteed by MBIA, which is rated AAA.
23
<PAGE> 24
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. We
own 28.82% of the BIDCO. We bought our 298 shares of the BIDCO for a total of
$307,000 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 10-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. A total of
$1,850,000 of these bonds were repurchased by the BIDCO in April 1999 and
$130,000 in May 2000, we converted $27,000 of our bonds into common stock at
March 31, 1999, and the remaining bonds were converted to common stock on May
31, 2000.
The consolidated financial statements include the BIDCO for 1999 and
are presented using the investment company method, and, accordingly, the BIDCO's
Investments in stocks, stock rights, limited liability companies and loans are
reported at fair value. BIDCO typically invests in companies for which current
market quotations are not readily available; therefore we estimate the fair
value of BIDCO Investments on a quarterly basis and the board of directors
approves the fair value estimates. In deriving its estimates, we review the
financial condition and operating performance of the investee companies, as well
as performance of the company with its contractual arrangements with BIDCO. We
then estimate the fair value of BIDCO Investments by the use of operating cash
flow multiples applicable to a company's industry, discounted cash flow
analyses, and other valuation techniques. We 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. In the second quarter of 2000 our
ownership percentage of the BIDCO dropped below 50% and the BIDCO is no longer
consolidated in the financial statements and the investment is now accounted for
using the equity method.
Our profit (loss) from our investment in the BIDCO was ($55,499),
$128,219, and $312,143 for the years ended December 31, 1997, 1998 and 1999
respectively. Our profit from our investment in the BIDCO was $234,739 in the
six months ended June 30, 2000.
Michigan BIDCO invests in businesses in Michigan with the objective of
fostering job growth and economic development. As of August 1, 2000, the BIDCO
had made twenty-eight investments, amounting to a total of $13,386,600 at
original cost. At June 30, 2000, Michigan BIDCO had total assets of $2,992,469.
Initially Michigan BIDCO made its investments in the form of both loans
and direct equity investments. Since 1996 the BIDCO has made no new direct
equity investments, but has focused on loans with rights or participation rights
in the companies in which it invests. As a matter of policy, our 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
24
<PAGE> 25
less favorable than the BIDCO's. As of December 31, 1999, investments, at
original investment cost, have been made in the following types of businesses:
<TABLE>
<CAPTION>
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 Repurchased
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 $13,386,600
===========
</TABLE>
The BIDCO has a loan to one borrower limit of $500,000, but sells
participations in larger financings and seeks loan guarantees from government
agencies for larger financings. The table includes the original amount of the
BIDCO's investment prior to sale of participations or loan guarantees.
Please refer 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 for
additional information.
Competition
COMMUNITY BANKING, ANN ARBOR
Our attraction and retention of deposits depend on the Bank's ability
to provide investment opportunities that satisfy the requirements of investors
with respect to rate of return, liquidity, risk and other factors. We compete
25
<PAGE> 26
for these deposits by offering personal service and attention, fair and
competitive rates, low fees, and a variety of savings programs including
tax-deferred retirement programs.
We compete for loan originations primarily through the quality of
services we provide to the Bank's loan customers, competitive interest rates and
reasonable loan fees, rapid and local decision-making and the range of services
we offer. Our 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 2000, June 1999 and June 1998, from the FDIC's
2000 annual branch deposit survey:
WASHTENAW COUNTY FINANCIAL INSTITUTION DEPOSITS:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Great Lakes Bancorp 17.8% 16.2%
National City Bank 12.8% 14.4%
Bank One 11.1% 9.5%
Comerica Bank 10.7% 9.8%
Key Bank 7.3% 7.1%
Ann Arbor Commerce Bank 4.5% 3.6%
Standard Federal FSB 4.2% 4.1%
Flagstar Bank FSB 4.0% 1.9%
University of Michigan CU 3.5% 2.9%
Chelsea State Bank 3.3% 3.1%
Citizens Bank 3.2% 3.3%
Huron River Area CU 3.0% 2.5%
Bank of Ann Arbor 2.8% 2.2%
Michigan Natl Bank 2.5% 2.3%
Republic Bank 2.3% 11.1%
Midwest Financial CU 2.0% 1.7%
Automotive FCU 1.4% 1.2%
University Bank 0.9% 1.0%
United Bank & Trust 0.9% 0.0%
Charter One FSB 0.7% 0.6%
5 Credit Unions, 2 Banks 1.2% 1.4%
Total Deposits (billions) $3.865 $4.060
</TABLE>
Total deposits in the county decreased 4.8% from June 1998 to June 1999.
(Market share data as of June 2000 was not available at the time of this
document preparation). In attracting deposits, our primary competitors for
deposits are mutual funds, other commercial banks, credit unions, savings and
loans and insurance companies.
Our 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. While the bank competes with all of these financial
institutions for loans and deposits and in particular the eight financial
institutions that have branch offices in the Northeast Ann Arbor market area,
the other major competitor in the immediate local deposit market near the
Medical Center Complex is Midwest Financial Credit Union, formerly known as
Hospital & Health Services Credit Union. Our main office was formerly the
26
<PAGE> 27
headquarters of this 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.
MORTGAGE BANKING
Origination. We originate internally or via other financial
institutions residential home loans which generally qualify for sale to
secondary market investors under the underwriting criteria of the Federal Home
Loan Mortgage Corporation, the Federal National Mortgage Association and the
Government National Mortgage Association. Loans purchased or originated
internally are either sold directly to FHLMC, FNMA or GNMA, or are pooled into
mortgage-backed securities and the securities are sold to investors in the
secondary market. We also keep some residential mortgages for our loan portfolio
as an investment.
Our 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. Our ability to hold
mortgage loans for our portfolio helps us to compete more effectively. Most
loans sold into the secondary market, however, go to the same sources, those
being Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation and Government National Mortgage Association 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, we 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 our staff. An
important element in our 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. Our 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.
We also originate residential loans to be held in portfolio, and
management believes that this product together with the product offerings which
27
<PAGE> 28
FHLMC, FNMA and GNMA have are sufficient for our competitive needs. Although we
are currently licensed as a HUD Title 1 and Multifamily seller/servicer, we have
no plans at this time to expand our utilization of HUD or GNMA programs. We also
are correspondents for several impaired credit conduits and sell this type of
residential mortgage on a non-recourse, servicing released basis.
Mortgage Servicing and Subservicing. 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 these 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 about 30 firms nationwide, including specialized subservicing units of
mortgage banking companies, and specialized firms owned by banks and savings and
loans. Most of these companies have substantially larger financial resources
than Midwest Loan Services, and some of them are located in rural areas with low
prevailing wages.
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. Midwest Loan Services has developed a unique business extranet website
for its business partners and their retail customers. Through its website at
www.subservice.com, Midwest Loan Services provides the opportunity for all
customers to access their mortgage information 24 hours a day 7 days a week in
an environment which provides seamless access to all information. Business
partners have access to all mortgage data as easily as if it were serviced on
their in-house computer system. Customers can access all information about their
accounts and perform any type of transaction through the internet. To the best
of our knowledge, Midwest Loan Services has the most advanced internet mortgage
servicing technology in the industry. As a result of both low personnel costs
and its internet technology, we believe that Midwest Loan Services' mortgage
servicing operation has a competitive advantage.
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. BIDCO 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 and there
are six active BIDCOs in Lower Michigan.
28
<PAGE> 29
The BIDCO's staff manages under a management contract a 501(c)3
IRS-qualified non-profit re-lending company, Northern Michigan Foundation, which
has received the right to borrow $2,012,801 at 1% interest for 30-years from the
U.S. Department of Agriculture (USDA) Intermediate Relending Program. The
Foundation is one of three non-profit, privately-run, USDA Intermediate
Re-lending Programs located in Northern Michigan. Each of these community
development loan funds covers six counties as its primary market area.
Generally, the Foundation competes with other specialized non-bank lenders and
wealthy investors who make risk-oriented investments in businesses located in
northern Michigan.
Since year-end 1996, the BIDCO has pursued a strategy of liquidating
its existing investment portfolio to raise cash 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:
- formation of a Small Business Investment Company
- expansion of the Foundation's funds under management
The BIDCO completed its planned buyout of the minority investors in March and
April 1999. The BIDCO continues to evaluate the feasibility of expanding its
funds under management via the two government sponsored lending programs.
RECENT DEVELOPMENTS
During July 2000, University Bank posted a pre-tax profit from
operations of $32,008 as a result of continued improved results and business
volume growth at Midwest Loan Services and ongoing cost control efforts at
University Bank. A pre-tax loss of $8,257 was realized in August 2000 at
University Bank. Results were lower in August than July as Midwest Loan
Services' income was down because additional employees were hired at Midwest to
meet anticipated additional volume increases and some unusual miscellaneous
operating expenses were incurred at the Bank.
Subsequent to June 30, 2000, Midwest Loan Services increased its
mortgage subservicing contracts by nearly 75% in a single month (from $750
million to $1,300 million) as a result of continued increases in business with
the mortgage banking subsidiary of a major Wall Street firm. Although there is
no assurance that further increases will occur, management of Midwest has been
told by this firm to expect additional increases as this firm shifts additional
existing business to Midwest from its former primary subservicing firm. Midwest
currently is receiving between 5% and 10% of the monthly volume of this firm's
subservicing business. In late September 2000 the mortgage subsidiary of one of
the World's largest banks informed management of Midwest that this firm expects
to move approximately $10 billion in mortgage servicing rights to Midwest for
subservicing within the next twelve months. There is no assurance that either
firm will follow through on their verbal statements, and although written
contracts are being negotiated with each firm to document the business
arrangements, there is not currently any written subservicing contracts in place
at this time with either firm.
29
<PAGE> 30
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 several years. You should refer to the
consolidated financial statements, the related notes thereto, and statistical
information presented elsewhere in this prospectus when reading this section of
the prospectus.
This prospectus contains certain forward-looking statements which
reflect our 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 our community banking, mortgage
banking and money management operations and the nature and adequacy of
allowances for loan losses. We can give no assurance that the expectations
reflected in the forward looking statements will prove to be correct. Various
factors could cause results to differ materially from our expectations.
STRATEGY
Since its inception, we have pursued a strategy of growth through
internal expansion built on providing a full range of quality banking services
in selected community market areas, together with the creation of niche-oriented
specialty financial services units which aim to provide us with a higher return
on equity together with economies of scale to enhance the competitiveness of our
banking services in our targeted community markets.
Our current plan is to continue to grow the Bank's traditional
community banking, insurance & investment operations in the Ann Arbor area, to
expand our money management activities (including University Insurance &
Investment Services), and to grow our remaining mortgage banking subsidiary,
Midwest Loan Services.
BACKGROUND
The discussion below must be considered in light of the fundamental
changes resulting from the sale in November 1999 of Varsity Mortgage.
THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEARS ENDED DECEMBER 31, 1998
AND 1997
SUMMARY OF RESULTS OF OPERATIONS
Our net loss from continuing operations was $(723,725) in 1999,
$(801,291) in 1998 and $(1,381,055) in 1997. Earnings (loss) per share from
continuing operations for 1999, 1998 and 1997 were $(0.36), $(0.40) and $(0.72),
respectively. Including both continuing operations and discontinued operations,
our net loss was $(915,480) in 1999, $(198,049) in 1998 and $(1,117,924) in
1997.
30
<PAGE> 31
Including only activity from continuing operations, the decreased loss
in 1999 versus 1998 was principally due to improved results at the Ann Arbor
retail banking office as a result of a 28% increase in portfolio loans excluding
loans held for sale, and improved results at Michigan BIDCO, which were only
partially offset by the loss of a legal suit which caused a loss of $152,000
plus legal expenses of about $40,000.
The Bank's discontinued mortgage banking subsidiaries, Varsity Mortgage
and Varsity Funding had total losses of $191,755 in 1999 versus profits of
$603,242 in 1998 and $263,131 in 1997. The $794,997 swing between 1998 and 1997
accounted for more than 100% of the overall shortfall in pre-tax income versus
management's budget for 1999.
The decreased loss in 1998 versus 1997 was principally due to decreased
losses at the Bank's new Ann Arbor retail banking 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 achieved 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.
Pre-tax income (loss) from continuing operations was as follows for the years
ended December 31, 1999, 1998 and 1997 (in $000s):
<TABLE>
<S> <C> <C> <C>
Banking:
Retail banking (363) (914) (1,432)
Mortgage banking (531) (150) 28
Merchant Banking (1) 543 128 (55)
Corporate Office (340) (64) (215)
----- ------- -------
Total (691) (1,000) (1,674)
</TABLE>
(1) Reflects only the Bank's share of Michigan BIDCO's net income in the first
quarter of 1999. 1998 and 1997 reflect BIDCO's net income under the equity
method which was 44.1%. Effective April 1, 1999, we increased our overall
ownership of Michigan BIDCO to 80.1%, and the results of Michigan BIDCO are
included in our consolidated results from that day forward for 1999.
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 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.
31
<PAGE> 32
In each period, net interest income on a consolidated basis was reduced
by interest expense associated with University Bancorp's bank loan indebtedness.
The interest expense was $0.08 million in 1999, $0.09 million in 1998 and $0.11
million in 1997.
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, our
interest-bearing assets and liabilities:
NET INTEREST INCOME TABLE
<TABLE>
<CAPTION>
------------------- -----------------------------------------------
AT DEC-31-99 1999
------------------- -----------------------------------------------
AVERAGE AVERAGE INTEREST AVERAGE
YIELD BALANCE INC/EXP YIELD
<S> <C> <C> <C> <C>
Interest Earning Assets:
Commercial Loans 9.36% $ 10,991,176 $ 1,100,049 10.01%
Real Estate Construction Loans 9.69% 1,251,077 120,269 9.61%
Real Estate Mortgage Loans 8.29% 18,142,245 1,317,127 7.26%
Installment/Consumer Loans 9.56% 4,115,908 404,801 9.84%
---------- ----------
Total Loans 8.91% 34,500,406 2,942,246 8.53%
Investment Securities 6.07% 3,482,913 197,367 5.67%
Federal Funds & Bank Deposits 5.26% 1,177,852 54,981 4.67%
---------- ----------
Total Interest Earning Assets 8.61% $ 39,161,171 $ 3,194,594 8.16%
Interest Bearing Liabilities:
Now/Super-Now Deposits 3.14% $ 3,169,317 $ 100,543 3.17%
Savings Deposits 2.00% 225,017 4,799 2.13%
Time Deposits 6.13% 18,992,483 1,071,991 5.64%
Borrowed Funds 5.72% 1,751,173 111,245 6.35%
Money Market Deposit Accounts 4.39% 11,747,329 487,866 4.15%
BIDCO Debt 9.00% 1,793,542 111,725 6.23%
Holding Company Debt 9.75% 757,285 78,392 10.35%
---------- ----------
Total Interest Bearing Liabilities 5.40% $ 38,436,146 $ 1,966,561 5.12%
---------- ----------
Net Earning Assets, net interest
income, and interest rate spread 3.21% $ 725,025 $ 1,228,033 3.04%
Net yield on interest-earning assets 3.38% 3.14%
</TABLE>
32
<PAGE> 33
NET INTEREST INCOME TABLE
<TABLE>
<CAPTION>
----------------------------------------------------------
1998
----------------------------------------------------------
AVERAGE INTEREST AVERAGE
BALANCE INC/EXP YIELD
<S> <C> <C> <C>
Interest Earning Assets:
Commercial Loans $ 9,680,308 $ 1,010,205 10.44%
Real Estate Construction Loans
644,430 65,269 10.13%
Real Estate Mortgage Loans 22,419,974 1,726,354 7.70%
Installment/Consumer Loans 4,590,026 464,041 10.11%
----------- ---------
Total Loans 37,334,738 3,265,869 8.75%
Investment Securities 1,796,853 153,418 8.54%
Federal Funds & Bank Deposits 2,255,064 125,024 5.54%
----------- ---------
Total Interest Earning Assets $ 41,386,655 $ 3,544,311 8.56%
Interest Bearing Liabilities:
Now/Super-Now Deposits $ 2,956,611 $ 118,622 4.01%
Savings Deposits 158,350 3,900 2.46%
Time Deposits 24,238,176 1,444,236 5.96%
Borrowed Funds 1,481,112 85,604 5.78%
Money Market Deposit Accounts 13,218,519 617,431 4.67%
Holding Company Debt 884,764 88,893 10.05%
----------- ---------
Total Interest Bearing
Liabilities $ 42,937,532 $ 2,358,686 5.49%
----------- ---------
Net Earning Assets, net interest
income, and interest rate spread $ (1,550,877) $ 1,185,625 3.07%
Net yield on interest-earning assets 2.86%
</TABLE>
33
<PAGE> 34
NET INTEREST INCOME TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------
1997
-------------------------------------------------------
AVERAGE INTEREST AVERAGE
BALANCE INC/EXP YIELD
<S> <C> <C> <C>
Interest Earning Assets:
Commercial Loans $ 12,051,647 $ 1,092,970 9.07%
Real Estate Construction Loans
828,157 65,665 7.93%
Real Estate Mortgage Loans 21,723,711 2,183,233 10.05%
Installment/Consumer Loans 4,786,743 471,542 9.85%
---------- ---------
Total Loans 39,390,258 3,813,410 9.68%
Investment Securities 2,272,225 305,966 13.47%
Federal Funds & Bank Deposits 5,498,798 355,151 6.46%
---------- ---------
Total Interest Earning Assets $ 47,161,281 $ 4,474,527 9.49%
Interest Bearing Liabilities:
Now/Super-Now Deposits $ 3,360,913 $ 156,902 4.67%
Savings Deposits 572,551 13,745 2.40%
Time Deposits 27,885,534 1,672,477 6.00%
Borrowed Funds 6,512,328 424,419 6.52%
Money Market Deposit Accounts 16,686,401 832,345 4.99%
Holding Company Debt 937,363 108,195 11.54%
---------- ---------
Total Interest Bearing
Liabilities $ 55,955,090 $ 3,208,083 5.73%
---------- ---------
Net Earning Assets, net interest
income, and interest rate spread $ (8,793,809) $ 1,266,444 3.76%
Net yield on interest-earning assets 2.69%
</TABLE>
34
<PAGE> 35
The tables above does not specify the average level of non-interest
bearing demand deposits, which were $2,306,983, $2,626,160 and $3,510,337 for
the years ended December 31, 1999, 1998 and 1997, respectively, as computed
using month-end balances for these years.
