<PAGE> 1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
(State of incorporation) (IRS Employer Identification Number)
959 Maiden Lane, Ann Arbor, Michigan 48105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 741-5858
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value Outstanding at November 1, 2000:
2,027,801 shares
page 1 of 29 pages
Exhibit index on sequentially numbered page 28
<PAGE> 2
2
FORM 10-Q
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements PAGE
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Summary 9
Recent Events 10
Results of Operations 11
Liquidity and Capital Resources 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
PART II - Other Information
Item 1. Legal Proceedings 22
Item 5. Other Information:
Parent Company Condensed Financial
Information 23
Item 6. Exhibits & Reports on Form 8-K 27
Signatures 27
Exhibit Index 28
-------------------------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals that are, in the opinion of management, necessary for a
fair statement of the results for such periods. The results of operations in the
interim statements are not necessarily indicative of the results that may be
expected for the full year.
<PAGE> 3
3
Part I.- Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 (Unaudited) and December 31,1999
<TABLE>
<CAPTION>
UNAUDITED
September 30, December 31,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Cash and due from banks $ 1,951,428 $ 1,542,567
Short term investments 9,159 8,753
------------ ------------
Total cash and cash equivalents 1,960,587 1,551,320
Securities available for sale at market 2,641,203 2,626,415
Federal Home Loan Bank Stock 848,400 848,400
Equity investments of Michigan BIDCO 0 892,965
Loans held for sale 71,826 305,049
Loans 34,115,521 31,112,496
Allowance for loan losses (534,218) (532,585)
------------ ------------
Loans, net 33,581,303 30,579,911
Premises and equipment 1,332,814 1,405,210
Investment in Michigan BIDCO Inc. 1,277,383 0
Investment in Michigan Capital Fund LP I 581,904 656,904
Mortgage servicing rights 661,300 704,164
Other real estate owned 341,317 683,784
Accounts receivable 378,738 159,584
Accrued interest receivable 298,825 234,252
Prepaid expenses 106,137 84,036
Other assets 169,998 90,544
------------ ------------
TOTAL ASSETS $ 44,251,735 $ 40,822,538
============ ============
</TABLE>
-Continued-
<PAGE> 4
4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
September 30, 2000 (Unaudited) and December 31, 1999
<TABLE>
<CAPTION>
UNAUDITED
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------ ------------
<S> <C> <C>
Liabilities
Deposits:
Demand - non interest bearing $ 4,068,444 $ 2,126,157
Demand - interest bearing 14,385,940 13,840,469
Savings 378,239 294,487
Time 18,469,239 15,789,866
------------ ------------
Total Deposits 37,301,862 32,050,979
Mortgage escrow 5,293 3,058
Short term borrowings 3,344,294 3,113,860
Long term borrowings 1,526,116 2,627,116
Accounts payable 141,893 230,802
Accrued interest payable 281,702 240,106
Other liabilities 31,250 100,442
------------ ------------
Total Liabilities 42,632,410 38,366,363
Minority Interest 247,667 505,795
Stockholders' equity:
Preferred stock, $0.001 par value;
Authorized - 500,000 shares;
Issued - 0 shares in 2000 and 1999 -- --
Common stock, $0.01 par value;
Authorized - 5,000,000 shares;
Issued - 2,142,985 shares in 2000 and
2,127,985 shares in 1999 21,430 21,280
Treasury stock - 115,184 shares in 2000
and 1999 (340,530) (340,530)
Additional paid-in-capital 3,817,608 3,786,508
Retained deficit (1,474,587) (931,980)
Accumulated other comprehensive loss (652,263) (584,898)
------------ ------------
Total Stockholders' Equity 1,371,658 1,950,380
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 44,251,735 $ 40,822,538
============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
<PAGE> 5
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended Period Ended
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 784,816 $ 750,902 2,268,989 $ 2,134,236
Interest on securities:
U.S. Government agencies 36,303 37,114 108,399 93,926
Other securities 22,189 17,108 55,940 50,765
Interest on bank deposits 360 29 971 1,118
Interest on federal funds 150 1,268 404 53,293
----------- ----------- ----------- -----------
Total interest income 843,818 806,421 2,434,703 2,333,338
=========== =========== =========== ===========
Interest expense:
Interest on deposits:
Demand deposits 159,307 139,800 464,239 443,365
Savings deposits 1,777 1,269 4,655 3,494
Time certificates of deposit 285,200 257,331 738,143 825,308
Bank and other short term borrowings 61,188 24,758 162,271 67,271
Long Term Notes Payable 25,177 65,823 106,069 125,008
----------- ----------- ----------- -----------
Total interest expense 532,649 488,981 1,475,377 1,464,446
=========== =========== =========== ===========
Net interest income 311,169 317,440 959,326 868,892
Provision for loan losses 22,500 25,148 88,500 70,148
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 288,669 292,292 870,826 798,744
----------- ----------- ----------- -----------
Other income:
Loan origination and other fees 342,091 210,119 647,285 398,742
Loan servicing and subservicing fees 292,928 150,695 684,073 410,640
Gain on sale of mortgage loans 17,976 6,619 37,241 54,746
Merchant banking/ BIDCO income 0 175,133 234,739 427,572
Insurance and investment fee income 16,083 20,949 58,160 68,812
Deposit service charges and fees 14,729 15,257 47,516 45,202
Net security gains (losses) 20,625 0 24,126 (15,477)
Other 40,935 8,677 62,966 66,954
----------- ----------- ----------- -----------
Total other income 745,367 587,449 1,796,106 1,457,191
=========== =========== =========== ===========
</TABLE>
-Continued-
<PAGE> 6
