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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
for the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-16023
NEWBERRY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 38-2929531
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
209 East Portage Avenue, Michigan 49783
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(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (906) 635-9794
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.010 per share
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the average bid and asked price for the Registrant's Common
Stock on March 25, 1996, as reported by NASDAQ, was approximately $1,435,495.*
The number of shares outstanding of the Registrant's Common Stock as of March
25, 1996: 1,238,843 shares.
* For purposes of this calculation shares of the Registrant held by directors
and officers of the Registrant and officers of its subsidiaries and other
affiliates have been excluded.
Documents Incorporated by Reference: Portions of the registrant's Proxy
Statement, to be filed by April 29, 1996 for the 1996 Annual Meeting of
Stockholders, are incorporated by reference into Part III of this Report.
page 1 of *** pages
Exhibit index on sequentially numbered page **
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PART I.
ITEM 1. - BUSINESS
GENERAL
Newberry Bancorp, Inc. a Delaware corporation (individually and on a
consolidated basis with its subsidiary where the context indicates, the
"Company" or the "Corporation"), operates as a bank holding company for its
wholly-owned subsidiary, University Bank. University Bank (the "Bank") is a
state chartered community bank. The Bank was chartered by the state of Michigan
in 1908 as successor to a banking organization organized in 1890. The Bank
changed its name from "The Newberry State Bank" to its current name in July 1995
to more closely identify the name of the Bank with its current places of
business. Ann Arbor and Sault Ste. Marie are both university towns, the first
being the home of the University of Michigan, and the latter being the home of
Lake Superior State University. The Bank's accounts are insured by the Federal
Deposit Insurance Corporation.
Newberry Bancorp, Inc. is essentially a holding company for the Bank and it
invests available cash resources in marketable equity and debt securities and
interest bearing deposits. At December 31, 1995 Newberry Bancorp, Inc. had cash
on deposit of $239,868 and available for sale investments at fair value of
$363,782. Newberry Bancorp, Inc. intends to seek stockholder approval to change
its name to University Bancorp, Inc. at its June 1996 annual meeting of
stockholders, to more closely identify the bank holding company with the Bank.
University Bank is headquartered in the town of Ann Arbor, Michigan, which is
the largest city in Washtenaw County, in the western suburbs of the Detroit MSA.
Following the closing of its sale of bank office assets and liabilities relating
to its former main office in Newberry, Michigan and its two branch offices in
Sault Ste. Marie, Michigan on December 5, 1994, more fully described below,
during 1995, the Bank was primarily engaged in residential mortgage lending and
servicing operations, and the investment of deposits and other bank borrowings
in various investments, including investment securities issued by government
agencies and U.S. Treasury securities. On February 6, 1996, the Bank opened its
new Ann Arbor main office.
The Bank conducts its banking business from its headquarters office in Ann
Arbor. The Bank's computer operations center and accounting function is located
in a separate office in Sault Ste. Marie along with the Bank's mortgage banking
operation. The Bank's primary market area is defined as the City of Ann Arbor
with residential mortgage lending being conducted in the greater Washtenaw
County area. In addition, the Bank retains a portfolio of loans from Chippewa
County including the city of Sault Ste. Marie, Michigan, the immediately
adjacent areas of Sault Ste. Marie, Ontario, Canada, and Luce County and its
county seat, Newberry, which is located approximately 60 miles east of Sault
Ste. Marie, Michigan.
Eastern Upper Peninsula Banking. On December 5, 1994, the Bank sold assets
pertaining to its former main office in Newberry and two branch offices in Sault
Ste. Marie, including deposits and associated loan portfolios for a premium
above book value of $3,500,000, before certain expenses related to the sale (the
"Branch Sale"). Having operated solely in Newberry, Michigan, the largest city
in Luce County, in the eastern Upper Peninsula, for 100 years, the Bank opened
its first branch office in Sault Ste. Marie in February, 1991, and
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a second branch office in Sault Ste. Marie in June, 1993. Following the sale,
the Bank relocated its main office to the offices of its mortgage operation,
which is also the Company's corporate headquarters in Sault Ste. Marie,
Michigan. Sault Ste. Marie is the largest city in the eastern Upper Peninsula
of Michigan and the county seat of Chippewa County.
Following the completion of the Branch Sale, the Bank retained and from time to
time originated a relatively small number of loans to borrowers engaged in
commercial businesses, agriculture and commercial real estate. The Bank also
retained a small consumer loan portfolio and credit card loan portfolio. With
few exceptions, until the opening of the Bank's new Ann Arbor main office, all
of the Bank's consumer and business loans were to borrowers located in the
eastern Upper Peninsula of Michigan.
Mortgage Banking. The Bank's residential mortgage banking operation purchases
and originates residential home loans which generally qualify for sale to
secondary market investors under the underwriting criteria of the Federal Home
Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") from correspondents in Michigan and in the eastern United States.
Loans purchased or originated internally are then either pooled into
mortgage-backed securities and the securities are sold to investors or they are
sold directly to FHLMC or FNMA. The Bank retains the servicing rights to the
loans or securities sold, and consequently services residential mortgages
located throughout the country which are guaranteed by government agencies.
In October 1995, the Bank established a new mortgage banking subsidiary, Varsity
Funding, L.L.C. ("Varsity Funding"). Varsity Funding specializes in the
purchase and origination of impaired credit, or subprime quality, residential
mortgages, for sale to mortgage conduits. Varsity Funding's offices are located
in Farmington Hills, Michigan, which is located on the northwest side of the
Detroit Metropolitan Statistical Area ("MSA").
In February 1996, Varsity Funding expanded the scope of its operations by
establishing another subsidiary of the Bank, Varsity Mortgage, L.L.C. ("Varsity
Mortgage"), which operates in a similar manner to the Bank's Sault Ste. Marie
residential mortgage banking operation by purchasing, from correspondents in
Michigan, or by originating residential home loans which generally qualify for
sale to secondary market investors under the underwriting criteria of the FHLMC
and FNMA.
Mortgage Servicing. In July 1995 the Bank terminated its mortgage servicing
operation in Sault Ste. Marie by outsourcing its servicing operations under a
contract with Midwest Loan Services, Inc., of Houghton, Michigan ("Midwest Loan
Services"). In December 1995, the Bank acquired 80% of the common stock of
Midwest Loan Services, which specializes in subservicing for the account of
other financial institution and mortgage brokers, residential mortgage loans
sold to FNMA and FHLMC.
Michigan BIDCO. In May 1993, the Company established a Business and Industrial
Development Company (the "BIDCO") called Michigan BIDCO, Inc. ("Michigan
BIDCO"). The BIDCO is licensed by the Michigan Financial Institutions Bureau
under the State of Michigan BIDCO program. Michigan BIDCO invests in businesses
in Michigan with the objective of fostering job growth and economic development.
Michigan BIDCO is currently 44.1%-owned by the Bank, and is accounted for under
the equity method. Such percentage is subject to a reduction in the event of
conversion of the BIDCO's outstanding convertible
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bonds. The BIDCO changed its name to Michigan BIDCO, Inc. from Northern
Michigan BIDCO, Inc. in late 1995 to reflect its strategic plan of seeking
investment opportunities throughout the entire state of Michigan. Originally,
the BIDCO limited its investments to the northern half of Michigan.
Northern Michigan Foundation. In December 1995, the BIDCO donated $225,000 to
capitalize Northern Michigan Foundation (the "Foundation"), and in early 1996,
donated an additional $75,000 to the Foundation. The BIDCO anticipates that on
an ongoing basis a portion of its overhead will be borne by the Foundation. The
BIDCO and the Foundation share administrative staffs and offices, with the
Foundation reimbursing the BIDCO for these services. As a result of its
capitalization by the BIDCO, the Foundation was able to borrow a total of
$2,000,000 from the U.S. Rural Economic Community Development Service Agency
("U.S. RECDS") at 1% interest with a 30 year term.
EMPLOYEES
The Company employed 38 full-time persons at December 31, 1995, including the
following:
University Bank, Ann Arbor 9
University Bank, Sault Ste. Marie 10
Michigan BIDCO 4
Midwest Loan Services 10
Varsity Funding 5
LINES OF BUSINESS
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COMMUNITY BANKING, ANN ARBOR
The Bank opened a new main office in Ann Arbor on February 6, 1996. The retail
savings products and services of the Bank include demand deposit and NOW
interest-bearing checking accounts, money market deposit accounts, regular
savings accounts and term deposit certificates ranging in maturity from three to
sixty months. The Bank also offers self-directed retirement accounts, free
access to 24-Hour ATM machines and Gold VISA accounts. The Bank also is a
member of Mastercard, but currently is not offering a Mastercard product.
The Bank's community banking operation offers a range of traditional lending
products, including commercial small business loans, residential real estate
mortgage loans, commercial real estate mortgage loans, consumer installment
loans, and to a lesser extent land development and construction loans.
MORTGAGE BANKING
The Bank became a seller/servicer of Federal Home Loan Mortgage Corporation
insured mortgages ("FHLMC mortgages") in late 1991 and began to originate FHLMC
mortgages for sale into the secondary market. In late 1994 the bank became a
seller/servicer of Federal
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National Mortgage Association insured mortgages ("FNMA mortgages") and began to
originate FNMA mortgages for sale into the secondary market. The Bank has
retained the servicing rights on all mortgages sold to date. Of the 2024
mortgages serviced at year-end 1995, 4.20% (85) were delinquent one or more
payments.
Varsity Funding, which began operations in late 1995, specializes in the
purchase and origination of impaired credit, or subprime quality, residential
mortgages, for sale to mortgage conduits. Borrowers who have substantial
downpayments or equity in their homes, as a result of past credit problems may
be unable to obtain home mortgages or may be in danger of losing their home to
foreclosure. Impaired credit lenders provide fixed rate higher interest loans
to these borrowers. Typically, within two years, borrowers who have improved
their credit rating can qualify for conventional home mortgages and refinance
into a lower interest rate at that time. Varsity Funding sells all of the
mortgages it purchases to secondary market investors.
Reference is made to the discussion of the mortgage banking business in ITEM 7.
- - - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, in the section entitled "Non-Interest Income and Non-Interest
Expense", under the heading Mortgage Banking.
MORTGAGE SERVICING
The Bank's 80% owned subsidiary, Midwest Loan Services, specializes in
subservicing for the account of other financial institution and mortgage
brokers, residential mortgage loans sold to FNMA and FHLMC. Mortgage servicing
firms receive monthly payments from loan customers, aggregate and account for
these payments, and send the funds to mortgage-backed securities holders, such
as pension funds, and financial institutions. Mortgage servicers also dun
delinquent accounts and foreclose loans, if required. Midwest is regulated by
FHLMC and FNMA. Mortgage servicers receive a fixed monthly fee for performing
this service. As of December 31, 1995, Midwest Loan Services subserviced 3,300
loans for non-affiliated companies, and serviced 2,700 loans for the Bank and
its own account.
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INVESTMENT SECURITIES
The Bank maintains surplus investable funds in investments consisting of
short-term money market instruments, U.S. Treasury and federal agency
obligations, and mortgage-backed securities backed by federal agency
obligations. The Bank's investments and the Company's cash and equity portfolio
are managed by the President of the Company, subject to the review and approval
of the Board of Directors of the applicable corporate entity. The securities of
the Company and the Bank provide a source of liquidity to meet operating needs.
At December 31, 1995 the Bank's investments had a net unrealized gain of
approximately $139,373 at December 31, 1995 versus a net unrealized loss of
approximately $836,617 at December 31, 1994. The net unrealized loss was the
result of a decline in the market value of adjustable rate mortgage backed
securities in 1994 due to sharply rising short term interest rates. In January
and February 1996, the Bank sold approximately half of the investment portfolio
to reduce its exposure to rising interest rates.
The following table discloses certain information regarding securities held by
the Company, the amortized cost of which exceeded more than 10% of stockholders'
equity as of December 31, 1995:
Final Market Amortized
Issuer Coupon Yield Maturity Value Cost
------------------- ------ ----- -------- --------- ---------
GNMA Pool #8216 (1) FRN 6.91% 02/20/24 $ 832,643 $ 839,786
RTC 91-12-A1 (2) FRN 5.86% 01/25/21 748,613 781,431
GNMA Tr II-B 8.50% 7.25% 04/01/18 594,488 591,602
FHLMC #1576-F (3) FRN 5.96% 09/30/24 879,181 901,609
AM HSNG 11-3C 7.75% 8.04% 03/25/14 508,750 495,000
FHLMC #409251 (4) FRN 7.16% 01/15/24 826,533 809,674
FHLMC #609291 (4) FRN 6.77% 02/15/24 1,058,251 1,030,620
FHLMC #609451 (4) FRN 5.79% 03/15/24 1,303,467 1,277,687
FHLMC #609777 (4) FRN 6.06% 04/15/24 826,999 812,772
FHLMC #409786 (4) FRN 5.94% 06/15/24 701,146 686,376
FHLBI equity (5) VAR 8.00% None 651,000 651,000
FNMA CMO92-190F (6) VAR 6.29% 11/25/07 505,000 502,813
FNMA CMO93-246F (7) VAR 6.99% 10/25/23 504,797 504,797
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(1) The coupon of GNMA security adjusts annually at a rate of 1.50% over the
one year Treasury CMT rate, with a 1% annual and 6% life of security
adjustment cap.
(2) The floating rate Resolution Trust Corporation bond is backed by a
portfolio of single family home mortgages. Due to the structure of the
issue, the expected average life is 3-4 years. Although issued by a
government sponsored agency they are not government guaranteed. The bonds
are rated "AA" by Standard & Poor's and the coupon floats at 100 basis
points over the 11th District Cost of Funds Index, adjusted monthly.
[footnotes to table continued on following page]
(3) Due to the structure of the issue, the expected average life is 11-12
years. The coupon floats at 90 basis points over the 11th District Cost
of Funds Index, adjusted monthly.
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(4) The coupon of these FHLMC securities adjusts after 12 months and annually
thereafter at a rate of 2.00% over the one year Treasury CMT rate, with a
2% annual and 6% life of security cap.
(5) The rate varies quarterly. The Bank is required to maintain the
investment in Federal Home Loan Bank of Indianapolis (the "FHLBI") common
stock in an amount related to the Bank's single family mortgage related
assets and FHLBI advances. Shares are redeemed or sold at par value by
the FHLBI as required from time to time.