Including only activity from continuing operations, net interest income
increased from $1.19 million in 1998 to $1.23 million in 1999, mainly as a
result of an increase in net interest-earning assets and the net yield on
interest-earning assets. During the year ended December 31, 1999, the average
interest-earning asset base fell by $2.23 million or 5.4% from 1998, while
average interest-bearing liabilities decreased by $4.50 million or 10.5%. Net
interest earning assets increased by $2.28 million as a result of the BIDCO's
sale of various non-interest-earning assets during 1999. Due to the decrease of
wholesale deposits in the mix of interest-bearing liabilities, the average cost
of interest-bearing deposits decreased from 5.38% in 1998 to 4.88% in 1999. As a
result of the decrease of interest-bearing liabilities at a rate greater than
the decrease in interest-earning assets which more than offset a decrease in
yield on interest-earning assets in an amount greater than the decline in the
rate on interest-bearing liabilities, the net interest margin increased to 3.14%
in 1999 from 2.86% in 1998. Short term interest rates in both 1998 and 1999 were
mostly stable until mid-year 1999, and since then short term interest rates have
risen sharply. Long term interest rates hit 30-year lows in October 1998 and
trended sharply higher throughout 1999.
Including only activity from continuing operations, net interest income
decreased to $1.19 million in 1998 from $1.27 million in 1997, mainly as a
result of a larger decrease in interest-bearing liabilities than the decrease in
interest-earning assets, which was more than offset by a decline in the yield on
interest-earning assets, which fell faster than the decline in the cost of
interest-bearing liabilities. During the year ended December 31, 1998, the
Bank's average interest-earning asset base fell by $5.77 million or 12.2% from
1997, while average interest-bearing liabilities decreased by $13.02 million or
23.3%. 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 8.56% from 9.49% in 1997. Due to the
decrease of wholesale deposits in the mix of interest-bearing liabilities, the
average cost of deposits decreased from 5.52% in 1997 to 5.38% in 1998. The
decrease in yield on interest-earning assets in an amount greater than the
decline in the cost of interest-bearing liabilities, was more than offset by an
expansion in interest-earning assets relative to interest-bearing liabilities,
and as a result, the net interest margin increased to 2.86% in 1998 from 2.69%
in 1997. Interest rates were mostly stable until September 1998, and short term
interest rates declined for the balance of the year.
At December 31, 1999, the net yield on the Bank's interest-earning
assets was 3.38% up from the average net yield for the 1999 year of 3.14%,
principally as a result of higher rates on interest earning assets. Fee income
from our mortgage banking originations, income from our portfolio of mortgage
servicing rights and the income or loss from the Bank's investment in its
subsidiaries are not included in these calculations.
The following table presents information regarding fluctuations in our
interest income and interest expense 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
35
<PAGE> 36
old volume); with the rate/volume variance allocated to changes in rate and
volume, based on the relationship of the absolute dollar amount of the change in
each:
RATE VOLUME TABLE
<TABLE>
<CAPTION>
-----------------------------------------------
1999
-----------------------------------------------
VOLUME RATE TOTAL
<S> <C> <C> <C>
Interest Income
Commercial Loans $ 132,498 $ (42,654) $ 89,844
Real Estate Construction Loans 58,478 (3,478) 55,000
Real Estate Mortgage Loans (314,902) (94,325) (409,227)
Installment/Consumer Loans (46,901) (12,339) (59,240)
Investment Securities 108,318 (64,369) 43,949
Federal Funds & Bank Deposits (52,630) (17,413) (70,043)
-------- -------- --------
Total Interest Income (115,139) (234,578) (349,717)
Interest Bearing Liabilities:
Now/Super-Now Deposits 8,077 (26,156) (18,079)
Savings Deposits 1,475 (576) 899
Time Deposits (299,312) (72,933) (372,245)
Borrowed Funds 16,611 9,030 25,641
Money Market Deposit Accounts (64,902) (64,663) (129,565)
BIDCO Debt 111,725 0 111,725
Holding Company Debt (13,129) 2,628 (10,501)
-------- -------- --------
Total Interest Expense (239,455) (152,670) (392,125)
-------- -------- --------
Net Interest Income $ 124,316 $ (81,908) $ 42,408
======== ======== ========
</TABLE>
36
<PAGE> 37
RATE VOLUME TABLE
<TABLE>
<CAPTION>
------------------------------------------------
1998
------------------------------------------------
VOLUME RATE TOTAL
<S> <C> <C> <C>
Interest Income
Commercial Loans $ (233,410) $ 150,645 $ (82,765)
Real Estate Construction Loans (16,363) 15,967 (396)
Real Estate Mortgage Loans 68,002 (524,881) (456,879)
Installment/Consumer Loans (19,689) 12,188 (7,501)
Investment Securities (55,491) (97,057) (152,548)
Federal Funds & Bank Deposits (185,580) (44,547) (230,127)
--------- --------- ---------
Total Interest Income (442,531) (487,685) (930,216)
Interest Bearing Liabilities:
Now/Super-Now Deposits (17,651) (20,629) (38,280)
Savings Deposits (10,192) 347 (9,845)
Time Deposits (217,396) (10,845) (228,241)
Borrowed Funds (295,530) (43,285) (338,815)
Money Market Deposit Accounts (164,561) (50,353) (214,914)
Holding Company Debt (5,834) (13,468) (19,302)
--------- -------- ---------
Total Interest Expense (711,164) (138,233) (849,397)
--------- --------- ---------
Net Interest Income $ 268,633 $ (349,452) $ (80,819)
========= ========= =========
</TABLE>
37
<PAGE> 38
LOAN PORTFOLIO
Information regarding the Bank's loan portfolio as of December 31, 1999
and 1998 is set forth under Note 6 to University Bancorp's consolidated
financial statements incorporated by reference in this prospectus.
PROVISION FOR LOAN LOSSES
The Bank charges to operations a provision for loan losses which
creates an allowance for 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 loan losses at a level adequate to absorb anticipated
losses. In its evaluation, management considers factors like historical loan
loss experience, specifically identified problem loans, composition and growth
of the loan portfolio, current and projected economic conditions, and other
pertinent factors. A loan is charged-off by management as a loss when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
Non-performing loans are defined as loans which have been placed on
non-accrual status and loans over 90 days past due as to principal or interest
and still in an accrual status. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued. See Note 6 of
the Consolidated Financial Statements for additional information regarding
impaired and past due loans.
Non-performing loans amounted to $758,310 and $471,832 at December 31,
1999 and 1998, respectively. The increase in non-performing loans during 1999
was because the accounting treatment for the BIDCO changed from year to year and
the BIDCO's loans were consolidated in the consolidated totals at December 31,
1999 but were not consolidated at December 31, 1998. Excluding one BIDCO loan on
non-accrual at December 31, 1999, the non-performing loans at December 31, 1999
had declined to $362,310 versus $471,832 the prior year.
Including both continuing operations and discontinued operations, the
provision for loan losses in 1999 was $92,648, a decrease of $25,785 from the
1998 level, which in turn was a decrease of $141,567 from the 1997 level of
$260,000. Loans charged off net of recoveries were $19,064, $180,385 and $36,830
in 1999, 1998 and 1997, respectively. The allowance for loan losses totaled
$532,585, $459,001 and $520,953 at the end of 1999, 1998 and 1997, respectively.
A summary of activity in the allowance for loan losses for 1999, 1998, and 1997
years is illustrated below.
Analysis of the Allowance for Loan Losses ($ in thousands)
<TABLE>
<CAPTION>
Years Ending December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 459 $ 521 $ 298
Charge offs -- Domestic:
Commercial, financial and agricultural 0 25 55
Real estate-construction 0 0 0
Real estate-mortgage 60 165 0
Installment loans to individuals 6 66 28
Lease financing 0 0 0
Charge offs -- Foreign: 0 0 0
--- --- ---
Total Charge-Offs 66 256 83
--- --- ---
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C> <C> <C>
Recoveries -- Domestic:
Commercial, financial and agricultural 28 10 3
Real estate-construction 0 0 0
Real estate-mortgage 0 42 24
Installment loans to individuals 19 24 19
Lease financing 0 0 0
Recoveries -- Foreign 0 0 0
--- --- ---
Total Recoveries 47 76 46
--- --- ---
Net charge-offs 19 180 37
Provision for loan losses 93 118 260
--- --- ---
Balance at end of period $ 533 $ 459 $ 521
=== === ===
Ratio of net charge-offs during period to average loans
outstanding during period 0.06% 0.48% 0.09%
</TABLE>
Analysis of the Allowance for Loan Losses ($ in thousands)
<TABLE>
<CAPTION>
Ratio of loans in Ratio of loans in
category to total category to total
Applicable to: Amount loans Amount loans
Dec. 31, Dec. 31, Dec. 31 Dec. 31
1999 1999 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic:
Commercial, financial,
agricultural $ 268 39.6% $ 158 33.5%
Real estate-construction 10 3.2% 8 6.7%
Real estate-mortgage 110 37.8% 185 36.6%
Installment loans to
individuals 47 19.4% 68 23.2%
Unallocated 98 0.0% 40 0.0%
---- ------ --- ------
Total 533 100.0% 459 100.0%
==== ====== === ======
</TABLE>
($ in thousands)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Total loans (1) $ 31,112 $ 23,652
Allowance for loan losses $ 533 $ 459
Allowance/Loans, % (1) 1.71% 1.94%
</TABLE>
(1) Excludes loans held for sale.
The monthly provision for loan loss remained at $7,500 during 1999.
Management at Midwest added a special provision of $2,648 during the year for a
specific loan loss. The amount of the allowance for loan losses is calculated by
applying the following formulas:
39
<PAGE> 40
Assumptions used in the Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
Bank's Ratio Used
Average Peer Group By Bank in
5 Year Average Allowance
Loss Ratio Loss Ratio Calculation
---------- ---------- -----------
<S> <C> <C> <C>
Commercial loans, performing (1) 0.61% 0.43% 0.61%
Commercial loans, classified (2) N/A N/A (2)
Commercial loan commitments to lend 0.00% N/A 0.20%
Real estate mortgage, performing 0.22% 0.07% 0.30%
Real estate mortgage, classified (3) N/A N/A (3)
Installment loans to individuals (4) 0.00% 0.74% 1.00%
Home Equity loans, performing (5) 0.00% 0.04% 0.50%
Credit Cards (6) 0.00% 1.83% 2.76%
Overdrafts (7) N/A N/A 15.00%
</TABLE>
(1) Performing Loans:
The Bank's actual 5-year average losses were 0.61%, and this is the rate used.
Per the FDIC Quarterly Banking Profile (FDIC Profile) the loss rate for loans in
the central region is .38%. Real estate construction loans are included in
commercial loan balances.
(2) Commercial Classified Loans: The allocation for the classified loans was
determined by a combination of the risk rating and the collateral value. The
loan loss reserve is the greater of the collateral deficiency or the required
loan loss reserve for the risk rating. All loans are rated 1 (highest quality)
to 8 (lowest quality), with performing loans rated 1 to 4. A Special Mention or
Watch List loan (5) requires a minimum of a 5% allocation, a Substandard loan
(6) requires a minimum of a 15% allocation, a Doubtful loan (7) requires a
minimum of a 50% allocation and a Loss loan (8) requires a complete charge off
of the loan.
(3) Classified Residential Mortgages: A specific analysis is used, based on the
Broker Price Opinion value of the home, less a 15% liquidation expense. If the
estimated loss is $0, then a 5% (Watch List) allocation ratio is used to account
for increased administration costs and risks associated with the foreclosure
process.
(4) Installment loans to individuals: The FDIC Profile loss ratio is 1.39%. All
Installment loans are rated A-D, with A being highest quality and D being lowest
quality. For loans between 32 -120 days delinquent, an allocation can be taken
as follows: "A" & "B" Loans - 2.5%, "C" - 5%, "D" - 15%. The Bank typically
gives a 15% allocation for all installment loans over 32 days delinquent.
However, a specific analysis, based on the FMV of the collateral, less
liquidation costs was used for Secured Installment loans greater than 120 days
past due. See the UB Classified Loan Report for specific allocations.
(5) Home Equity: Term Loans & Lines of Credit: The rate shown above of 0.50% is
for Home Equity Term Loans. The allocation ratio for Home Equity Lines of Credit
is .75% since they carry higher risk since they do not amortize during the life
of the loan.
(6) Credit Cards: The FDIC Profile loss ratio is 4.13%.
40
<PAGE> 41
(7) Overdrafts: Overdrafts generally carry an unusually high risk of loss as
they are generally unsecured and are rated the same way as non-performing
installment loans with an allocation ratio of 15%.
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. Since the Bank has a
limited experience with its loan portfolio in Ann Arbor, the Bank's historical
loss ratios may be less than future loss ratios.
Management believes that the allowance for loan losses 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
our control. A downturn in the general nationwide economy will tend to
aggravate, for example, the problems of local loan customers currently facing
some difficulties. A general nationwide business expansion could result in fewer
loan customers being unable to repay their loans.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Included in results for 1999 is a loss of $152,000 due to an adverse
legal judgment and associated legal expenses of about $40,000. In 1999, the Bank
sold its Varsity Mortgage and Varsity Funding subsidiaries. The Varsity Mortgage
and Varsity Funding discontinued operations had a combined loss of $191,755 for
the 1999 year versus profits in 1998 of $603,242 and 1997 of $263,131. The
discontinued operations had $2,165,509 of total non-interest expenses during
1999.
Non-interest income. Including only continuing operations, non-interest
income in 1999 increased from $2,129,494 to $2,289,126 in 1999, an increase of
7.5%. The increase in 1999 was mainly the result of increased revenues from
merchant banking (BIDCO) income, which was included because the BIDCO's results
were consolidated for the first time and more than offset a decline in mortgage
banking income. Other non-interest income in 1998 also included gains from the
sale of excess property.
Non-interest income in 1998 rose to $2,129,494 from $1,819,721 in 1997, an
increase of 17.0%. The increase in 1998 was mainly the result of mortgage
banking income, 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.
Mortgage Banking. Mortgage banking, servicing and origination fees
decreased to $1,151,923 in 1999 from $1,493,095 in 1998. The decrease in
mortgage banking fee income was the result of a decrease in loan purchase and
origination volumes during 1999 and a decrease in the size of the servicing
rights portfolio.
The servicing rights portfolio totaled $64,366,000 of FHLMC and FNMA
mortgages at December 31, 1999, versus $95,588,000 at December 31, 1998. All
servicing in 1999 was done by Midwest Loan Services. The amount decreased as a
result of a portfolio sale of servicing rights by the Bank in December 1998
(which settled in March 1999), and payoff and refinancing of existing rights
throughout the year. The following table summarizes the portfolio by type and
mortgage note rate:
41
<PAGE> 42
Interest Rate Stratification of the Bank's Servicing($ in 000's)
<TABLE>
<CAPTION>
FIXED RATE -- BY MATURITY
Mortgage Rate (%) ARMs UNDER 10 10-25 OVER 25
----------------- ---- -------- --------- -------
<S> <C> <C> <C> <C>
9.00 and up $ 397 $ 0 $97 $ 613
8.50 - 8.99 823 0 167 1,523
8.00 - 8.49 3,070 0 288 4,743
7.50 - 7.99 2,057 0 2,591 20,649
7.00 - 7.49 975 0 6,188 11,381
6.50 - 6.99 0 25 4,903 2,840
6.00 - 6.49 0 0 772 88
Under 6.00 0 0 0 176
------- ---- -------- --------
Totals $ 7,322 $ 25 $ 15,006 $ 42,013
======= ==== ======== ========
Current market
interest 7.50% 7.50% 8.13% 8.38%
Average annual
servicing fee 0.38% 0.25% 0.25% 0.27%
</TABLE>
Mortgage interest rates hit 30-year lows in October 1998 and rose
steadily from that point throughout 1999. Midwest Loan Services actively
refinanced its existing portfolio during 1999, causing increased amortization of
mortgage servicing rights as well as increased fee income.
Based on recent comparable sales and indications of market value from
industry brokers, management believes that the current market value of the
Bank's portfolio of mortgage servicing rights slightly exceeds 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.
Servicing Rights Held by University Bank ($ amounts in 000's)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Total servicing $64,366 $95,588
Book value of servicing $704 $948
Estimated market value of servicing:
Management estimate (1) $755 $950
Discounted cash flow (2) $869 $1,066
Estimated excess of market over book value (3) $51-$165 $2-$118
</TABLE>
(1) In addition to checking the market value of servicing rights with
similar characteristics to our portfolio, we also analyze the portfolio
using the following assumptions: The market value of servicing is based
upon market transactions at December 31, 1999 of 5.3x (5.3 times the
servicing fee) for 30-year servicing, 4.4x for 15-year servicing, 3.6x
for Balloon servicing and 3.0x for ARM servicing. The market value of
servicing at December 31, 1998 was based on a price of 4.3x for 30-year
servicing, 3.6x for 15-year servicing, 2.6x for Balloon servicing and
1.8x for ARM servicing. Excess servicing is discounted from these
amounts at a multiple of one times the servicing fee.
42
<PAGE> 43
(2) Uses net present value analysis of future cash flows, discounted back
at rates ranging from 10 to 12% in 1999 and 1998.
(3) Range based upon the two methods used in (1) and (2), above. During
1999 purchases and sales of mortgage servicing rights by third-parties
evidenced an increasing trend in price as long term interest rates
increased throughout the year.
Additional information regarding the Bank's mortgage banking activities
for the past three years is set forth in Note 5 to our consolidated financial
statements.
