<PAGE> 1
As filed with the Securities and Exchange Commission on January 2, 2001
Registration No. 333-47056.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 1
TO
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 PC
1300 First National Building, 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. [ ]
Calculation of Registration Fee
<TABLE>
<CAPTION>
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
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 1,525,000 shares $ 1.00 $ 1,525,000 $ 424
$0.01 par value
--------------------------------------------------------------------------------------------------------------------------
Rights 2,027,801 rights $ 0.00 $0 $0
--------------------------------------------------------------------------------------------------------------------------
</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's common stock is listed on the NASDAQ Small-Cap
market under the symbol "UNIBC". University Bancorp owns University Bank, a full
service community bank serving Ann Arbor, Michigan and the surrounding area.
Rights to purchase common stock are being offered to University Bancorp
shareholders as of January 1, 2001. Each shareholder will receive one right for
each share of common stock held on January 1, 2001. Each subscription right
represents the right to purchase 3/4 of a share of common stock. The exercise
price per share will be $1. The rights are transferable and any holder of the
rights will be entitled to purchase shares. Shareholders may sell their right to
purchase the shares to anyone else.
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 up to 100 shares of common stock for $1 per
share. To illustrate, 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.
In addition, subject to availability, shareholders may purchase additional
shares not purchased by other shareholders through the "Over-Subscription
Privilege".
The subscription offer will expire at 5:00 p.m., New York time, on
Wednesday, February 14, 2001. Interest will be paid on amounts tendered for
subscriptions and over-subscriptions from the time these amounts are received by
the subscription agent through February 13, 2001 at 6.50%.
As of December 13, 2000, the trading price for University Bancorp's
common stock was $1.25 per share. The majority shareholders of University
Bancorp (the
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Ranzini Group) intend to exercise all of their rights to purchase approximately
$1,052,000 of common stock available from this offering.
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.
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 8.
<TABLE>
<CAPTION>
Subscription Price Proceeds, before expenses
------------------ -------------------------
<S> <C> <C>
Per Share of Common Stock $1.00 $1.00
Total $1,525,000 (1) $1,525,000 (1)
</TABLE>
(1) If the entire amount is not sold upon 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 would be correspondingly less than the amounts shown.
The date of this Prospectus is December 20, 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY 4
RISK FACTORS 8
USE OF PROCEEDS 13
DIVIDEND POLICY 13
MARKET FOR COMMON STOCK 14
CAPITALIZATION 15
DILUTION 16
BUSINESS 17
RECENT EVENTS 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 28
PRINCIPAL SHAREHOLDERS 63
MANAGEMENT 66
CERTAIN RELATED TRANSACTIONS 69
SUPERVISION AND REGULATION 70
DESCRIPTION OF CAPITAL STOCK 79
PLAN OF DISTRIBUTION 82
LEGAL PROCEEDINGS 87
LEGAL MATTERS 87
EXPERTS 88
FORWARD LOOKING STATEMENTS 88
AVAILABLE INFORMATION 88
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 90
</TABLE>
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PROSPECTUS SUMMARY
Shareholders should read this prospectus with the December 31, 1999
Form 10-K, the July 6, 2000 Proxy Statement, and the September 30, 2000 Form
10-Q. Except as otherwise specified, financial information and other references
to University Bancorp include University Bank in this prospectus.
University Bancorp
University Bancorp owns University Bank, a full service community bank
serving Ann Arbor, Michigan and the surrounding area, which also specializes in
mortgage loan servicing. University Bank operates from its main office in Ann
Arbor. In addition, the bank's mortgage subsidiary, Midwest Loan Services, has
its main office in Houghton, Michigan. University Bancorp had consolidated net
losses from continuing operations of $723,725 and $801,291 in 1999 and 1998
respectively. This along with the impact of discontinued operations has resulted
in a retained deficit of $931,980 and $16,500 at December 31, 1999 and 1998
respectively. For the nine months ended September 30, 2000, University Bancorp
has realized a net loss $542,606 which has increased our retained deficit to
$1,474,587. At September 30, 2000, University Bancorp had consolidated total
assets of $44.3 million, deposits of $37.3 million and shareholders' equity of
$1.4 million. A primary reason for this stock rights offering is to raise
sufficient capital to avoid losing the public listing with NASDAQ and to raise
capital by selling shares in a way that doesn't discriminate against
non-management shareholders.
Products and Services
University Bank is 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. Midwest Loan Services specializes in servicing mortgage
loans for other financial institutions.
Market Area
The market area in which University Bancorp operates its 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. Midwest Loan Services
provides loan subservicing to financial institutions nationwide.
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Management
University Bancorp's 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. University Bank offers:
* Local Decision-Making
* Our Customers Receive Personal Service and Attention
* Competitive Pricing
* All Financial Services Products Available
* Low Fees
University Bank solicits retail customers and competes for deposits by
offering customers personal attention, professional service, fair interest rates
and low fees. University Bank's 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.
University Bank utilizes its own computers using software licensed from
reliable vendors to provide cost effective services to our customers. Where the
Bank does not have the ability to provide cost effective services in-house, it
has 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, the Bank sells products to its
customers using the brand name of a third-party service provider, when the Bank
cannot sell its own product by law. Examples of these products are mutual funds,
annuities, and insurance products.
About University Bancorp
University Bancorp incorporated in Delaware and owns 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, University
Bank opened for business in Ann Arbor, Michigan, which is now the main office.
In addition, University Bank's mortgage subsidiary, Midwest Loan Services has
its main office in Houghton, Michigan. Deposit accounts held at University Bank
are insured by the Federal Deposit Insurance Corporation to the extent
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permitted by law. University Bancorp's main office is located at 959 Maiden
Lane, Ann Arbor, Michigan 48105. University Bancorp's 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 University Bancorp plans to use the proceeds: To pay off outstanding debt,
provide working capital and for other general corporate purposes. (See "Use of
Proceeds").
Plan of distribution: University Bancorp is 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 100 shares on the record date would be able to purchase up
to 75 shares.
University Bancorp is providing a special benefit to its 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 share 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: UNIBC
For additional details about the offering and how to participate in the
offering, please see pages 82 to 86, which contain additional information about:
- Plan of Distribution
- Payment of Interest on Subscriptions and Over-subscriptions
- Rights to be Issued
- Basic and Step-Up Privileges
- Over-Subscription Privilege
- Exercise and Payment
- 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 September 30, 2000 and December 31, 1999 and the
consolidated statements of income for the year ended December 31, 1999 and the
nine months ended September 30, 2000 are incorporated by reference in this
prospectus.
(Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
At/For Nine Months At/For the
Ended Year Ended
September 30, 2000 December 31,1999
<S> <C> <C>
Financial Condition:
Total assets $ 44,252 $ 40,823
Loans held for portfolio, net (1) 33,581 30,580
Loans held for sale 72 305
Securities 2,641 2,626
Deposits 37,302 32,051
Shareholders' equity 1,372 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 2,026,378 1,993,607
Shares outstanding at end of period 2,027,801 2,012,801
Operations:
Interest income $ 2,435 $3,195
Interest expense 1,475 1,967
Net interest income 959 1,228
Provision for loan losses(1) 88 93
Net interest income after provision
for loan losses 871 1,135
Total noninterest income 1,796 2,289
Total noninterest expense 3,205 4,116
Net loss from continuing operations (543) (724)
Net loss (543) (915)
</TABLE>
(1) Management has established an 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
This 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.