6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Periods Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended Period Ended
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Other expenses:
Salaries and wages $ 384,269 $ 373,599 1,160,866 $ 1,051,893
Employee benefits 83,853 52,767 234,686 179,685
Occupancy, net 66,532 79,437 224,389 194,560
Data processing and equipment 86,998 70,004 248,308 189,102
Advertising 17,388 11,296 70,223 79,185
Supplies and postage 34,364 44,079 122,456 111,457
Servicing rights amortization 26,421 84,729 85,361 191,865
Mortgage banking expense 41,159 46,516 134,987 106,690
Legal and audit fees 49,009 204,543 299,640 339,236
Consulting fees 52,983 44,963 145,998 100,885
Memberships and training 21,602 23,936 50,321 65,426
Travel and entertainment 4,974 34,004 41,504 63,387
Insurance 21,963 15,200 76,892 48,097
Other 139,510 40,260 309,613 261,192
----------- ----------- ----------- -----------
Total other expenses 1,031,025 1,125,333 3,205,244 2,982,660
----------- ----------- ----------- -----------
Income (Loss) from continuing operations
before income taxes 3,011 (245,592) (538,312) (726,725)
----------- ----------- ----------- -----------
Income tax expense (benefit) (752) 13,910 4,294 2,410
----------- ----------- ----------- -----------
Net income (loss) from continuing operations 3,763 (259,502) (542,606) (729,135)
Discontinued operations:
Loss from Varsity Mortgage
and Varsity Funding (51,347) (160,074)
----------- ----------- ----------- -----------
Net income (loss) $ 3,763 $ (310,849) (542,606) $ (889,209)
=========== =========== =========== ===========
Comprehensive income (loss) $ (4,515) $ (540,361) (600,455) $(1,044,387)
=========== =========== =========== ===========
Basic and diluted income (loss) from
continuing operations per common share $ 0.00 $ (0.13) (0.27) $ (0.37)
=========== =========== =========== ===========
Basic and diluted income (loss) per
common share $ 0.00 $ (0.16) (0.27) $ (0.45)
=========== =========== =========== ===========
Weighted average shares outstanding 2,027,801 1,989,139 2,026,378 1,989,139
=========== =========== =========== ===========
</TABLE>
<PAGE> 7
7
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (542,607) $ (889,209)
Adjustments to reconcile net loss to net cash from Operating Activities:
Depreciation and amortization 344,257 403,591
Provision for loan loss 88,500 70,148
Net loss/(gain) on loan sales and securitization (37,241) (54,746)
Net (accretion)/amortization on securities (85,129) 65,200
Net loss/(gain) on sale of securities (24,126) 15,477
Change in:
Investment in Michigan BIDCO, Inc. 0 725,733
Purchased mortgage servicing rights 0 55,099
Other real estate 330,154 34,552
Other assets (456,139) (922,361)
Other liabilities 349,573 (2,578,502)
----------- -----------
Net cash from operating activities (32,758) (3,075,018)
=========== ===========
Cash flow from investing activities:
Purchase of securities available for sale (37,500) (980,412)
Proceeds from sales of securities 161,626 578,870
Proceeds from maturities and paydowns of securities available for sale 2,976 428,893
Net change in Michigan BIDCO equity investments 197,302 0
Capitalized mortgage servicing rights (42,497) 0
Loans granted net of repayments (3,337,995) (2,975,326)
Premises and equipment expenditures (162,223) (231,669)
----------- -----------
Net cash from investing activities (3,218,311) (3,179,644)
=========== ===========
Cash flow used in financing activities:
Change in deposits 3,504,417 (8,486,409)
Change in mortgage escrow accounts 2,235 (93,166)
Change in short term borrowings 230,434 4,790,674
Issuance of long term notes 60,000 1,661,000
Principal payments on long term notes (168,000) (132,000)
Issuance of common stock 31,250 0
Conversion of BIDCO bonds and buyout of minority interests 0 170,872
----------- -----------
Net cash from financing activities 3,660,336 (2,089,029)
=========== ===========
Net change in cash and cash equivalents 409,267 (8,343,691)
Cash and cash equivalents:
Beginning of period 1,551,320 9,246,015
----------- -----------
End of period $ 1,960,587 $ 902,324
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,433,781 $ 1,483,098
Supplemental disclosure of non-cash transactions:
BIDCO conversion of bonds to common stock $ 26,117
De-consolidation of Michigan BIDCO, Inc.:
Cash (deposits at University Bank) $(1,746,466)
Equity Investments of Michigan BIDCO, Inc. (595,663)
Loans (518,567)
Premises & Equipment (50,723)
Other Real Estate (12,313)
Other Assets (70,857)
Long Term Borrowings 993,000
Accrued Interest Payable 37,238
Other Liabilities 369,765
Minority Interest 317,203
Investment in Michigan BIDCO,Inc 1,277,383
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
<PAGE> 8
8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See note 1 of Notes to Financial Statements incorporated by reference
in the Company's 1999 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's 1999 Annual Report on Form 10-K.
Effective May 31, 2000, Michigan BIDCO, Inc. (`the BIDCO') converted
all outstanding bonds into common stock thus diluting the Company's ownership of
the BIDCO. This transaction required the removal of the BIDCO from the
consolidated results of the Company. Income has been consolidated through May
31, 2000, however assets and liabilities of the BIDCO, other than the remaining
investment in the shares of the BIDCO itself, have been removed as of May 31,
2000.
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 2,027,801 and
1,989,139 for the three months ended September 30, 2000 and 1999, respectively;
2,026,378 and 1,989,139 shares for the nine months ended September 30, 2000 and
1999, respectively. Stock options are considered not dilutive for the 2000
period and, therefore, are not included in earnings per share calculations.