Michigan BIDCO. Michigan BIDCO, invests in businesses in Michigan with
the objective of capital gains while fostering job growth and economic
development. As of December 31, 1999, the BIDCO had made twenty-eight
investments, amounting to a total of $13,463,600 at original cost, before
repayments or participations sold. At December 31, 1999, Michigan BIDCO had
total assets of $3,228,441 versus $5,327,697 at December 31, 1998. As discussed
above under "ITEM 1.-- Business, Lines of Business, Michigan BIDCO", as of
December 31, 1999, the consolidated financial statements include the BIDCO and
are presented using the investment company method, and, accordingly, investments
in stocks, stock rights, limited liability companies and loans ("BIDCO
Investments") are reported at fair value.
Due to the change in accounting treatment of our investment in the
BIDCO to consolidation using the investment method from the equity method, the
following discussion of the BIDCO's financial results for 1999 versus 1998
compares the BIDCO's own financial results and not just our pro rata share of
the results based on the accounting and consolidation methods used in 1998 and
1999. We realized pre-tax income from the investment in the BIDCO of $128,219 in
1998 versus income of $543,174 in 1999.
Securities. Proceeds from sales of marketable equity securities
included in proceeds from sales of investment securities were $74,550, $142,088
and $166,498 for the years ended December 31, 1999, 1998 and 1997, respectively.
Gross gains of approximately $1,879, $97,993 and $41,155 were realized on 1999,
1998 and 1997 sales, respectively. Gross losses of $17,981 were realized on 1999
sales and no gross losses were realized on 1998 and 1997 sales. See "Recent
Events", above.
Proceeds from sales of available for sale debt securities were
$530,763, $0 and $5,740,991 for the years ended December 31, 1999, 1998 and
1997, respectively, excluding sales associated with the Bank's mortgage banking
operation. There was a gross gain of $625 on 1999 sales, and 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.
At December 31, 1999, gross unrealized losses in the our
available-for-sale securities were $585,000 and gross unrealized gains were $0.
At December 31, 1998 gross unrealized losses in our available-for-sale
securities were $191,000 and gross unrealized gains were $8,000. At December 31,
1997 gross unrealized losses in our available-for-sale securities were $27,961
and gross unrealized gains were $46,549. Sales of loans pooled into mortgage
backed securities in connection with the Bank's mortgage banking activities were
$24,603,894 in 1999, $48,236,448 in 1998 and 171,639,196 in 1997.
43
<PAGE> 44
Non-interest expense. Including only activity from continuing
operations, our non-interest expense decreased from $4,204,947 in 1998 to
$4,115,712 in 1999, a 2.1% decrease. During the year non-interest expenses at
the retail bank division were decreased as a result of continued efforts at cost
control. Legal expenses remained high as a result of an adverse judgment in a
lawsuit which resulted in about $192,000 in total costs. Data processing
expenses were higher primarily because of a variety of Year 2000 expenses which
were incurred and expensed and various internet initiatives, including internet
banking and development projects at Midwest Loan Services. University Bancorp's
total non-interest expense increased $113,443 because of an adverse legal
judgment against University Bancorp, which caused the category of legal and
audit expense to increase $160,502, including a substantial portion of the
$192,000 legal expense mentioned previously, which was only partially offset by
declines in other categories including salaries and benefits, occupancy and
other expense.
Our non-interest expense decreased by $295,091 or 6.6% in 1998 as
compared to 1997. During the year, non-interest expenses at the Ann Arbor-based
retail bank division were substantially decreased as a result of a variety of
cost cutbacks in an effort to streamline the operation. The cost cutbacks were
initiated by new senior management at the Bank. 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 subsidiary, Midwest Loan Services. In addition, legal 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. University Bancorp's total non-interest 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 University Bancorp was an increase in ESOP
contributions expense and salary and related expenses reimbursed to a consultant
in connection with a special project.
Internet Banking. Management has begun a project to offer transactional
internet banking for all bank products. The internet banking product is now in
beta test. The project, which has a capital budget of approximately $100,000,
will add ongoing depreciation and operating expenses which are expected to be
more than offset by the transfer to the Bank of approximately $12,000,000 in
mortgage servicing escrow accounts controlled by Midwest Loan Services. These
escrow deposit accounts are currently held at another bank due to the inability
of the Bank currently to offer PC banking to Midwest to facilitate Midwest's
daily operational needs.
LIQUIDITY AND CAPITAL RESOURCES
Our total assets at December 31, 1999 amounted to $40.82 million
compared to $54.54 million at December 31, 1998. Loans receivable, net of
reserves, increased by $7.39 million to $30.58 million from $23.19 million. Cash
and cash equivalents including Federal Funds sold on an overnight basis at the
end of 1999 decreased by $7.69 million from the prior year, while securities
decreased by $0.32 million. Loans held for sale in the Bank's mortgage banking
division decreased by $11.55 million to $0.31 million from $11.86 million.
During 1999, 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
44
<PAGE> 45
resulted in a reduction in total assets, loans held for sale and deposits. In
late 1999, we sold Varsity Mortgage, which caused a further drop in loans held
for sale. At year-end 1999, the Bank had an unused line of credit from the
Federal Home Loan Bank of Indianapolis of $4,386,140, and an unused line of
credit from the Federal Reserve Bank of Chicago of $5,252,000.
University Bank, as an FDIC-insured bank, is subject to certain
regulations which require the maintenance of minimum liquidity levels of cash
and eligible investments. The Bank has historically exceeded this minimum as a
result of its investments in federal funds sold, U.S. government and U.S. agency
securities and cash. In addition, University Bancorp had $15,834 in cash and
cash equivalents at the end of 1999 to meet cash needs, primarily operating
expenses and interest and principal reductions on the University Bancorp's note
payable. The balance of the loan was $694,000 and $826,000 at year end 1999 and
1998. 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 us in 2000. 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 University Bancorp's loan.
At December 31, 1999, University Bancorp had outstanding $304,000 of
equity conversion notes, which bear interest at prime rate although all payment
of interest is deferred until conversion into common stock or redemption. Notes
are redeemable only through the proceeds of a future sale of common stock. Our
President, Chairman and members of their family hold the equity conversion notes
and provided $121,000 in additional financing during 2000 through the purchase
of additional equity conversion notes.
Our total stockholders' equity at December 31, 1999 was approximately
$1.95 million (or 4.8% of total assets) compared to $3.08 million (or 5.7% of
total assets) the year earlier. The Bank's regulatory capital at year-end was
$3.99 million or 9.43% of the Bank's total regulatory assets and the total
risk-adjusted capital ratio of 13.72% 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 University Bancorp's actual capital percentages:
45
<PAGE> 46
<TABLE>
<CAPTION>
CAPITAL ADEQUACY TABLE - UNIVERSITY BANK DECEMBER 31, 1999
Balance Risk Weighted
0% RISK CATEGORY Sheet (000's) Assets (000's)
----------------------------------
<S> <C> <C>
U.S. Treasury Securities $ 480 $ -
Mortgage-Backed Securities Guaranteed by GNMA 1 -
Currency & Coin 436 -
Federal Reserve Balance 26 -
-------------- --------------
TOTAL 943 -
20% RISK CATEGORY
Interest-bearing Balances 23 4
Fed Funds Sold 9 2
U.S. Gov't sponsored Agency Sec 2,228 445
Cash Items 219 44
FHLB Stock 848 170
Balances due from depository Inst 890 178
-------------- --------------
TOTAL 4,217 843
50% RISK CATEGORY
Municipal Revenue Obligation 494 247
Qualifying 1st liens on 1-4 family 12,175 6,088
-------------- --------------
TOTAL 12,669 6,335
100% RISK CATEGORY
All other Assets 25,026 25,026
Balance Sheet Items excluded from calculation:
Portion of Mortgage Servicing Rights 70 (123)
Unrealized Loss on Securities available for sale (585)
-------------- --------------
TOTAL ASSETS $ 42,340 $ 32,081
============== ==============
TIER 1 CAPITAL
Common Stock 200
Surplus 4,433
Undivided Profits & Capital Reserves (1,151)
Minority Interest 579
Other identifiable Intangible Assets (70)
--------------
TOTAL TIER 1 CAPITAL $ 3,991
TIER 2 CAPITAL
Allowance for loans & lease losses 532
Excess loan loss reserve (123)
--------------
TOTAL TIER 2 CAPITAL $ 409
--------------
TOTAL TIER 1 & TIER 2 CAPITAL $ 4,400
==============
TIER 1/TOTAL ASSETS 9.43%
TIER 1 & 2/TOTAL ASSETS 10.39%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 12.44%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 13.72%
</TABLE>
46
<PAGE> 47
IMPACT OF INFLATION
The primary impact of inflation on our operations is reflected in
increased operating costs. Since our assets and liabilities are primarily
monetary in nature, changes in interest rates have a more significant impact on
our performance than the general effects of inflation. However, to the extent
that inflation affects interest rates, it also affects our net income.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. This 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.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on these rights by lowering
required amortization rates on the rights. Rising interest rates tend to
decrease new mortgage origination activity, negatively impacting current income
from the Bank's retail mortgage banking operations. Rising interest rates also
slow Midwest Loan Services' rate of growth, but increases the duration of its
existing subservicing contracts.
The Bank utilizes a software risk model to determine its overall exposure
to changes in interest rates. At December 31, 1999, the model predicts that the
Bank's average 12 month GAP as a % of Earning Assets was -4.01%. The model
predicts that in a 400 basis point shift upward that the Bank only has $41,000
of annual net interest margin at risk, and $56,000 at risk in a 400 basis point
shift down environment.
However, the software model does not account entirely for the convexity of
the Bank's long term zero coupon Treasury securities, the optionality of the
Bank's Principal Only securities or our servicing rights which act as Interest
Only securities. The Bank's securities portfolio is designed to offset a portion
of the market value risk associated with the servicing rights. During 1999, the
change in market value of the servicing rights on the cash flow net present
value basis as calculated by management was an increase of $47,000. The change
in market value of the servicing rights versus book based on management's
estimate of market value was an increase of $49,000.
We also performs a static gap analysis which has limited value as a
simulation because of competitive and other influences that are both within and
beyond our control and does not take into account the historical variability of
deposit balances based on interest rate shifts. The table on page 48 details our
interest sensitivity gap between interest-earning assets and interest-bearing
liabilities at December 31, 1999. Certain items in the table are based upon
various assumptions of management which may not necessarily reflect future
experience, and therefore, certain assets and liabilities may in fact mature or
47
<PAGE> 48
re-price differently from what is illustrated. The one-year static gap position
at December 31, 1999 was estimated to be ($16,560,000) or -40.57%:
STATIC GAP ANALYSIS
UNIVERSITY BANCORP -- December 31, 1999
Amounts (in thousands) Maturing or Repricing in
<TABLE>
<CAPTION>
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 All
ASSETS or Less 1 Year Years Years Years Others Total
------ ------- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Short term investments $ 9 $ 0 $ 0 $ 0 $ 0 $ 0 $ 9
Loans, gross 7,942 8,713 5,309 2,787 6,126 - 30,877
Non-Accrual Loans - - - - - 541 541
Securities - - 1 - 3,474 - 3,475
Other Assets - - - - - 4,379 4,379
Cash & Due From Banks - 23 - - - 1,519 1,542
--------------------------------------------------------------------------------------------------
TOTAL ASSETS 7,951 8,736 5,310 2,787 9,600 6,439 40,823
--------------------------------------------------------------------------------------------------
LIABILITIES
-----------
CD's $100,000 or more 7,365 955 733 - 95 - 9,148
CD's under $100,000 811 3,742 1,384 7 698 - 5,642
Money Market Accts 10,788 - - - - - 10,788
NOW Accts 3,052 - - - - - 3,052
Demand Deposits 2,126 - - - - - 2,126
Savings Deposits 295 - - - - - 295
Other Borrowings 4,113 - 1,339 289 - - 5,741
Other Liabilities - - - - - 1,081 1,081
Shareholder Equity - - - - - 1,950 1,950
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES &
EQUITY 28,550 4,697 3,456 296 793 3,031 40,823
--------------------------------------------------------------------------------------------
GAP ($20,599) $ 4,039 $ 1,854 $2,491 $8,807 $3,408 $ 0
============================================================================================
CUMULATIVE GAP ($20,559) ($16,560) ($14,706) ($12,215) ($3,408) -
GAP PERCENTAGE -50.46% -40.57% -36.02% -29.92% -8.35% 0.00%
</TABLE>
48
<PAGE> 49
The following repricing information is provided for the Bank's
investment portfolio, using book values, as of December 31, 1999:
Investment Portfolio Maturities ($ in thousands) and Yield by Type:
<TABLE>
<CAPTION>
Maturity or Repricing Interval:
------------------------------
Less Than 1 Year to 5 Years to More Than
One Year 5 Years 10 Years 10 Years
-------- ------- -------- --------
<S> <C> <C> <C> <C>
U.S. Treasuries and Government Agencies:
Amount $0 $1 $490 $2,217
Yield 0% 7.38% 6.89% 4.41%
Municipal Obligations:
Amount $0 $0 $0 $503
Yield 0% 0% 0% 6.91%
</TABLE>
Additional information regarding the Bank's investments as of
December 31, 1999 and 1998 is set forth under note 3 to our consolidated
financial statements incorporated by reference in this prospectus.
The following information illustrates maturities and sensitivities of
the Bank's loan portfolio to changes in interest rates as of December 31, 1999:
Loan Portfolio Maturities by Type ($ in thousands):
<TABLE>
<CAPTION>
Maturity Interval:
------------------
Less Than 1 Year to More Than
One Year 5 Years 5 Years
-------- ------- -------
<S> <C> <C> <C>
Commercial & Financial $ 4,551 $ 3,560 $ 4,205
Real Estate -- Construction $ 1,007 $ 0 $ 0
Real Estate -- Mortgage (1) $ 1,694 $ 3,933 $ 6,140
Consumer $ 427 $ 860 $ 4,735
------- ------- --------
Total $ 7,679 $ 8,353 $ 15,080
======= ======= ========
<CAPTION>
Maturity Less Maturity Total Loans
Than One Year or More
One Year
<S> <C> <C> <C>
Total Variable Rate Loans $ 4,094 $ 10,436 $ 14,530
Total Fixed Rate Loans $ 3,585 $ 12,997 $ 16,582
------- -------- --------
Total Loans (1) $ 7,679 $ 23,433 $ 31,112
======= ======== ========
</TABLE>
(1) Excludes residential loans held for sale of $305 and the allowance for loan
losses.
INCOME TAXES
Income tax expense (benefit) in 1999 was $32,524, versus $(198,592) in
1998 and $(292,818) in 1997. A tax benefit resulting in refunds of prior years'
taxes paid was realized in 1998 and 1997 for net operating losses as a result of
the net losses from operations. In 1999, the deferred tax valuation allowance
was increased by $390,218 from $360,000 to $750,218 to establish a valuation
allowance for the net deferred tax assets at December 31, 1999, as we are in a
tax net operating loss carryforward position and realization of the deferred
49
<PAGE> 50
taxes is not more likely than not. The increase in the valuation allowance
resulted in net tax expense for 1999, despite our net loss for 1999.
In February 1996, the Bank, through a subsidiary, purchased a
$1,000,000 interest in a partnership investment in Michigan Capital Fund for
Housing Limited Partnership I, a Michigan limited partnership, which invested in
federal low income housing tax credits. The initial investment consisted of a
$50,000 equity purchase and the execution by the subsidiary of a $950,000
promissory note held by this Partnership. Additional capital contributions are
made over time to reduce the balance of the note. The purchase of the tax
credits increased our deferred federal income tax assets in 1999, 1998 and 1997
and is expected to decrease the amount of federal income taxes we would
otherwise pay annually through 2005. As we currently have no taxable income, a
valuation allowance, as discussed above, has been established until such time as
we become profitable or the tax credits expire. The additional investment in the
credits over the next two years would increase the amount required to be
reserved if there is insufficient taxable income to utilize these credits.
At December 31, 1999, we had available federal income tax loss
carryforwards and general business tax credit carryforwards that could be
utilized to shelter approximately $2,610,000 in taxable income, and we carried a
net deferred tax asset on our books of $0, net of deferred tax asset valuation
allowance of $750,218. If we are able to generate sufficient taxable income in
future years, the valuation allowance against our net deferred tax asset could
be reversed, resulting in an increase in future net income. However, if we do
not generate income in the future to utilize the existing deferred tax assets,
the amount of the valuation allowance could be increased as additional
investments are made in tax credits, resulting in a decrease in future net
income.
LEGAL PROCEEDINGS
From December 1995, we were engaged in a dispute over a $30,000 amount
owed to us, and refused to pay $45,000 which we owed to the same party until the
$30,000 was paid to us. During the third quarter of 1999, a mediator ruled
against us in this dispute awarding the plaintiff a sum of $167,000, including
interest, legal fees, and the sum of $80,000, which related to another matter
which was not originally in dispute and subject to a separate agreement, which
the mediator voided. As a result, $152,000 was charged as an expense during the
third quarter of 1999.
50
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000.
SUMMARY
For the six months ended June 30, 2000, a net loss of $546,370 was
realized versus a net loss of $578,360 in the same period in 1999, including a
loss of $108,727 from discontinued operations. Net loss from continuing
operations for the six months ended June 30, 2000 was $546,370 compared to
$469,633 for the same period in 1999. Net interest income from continuing
operations increased to $648,157 in the 2000 period from $551,452 in the 1999
period, and other income from continuing operations was $1,050,739 in the 2000
period versus $869,742 in the 1999 period. Operating expenses from continuing
operations increased to $2,174,220 in the 2000 period from $1,857,327 in the
1999 period. Basic and diluted net loss per share in the six months ended June
30, 2000 was ($0.27), compared to a net loss of ($0.29) for the six months ended
June 30, 1999 (including a loss of ($0.05) from discontinued operations in the
1999 period). The decreased loss in 2000 versus 1999 was due to improved results
at Midwest Loan Services that offset the decrease in income from the results of
University Bank and Michigan BIDCO. Discontinued operations at Varsity Mortgage
were unprofitable during the 1999 period.