Described below, are the material risks of investing in University
Bancorp's common stock. You should carefully consider these prior to purchasing
any shares.
THERE IS NO ASSURANCE OF FUTURE PROFITABILITY FOR THE COMPANY
University Bank's operations were relocated to Ann Arbor in 1996.
University Bank is not yet profitable and has incurred substantial operating
losses. Shareholders are subject to the risks inherent in starting a new
business. The Bank's profitability will depend primarily upon operations and
which might never become profitable. The management of the Bank believes 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. University Bancorp had a consolidated net loss of $915,480 during
1999, and a consolidated net loss of $542,606 during the first nine months of
2000. As of September 30, 2000, University Bancorp had a retained deficit of
$1,474,587.
THERE IS NO ASSURANCE THAT WE CAN EXPAND OUR BUSINESS SUCCESSFULLY
If University Bank's operations do not expand, it 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 inability to implement these
goals could result in further losses at the Bank. Our ability to achieve and
manage our growth and expansion, manage internal controls, and to attract and
retain capable management and operations personnel will determine the success of
our growth strategy.
THE NEED FOR ADDITIONAL CAPITAL COULD DILUTE YOUR OWNERSHIP IN THE COMPANY
Even if University Bancorp sells all 1,525,000 shares in this offering,
there can be no assurance that the Bank will not need additional capital in the
near future to support the Bank's growth to counter operating losses. Further,
additional capital may be necessary if University Bancorp does not sell all
1,525,000 shares in this offering if the Bank continues to remain unprofitable,
or if it continues to expand operations. Funds necessary to meet the Bank's
working capital needs and to finance this expansion might not be available. If
we sell additional equity securities to finance future expansion, such sale
could result in significant dilution to the interests of persons purchasing
shares in this offering.
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WE MAY NOT BE ABLE TO GROW AS FAST AS OUR COMPETITORS
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 University Bank specifically, at a
competitive disadvantage compared to less regulated competitors. Such
regulations could consequently have an adverse effect on University Bancorp's
ability to provide any return on investments made by its stockholders.
OUR STOCK IS MORE VOLATILE SINCE WE DO NOT CURRENTLY PAY A DIVIDEND
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 University Bancorp has never paid a dividend, and does not
anticipate paying dividends for at least the next two years. University
Bancorp's future earnings may not be sufficient to permit the legal payment of
dividends to its shareholders at any time in the future. Even if University
Bancorp may legally declare dividends, the amount and timing of any dividends
will be at the discretion of our Board of Directors. University Bancorp's
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 University Bancorp and by University Bancorp to its stockholders
are both subject to certain statutory and regulatory restrictions.
OUR SIZE LIMITS OUR ABILITY TO COMPETE WITH OTHER FINANCIAL INSTITUTIONS
University Bancorp faces 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. There
can be no assurance that
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University Bank will be able to compete effectively with these competitors
unless it can continue to grow its operations.
THERE IS NO ASSURANCE THAT WE CAN CONTINUE TO INVEST IN MODERN TECHNOLOGY
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.
THERE IS NO ASSURANCE WE CAN MAINTAIN OUR SENIOR MANAGEMENT TEAM
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 operating losses.
THERE IS NO ASSURANCE OUR COMPANY WILL NOT EXPERIENCE LOSSES ON OUR LOAN
PORTFOLIO
University Bank is in the business of making loans, and there is an
inherent risk that loans might not be repaid. If its 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. University Bank
also focuses on loans to individuals and loans to small-to-medium sized
businesses that may be riskier than loans to larger companies. The Bank's
management attempts to manage credit exposure by monitoring the concentration of
loans within specific industries and through specified loan application and
approval procedures. However, there can be no guarantee that the Bank's
monitoring system and procedures will reduce 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.
THERE IS NO ASSURANCE WE CAN ATTRACT LARGE CUSTOMERS
University Bank's legal lending limit is currently approximately $800,000.
The Board of Directors has established an internal lending limit of $500,000.
Accordingly, the size of the loans for which the Bank can offer to potential
customers is less than the size of loans that many of its competitors are able
to offer. These limits affect to some degree our ability to seek relationships
with the area's larger
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businesses. The Bank can expand loan volumes in excess of its lending limit
through the sale of participations in these loans to other banks. However, due
to its lending limits, the Bank might not be successful in attracting or
maintaining customers seeking larger loans. In addition, the Bank might not be
able to sell participations in these loans on favorable terms to the Bank.
THERE IS NO ASSURANCE THAT CHANGES IN MARKET CONDITIONS WILL NOT AFFECT THE
COMPANY'S OPERATIONS
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 negative pressure on the profitability
of University Bank or that high interest rate spreads will return. Substantially
all of the Bank's loans are to businesses and individuals in southeastern
Michigan and any decline in the economy of this area could adversely affect the
net income or loss of the Bank. The positive trends or developments discussed in
this prospectus might not continue. Negative trends or developments might have a
material adverse effect on us.
THERE IS NO ASSURANCE THAT MINORITY SHAREHOLDERS WILL RECEIVE THE BEST POSSIBLE
RETURN ON THEIR INVESTMENT
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 September
30, 2000. These individuals are able to exert a significant measure of control
over University Bancorp's 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. 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 should 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.
THERE IS NO ASSURANCE THAT SHAREHOLDERS' RETURN ON INVESTMENT WOULD NOT BE
ADVERSELY IMPACTED DUE TO DECISIONS MADE BY COMPANY MANAGEMENT AND ITS DIRECTORS
University Bancorp's Articles of Incorporation provide for the
indemnification of its officers and directors and protects University
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Bancorp's officers and directors from liability for certain limited breaches of
the duty of care. It is possible that the indemnification obligations imposed
under these provisions could reduce University Bancorp's earnings and adversely
affect its ability to pay dividends causing an adverse impact on the share
price. The Articles of Incorporation of University Bank contains similar
provisions.
THERE IS NO ASSURANCE THAT THE MARKET PRICE WILL BE MORE THAN THE OFFERING PRICE
The offering price of $1.00 per share for this offering was set by our
Board of Directors upon review of a number of key factors described below. The
present or future value of the common stock could be more or less than $1.00.
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 as of December 13, 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.
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THERE IS NO ASSURANCE THAT THE COMPANY WILL CONTINUE TO BE LISTED ON THE NASDAQ
SMALL-CAP MARKET
NASDAQ has informed us that our stock will be de-listed from the NASDAQ
Small-Cap Market in the near future, unless our shareholders' equity increases
to at least $2,000,000. On November 28, 2000, the company exchanged debt of
$712,827 and cash of $12,173 for cumulative, convertible preferred stock
totaling $725,000. This increased shareholder's equity above $2,000,000 on a
pro-forma basis. Stephen and Joseph Ranzini and their affiliates currently hold
69% of the Company's common stock. They have indicated in writing to NASDAQ that
they intend to exercise all of the rights they will receive as part of this
offering (upon approval from the Securities and Exchange Commission). The
exercise of these rights will raise an additional $1,052,250 of shareholders'
equity (before expenses of the offering). $725,000 of this increased
shareholders' equity will be immediately used to redeem the preferred stock. If
the Company does 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.