(6) The coupon of these FNMA securities adjusts every month to 1.60% over the
three month T-Bill rate, with an 9% life of security cap.
(7) The coupon of these FNMA securities adjusts every month to 1.1875% over
the one month LIBOR, with an 11% life of security cap.
EASTERN UPPER PENINSULA BANKING
At December 31, 1994, approximately $8,953,518, or 23.4%, of the Company's
assets were invested in a portfolio of loans, of which 35.2% were commercial
loans, 50.7% were real estate mortgage loans, and 14.1% were installment loans.
Pursuant to the Branch Sale on December 5, 1994, the Bank sold $22,510,298 of
loans, and the buyer had the right until February 28, 1995 to put back loans to
the Bank. The buyer put back to the Bank $1,722,891 of these loans.
As a result of a non-compete agreement signed in conjunction with the sale of
the Bank branches, the Bank is restricted until December 5, 1999 from competing
with the buyer in the general banking business in the Upper Peninsula of
Michigan, excluding soliciting business from affiliates of the BIDCO, existing
customer relationships which the buyer did not assume, residential mortgage
loans from the general public, and non-Upper Peninsula residents.
The retail savings products and services of the Bank include (for those exempt
from the non-compete agreement) demand deposit and NOW accounts, money market
deposit accounts, regular savings accounts and term deposit certificates ranging
in maturity from three to sixty months. The Bank also offers self-directed
retirement accounts, 24-Hour ATM machine cards and Gold Visa accounts. The Bank
also offers a Canadian Dollar denominated, FDIC-insured savings account to its
customers. From time to time to raise liquidity, the Bank sells CDs through
brokers.
Foreign exchange revenue has in the past been a major focus of the services
offered at the Bank's former branches in Sault Ste. Marie. Pursuant to the
Branch Sale, the Bank has contracted to manage the foreign exchange business of
the bank which purchased the two branches in Sault Ste. Marie, Michigan. The
Bank also conducts foreign exchange for its own customers located outside of the
Upper Peninsula of Michigan.
MICHIGAN BIDCO
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Michigan BIDCO, Inc., which was founded in May 1993, is licensed by the Michigan
Financial Institutions Bureau under the State of Michigan BIDCO Act. The BIDCO
is 44.1%-owned by the Bank, and is accounted for under the equity method. There
are $3,000,000 in convertible bonds outstanding. An initial investment of
$280,000 to buy 280 shares of common stock was made by the Bank in Michigan
BIDCO in 1993.
At the time of establishment, the BIDCO received $3,000,000 in financing from
the Michigan Strategic Fund. This investment was made in the form of a ten year
loan which carries concessionary terms allowing it to be converted to a grant
over time under certain circumstances. The BIDCO earns grants applied against
the $3,000,000 Michigan Strategic Fund financing if there is growth in the sales
and jobs of the businesses the BIDCO invests in. At the time of establishment,
Michigan BIDCO received commitments for $3,000,000 in 9% Senior Convertible
Bonds to match the State of Michigan's commitment, all of which amount had been
issued at December 31, 1995.
The Bank's investment in the BIDCO is accounted for under the equity method, and
$12,878, $174,942 and $94,538 of income from the BIDCO was included in the
results of operations for the seven months ended December 31, 1993, and the
years ended December 31, 1994 and 1995, respectively. During 1995, the Company
purchased a total of $197,000 of the convertible bonds for $203,500. If the
$3,000,000 of convertible bonds were converted, the Company's ownership of the
BIDCO upon conversion would be 411 shares of common stock, or 15.61%. Joseph and
Stephen Ranzini, officers and directors of the Company, and, together with
members of their family and family trusts, together the principal stockholders
of the Company, hold 55 shares of common stock of the BIDCO, and $693,000
principal amount of convertible bonds, convertible into 462 shares of common
stock, or a total of an additional 19.62% of the common stock on a fully diluted
basis (assuming conversion of all convertible bonds referred to above).
Consideration is currently being given to the possibility of selling to the
Company some or all of the BIDCO convertible bonds held by the Ranzini family
for cash or shares of the Company or the Bank in order to maintain the Company's
ownership of the BIDCO after conversion, at a level of at least 20% on a fully
diluted basis. If the bonds are converted and the Company's ownership of the
BIDCO at that time is less than 20%, the net income of the BIDCO may not be
included in the Company's statement of operations under the equity method.
There is no assurance that the Company's ownership of the BIDCO will not drop
under 20% in the future.
Michigan BIDCO invests in businesses in Michigan with the objective of fostering
job growth and economic development. The BIDCO has, by general policy of its
board of directors, a loan to one borrower limit of $500,000. In order to be
able to make investments larger than this lending limit, Michigan BIDCO will
leverage its investment with loan guarantees from government agencies, the
guaranteed portion of which is sold in the form of a participation, or if a
government agency loan guarantee is unavailable, a participation may be sold to
one or more investors, including BIDCO management, bondholders and directors.
As of December 31, 1995, the BIDCO had made fourteen such investments, amounting
to a total of $9,820,600 at original cost ($6,974,850 net of participation
interests). At December 31, 1995, Michigan BIDCO had total assets of
$6,798,463. For the years ended December 31, 1995 and 1994, it reported net
income of $214,372 and $405,890, respectively. For the eight months ended
December 31, 1993, Michigan BIDCO reported net income of $31,275.
Michigan BIDCO makes its investments in the form of loans or direct equity
investments,
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or a combination thereof. It typically receives warrants or participation
rights in the companies in which it invests. As a matter of policy, the Bank
restricts itself from investing or lending to a business that the BIDCO
finances, and related parties which co-invest with the BIDCO must do so on a
basis equal to or less favorable than the BIDCO's. The BIDCO typically requires
warrants or participation rights in the companies in which it invests. As of
December 31, 1995, investments (at original investment cost) have been made in
the following types of businesses:
Michigan BIDCO, investments:
--------------------------------
Total Equity
Industry Investment Participation?
ABC-TV affiliate $300,000 yes
Adult foster care 40,000 no
Cable TV 545,000 yes
Children's clothing manufacturer 200,000 yes
Environmental engineering 100,000 repurchased
Limited service hotels 738,600 yes
Metal manufacturing 80,000 no
Paper converting 2,662,000 yes
Plastic injection molding 2,000,000 repurchased
Railcar parts manufacturing 125,000 yes
Railroad boxcar leasing 1,300,000 no
Recycled paper pulp mill 780,000 yes
Residential mortgage servicing 450,000 repurchased
Tissue paper mill 500,000 yes
----------
Total $9,820,600
==========
The $1,600,000 80% guaranteed portion of the $2,000,000 loan to the
plastic injection molding firm was sold to Federal Agricultural Mortgage
Corporation and subsequently the loan was paid off. The $1,245,150 guaranteed
portion of the $1,962,000 loan to the paper converting firm was sold to Federal
Agricultural Mortgage Corporation. An $800,000 participation in the railroad
boxcar lease was sold to a private investor group of nine individuals including
Joseph and Stephen Ranzini. This same investor group purchased a $280,000
participation in the recycled paper pulp mill financing, and also purchased a
$28,000 investment in one limited service hotel project to reduce the BIDCO's
net exposure to $500,000. The BIDCO's investment in the recycled paper pulp
mill consisted of an equity investment and a royalty on sales of a new
$238,000,000 mixed office waste paper recycling/de-inking pulp mill financed by
Kidder Peabody, Travelers Insurance and the Michigan Strategic Fund in
Menominee, Michigan.
In December 1995, the Bank acquired 80% of the common stock of the
residential mortgage servicing business, Midwest Loan Services. In connection
with this acquisition, the BIDCO received 23,000 shares of Common Stock of the
Company, puttable to the Company at $5.00 per share in December 1996, in
exchange for its ownership of 10% of the common stock of Midwest Loan Services
and
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options to buy an additional 30% of the common stock of that company. The
consideration the BIDCO received for its stake was on substantially similar
terms to the terms the other selling shareholders of Midwest Loan Services
received from the Bank and the Company.
Reference is made to the discussion of the BIDCO's investments and operations in
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, in the section entitled "Non-Interest Income and
Non-Interest Expense", under the heading Michigan BIDCO.
COMPETITION
COMMUNITY BANKING, ANN ARBOR
The Bank's attraction and retention of deposits depends on its ability to
provide investment opportunities that satisfy the requirements of investors with
respect to rate of return, liquidity, risk and other factors. The Bank competes
for these deposits by offering competitive rates, personal service, a variety of
savings programs, tax-deferred retirement programs and foreign currency
deposits.
The Bank competes for loan originations primarily through the interest rates and
loan fees it charges, the quality of services it provides to its loan customers,
and the range of services it offers. The Bank's competition in originating
loans comes principally from other commercial banks, credit unions , insurance
companies and savings and loans.
The following table shows market share of deposits for Washtenaw County by
financial institution for June 1995 and June 1994 (from the FDIC's annual branch
deposit survey):
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WASHTENAW COUNTY FINANCIAL INSTITUTION DEPOSITS:
1995 1994
Great Lakes Bancorp 19.0% 21.5%
First of America Bank 17.4% 16.5%
Key Bank 13.4% 14.9%
NBD First Chicago Bank 9.6% 9.1%
Comerica Bank 9.3% 8.6%
Republic Bank 5.5% 4.1%
Standard Federal FSB 4.9% 4.0%
Citizens Bank 3.4% 3.7%
Chelsea State Bank 3.2% 3.4%
University of Michigan CU 2.7% 2.9%
Michigan Natl Bank 2.5% 2.8%
Huron River Area CU 2.3% 2.2%
Ann Arbor Commerce Bank 1.8% 1.3%
Hospital & Health Services CU 1.7% 1.5%
6 Credit Unions, 3 Banks, 1 S&L 3.3% 3.5%
Total Deposits (Bn) $3.545 $3.431
Total deposits in the county grew 3.3% from June 1994 to June 1995. In
attracting deposits, the Bank's primary competitors are other commercial banks,
credit unions and savings and loans operating outside of the Upper Peninsula of
Michigan.
The Bank's main office is adjacent to the University of Michigan Hospital
Complex. The Complex employs a total of 8,500 persons. The nearest competitors
to the Bank's main office are First of America Bank and Hospital & Health
Services Credit Union. The Bank's main office was formerly the headquarters of
the latter credit union, which moved its office to a new office building three
miles from the Complex.
The Ann Arbor banking market is dominated by banks which are owned by
out-of-area holding companies. In the city of Ann Arbor, the University of
Michigan Credit Union is the largest locally-owned financial institution. The
only locally-owned community financial institutions, excluding University Bank,
are the Hospital & Health Services Credit Union and Bank of Ann Arbor, a new
start-up bank.
The Bank recruited a management team of local bankers, mostly from Great Lakes
Bancorp, to operate University Bank. Great Lakes was acquired in early 1994 by
TFC Bank of Minneapolis, Minnesota. Prior to the acquisition, Great Lakes was
the largest locally-owned financial institution in the Ann Arbor area.
MORTGAGE BANKING
Origination. The Bank's Ann Arbor community bank, the Bank's mortgage banking
division and Varsity Mortgage purchase or originate internally residential home
loans which generally
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qualify for sale to secondary market investors under the underwriting criteria
of the Federal Home Loan Mortgage Corporation (FHLMC) or the Federal National
Mortgage Association (FNMA) from correspondents in Michigan and in the eastern
United States. Loans purchased or originated internally are either sold
directly to FHLMC or FNMA, or are pooled into mortgage-backed securities and the
securities are sold to investors in the secondary market.
The Bank's Ann Arbor community bank, the Bank's mortgage banking division and
Varsity Mortgage encounter competition for the origination of residential real
estate loans primarily from savings institutions, commercial banks, insurance
companies and other mortgage banking firms. Many of these firms have a well
established customer and/or borrower client base. Some competitors, primarily
savings institutions, insurance companies and commercial banks, have the ability
to create unique loan products from time to time because they are able to close
the loans for their own portfolio rather than sell into the secondary market.
Most loans sold into the secondary market, however, go to the same sources,
those being Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") and Government National Mortgage Association
("GNMA") guaranteed securities. Most lenders have access to these secondary
market sources; therefore, competition often becomes more a matter of service
and pricing than that of product. As a mortgage loan originator and a purchaser
of mortgage loans through correspondents, the Bank and its affiliates must be
able to compete with respect to the types of loan products offered by
competitors to borrowers and correspondents, including the price of the loan in
terms of origination fees or fee premium or discount, loan processing costs,
interest rates, and the service provided by the Bank's staff.
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.
Although the Bank generally does not originate residential loans to be held in
portfolio, management believes that the product offerings which FHLMC and FNMA
have is sufficient for its competitive needs. Although the Bank is currently
licensed as a HUD Title 1 and Title 2 seller/servicer, it has no plans at this
time to expand its utilization of HUD or GNMA programs. The Bank and Varsity
Funding also are correspondents for several impaired credit conduits and sells
this type of residential mortgage on a non-recourse, servicing released basis.
Mortgage Servicing. The Bank currently retains all FHLMC and FNMA mortgage
servicing rights which it originates or purchases. 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. Servicing is dependent on the
capability of the origination and loan purchase correspondent network for its
volume. Falling interest rates also present competitive challenges for the
mortgage servicing operation in that mortgagors are more likely to refinance
existing mortgages. The quality of service and the ability of the origination
operation to compete on price and service is important in retaining such
customers by
- 12 -
13
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.
Midwest Loan Services, Inc. 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 substantially below the national
average. As a result, management believes that Midwest Loan Services' mortgage
servicing operation could potentially offer its mortgage banking operations a
competitive advantage in the future if the mortgage servicing operation were to
continue to grow.
EASTERN UPPER PENINSULA BANKING
As noted above, pursuant to the Branch Sale, on December 5, 1994 the Bank's
existing two branches in Sault Ste. Marie, and its main office in Newberry,
Michigan were sold. Following the sale, the Bank established a new branch
office in its mortgage operation offices. At year-end 1995, this office had
approximately $20.7 million in deposits. Pursuant to the terms of the Branch
Sale, the Bank is restricted from soliciting deposits from non-affiliates in the
Upper Peninsula of Michigan. Accordingly, the Bank has focused its efforts on
soliciting deposits from its mortgage customers nationwide, brokered deposits
and local depositors from Sault Ste. Marie, Ontario, which is the Canadian
sister city of Sault Ste. Marie, Michigan.