For the three months ended June 30, 2000, a net loss of $370,978 was
realized versus a net loss of $355,302 in the same period in 1999. Net loss from
continuing operations for the three months ended June 30, 2000 was $370,978
compared to $144,452 for the same period in 1999. Net interest income from
continuing operations increased to $337,763 in the 2000 period from $306,061 in
the 1999 period, and other income from continuing operations was $498,354 in the
2000 period versus $585,925 in the 1999 period. Operating expenses from
continuing operations increased to $1,146,421 in the 2000 period from $1,014,238
in the 1999 period. Basic and diluted net loss per share in the three months
ended June 30, 2000 was ($0.18), compared to a net loss of ($0.18) for the three
months ended June 30, 1999 (and a loss of ($0.07) from continuing operations in
the 1999 period).
The following table summarizes the net income (loss) of each profit
center of the Company for the six months ended June 30, 2000 and 1999 (in
thousands):
Six months ended June 30, 2000 Net Income (Loss) Summary:
<TABLE>
<S> <C>
Community Banking $(678)
Midwest Loan Services 86
Merchant Banking (Michigan BIDCO) 114
Corporate Office (68)
------
Net Loss $(546)
======
Six months ended June 30, 1999 Net Income (Loss) Summary:
Community Banking $(519)
Midwest Loan Services (17)
Merchant Banking (Michigan BIDCO) 146
Corporate Office (79)
------
Loss from continuing operations (469)
Loss from discontinued
operations(Varsity Mortgage
and Varsity Funding) (109)
------
Net Loss $(578)
======
</TABLE>
51
<PAGE> 52
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income from continuing operations increased to $337,762
for the three months ended June 30, 2000 from $306,061 for the three months
ended June 30, 1999. Net interest income rose from the year ago period primarily
because of a higher interest rate spread. The yield on interest earning assets
increased from 8.51% in the 1999 period to 9.04% in the 2000 period. The cost of
interest bearing liabilities increased from 5.02% in the 1999 period to 5.17% in
the 2000 period. Net interest income as a percentage of total average earning
assets increased from 3.33% to 3.73%.
Net interest income from continuing operations increased to $648,156
for the six months ended June 30, 2000 from $551,452 for the six months ended
June 30, 1999. Net interest income rose from the year ago period primarily
because of a higher interest rate spread. The yield on interest earning assets
increased from 8.55% in the 1999 period to 8.99% in the 2000 period. The cost of
interest bearing liabilities increased from 5.07% for the 1999 period to 5.18%
for the June 30, 2000. Net interest income as a percentage of total average
earning assets increased from 3.09% to 3.66%.
INTEREST INCOME
Interest income increased to $818,490 in the quarter ended June 30,
2000 from $781,176 in the quarter ended June 30, 1999. The average volume of
interest earning assets decreased to $36,311,151 in the 2000 period from
$36,837,051 in the 1999 period, a decrease of 1.4%. The decreased volume of
earning assets was due to a decrease in loans made to Varsity Mortgage, which
more than offset an increase in portfolio loans. The overall yield on the loan
portfolio increased to 9.35% from 9.01%.
The average volume of investment securities in the three months ended
June 30, 2000 decreased 2.6% over the same period in 1999. The yield on the
securities portfolio increased from 4.29% in the three month period ended June
30, 1999 to 6.19% in the 2000 period.
Interest income increased to $1,590,885 in the six months ended June
30, 2000 from $1,526,917 in the six months ended June 30, 1999. The average
volume of interest earning assets decreased to $35,686,673 in the 2000 period
from $36,029,183 in the 1999 period, a decrease of 1.0%. The overall yield on
the loan portfolio increased to 9.30% from 9.17%.
The average volume of investment securities in the six months ended
June 30, 2000 increased 5.4% over the same period in 1999. The yield on the
securities portfolio increased from 5.54% in the six month period ended June 30,
1999 to 6.15% in the 2000 period.
INTEREST EXPENSE
Interest expense increased to $480,728 in the three months ended June
30, 2000 from $475,115 in the 1999 period. The increase was due to an increase
in rate paid that more than offset a decrease in interest bearing liabilities as
a result of decreased brokered time deposits. Interest expense was increased
during the period by inclusion of the BIDCO's term debt and increased holding
52
<PAGE> 53
company debt. The cost of funds increased to 5.17% in the 2000 period from 5.02%
in the 1999 period. The average volume of interest bearing liabilities decreased
1.6% in the 2000 period versus the 1999 period.
Interest expense decreased to $942,728 in the six months ended June 30,
2000 from $975,465 in the 1999 period. The decrease was due to a decrease in
interest bearing liabilities as a result of decreased brokered time deposits.
Interest expense was increased during the period by inclusion of the BIDCO's
term debt and increased holding company debt. The cost of funds increased to
5.18% in the 2000 period from 5.07% in the 1999 period. The average volume of
interest bearing liabilities decreased 5.4% in the 2000 period versus the 1999
period.
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The tables on the following two pages summarize monthly average
balances, revenues from earning assets, expenses of interest bearing
liabilities, their associated yield or cost and the net return on earning assets
for the three months and six months ended June 30, 2000 and 1999.
ALLOWANCE FOR LOAN LOSSES
The provision for loan loss was increased to $65,000 during the second
quarter of 2000 as a result of management's assessment of overall loan quality.
The actual loan losses were $56,536 in the six month period ended June 30, 2000
versus $28,904 in the six month period ended June 30, 1999.
<TABLE>
<CAPTION>
Six months ended: June 30, 2000 June 30, 1999
----------------- ------------- -------------
<S> <C> <C>
Provision for loan losses $ 66,000 $ 45,000
Loan charge-offs (56,536) (28,904)
Recoveries 47,801 25,014
-------- --------
Net increase in allowance $ 57,265 $ 41,110
<CAPTION>
As of: June 30, 2000 December 31, 1999
----- ------------- -----------------
<S> <C> <C>
Total loans (1) $ 32,190,277 $ 31,112,496
Allowance for loan losses $ 589,850 $ 532,585
Allowance/Loans % (1) 1.83% 1.71%
</TABLE>
(1) Excludes loans held for sale which are valued at fair market value.
53
<PAGE> 54
NET INTEREST INCOME TABLE
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
------------------------------------ ---------------------------------------
June 30, 2000 June 30, 1999
------------------------------------ ---------------------------------------
Average Interest Average Average Interest Average
Balance Inc/Exp Yield(1) Balance Inc/Exp Yield(1)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Commercial Loans $ 12,988,281 $ 331,002 10.22% $ 12,729,689 $ 325,196 10.25%
Real Estate Loans (2) 18,743,899 404,741 8.66% 19,069,401 382,770 8.05%
Installment/Consumer Loans 1,051,286 28,575 10.90% 1,086,710 30,655 11.31%
------------ --------- ------------ ---------
Total Loans 32,783,466 764,318 9.35% 32,885,800 738,621 9.01%
Investment Securities (3) 3,479,185 53,695 6.19% 3,570,868 38,195 4.29%
Federal Funds & Bank Deposits 48,500 477 3.94% 380,383 4,360 4.60%
------------ --------- ------------ ---------
Total Interest Earning Assets $ 36,311,151 $ 818,490 9.04% $ 36,837,051 $ 781,176 8.51%
Interest Bearing Liabilities:
Now/Super-Now Deposits $ 2,907,452 $ 21,046 2.90% $ 3,225,075 $ 25,207 3.13%
Savings Deposits 290,465 1,437 1.98% 206,300 1,103 2.14%
Time Deposits 15,388,978 234,340 6.11% 18,147,998 252,714 5.59%
Borrowed Funds 3,604,525 54,728 6.09% 2,759,555 34,797 5.06%
Money Market Deposit Accts 13,327,101 137,079 4.13% 11,561,539 113,974 3.95%
Convertible Bonds - BIDCO (4) 752,780 16,362 8.72% 1,123,000 25,275 9.03%
Long Term Notes - Bancorp 1,039,649 15,736 6.07% 905,644 22,045 9.76%
------------ --------- ------------ ---------
Total Interest Bearing
Liabilities $ 37,310,950 $ 480,728 5.17% $ 37,929,111 $ 475,115 5.02%
------------ --------- ------------ ---------
Net Earning Assets, net interest
income, and interest rate spread $ (999,799) $ 337,762 3.87% $ (1,092,060) $ 306,061 3.48%
Net yield on interest-earning assets 3.73% 3.33%
</TABLE>
54
<PAGE> 55
NET INTEREST INCOME TABLE
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
-----------------------------------------------------------------------------------
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Inc/Exp Yield(1) Balance Inc/Exp Yield(1)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial Loans $ 13,089,733 $ 645,353 9.94% $ 11,264,617 $ 557,775 9.99%
Real Estate Loans (2) 18,024,575 776,591 8.69% 18,019,043 763,099 8.54%
Installment/Consumer Loans 1,055,757 62,229 11.89% 1,149,336 62,460 10.96%
------------ ----------- ------------ -----------
Total Loans 32,170,065 1,484,173 9.30% 30,432,996 1,383,334 9.17%
Investment Securities (3) 3,470,750 105,847 6.15% 3,294,234 90,469 5.54%
Federal Funds & Bank Deposits 45,858 865 3.80% 2,301,953 53,114 4.65%
------------ ----------- ------------ -----------
Total Interest Earning Assets $ 35,686,673 $ 1,590,885 8.99% $ 36,029,183 $ 1,526,917 8.55%
Interest Bearing Liabilities:
Now/Super-Now Deposits $ 2,952,898 $ 41,483 2.83% $ 3,256,987 $ 50,666 3.14%
Savings Deposits 288,500 2,878 2.01% 194,967 2,225 2.30%
Time Deposits 15,076,851 452,944 6.06% 20,089,364 567,977 5.70%
Borrowed Funds 3,383,157 101,083 6.03% 1,591,686 42,513 5.39%
Money Market Deposit Accts 13,051,709 263,449 4.07% 12,338,221 252,899 4.13%
Convertible Bonds - BIDCO (4) 936,867 41,624 8.96% 561,500 25,275 9.08%
Long Term Notes - Bancorp 1,032,641 39,268 7.67% 792,635 33,910 8.63%
------------ ----------- ------------ -----------
Total Interest Bearing
Liabilities $ 36,722,623 $ 942,729 5.18% $ 38,825,360 $ 975,465 5.07%
------------ ----------- ------------ -----------
Net Earning Assets, net interest
income, and interest rate spread $ (1,035,950) $ 648,156 3.81% $ (2,796,177) $ 551,452 3.48%
Net yield on interest-earning assets 3.66% 3.09%
</TABLE>
NOTES TO NET INTEREST INCOME TABLE:
----------------------------------
(1) Yield is annualized.
(2) The amounts for 1999 were adjusted to eliminate loans and income from
discontinued operations.
(3) Actual yields; not adjusted to take into account tax-equivalent yields
resulting from tax-free municipal bonds and includes bank deposits.
(4) Michigan BIDCO's convertible bonds were converted on May 31, 2000.
55
<PAGE> 56
The following schedule summarizes the Company's non-performing loans
for the periods indicated :
<TABLE>
<CAPTION>
At At
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Past due 90 days and over and still accruing (1):
Real estate $ 10,426 $ 93,883
Installment 1,114 0
Commercial 260,230 123,688
--------- -----------
Subtotal 271,770 217,571
Non-accrual loans (1):
Real estate 72,375 144,739
Installment 0 0
Commercial 87,500 396,000
--------- -----------
Subtotal 159,875 540,739
Other real estate owned 519,015 683,784
--------- -----------
Total non-performing $ 950,660 $ 1,442,094
Ratio of non-performing to total loans (1) 2.95% 4.64%
Ratio of loans past due over 90 days and 73.2% 142.4%
non-accrual loans to loan loss reserve
</TABLE>
(1) Excludes loans held for sale which are valued at fair market value.
The decrease in non-performing commercial loans relates to one new
$87,500 loan on non-accrual that was subsequently charged off, and a $396,000
BIDCO loan which was removed from the list due to the deconsolidation of the
BIDCO in 2000. A total of $260,230 in commercial loans secured by residential
investment properties that were over 90 days delinquent and still accruing at
June 30, 2000 were subsequently brought to 30 days delinquent.
Subsequent to June 30, 2000, one parcel of other real estate owned was
sold and another parcel was under contract to be sold. These parcels have a
total carrying value of $252,936 and no gain or loss is expected. Other real
estate owned at June 30, 2000 and December 31, 1999 includes a commercial
development site in Sault Ste. Marie, Michigan. Based upon an appraisal,
management believes the 16-acre site where a former loan office is located has a
fair market value substantially more than its carrying value of $266,079 at June
30, 2000. The Bank no longer intends to utilize it for a branch location and
accordingly has classified it as other real estate owned. There is no assurance
that a sale of the Sault Ste Marie property will be consummated.
Economic conditions in the Bank's primary market area in Ann Arbor were
strong in the period. Management believes that the current allowance for loan
losses is adequate to absorb losses inherent in the loan portfolio, although the
ultimate adequacy of the allowance is dependent upon future economic factors
beyond the Company's control. A downturn in the general nationwide economy could
tend to aggravate, for example, the problems of local loan customers currently
facing some difficulties, and could decrease residential home prices.
56
<PAGE> 57
A general nationwide business expansion could result in fewer loan customers
being unable to repay their loans.
NON-INTEREST INCOME
Total non-interest income decreased to $498,354 for the three months
ended June 30, 2000 from $585,925 for the three months ended June 30, 1999. The
decrease was principally a result of a decrease in the Bank's merchant banking
income. Loan origination and loan subservicing fee income increased during the
period primarily as a result of an increase in volume at Midwest Loan Services.
Total non-interest income increased to $1,050,740 for the six months
ended June 30, 2000 from $869,742 for the six months ended June 30, 1999. The
increase was principally a result of increases in loan origination and loan
subservicing fee income primarily as a result of an increase in volume at
Midwest Loan Services.
Securities. During the three months ended June 30, 2000, there were no
securities sales from the available-for-sale securities portfolio. During the
first quarter of 2000, the BIDCO realized a $3,501 gain on the sale of a common
stock investment. Gross proceeds from this sale were $103,501.
Mortgage Banking. Mortgage banking income (including loan origination,
gain on sale of mortgage loans, servicing and subservicing fee income) increased
to $421,007 in the three months ended June 30, 2000 from $297,396 in the three
months ended June 30, 1999 and increased to $715,604 in the six months ended
June 30, 2000 from $546,945 in the six months ended June 30, 1999. Increased
loan origination and subservicing activity at Midwest Loan Services was
responsible for the increase.
Subsequent to June 30, 2000, Midwest Loan Services increased its
mortgage subservicing contracts by nearly 75% in a single month (from $750
million to $1,300 million) as a result of continued increases in business with
the mortgage banking subsidiary of a major Wall Street firm. Although there is
no assurance that further increases will occur, management of Midwest has been
told by this firm to expect additional increases as this firm shifts additional
existing business to Midwest from its former primary subservicing firm. Midwest
currently is receiving between 5% and 10% of the monthly volume of this firm's
subservicing business. In late September 2000 the mortgage subsidiary of one of
the World's largest banks informed management of Midwest that this firm expects
to move approximately $10 billion in mortgage servicing rights to Midwest for
subservicing within the next twelve months. There is no assurance that either
firm will follow through on their verbal statements, and although written
contracts are being negotiated with each firm to document the business
arrangements, there is not currently any written subservicing contracts in place
at this time with either firm.
At June 30, 2000, the Bank and its subsidiaries owned the right to
service mortgages for FHLMC, FNMA and others, most of which was owned by Midwest
Loan Services, and the remainder by the Bank. The carrying value of mortgage
servicing rights at June 30, 2000 was $673,135. 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.
57
<PAGE> 58
Michigan BIDCO. In 1999 the Company received permission from the
Michigan Financial Institutions Bureau for the BIDCO to repurchase the shares
and convertible bonds held by certain minority shareholders of the BIDCO. The
shares were repurchased on March 31, 1999 and the bonds in mid-April. As a
result of the transaction, the Company's ownership of the BIDCO increased to
80.1% from 44.1%, and the BIDCO became part of the Company's tax filing group
for federal income tax purposes and the BIDCO's financial results began to be
consolidated in the Company's from March 31, 1999 forward.
On May 31, 2000, the BIDCO converted its outstanding convertible bonds
into common stock (a few convertible bonds were redeemed at that time). With the
conversion of these convertible bonds, the Company's consolidated ownership in
the BIDCO dropped to 28.8%. As a result, the Company's investment in the BIDCO
is now carried under the equity method of accounting, and the BIDCO was no
longer consolidated in the Company's financial results after May 31, 2000.
During the six months ended June 30, 2000, the BIDCO made no new
investments, although its equity interest in two investments were sold for an
amount approximately equal to the carrying value at December 31, 1999.
Management is considering a transaction where the Bank would sell its
interest in the BIDCO to the BIDCO itself. Under the terms of the proposed
transaction which has recently been revised, the Bank would be paid cash for the
current carrying value of its shares in the BIDCO, and University Bancorp would
issue $461,875 worth of shares of Company common stock to the BIDCO shareholders
as additional compensation.
The BIDCO is pursuing development of a technology to send money
securely over the internet using e-mail file attachments under the web domain
name pay-it.net. The technology, for which a patent has been applied, was
developed in connection with the National Center for Manufacturing Sciences,
based in Ann Arbor, and is based on patented technology of InterTrust
Technologies of Palo Alto, California. A pilot of the project has been agreed
for a business to business application in the auto industry and several
additional pilots are being discussed both domestically and internationally.
There is no assurance that the technology, if fully developed and deployed, will
be profitable for the BIDCO.