NASDAQ has also informed us that our stock would be de-listed from the
NASDAQ Small Cap Market if the market value of shares held by non-insiders of
the Company falls below $1,000,000. Currently, 562,547 shares of common stock
are held by non-insiders of the Company and a floor bid price of $1.78 per share
is needed to meet this requirement. As of December 13, 2000, the current bid
price was $1.25 per share of common stock. Management anticipates that
sufficient stock rights will be subscribed to by non-insiders from this rights
offering to correct this problem.
If University Bancorp's stock is de-listed 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 for our stock. This would significantly
limit the ability of shareholders who decide to sell their shares to do so. If
the Company is de-listed, the management of University Bancorp intends to list
its common stock on the NASDAQ Bulletin Board.
THERE IS NO ASSURANCE THAT INVESTORS WILL BE ABLE TO TRADE THE COMPANY'S STOCK
UPON DEMAND
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. In addition, 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 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
15
<PAGE> 16
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.
16
<PAGE> 17
USE OF PROCEEDS
The net proceeds we receive from the sale of the common stock in this
offering will be used to convert preferred stock to common stock and provide
working capital for the Company. We plan to immediately convert $725,000 of 6%
cumulative, non-voting, convertible preferred stock, payable to members of the
Ranzini family. 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 $75,000, we will receive net proceeds of $1,450,000. This will be reduced to
$725,000 after the redemption of $725,000 in preferred stock.
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
September 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.
17
<PAGE> 18
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>
<S> <C> <C>
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
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
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
<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
Fourth Quarter (through December 13) 3 1/2 0 1/2
</TABLE>
These quotations represent inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions. As of
September 30, 2000 we had approximately 375 stockholders including approximately
240 beneficial owners of shares held by brokerage firms or other institutions.
As of December 13, 2000, the bid price was $1.25 per share and the ask price was
$1.62 per share for our common stock.
18
<PAGE> 19
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".
19
<PAGE> 20
CAPITALIZATION
The following table sets forth University Bancorp's capitalization as
of September 30, 2000, and as adjusted to reflect the sale of the shares of
common stock we are offering (amounts in thousands):
<TABLE>
<CAPTION>
September 30, 2000 September 30, 2000
Actual As Adjusted
<S> <C> <C>
Debt (1):
Short-term Debt 3,344 3,344
Long-term Debt (3)(4) 1,526 1,101
Minority Interest 248 248
Stockholder's Equity:
Preferred Stock, $.001 par value;
500,000 shares authorized; 0 issued (4) 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 5,289
Treasury Stock, at cost (115,184 shares) (341) (341)
Net unrealized gain (loss) on
Securities available-for-sale, net
of tax (652) (652)
Retained earnings (deficit) (1,474) (1,474)
Total Stockholders' Equity 1,372 2,822
Total Capitalization 6,490 7,515
</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 consolidated financial statements for additional
information regarding short 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.
(3) On November 17, 2000, the Company issued an additional $100,000 of
equity conversion notes to a member of the Ranzini family.
(4) On November 28, 2000, the Company issued $725,000 of cumulative,
non-voting, convertible preferred stock. This also reduced existing
long-term debt by $525,000. The Company plans to immediately redeem
this preferred stock after the completion of the rights offering.
The information set forth above should be read in conjunction with the
consolidated financial statements incorporated by reference in this prospectus.
20
<PAGE> 21
DILUTION
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
September 30, 2000 was $0.68 per share.
Net Tangible Book Value. The net tangible book value (total assets minus total
liabilities) of the Company as of September 30, 2000, was $1,371,658 or $0.68
per shares 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 $75,000), the pro-forma net tangible book value of the
company as of September 30, 2000, would have been $2,821,658 or $0.79 per share
of common stock outstanding on such date.
This represents an immediate increase in pro forma net tangible book value per
share of $0.11 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: $0.11
-----
Pro-forma net tangible book value per
share after the offering $0.79
=====
Dilution per share to shareholders
purchasing shares $0.21
=====
</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 September 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.
21
<PAGE> 22
BUSINESS
General
University Bancorp, Inc. The Company is a Delaware corporation which
operates as a bank holding company for its wholly-owned subsidiary, University
Bank.
Our holding company invests available cash resources in marketable
equity and debt securities and interest bearing deposits. At September 30, 2000
our holding company had cash on deposit of $142 and other investments at fair
value of $77,390, including an investment in Michigan BIDCO. We changed our
holding company's name to `University Bancorp, Inc.' from `Newberry Bancorp,
Inc.' in 1996, because we wanted to more closely identify our name with the
Bank.
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. In
1994, we sold the bank's offices in Newberry, Michigan and Sault Ste. Marie,
Michigan. As part of a non-compete agreement with the purchaser of the bank's
offices, we relocated the Bank's main office to the former offices of its
mortgage operation in Sault Ste. Marie, Michigan. In 1995, the Bank changed its
name from `The Newberry State Bank' to `University Bank' to more closely
identify with its current place of business, Ann Arbor, Michigan. Ann Arbor is a
university town, home to the University of Michigan and is the largest city in
Washtenaw County, just west of the Detroit Metropolitan Statistical Area.
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.
Midwest Loan Services. In December 1995, University Bank acquired 80%
of the common stock of Midwest Loan Services. Midwest specializes in the
servicing and subservicing of mortgage loans for various credit unions,
22
<PAGE> 23
financial institutions and mortgage brokers. Most of their servicing and
subservicing portfolio is comprised of residential mortgage loans sold to Fannie
Mae, Freddie Mac and other private residential mortgage conduits.
Varsity Funding. In October 1995, University Bank established a
mortgage-banking subsidiary, 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. In
September 1999, this subsidiary was sold to another financial institution and is
no longer included with the current operations of the Bank.
Varsity Mortgage. In February 1996, University Bank 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, this
subsidiary was sold to another financial institution and is no longer included
with the current operations of the Bank.
Michigan BIDCO. In May 1993, Stephen Lange Ranzini and Joseph Louis
Ranzini 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.
23
<PAGE> 24
University Bancorp currently owns 28.82% of the BIDCO. The Bancorp holds 1.74%
directly, and the remaining 27.08% is held by the Bank.
Northern Michigan Foundation. In December 1995, Michigan 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
of the $300,000 donation received from Michigan BIDCO. 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. In 1996, University Bank
established an insurance and investment sales agency. This subsidiary of the
Bank, called "University Insurance & Investment Services, Inc." is based in our
Ann Arbor office. The 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 health care 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
service property and casualty insurance agency offering insurance for homes,
autos, apartments and businesses.
Employees
We employed 63 full-time equivalents as of December 20, 2000:
<TABLE>
<S> <C>
University Bank, Ann Arbor 21
Midwest Loan Services 39
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 Tuomy 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.
24
<PAGE> 25
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
DEPOSIT PRODUCTS & SERVICES
University Bank offers traditional retail savings products and services
to its customers. These 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 in hardware and software related
to the internet banking system 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 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 September 30, 2000, we had approximately $9,601,000 in
outstanding CDs issued through brokers.
LENDING PRODUCTS
Our community banking operation offers a range of traditional lending
products, including commercial small business loans, residential real estate
mortgage loans, home equity loans, commercial real estate mortgage loans,
consumer installment loans, and land development and construction loans.