With respect to attracting deposits and lending in Sault, Ontario, Canada, the
Bank's primary competitors include Royal Bank of Canada, Canadian Imperial Bank
of Commerce, Bank of Nova Scotia, Bank of Montreal, Toronto-Dominion Bank, Hong
Kong & Shanghai Bank, Algoma Steel Credit Union and Northern Credit Union, most
of which have substantially larger financial resources than the Bank. The
Sault, Canada deposit market is estimated by management to approximate
C$3,000,000,000, of which the Bank is believed to have approximately a 0.04%
market share.
The Bank also manages the foreign exchange business of the bank which purchased
its two branches in Sault Ste. Marie, and its main office in Newberry, Michigan
under a contract which calls for payment monthly at an annual rate of $35,000.
MICHIGAN BIDCO AND NORTHERN MICHIGAN FOUNDATION
Michigan BIDCO seeks to invest in businesses located in Michigan. The BIDCO's
objective is to seek profit while fostering job growth and economic development
in its market area. Michigan BIDCO makes its investments directly, or through
investment entities formed with other participants, to make investments, in the
form of loans or direct equity investments,
- 13 -
14
or a combination thereof. As such, it competes with other specialized lenders
and wealthy investors who make risk-oriented investments in businesses located
in Michigan. The BIDCO assumes more credit risk in a typical investment than
commercial banks generally are willing to assume when they make loans. The
BIDCO does not make an investment in a company unless it can be shown that the
funds are not available from a traditional bank lender; therefore, the BIDCO
does not compete with banks. There is only one other BIDCO in Northern
Michigan; the BIDCO is one of eleven BIDCOs in Michigan.
The BIDCO's non-profit relending affiliate, Northern Michigan Foundation
received a loan of $2,000,000 at 1% interest for 30-years from the U.S. RECDS
under the RECDS-sponsored intermediate relending program. The Foundation is one
of three non-profit, privately-run, U.S. Rural Economic Community Development
Service intermediate relending programs located in Northern Michigan. U.S.
RECDS was formerly the Farmers Home Administration. Each of these community
development loan funds covers six counties as its primary market area.
- 14 -
15
CERTAIN FINANCIAL INFORMATION
for the years ended December 31, 1995, 1994 and 1993 (in thousands)(1):
Revenues: 1995 1994 1993
Banking
Newberry office - $ 2,164 $ 3,381
Sault office - 788 557
Mortgage banking 1,051 888 607
Other banking 1,976 3,850 -
Midwest Loan Services (3) 49 - -
Varsity (4) 66 - -
Corporate Office 102 16 103
----- ------ ------
Total 3,244 7,706 4,648
Michigan BIDCO 1,820 1,488 760
Expenses:
Banking
Newberry office - $ 1,993 $ 2,517
Sault office - 977 798
Mortgage banking 769 981 685
Other banking 2,572 703 -
Midwest Loan Services (3) 40 - -
Varsity (4) 99 - -
Corporate Office 166 442 487
------ ------ -----
Total 3,646 5,096 4,487
Michigan BIDCO 1,495 728 667
Pre-tax income:
Banking
Newberry office - $ 171 $ 864
Sault office - (189) (165)
Mortgage banking 282 (93) (154)
Other banking (711) 2,972 -
Midwest Loan Services (3) 9 - -
Varsity (4) (33) - -
Corporate Office (44) (426) (396)
Michigan BIDCO (2) 95 175 12
------ ------ -----
Total (402) 2,610 161
Assets, at Dec. 31, 1995, 1994 and 1993:
Banking
Newberry office $ - $ - $36,414
Sault office - - 9,057
Other banking &
Mortgage banking 35,781 31,638 18,882
Midwest Loan Services 1,576 - -
Varsity 32 - -
Corporate Office 886 189 69
------ ------ -----
Total 38,275 31,827 64,422
Michigan BIDCO 6,798 6,444 5,028
(table continued on following page)
- 15 -
16
Liabilities and Stockholders' Equity,
at Dec. 31, 1995, 1994 and 1993 (in thousands):
Banking
Newberry office $ - $ - $ 48,590
Sault office - - 5,220
Other banking
& Mortgage banking 36,641 30,014 10,504
Midwest Loan Services 548 - -
Varsity 32 - -
Corporate Office 1,054 1,813 108
------ ------- ---------
Total 38,275 31,827 64,442
Michigan BIDCO 6,798 6,444 5,028
Intersegment Information, at Dec. 31, 1995, 1994 and 1993:
Assets:
Newberry office $ - $ - $ (12,176)
Sault office - - 3,837
Other banking
& Mortgage banking (860) 1,624 8,378
Midwest Loan Services 1,028 - -
Varsity - - -
Corporate Office (168) (1,624) (39)
Michigan BIDCO - - -
NOTES TO CERTAIN FINANCIAL INFORMATION TABLE
for the years ended December 31, 1995, 1994 and 1993 (in thousands)
(1) Certain balances have been reclassified from the presentation in the
Annual Report on Form 10-K for the year ended December 31, 1994 because of
the sale of the Sault Ste. Marie and Newberry office operations, which
were sold December 5, 1994.
(2) Michigan BIDCO commenced operations during 1993. The Bank's share of the
net income under the equity method was 41.2% or $12 in 1993. Michigan
BIDCO's 1993 pre-tax income was $93, and net income was $31. The Bank's
share of the net income in 1994 under the equity method was 43.1%. The
BIDCO's 1994 pre-tax income was $617 and net income was $406. The Bank's
share of the net income in 1995 under the equity method was 44.1%. The
BIDCO's 1995 pre-tax income was $325 and net income was $214.
(3) 80% of the common stock of Midwest Loan Services was acquired effective
as of December 1, 1995. Revenues, expenses and pre-tax income for the
month ended December 31, 1995 is included above, with a reduction for
minority interest. Midwest Loan Services's pre-tax profit (loss) for the
years ended December 31, 1995, 1994 and 1993 was 17, (75) and (247),
respectively.
(4) Includes all Varsity LLCs. Varsity Funding commenced operations in
October 1995, and Varsity Mortgage commenced operations in March 1996.
- 16 -
17
REGULATION
The Company and the Bank are extensively regulated under federal law and state
law.
As a bank holding company under the Federal Bank Holding Company Act of 1956, as
amended, the Company is required to file an semi-annual reports and other
information as required under the rules of the Board of Governors of the Federal
Reserve System (the "FRB") and is also subject to examination by the FRB. In
connection with obtaining the consent of the FRB to a 1989 merger transaction
involving the Bank and Newberry Bancorp, Inc., the Company has made certain
commitments to the Federal Reserve Bank of Minneapolis providing that the
Company will not incur additional debt, and that its Employee Stock Ownership
Plan would not purchase more than 10% of the common stock or 5% of any other
class of voting shares of the Company, without the prior approval of such
Reserve Bank.
Michigan-chartered commercial banks, such as the Bank, are regulated and
supervised by the Michigan Department of Commerce, Financial Institutions
Bureau, Bank and Trust Division (the "FIB"). As an insured bank, the Bank is
also subject to supervision and regulation by the Federal Deposit Insurance
Corporation (the "FDIC") and is required to file quarterly reports and other
information as required. As subsidiaries of the Bank, Midwest Loan Services,
Varsity Funding and Varsity Mortgage are all also subject to examination by both
the FIB and the FDIC.
As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD multifamily
seller/servicer, the Bank's mortgage banking operation, and the Bank's mortgage
operation subsidiaries, including Midwest Loan Services and Varsity Mortgage are
subject to regulation and examination by FHLMC, FNMA and HUD.
Michigan BIDCO is 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. The BIDCO is also required
to permit an observer from the Michigan Department of Commerce, Michigan
Strategic Fund, BIDCO Program to attend its Board of Directors meetings, and is
required to make regular reports and filings of its activities with this
department, as a result of the terms of the loan agreement between the Michigan
Strategic Fund and Michigan BIDCO.
ITEM 2. - PROPERTIES
In May 1995, the Bank purchased a building in Ann Arbor, Michigan. The Bank
leased 58% of the building to the University of Michigan effective October 1,
1995. The lease
- 17 -
18
calls for minimum payments of $68,000 (adjusted annually for inflation) plus the
pro rata share of the building's expenses. The initial term of the lease is
three years.
The Company leases space in Sault Ste. Marie under a month to month agreement
for its corporate headquarters and the Bank's mortgage banking operations.
Michigan BIDCO and Northern Michigan Foundation also utilize a portion of this
space for their office. This leased space is currently adequate to support the
Bank's Sault mortgage banking operations and the Bank's accounting and computer
system needs.
The Company leases its former loan office in Sault Ste. Marie to an unrelated
third-party. Management hopes to either develop this 16-acre site or to sell it
in the future. The site is also being considered by Michigan BIDCO for
development.
The Bank owns a small commercial office building in Newberry, Michigan, which
the Bank purchased in early 1995.
Varsity Funding and Varsity Mortgage lease a small office in Farmington Hills,
Michigan under a three-year agreement.
Midwest Loan Services leases an office in Houghton, Michigan under a
year-to-year lease.
Management believes that its office facilities are adequate to support the
anticipated level of future expansion of the Bank's business.
The following table sets forth certain information relating to real estate owned
and leased at December 31, 1995. The Bank believes that the fair market value
of the real estate which it owns exceeds the book value of such real estate.
Based upon its assessment of current market conditions, management believes the
16-acre site where the former loan office is located has a fair market value
substantially more than its carrying cost as of December 31, 1995 of $266,595.
Year Owned or
Office Location Opened Leased Cost
---------------------------------- ------ -----------
Bank Main Office
959 Maiden Lane
Ann Arbor, MI 48105 1996 Owned $689,877
Corporate Office,
Bank Mortgage Banking Office,
Operations Center, and
Michigan BIDCO Office
Federal Heritage Building
209 E. Portage Avenue
Sault Ste. Marie, Michigan 1990 Leased -
[continued on following page]
Former Loan Office
- 18 -
19
Easterday & I-75
Sault Ste. Marie, Michigan 1991 Owned $266,595
Newberry Loan Collection Office
207 W. John St.
Newberry, Michigan 1995 Owned $30,000
Varsity Funding & Varsity Mortgage
33493 14 Mile Rd., Ste. 20
Farmington Hills, Michigan 1995 Leased -
Midwest Loan Services
616 Sheldon Ave., Ste. 300
Houghton, Michigan 1991 Leased -
ITEM 3. - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is party to or to which any of their properties are subject.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
- 19 -
20
PART II.
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK AND DIVIDEND INFORMATION
The Company's Common Stock trades on The NASDAQ Small-Cap Market under the
symbol NEWB. As of the March 1, 1996 there were approximately 380 stockholders
including approximately 240 beneficial owners of shares held by brokerage firms
or other institutions. The high and low sales prices of the Company's common
stock as quoted by NASDAQ, for each quarter of the two year period ended
December 31, 1995 are listed below. The quotations represent interdealer
prices only, without retail markups, markdowns or commissions:
High Low
1995
Fourth Quarter $5 5/8 $4
Third Quarter 4 1/4 3 1/2
Second Quarter 4 1/4 3 1/2
First Quarter 4 3 3/4
1994
Fourth Quarter $5 1/4 $3 3/4
Third Quarter 4 3/4 3
Second Quarter 5 3 1/4
First Quarter 5 1/4 3 3/4
No dividends have been paid on the Company's Common Stock. The Bank is limited
in its ability to pay dividends to the Company by reason of a covenant in its
term loan agreement (see Note 15 of the Notes to Consolidated Financial
Statements). The Company does not currently anticipate declaring or paying
dividends.
- 20 -
21
ITEM 6. - SELECTED FINANCIAL DATA
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands Except Per Share Data)
1995 1994 1993 1992 1991
------- ------ ------ ------ -------
SUMMARY OF OPERATIONS
Interest income 2,379 $3,987 $3,852 $3,749 $3,899
Interest expense 1,845 2,104 1,660 1,755 2,270
Net interest income 534 1,883 2,192 1,994 1,629
Provision for loan losses 17 210 203 163 147
Net interest income after
provision for loan losses 517 1,673 1,989 1,831 1,482
Net gain (loss) on investments 56 (178) 203 141 (271)
Profit from equity investment
in Michigan BIDCO 95 178 13 - -
Other non-interest income 631 702 580 357 179
Gain on sale of branches & loans - 3,018 - - -
Non-interest expense 1,699 2,782 2,624 1,937 1,614
Income (loss) before income tax (402) 2,611 161 391 (226)
Income tax expense (benefit) (107) 770 23 86 (49)
Net income (loss) (295) $1,841 $138 $305 $ (177)
SELECTED YEAR END BALANCES
Total assets 38,275 31,827 64,468 49,991 47,920
Loans receivable, net 8,954 4,221 27,409 28,756 25,948
Loans held for sale 7,983 4,129 14,138 172 31
Cash, cash equivalents
and securities 15,028 19,264 14,741 16,322 17,618
Deposits 20,745 13,128 48,222 44,992 43,431
Note payable 1,000 1,000 2,294 1,908 2,060
FHLB advances 10,000 9,800 7,000 - -
Minority interest 201 - - - -
Stockholders' equity 4,651 4,096 2,411 2,326 2,114
SHARES OUTSTANDING AND PER SHARE DATA
Common shares, year-end 1,276 1,200 1,173 1,142 1,167
Weighted average shares, year 1,201 1,186 1,165 1,149 1,167
Cash dividends - - - - -
Net income (loss) ($0.25) $1.55 $0.12 $0.26 ($0.15)
Book value $3.64 $3.41 $2.06 $2.04 $1.81
SELECTED RATIOS
Net average interest rate spread 1.09% 3.03% 4.01% 4.46% 3.66%
Net yield on average
earning assets 1.69% 3.42% 4.38% 4.70% 4.06%
- 21 -
22
Return on average assets (0.84%) 3.02% 0.24% 0.62% (0.38%)
Return on average equity (6.94%) 54.47% 5.83% 13.21% (8.31%)
Avg. equity to asset ratio 12.14% 5.55% 4.14% 4.70% 4.62%
[See the Note on the following page]
(1) The Bank sold three branches and associated loans and deposits on December
5, 1994. Income and expense associated with these branches are included up
until the date of the sale. Net income includes a gain from the Branch Sale of
$1.66 per share.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of the following discussion and analysis is to assist the reader in
understanding and evaluating the changes in financial position and results of
operations over the past three years. The discussion should be read in
conjunction with the consolidated financial statements, the related notes
thereto, and statistical information presented elsewhere in this report.