(2) Available-for-sale Securities
The Bank's available-for-sale securities portfolio at September 30,
2000 had a net unrealized loss of approximately $652,000 as compared with a net
unrealized loss of approximately $639,000 at June 30, 2000 and $585,000 at
December 31, 1999.
Securities available for sale at September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 500 $ 0 $ (79) $ 421
U.S. agency note 491 0 (15) 476
U.S. agency mortgage-backed 1,772 0 (516) 1,256
Municipal bonds 530 0 (42) 488
------ ------ ------ ------
Total securities
available-for-sale $3,293 $ 0 $ (652) $2,641
====== ====== ====== ======
</TABLE>
<PAGE> 9
9
Securities available for sale at June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 493 $ 0 $ (86) $ 407
U.S. agency note 491 0 (22) 469
U.S. agency mortgage-backed 1,761 0 (521) 1,240
Municipal bonds 521 0 (40) 481
Other equity securities 37 30 0 67
------ ------ ------ ------
Total securities
available-for-sale $3,303 $ 30 $ (669) $2,664
====== ====== ====== ======
</TABLE>
Securities available-for-sale at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 480 $ 0 $ (138) $ 342
U.S. agency note 490 0 (29) 461
U.S. agency mortgage-backed 1,738 0 (368) 1,370
Municipal bonds 503 0 (50) 453
------ ------ ------ ------
Total securities
available-for-sale $3,211 $ 0 $ (585) $2,626
====== ====== ====== ======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward looking statements which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
merchant banking, mortgage banking and investment activities, and the nature and
adequacy of allowances for loan losses. The Company can give no assurance that
the expectations reflected in forward looking statements will prove correct.
Various factors could cause results to differ materially from the Company's
expectations. Among these factors are those referred to in the introduction to
the Company's Management Discussion and Analysis of Financial Condition and
Results of Operations which appears at Item 7. of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
SUMMARY
For the nine months ended September 30, 2000, a net loss of $542,606
was realized versus a net loss of $889,209 in the same period in 1999. Net loss
from continuing operations decreased to $542,606 in the 2000 from $729,135 in
the 1999 period. Net interest income from continuing operations increased to
$870,826 in the 2000 period from $798,744 in the 1999 period, and other income
from continuing operations increased to $1,796,106 in the 2000 period from
$1,457,191 in the 1999 period. Operating expenses from continuing operations
increased to $3,205,244 in the 2000 period from $2,982,660 in the 1999 period.
<PAGE> 10
10
Basic and diluted net loss per share in the nine months ended September 30, 2000
was ($0.27), compared to a net loss of ($0.45) for the nine months ended
September 30, 1999 (and a loss of ($0.37) from continuing operations in the 1999
period). The decreased loss in 2000 versus 1999 was due to improved results at
Midwest Loan Services and Michigan BIDCO that offset the decrease in income from
the results of University Bank. Discontinued operations at Varsity Mortgage were
unprofitable during the 1999 period.
For the three months ended September 30, 2000, net income of $3,763 was
realized versus a net loss of $310,849 in the same period in 1999. Net income
from continuing operations in the 2000 period was $3,763 versus net loss from
continuing operations in the 1999 period of $259,502. Net interest income from
continuing operations decreased to $311,169 in the 2000 period from $317,440 in
the 1999 period, and other income from continuing operations was $745,367 in the
2000 period versus $587,449 in the 1999 period. Operating expenses from
continuing operations decreased to $1,031,025 in the 2000 period from $1,125,333
in the 1999 period. Basic and diluted net income per share in the three months
ended September 30, 2000 was $0.00, compared to a net loss of ($0.16) for the
three months ended September 30, 1999 (and a loss of ($0.13) from continuing
operations in the 1999 period).
The following table summarizes the net income (loss) of each profit
center of the Company for the nine months ended September 30, 2000 and 1999 (in
thousands):
Nine months ended September 30, 2000 Net Income (Loss) Summary:
<TABLE>
<CAPTION>
<S> <C>
Community Banking $ (819)
Midwest Loan Services 273
Merchant Banking (Michigan BIDCO) 114
Corporate Office (111)
-------
Net Loss $ (543)
=======
</TABLE>
Nine months ended September 30, 1999 Net Income (Loss) Summary:
<TABLE>
<CAPTION>
<S> <C>
Community Banking $ (774)
Midwest Loan Services 5
Merchant Banking (Michigan BIDCO) 130
Corporate Office (180)
-------
Loss from continuing operations (729)
Loss from discontinued
Operations (Varsity Mortgage
and Varsity Funding) (160)
-------
Net Loss $ (889)
=======
</TABLE>
RECENT EVENTS
University Bank had unaudited net income in the month of October 2000
of $38,295. The Company acquired Midwest Loan Services under an agreement dated
November 1, 1995. Under the terms of the Agreement, which is exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995,
the Company is to pay an earn-out in an amount equal to 124% of the amount of
Midwest Loan Services' pre-tax income in excess of $375,000 in any calendar year
until the year ending December 31, 2000. No further payments after December 31,
<PAGE> 11
11
2000 are required and the total cumulative payments cannot exceed $310,000.