Classifications of loans, including loans held for sale, as of September 30,
2000 are as follows:
<TABLE>
<CAPTION>
Amount
Outstanding % of Total
-------------- ----------
<S> <C> <C>
Commercial $11,673,174 34.15%
Construction 2,292,660 6.71%
Real estate 13,857,232 40.53%
Home equity 5,453,662 15.95%
Installment 815,101 2.38%
Credit Card 95,518 0.28%
-------------- -------
Gross Loans $ 34,187,347 100.00%
============== =======
</TABLE>
25
<PAGE> 26
The Company's loan portfolio is geographically concentrated in Ann Arbor and
Washtenaw County, Michigan. Customers' ability to honor their debts is partially
dependent on the local economy. The Ann Arbor area is primarily dependent on the
education, healthcare, services, and manufacturing (automotive and other)
industries.
26
<PAGE> 27
Real estate and home equity loans are secured by residential or commercial
property. Commercial loans are generally secured by equipment, inventory, or
real estate. Installment loans are generally secured by various items of
personal property. Land development and construction loans are secured by
specific real state.
There is a certain amount of credit risk associated with each loan which varies
from borrower to borrower. The Bank's credit analysis function assesses this
risk using an established methodology for each type of loan. Also, the Bank has
established an allowance for loan losses which is a reserve for possible credit
losses. Management estimates the allowance based on past loan loss experience,
known and inherent risks in the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. As of September 30, 2000, the Bank's Board of Directors had established
a lending limit of $500,000 to an individual borrower.
MORTGAGE BANKING
University Bank 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, University Bank
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 rights 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.
27
<PAGE> 28
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 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.
During the third quarter of 2000, Midwest Loan Services increased its
mortgage subservicing contracts by over 50% (from $1.1 billion to $1.7 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 additional increases as this firm shifts additional existing business
to Midwest from its former primary subservicing firm. Midwest currently is
receiving approximately 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.
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 September 30, 2000, our investments had a net unrealized loss of
approximately $652,000 versus a net unrealized loss of approximately $585,000 at
December 31, 1999, $183,000 at December 31, 1998 and $19,000 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 September 30, 2000:
28
<PAGE> 29
<TABLE>
<CAPTION>
Issuer Coupon Yield Final Maturity Market Value Amortized Cost
------ ------ ----- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
FHLBI equity (1) VAR 8.50% None $848,400 $848,400
FNMA CMO 93-205H (2) PO 4.15% 9/25/23 1,254,968 1,771,537
US Treasury Strip PO 5.33% 2/15/27 420,800 499,359
FHLMC Note 6.60% 6.89% 4/20/09 475,500 490,978
Toll Road (3) 0% 6.91% 2/15/10 487,500 529,947
</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.
MICHIGAN BIDCO
Michigan BIDCO, Inc., was founded in May 1993, and is licensed by the
Michigan Financial Institutions Bureau under the State of Michigan BIDCO Act.
In 1993, 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
carried concessionary terms allowing it to be converted to a grant over time
under certain circumstances. The BIDCO earned job and sales credits to be
applied against the principal and interest owed to the Michigan Strategic Fund.
Job and sales credits were earned from the growth of businesses that the BIDCO
invests in.
In 1993, Michigan BIDCO issued $3,000,000 in 9% senior convertible
bonds to match the State of Michigan's commitment. University Bank purchased
$27,000 in bonds and contributed $280,000 for 298 shares of Michigan BIDCO
stock. This represented a 44.1% interest in Michigan BIDCO. The financial
results of Michigan BIDCO were accounted for under the equity method of
accounting until March 1999. In April 1999, $1,850,000 of Michigan BIDCO bonds
were repurchased by the BIDCO, and University Bank converted its $27,000 of
bonds into common stock, thereby increasing the Bank's equity ownership to
80.1%. Effective April 1999, Michigan BIDCO's financial results became
consolidated
29
<PAGE> 30
into the results of University Bancorp. The remaining Michigan BIDCO bonds were
converted into common stock on May 31, 2000, and thus diluted University Bank's
equity ownership down to 28.8%. As a result, the BIDCO is no longer consolidated
in the financial statements of University Bancorp and the investment is now
accounted for under the equity method of accounting.
The financial statements of Michigan BIDCO 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.
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
nine months ended September 30, 2000.
Michigan BIDCO invests in businesses in Michigan with the objective of
fostering job growth and economic development. As of November 20, 2000, the
BIDCO had made 29 investments, amounting to a total of $16,569,800 at original
cost. At September 30, 2000, Michigan BIDCO had total assets of $2,767,509.
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
less favorable than the BIDCO's. As of November 20, 2000, investments, at
original investment cost, have been made in the following types of businesses:
30
<PAGE> 31
<TABLE>
<CAPTION>
Industry Investment Equity 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 200,000 Repurchased
manufacturer
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
Manufactured homes factory 3,183,200 Yes
Manufacturing (misc.) 600,000 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 450,000 Repurchased
subservicing
Secured credit card issuer 540,000 No
Tissue paper mill 700,000 Repurchased
Truck maintenance 70,000 No
-----------
Total $16,569,800
===========
</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
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
31
<PAGE> 32
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 June 1999 and June 1998, from the FDIC's annual branch
deposit survey. (Market share data as of June 2000 was not available as of
December 20, 2000).
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.
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
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
32
<PAGE> 33
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
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.
33
<PAGE> 34
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.
The BIDCO's staff manages a 501(c)3 tax-exempt non-profit re-lending
company, Northern Michigan Foundation under a management contract, 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
34
<PAGE> 35
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 1996, the BIDCO has pursued a strategy of liquidating its
existing investment portfolio to raise cash for two purposes: 1) the buyout of
some of the investors in the BIDCO; and 2) expanding its funds under management
through other government agency economic development programs (Conifer Capital
L.P. - a small business investment company and Northern Michigan Foundation).
Michigan BIDCO is currently offering to repurchase University Bank's shares of
Michigan BIDCO, but is awaiting approval from the Commissioner of the Michigan
Financial Institutions Bureau.
RECENT EVENTS
University Bank had unaudited net income in the month of October 2000
of $38,295.
As part of the acquisition of Midwest Loan Services, the Company is
required 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, 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 earns an additional $129,541 in pre-tax profit in the final two
months of 2000, the maximum $310,000 of earn-out could be owed by the Company.
Such payments would be due 60 days after the completion of the Company's audited
financial statements.
On November 28, 2000, University Bancorp, Inc. issued a private
placement of $725,000 of 6% cumulative, non-voting, convertible, preferred stock
which will allow the Company to meet the requirement of $2,000,000 in Net
Tangible Capital for continued listing on the NASDAQ Small-Cap Market. The
Company's pro-forma consolidated balance sheet as of October 31, 2000 reflects
an adjusted amount of shareholder equity of $2,171,458 before the impact of the
rights offering, but giving consideration to the $725,000 in preferred stock.
35
<PAGE> 36
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.
STRATEGY
36
<PAGE> 37
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.
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):
37
<PAGE> 38
<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.
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:
38
<PAGE> 39
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>
39
<PAGE> 40
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>
40
<PAGE> 41
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>
41
<PAGE> 42
The tables above do 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.