NON-INTEREST EXPENSE
Non-interest expense increased to $1,146,421 in the three months ended
June 30, 2000 from $1,014,238 for the three months ended June 30, 1999. The
increase was primarily the result of increased operational expenses at Midwest
Loan Services, and also included increased audit and certain other expenses at
the Bank, which more than offset cost control efforts in other areas at the
Bank.
Non-interest expense increased to $2,174,220 in the six months ended
June 30, 2000 from $1,857,327 for the six months ended June 30, 1999. The
increase was primarily the result of increased operational expenses at Midwest
Loan Services, and also included increased audit and certain other expenses at
the Bank, which more than offset cost control efforts in other areas at the
Bank. Our external auditing firm changed in early September and, based on the
proposal of our new external auditing firm, the completion of several consulting
projects, by taking our internal audit function in-house and by hiring
additional in-house accounting staff, future audit and other accounting expenses
could decrease, if we are capable of handling a greater share of our accounting
and reporting matters with our internal staff.
58
<PAGE> 59
Non-interest operating expense for the parent company only increased to
$21,115 for the three month 2000 period from $19,307 for the 1999 period. The
increase was primarily the result of an increase in audit and accounting
expenses.
Non-interest operating expense for the parent company only decreased to
$29,058 for the six month 2000 period from $31,600 for the 1999 period. The
decrease was primarily the result of ongoing efforts to keep holding company
expenses at a minimum.
Internet Banking. The Bank anticipates rolling out an internet banking
product to its customers within the next two months. During the quarter, the
Bank's credit card account statements and transaction histories became available
through the Bank's web site to its customers. Also during the quarter, the Bank
became an affiliate reseller of CybercashTM merchant internet credit card
services.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources. The table on the following page sets forth the
Bank's risk based assets, and the capital ratios and risk based capital ratios
of the Bank. At June 30, 2000, the Bank was "well-capitalized" (the required
ratio for "well-capitalized" was 10% of total risk-based assets).
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, the sale of loans held for
sale, borrowings from correspondent lenders secured by securities, residential
mortgage loans and/or commercial loans. In addition, the Bank invests in
overnight Federal Funds. At June 30, 2000, the Bank had cash and due from banks
and Federal Funds on hand of $1,365,236. The Bank has a $5,500,000 line of
credit secured by investment securities and portfolio mortgage loans and a
$3,000,000 line of credit secured by commercial loans. In order to bolster
liquidity, the Bank has also sold brokered CDs from time to time.
Long term borrowings at 12/31/99 included $1,123,000 face amount of
Michigan BIDCO's 9% convertible bonds due January 15, 2002. On May 31, 2000, the
majority of the bonds were converted into common stock.
Long term borrowings at 6/30/00 include $425,000 of equity conversion
notes of the Company which are redeemable by the Company only in the context of
an offering of additional shares of common stock, have no set maturity date and
have interest payments deferred until maturity.
Parent Company Liquidity. At year-end 1999, University Bancorp, Inc.
held cash and marketable equity securities of $16,067 (excluding Michigan BIDCO
common stock). This increased by $52,247 to $68,314 at June 30, 2000. During the
six months ended June 30, 2000 no dividends were paid from the Bank, as a result
of low profitability at the Bank. In an effort to maintain the Bank's Tier 1
capital to assets ratio above 7% and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during 2000 or 2001. Management intends that the cash and securities on
hand, other receivables, and cash from the sale of common stock to be sufficient
to cover the required principal reductions during 2000 on the parent company's
indebtedness owing to North Country Bank & Trust ("NCB&T"). The NCB&T loans
amounted to $628,000 and $694,000 at June 30, 2000 and at December 31, 1999,
59
<PAGE> 60
respectively. Current shareholders, including Stephen and Joseph Ranzini and
their affiliates, intend to invest at least $1,000,000 in the rights offering
covered by this prospectus.
60
<PAGE> 61
CAPITAL ADEQUACY TABLE - UNIVERSITY BANK
<TABLE>
<CAPTION>
JUNE 30, 2000
Balance Risk Weighted
0% RISK CATEGORY (000s) (000s)
<S> <C> <C>
Currency & Coin $ 289 $ 0
U.S. Treasury Strip 493 0
Federal Reserve Balance 26 0
-------- -------
TOTAL 808 -
20% RISK CATEGORY
Interest Bearing Balances 29 6
Fed Funds Sold 9 2
U.S. Government sponsored Agency Securities 2,252 450
Cash Items 398 80
FHLB Stock 848 170
Balances Due From Depository Institution 640 128
-------- -------
TOTAL 4,176 835
50% RISK CATEGORY
Municipal Revenue Obligation Securities 521 261
Qualifying 1st Liens on 1-4 Family Mortgage Loans 12,878 6,439
-------- -------
TOTAL 13,399 6,700
100% RISK CATEGORY
ALL OTHER ASSETS 26,540 26,540
Balance Sheet Items Excluded from Calculation:
10% of Mortgage Servicing Rights 67
Valuation Adjustment for AFS Securities (699) -
-------- --------
TOTAL ASSETS $ 44,291 $ 34,075
======== ========
TIER 1 CAPITAL
Common Stock 200
Surplus 4,432
Undivided Profits & Capital Reserves (1,644)
Minority Interest - Midwest Loan Services 215
Other Identifiable Intangible Assets (67)
--------
TOTAL TIER 1 CAPITAL $ 3,136
TIER 2 CAPITAL
Allowance For Loans & Lease Losses 590
Excess Loan Loss Reserve (164)
--------
TOTAL TIER 2 CAPITAL $ 426
--------
TOTAL TIER 1 & TIER 2 CAPITAL $ 3,562
========
TIER 1/TOTAL ASSETS 7.08%
TIER 1 & 2/TOTAL ASSETS 8.04%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 9.20%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 10.45%
</TABLE>
61
<PAGE> 62
Subsequent to June 30, 2000, University Bancorp sold its shares of
common stock in Cereus Technology Partners (Symbol CEUS) for a capital gain of
$20,625 for net proceeds of $58,125. We continue to hold 7,500 warrants to buy
Cereus common stock at $10 per share.
IMPACT OF INFLATION
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank utilizes a software risk model to determine its overall exposure
to changes in interest rates. At June 30, 2000, the model predicts that the
Bank's average 12 month GAP as a % of Earning Assets was $6,732,000 or -19.28%.
The model predicts that in a 400 basis point shift upward that the Bank would be
positively impacted, with a $177,000 increase in annual net interest margin, and
that the Bank would suffer a $184,000 decrease in annual net interest margin in
a 400 basis point shift down environment.
We perform a static gap analysis that has limited value as a simulation
because of competitive and other influences that are beyond our control and does
not take into account the historical variability of deposit balances based on
interest rate shifts. The table on the following page details the Bancorp's
interest sensitivity gap between interest-earning assets and interest-bearing
liabilities at June 30, 2000 using a static gap analysis. The table is based
upon various assumptions of management that may not necessarily reflect future
experience. As a result, certain assets and liabilities indicated in the table
as maturing or re-pricing within a stated period may, in fact, mature or
re-price in other periods or at different volumes. The one-year static gap
position at June 30, 2000 was estimated to be ($27,159,000) or -64.24%.
62
<PAGE> 63
STATIC GAP ANALYSIS
UNIVERSITY BANCORP - June 30, 2000
Amounts (in thousands) Maturing or Repricing in
<TABLE>
<CAPTION>
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 All
ASSETS or Less 1 Year Years Years Years Others Total
------ ------- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fed Funds $ 9 $ 0 $ 0 $ 0 $ 0 $ 0 $ 9
Loans, gross 4,251 4,172 10,019 4,116 9,731 - 32,289
Non-Accrual Loans - - - - 160 160
Securities - - - - 3,512 - 3,512
Other Assets - - - - - 4,950 4,950
Cash and Due from Banks - - - - - 1,356 1,356
--------------------------------------------------------------------------------------------
TOTAL ASSETS 4,260 4,172 10,019 4,116 13,243 6,466 42,276
--------------------------------------------------------------------------------------------
LIABILITIES
-----------
CD's $100,000 or more 4,609 3,842 1,384 716 - - 10,551
CD's over $100,000 3,357 1,832 981 105 - - 6,275
Money Market Accounts 12,322 - - - - - 12,322
NOW Accounts 3,101 - - - - - 3,101
Demand Deposits 2,976 - - - - - 2,976
Savings Deposits 455 - - - - - 455
Other Borrowings 2,957 140 224 - - 1,335 4,656
Other Liabilities - - - - - 559 559
Equity - - - - - 1,381 1,381
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES
& EQUITY 29,777 5,814 2,589 821 - 3,275 42,276
--------------------------------------------------------------------------------------------
GAP ($25,517) ($1,642) $7,430 $3,295 $13,243 $3,191 $0
============================================================================================
CUMULATIVE GAP ($25,517) ($27,159) ($19,729) ($16,434) ($3,191) $0
===============================================================================
GAP PERCENTAGE -60.36% -64.24% -46.67% -38.87% -7.55% 0.00%
===============================================================================
</TABLE>
63
<PAGE> 64
LEGAL PROCEEDINGS
In November 1999, the Bank sold its shares in Varsity Mortgage, LLC to
Paramount Bank of Farmington Hills, Michigan. Subsequent to the sale, Varsity
experienced management problems and a further drop in its business. Paramount
Bank also discovered some minor accounting errors of approximately $30,000, not
previously uncovered by an internal audit and a special external audit performed
shortly after the sale. Management of Paramount initiated a lawsuit against
University Bank alleging various theories of damages as a result of the sale of
Varsity to Paramount and seeking total damages of $750,000. Paramount purchased
Varsity for just $10. University Bank intends to vigorously defend itself,
denies Paramount's various allegations (other than the small accounting error
dispute), and believes that the suit will ultimately not have any material
financial impact on University Bank.
There are no other pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties are
subject, for which management believes we face potential loss or exposure which
will materially effect shareholders' equity or our business or financial
condition upon completion of this offering.
64
<PAGE> 65
PRINCIPAL SHAREHOLDERS
Set forth below is information with respect to number and percentage of
outstanding shares of University Bancorp beneficially owned by certain persons,
including those known to us to own beneficially more than 5% of University
Bancorp's outstanding common stock, the directors of University Bancorp
individually and the directors and officers of University Bancorp as a group.
The information in the table is as of August 1, 2000, except as otherwise
indicated.
<TABLE>
<CAPTION>
Name and Address Amount and
---------------- Nature of
Title of Beneficial Percent
Class Ownership (1) Notes Of Class
----- ------------- ----- --------
<S> <C> <C> <C> <C>
Dr. Joseph Lange Ranzini Common 975,393 (2)(3)(11) 48.10%
675 Cherry Avenue Stock
Waynesboro, VA 22980
Joseph L. Ranzini, Esq. Common 144,223 (4)(10) 7.11%
c/o University Bank Stock
959 Maiden Lane
Ann Arbor, MI 48105
Mildred Ranzini Common 45,000 (5)(9) 2.22%
c/o University Bank Stock
959 Maiden Lane
Ann Arbor, MI 48105
Prof. Paul Lange Ranzini Common 1,151,623 (2)(3)(11) 56.74%
1024 Pleasant View Road Stock
Middleton, WI 53562
Stephen Lange Ranzini Common 741,640 (3)(6) 36.57%
c/o University Bank Stock (10)(11)
959 Maiden Lane
Ann Arbor, MI 48105
Keith E. Brenner Common 29,582 (7)(9) 1.45%
135 Green Meadow Lane Stock
Boulder, CO 80302
Robert Goldthorpe Common 42,810 (9) 2.10%
2564 Helmer Street Stock
McMillan, MI 49853
Michael Talley Common 15,000 (9) 0.73%
55 Payson Ave. #4I Stock
New York, NY 10034
Ranzini Family Trust Common 480,000 (2) 23.67%
(dated 11/8/90) Stock
c/o University Bank
959 Maiden Lane
Ann Arbor, MI 48105
</TABLE>
65
<PAGE> 66
<TABLE>
<CAPTION>
Amount and
Nature of
Title of Beneficial Percent
Name and Address Class Ownership (1) Notes Of Class
---------------- ----- ------------- ----- --------
<S> <C> <C> <C> <C>
Ranzini Family Trust Common 290,958 (3) 14.35%
(dated 12/20/89) Stock
c/o University Bank
959 Maiden Lane
Ann Arbor, MI 48105
Ranzini Family Trusts Common 379,665 (11) 18.72%
(of 1996) Stock
c/o University Bank
959 Maiden Lane
Ann Arbor, MI 48105
All Current Officers and Directors, as a Common 1,483,254 (2)(3)(7) 71.56%
Group (Eight Persons) Stock (8)(9)(10)
(11)(12)
</TABLE>
(1) Unless otherwise indicated, the indicated person is believed to have
sole voting and investment power over shares indicated as beneficially
owned by this person.
(2) Includes 480,000 shares of common stock held by an irrevocable trust,
the primary beneficiary of which is Mr. Stephen Lange Ranzini. The
trustees of the trust are Dr. Joseph Lange Ranzini and Prof. Paul Lange
Ranzini.
(3) Includes 290,958 shares of common stock held by an irrevocable trust,
the primary beneficiaries of which are Mr. Joseph L. Ranzini's five
adult children, including Stephen Lange Ranzini, Dr. Joseph Lange
Ranzini and Prof. Paul Lange Ranzini. The trustees of the trust are Mr.
Stephen Lange Ranzini, Dr. Joseph Lange Ranzini and Prof. Paul Lange
Ranzini. Mr. Stephen Lange Ranzini and each of his siblings is a
primary beneficiary of one-fifth or 58,192 of the shares of common
stock held under the terms of the trust.
(4) Does not include the 480,000 shares of common stock referred to in note
2 above, the 199,308 shares of common stock referred to in note 3
above, or the 232,765 shares of common stock referred to in note 11
below, as to which Mr. Ranzini disclaims voting and investment power.
(5) Mrs. Ranzini disclaims beneficial ownership of shares of common stock
owned by her spouse, Joseph L. Ranzini.
(6) Includes 22,132 shares of common stock which represent Mr. Stephen
Lange Ranzini's current accrued allocation of shares of common stock
under the University Bancorp, Inc. ESOP. Does not include the shares
held in the trust referred to above in note 2 as to which Mr. Ranzini
is the primary beneficiary.
(7) Includes shares of common stock owned beneficially by Mr. Brenner's
retirement plan, and also includes 1,062 shares of common stock owned
by Mr. Brenner's minor children.
66
<PAGE> 67
(8) Does not include shares held by the University Bancorp, Inc. ESOP,
other than the accrued allocation of shares thereunder to Stephen Lange
Ranzini referred to in note 6 above.
(9) Currently exercisable options on 15,000 shares of common stock are held
by each of Mr. Brenner, Mr. Goldthorpe, Mrs. Ranzini and Mr. Talley.
The shares subject to their respective option are included in their
respective holdings and in the total shares held by all current
officers and directors as a group.
(10) Includes 34,500 shares of common stock held by Michigan BIDCO, Inc., as
to which each individual disclaims voting and investment power.
(11) Includes shares held by the thirteen Ranzini Family Trusts of 1996,
which collectively hold 379,665 shares of common stock. Stephen Lange
Ranzini and Prof. Paul Lange Ranzini as trustees disclaim beneficial
ownership of 379,665 shares of common stock each held by trusts for
which they are trustees, and which are included in the shares above.
Dr. Joseph Lange Ranzini as trustee disclaims beneficial ownership of
204,435 shares of common stock held by trusts for which he is trustee.
(12) 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 various Ranzini Family Trusts) and the shares included in
note 6, above, is 1,395,863. Does not include any shares to be issued
in connection with the retirement of the equity conversion notes or any
shares issued as a result of this rights offering.
67
<PAGE> 68
MANAGEMENT
Joseph L. Ranzini and Stephen Lange Ranzini are the executive officers
of our company. Officers of University Bancorp serve at the discretion of the
board of directors and generally are to be elected annually. Directors of
University Bancorp are elected annually by the shareholders.
The board of directors oversee the management of the business of our
firm. The board of directors formed an audit committee during the fiscal year
ended December 31, 1998 consisting of Prof. Paul Lange Ranzini, Robert
Goldthorpe and Michael Talley which met once during 1998 and once during 1999.
Paul Lange Ranzini left the audit committee in 2000 during which the committee
has met twice to date. The Compensation Committee of the board of directors
consists of three members of the board, presently Messrs. Stephen Lange Ranzini,
Joseph L. Ranzini and Michael Talley. The Compensation Committee met once in
each of 1998, 1999 and 2000 and all members of this committee attended this
meeting. The board had no nominating committee during the fiscal year ended
December 31, 1998. The board of directors held a total of 5 meetings during the
1998 fiscal year. Four directors attended each meeting, and four of the eight
directors missed just 1 of the 5 meetings as a result of conflicting travel
plans. The board of directors held 5 meetings in 1999 and one director missed
one meeting as a result of conflicting travel plans. The board of directors has
held 3 meetings in 2000 to date and two directors missed one meeting each due to
conflicting travel plans.
Biographical information concerning the directors and officers of
University Bancorp is set forth below.
Stephen Lange Ranzini, age 35, has been President, CEO and a director
of University Bancorp or its Predecessors since July 1988, and served as the
Treasurer of University Bancorp and its Predecessors from July 1988 to December
1995. Since May 1993, Mr. Ranzini has also served as the Treasurer and a
Director of Michigan BIDCO. Since December 1995, Mr. Ranzini has been Treasurer
and a Director of Northern Michigan Foundation, a non-profit community
development lending organization that shares common senior management with
BIDCO. Since March 1994 Mr. Ranzini has served as a director of University Bank
and has held various senior management positions with the bank, including that
of President of the Bank between October 1994 and November 1995 and again since
November 1997. Between December 1995 and October 1997 he served as the Bank's
Senior Vice President - Mortgage Banking, supervising the Bank's subsidiaries:
Arbor Street LLC, Midwest Loan Services, Inc., Varsity Funding, LLC., and
Varsity Mortgage, LLC. He is the son of Joseph L. and Mildred Ranzini and the
brother of Joseph Lange Ranzini and Paul Lange Ranzini. Since July 1991, Mr.