GENERAL
The discussion below must be considered in light of the fundamental changes
resulting from 1) the opening in February 1996 of a new main office of the Bank
in Ann Arbor, and 2) the closing on December 5, 1994 of the sale by the Bank of
assets pertaining to its Newberry, Michigan headquarters office and its two
branches in Sault Ste. Marie, Michigan, which included the sale of deposits and
loan portfolios (the "Branch Sale"). Accordingly, historical results of
operations of the commercial banking division are not indicative of future
operations. In addition, results of operations for 1995 and 1994, and
attributes of the Bank's assets and liabilities at year-end 1995 and 1994, were
significantly affected by the Branch Sale. The operations of the Company and the
banking industry in general are significantly influenced by general economic
conditions, related monetary and fiscal policies of the federal government, and
policies of financial institution regulatory authorities, including the Federal
Reserve Board (FRB), the Michigan State Financial Institutions Bureau (FIB), and
the Federal Deposit Insurance Corporation (FDIC). Deposit flows and cost of
funds are influenced by interest rates in competing investments and general
market rates of interest. Lending activities are affected by the demand for
loan borrowing, which in turn is affected by the interest rates at which such
financing may be offered and other factors affecting the economy and the
availability of funds.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets of the Company at December 31, 1995 amounted to $38.27 million
compared to $31.83 million at December 31, 1994. Loans receivable increased by
$4.73 million from $4.22 million to $8.95 million. Cash and cash equivalents
(including Federal Funds sold on an overnight basis and time deposits) at the
end of 1995 increased by $0.43 million from the prior year, while securities
- 22 -
23
decreased by $5.57 million. Loans held for sale in the Bank's mortgage banking
division increased to $7.54 million from $4.13 million.
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. Treasury and Agency securities and cash.
In addition the bank holding company had $0.40 million in cash and equity
securities at the end of 1995 to meet cash needs, primarily operating expenses
and interest and principal reductions on the holding company's bank loan. The
balance of the loan was $1,000,000 at year end 1995 and 1994. The note matures
November 1, 1996, but may be renewed for an additional one year subject to the
Company's compliance with the loan terms. Management believes that the cash and
securities on hand together with available unrestricted retained earnings that
University Bank is able to pay the Company in the form of dividends, with
permission of the Company's secured debt lender, is currently sufficient to
cover any required principal reductions during 1996 on the holding company's
loan.
Total stockholders' equity of the Company at December 31, 1995 was approximately
$4.65 million (or 12.2% of total assets) compared to $4.10 million (or 12.9% of
total assets) the year earlier. The Bank's regulatory capital at year end was
$6.05 million or 15.97% of the Bank's total regulatory assets and the
risk-adjusted capital ratio of 28.61% exceeded the minimum regulatory risk-based
capital requirement of 8% of the risk-adjusted assets for the Bank. The
following table provides additional information about the risk-adjusted assets
of the Bank and the Company's actual capital percentages.
- 23 -
24
UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio at December 31, 1995
($ in 000's)
Risk Adj.
Value Risk Asset
Asset (000's) Weight Value
- - --------------------------------------------- --------- --------- ---------
Cash and Fed Funds 1,209 0% 0
Reserve for Loan Losses (317) 0% 0
U.S. Gov't Agency Mortgage-backed Securities 10,343 20% 2,069
U.S. Gov't Equity Securities 855 20% 171
U.S. Gov't Guaranteed Loans 306 20% 61
Balances at Domestic and Canadian Banks 729 20% 146
Other Mortgage-backed Securities 1,709 50% 855
1-4 Family Mortgage Loans 12,756 50% 6,378
All Other Loans 4,192 100% 4,192
All Other Securities 184 100% 184
Real Estate Owned 131 100% 131
Premises & Equipment 1,360 100% 1,360
Mortgage Servicing Rights 2,937 100% 2,937
Other Assets 1,881 100% 1,881
- - --------------------------------------------- --------
TOTAL ASSETS 38,275
========
Off Balance Sheet Items:
Letters of Credit and Committments 729 100.00% 729
Foreign Exchange Contracts 700 0.50%(1) 4
Interest Rate Contracts 496 0.00%(1) 5
FHLMC Loan Purchase Committments 2,026 50.00% 391
MBS FHLMC Forward Sell Committments 2,253 0.00%(1) 8
Agency Guaranteed Commercial Loans Sold 203 20.00% 41
-------- -------- ------
TOTAL RISK-ADJUSTED ASSETS 21,541
======
CAPITAL RESOURCES
Shareholders Equity, GAAP 4,651 4,651
Unrealized (Gain) on AFS Securities (142) (142)
Investment in Unconsolidated Subsidiary 563 563
----- -----
Total Equity (Tier 1) 5,072 5,072
Minority Interest in consolidated subsidiary (Tier 2) 201
Qualifying Loan Loss Reserve (Tier 2) 269 269
----- -----
Regulatory Capital (Tier 1 & Tier 2) 5,542 5,341
===== =====
Primary and Total Capital Ratio (Leverage) 14.48%
=====
Risk-adjusted Capital Ratio (Tier 1) 23.55% 23.55%
===== =====
Risk-adjusted Capital Ratio (Tier 1 & Tier 2) 25.73% 25.73%
===== =====
Newberry Bancorp Consolidated
Total Capital Ratio (Leverage Ratio) 12.15%
=====
(1) Plus market value, or replacement cost valuation, as required.
-24-
25
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the notes thereto have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial condition and operating results in terms of historical
dollars (with the exception of the BIDCO, which uses the investment company
method of accounting), without considering changes in the relative purchasing
power of money over time due to inflation. The primary impact of inflation on
operations is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services, since
such prices are affected by inflation. In the current interest rate
environment, where there are rapid increases and decreases of interest rates,
liquidity and the maturity structure of the Bank's assets and liabilities are
crucial determinants of the Bank's profitability.
ASSET/LIABILITY MANAGEMENT
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a positive gap position will result in generally
higher earnings as short-term assets are repricing upward faster than
longer-term liabilities. However during a declining rate environment, the
opposite effect on earnings is true, with earnings being reduced due to
short-term assets repricing downward faster than longer-term liabilities.
The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at December 31, 1995.
The table is based upon various assumptions of management which may not
necessarily reflect future experience. The one-year gap position at December
31, 1995 was estimated to be $8,579,000 or +22.68%:
- 25 -
26
UNIVERSITY BANK
Asset/Liability Position Analysis 12/31/95
($ in 000's)
Maturing or Repricing in
3 Mos 91 Days to 1 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years OTHERS TOTAL
Fed Funds 1,209 0 0 0 0 1,209
Loans (1) 712 1,922 2,481 3 0 5,118
Canadian Investments 151 0 0 0 0 151
Securities Available for 3,917 2,088 34 599 767 7,404
Securities held for Sale 3,507 2,579 1 3 0 6,089
Loans held for Sale 7,983 0 0 0 0 7,983
Matured Loans 963 0 0 0 0 963
Variable Rate Loans 2,449 0 0 0 0 2,449
Other Assets 0 0 0 0 5,465 5,465
Cash and Due from Banks 0 0 0 0 578 578
Overdrafts 11 0 0 0 0 11
Non-Accrual Loans 0 0 0 0 412 412
---- ---- ---- ---- ---- ----
TOTAL ASSETS 20,901 6,589 2,515 605 7,222 37,833
LIABILITIES
CD's over $100,000 0 0 200 0 0 200
CD's under $100,000 3,174 2,832 10,717 0 0 16,723
MMDA 1,817 0 0 0 0 1,817
NOW 3 9 50 0 0 62
Demand 0 0 0 0 2,162 2,162
Savings 24 0 0 0 0 24
Canadian Savings 1,051 0 0 0 0 1,051
Other Liabilities 0 0 0 0 769 769
Borrowings 2,500 7,500 0 0 0 10,000
Equity 0 0 0 0 5,023 5,023
------ ------ ------ ------ ------ ------
TOTAL LIABILITIES 8,570 10,341 10,967 0 7,954 37,833
GAP 12,331 (3,753) (8,452) 605 (732) 0
CUMULATIVE
GAP 12,331 8,579 127 732 0
GAP
PERCENTAGE 32.59% 22.68% 0.34% 1.94 % 0.00%
Notes:
(1) Net of bad debt reserves.
- 26 -
27
The following additional information is provided with respect to the Bank's
investment portfolio, at book value, as of December 31, 1995:
Investment Portfolio Maturities (in $000s) and Yield by Type:
Maturity or Repricing Interval
-------------------------------------------------------
Under 1 Year to 5 Years to More Than
One Year 5 Years 10 Years 10 Years
Treasuries and
Gov't Agencies
- Amount $11,439 $ 11 $ 7 $ 1,447
- Yield 6.42% 10.08% 6.39% 6.66%
All Other Securities
- Amount $ 23 $ -0- $ -0- $-0-
- Yield 5.50% --% --% --%
Additional information regarding the Bank's investments as of December 31,
1995 and 1994 is set forth under note 3 to the Company's consolidated financial
statements included with this report.
The following information pertaining to maturities and sensitivities of the
Bank's loan portfolio to changes in interest rates is provided as of December
31, 1995:
Loan Portfolio Maturities by Type (in $000s):
Maturity
----------------------------------
Under 1 Year to After 5
One Year 5 Years Years
Commercial & Financial $ 3,576 $ -0- $ -0-
Agricultural $ -0- $ -0- $ -0-
Real Estate:
Construction $ -0- $ -0- $ -0-
Mortgage (1) $ 2,548 $ 2,482 $ -0-
Consumer $ 94 $ 572 $ -0-
------- -------- ------
Total $ 6,218 $ 3,054 $ -0-
Maturity Maturity
Under One Year Total
One Year or More Loans
Total Variable Rate Loans $3,576 $ -0- $3,576
Total Fixed Rate Loans $2,642 $3,054 $5,696
------ ------ ------
Total Loans (1) $6,218 $3,054 $9,272
====== ====== ======
(1) Excludes residential loans held for sale of $7,542, and the allowance for
loan losses.
- 27 -
28
SUMMARY OF RESULTS OF OPERATIONS
The net loss from operations of the Company was $294,977 in 1995. There was net
income of $1,841,001 in 1994 and $137,532 in 1993. Earnings (loss) per share
for 1995, 1994 and 1993 were $(0.25), $1.55 and $0.12, respectively.
The change from 1994 to 1995 was principally due to the sale in December 1994 of
the Bank's former main office in Newberry and two branch offices in Sault Ste.
Marie, including deposits and associated loan portfolios for a premium above
book value of $3,500,000, before certain expenses related to the sale (the
"Branch Sale"). 1995 was primarily a transition year in which plans were laid
to establish a new main office of the Bank in Ann Arbor and to expand the Bank's
mortgage banking activities. Expenses associated with these initiatives and
other unusual expenses decreased income in 1995. Also, the Bank sold most of
its core loan portfolio in December 1994, and a 42.7% decrease in average
earning assets together with the resulting decrease in net interest income as a
percent of earning assets depressed the income of the Bank in 1995 versus 1994.
The increase in net income in 1994 was principally the result of the Bank's sale
of the former main office and two branch banks and an income contribution from
Michigan BIDCO, which offset a decline in profitability of the branch banks
prior to the sale.
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 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 the holding company's bank loan indebtedness.
Such interest expense was $0.08 million in 1995, $0.18 million in 1994 and $0.13
million in 1993.
The following table presents, for the periods and dates indicated, the average
balances (all averages are calculated using monthly averages) of, the interest
earned or paid on, and the weighted average yield earned or rate paid on, the
Bank's interest earning assets and liabilities:
- 29 -
29
Net Interest Income
Years Ended December 31,
1995 1994 1993
------------------------------ ---------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Interest Earning Assets:
Loans:
Commercial 2,799,197 312,643 11.17% 6,419,846 595,750 9.28% 7,070,429 595,353 8.42%
Real Estate Construction 137,524 12,251 8.91% 822,800 74,052 9.00% 889,600 82,288 9.25%
Real Estate Mortgage 9,352,940 813,909 8.70% 16,298,685 1,360,401 8.35% 17,695,484 1,562,648 8.83%
Installment/Consumer 958,889 103,825 10.83% 9,448,311 957,024 10.13% 10,107,136 921,675 9.12%
----------- ---------- ------- ----------- ---------- ------- ----------- --------- -------
Total Loans 13,248,550 1,242,628 9.38% 32,989,642 2,987,227 9.06% 35,762,649 3,161,964 8.84%
Investment Securities(1) 16,579,737 1,042,855 6.29% 19,311,243 882,791 4.57% 11,631,724 599,940 5.16%
Federal Funds 1,704,543 93,494 5.48% 2,719,263 116,650 4.29% 2,705,085 89,663 3.31%
----------- ---------- ------- ----------- ---------- ------- ----------- --------- -------
Total Interest Bearing Assets 31,532,830 2,378,977 7.54% 55,020,148 3,986,668 7.25% 50,099,458 3,851,567 7.69%
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 61,212 1,774 2.90% 4,941,059 125,207 2.53% 4,974,208 131,780 2.65%
Savings 63,381 1,658 2.62% 4,789,687 119,236 2.49% 4,869,653 126,663 2.60%
Canadian Dollar Savings 1,225,086 59,169 4.83% 2,283,227 125,369 5.49% 1,192,033 53,329 4.47%
Time 12,924,479 838,019 6.48% 9,959,058 478,727 4.81% 10,536,700 551,541 5.23%
Borrowed Funds 11,088,914 739,898 6.67% 7,664,202 337,755 4.41% 2,437,542 78,364 3.21%
Money Markets 2,344,207 123,708 5.28% 17,958,889 736,093 4.10% 19,157,045 589,885 3.08%
----------- ---------- ------- ----------- ---------- ------- ----------- --------- -------
Total 27,707,279 1,764,226 6.37% 47,596,122 1,922,387 4.04% 43,167,181 1,531,562 3.55%
Holding Company Debt 903,127 81,181 8.99% 2,231,241 181,510 8.13% 1,970,737 128,128 6.50%
----------- ---------- ------- ----------- ---------- ------- ----------- --------- -------
Total Interest Bearing
Liabilities 28,610,406 1,845,407 6.45% 49,827,363 2,103,897 4.22% 45,137,918 1,659,690 3.68%
----------- ---------- ------- ----------- ---------- ------- ----------- --------- -------
Net Earning Assets, net interest
income, and interest rate spread 2,922,424 533,570 1.09% 5,192,785 1,882,771 3.03% 4,961,540 2,191,877 4.01%
Net yield on interest-earning assets 1.69% 3.42% 4.38%
(1) Actual yields; not adjusted to take into account tax-equivalent yields
resulting from tax-free municipal income and includes ban
- 30 -
30
The table above does not specify the average level of non-interest bearing
demand deposits, which were $2,156,136, $9,341,903, and $6,805,681 for the years
ended December 31, 1995, 1994 and 1993, respectively, as computed using
month-end balances for such years.