42
<PAGE> 43
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
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>
43
<PAGE> 44
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>
44
<PAGE> 45
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>
45
<PAGE> 46
<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% $158 33.5%
Real estate-construction 10 3.2% 8 6.7%
Real estate-mortgage 110 37.8% 185 36.6%
Installment loans to
individuals 47 19.4% 68 23.2%
Unallocated 98 0.0% 40 0.0%
---- ------ ---- ------
Total 533 100.0% 459 100.0%
==== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
($ in thousands)
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:
46
<PAGE> 47
Assumptions used in the Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
Bank's Average Peer Group Ratio Used By
5 Year Average Loss Bank in Allowance
Loss Ratio 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%.
47
<PAGE> 48
(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 $95,588,000 at December 31, 1998. All
servicing in 1999 was done by Midwest Loan Services. The amount decreased as a
result of a portfolio sale of servicing rights by the Bank in December 1998
(which settled in March 1999), and payoff and refinancing of existing rights
throughout the year. The following table summarizes the portfolio by type and
mortgage note rate:
48
<PAGE> 49
Interest Rate Stratification of the Bank's Servicing ($ in 000's)
<TABLE>
<CAPTION>
FIXED RATE - BY MATURITY
Mortgage Rate (%) ARMs UNDER 10 10-25 OVER 25
----------------- ------- -------- -------- -------
<C> <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
rates 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.
49
<PAGE> 50
(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.
50
<PAGE> 51
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 a portion 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
51
<PAGE> 52
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 2000 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:
52
<PAGE> 53
<TABLE>
<CAPTION>
CAPITAL ADEQUACY TABLE - UNIVERSITY BANK DECEMBER 31, 1999
Balance Risk Weighted
Sheet (000's) Assets (000's)
----------------------------------------
<S> <C> <C>
0% RISK CATEGORY
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>
53
<PAGE> 54
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 perform 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 the following page
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 which may not necessarily reflect future
experience, and therefore, certain assets and
54
<PAGE> 55
liabilities may in fact mature or re-price differently from what is illustrated.
The one-year static gap position at December 31, 1999 was estimated at
($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 - 6,642
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 ($20,599) ($16,560) ($14,706) ($12,215) ($3,408) -
GAP PERCENTAGE -50.46% -40.57% -36.02% -29.92% -8.35% 0.00%
</TABLE>
55
<PAGE> 56
The following repricing information is provided for the Bank's
investment portfolio, using book values, as of December 31, 1999:
Investment Portfolio Maturities ($ 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
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Maturity Maturity Total Loans
Less Than One Year
One Year or More
<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
56
<PAGE> 57
tax net operating loss carryforward position and realization of the deferred
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
Shortly after the acquisition of Midwest Loan Services in December
1995, we discovered that Midwest was owed $30,000 from the former majority owner
of Midwest that was not disclosed to us prior to the sale. In response, we held
back $45,000 in funds due them from the sale. During the third quarter of 1999,
an arbitrator ruled against University Bancorp in this dispute awarding the
plaintiff a sum of $167,000, including interest, legal fees, and the sum of
$80,000. The $80,000 sum related to another matter which was not originally in
dispute and was subject to a separate agreement, which the arbitrator voided.
The arbitrator's decision was final and could not be appealed. As a result,
$152,000 was charged as an expense during the third quarter of 1999.
57
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000.
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
$959,326 in the 2000 period from $868,892 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.
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>
<S> <C>
Community Banking $ (819)
Midwest Loan Services 273
Merchant Banking (Michigan BIDCO) 114
Corporate Office (111)
------
Net Loss $ (543)
=======
Nine months ended September 30, 1999 Net Income (Loss) Summary:
Community Banking $ (684)
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>
58
<PAGE> 59
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 8.87%
in the 1999 period to 9.09% in the 2000 period. The cost of interest bearing
liabilities increased from 5.20% in the 1999 period to 5.65% in the 2000 period.
Net interest income as a percentage of total average earning assets decreased to
3.35% from 3.49%.
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 8.63%
in the 1999 period to 9.08% in the 2000 period. The cost of interest bearing
liabilities increased from 5.10% for the 1999 period to 5.34% for the 2000
period. Net interest income as a percentage of total average earning assets
increased from 3.21% 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 9.38% from 9.15%.
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.
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.
59
<PAGE> 60
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 average 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 following tables summarize monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated yield
or cost and the net return on earning assets for the three months and nine
months ended September 30, 2000 and 1999.
NET INTEREST INCOME TABLE
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
-------------------------------------- -----------------------------------
September 30, 2000 September 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 $13,401,989 $328,347 9.72% $12,793,883 $315,586 9.79%
Real Estate Loans (2) 15,170,382 340,402 8.90% 15,567,337 339,726 8.66%
Installment/Consumer Loans 4,728,843 116,067 9.74% 4,271,867 95,590 8.88%
----------- -------- ----- ----------- -------- -----
Total Loans 33,301,214 784,816 9.35% 32,633,087 750,902 9.13%
Investment Securities (3) 3,479,129 58,492 6.67% 3,322,992 54,221 6.47%
Federal Funds & Bank Deposits 57,446 510 3.52% 110,477 1,298 4.66%
----------- -------- ----- ----------- -------- -----
Total Interest Earning Assets $36,837,789 $843,818 9.09% $36,066,556 $806,421 8.87%
Interest Bearing Liabilities:
Demand Deposits $ 2,794,612 $ 19,144 2.72% $ 3,135,899 $ 25,094 3.17%
Savings Deposits 353,503 1,777 1.99% 251,650 1,269 2.00%
Time Deposits 17,703,268 285,199 6.39% 18,753,823 257,331 5.44%
Money Market Accts 11,837,473 140,164 4.70% 11,022,404 114,706 4.13%
Short-term Borrowings 3,649,753 61,188 6.65% 1,489,618 24,758 6.59%
Long-term Borrowings (4) 1,036,500 25,177 9.64% 2,621,249 65,823 9.96%
----------- -------- ----- ----------- -------- -----
Total Interest Bearing
Liabilities $37,375,109 $532,649 5.65% $37,274,643 $488,981 5.20%
----------- -------- ----- ----------- -------- -----
Net Earning Assets, net interest
income, and interest rate spread $ (537,320) $311,169 3.44% $(1,208,087) $317,440 3.67%
Net yield on interest-earning assets 3.35% 3.49%
</TABLE>
60
<PAGE> 61
NET INTEREST INCOME TABLE
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
Average Interest Average Average Interest Average
Balance Inc/Exp Yield (1) Balance Inc/Exp Yield (1)
Interest Earning Assets:
Loans:
<S> <C> <C> <C> <C> <C> <C>
Commercial Loans $ 13,251,665 $ 973,700 9.82% $11,779,974 $ 873,362 9.91%
Real Estate Loans (2) 14,443,749 948,380 8.78% 15,151,624 965,707 8.52%
Installment/Consumer Loans 4,629,632 346,909 10.02% 4,363,153 295,168 9.04%
------------ ---------- ---------- ----------
Total Loans 32,325,046 2,268,989 9.38% 31,294,751 2,134,237 9.12%
Investment Securities (3) 3,474,009 164,339 6.32% 3,303,925 144,690 5.86%
Federal Funds & Bank Deposits 49,699 1,375 3.70% 1,563,434 54,411 4.65%
------------ ---------- ----------- ----------
Total Interest Earning Assets $ 35,848,754 $2,434,703 9.08% $36,162,110 $2,333,338 8.63%
Interest Bearing Liabilities:
Demand Deposits $ 2,899,751 $ 60,627 2.80% $ 3,216,181 $ 75,760 3.15%
Savings Deposits 310,326 4,655 2.01% 214,069 3,494 2.18%
Time Deposits 15,958,714 738,143 6.18% 19,639,292 825,308 5.62%
Money Market Accts 12,644,009 403,612 4.27% 11,893,053 367,605 4.13%
Short-term Borrowings 3,472,609 162,271 6.25% 1,628,202 67,271 5.52%
Long-term Borrowings (4) 1,655,089 106,069 8.57% 1,790,347 125,008 9.34%
------------ ---------- ----------- ----------
Total Interest Bearing
Liabilities $ 36,940,498 $1,475,377 5.34% $38,381,144 $1,464,446 5.10%
------------ ---------- ----------- ----------
Net Earning Assets, net interest
income, and interest rate spread $(1,091,744) $ 959,326 3.74% $(2,219,034) $ 868,892 3.53%
Net yield on interest-earning assets 3.58% 3.21%
</TABLE>
NOTES TO NET INTEREST INCOME TABLES:
(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.