Ranzini has been a director of CityFed Financial Corp., a former savings and
loan holding company now based in Massachusetts. Since May 1997 he has been a
director of Municipal Bankers Corporation, a Toronto Stock Exchange listed
financial services company based in Toronto, Canada.
Joseph L. Ranzini, Esq., age 71, has been Chairman of the Board, a
director and Secretary of University Bancorp or of predecessor corporations
merged into University Bancorp (the "Predecessors") since July 1988. Mr. Ranzini
has been a Director of University Bank since July 1988 and served as Chairman of
the Board from March 1994 to January 1996 and Secretary since November 1997.
Since May 1993, Mr. Ranzini has served as the President and Chairman of the
Board of Michigan BIDCO, Inc. Since December 1995, Mr. Ranzini has been
President and Chairman of the Board of Northern Michigan Foundation.
68
<PAGE> 69
Keith Brenner, age 55, has served as a director since October 1985, and
also as the President and Treasurer of the Predecessors of our firm when it was
known as Fortune 44 Company and manufactured and sold fortune cookies, from
inception until December 31, 1989. Since the fourth quarter of 1988, Mr. Brenner
has been President and owner of Brenner & Associates, a strategic planning and
marketing consulting firm, located in Boulder, Colorado.
Robert Goldthorpe, age 63, has served as a director of University
Bancorp since April 1996. Mr. Goldthorpe also served as a Director of University
Bank from September 1992 to January 1996. For more than the past five years, Mr.
Goldthorpe has been President of Goldthorpe Enterprises, a diversified holding
company with operations in the central and eastern portion of the Upper
Peninsula of Michigan, with investments in hotels, restaurants, apartment
buildings, a hardware store, and the construction and contracting business.
Dr. Joseph Lange Ranzini, age 40, has served as a director of
University Bancorp since April 1996. Mr. Ranzini has a B.A. from Dartmouth
College and a medical degree from the University of Virginia. Mr. Ranzini has
been in a general surgery private practice since 1992 when he completed his
residency. He is the son of Joseph L. and Mildred Ranzini and the brother of
Stephen Lange Ranzini and Paul Lange Ranzini.
Mildred Lange Ranzini, age 68, has been a director of University
Bancorp or its Predecessors since July 1988, and has served as Assistant
Secretary since January 1990. Mrs. Ranzini holds a M. Div. from Princeton
Theological Seminary, a Masters Degree in Education from Columbia University and
a B.A. from Wellesley College. Mrs. Ranzini has not otherwise held an active
business position during the prior five years.
Prof. Paul Lange Ranzini, age 39, has served as a director of
University Bancorp since April 1996. He is a Musicology Editor at A-R Editions
and a Doctoral Candidate in Music History and Theory at the University of
Chicago. He has attended the University of Chicago since 1989, except in 1994
and 1995, when he earned a Fulbright Fellowship to Germany for Dissertation
Research. At the University of Chicago, he was also employed part-time as the
computer data center manager at the University's International House. Mr.
Ranzini has two Masters, an M.A. in Musicology and an M.M. in Organ and Church
Music from the University of Michigan and a B.A. in Philosophy from the College
of William and Mary. He is the son of Joseph L. and Mildred Ranzini and the
brother of Stephen Lange Ranzini and Joseph Lange Ranzini.
Michael Talley, age 49, has served as a director of University Bancorp
or its Predecessors since 1988. Since March 1990, Mr. Talley has served as an
Account Executive at Ladenburg, Thalmann & Co. Inc, a financial services firm in
New York, New York.
There is no family relationship between any current director or
executive officer of University Bancorp and any other current director or
executive officer of University Bancorp, except as indicated above.
DIRECTOR COMPENSATION
We have not paid any directors' fees and we do not intend to pay
directors' fees in the near future. Generally, in lieu of directors' fees
non-employee directors receive options to purchase stock upon becoming a member
of
69
<PAGE> 70
the board. Keith Brenner, Mildred Ranzini and Michael Talley received options to
buy 15,000 shares of common stock in 1993 and Robert Goldthorpe received them in
1995 when he joined the board.
EXECUTIVE COMPENSATION
We are required to disclose information for all persons who had total
annual salary and bonus in excess of $100,000. Compensation information is
provided for Mr. Stephen Lange Ranzini, the only executive officer who met such
criteria:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Restricted Underlying
Name and Principal Stock Options/
Position Year Salary Bonus Other awards SARs (#)
-------- ---- ------ ----- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Stephen Lange Ranzini, 1999 $ 105,365 $ 0 $6,750 $ 0 None
President & CEO (2)(3)
Stephen Lange Ranzini, 1998 $ 110,281 $ 0 $ 10,715 $ 0 None
President & CEO (1) (2)(4)
Stephen Lange Ranzini, 1997 $ 110,080 $ 0 $ 13,634 $ 0 None
President & CEO (1) (2)(5)
</TABLE>
(1) Salary in 1999, 1998, 1997 and 1996 includes $45,400, 45,500, and
$45,600 respectively, from Michigan BIDCO, Inc., for which Mr. Ranzini
served as Treasurer.
(2) Includes SEP IRA pension payment of $6,750 from Michigan BIDCO, Inc. in
1999, 1998 and 1997.
(3) At the end of our fiscal year ended December 31, 1999, 22,132 shares of
our common stock were allocated to Mr. Ranzini under the University
Bancorp ESOP. Mr. Ranzini's rights in all of all these shares are
vested. Valued at $3.00 per share, the last sale price of our common
stock on December 31, 1999, the aggregate value of the shares was
$66,396. Mr. Ranzini is entitled to an allocation for 1999, however,
the allocation has not yet been finalized.
(4) Allocation under the University Bancorp ESOP of 1,220 shares of our
common stock to Mr. Ranzini in June 1998.
(5) Allocation under the University Bancorp ESOP of 2,118 shares of our
common stock to Mr. Ranzini in August 1997.
No options to purchase shares of common stock were granted to Stephen
Lange Ranzini during 1999.
70
<PAGE> 71
Except as indicated in the above table Stephen Lange Ranzini did not
receive during the three fiscal years ended December 31, 1999 or held at
December 31, 1999, any stock options, SAR grants or Long Term Incentive Plan
Awards. The Company does not have a defined benefit or actuarial pension plan.
CERTAIN RELATED TRANSACTIONS
In May 1993, a Rural Business and Industrial Development Company now
called Michigan BIDCO, Inc. was established. In 1995 and 1996, University
Bancorp purchased a total of $197,000 principal amount of 9% convertible
debentures of BIDCO for $203,000, convertible into 131 shares of BIDCO's shares,
representing 4.97% of BIDCO's shares on a fully diluted basis. In order to fund
our working capital needs, during 1998 a total of $136,000 convertible
debentures of BIDCO were sold to various affiliates of Joseph L. Ranzini and
Stephen Lange Ranzini at the then current adjusted book value of BIDCO, for a
total of $157,436. During 1999 a total of $34,000 convertible debentures of
BIDCO were sold to various affiliates of Joseph L. Ranzini and Stephen Lange
Ranzini and employees of the BIDCO at the then current adjusted book value of
BIDCO, for a total of $42,337.
Joseph L. Ranzini is the President and Chairman of the Board of BIDCO
and Stephen Lange Ranzini is the Treasurer. Stephen Lange Ranzini received
$52,150 in salary, SEP IRA and board fee compensation from BIDCO in 1999. Joseph
L. Ranzini received $98,338 in salary, SEP IRA and board fee compensation from
BIDCO.
The BIDCO has, by general policy of its board of directors, a loan and
investment in one borrower limit of $500,000. From time to time, the BIDCO
receives loan and investment proposals from third parties requesting an
investment by the BIDCO in excess of this $500,000 limit. In this event, the
BIDCO has in certain instances formed single purpose limited liability companies
whose members, including Joseph and Stephen Ranzini, are directors, shareholders
and bondholders of the BIDCO to fund amounts over the $500,000 limit. The
outside investor groups invest on a pro rata, parri passu (equal) basis with the
BIDCO.
In 1995, the Bank, through a 98%-owned subsidiary, Arbor Street LLC
(Michigan), 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 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. In connection with the execution of the
Partnership Note, the Partnership required Joseph L. Ranzini and the Ranzini
Family Trust dated 12/20/89 to personally guarantee the Note, because the Bank
was prohibited from doing so by state banking regulations. In exchange for
arranging for the guaranty of the Note, Joseph L. Ranzini and Stephen Lange
Ranzini each received a 1% interest in Arbor Street LLC. At year-end 1998,
Stephen Lange Ranzini and Joseph L. Ranzini conveyed their 2% interest in Arbor
Street LLC to a subsidiary of the Bank for no consideration. During 1999, Arbor
Street LLC was dissolved and the partnership investment in the low income
housing tax credit limited partnership was conveyed to University Insurance &
Investment Services, another subsidiary of University Bank. In August 2000,
Joseph L. Ranzini paid on behalf of University Insurance & Investment Services
the annual installment of $141,142 on the promissory note held by the
Partnership and we continue to reflect this as a liability until we resolve this
matter.
71
<PAGE> 72
We maintain an investment securities account with Ladenburg Thalmann &
Co. Inc. Michael Talley, a director of University Bancorp, receives commissions
on the transactions in this account. We pay commissions at rates which are
comparable to those paid in its other investment securities accounts at other
brokerage firms.
Stephen Lange Ranzini, Prof. Paul Lange Ranzini and Dr. Joseph Lange
Ranzini are the sons of Joseph L. Ranzini and Mildred Ranzini.
SUPERVISION AND REGULATION
We are extensively regulated under federal law and state laws. Federal
and state laws and regulations generally applicable to financial institutions
and their holding companies regulate, among other things:
- the scope of business;
- investments;
- reserves against deposits;
- capital levels relative to operations;
- lending activities and practices;
- the nature and amount of collateral for loans;
- the establishment of branches;
- mergers, acquisitions and consolidations;
- dividends;
- internal controls
These laws and regulations are primarily intended to protect depositors
and the deposit insurance fund of the Federal Deposit Insurance Corporation, not
us or our shareholders. The following is a summary of certain statutes and
regulations affecting us. The following information is qualified in its entirety
by reference to the particular statutory and regulatory provisions.
Any change in applicable laws, regulations or regulatory policies of
various governmental regulatory authorities may have a material effect on our
business, operations and prospects. Those authorities include, but are not
limited to, the Board of Governors of the Federal Reserve System, the FDIC, the
Commissioner of the Michigan Financial Institutions Bureau, the Internal Revenue
Service, and state taxing authorities. We are unable to predict the nature or
extent of the effects that fiscal or monetary policies, economic controls or new
federal or state legislation may have on our future business and earnings.
72
<PAGE> 73
UNIVERSITY BANCORP, INC.
General. We are a bank holding company registered under the Federal
Bank Holding Company Act of 1956. The Federal Reserve Bank of Chicago is our
primary regulator. We are also subject to regulation, supervision and
examination by the Federal Reserve. We are required to file semi-annual reports
with the Federal Reserve and other information as required under the rules of
the Board of Governors of the Federal Reserve System. Additionally, the Federal
Reserve Board possesses enforcement powers over bank holding companies and their
non-bank subsidiaries to prevent or remedy actions that represent unsafe or
unsound practices or violations of applicable statutes and regulations. Among
these powers is the ability to proscribe the payment of dividends by banks and
bank holding companies.
Acquisitions. We are generally prohibited from engaging in a nonbanking
activity because we are a bank holding company. We cannot acquire more than 5%
of the shares of a company engaged in nonbanking activities. We can only acquire
direct or indirect control of more than 5% of the voting shares of a company
engaged in a banking related activity with the prior approval by the Federal
Reserve Board to acquire these shares or by regulatory exemption. The Federal
Reserve Board has identified specific banking related activities in which a bank
holding company may engage with notice to the Federal Reserve. The Federal
Reserve considers managerial, capital, and other financial factors, including
the impact on local competition of any proposal and past performance under the
Community Reinvestment Act in acting on acquisition or merger application.
Effective September 29, 1995, bank holding companies may acquire banks
located in any state in the United States without regard to geographic
restrictions or reciprocity requirements imposed by state law, but subject to
certain conditions, including limitations on the aggregate amount of deposits
that may be held by the acquiring company and all of its insured depository
institution affiliates.
Commitments. In connection with obtaining the consent of the Federal
Reserve to a 1989 merger transaction when we gained our listing on the NASDAQ
Small-Cap Market, we made certain commitments to the Federal Reserve. We agreed
that our Employee Stock Ownership Plan would not purchase more than 10% of the
common stock or 5% of any other class of our voting shares, without the prior
approval of the Federal Reserve. We also agreed not to incur additional debt or
to have the Bank pay dividends to us without the prior approval of the Federal
Reserve.
Capital Requirements. The Federal Reserve Board imposes certain capital
requirements on us under the Federal Bank Holding Company Act, including a
minimum leverage ratio and a minimum ratio of "qualifying" capital to
risk-weighted assets. These requirements are described below under "Capital
Regulations". The Federal Reserve uses capital adequacy guidelines in its
examination and regulation of bank holding companies. If capital falls below
minimum guidelines, a bank holding company may, among other things, be denied
approval to acquire or establish additional banks or non-bank businesses. The
"prompt corrective action" provisions of federal law and regulation authorizes
the Federal Reserve to restrict the payment of dividends to us from an insured
bank which fails to meet specified capital levels.
Source of Strength. In accordance with Federal Reserve Board policy, we
are expected to act as a source of financial strength to the Bank and to commit
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resources to support the Bank in circumstances in which we might not otherwise
do so. Under the Federal Bank Holding Company Act, the Federal Reserve may
require a bank holding company to terminate any activity or relinquish control
of a bank subsidiary if the agency determines that divestiture may aid the
depository institution's financial condition. In addition, if the Commissioner
deems our Bank's capital to be impaired, the Commissioner may require the Bank
to restore its capital by a special assessment upon us as University Bank's sole
shareholder. If we were to fail to pay any assessment, the directors of the Bank
would be required, under Michigan law, to sell the shares of the Bank's stock
owned by us to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
Recent Regulatory Developments. Various bills have been introduced in
the Congress that would allow bank holding companies to engage in a wider range
of nonbanking activities, including greater authority to engage in securities
and insurance activities. While the scope of permissible nonbanking activities
and the conditions under which the new powers could be exercised varies among
the bills, the expanded powers generally would be available to a bank holding
company only if the bank holding company and its bank subsidiaries remain
well-capitalized and well-managed. The bills also impose various restrictions on
transactions between the depository institution subsidiaries of bank holding
companies and their non-bank affiliates. These restrictions are intended to
protect the depository institutions from the risks of the new nonbanking
activities permitted to affiliates. At this time, we are unable to predict
whether any of the pending bills will be enacted and, therefore, are unable to
predict the impact this legislation may have on our operations.
UNIVERSITY BANK
Primary Regulators. University Bank is a Michigan banking corporation
and its deposit accounts are insured by the Bank Insurance Fund (the "BIF") of
the FDIC. As a Michigan-chartered commercial bank, University Bank is subject to
the examination, supervision, reporting and enforcement requirements of the
Commissioner, as the chartering authority for Michigan banks, and the FDIC, as
administrator of the BIF. These agencies and the federal and state laws
applicable to the Bank and its operations, extensively regulate various aspects
of the banking business including, among other things, permissible types and
amounts of loans, investments and other activities, capital adequacy, branching,
interest rates on loans and on deposits, the maintenance of non-interest bearing
reserves on deposit accounts, and the safety and soundness of banking practices.
As an insured bank, University Bank is also required to file quarterly reports
and other information as required with the FDIC.
All subsidiaries of University Bank including Midwest Loan Services,
University Insurance & Investment Services and University Insurance Center are
all also subject to all regulations applicable to University Bank itself,
including regular on-site examination by both the FIB and the FDIC.
Other Regulators. As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD
multifamily seller/servicer, University Bank's mortgage banking operation, and
its mortgage operation subsidiaries, including Midwest Loan Services and Varsity
Mortgage are subject to regulation and regular on-site examination by FHLMC,
FNMA and HUD. In addition, University Insurance Center and University Insurance
& Investment Services are also subject to examination by the State of Michigan's
Financial Institutions Bureau, Insurance Division.
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Other Regulations. University Bank and its subsidiaries are also
subject to various regulations including:
- the Community Reinvestment Act;
- federal Truth-in-Lending Act;
- the Home Mortgage Disclosure Act of 1975;
- the Equal Credit Opportunity Act;
- the Fair Credit Reporting Act of 1978;
- the Fair Debt Collection Act;
- the federal Right to Privacy Act;
- the Real Estate Settlement Procedures Act;
- the Bank Secrecy Act;
- the Electronic Funds Transfer Act;
- all Federal Reserve regulations;
- state usury laws; and
- certain federal laws concerning interest rates.
Also, University Bank may not engage in any activity not authorized by the
Michigan Banking Code unless it is authorized by the Commissioner of the FIB as
being closely related to banking.
Deposit Insurance. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation.
Banks classified as well-capitalized, as defined by the FDIC, and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized, as defined by the FDIC, and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to
establish assessment rates at levels which will maintain the Deposit Insurance
Fund at a mandated reserve ratio of not less than 1.25% of estimated insured
deposits. Accordingly, the FDIC established the schedule of BIF insurance
assessments for the first semi-annual assessment period of 1999, ranging from 0%
of deposits for institutions in the lowest risk category to .27% of deposits for
institutions in the highest risk category.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay
supervisory fees to the Commissioner to fund the operations of the Commissioner.
The amount of supervisory fees paid by a bank is based upon the bank's total
assets, as reported to the Commissioner.