Midwest Loan Services' preliminary unaudited pre-tax profit through October 31,
2000 was $495,459, including $161,387 in pre-tax income just in the month of
October 2000. A substantial earn-out may be required to be paid if this trend
continues. If Midwest has an additional $129,541 in pre-tax profit in the final
two months of 2000, an earn-out of the maximum $310,000 could be due and owing
by the Company. Such payments would be due 60 days after the completion of the
Company's audited financial statements next year.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income from continuing operations decreased to $311,169
for the three months ended September 30, 2000 from $317,440 for the three months
ended September 30, 1999. Net interest income fell primarily because of a lower
interest rate spread. The yield on interest earning assets increased from 8.97%
in the 1999 period to 9.19% in the 2000 period. The cost of interest bearing
liabilities increased from 5.26% in the 1999 period to 5.72% in the 2000 period.
Net interest income as a percentage of total average earning assets decreased to
3.39% from 3.53%.
Net interest income from continuing operations increased to $959,326
for the nine months ended September 30, 2000 from $868,892 for the nine months
ended September 30, 1999. Net interest income rose primarily because of a higher
interest rate spread. The yield on interest earning assets increased from 8.66%
in the 1999 period to 9.08% in the 2000 period. The cost of interest bearing
liabilities increased from 5.12% for the 1999 period to 5.34% for the September
30, 2000. Net interest income as a percentage of total average earning assets
increased from 3.22% to 3.58%.
Interest income
Interest income increased to $843,818 in the quarter ended September
30, 2000 from $806,421 in the quarter ended September 30, 1999. The average
volume of interest earning assets increased to $36,837,789 in the 2000 period
from $36,066,556 in the 1999 period, an increase of 2.1%. The increased volume
of earning assets was due to an increase in portfolio loans and investment
securities. The overall yield on the loan portfolio increased to 9.45% from
9.23%.
The average volume of investment securities in the three months ended
September 30, 2000 increased 4.7% over the same period in 1999. The yield on the
securities portfolio increased from 6.54% in the three month period ended
September 30, 1999 to 6.74% in the 2000 period.
Interest income increased to $2,434,703 in the nine months ended
September 30, 2000 from $2,333,338 in the nine months ended September 30, 1999.
The average volume of interest earning assets decreased to $35,848,754 in the
2000 period from $36,162,110 in the 1999 period, a decrease of 0.9%. The overall
yield on the loan portfolio increased to 6.32% from 5.88%.
The average volume of investment securities in the nine months ended
September 30, 2000 increased 5.1% over the same period in 1999. The yield on the
securities portfolio increased from 5.88% in the nine month period ended
September 30, 1999 to 6.32% in the 2000 period.
<PAGE> 12
12
UNIVERSITY BANCORP
Net Interest Income Table
<TABLE>
<CAPTION>
Three Months Ended September 30, Three Months Ended September 30,
---------------------------------------- ---------------------------------------
2000 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 $ 13,401,989 $ 328,347 9.83% $ 12,793,883 $ 315,586 9.89%
Real Estate Loans (2) 15,170,382 340,402 9.00% 15,567,337 339,726 8.75%
Installment Loans 4,728,843 116,067 9.84% 4,271,867 95,590 8.98%
============ ============ ============ ============
Total Loans 33,301,214 784,816 9.45% 32,633,087 750,902 9.23%
Investment Securities (3) 3,479,129 58,492 6.74% 3,322,992 54,221 6.54%
Federal Funds & Bank Deposits 57,446 510 3.56% 110,477 1,298 4.71%
============ ============ ============ ============
Total Interest Bearing Assets $ 36,837,789 $ 843,818 9.19% $ 36,066,556 $ 806,421 8.97%
Interest Bearing Liabilities:
Deposit Accounts:
Demand $ 2,794,612 $ 19,144 2.75% $ 3,135,899 $ 25,094 3.21%
Savings 353,503 1,777 2.02% 251,650 1,269 2.02%
Time 17,703,268 285,199 6.46% 18,753,823 257,331 5.50%
Money Market Accts 11,837,473 140,164 4.75% 11,022,404 114,706 4.17%
Short-term Borrowings 3,649,753 61,188 6.72% 1,489,618 24,758 6.67%
Long-term Borrowings (4) 1,036,500 25,177 9.74% 2,621,249 65,823 10.07%
============ ============ ============ ============
Total Interest Bearing
Liabilities $ 37,375,109 $ 532,649 5.72% $ 37,274,643 $ 488,981 5.26%
============ ============ ============ ============
Net Earning Assets, net interest
income, and interest rate spread $ (537,320) $ 311,169 3.47% $ (1,208,087) $ 317,440 3.71%
Net yield on interest-earning assets 3.39% 3.53%
</TABLE>
(1) Yield is annualized.
(2) The amounts for 1999 were adjusted to eliminate loans and income from
discontinued operations (Varsity Mortgage & Varsity Funding)
(3) Actual yields; not adjusted to take into account tax-equivalent yields
resulting from tax-free municipal income and includes bank deposits.
(4) The convertible bonds at Michigan BIDCO were converted on May 31,2000,
resulting in the de-consolidation of BIDCO related interest earning assets
and interest bearing liabilities.