Net interest income of the Bank decreased to $0.53 million in 1995 from $1.88
million in 1994, mainly as a result of a decrease in the amount of earning
assets and liabilities and a reduction of the spread achieved on the smaller
base. During the year ended December 31, 1995, the Bank's average
interest-earning asset base fell by $23.49 million or -42.7% over 1994, while
average interest-bearing liabilities decreased by $19.89 million or -41.8%. Due
to repricing of variable rate securities and increases in the portfolio loan
lending rate, the average yield on interest-earning assets increased from 7.25%
to 7.54% in 1995. Due to a rise in short term interest rates, the average cost
of funds increased from 4.04% in 1994 to 6.37% in 1995. As a result of the
Branch Sale, which increased funding costs and resulted in a decrease in higher
yielding loans, the net interest margin decreased to 1.07% in 1995 from 3.03% in
1994.
Net interest income of the Bank decreased to $1.88 million in 1994 from $2.19
million in 1993, mainly as a result of a decrease in the spread between the rate
on earning assets and liabilities. During the year ended December 31, 1994, the
Bank's average interest-earning asset base rose by $4.92 million or 9.8% over
1993, while average interest-bearing liabilities increased by $4.69 million or
10.4%. Due to a repositioning of earning assets into variable rate securities,
the average yield on interest-earning assets decreased from 7.69% to 7.25% in
1994. Due to a persistent rise in interest rates, the average cost of funds
increased from 3.55% in 1992 to 4.04% in 1993. As a result of an expansion in
variable rate investments and a decrease in higher yielding loans, the net
interest margin decreased to 3.02% in 1994 from 4.01% in 1993. Moreover,
management of the Bank opted to raise rates paid on deposits faster than
otherwise would have been required in an attempt to stem the loss of deposits
following the announcement of the Branch Sale in early May 1994. The Branch
Sale agreement required the Bank to deliver at the closing of the Branch Sale a
minimum amount of deposits, and management opted to decrease margins by raising
deposit rates rather than risk a drop in deposits under the minimum amount
required pursuant to the Branch Sale agreement.
At December 31, 1995, the net spread between the Bank's interest earning assets
and interest earning liabilities was 1.78% up from the average net spread for
the 1995 year of 1.09%, principally as a result of a decrease in the cost of
funds as result of a decline in short term interest rates, further helped by a
small rise in the yield on earning assets as a result of a modest rise in the
yield on the loan portfolio. Fee income from the Bank's mortgage banking
originations and income from the Bank's portfolio of mortgage servicing rights
are not included in these calculations. As a result of the Branch Sale, the
relative importance of these types of non-interest income to the Bank's
profitability increased in 1995.
- 31 -
31
The following table presents information regarding fluctuations in interest
income and interest expense of the Bank 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); (2) changes in rate (changes in rate multiplied by old
volume); the rate/volume variance is allocated to changes in rate:
Rate/Volume Analysis
Years Ended December 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
Interest Income
Loans:
Commercial (335,990) 52,883 (283,107) (54,781) 55,178 397 (7,740) (16,713) (24,453)
Real Estate Construction (61,675) (126) (61,801) (6,179) (2,057) (8,236) (22,294) (5,722) (28,016)
Real Estate Mortgage (579,740) 33,248 (546,492) (123,348) (78,899) (202,247) 891,838 (548,013) 343,825
Installment/Consumer (859,898) 6,699 (853,199) (60,079) 95,428 35,349 146,134 (171,936) (25,802)
---------- ------ ---------- -------- ------- -------- --------- -------- --------
Total Loans (1,837,302) 92,703 (1,744,599) (244,387) 69,650 (174,737) 1,007,938 (742,384) 265,554
Investment Securities (124,868) 284,932 160,064 396,094 (113,243) 282,851 589 (114,906) (114,317)
Federal Funds (43,529) 20,373 (23,156) 470 26,517 26,987 (33,939) (14,177) (48,116)
---------- ------ ---------- -------- ------- -------- --------- -------- --------
Total Interest Income (2,005,699) 398,008 (1,607,691) 152,177 (17,076) 135,101 974,588 (871,467) 103,121
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now (123,656) 223 (123,433) (878) (5,695) (6,573) 23,727 (42,166) (18,439)
Savings (117,658) 80 (117,578) (2,080) (5,347) (7,427) 19,752 (41,122) (21,370)
Canadian Dollar Savings (58,101) (8,099) (66,200) 48,818 23,222 72,040 61,253 (25,600) 35,653
Time 142,546 216,746 359,292 (30,237) (42,577) (72,814) 55,755 (71,064) (15,309)
Borrowed Funds 150,924 251,219 402,143 168,031 91,360 259,391 63,876 11,141 75,017
Money Markets (640,009) 27,624 (612,385) (36,894) 183,102 146,208 (16,778) (125,693) (142,471)
---------- ------ ---------- -------- ------- -------- --------- -------- --------
Total Deposit Interest (645,954) 487,793 (158,161) 146,760 244,065 390,825 207,585 (294,504) (86,919)
Holding Company Debt Interest (108,041) 7,712 (100,329) 16,937 36,445 53,382 (470) (7,669) (8,139)
---------- ------ ---------- -------- ------- -------- --------- -------- --------
Total Interest Expense (753,995) 495,505 (258,490) 163,697 280,510 444,207 207,115 (302,173) (95,058)
---------- ------ ---------- -------- ------- -------- --------- -------- --------
Net Interest Income (1,251,703) (97,498)(1,349,201) (11,520) (297,586) (309,106) 767,473 (569,294) 198,179
========== ====== ========= ======== ======= ======== ========= ======== ========
- 32 -
32
LOAN PORTFOLIO
Information regarding the Bank's loan portfolio is set forth under Note 5
to the Company's consolidated financial statements included with this report as
of December 31, 1995 and 1994.
PROVISION FOR LOAN LOSSES
The Bank charges to operations a provision for possible loan losses which
is intended to create an allowance for future loan losses. Each year's
provision reflects management's analysis of the amount necessary to maintain
the allowance for possible loan losses at a level adequate to absorb
anticipated losses. In its evaluation, management considers such factors as
historical loan loss experience, specifically identified problem loans,
composition and growth of the loan portfolio, current and projected economic
conditions, and other pertinent factors. A loan is charged-off by management
as a loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Non-performing loans amounted to $508,336 and $394,691 at December 31, 1995 and
1994, respectively. 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 5
of the Consolidated Financial Statements for additional information regarding
impaired loans.
The provision for loan losses in 1994 was $16,800, a decrease of $193,200 from
the 1994 level, which in turn was an increase of $7,500 from the 1993 level of
$202,500. Loans charged off net of recoveries were $62,174, $14,274, and
$253,659 in 1995, 1994, and 1993, respectively. The allowance for possible loan
losses totaled $317,185, $362,559, and $292,290 at the end of 1995, 1994, and
1993, respectively.
In addition, the Bank is a participant in the Capital Access Program of the
Michigan Strategic Fund. The Michigan Strategic Fund (the "MSF") is a State of
Michigan sponsored program. Under the terms of the program, the Bank can
assign, at the Bank's sole discretion, business loans to be covered by MSF
guarantees. The borrower pays points at the loan closing which are matched 150%
by the MSF. The funds which are paid to the Bank by the MSF are held at the
Bank in a segregated account to offset such loan losses. If there are no losses
and the loans are all liquidated, the MSF would retain ownership of the funds in
the segregated account. Management takes the MSF fund into account in
determining the collateral backing of its MSF guaranteed loans. A Michigan
Strategic Fund balance of $5,212, $64,816 and $45,964 was available at year-end
1995, 1994, and 1993, respectively, to offset loan losses on a group of
commercial loans amounting to $564,000, $534,893 and $1,705,516 at year-end
1995, 1994, and 1993, respectively. A total of $24,597 of the Bank's MSF Fund
balance was transferred in connection with the Branch Sale.
Included in past due loans 90 days and still accruing at December 31, 1995 and
1994 was $10,033 and $21,796, respectively, in 90% FHA Title 1 insured loans.
On December 5, 1994, the Bank sold approximately $22,510,298 in loans associated
with three bank offices. The general loan loss
- 33 -
33
reserve associated with such loans of $125,457 was transferred to the acquiror
along with the loan balances.
A summary of loan loss expense for the Bank for the years indicated is presented
below:
Analysis of the Allowance for Loan Losses
($ in thousands)
Years Ending December 31,
-------------------------------
1995 1994 1993
------- ------- --------
Balance at beginning of period $ 363 $ 292 $ 343
------- ------- -------
Chargeoffs:
Domestic:
Commercial, financial and agricultural 36 36 246
Real estate-construction 0 0 0
Real estate-mortgage 61 9 63
Installment loans to individuals 31 54 65
Lease financing 0 0 0
Foreign 0 0 0
------- ------- --------
108 99 364
------- ------- --------
Recoveries:
Domestic:
Commercial, financial and agricultural 30 68 95
Real estate-construction 0 0 0
Real estate-mortgage 02 03 02
Installment loans to individuals 13 14 13
Lease financing 0 0 0
Foreign 0 0 0
------- ------- --------
45 85 110
------- ------- --------
Net charge-offs 63 14 254
------- ------- --------
Provision for loan losses 17 210 203
------- ------- --------
Sale of loans with associated reserve 0 125 0
------- ------- --------
Balance at end of period $ 317(1) $ 363(1) $ 292(1)
======= ======= ========
Ratio of net charge-offs during period
to average loans outstanding during period 0.48% 0.04% 0.89%
======= ======= ========
(1) Does not include Michigan Strategic Fund reserve balance of $5,212, $64,816
and $45,964 at year-end 1995, 1994 and 1993, respectively.
- 34 -
34
Analysis of the Allowance for Loan Losses
($ in thousands)
December 31, 1995
Percent of loans
Balance at End of Period in each category
Applicable to: Amount to total loans
------------------------- ------------ ----------------
Domestic
Commercial, financial,
agricultural $146 35.2%
Real estate-construction - 0.0%
Real estate-mortgage 40 50.7%
Installment loans to
individuals 83 14.1%
Unallocated 48 N/A%
---- ------
317 100.0%
==== ======
December 31, December 31,
1995 1994
----------- -------------
Total loans (1) 9,271 4,584
Reserve for loan losses 317 363
MSF reserve balance 5 65
Reserve/Loans, % (1) 3.42% 7.92%
Reserve/Loans, % (1)(2) 3.47% 9.34%
(1) Excludes loans held for sale.
(2) Includes both MSF and general loan loss reserve
During 1995, management decreased the monthly rate of reserve provision
for loan losses to $400, or $4,800 per year, and added a $12,000 extra
provision at year-end to account for the adoption of a new accounting principle
under which the Bank has allocated a portion of the allowance for loan losses
to the balance of impaired loans. The historic and current levels of the
reserve have been set at a level which management believes will be sufficient
to maintain the overall allowance, including the Michigan Strategic Fund loan
loss reserve, at an appropriate amount. At year-end 1995, such ratio was
3.47%, or $322,000. The 3.47% ratio reflects management's realization that the
loan portfolio the Bank retained after the Branch Sale is, in some instances,
of lower credit quality than the much larger loan portfolio which was sold.
The buyer's decision to put back loans was not based solely on credit quality,
but on geography, familiarity with the borrower, and lack of time to complete
due diligence on smaller balance loans, among other reasons. Loans put back by
the buyer to the Bank subsequent to the Branch Sale were transferred at the
current payoff figure less the associated general or specific loan loss reserve
which the Bank had assigned to the loans immediately prior to the Branch Sale.
The future performance of the loans is geographically concentrated and
dependent upon the performance of a relatively limited geographical area. The
loan loss reserve goal is believed to be at the high end of the Bank's peer
group, and is reflective of management's desire to have a loan loss reserve in
excess of its peer group average as a result of the forgoing.
Based upon current economic conditions in the Eastern Upper Peninsula
market area, management currently anticipates that net
- 35 -
35
loan losses in 1996 will not exceed $150,000. The redevelopment of the
previously closed State of Michigan Newberry Regional Mental Health Hospital
into a medium security prison, has had a positive impact on the Bank's loan
portfolio. The prison added 300 base economic jobs to the Newberry area
economy, on a base of 2,200 jobs. Local area real estate prices rose 30% during
1995 and with increased economic activity in the area, the prison may prove
beneficial to the Bank in mitigating future loan losses from its loan portfolio.
Moreover, the improving real estate market allowed to Bank to sell all of its
repossessed real estate properties in the Newberry area in 1995 and early 1996,
and has provided an incentive for borrowers to cure defaults rather than
allowing foreclosure of properties. While the Bank has just begun lending in
the Ann Arbor area, and the local economy is growing, management has no
historical basis upon which to predict credit losses from this new lending
activity.