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FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, University Bank, as a member of the BIF, is subject to assessments to
cover the payments on outstanding obligations of the Financing Corporation
(FICO). FICO was created in 1987 to finance the recapitalization of the Federal
Savings and Loan Insurance Corporation, the predecessor to the FDIC's Savings
Association Insurance Fund (SAIF) which insures the deposits of thrift
institutions. Until January 1, 2000, the FICO assessments made against BIF
members may not exceed 20% of the amount of FICO assessments made against SAIF
members. Currently, SAIF members pay FICO assessments at a rate equal to
approximately 0.063% of deposits while BIF members pay FICO assessments at a
rate equal to approximately 0.013% of deposits. Between January 1, 2000 and the
maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. It is estimated that FICO assessments during this period will be less
than 0.025% of deposits.
Capital Regulations. The FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, like
University Bank:
- a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total assets of 3% for the most highly-rated banks with minimum
requirements of 4% to 5% for all others;
- and a risk-based capital requirement consisting of a minimum ratio of
total capital to total risk-weighted assets of 8%, at least one-half of
which must be Tier 1 capital.
Tier 1 capital consists principally of shareholders' equity. These capital
requirements are minimum requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
institutions. For example, FDIC regulations provide that higher capital may be
required to take adequate account of, among other things, interest rate risk and
the risks posed by concentrations of credit, nontraditional activities or
securities trading activities.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring the submission of
a capital restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock,
including additional voting stock, or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
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receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
The extent of the regulators' powers depends on whether the institution
in question is "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized." An
institution is critically undercapitalized if it has a tangible equity to total
assets ratio that is equal to or less than 2%. An institution is well
capitalized if it has a total risk-based capital ratio of 10% or greater, core
risk-based capital of 6% or greater, and a leverage ratio of 5% or greater, and
the institution is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure. An institution is adequately capitalized
if it has a total risk-based capital ratio of not less than 8%, a core
risk-based capital of not less than 4%, and a leverage ratio of not less than
4%. Under these regulations, as of December 31, 1998 and June 30, 1999
University Bank was well capitalized.
At December 31, 1999 and June 30, 2000, the Bank's capital position was
as follows ($ amounts in thousands):
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Well
Capitalized Actual Minimum Actual
Ratio Ratio Amount Amount
----- ----- ------ ------
<S> <C> <C> <C> <C>
Total Capital/Risk-Weighted Assets 10% 13.7% $3,208 $4,400
Tier 1 Capital/Risk-Weighted Assets 6% 12.4% $1,925 $3,991
Tier 1 Capital/Average Assets 5% 9.4% $2,117 $3,991
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000
-------------
Well
Capitalized Actual Minimum Actual
Ratio Ratio Amount Amount
----- ----- ------ ------
<S> <C> <C> <C> <C>
Total Capital/Risk-Weighted Assets 10% 10.5% $3,408 $3,562
Tier 1 Capital/Risk-Weighted Assets 6% 9.2% $2,045 $3,136
Tier 1 Capital/Average Assets 5% 7.1% $2,215 $3,136
</TABLE>
These capital guidelines can affect us is several ways. Our capital
levels are currently adequate. However, rapid growth, poor loan portfolio
performance, or poor earnings performance, or a combination of these factors,
could change our capital position in a relatively short period of time, making
an additional capital infusion necessary. In general, if the FDIC's assessment
of a Bank's financial and managerial strength changes negatively, the Bank's
cost of FDIC insurance will rise in subsequent semi-annual periods. A financial
institution may also be ordered to restrict its growth, dispose of certain
assets, rescind agreements or contracts, or take other actions as determined by
the ordering agency to be appropriate.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts.
The Bank may not declare or pay a dividend unless the bank will have a surplus
amounting to at least 20% of its capital after the payment of the dividend. If
the Bank has a surplus less than the amount of its capital, it may not declare
or pay any dividend until an amount equal to at least 10% of net profits for the
preceding one-half year (in the case of quarterly or semi-annual dividends) or
full-year (in the case of annual dividends) has been transferred to surplus. The
Bank may not declare or pay any dividend until the cumulative dividends on
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preferred stock, should any preferred stock be issued and outstanding, have been
paid in full. The Bank's articles of incorporation do not authorize the issuance
of preferred stock and there are no current plans to seek this authorization.
Federal law generally prohibits the Bank from making any capital
distribution, including payment of a dividend, or paying any management fee to
us if the Bank would thereafter be undercapitalized. The FDIC may prevent the
Bank from paying dividends if the Bank is in default of payment of any
assessment due to the FDIC. In addition, the FDIC may prohibit the payment of
dividends by the Bank, if a payment is determined, by reason of the financial
condition of the Bank, to be an unsafe and unsound banking practice.
Insider Transactions. The Bank is subject to certain restrictions
imposed by the Federal Reserve Act including any extensions of credit to us,
investments in our stock or other securities, and the acceptance of our stock as
collateral for loans. Certain limitations and reporting requirements are also
placed on extensions of credit by the Bank to its directors and officers, to our
directors and officers, to our principal shareholders, and to "related
interests" of the directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
one of our directors or officers or one of our principal shareholders may obtain
credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have
adopted guidelines to promote the safety and soundness of federally insured
depository institutions. These guidelines establish standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality, and earnings. In general, the guidelines prescribe
the goals to be achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution fails
to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of the severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an acceptable compliance plan, or failure to adhere to a compliance plan
that has been accepted by the appropriate regulator, would constitute grounds
for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations,
FDIC-insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law.
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Consumer Protection Laws. The Bank's business includes making a variety
of types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, including:
- the Equal Credit Opportunity Act;
- the Fair Credit Reporting Act;
- the Truth in Lending Act;
- the Real Estate Settlement Procedures Act; and
- the Home Mortgage Disclosure Act.
The regulations flowing from these laws which prohibit discrimination, specify
disclosures to be made to borrowers regarding credit and settlement costs, and
regulate the mortgage loan servicing activities of the Bank, including the
maintenance and operation of escrow accounts and the transfer of mortgage loan
servicing. In receiving deposits, the Bank is subject to extensive regulation
under State and federal law and regulations, including:
- the Truth in Savings Act;
- the Expedited Funds Availability Act;
- the Bank Secrecy Act;
- the Electronic Funds Transfer Act; and
- the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Real Estate Lending Regulations. The federal regulators have adopted
uniform standards for appraisals of loans secured by real estate or made to
finance improvements to real estate. Banks are required to establish and
maintain written internal real estate lending policies consistent with safe and
sound banking practices and appropriate to the size of the institution and the
nature and scope of its operations. The regulations establish loan to value
ratio limitations on real estate loans, which generally are equal to or less
than the loan to value limitations established under University Bank's lending
policies.
Branching Authority. Michigan banks, including the Bank, have the
authority under Michigan law to establish branches anywhere in the State of
Michigan, subject to receipt of all required regulatory approvals, including the
approval of the Commissioner and the FDIC.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allows banks to establish interstate branch networks through acquisitions of
other banks, subject to certain conditions, including certain limitations on the
aggregate amount of deposits that may be held by the surviving bank and all of
its insured depository institution affiliates. The establishment of de novo
interstate branches or the acquisition of individual branches of a bank in
another state, rather than the acquisition of an out-of-state bank in its
entirety, is allowed only if specifically authorized by state law.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allowed individual states to "opt-out" of interstate branching authority by
enacting appropriate legislation prior to June 1, 1997. Michigan did not opt
out, and now permits both U.S. and non-U.S. banks to establish branch offices in
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Michigan. The Michigan Banking Code permits, in appropriate circumstances and
with the approval of the Commissioner:
- the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank, or
savings and loan association located in another state;
- the acquisition by a Michigan-chartered bank of all or substantially
all of the assets of an FDIC-insured bank, savings bank or savings and
loan association located in another state;
- the consolidation of one or more Michigan-chartered banks and
FDIC-insured banks, savings banks or savings and loan associations
located in other states having laws permitting this consolidation, with
the resulting organization chartered by Michigan;
- the establishment by a foreign bank, which has not previously
designated any other state as its home state under the International
Banking Act of 1978, of branches located in Michigan
- the establishment or acquisition of branches in Michigan by
FDIC-insured banks located in other states, the District of Columbia or
U.S. territories or protectorates having laws permitting
Michigan-chartered banks to establish branches in these jurisdictions.
Further, the Michigan Banking Code permits, upon written notice to the
Commissioner:
- the acquisition by a Michigan-chartered bank of one or more branches,
not comprising all or substantially all of the assets, of an
FDIC-insured bank, savings bank or savings and loan association located
in another state, the District of Columbia, or a U.S. territory or
protectorate;
- the establishment by Michigan-chartered banks of branches located in
other states, the District of Columbia, or U.S. territories or
protectorates; and
- the consolidation of one or more Michigan-chartered banks and
FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by
one of the other states.
MICHIGAN BIDCO
Michigan BIDCO is regulated and supervised by the Michigan Department
of Commerce, Financial Institutions Bureau, Consumer Affairs Division. The BIDCO
is examined annually by the Consumer Affairs Division, 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. Most importantly, the BIDCO
is partially exempt from the state's usury law. As a result, the BIDCO can lend
money to a firm and take equity participation in the firm it lends to, with the
result that the BIDCO's overall combined yield on the investment and loan can
exceed the state's usury limit. The amount of the BIDCO's return from the equity
participation or contingent payments is excluded from the calculation to
determine compliance with the state's usury limits. The BIDCO is also required
to permit an observer from the Michigan Economic Development Corporation, BIDCO
Program to attend its board of directors meetings, and is required to make
regular reports and filings of its activities with this state agency, as a
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result of the terms of the loan agreement between the Michigan Strategic Fund
and Michigan BIDCO.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 5,000,000 shares of common
stock and 500,000 shares of preferred stock. As of the date of this prospectus,
there were 2,027,801 shares of common stock outstanding.
COMMON STOCK
Common stock does not have cumulative voting or preemptive rights. Each
share of common stock is entitled to:
- one vote per share on all matters;
- subject to the rights of any outstanding preferred shares, dividends as
may be declared by the board of directors out of funds legally
available to pay dividends;
- upon liquidation of University Bancorp, share pro rata in its remaining
net assets.
Funds for the payment of dividends by us are expected to be obtained
primarily from dividends of University Bank. There can be no assurance that we
will have funds available for dividends, or that if they are available, that
dividends will be declared by our board of directors. As University Bank is not
expected to be profitable during its start up period, we do not expect to be in
a position to declare dividends in the near future.
Shares Available for Issuance. The availability for issuance of a
substantial number of shares of common stock and preferred stock at the
discretion of the board of directors will provide us with the flexibility to
take advantage of opportunities to issue stock in order to obtain capital, as
consideration for possible acquisitions and for other purposes including, for
example, the issuance of additional shares through stock splits and stock
dividends in appropriate circumstances. There are, at present, no plans,
understandings, agreements or arrangements concerning the issuance of additional
shares of our capital stock, except for:
- the shares of common stock reserved for issuance under our stock option
plans;
- shares issued annually to our employees under our Employee Stock
Ownership Plan;
Uncommitted authorized but unissued shares of common stock may be
issued from time to time to any person and for the consideration as the board of
directors of University Bancorp may determine. Holders of the then outstanding
shares of common stock may or may not be given the opportunity to vote on any
share issue made by the board of directors, depending upon the nature of any
transaction, applicable law and the judgment of our board of directors regarding
the submission of the issuance to our shareholders. As noted, our shareholders
will have no preemptive rights to subscribe to newly issued shares.
PREFERRED STOCK
Our preferred stock has a par value of $0.001 per share, and may be
issued from time to time without further stockholder approval in one or more
series
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with the dividend, voting, redemption, liquidation and any other provisions as
fixed by the board of directors. For example, the board of directors, without
stockholder approval, can issue preferred stock with voting and conversion
rights which could adversely affect the voting power of the common stock. As of
the date of this prospectus, there were no shares of preferred stock
outstanding.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have included in our certificate of incorporation a provision
eliminating the personal liability of directors and officers to University
Bancorp or its shareholders for damages for breach of duty. University Bank has
a similar provision in its bylaws. The principal effect of these provisions is
to eliminate potential monetary damage actions against any director for breach
of his or her duties as a director unless a judgment or other final adjudication
establishes that:
- his or her acts or omissions were in bad faith;
- his or her acts or omissions involved intentional misconduct or a
knowing violation of law, or
- he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled.
This provision does not affect the liability of any director for acts or
omissions occurring prior to the date of adoption of this provision.
In addition, the Delaware Business Corporation Law empowers our board
of directors to grant indemnification to any officer or director except where it
determines that:
- his or her acts were committed in bad faith;
- his or her acts were the result of active and deliberate dishonesty and
were material to the cause of action in dispute;
- he or she personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
The Delaware Business Corporation Law also empowers our board of directors to
advance to an officer or director the expenses of defending the claims upon
receipt of his or her written agreement to repay any amount he or she is later
determined not to be entitled to. Our bylaws have been amended to provide that
we will advance expenses of defense to our officers and directors substantially
to the full extent authorized by the Delaware Business Corporation Law.
University Bank has a similar bylaw.
The description of our indemnification provisions is subject to the
detailed provisions of the Delaware Business Corporation Law and the Michigan
Business Corporation Act.
FDIC regulations impose limitations on indemnification payments which
could restrict, in certain circumstances, payments by us or by University Bank
to directors or officers otherwise permitted under the Delaware Business
Corporation Law, the Michigan Business Corporation Act or the Michigan Banking
Code.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons under
the
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provisions discussed above or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
We do not maintain insurance to indemnify our directors and officers.
University Bank has purchased directors' and officers' liability insurance for
directors and officers of the Bank.
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PLAN OF DISTRIBUTION
SUMMARY
We are offering to holders of record of our common stock at the close
of business on October 1, 2000 (the "Record Date") the right to subscribe for
and purchase shares of common stock at $1 per share. If all rights are exercised
a total of 1,525,000 shares of common stock would be issued.
Each shareholder will receive one right for every share they owned on
October 1, 2000. With the rights, right holders are entitled to purchase 3
shares of common stock, upon surrendering 4 rights accompanied by payment of $1
per share purchased.
No fractional shares may be purchased but every 4 rights can be
exchanged for 3 shares upon payment of $1.00 per share. For example, a
shareholder who owned 702 shares on the record date would be able to purchase up
to 526 shares. Holders of less than 100 shares of common stock will also receive
a non-transferable Step-up Privilege entitling each shareholder, along with the
rights they receive, to purchase 100 shares of common stock for $1 per share. To
illustrate, for a shareholder holding a total of between 1 and 100 shares, that
shareholder will receive rights to purchase shares, as described in the
preceding paragraph, plus a Step-Up Privilege to purchase additional shares,
with the combination of the rights and the Step-Up Privilege totaling 100
shares. Thus, a shareholder owning 60 shares will receive 60 rights that would
enable the purchase of 45 shares at $1 per share and will receive a Step-Up
Privilege to purchase an additional 55 shares for $1 per share. A shareholder
owning 10 shares will receive 10 rights enabling the purchase of 7 shares for $1
per share and a Step-Up Privilege to purchase an additional 93 shares for $1 per
share.
To the extent our shareholders do not choose to purchase some or all of
the shares they are entitled to purchase, the shares will be offered to the
other shareholders who purchased shares in the initial phase of the offering. To
subscribe, you must complete and return to us the subscription agreement
together with payment for the shares.
Right holders must exercise their right to purchase by November 14,
2000. The subscription offer will expire at 5:00 P.M., New York time, on
Tuesday, November 14, 2000. All subscriptions must be received by us before 5:00
p.m., Michigan (EST) time, on November 14, 2000.
Although not required by Delaware or Michigan law or by our Articles of
Incorporation, our board of directors has authorized this offering in order to
permit existing shareholders with more than 100 shares to maintain their
approximate proportionate interest in the outstanding common stock and to allow
existing shareholders with less than 100 shares to purchase additional shares to
become shareholders of at least 100 shares, thus increasing their proportionate
interest in the outstanding common stock, to the disadvantage of shareholders
with more than 100 shares.
The offering price was established by the board of directors based on the
recent market price of the common stock, the impact of this offering on the
price of the common stock and the board's desire that the offering be attractive
to shareholders. The offering price is a 50% discount from the NASDAQ Small-Cap
Market closing price on September 27, 2000.
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PAYMENT OF INTEREST ON SUBSCRIPTIONS AND OVERSUBSCRIPTIONS
Interest will be paid on amounts tendered for Subscriptions and
Oversubscriptions from the time these amounts are received by the subscription
agent through November 13, 2000 at 6.50%. Interest will be paid to November 13,
2000.
RIGHTS TO BE ISSUED
Holders of common stock on the record date will receive one right with
respect to each share of common stock held.
Rights: Rights to subscribe are evidenced by transferable rights, each
right evidencing the total number of rights to which the holder is entitled.
Rights may be divided and transferred and rights may be combined at the office
of the subscription agent.
Expiration Date: The rights expire at 5:00 p.m., Michigan time, on
Tuesday, November 14, 2000 (the "Expiration Date"). To subscribe, the rights and
payment must be received by University Bank (the subscription agent), not later
than 5:00 p.m., Michigan time, on Tuesday, November 14, 2000. Right holders who
elect to send their rights to the subscription agent by mail should allow
adequate time for actual receipt prior to the times specified above. Rights
received by the subscription agent at the Office after 5:00 p.m., Michigan time,
on the Expiration Date will not be accepted and will be returned except under
the circumstances described under "Exercise and Payment".
BASIC AND STEP-UP PRIVILEGES
Basic Subscription Privilege: Rights entitle the holders to subscribe
at the Subscription Price for 75 shares of common stock for each 100 rights
indicated on the right. Fractional shares of common stock will not be issued.
Step-up Privilege: A right evidencing fewer than 100 rights will
entitle the holder who exercises a right, to subscribe, at the Subscription
Price, for 100 shares of common stock without furnishing any additional rights.