<PAGE> 13
13
UNIVERSITY BANCORP
Net Interest Income Table
<TABLE>
<CAPTION>
Nine Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- -----------------------------------------
2000 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 $ 13,251,665 $ 973,700 9.82% $ 11,779,974 $ 873,362 9.95%
Real Estate Loans (2) 14,443,749 948,380 8.78% 15,151,624 965,707 8.55%
Installment Loans 4,629,632 346,909 10.02% 4,363,153 295,168 9.08%
============ ============ ============ ============
Total Loans 32,325,046 2,268,989 9.38% 31,294,751 2,134,237 9.15%
Investment Securities (3) 3,474,009 164,339 6.32% 3,303,925 144,690 5.88%
Federal Funds & Bank Deposits 49,699 1,375 3.70% 1,563,434 54,411 4.67%
============ ============ ============ ============
Total Interest Bearing Assets $ 35,848,754 $ 2,434,703 9.08% $ 36,162,110 $ 2,333,338 8.66%
Interest Bearing Liabilities:
Deposit Accounts:
Demand $ 2,899,751 $ 60,627 2.80% $ 3,216,181 $ 75,760 3.16%
Savings 310,326 4,655 2.01% 214,069 3,494 2.19%
Time 15,958,714 738,143 6.18% 19,639,292 825,308 5.64%
Money Market Accts 12,644,009 403,612 4.27% 11,893,053 367,605 4.15%
Short-term Borrowings 3,472,609 162,271 6.25% 1,628,202 67,271 5.54%
Long-term Borrowings (4) 1,655,089 106,069 8.57% 1,790,347 125,008 9.37%
============ ============ ============ ============
Total Interest Bearing
Liabilities $ 36,940,498 $ 1,475,377 5.34% $ 38,381,144 $ 1,464,446 5.12%
============ ============ ============ ============
Net Earning Assets, net interest
income, and interest rate spread $ (1,091,744) $ 959,326 3.74% $ (2,219,034) $ 868,892 3.54%
Net yield on interest-earning assets 3.58% 3.22%
</TABLE>
(1) Yield is annualized.
(2) The amounts for 1999 were adjusted to eliminate loans and income from
discontinued operations (Varsity Mortgage & Varsity Funding)
(3) Actual yields ; not adjusted to take into account tax-equivalent yields
resulting from tax-free municipal income and includes bank deposits.
(4) The convertible bonds at Michigan BIDCO were converted on May 31,2000,
resulting in the de-consolidation of BIDCO related interest earning assets
and interest bearing liabilities.
<PAGE> 14
14
Interest Expense
Interest expense increased to $532,649 in the three months ended
September 30, 2000 from $488,981 in the 1999 period. The increase was due to a
general increase in short term interest rates over the past year. The cost of
funds increased to 5.72% in the 2000 period from 5.26% in the 1999 period. The
average volume of interest bearing liabilities increased 0.3% in the 2000 period
versus the 1999 period.
Interest expense increased to $1,475,377 in the nine months ended
September 30, 2000 from $1,464,446 in the 1999 period. The increase was due to
an increase in rate that more than offset a decrease in interest bearing
liabilities as a result of the general increase in short term interest rates
over the past year. The cost of funds increased to 5.34% in the 2000 period from
5.12% in the 1999 period. The average volume of interest bearing liabilities
decreased 3.8% in the 2000 period versus the 1999 period.
The proceeding tables on pages 12 and 13 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 nine months ended September 30, 2000 and 1999.
Allowance for Loan Losses
The provision for loan loss was $22,500 during the third and first
quarters of 2000. The provision increased to $65,000 during the second quarter
of 2000 as a result of the deterioration of one commercial loan subsequently
charged off in the third quarter of 2000, and management's assessment of overall
loan quality. The actual loan losses were $144,036 in the nine month period
ended September 30, 2000 versus $55,500 in the nine month period ended September
30, 1999.
<TABLE>
<CAPTION>
Nine Months Ended: September 30, 2000 September 30, 1999
----------------- ------------------ ------------------
<S> <C> <C>
Provision for loan losses $ 88,500 $ 70,148
Loan charge-offs (144,036) (55,500)
Recoveries 57,169 34,998
--------- ---------
Net increase in allowance $ 1,633 $ 49,646
========= =========
<CAPTION>
Three Months Ended: September 30, 2000 September 30, 1999
------------------ ------------------ ------------------
<S> <C> <C>
Provision for loan losses $ 22,500 $ 25,148
Loan charge-offs (87,500) (26,596)
Recoveries 9,368 9,984
-------- --------
Net increase in allowance $(55,632) $ 8,536
======== ========
<CAPTION>
As of: As of: As of:
----- ----- -----
September 30, June 30, December 31,
------------- -------- ------------
2000 2000 1999
---- ---- ----
<S> <C> <C> <C>
Total loans (1) $ 34,115,520 $ 32,190,277 $ 31,112,496
Allowance for loan losses $ 534,218 $ 589,850 $ 532,585
Allowance/Loans % (1) 1.57% 1.83% 1.71%
</TABLE>
(1) Excludes loans held for sale which are valued at fair market value.
<PAGE> 15
15
The schedule below summarizes the Company's non-performing loans for the
periods indicated (1):
<TABLE>
<CAPTION>
At At At
September 30, June 30, December 31,
------------- -------- ------------
2000 2000 1999
---- ---- ----
<S> <C> <C> <C>
Past due 90 days and over and still accruing (1):
Real estate $ 198,666 $ 10,426 $ 93,883
Installment 0 1,114 0
Commercial 36,581 260,230 123,688
---------- ---------- ----------
Subtotal 235,247 271,770 217,571
Non-accrual loans (1):
Real estate 72,375 72,375 144,739
Installment 272 0 0
Commercial 0 87,500 0
---------- ---------- ----------
Subtotal 72,647 159,875 144,739
Other real estate owned 341,317 519,015 683,784
---------- ---------- ----------
Total non-performing $ 649,211 $ 950,660 $1,046,094
========== ========== ==========
Ratio of non-performing to total loans (1) 1.90% 2.95% 3.36%
Ratio of loans past due over 90 days and 57.6% 73.2% 68.0%
non-accrual loans to loan loss reserve
</TABLE>
(1) Excludes loans held for sale which are valued at fair market value.
Other real estate owned at September 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 September 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, the problems of local loan customers currently facing some
difficulties, and could decrease residential home prices. A general nationwide
business expansion could conversely tend to diminish the severity of any such
difficulties.