Management believes that the current reserve level is adequate to absorb
future losses inherent in the loan portfolio, although the ultimate adequacy of
the reserve is dependent upon future economic factors beyond the Company's
control. A downturn in the general nationwide economy will tend to aggravate,
for example, the problems of local loan customers currently facing some
difficulties. A general nationwide business expansion could conversely tend to
diminish the severity of any such difficulties.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income. Excluding the $3,018,408 gain in 1994 from the sale of
bank branches and related loans, non-interest income in 1995 for the Company
increased by $79,759 from $701,201 in 1994 to $780,960. The increase in 1995
was a result of increases in securities gains and mortgage banking income, which
more than offset decreases in foreign exchange income, the contribution from
Michigan BIDCO and service charges and fees.
Excluding the aforementioned $3,018,408 gain in 1994, non-interest income in
1994 for the Company increased by $31,008 to $701,201 in 1994 from $670,193. A
negative variance in income from realized gains on securities from a gain in
1993 to a loss in 1994 which totalled $400,093 more than offset a $188,414
increase in mortgage servicing and origination fees, a $162,064 increase in
equity income from the profits of the BIDCO, and a $31,282 (+19.4%) gain in
foreign exchange income. Other categories decreased slightly primarily as a
result of the sale of the Bank branches on December 5, 1994.
Results of the Company's Ann Arbor community bank and the Bank's mortgage
banking operations are expected to have a more significant impact on the
Company's operating results in the future.
Mortgage Banking. Mortgage servicing and origination fees decreased to
$349,688 in 1995 from $357,141 in 1994. A 352% increase in loan purchase and
origination volumes during the 1995 and an increase in return from the Bank's
investment in FHLMC and FNMA single family mortgage loans serviced for others
was offset by a decrease in margin from each transaction.
Excluding the mortgage servicing rights held directly by Midwest Loan Services,
at December 31, 1995, the Bank serviced $188,319,200 of FHLMC mortgages for
others, versus $150,627,733 at December 31, 1994. The following table
summarizes the portfolio by type and mortgage note rate:
Interest Rate Stratification of the Bank's Servicing
- 36 -
36
($ thousands)
FIXED RATE - BY MATURITY (in years)
----------------------------------
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 239 188 160 5,025
8.50 - 8.99 2,674 485 994 22,005
8.00 - 8.49 2,219 682 2,220 32,618
7.50 - 7.99 286 1,691 3,746 50,108
7.00 - 7.49 479 1,055 14,242 22,687
6.50 - 6.99 1,374 983 11,166 5,995
6.00 - 6.49 1,781 573 1,666 469
under 6.00 117 314 78 -
----- -------- ------ -------
9,169 5,971 34,272 138,907
Current market
interest rates 5.75% 7.25% 7.50% 8.00%
Average annual
servicing fee 0.42% 0.30% 0.30% 0.26%
If interest rates were to decline to levels briefly seen during the Summer of
1993 and the Winter of 1995, the portfolio would experience significant
refinancings and payoffs, which would hurt income. Mortgage payoffs have been:
Mortgage Payoffs
First Quarter 1994 $5,347,079
Second Quarter 1994 3,358,617
Third Quarter 1994 1,539,680
Fourth Quarter 1994 1,544,922
First Quarter 1995 765,480
Second Quarter 1995 1,239,571
Third Quarter 1995 1,919,412
Fourth Quarter 1995 3,675,824
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 exceeds cost by approximately $75,000 to
$300,000. 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 $ thousands)
December 31, December 31,
1995 1994
------------ ------------
Total servicing (1) 188,319 150,628
Book value of servicing 2,035 1,626
Estimated market value
of servicing:
Management estimate (2) 2,208 2,162
Discounted cash flow (3) 2,318 1,910
Estimated excess of market
over book value (4) 283-173 536-284
(1) Includes servicing related to loans held for delivery of $7,542 at
December 31, 1994 and $4,129 at December 31, 1994. Excludes servicing
held by Midwest Loan Services carried at appraised value of $901 as of
December 31, 1995, less amortization.
(2) Assumes a price based upon market transactions at December 31, 1994 of
4.7x (4.7 times the servicing fee) for 30-year servicing, 4.0x for
15-year servicing, 2.4x for Balloon servicing and 2.3x for ARM servicing.
The market value of servicing at December 31, 1994 was based on a price
- 37 -
37
of 5.8x for 30-year servicing, 4.8x for 15-year servicing, and 3.1x for
Balloon servicing and 3.2x for ARM servicing.
Excess servicing is discounted from these amounts at a multiple of one
times the servicing fee.
(3) Uses net present value analysis of future cash flows, discounted back at
13.14% (the original rate used to price the bulk portfolio purchased in
1993).
(4) Range based upon the two methods used in (2) and (3), above.
During 1995 purchases and sales of mortgage servicing rights by third-parties
evidenced a gradual trend to decreased prices which mirrored the fall in
interest rates throughout the year.
With the opening of the Bank's Ann Arbor main office and the start-up of Varsity
Mortgage and Varsity Funding, management anticipates that its monthly mortgage
origination activity will be higher in the first part of 1996 than the average
monthly rate in 1995.
Additional information regarding the Bank's mortgage banking activities
for the past three years is set forth in Note 4 to the Company's consolidated
financial statements.
Michigan BIDCO. Michigan BIDCO (the "BIDCO") invests in businesses in Michigan
with the objective of fostering job growth and economic development. As of
December 31, 1995, the BIDCO had made fourteen such investments, amounting to a
total of $9,820,600 at original cost. At December 31, 1995, the BIDCO had total
assets of $6,798,463. For the years ended December 31, 1995 and 1994, the
BIDCO reported net income of $214,372 and $501,525, respectively. For the eight
months ended December 31, 1993, Michigan BIDCO reported net income of $31,275.
At December 31, 1995, the BIDCO had no outstanding conditional commitments to
lend, but had committed to donate $75,000 as an additional start-up capital
infusion to the Foundation. The Foundation had the following condition
commitments to lend:
Paper mill (add-on) $200,000
--------
Total $200,000
========
Securities. Proceeds from sales of marketable equity securities (included in
proceeds from sales of investment securities) were $238,481, $14,000 and
$139,341 for the years ended December 31, 1995, 1994 and 1993, respectively.
Gross gains of approximately $46,240, $13,456 and $41,216 and no gross losses
were realized on 1995, 1994 and 1993 sales, respectively.
Proceeds from sales of investment securities were $11,942,615, $2,515,942 and
$8,643,259 for the years ended December 31, 1995, 1994 and 1993, respectively
(excluding sales of marketable equity securities and sales associated with the
Bank's mortgage banking operation). Gross gains of approximately $164,717 and
gross losses of approximately $153,080 were realized on 1995 sales. Gross gains
of approximately $242 and gross losses of approximately $6,889 were realized on
1994 sales. Gross gains of approximately $133,677 and gross losses of
approximately $15,928 were realized on 1993 sales.
At December 31, 1995 gross unrealized losses in the Company's investment
securities (excluding those securities held by the bank holding company) were
$63,000 and gross unrealized gains were $278,000. At December 31, 1994 gross
unrealized losses in the Company's investment securities were $865,000 and gross
unrealized gains were $26,000. At December 31, 1993 gross unrealized losses in
the Bank's investment securities were $37,000 and gross unrealized gains were
$49,000. Sales of loans pooled into mortgage backed securities in connection
with the Bank's mortgage banking activities were $7,690,967 in 1995, $34,232,269
in 1994 and $32,952,797 in 1993.
Foreign Exchange. The Bank manages the foreign exchange business of the bank
which purchased the Bank's branches for a fee of $35,000 per year plus 40% of
the annual
- 38 -
38
net income, after allocation of direct costs, as defined, of the foreign
exchange business in excess of $150,000. Although the Bank continues to pursue
foreign exchange business for its own account, the revenue expected in 1996 from
that activity will be only a fraction of the level of prior years. Foreign
exchange revenues decreased to $49,656 for 1995 versus $192,841 in the 1994
period, as a result of lower volumes due to the Branch Sale, partially offset by
revenue under the management contract.
Foreign exchange revenues increased to $192,841 for 1994 versus $161,559 in
1993, as a result of higher volumes from large wholesale customers, which were
only partially offset by a sharp decline in volume from retail customers. The
35-40% decrease experienced in 1994 in the overall level of cross-border
shopping negatively impacted the Bank's retail customer volumes.
Non-interest expense. Non-interest expense for the Company decreased by
$1,017,390 or 36.6% in 1995 to $1,764,316 from $2,781,706 in 1994. Decreased
personnel, occupancy, data processing and depreciation expense resulting from
the Branch Sale was a major factor in the decrease. Increased legal expense,
primarily in the first half of 1995, was incurred as a result of loan collection
legal expense. Holding company total expense decreased $370,932 primarily as a
result of decreases in interest, amortization, management and legal expenses, to
$180,247 from $551,179. The decrease in interest expense was the result of a
decrease in debt as a result of the Branch Sale.
Non-interest expense for the Company increased by $157,233 or 6.0% in 1994 to
$2,781,706 from $2,624,473 in 1993. Increased personnel, occupancy, data
processing and depreciation expense resulting from the expansion of the Bank's
new full-service branch office in Sault Ste. Marie during the
second half of 1993 and the first half of 1994 was a major factor in the
increase. Increased legal expense was incurred as a result of the branch sale
and ongoing loan collection legal expense. Holding company total expense
increased $51,497 primarily as a result of a increased amortization expense
from $95,557 to $122,060 because of the Branch Sale during 1994. The increase
was result of increased legal collection expenses and an increase in interest
expense as a result of rising short term interest rates and a higher average
balance of bank borrowings during 1994.
INCOME TAXES
Income tax expense (benefit) in 1995 was $(106,949) versus $769,673 in 1994 and
$23,643 in 1993. The effective tax rate was (26.6)% in 1995, 29.5% in 1994, and
14.7% in 1993. A tax benefit was realized in 1995 as a result of the net loss
from operations. The effective tax rate for 1994 was lower than the statutory
rate due to equity income from the Bank's investment in the BIDCO, which
earnings are taxed at the BIDCO. The effective tax rate for 1993 was lower than
the statutory rate due to tax exempt interest income and graduated tax rates.
In February 1996, the Bank, through its 98%-owned subsidiary, Arbor Street LLC,
purchased $1,000,000 in federal low income housing tax credits through a
partnership investment in Michigan Capital Fund for Housing Limited Partnership
I, a Michigan limited partnership (the "Partnership"). The investment consisted
of a $50,000 equity purchase and the execution by Arbor Street LLC of a $950,000
promissory note held by the Partnership (the "Note"). The purchase of the tax
credits is expected to decrease the amount of federal income taxes the Company
would otherwise pay for the next ten
- 39 -
39
years.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements provided pursuant to this item are listed under Item
14(a) below and appear beginning on page 41.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
- 40 -
40
NEWBERRY BANCORP, INC.
AND
SUBSIDIARIES
__________________
CONSOLIDATED FINANCIAL STATEMENTS
___________________
DECEMBER 31, 1995, 1994, 1993
- 41 -
41
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Newberry Bancorp, Inc.
Sault Ste. Marie, Michigan
We have audited the accompanying consolidated balance sheets of Newberry
Bancorp, Inc. as of December 31, 1995 and 1994 and the related consolidated
statements of income, stockholder's equity and cash flows for the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Newberry Bancorp, Inc. as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for impaired loans and investment securities
in 1995 and 1993, respectively, to conform to new accounting guidance.