If, as a result of this Step-up Privilege, the common stock subscribed for by
all persons exceed the total number of common stock offered and we do not
exercise our Over-Allotment Option for all or any part of this excess, all or a
portion of the subscriptions pursuant to this Step-up Privilege for the excess
common stock may be cancelled on the basis as we shall determine in our sole
discretion. The Step-up Privilege is available to holders of our common stock on
the record date and is not transferable.
Exercise of Fractional Amounts: Any holder of a right evidencing a
total number of rights which is more than 100 will be entitled to subscribe for
an added 3 shares of common stock at the subscription price for every 4 Rights.
No right may be divided in a way as to permit the holder to subscribe
to a greater number of shares of common stock than the number to which the Right
originally entitled its holder, except that a bank, trust company, securities
dealer or broker which holds common stock on the record date for more than one
beneficial owner may, upon proper showing to the Subscription Agent, exchange
its right on the same basis as if the beneficial owners were record holders on
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the record date. We reserve the right to deny any division of rights which could
result in rights which are not exact multiples of 100 rights, where the result
in our opinion would be inconsistent with the intent of the Step-up Privilege.
OVERSUBSCRIPTION PRIVILEGE
A holder who exercises his right may oversubscribe at the Subscription
Price, subject to the allotment described below, for any number of additional
shares of common stock.
Common stock will be available for purchase pursuant to the
Oversubscription Privilege to the extent that the maximum of 1,525,000 shares of
common stock is not subscribed for through the exercise of rights, including the
exercise of the Step-up Privilege, by the Expiration Date. If the common stock
so available are not sufficient to satisfy all subscriptions pursuant to the
Oversubscription Privilege, the available common stock will be allocated pro
rata among the holders of rights who exercise the Oversubscription Privilege
based upon the proportion that the number of rights exercised by each holder of
rights who exercises his Oversubscription Privilege bears to the aggregate
number of rights exercised by all holders of rights who exercise their
Oversubscription Privilege.
EXERCISE AND PAYMENT
Shareholders with questions on subscribing should contact Stephen Lange
Ranzini, our information agent, at telephone number (734) 741-5858 extension
226, by fax at (734)741-5859 or by email at [email protected].
Rights to subscribe may be exercised by filling in and signing the
subscription form on the right and returning the right together with payment in
full for all common stock subscribed, to the subscription agent at:
University Bank
Attn: Stephen Lange Ranzini
959 Maiden Lane,
Ann Arbor, Michigan 48105
Payment in full of the Subscription Price must be received at the above
office of the subscription agent not later than 5:00 P.M., Michigan time, on
November 14, 2000. Except in cases of satisfactory late delivery of rights
provided for in the next paragraph, the rights being exercised must accompany
this payment. Checks or money orders should be made payable to UNIVERSITY BANK.
Please refer to the above paragraph regarding "Payment of Interest on
Subscriptions and Oversubscriptions".
If prior to the Expiration Date the subscription agent has received the
full Subscription Price, together with a written or telefaxed guarantee (use fax
number (734) 741-5859) from a bank, trust company or a member of the NYSE, other
national securities exchange or the National Association of Securities Dealers,
Inc. that states either:
- Rights with respect to the common stock subscribed for have been mailed
to the subscription agent, or;
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<PAGE> 87
- Rights will be delivered to the subscription agent prior to 3:00 P.M.,
Michigan time, on Monday, November 20, 2000;
The subscription will be accepted subject to receipt of the properly exercised
rights.
Common stock certificates will be dated and authenticated as of
November 20, 2000.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of any subscription (including any subscription pursuant
to the Step-up or Oversubscription Privilege) will be determined by us, in our
sole discretion, and our decisions shall be final and binding. We reserve the
absolute right to reject any subscription, including any subscription pursuant
to the Oversubscription Privilege, if the subscription is not in proper form or
if the acceptance could, in the opinion of our counsel, be deemed unlawful. We
also reserve the right to waive any defect with regard to any particular
subscription. Neither we nor the subscription agent shall be under any duty to
give notification of any defects or irregularities in subscriptions, nor shall
either incur any liability for failure to give any notification. In the event a
subscriber delivers to the subscription agent a right or rights for more rights
than required for the shares of common stock for which the subscriber seeks to
subscribe and does not instruct the subscription agent what to do with the
balance of the excess rights, no right shall be issued for the extra amount.
Purchase and Sale of Rights: Rights may be purchased or sold through
the usual investment channels, including banks and brokers. While rights may be
traded on the NASDAQ Small-Cap Market, there can be no assurance of the extent,
if any, that trading will take place or how long it will continue.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE SUBSCRIPTION OFFER
General: For federal income tax purposes, neither the distribution of
the rights to holders of our common stock nor the purchase of shares of common
stock by the exercise of the Basic Subscription Privilege, Step-up Privilege,
Fractional Step-up Privilege or Oversubscription Privilege will result in
taxable income to holders of the common stock or to us. If the rights received
by a holder of common stock are not exercised or sold but are allowed to expire,
no loss will be allowed to the holder and adjustment will be made to the tax
basis of the common stock held by the holder. If rights are purchased and are
allowed to expire, there will be a loss equal to the tax basis of the rights in
the hands of the purchaser. The loss will be a capital loss, long- or short
term, depending upon the holding period of the rights, if the rights are a
capital asset in the hands of the holder.
Tax Consequences of Exercise of the Rights: If the rights distributed
to a holder of common stock or held by a purchaser are exercised, the tax basis
of the common stock acquired will be equal to the Subscription Price plus the
tax basis in the rights, if any, calculated in the manner described below, and
the holding period for the common stock will commence on the date the rights are
exercised.
Tax Consequences of Sale of the Rights: If the rights distributed to a
holder of common stock or held by a purchaser are sold, gain or loss will be
realized on the sale, equal to the difference between the sale proceeds and the
seller's tax basis, if any, in the rights calculated upon the sale of rights
distributed to a holder of common stock calculated in the manner described
below. Any gain or loss realized upon the sale of rights
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<PAGE> 88
distributed to a holder of common stock will be capital gain or loss if the
common stock is a capital asset in the hands of the holder, and for purposes of
determining whether the capital gain is long- or short-term, the holding period
of the rights will be deemed to have commenced on the same date as the holding
period of the related common stock. Any gain or loss realized on the sale of
rights previously acquired by purchase will be a capital gain or loss, long- or
short-term depending on the holding period of the rights, if the rights are a
capital asset in the hands of the seller.
Basis in Rights: In the case of a holder of common stock who exercises
or sells the rights distributed to her or him by us, the determination of the
tax basis in the rights depends on their fair market value upon distribution. It
is anticipated that the fair market value of the rights distributed to each
holder of common stock will be less than 15% of the fair market value of the
common stock held by the holder. In that event, the tax basis of the rights will
be zero. Any holder may, however, elect to allocate to the rights part of the
tax basis of the related common stock in the same proportion which the fair
market value of the rights so received bears to the total of the fair market
fair of the common stock and the fair market value of the rights. Any election,
if made, must be filed with the federal income tax return for the taxable year
in which the rights are received. In the event that the fair market value of the
rights distributed to a holder of common stock is 15% or more of the fair market
value of the common stock held by the holder (which is likely), the rights will
have a tax basis calculated in the manner set forth above. For purposes of
allocating tax basis between the rights and the related common stock, the
respective fair market values are determined as of the date the rights are
distributed.
In the case of a purchase of rights who exercises or sells rights
acquired by him, the tax basis of the rights will be equal to the purchase price
paid therefor.
Holders of common stock are advised to consult their own tax advisors
as to the federal income tax consequences of the subscription offer to them and
as to the tax consequences of the subscription offer under applicable state,
local and foreign laws.
RESTRICTIONS ON CERTAIN HOLDERS OF COMMON STOCK
In order to comply with securities laws of the States of Florida and
Texas, this offering is not being made to persons residing in those states who
are not holders of record of common stock on the record date. In addition, any
transfer of rights to residents of these states who were not holders of record
of common stock on the record date will not entitle those residents to exercise
the rights provided by these rights.
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LEGAL PROCEEDINGS
Other than the following, we have no outstanding disputes or threatened
litigation which is of a material nature:
In November 1999 the Bank sold its shares in Varsity Mortgage, LLC to
Paramount Bank of Farmington Hills, Michigan. Subsequent to the sale, Varsity
experienced management problems and a further drop in its business. Paramount
Bank also discovered some minor accounting errors of approximately $30,000, not
previously uncovered by internal audit and a special external audit performed
shortly after the sale. Management of Paramount initiated a lawsuit against
University Bank alleging various theories of damages as a result of the sale of
Varsity to Paramount and seeking total damages of $750,000. Paramount purchased
Varsity for just $10. University Bank intends to vigorously defend itself,
denies Paramount's various allegations (other than the small accounting error
dispute), and believes that the suit will ultimately not have any material
financial impact on University Bank.
Management believes there is no other litigation threatened in which we
face potential loss or exposure which will materially affect shareholders'
equity or our business or financial condition upon completion of this offering.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Lewis & Munday, 1300 First National Building, 660 Woodward Avenue, Detroit,
Michigan 48226.
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EXPERTS
The consolidated financial statements of University Bancorp, Inc. as of
December 31, 1999 and 1998 and for the three years ended December 31, 1999
included in the 1999 Annual Report and incorporated by reference in the 1999
Annual Report on Form 10-K have been incorporated by reference in this
registration statement in reliance upon the report of Crowe, Chizek and Company
LLP, independent certified public accountants, and upon the authority of said
firm as experts in accounting and auditing.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We intend these
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and are including this statement for purposes of these safe harbor
provisions.
The outcome of the events described in these forward-looking statements
is subject to risks and actual results could differ materially. The sections
entitled "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" contain a discussion of some
of the factors that could contribute to those differences. The forward-looking
statements reflect management's expectation or belief containing future events
that involve risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words including "believes," "expects," "may," "will,"
"should," "seeks," "pro forma," or "anticipates," and similar expressions. Among
others, certain forward looking statements relate to the continued growth of
various aspects of our community banking, mortgage banking and money management
operations and the nature and adequacy of allowances for loan losses. We can
give no assurance that the expectations reflected in our forward looking
statements will prove to be correct. Various factors could cause results to
differ materially from management's expectations.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and as a result file reports and other information with the
Securities and Exchange Commission. Copies of these reports can be inspected at
and copied at the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 606661, and Room 1400, 75 Park Place, New York, New York
10007. Copies of these materials can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition we are required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
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We have filed a registration statement with the Commission in accordance
with the provisions of the Securities Act. This prospectus does not contain all
of the information set forth in the registration statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information pertaining to the shares of common stock
offered in this prospectus and for further information on us, reference is made
to the registration statement, including the exhibits to the registration
statement.
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<PAGE> 92
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We incorporate by reference in this prospectus the following documents
of University Bancorp (File No. 0-16023) previously filed with the Commission:
- University Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1999.
- University Bancorp's definitive proxy statement, dated July 6, 2000, in
conjunction with its Annual Meeting of Stockholders held on September
5, 2000.
- University Bancorp's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.
- University Bancorp's Current Report on Form 8-K dated September 12,
2000 regarding the change in external auditors.
- All documents filed by University Bancorp pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the
date of this prospectus and prior to the termination of the offering of
the common stock offered by this prospectus.
We have the right to make a statement in a document listed above which modifies
or supersedes a statement in this prospectus. If we do, then that statement in
this prospectus shall be deemed modified or superseded. Only the part of a
statement that modifies or supersedes this prospectus becomes a part of this
prospectus.
If you receive a copy of this prospectus and ask us, we will provide
you a copy of any and all of the documents referred to above, other than
exhibits to those documents. Requests for copies should be directed to:
Stephen Lange Ranzini, President
University Bancorp
959 Maiden Lane, Ann Arbor, Michigan 48105
Telephone Number: (734) 741-5858
Fax Number: (734) 741-5859
Email: [email protected]
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<PAGE> 93
You may rely on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of this prospectus nor sale of common
stock means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy these shares of the common stock in any
circumstances under which the offer or solicitation is unlawful.
================================================================================
1,525,000 SHARES
COMMON STOCK
TABLE OF CONTENTS PAGE PAR VALUE $.01
----------------- ----
Prospectus Summary................5
Risk Factors......................9
Use of Proceeds..................15
Dividend Policy..................15
Market for Common Stock..........16
Capitalization...................17
Dilution.........................18
Business.........................19
Recent Developments..............29
Management's Discussion
and Analysis...................30
Principal Shareholders...........65 [UNIVERSITY BANCORP LOGO]
Management.......................68
Certain Related Transactions.....71
Supervision and Regulation.......72
Description of Capital Stock.....81 UNIVERSITY BANCORP, INC.
Plan of Distribution.............84
Legal Proceedings................89
Legal Matters....................89
Experts..........................90 ------------------------
Forward-Looking Statements.......90
Available Information............90
Incorporation of Certain Prospectus
Documents by Reference.........92
------------------------
Dated September 28, 2000
================================================================================
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection
with the offering described in this registration statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 403
Blue Sky filing and counsel fees - California (est) 3,250
Blue Sky filing and counsel fees - Colorado (est) 75
Blue Sky filing and counsel fees - Florida (est) 1,000
Blue Sky filing and counsel fees - Illinois (est) 763
Blue Sky filing and counsel fees - Indiana (est) 763
Blue Sky filing and counsel fees - Iowa (est) 1,000
Blue Sky filing and counsel fees - Maryland (est) 1,500
Blue Sky filing and counsel fees - Michigan (est) 1,250
Blue Sky filing and counsel fees - Minnesota (est) 300
Blue Sky filing and counsel fees - Missouri (est) 813
Blue Sky filing and counsel fees - New York (est) 3,200
Blue Sky filing and counsel fees - New Jersey (est) 0
Blue Sky filing and counsel fees - Nevada (est) 3,200
Blue Sky filing and counsel fees - Oklahoma (est) 0
Blue Sky filing and counsel fees - Pennsylvania (est) 500
Blue Sky filing and counsel fees - Texas (est) 1,535
Blue Sky filing and counsel fees - Virginia (est) 700
Blue Sky filing and counsel fees - Washington DC (est) 0
Less: state exemptions (est) -10,752
Printing registration statement, prospectus, and
other documents 2,500
Fees and expenses of subscription agent 1,000
Legal Fees 10,000
Accounting Fees 25,000
Miscellaneous expenses (including estimated
interest payable in respect of early subscriptions) 2,000
-------
Total $50,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Delaware Business Corporation Law we may or shall, subject to
various exceptions and limitations, indemnify our directors or officers and may
purchase and maintain insurance therefor.
We have included in our certificate of incorporation pursuant to the
Delaware Business Corporation Law a provision eliminating the personal liability
of directors and officers to us or our shareholders for damages for breach of
duty. The principal effect of this provision in our certificate of incorporation
is to eliminate potential monetary damage actions against any director for
breach of his or her duties as a director unless a judgment or other final
adjudication establishes that his or her acts or omissions were in bad faith;
his or her acts or omissions involved intentional misconduct or a knowing
violation of law; or he or she personally gained in fact a financial profit or
other advantage to which he or she was not legally entitled. This
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<PAGE> 95
provision does not affect the liability of any director for acts or omissions
occurring prior to the date of adoption of this provision.
In addition, the Delaware Business Corporation Law empowers a
corporation to grant indemnification to any officer or director except where it
is adjudged that his or her acts were committed in bad faith; or were the result
of active and deliberate dishonesty and were material to the cause of action so
adjudicated; or that he or she personally gained in fact a financial profit or
other advantage to which he was not legally entitled. Also, the Delaware
Business Corporation Law empowers a corporation to advance to an officer or
director the expenses of defending any covered claim upon receipt of his or her
written agreement to repay any amount he or she is later determined not to be
entitled to. Our bylaws have been amended to provide that we advance expenses of
defense to our officers and directors substantially to the full extent
authorized by the Business Corporation Law.
The above statement is subject to the detailed provisions of Sections
of the Delaware Business Corporation Law. We do not maintain insurance to
indemnify directors and officers.
ITEM 16. EXHIBITS.
Exhibit 5 -- Opinion and consent of Lewis & Munday **
Exhibit 23 -- Consent of Crowe, Chizek and Company LLP
** To be filed by Amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to the information in the
registration statement; provided, however, that the undertakings
set forth in paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
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<PAGE> 96
2) That, for the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities being
offered, and the offering of these securities at the time shall be
deemed to be the initial bona fide offering.
3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of these securities at the time shall
be deemed to be the initial bona fide offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions discussed in Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission this indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against these liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by any director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
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<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSITY BANCORP, INC.
(Registrant)
By: /s/Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini, President
Date: September 28, 2000
Each person whose signature appears below hereby appoints Stephen Lange Ranzini,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to this Registration
Statement filed by University Bancorp, Inc., and to file the same with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof. In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated on September 28, 2000.
Pursuant to the requirements of the Securities Exchange Act of 1933,
this registration statement has been signed below by the following persons on
behalf of the registrant in the capacities and dates indicated.
Signature Title Date
--------- ----- ----
/s/Stephen Lange Ranzini Director, President, September 28, 2000
------------------------ Chief Executive Officer
Stephen Lange Ranzini
/s/Joseph L. Ranzini Director, Secretary, September 28, 2000
-------------------- Chairman
Joseph L. Ranzini
/s/Keith Brenner Director September 28, 2000
----------------
Keith E. Brenner
/s/Robert Goldthorpe Director September 28, 2000
--------------------
Robert Goldthorpe
/s/Dr. Joseph Lange Ranzini Director September 28, 2000
---------------------------
Dr. Joseph Lange Ranzini
/s/Mildred Lange Ranzini Director September 28, 2000
------------------------
Mildred Lange Ranzini
/s/Paul Lange Ranzini Director September 28, 2000
---------------------
Paul Lange Ranzini
/s/Michael Talley Director September 28, 2000
-----------------
Michael Talley
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<PAGE> 98
EXHIBIT INDEX
Exhibit No. Document Page
----------- -------- ----
5 Opinion and consent of Lewis & Munday ** 99
23 Consent of Crowe, Chizek and Company LLP 100
** To be filed by Amendment
98