<PAGE> 16
16
Non-Interest Income
Total non-interest income increased to $745,367 for the three months
ended September 30, 2000 from $587,449 for the three months ended September 30,
1999. The increase was principally a result of an increase in the loan
origination and loan subservicing fee income at Midwest Loan Services as a
result on an increase in mortgages subserviced by Midwest.
Total non-interest income increased to $1,796,106 for the nine months
ended September 30, 2000 from $1,457,191 for the nine months ended September 30,
1999. The increase was principally a result of increases in merchant baking
income from Michigan BIDCO and 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 September 30, 2000, the
Company realized a $20,625 gain on the sale of a common stock investment. Gross
proceeds from this sale were $58,125. 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. During the nine months ended September
30, 1999, a gain of $625 was realized on the sale of $504,098 in securities from
the Bank's available-for-sale securities portfolio. There were no losses on
sales of securities from the Bank's available-for-sale securities portfolio.
During the first quarter of 1999, the Company realized a $23,009 loss on the
sale of a common stock investment to raise working capital. Gross proceeds from
this sale were $32,049. During the second quarter of 1999, the Company realized
a $6,906 gain on the sale of a portion of the Company's investment in Michigan
BIDCO senior convertible bonds. Gross proceeds from this sale were $43,461. The
Company made no securities transactions during the third quarter of 1999.
Mortgage Banking. Mortgage banking income (including loan origination,
gain on sale of mortgage loans, servicing and subservicing fee income) increased
to $652,995 in the three months ended September 30, 2000 from $367,433 in the
three months ended September 30, 1999 and increased to $1,368,599 in the nine
months ended September 30, 2000 from $864,128 in the nine months ended September
30, 1999. Increased loan origination and subservicing activity at Midwest Loan
Services was responsible for the increase.
During the third quarter of 2000, Midwest Loan Services increased its
mortgage subservicing contracts by 50% (from $1,100 million to $1,700 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 10% of the monthly volume of this firm's subservicing
business. Also during the third quarter of 2000, Midwest was informed that it
would receive up to $10 billion in mortgage subservicing from the mortgage
subsidiary of one of the world's largest banks over the next twelve months.
There is of course, no assurance that this business will materialize or in the
amount or timeframe currently contemplated.
At September 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
<PAGE> 17
17
servicing rights at September 30, 2000 was $661,300. 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.
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 nine months ended September 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 and
several loans paid off. Subsequent to quarter-end, BIDCO closed on a $3,180,000
loan to a modular housing factory. The BIDCO sold the 80% of the loan that had
been guaranteed by a government agency to a government sponsored enterprise and
retained a $636,000 participation in the loan at a net yield of 32%. In
addition, the BIDCO received an option to buy 40% of the firm that owns the
modular housing factory for $1.
Management is considering a transaction where the Bank would sell its
interest in the BIDCO to the BIDCO itself. The Bank's board has now approved the
transaction and we are awaiting regulatory approval for the transaction. The
sale would result in no gain or loss for the Bank, although it would increase
the Bank's interest earning assets by approx. $800,000 in the short term and
$400,000 over the intermediate term.
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 paythat.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. The BIDCO has been appointed project leader of a business to
business internet payments pilot by the Financial Services Technology Consortium
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 decreased to $1,031,025 in the three months ended
September 30, 2000 from $1,125,333 for the three months ended September 30,
1999. The increase was primarily the result of decreased audit expenses and
<PAGE> 18
18
cost control efforts in other areas at the Bank, which more than offset
increased expenses due to growth at Midwest Loan Services.
Non-interest expense increased to $3,205,244 in the nine months ended
September 30, 2000 from $2,982,660 for the nine months ended September 30, 1999.
The increase was primarily the result of increased operational expenses at
Midwest Loan Services, which more than offset cost control efforts in other
areas at the Bank. The audit contract was put out for bid in the third quarter
of 2000 in an effort to reduce expenses.
Non-interest operating expense for the three month period ended
September 30, 2000 for the parent company only decreased to $17,932 compared
$166,907 for the period ended September 30, 1999. The increase was primarily the
result of an increase in audit and legal expenses. Non-interest operating
expense for the nine month period ended September 30, 2000 for parent company
only decreased to $46,990 from $198,506 for the period ended September 30, 1999.
In 1999, the Company expensed $152,000 as the result of a lawsuit in which the
Company lost. Other expenses in 2000 were slightly higher than 1999 due to the
timing of the annual shareholders meeting that was held in the third quarter
this year versus the second quarter last year.
Internet Banking and Internet Payments. University Bank is beta testing
an internet banking product with its customers. During the quarter, the Bank
tentatively formed a strategic alliance with `thatbank.com' to offer merchant
internet credit card services and won a mandate to provide the banking payments
interface for the nations largest electronic check processor. There is no
assurance that either contract, if executed, will be profitable for the Bank, or
that these service providers will follow through on their stated intent to
partner in providing these services through the Bank.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources. The table on page 19 sets forth the Bank's risk
based assets, and the capital ratios and risk based capital ratios of the Bank
and Company. At September 30, 2000, the Bank was "well-capitalized" (the
required ratio for "well-capitalized" was 10% of total risk-based assets).
Long term borrowings at December 31, 1999 included $1,123,000 face
amount of Michigan BIDCO's 9% convertible bonds due January 15, 2002. In May,
2000, the bonds were either converted into common stock or redeemed by the
bondholder. Long term borrowings at September 30, 2000 includes $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. The notes
have no defined maturity date and interest payments are deferred until maturity.
An additional $141,000 is due to a related party from a subsidiary of the Bank.