61
<PAGE> 62
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses was $1,000 for the first quarter 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, and
management's assessment of overall loan quality. The provision for loan losses
was $22,500 for the third quarter of 2000. Loan charge-offs 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.
62
<PAGE> 63
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.
63
<PAGE> 64
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 banking
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 $914,378 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 over 50% (from $1.1 billion to $1.7 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 additional increases as this firm shifts additional existing business
to Midwest from its former primary subservicing firm. Midwest currently is
receiving approximately 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.
64
<PAGE> 65
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
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.
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 approximately $200,000 in the short term
and $1,000,000 over the intermediate term.
65
<PAGE> 66
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 decrease was primarily the result of decreased audit expenses and 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 decrease was primarily the
result of a decrease 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 the following page sets forth
University Bank's risk based assets, and the capital ratios and risk based
capital ratios of the Bank. At September 30, 2000, University Bank was
"well-capitalized" (the required ratio for "well-capitalized" was 10% of total
risk-based assets).
66
<PAGE> 67
<TABLE>
<CAPTION>
CAPITAL ADEQUACY TABLE - UNIVERSITY BANK SEPTEMBER 30, 2000
Balance Risk Weighted
(000s) (000s)
<S> <C> <C>
0% RISK CATEGORY
Currency & Coin $ 453 $ 0
U.S. Treasury Strip 499 0
Federal Reserve Balance 25 0
-------- --------
TOTAL 977 -
20% RISK CATEGORY
Interest Bearing Balances 54 11
Fed Funds Sold 9 2
U.S. Government sponsored Agency Securities 2,263 453
Cash Items 182 36
FHLB Stock 848 170
Balances Due From Depository Institution 1,237 247
-------- --------
TOTAL 4,593 919
50% RISK CATEGORY
Municipal Revenue Obligation Securities 530 265
Qualifying 1st Liens on 1-4 Family Mortgage Loans 13,857 6,929
-------- --------
TOTAL 14,387 7,194
100% RISK CATEGORY
ALL OTHER ASSETS 26,096 26,096
Balance Sheet Items Excluded from Calculation:
10% of Mortgage Servicing Rights 66
--------
Valuation Adjustment for AFS Securities (652) -
-------- --------
TOTAL ASSETS $ 45,467 $ 34,209
======== ========
TIER 1 CAPITAL
Common Stock 200
Surplus 4,433
--------
Individed Profits & Capital Reserves (1,622)
--------
Minority Interest - Midwest Loan Services 248
--------
Other Identifiable Intangible Assets (66)
--------
TOTAL TIER 1 CAPITAL $ 3,193
--------
TIER 2 CAPITAL
Allowance For Loans & Lease Losses 534
--------
Excess Loan Loss Reserve (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>
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<PAGE> 68
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 $148,000 is due to a related party from a subsidiary of the Bank.
This account payable carries no interest rate or stated repayment terms.
Subsequent to September 30, 2000, an additional $100,000 of equity conversion
notes were issued. The equity conversion notes, related party account payable
and accrued interest plus cash were converted into $725,000 of convertible
preferred stock of the Company on November 28, 2000. It is intended that the
convertible preferred stock 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
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.
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<PAGE> 69
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. 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.
University 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.
University Bancorp 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 the following page details the Company'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 ($29,516,000) or -66.7%.
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<PAGE> 70
<TABLE>
<CAPTION>
STATIC GAP ANALYSIS
UNIVERSITY BANCORP - September 30, 2000
Amounts (in thousands) Maturing or Repricing in
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>
Cash and Due from Banks $0 $0 $0 $0 $0 $1,951 $1,951
Fed Funds Sold 9 - - - - - 9
Securities - - - - 2,641 - 2,641
Loans, Gross 4,479 4,472 10,519 4,384 10,190 - 34,044
Non-accrual Loans - - - - - 72 72
Other Assets - - - - - 5,535 5,535
-----------------------------------------------------------------------------------------
TOTAL ASSETS 4,488 4,472 10,519 4,384 12,831 7,558 44,252
-----------------------------------------------------------------------------------------
LIABILITIES
-----------
Demand Deposits 4,073 - - - - - 4,073
NOW Accounts 2,861 - - - - - 2,861
Savings Deposits 378 - - - - - 378
Money Market Accounts 11,525 - - - - - 11,525
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
Other Borrowings 3,418 272 491 264 - 425 4,870
Other Liabilities - - - - - 703 703
Equity - - - - - 1,372 1,372
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES
& EQUITY 24,501 13,975 2,203 268 805 2,500 44,252
-----------------------------------------------------------------------------------------
GAP ($20,013) ($9,503) $8,316 $4,116 $12,026 $5,058 $0
=========================================================================================
CUMULATIVE GAP ($20,013) ($29,516) ($21,200) ($17,084) ($5,058) $0
=============================================================================
GAP PERCENTAGE -45.23% -66.70% -47.91% -38.61% -11.43% 0.00%
=============================================================================
</TABLE>
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<PAGE> 71
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. Paramount
purchased Varsity for $10 and assumed all assets and liabilities of Varsity at
the time of sale. 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 (although there may be offsetting
accounting errors), which were not revealed after certain due diligence
procedures were performed by an external accounting firm shortly after the sale.
On May 19, 2000, Paramount Bank filed a complaint (Case No. 00-023299-CK) in
Oakland County Circuit Court against University Bank and two of its former
officers. On December 14, 2000, the parties settled the suit with University
Bank paying Paramount Bank $25,000.
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.
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<PAGE> 72
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 December 13, 2000, except as otherwise
indicated.