/s/Crowe, Chizek and Company
Crowe, Chizek and Company
Grand Rapids, Michigan
March 20, 1996
- 42 -
42
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31,1995 and December 31,199
December 31 December 31
1995 1994
ASSETS ---------- -----------
Cash and due from banks $ 578,216 $ 908,257
Federal funds sold 1,359,415 606,422
----------- -----------
Total cash and cash equivalents 1,937,631 1,514,679
Securities available for sale (Note 3) 13,090,547 18,658,332
Loans held for sale (Note 4) 7,983,154 4,129,321
Loans, net (Notes 5 & 6) 8,953,518 4,220,633
Premises and equipment (Note 7) 1,360,283 373,877
Purchased mortgage servicing rights (Note 4) 2,936,703 1,625,889
Investment in and Advances to
Michigan BIDCO (Note 1) 765,858 467,820
Other real estate owned 130,596 130,015
Other assets (Note 14) 1,116,238 706,018
----------- -----------
Total other assets 6,309,678 3,303,619
----------- -----------
TOTAL ASSETS $38,274,528 $31,826,584
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 43 -
43
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31,1995 and December 31,1994
December 31 December 31
1995 1994
LIABILITIES AND STOCKHOLDERS EQUITY ------- -------
Deposits:
Demand - non interest bearing $ 1,103,921 $ 1,638,101
Demand - interest bearing 1,642,425 3,026,925
Savings 1,075,328 587,370
Time (Note 8) 16,923,492 7,875,499
----------- -----------
Total Deposits 20,745,166 13,127,895
FHLB advances (Note 16) 10,000,000 9,800,000
Mortgage escrow 1,055,337 1,214,313
Note payable (Note 15) 1,000,000 1,000,000
Due to broker - 1,288,169
Deferred Noncompete income (Note 2) 137,080 175,000
Other Liabilities 484,912 1,125,518
----------- -----------
Total Liabilities 33,422,495 27,730,895
----------- -----------
Minority Interest (Note 11) 201,135 -
Committments and Contingencies (Note 7 and 12)
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
issued 0 shares in both 1995 and 1994 - -
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
issued and outstanding
1,276,125 shares in 1995
and 1,200,000 shares in 1994 12,761 12,000
Treasury Stock - 37,282 shares at
December 31,1995 (139,808) -
Additional Paid-in-Capital 2,799,656 2,478,270
Retained earnings 1,836,231 2,131,207
Net unrealized gain (loss) on securities
available for sale, net of tax
of ($73,181) in 1995, and
$270,860 in 1994. 142,058 (525,788)
----------- -----------
Total Stockholders' equity 4,650,898 4,095,689
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $38,274,528 $31,826,584
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 44 -
44
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the years ended December 31,1995, 1994, and 1993
1995 1994 1993
-------- -------- --------
Interest income:
Interest and fees on loans $ 1,242,628 $ 2,987,227 $ 3,161,964
Interest on securities:
U.S. Treasury Securities - 61,343 -
U.S. Government agencies 1,014,804 711,911 484,655
State and political subdivisions 4,056 16,858 19,794
Other securities 23,995 6,516 19,335
Interest on bank deposits - 86,163 76,156
Interest on federal funds 93,494 116,650 89,663
------------- ------------ ------------
Total interest income 2,378,977 3,986,668 3,851,567
------------- ------------ ------------
Interest expense:
Interest on deposits:
Demand deposits 125,482 861,300 721,665
Savings deposits 60,827 244,605 179,992
Time certificates of deposit 838,019 478,727 551,541
Bank borrowings 648,873 328,574 60,308
Repurchase agreements 91,025 9,181 18,056
Interest expense on note payable 81,181 181,510 128,128
------------- ------------ ------------
Total interest expense 1,845,407 2,103,897 1,659,690
------------- ------------ ------------
Net interest income 533,570 1,882,771 2,191,877
Provision for loan losses (Note 5) 16,800 210,000 202,500
------------- ------------ ------------
Net interest income after
provision for loan losses 516,770 1,672,771 1,989,377
------------- ------------ ------------
Other income:
Net security gains (losses) (Note 3) 55,681 (177,761) 222,332
Increase (decrease) in market value
of equity investments to cost - - 44,255
Service charges on deposit accounts 128 84,822 95,278
Foreign exchange income (Note 1) 49,656 192,841 161,559
Mortgage banking income (Note 4) 491,554 357,141 168,727
Profit from equity investment in
Michigan BIDCO (Note 1) 94,538 174,942 12,878
Profit on sale of branches
and loans (Note 2) - 3,018,408 -
Other 89,403 69,216 91,243
------------- ------------ ------------
Total other income 780,960 3,719,609 796,272
------------- ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
- 45 -
45
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income (continued)
For the years ended December 31,1995, 1994, and 1993
1995 1994 1993
------------ ----------- -----------
Other expenses:
Salaries and wages $ 507,204 $ 801,183 $ 739,336
Employee benefits 149,397 236,425 193,694
Occupancy, net 101,464 186,594 159,582
Taxes other than income (41,059) 131,735 48,096
Data processing and equipment expense 194,419 344,751 358,235
Correspondent bank service charges 27,243 70,633 51,840
Advertising 18,574 63,057 134,000
Net expense of other real estate owned 12,365 15,151 60,594
FDIC insurance 34,052 106,918 101,034
Mortgage banking expense (Note 4) 106,978 175,203 195,224
Legal and audit expense 354,268 333,923 193,928
Amortization of goodwill - 12,737 96,307
Management fees - 60,000 60,000
Other operating expenses 234,750 243,396 232,604
---------- ---------- ----------
Total other expenses 1,699,655 2,781,706 2,624,474
---------- ---------- ----------
Income (Loss) before income taxes (401,925) 2,610,674 161,175
---------- ---------- ----------
Income taxes (benefit) (Note 13) (106,949) 769,673 23,643
---------- ---------- ----------
Net Income (Loss) $ (294,976)$ 1,841,001 $ 137,532
========== ========== ==========
Earnings(Loss) per common share (Note 1) ($0.25) $1.55 $0.12
========== ========== ==========
Weighted average shares outstanding (Note 1) 1,201,012 1,186,427 1,165,072
========== ========== ==========
Dividends declared per share $ --- $ --- $ ---
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
- 46 -
46
NEWBERRY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1995, 1994, and 1993
Preferred Stock Common stock $.01 Treasury stock
$.001 par value par value
--------------------------- -------------------------- -----------------------
Number of Par Number of Par Number of
shares Value shares Value shares Cost
-------------- --------- -------- ------- ------------ --------
Balance January 1,1993 - - 1,142,853 $11,429 - -
Issuance of shares at
$2.75 per share - - 30,000 300 - -
Net unrealized gain on securities
available for sale, net of tax - - - - - -
Net Income - - - - -
----- ----- ---------- ------- -------- --------
Balance December 31,1993 - - 1,172,853 11,729 - -
Issuance of shares to ESOP at
$3.50 per share (Note 10) - - 7,147 71 - -
Issuance of shares at
$5.00 per share - - 20,000 200 - -
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - - - -
Net Income - - - - - -
----- ----- ---------- ------- -------- --------
Balance December 31, 1994 - - 1,200,000 12,000 - -
Issuance of shares at
$4.35 per share - - 66,125 661 - -
Issuance of shares to ESOP at - - 10,000 100 - -
$3.50 per share
Purchase of shares at
$3.75 per share - - - - (37,282) (139,808)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - - - -
Net Income (Loss) - - - - - -
----- ----- ---------- ------- -------- --------
Balance December 31, 1995 - - 1,276,125 $12,761 (37,282) ($139,808)
----- ----- ---------- ------- -------- --------
Unrealized
gain (loss)
Additional on available Total
Paid in Retained for sale Stockholder
Capital Earnings securities Equity
----------- ---------- -------------- ------------
Balance January 1,1993 $2,271,333 $ 152,674 - $2,435,436
Issuance of shares at
$2.75 per share 82,200 - - 82,500
Net unrealized gain on securities
available for sale, net of tax - - 8,222 8,222
Net Income 137,532 137,532
---------- ---------- -------- ----------
Balance December 31,1993 2,353,533 290,206 8,222 2,663,690
Issuance of shares to ESOP at
$3.50 per share (Note 10) 24,937 - - 25,008
Issuance of shares at
$5.00 per share 99,800 - - 100,000
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - (534,010) (534,010)
Net Income - 1,841,001 - 1,841,001
---------- ---------- -------- ----------
Balance December 31, 1994 2,478,270 2,131,207 (525,788) 4,095,689
Issuance of shares at
$4.35 per share 286,486 - - 287,147
Issuance of shares to ESOP at 34,900 - - 35,000
$3.50 per share
Purchase of shares at
$3.75 per share - - - (139,808)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - 667,846 667,846
Net Income (Loss) - (294,976) - (294,976)
---------- ---------- -------- ----------
Balance December 31, 1995 $2,799,656 $1,836,231 $142,058 $4,650,898
========== ========== ======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
- 47 -
47
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31,1995, 1994 and 1993
1995 1994 1993
------------- ------------ -------------
Cash flow from operating activities:
Net income (loss) $ (294,976) $ 1,841,001 $ 137,532
Adjustments to reconcile net income(loss) to net
cash from operating activities:
Depreciation and amortization 212,621 295,673 221,320
Compensation expense 101,750 25,008 -
Equity in undistributed earnings of BIDCO (94,538) (174,942) (12,878)
Provision for loan loss 16,800 210,000 202,500
Mortgage loans originated for sale (84,528,789) (24,044,097) (47,097,857)
Proceeds from sale of loans 74,798,121 8,876,621 32,952,797
Net Loss/(Gain) on loan sales (63,894) 272,035 -
Net amortization/accretion on securities (4,506) (69,089) 26,295
Net Loss/(Gain) on sale of available for
sale securities (57,880) (6,809) (181,116)
Net Loss/(Gain) on sale of trading account
securities 2,199 184,570 (41,216)
Proceeds from sales of trading account
securities 6,098,191 34,246,269 33,092,138
Market Adjustment on loans held for sale (64,661) 64,661 -
Gain from branch sale - (3,018,408) -
Expenses associated with branch sale - (197,269) -
Change in:
Purchased mortgage servicing rights (534,112) (65,110) (1,731,340)
Other real estate (581) 42,404 9,500
Decrease (increase) in other assets (544,425) (136,866) 58,408
Increase (decrease) in other liabilities (2,698,358) 2,289,640 (16,662)
------------ ------------ ------------
Net cash from operating activities (7,657,038) 20,635,292 17,619,421
------------ ------------ ------------
Cash flow from investing activities:
Purchase of available for sale
securities (7,974,794) (21,238,539) (55,830,834)
Proceeds from sales of available for
sale securities 12,181,096 2,515,942 18,779,402
Proceeds from maturities and paydowns of
available for sale securities 2,453,703 2,371,268 1,421,283
Acquisition of Midwest Loan Services, net
of cash received (161,882) - -
Purchase of home equity loans (1,903,212) - -
Loans granted net of repayments (2,846,473) 623,735 1,114,122
Investment in BIDCO (Note 1) (203,500) - (250,000)
Proceeds from disposal of assets - 24,494 25,393
Premises and equipment expenditures (983,436) (216,718) (407,624)
Disbursement of funds due to
branch sale (note 2) - (19,641,424) -
------------ ------------ ------------
Net cash from investing activities 561,502 (35,561,242) (35,148,258)
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statement
- 48 -
48
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31,1995, 1994 and 1993
Cash flow from financing activities:
Net increase (decrease)in repurchase agreements - (483,569) 56,679
Net increase in deposits 7,617,272 11,213,702 3,230,115
Proceeds from FHLB advances 7,500,000 2,800,000 7,000,000
Payments of FHLB advances (7,300,000) - -
Net increase (decrease) in mortgage
escrow accounts (158,976) (2,351,020) 3,543,222
Additional borrowing on notes payable - - 500,000
Principal payment on notes payable - (1,294,000) (114,000)
Issuance of common stock - 100,000 82,494
Purchase of treasury stock (139,808) - -
------------ ------------ ------------
Net cash from
financing activities 7,518,488 9,985,113 14,298,510
------------ ------------ ------------
Net change in cash and
cash equivalents 422,952 (4,940,837) (3,230,327)
Cash and cash equivalents:
Beginning of period 1,514,679 6,455,516 9,685,843
------------ ------------ ------------
End of period $ 1,937,631 $ 1,514,679 $ 6,455,516
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 1,773,595 $ 2,047,987 1,620,282
Cash paid for income taxes 740,108 18,570 (19,252)
Supplemental disclosure of noncash investing activities:
Par value of mortgage loans securitized $ 7,690,957 $ 25,018,952
Debt assumed in exchange for Midwest acquisition 312,500 -
Fair value of shares exchanged for Midwest acquisition 287,147 -
Assets and liabilities acquired in acquisition of Midwest
Other equity securities 17,946 -
Loans held for sale 95,000 -
Premises and equipment, net 85,695 -
Purchased mortgage servicing rights 906,598 -
Other assets 198,559 -
Other liabilities 342,357 -
Minority interest 199,912 -
The accompanying notes are an integral part of the consolidated financial
statements.
- 49 -
49
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements of Newberry Bancorp, Inc. (the
Company or the Corporation) include the operations of its wholly-owned
subsidiary, University Bank (the Bank), and the Bank's wholly-owned and 80%
owned subsidiaries, Varsity Funding Services, L.L.C. (Varsity) and Midwest
Loan Services, Inc. (Midwest), respectively. The accounts are maintained
on an accrual basis in accordance with generally accepted accounting
principles and predominant practices within the banking industry. All
significant intercompany balances and transactions have been eliminated in
preparing the consolidated financial statements.
The Company is a bank holding company. The subsidiary Bank, which is
located in Michigan, is a full service community bank, which offers all
customary banking services, including the acceptance of checking, savings
and time deposits, and the making of commercial, real estate, personal,
home improvement, automotive and other installment, credit card and
consumer loans. The Bank's Sault Ste. Marie branch also exchanges foreign
currency for both United States and Canadian customers. During 1995, the
Bank changed its name from The Newberry State Bank to University Bank.
Also during 1995, the Bank established a new bank office in Ann Arbor,
which opened in February 1996, in addition to its limited service branch
office in Sault Ste. Marie, Michigan. The Ann Arbor office will be the
focus of the Bank's future business development plan. The consolidated
assets of the Company of $38,274,528 as of December 31, 1995, primarily
represent commercial and retail banking activity. Mortgage loans which
were sold into the secondary market and are being serviced by the Bank and
Midwest for others of $269,000,000 as of December 31, 1995, are not
included in the Company's consolidated balance sheet. The Bank uses
brokers to arrange time deposits, and during 1995, a significant portion of
the Bank's time deposits were brokered deposits (See Note 8).
The Bank's operating subsidiaries are engaged in residential home mortgage
origination, mortgage sales to the secondary market, and mortgage
servicing. Midwest Loan Services is based in Houghton, Michigan, and is a
specialist in servicing residential mortgage loans for itself and other
financial institutions, including the Bank (See Notes, 4, 7 & 11). Varsity
which is based in Farmington Hills, Michigan, specializes in the purchase,
from correspondents, and the sale to the secondary market, of nonconforming
residential loans. Varsity commenced operations in October 1995 (See Notes
4 & 7).
Michigan BIDCO, Inc.
The investment in Michigan BIDCO, Inc. (the BIDCO) is accounted for under
the equity method of accounting. The Bank owns 44.1% (43.1% at December
31, 1994, and 41.2% at December 31, 1993) of the outstanding shares of the
BIDCO at December 31, 1995, which began operations in May, 1993. During
1995, the Company purchased
1. Summary of significant accounting policies (continued)
$203,500 in bonds issued by the BIDCO which remained outstanding at
December 31, 1995. On a fully diluted basis, assuming conversion of
outstanding convertible bonds, the Bank and the Company together owned
15.61% and 10.57% at December 31, 1995 and 1994, respectively. In
addition, upon conversion, certain Corporation officers and directors and
their immediate family (two of whom serve as President and Chairman of the
Corporation) would have an ownership interest in the BIDCO of 19.6%. The
conversion may take place, at the election of the BIDCO, subsequent to any
time that the BIDCO's equity pursuit to an audit performed using generally
accepted accounting principles exceeds $1,500,000. Total equity of the
BIDCO was $1,288,103 at December 31, 1995.
The financial statements of Michigan BIDCO, Inc. are stated using the
investment company method. As a result, investments made by the BIDCO are
evaluated by management and carried at estimated fair value. Net income
for the BIDCO for the seven months ended December 31, 1993 totaled $31,257
of which 41.2%, or $12,878 was included in other income. Net income for
the BIDCO for the year ended December 31, 1994 totaled $405,898, of which
43.1%, or $174,942, was included in other income. Net income for the BIDCO
for the year ended
- 50 -
50
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
December 31, 1995 totaled $214,372, of which 44.1%, or $94,538, was
included in other income.
Current Vulnerability Due to Certain Concentrations: The Company's loan
portfolio is concentrated in the eastern Upper Peninsula of Michigan.
Management is of the opinion that no concentrations exist that make the
Company vulnerable to the risk of a near term severe impact. While the
loan portfolio is diversified, the customers' ability to honor their debts
are partially dependent on the local economies. This area is primarily
dependent on the recreation, gambling, government (education and other),
cross-border shopping and manufacturing (automotive and other) industries.