This account payable carries no interest rate or stated repayment terms. It is
intended that both amounts due will be converted into common stock in the near
future.
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 September 30, 2000, the bank had cash and due from
<PAGE> 19
19
UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio
9/30/00
<TABLE>
<CAPTION>
Balance Risk Weighted
0% RISK CATEGORY Sheet (000) Assets (000)
<S> <C> <C>
Currency & Coin 453 --
US Treasury Strip 499 --
Federal Reserve Balance 25 --
====== ======
TOTAL 977 --
20% RISK CATEGORY
Interest-bearing Balances 54 11
Fed Funds Sold 9 2
U.S. Gov't sponsored Agency Sec 2,263 453
Other Mortgage-Back Securities -- --
Cash Items 182 36
FHLB Stock 848 170
Balances due from depository Inst 1,237 247
====== ======
TOTAL 4,593 919
50% RISK CATEGORY
Revenue Oblig Sec issued by state 530 265
Qualifying 1st liens on 1-4 family 13,857 6,929
====== ======
TOTAL 14,387 7,194
100% RISK CATEGORY
ALL OTHER ASSETS 26,096 26,096
ON BALANCE SHEET ITEMS EXCLUDED FROM CALCULATION
10% of mtg serving right of $661 66
Valuation Adjustment for Govt Bond AFS (652)
TOTAL ASSETS 45,467 34,208
====== ======
TIER 1 CAPITAL Balance
Common Stock 200
Surplus 4,433
Undivided Profits & Capital Reserves (1,622)
Minority Interest 248
Other identifiable Intangible Assets (66)
TOTAL TIER 1 CAPITAL 3,193
TIER 2 CAPITAL
Allowance for loans & Lease losses 534
Excess LLR (limited to 1.25% gross risk-weighted assets (106)
TOTAL TIER 2 CAPITAL 428
TOTAL TIER 1 & TIER 2 CAPITAL 3,621
TIER 1/TOTAL ASSETS 7.02%
TIER 1 & 2/TOTAL ASSETS 7.96%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 9.33%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 10.58%
</TABLE>
<PAGE> 20
20
banks and Federal Funds on hand of $1,960,587. The Bank has a $6,000,000 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.
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 decreased by $15,692 to $375 at September 30, 2000. During
the nine months ended September 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. To provide working capital to the parent
company, management has provided loans to the parent company, and has committed
to provide additional funds. Management intends that the cash and securities on
hand, other receivables, and cash from the sale of common stock and the exercise
of stock options 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 $595,000 and $694,000 at September
30, 2000 and at December 31, 1999, respectively.
As further described above under "Recent Events", the Company acquired
Midwest Loan Services under an agreement dated November 1, 1995. Midwest Loan
Services' preliminary unaudited pre-tax profit through October 31, 2000 was
$495,459, including $161,387 in pre-tax income just in the month of October
2000. Under the terms of the Agreement if Midwest has an additional $129,541 in
pre-tax profit in the final two months of 2000, an earn-out of the maximum
$310,000 could be due and owing by the Company. Such payments would be due 60
days after the completion of the Company's audited financial statements next
year.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.
<PAGE> 21
UNIVERSITY BANCORP
Asset/Liability Gap Analysis as of September 30, 2000
($ Amounts in 000's)
Maturing or Repricing in
<TABLE>
<CAPTION>
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 All
ASSETS or Less 1 Year Years Years Years Others Total
------ ------- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fed Funds Sold 9 - - - - - 9
Loans - Net 4,479 4,472 10,519 4,384 9,655 - 33,509
Non-accrual Loans - - - - - 72 72
Investment Securities - - - - 2,641 - 2,641
Other Assets - - - - - 6,070 6,070
Cash and Due from Banks - - - - - 1,951 1,951
------ ------- ------- ------- ------ ----- ------
TOTAL ASSETS 4,488 4,472 10,519 4,384 12,296 8,093 44,252
------ ------- ------- ------- ------ ----- ------
LIABILITIES
CD's under $100,000 694 11,840 1,237 4 699 - 14,474
CD's over $100,000 1,552 1,863 475 - 106 - 3,996
Money Market Accts 5,763 5,763 - - - - 11,525
NOW - - 2,861 - - - 2,861
Demand and Escrow - - 4,073 - - - 4,073
Savings - - 378 - - - 378
Other Borrowings 3,418 272 491 264 - 425 4,870
Other Liabilities - - - - - 703 703
Equity - - - - - 1,372 1,372
------ ------- ------- ------- ------ ----- ------
TOTAL LIABILITIES 11,427 19,738 9,515 268 805 2,500 44,252
------ ------- ------- ------- ------ ----- ------
GAP (6,939) (15,266) 1,004 4,116 11,491 5,593 -
====== ======= ======= ======= ====== ===== ======
CUMULATIVE
GAP (6,939) (22,204) (21,200) (17,084) (5,593) -
====== ======= ======= ======= ====== =====
GAP
PERCENTAGE -15.68% -50.18% -47.91% -38.61% -12.64% 0.00%
====== ======= ======= ======= ====== =====
</TABLE>
<PAGE> 22
22
Rising long term and short term interest rates tend to increase the value of
Midwest Loan Services' investment in mortgage servicing rights and improve
Midwest Loan Services' current return on such rights by lowering required
amortization rates on the rights. Rising interest rates tends to decrease new
mortgage origination activity, negatively impacting current income from the
retail mortgage banking operations of the Bank and Midwest Loan Services. Rising
interest rates also slows 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 September 30, 2000, the model predicts that the
Bank's average 12 month GAP as a % of Earning Assets was -25.5%. The model
predicts that in a 400 basis point shift upward that the Bank has ($67,000) of
annual net interest margin at risk, and $49,000 annual positive variance in a
400 basis point shift down environment. However, the software model does not
account for the convexity of the Bank's long term zero coupon Treasury
securities, the optional feature of the Bank's principal-only securities or its
mortgage 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 mortgage servicing rights.