<TABLE>
<CAPTION>
Amount and
Nature of
Title of Beneficial Percent
Name and Address Class Ownership (1) Notes Of Class
---------------- ----- ------------- ----- --------
<S> <C> <C> <C> <C>
Dr. Joseph Lange Ranzini Common 975,393 (2)(3)(10) 48.10%
675 Cherry Avenue Stock
Waynesboro, VA 22980
Joseph Louis Ranzini, Esq. Common 144,223 (4) 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
Paul Lange Ranzini Common 1,151,623 (2)(3)(10) 56.74%
1024 Pleasant View Road Stock
Middleton, WI 53562
Stephen Lange Ranzini Common 741,640 (3)(6)(10) 36.57%
c/o University Bank Stock
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>
72
<PAGE> 73
<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 (10) 18.72%
(of 1996) Stock
c/o University Bank
959 Maiden Lane
Ann Arbor, MI 48105
All Current Officers and
Directors, as a Group Common 1,483,254 (2)(3)(7) 71.56%
(Eight Persons) Stock (8)(9)(10)
(11)
</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 Stephen Lange Ranzini. The trustees
of the trust are Dr. Joseph Lange Ranzini and Paul Lange Ranzini.
(3) Includes 290,958 shares of common stock held by an irrevocable trust,
the primary beneficiaries of which are Joseph Louis Ranzini's five
adult children, including Stephen Lange Ranzini, Dr. Joseph Lange
Ranzini and Paul Lange Ranzini. The trustees of the trust are Mr.
Stephen Lange Ranzini, Dr. Joseph Lange Ranzini and Paul Lange Ranzini.
Stephen Lange Ranzini and each of his siblings are entitled to
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 Joseph Louis Ranzini disclaims voting and
investment power.
(5) Mildred Ranzini disclaims beneficial ownership of shares of common
stock owned by her spouse, Joseph Louis Ranzini.
(6) Includes 22,132 shares of common stock which represent 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 Stephen Lange
Ranzini is the primary beneficiary.
(7) Includes shares of common stock owned beneficially by Keith Brenner's
retirement plan, and also includes 1,062 shares of common stock owned
by Keith Brenner's minor children.
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<PAGE> 74
(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 Keith Brenner, Robert Goldthorpe, Mildred Ranzini and
Michael 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 shares held by the thirteen Ranzini Family Trusts of 1996,
which collectively hold 379,665 shares of common stock. Stephen Lange
Ranzini and 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.
(11) The total number of shares of common stock held by the Ranzini Group
(Joseph Louis Ranzini, Stephen Lange Ranzini, Mildred Ranzini, and 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.
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<PAGE> 75
MANAGEMENT
Joseph Louis 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 oversees the management of our Company. The
Board of Directors formed an Audit Committee during the fiscal year ended
December 31, 1998 consisting of 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 Stephen Lange Ranzini, Joseph Louis
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
does not have a Nominating Committee. The Board of Directors held a total of 5
regular meetings during 1998. 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 regular meetings in 1999 and one
director missed one meeting as a result of conflicting travel plans. The Board
of Directors has held three 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 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 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. Since May 1997, he has been a director of Municipal Bankers Corporation, a
Toronto Stock Exchange listed financial services company based in Toronto,
Canada. Stephen is the son of Joseph Louis and Mildred Ranzini and the brother
of Joseph Lange Ranzini and Paul Lange Ranzini.
Joseph Louis Ranzini, Esq., age 71, has been Chairman of the Board, a
director and Secretary of University Bancorp or of predecessor corporations
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<PAGE> 76
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. Joseph
Louis Ranzini is the father of Stephen Lange Ranzini.
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. Dr. Joseph Lange Ranzini is the brother of Stephen 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. Mildred Lange Ranzini is the
mother of Stephen Lange Ranzini.
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. Paul Lange Ranzini is the brother of Stephen 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.
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<PAGE> 77
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 forseeable future. Generally, in lieu of directors' fees
non-employee directors receive options to purchase stock upon becoming a member
of the Board.
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<PAGE> 78
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 Stephen Lange Ranzini, the only executive officer who met such
criteria:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Underlying
Name and Principal Restricted Options/
Position Year Salary Bonus Other Stock 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.
Except as indicated in the table above, Stephen Lange Ranzini did not
receive during the three fiscal years ended December 31, 1999 or hold
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<PAGE> 79
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.
79
<PAGE> 80
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 (and subsequently paid
interest of $7,585) to the Partnership and we continue to reflect this as a
liability until we resolve this matter.
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
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<PAGE> 81
comparable to those paid in its other investment securities accounts at other
brokerage firms.
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<PAGE> 82
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
the Company or its 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.
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<PAGE> 83
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
non-banking activity because we are a bank holding company. We cannot acquire
more than 5% of the shares of a company engaged in non-banking 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 non-banking 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 non-banking
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, 1999 and September 30, 2000,
University Bank was "well capitalized."
At December 31, 1999 and September 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
<CAPTION>
September 30, 2000 Well Capitalized Actual Minimum Actual
------------------ ----------------- ------- ----------- ------
Ratio Ratio Amount Amount
----- ----- ------ ------
<S> <C> <C> <C> <C>
Total Capital/Risk-Weighted Assets 10% 10.6% $3,421 $3,621
Tier 1 Capital/Risk-Weighted Assets 6% 9.3% $2,053 $3,193
Tier 1 Capital/Average Assets 5% 7.0% $2,273 $3,193
</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
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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
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 practises 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
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agency, as a 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.
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PREFERRED STOCK
Our preferred stock has a par value of $0.001 per share, liquidation
value of $1,000 per share, and may be issued from time to time without further
stockholder approval in one or more series 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 stockholders. As of November 30,
2000, there were 725 shares of 6% cumulative, non-voting, convertible, 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.
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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 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 January 1, 2001 (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
January 1, 2001. 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 100 shares on the record date would be able to purchase up
to 75 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 February 14,
2001. The subscription offer will expire at 5:00 P.M., New York time, on
Wednesday, February 14, 2001. All subscriptions must be received by us before
5:00 p.m., Michigan (EST) time, on February 14, 2001.
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 20% discount
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from the NASDAQ Small-Cap Market closing price of $1.25 on December 13, 2000.
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PAYMENT OF INTEREST ON SUBSCRIPTIONS AND OVER-SUBSCRIPTIONS
Interest will be paid on amounts tendered for Subscriptions and
Over-subscriptions from the time these amounts are received by the subscription
agent through February 13, 2001 at 6.50%. Interest will be paid to February 13,
2001.
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
Wednesday, February 14, 2001 (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 Wednesday, February 14, 2001. 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, 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
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<PAGE> 97
its right on the same basis as if the beneficial owners were record holders on
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.
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OVER-SUBSCRIPTION 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
Over-subscription 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 Over-subscription Privilege, the available common stock will be allocated
pro rata among the holders of rights who exercise the Over-subscription
Privilege based upon the proportion that the number of rights exercised by each
holder of rights who exercises his Over-subscription Privilege bears to the
aggregate number of rights exercised by all holders of rights who exercise their
Over-subscription 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
February 14, 2001. 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 Over-subscriptions".
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;
- Rights will be delivered to the subscription agent prior to 3:00
P.M., Michigan time, on Tuesday, February 20, 2001;
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The subscription will be accepted subject to receipt of the properly exercised
rights.
Common stock certificates will be dated and authenticated as of
February 20, 2001.
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 Over-subscription 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 Over-subscription 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 the Company 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.
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 Over-subscription 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 distributed to a
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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. Paramount purchased Varsity for
$10 and assumed all assets and liabilities of Varsity at the time of sale.