The Bank also performs a static gap analysis that has limited value as
a simulation. In addition, there are competitive and other influences based on
past experience that are not adequately reflected in the static gap model. The
table on page 21 details the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at September 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 September 30, 2000 was
estimated to be ($22,204,000) or -49.4%.
PART II - OTHER INFORMATION
Item 1. 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 accounting errors of approximately $30,000, not
previously uncovered by an internal audit and certain due diligence procedures
performed by an external accounting firm shortly after the sale. Management of
Paramount initiated a lawsuit against the 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 $10 and assumed all
assets and liabilities of Varsity at the time of sale. A trial is scheduled for
April 2001. University Bank is vigorously defending itself, denies Paramount's
various allegations (other than the accounting error dispute), and believes that
the suit will ultimately not have any material financial impact on University
Bank.
There are no other material pending legal proceedings to which the
Company or any of its subsidiaries is party or to which any of their properties
are subject.
<PAGE> 23
23
Item 5. Other information
Parent Company Condensed Financial Information
Certain condensed financial information with respect to University
Bancorp, Inc. is presented on pages 24, 25, and 26.
<PAGE> 24
24
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Balance Sheets
September 30, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 142 $ 15,834
Securities available for sale 233 233
Investment in University Bank 2,358,354 2,885,704
Investment in Michigan BIDCO 77,157 73,397
Other assets 10,568 3,584
---------- ----------
Total Assets $2,446,454 $2,978,752
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 595,000 $ 694,000
Equity conversion bonds 425,000 304,000
Accounts payable 14,721 5,372
Accrued interest payable 40,075 25,000
Total Liabilities 1,074,796 1,028,372
Stockholders Equity 1,371,658 1,950,380
---------- ----------
Total Liabilities and Stockholders Equity $2,446,454 $2,978,752
========== ==========
</TABLE>
<PAGE> 25
25
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Statements of Operations
For the Periods Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For Three Month For Nine Month
Period Ended Period Ended
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income:
Dividends from subsidiary $ 0 $ 0 $ 0 $ 0
Interest & dividends on investments 4,187 33 4,348 2,495
Income (loss) from Michigan BIDCO 0 8,409 3,760 8,409
Gain (loss) on sale of securities 20,625 0 20,625 (16,102)
---------- ---------- ---------- ----------
Total Income 24,812 8,442 28,733 (5,198)
Expense:
Interest 25,177 21,625 64,445 55,535
Salaries & benefits 0 0 0 1,082
Public listing 12,604 3,661 25,300 16,664
Audit & legal 4,654 160,117 19,455 174,835
Other taxes 0 0 6 1,986
Occupancy & other miscellaneous 674 3,129 2,229 3,939
---------- ---------- ---------- ----------
Total Expense 43,109 188,532 111,435 254,041
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (18,297) (180,090) (82,702) (259,239)
Federal income taxes (benefit) 0 0 0 0
---------- ---------- ---------- ----------
Income (loss) before equity in
undistributed net income of subsidiaries (18,297) (180,090) (82,702) (259,239)
Equity in undistributed net income (loss)
of subsidiaries 22,060 (130,758) (459,905) (629,968)
---------- ---------- ---------- ----------
Net loss $ 3,763 $ (310,848) $ (542,607) $ (889,207)
========== ========== ========== ==========
Basic and diluted net loss per common share $ 0.00 $ (0.16) $ (0.27) $ (0.45)
========== ========== ========== ==========
Weighted average shares outstanding 2,027,801 1,989,139 2,026,378 1,989,139
========== ========== ========== ==========
</TABLE>
<PAGE> 26
26
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (542,607) $ (578,360)
Reconciliation of net loss to net cash from
operating activities:
Loss (gain) on sale of securities (20,625) 16,102
Net amortization/accretion on securities 0 (883)
Change in other assets (6,984) 27,238
Change in other liabilities 24,504 57,876
Change in investment in Michigan BIDCO (3,760) 0
Change in investment in University Bank 459,905 323,117
------------ ------------
Net cash from operating activities (89,567) (154,910)
------------ ------------
Cash flow from investing activities:
Advances to Michigan BIDCO 0 (20,896)
Purchase of securities available for sale (37,500) 0
Proceeds from sale of securities available for sale 58,125 75,432
------------ ------------
Net cash from investing activities 20,625 54,536
------------ ------------
Cash flow from financing activities:
Principal payment on notes payable (99,000) (99,000)
BIDCO conversion of bonds to common stock 0 170,872
Issuance of equity conversion bonds 121,000 0
Proceeds from sale of common stock 31,250 0
------------ ------------
Net cash from financing activities 53,250 71,872
------------ ------------
Net changes in cash and cash equivalents (15,692) (28,502)
Cash and cash equivalents:
Beginning of period 15,834 33,702
------------ ------------
End of period $ 142 $ 5,200
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 49,370 $ 35,151
BIDCO conversion of bonds to common stock 26,117
</TABLE>
<PAGE> 27
27
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
One Report on Form 8-K was filed during the quarter ended
September 30, 2000. On September 12, 2000, the Company engaged Grant Thornton
LLP as its independent accountants for the year ending December 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: November 14, 2000
/s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President & CEO
<PAGE> 28
28
Exhibit Index Sequentially
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Numbered Page
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27. Financial Data Schedule 29