Subsequent to the sale, Varsity experienced management problems and a further
drop in its business. Paramount also discovered some accounting errors of
approximately $30,000 (although there may be offsetting accounting errors),
which were not revealed after certain due diligence procedures were performed by
an external accounting firm shortly after the sale. On May 19, 2000, Paramount
Bank filed a complaint (Case No. 00-023299-CK) in Oakland County Circuit Court
against University Bank and two of its former officers. On December 14, 2000,
the parties settled the suit with University Bank paying Paramount Bank $25,000.
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
L.R. Sowell & Associates PLLC, 42860 Nine Mile Road, Novi, Michigan 48376.
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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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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 Amended Annual Report on Form 10-K for the year
ended December 31, 1999 (filed July 5, 2000).
- 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 September 30, 2000.
- University Bancorp's Current Report on Form 8-K dated September 12,
2000 regarding the change in external auditors.
- University Bancorp's Current Report on Form 8-K dated November 30, 2000
regarding the issuance of preferred stock.
The Company will provide each person who receives this prospectus
(including beneficial owners) a copy of any or all of the information that has
been incorporated by reference in this prospectus, but not delivered with the
prospectus. The Company will provide this information (free-of-charge) upon
written or oral request 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]
The Company files its annual (Form 10-K) and quarterly reports (Form
10-Q) with the Securities and Exchange Commission (SEC) on a regular basis. The
Company also files proxy statements, and current reports (Form 8-K) as
necessary. The public may read and copy any of these reports at:
SEC's Public Reference Room
450 Fifth Street N.W.
Washington, D.C. 20549
Telephone Number: (800) 732-0330
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<PAGE> 105
The SEC also maintains an internet site that contains all information
that the Company has filed electronically (reports, proxy, and other
information). This information is available at: www.sec.gov.
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<PAGE> 106
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.
<TABLE>
<S><C>
=================================================================================================
1,525,000 SHARES
COMMON STOCK
TABLE OF CONTENTS PAGE PAR VALUE $.01
----------------- ----
Prospectus Summary................4
Risk Factors......................8
Use of Proceeds..................13
Dividend Policy..................13
Market for Common Stock..........14
Capitalization...................15
Dilution.........................16 [UNIVERSITY BANCORP, INC. LOGO]
Business.........................17
Recent Events....................27
Management's Discussion
and Analysis...................28
Principal Shareholders...........63
Management.......................66
Certain Related Transactions.....69
Supervision and Regulation.......70
Description of Capital Stock.....79 UNIVERSITY BANCORP, INC.
Plan of Distribution.............82
Legal Proceedings................87
Legal Matters....................87
Experts..........................88 _______________________
Forward-Looking Statements.......88
Available Information............88
Incorporation of Certain Prospectus
Documents by Reference.........90
________________________
Dated December 20, 2000
=================================================================================================
</TABLE>
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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 50,000
Miscellaneous expenses (including estimated
interest payable in respect of early subscriptions) 2,000
-----
Total $75,000
=======
</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> 108
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.
3. Certificate of Incorporation and By-laws
3.1 Composite Certificate of Incorporation of the Company, as
amended (on Form 10-Q for the quarter ended June 30, 1996).
3.1.1 Certificate of Amendment, dated June 10, 1998, of the
Company's Certificate of Incorporation (incorporated by reference to
Exhibit 3.1.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
3.2 Composite By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1989).
3.3 Certificate of the Series 3 6% Cumulative Convertible
Preferred Stock (incorporated by reference to Exhibit 3.3 to the
Company's Current Report on Form 8-K as of November 30, 2000).
5. Opinion from Counsel
5.1 Opinion of L.R. Sowell and Associates.
10. Material Contracts
10.1 Loan Agreement and Promissory Note, dated December 31,
1997 issued to North Country Bank & Trust (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990).
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10.2.1 Amendment to the ESOP, effective as of December 31,
1991 (incorporated by reference to Exhibit 10.2.A to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991).
10.3 University Bank 401(k) Profit Sharing Plan, adopted
August 1, 1996, effective as of January 1, 1996 (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.4 Letter regarding grant of options to outside directors,
dated as of July 20, 1993 (incorporated by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1993).
10.5 1995 Stock Plan of the Company (incorporated by reference
to Exhibit A to the definitive Proxy Statement of the Company for 1996
Annual Meeting of Stockholders).
10.5.1 Form of Stock Option Agreement related to the 1995
Stock Plan, (incorporated by reference to Exhibit 10.7.1 to the Annual
Report on Form 10-K for the year ended December 31, 1995).
10.6 Letter from Federal Reserve Bank of Minneapolis, dated
December 1, 1989, (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1989).
10.7 Lease Agreement (the "Cascade Lease Agreement") between
RG Properties, Inc., as agent for Sault Associates, a Michigan Limited
Partnership, and University Bank, dated September 30, 1992
(incorporated by reference to exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992).
10.7.1 First Amendment to the Cascade Lease Agreement, dated
January 5, 1993 (incorporated by reference exhibit 10.9.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992).
10.8 Federal Income Tax Allocation Agreement Between Newberry
State Bank and Newberry Holding Inc., dated March 21, 1992
(incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991).
10.8.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and Newberry Bancorp, Inc., dated May 21, 1991
(incorporated by reference to Exhibit 10.11.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991).
10.9 Purchase and Sale Agreement, dated November 1, 1995,
concerning Common Stock of Midwest Loan Services, Inc., among its
shareholders and University Bank and Newberry Bancorp, Inc
(incorporated by reference to Exhibit 10.16 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.10 Equity Conversion Note Agreements, between various
related parties and University Bancorp, Inc. (incorporated by reference
to Exhibit 10.15 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
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10.10.1 Equity Conversion Note Agreements, between various
related parties and University Bancorp, Inc. (incorporated by reference
to Exhibit 10.10.1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1999).
21. Subsidiaries of Registrant
23. Consent of Experts and Counsel
23.1 Consent of Crowe, Chizek and Company LLP, independent
public accountants.
23.2 Consent of L.R. Sowell and Associates, is included in
Exhibit 5 to this Registration.
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.
iv. The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3
or Rule 14c-3 under the Securities Exchange Act of 1934; and,
where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus,
to deliver, or cause to be delivered to each person to whom the
prospectus is
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sent or given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such
interim financial information.
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.
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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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: December 20, 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 December 20, 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Stephen Lange Ranzini Director, President, December 20, 2000
------------------------ Chief Executive Officer
Stephen Lange Ranzini
/s/Joseph L. Ranzini Director, Secretary, Chairman December 20, 2000
--------------------
Joseph L. Ranzini
/s/Keith Brenner Director December 20, 2000
----------------
Keith E. Brenner
/s/Robert Goldthorpe Director December 20, 2000
--------------------
Robert Goldthorpe
/s/Dr. Joseph Lange Ranzini Director December 20, 2000
---------------------------
Dr. Joseph Lange Ranzini
/s/Paul Lange Ranzini Director December 20, 2000
---------------------
Paul Lange Ranzini
/s/Michael Talley Director December 20, 2000
-----------------
</TABLE>
112
<PAGE> 113
Michael Talley
113
<PAGE> 114
Exhibit Index
Exhibit No. Description
5.1 Opinion of L.R. Sowell and Associates
21 Subsidiaries of Registrant
23.1 Consent of Crowe, Chizek and Company LLP,
independent public accountants