Most real estate loans are secured by federal agency guarantees and
residential or commercial real estate and most business loans are secured
by business assets. Generally, installment loans are secured by various
items of personal property. A large portion of time deposits consist of
certificates of deposit obtained through brokers and are subject to
withdrawl (with penalties for early withdrawl) should the Company's credit
worthiness downgrade. In the future management expects that the loan
portfolio will be concentrated in the Ann Arbor area of Michigan due to its
new bank office in Ann Arbor (see Note 21). This area is primarily
dependent on the education, healthcare, services, and manufacturing
(automotive and other) industries.
Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements,
and the
1. Summary of significant accounting policies (continued)
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
The primary estimates incorporated into these consolidated financial
statements which are more susceptible to change in the near term include
the value of mortgage servicing rights, the allowance for loan losses, the
carrying value of impaired loans and other real estate, the equity interest
in the fair value and the change in the fair value of investments made by
the BIDCO, and the fair value of financial instruments.
Goodwill: Goodwill, which relates to the purchase of the Bank in 1988, was
being amortized on a straight-line basis over 15 years. After the sale of
branches in December 1994, it was determined that goodwill should be fully
amortized (Note 2). Accumulated amortization of goodwill was $191,048 and
$68,988 at December 31, 1994 and 1993, respectively.
Trading account securities
All trading securities are designated as such at the time of purchase.
Realized and
- 51 -
51
unrealized gains and losses on trading account securities are included
immediately in other income.
Securities available for sale
Securities available for sale consist of bonds, notes, mortgage-backed
securities and certain equity securities. Some adjustable rate mortgage
loans are securitized and retained as securities available for sale. For
securities classified as securities available for sale, it is the intention
of management to hold such assets for an indefinite period of time. From
time to time, management may decide to sell such securities prior to
maturity for liquidity purposes, asset/liability strategy, tax planning,
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors. At December 31, 1993 the
Corporation adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No.
115). As required by SFAS No. 115, securities classified as available for
sale are reported at their fair value and the related net unrealized
holding gain or loss is reported, net of related income tax effects, as a
separate component of shareholders' equity until realized. Prior to
adopting this statement, available-for-sale securities were recorded at the
lower of cost or fair market value. Adoption of SFAS No. 115 increased
stockholders' equity at December 31, 1993 by $8,222, net of tax.
Premiums and discounts on securities available for sale are recognized in
interest income using the interest method over the period to maturity.
- 52 -
52
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of significant accounting policies (continued)
1
Gains or losses on the sale of securities available for sale are determined
using the specific identification method.
Securities held to maturity
Investment securities held to maturity reflect securities which the
Corporation has the ability and intent to hold until maturity. As of
December 31, 1995 and 1994, there were no investment securities classified
as held to maturity.
Mortgage banking activities
Mortgage banking activities include the purchase of loans from
correspondents. The agreements with the correspondents and the degree of
underwriting the Bank performs on the loans determine whether the loans are
purchased with or without recourse. Mortgage loans held for sale as part
of the Bank's mortgage banking activities are valued at the lower of cost
or market as determined by bid prices for loans in the secondary market. A
mortgage loan held for sale is one committed for sale to secondary market
investors under a firm agreement at or prior to the closing date of the
loan. The net deferred fees or costs are reclassified on the balance sheet
from loans to investment securities, and treated as a discount or premium
upon securitization and recognized as an adjustment to yield over the life
of the security using the effective interest method. If the security is
sold, the net deferred fees or costs are treated as part of the historical
cost basis in calculating the gain or loss on sale of security.
The cost of purchased mortgage servicing rights is capitalized and
amortized over the period of, and in proportion to, the related net
positive servicing income to be generated from the various servicing
portfolios acquired. Amortization occurs proportionately as the principal
balance of the mortgages serviced is reduced. These servicing rights are
periodically analyzed to determine if prepayment speeds or other factors
have reduced their value below the present value of future service fee
income. Reductions in value are itemized as an other expense.
Allowance for loan losses
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. Increases in the allowance are recorded by a provision for
loan losses charged to expense. Estimating the risk of loss and the amount
of loss on any loan is necessarily subjective. Accordingly, the allowance
is maintained by management at a level considered adequate to cover
possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific
borrower situations including their financial position and collateral
values, and other factors and estimates which are subject to change over
time. While management may periodically allocate portions of the allowance
for specific problem loan situations,
1. Summary of significant accounting policies (continued)
the whole allowance is available for any loan charge-offs that occur. A
loan is charged-off by management as a loss when deemed uncollectible,
although collection efforts may continue and future recoveries may occur.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No, 114, Accounting by
Creditors for Impairment of a Loan, and later amended by No. 118,
Accounting by Creditors for Impairment of Loan - Income Recognition and
Disclosures (SFAS No. 114 and 118). As amended, SFAS No. 114, adopted by
the Company at January 1, 1995, requires that impaired loans, as defined,
be measured based on the present value of expected cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or at the fair value of collateral if the
loan is collateral dependent. Under this standard, loans considered to be
impaired are reduced to the present value of expected cash flows or to the
fair value of collateral, by allocating a portion of the allowance for loan
losses to such loans. If these allocations cause the allowance for loan
losses to require an increase, such increase is reported as bad debt
expense. The effect of adopting this standard is reported in the provision
for loan losses, and was not material for 1995.
- 53 -
53
Smaller balance homogeneous loans such as real estate, consumer and
installment loans are collectively evaluated for impairment. Commercial
loans and first mortgage loans secured by non-residential properties are
evaluated individually for impairment. When credit analysis of the
borrower's operating results and financial condition indicates the
underlying ability of the borrower's business activity is not sufficient to
generate adequate cash flow to service the business' cash needs, including
the Company's loans to the borrower, the loan is evaluated for impairment.
Often this is associated with a delay or shortfall in payments of 90 days
or less. Commercial credits are rated on a scale of A to E, with grade A
being pass, B being special attention or watch, C substandard, D doubtful,
and E loss. Loans graded B, C, D & E are considered for impairment. Where
serious doubt exists as to the collectibility of a loan, the accrual of
interest is discontinued. These loans are often also considered impaired.
Impaired loans, or portions thereof, are charged off when deemed
uncollectible. The nature of disclosures for impaired loans is considered
generally comparable to prior nonaccrual and renegotiated loans and
nonperforming and past-due asset disclosures.
Loan fees and interest income
Interest on loans is accrued over the term of the loan based on the amount
of principal outstanding. Under SFAS No. 114, as amended by SFAS No. 118,
the carrying value of impaired loans is periodically adjusted to reflect
cash payments, revised estimates
1. Summary of significant accounting policies (continued)
of future cash flows and increases in the present value of expected cash
flows due to the passage of time. Cash payments representing interest
income are reported as such and other cash payments are reported as
reductions in carrying value. Increases or decreases in carrying value due
to changes in estimates of future payments or the passage of time are
reported as reductions or increases in bad debt expense.
Loan fees, net of direct origination costs, are deferred and amortized over
the life of the loan as a yield adjustment.
Other real estate
Other real estate consists of property acquired through or in lieu of
foreclosure, are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at
the lower of cost or fair value minus estimated costs to sell.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Provisions for depreciation are computed primarily on the
straight-line method for bank premises and the accelerated methods for
equipment and land improvements over their estimated useful lives. The
estimated useful lives and methods of depreciation for principal items are
as follows:
Depreciation Depreciation
Type of asset Life in years Method
------------------- ------------- ----------------------
Land improvements 15 150% declining balance
Buildings and
improvements 15-40 Straight-line
Furniture, fixtures
and equipment 5-7 200% declining balance
Income taxes
The Corporation records income tax expense on the liability method. The
expense represents the sum of the estimated tax obligation per the income
tax return, and the change in the estimated future tax effects of temporary
differences and carryforwards. Deferred tax assets or liabilities are
computed by applying enacted income tax rates to the expected
- 54 -
54
reversals of temporary differences between financial reporting and income
tax reporting, and by considering carryforwards for operating losses and
tax credits. A valuation allowance adjusts deferred tax assets to the net
amount that is more likely than not to be realized.
- 55 -
55
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of significant accounting policies (continued)
Retirement plan
Until September 30, 1994 the Bank offered a 401-K Plan which allowed an
employee to contribute up to 15% of salary pre-tax, to the allowable limit
prescribed by the Internal Revenue Service. The Bank matched up to 3% of
an employee's salary multiplied by 100 times the Bank's percentage return
on assets (with a minimum payment of 1.5% of employee's salary).
Assets of the plan are invested with the 401-K Plan's trustee. The
Corporation's contributions to the plan were $16,722 and $24,633 for the
years ended December 31, 1994 and 1993, respectively. The plan was
terminated on September 30, 1994, and replaced by a noncontributory SEP IRA
contribution plan. The Bank contributes 3% of an employee's salary
multiplied by 100 times the Bank's percentage return on assets (with a
minimum payment of 1.5% of employee's salary) to an employee SEP IRA, with
immediate vesting. The Corporation made no contributions to the plan for
the years ended December 31, 1995 and 1994.
Employees Stock Ownership Plan (ESOP)
The Corporation has a noncontributory ESOP covering all full-time employees
who have met certain service requirements. The employees' share in the
Corporation's contribution is based on their current compensation as a
percentage of the total employee compensation. As shares are committed to
be released they are allocated to employees and compensation expense is
recorded at the shares' fair value.
Statement of cash flows
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents is defined to include the cash on hand, non-interest bearing
deposits in other institutions, Federal funds sold and other investments
with a maturity of three months or less when purchased. Customer loan and
deposit transactions are reported on a net cash flow basis.
Per share calculations
Earnings per common share are calculated based on the weighted average
number of common shares outstanding during each period including those
shares committed to the ESOP. Stock options are considered not dilutive
and therefore, not included in earnings per share calculations.
Foreign activities and hedging policy
The Bank exchanges foreign currency for the Bank's United States and
Canadian customers. The income from this activity, net of brokerage fees
and costs to settle hedging contracts, was $49,656,
- 56 -
56
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of significant accounting policies (continued)
$192,841 and $161,559 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The Bank enters into foreign exchange futures contracts as a hedge against
the Bank's exchange of foreign currency. Realized and unrealized gains and
losses are netted against currency exchange gains or losses.
Issued But Not Yet Adopted Accounting Standards
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long Lived Assets and for Long
Lived Assets To Be Disposed Of (SFAS No. 121). SFAS No. 121 establishes
accounting standards for the impairment of long lived assets and certain
identifiable intangibles and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
will adopt SFAS No. 121 effective January 1, 1996. Its adoption is
expected to have no material effect on the Company's consolidated financial
position or results of operations.
The FASB has issued Statement of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights (SFAS No. 122). This Statement
changes the accounting for mortgage servicing rights retained by the loan
originator. Under this Statement, if the originator sells or securitizes
mortgage loans and retains the related servicing rights, the total cost of
the mortgage loan is allocated between the loan (without the servicing
rights) and the servicing rights, based on their relative fair values.
Under current practice, all such costs are assigned to the loan. The costs
allocated to mortgage servicing rights will be recorded as a separate asset
and amortized in proportion to, and over the life of, the net servicing
income. The carrying value of the mortgage servicing rights will be
periodically evaluated for impairment. Impairment will be recognized using
the fair value of individual stratum of servicing rights based on the
underlying risk characteristics of the serviced loan portfolio, compared to
an aggregate portfolio approach under existing accounting guidance. The
Company believes that the adoption of this Statement will positively impact
the Company's net income in the short term, unless impairment is recognized
through a charge to income in any given future fiscal year, although in the
long term the underlying economics of the cash flows from this activity
will be unaffected.
The FASB has issued Statement of Financial Accounting Standards No. 123,
(SFAS No. 123). The Statement establishes a fair value based method of
accounting for employee stock options and similar equity instruments, such
as warrants, and encourages all companies to adopt that method of
accounting for all their employee stock compensation plans. However, the
Statement allows companies to
- 57 -
57
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of significant accounting policies (continued)
continue measuring compensation cost for such plans using accounting
guidance in place prior to SFAS No. 123. Companies that elect to remain
with the former method of accounting must make pro-forma disclosures of net
income and earnings per share as if the fair value method provided for in
SFAS No. 123 had been adopted. The accounting requirements of the
Statement are required for transactions entered into in fiscal years that
begin after December 15, 1995, although early adoption is permitted.
Disclosure requirements are effective for financial statements for fiscal
years beginning after December 15, 1995, or the period in which the
accounting requirements of the Statement are adopted if they are adopted
early. Management has concluded that the Company will not adopt the fair
value accounting provisions of SFAS No. 123 and will continue to apply its
current method of accounting. Accordingly, adoption of the SFAS No. 123
will have no impact on the Company's consolidated financial position or
results of operations.
Reclassifications
Certain amounts for 1994 and 1993 have been reclassified to conform to the
1995 presentation.
2. Sale of branches and associated loans
On December 5, 1994 the Bank sold three branches, certain deposits and
associated loans to another bank. In conjunction with the sale, the Bank
signed an agreement not to compete with the buyer in the general banking
business in the Upper Peninsula of Michigan for a period of five years from
the date of the sale. Excluded from the non-compete are the BIDCO and its
current and future affiliates, the Bank's residential mortgage lending
activities, and any pre-existing customer relationships which the buyer did
not assume. In addition, the Bank is free to operate from its branch in
the Upper Peninsula in providing banking services to other areas of the
United States and Canada.
A portion of the sales price, $175,000, was allocated to deferred income
attributable to the non-compete agreement. This is being amortized into
income over the five year term of the agreement. Other income in 1995 and
1994 includes $33,974 and $3,946, respectively, of amortization income from
this non-compete agreement.
At the time of the sale, the Bank entered into an agreement with the buyer
to manage the buyer's foreign exchange program for a fee of $35,000 per
year. The contract is cancellable upon sixty days notice to the Bank,
however, if the contract is terminated, the Bank would be free to compete
with the buyer in the foreign exchange business in the Upper Peninsula of
Michigan.
- 58 -
58
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
2. Sale of branches and associated loans (continued)
The following is a condensed summary of the transaction:
Assets Sold
-----------
Loans $(22,510,298)
Loan loss reserve transferred to buyer 125,457
Accrued interest on loans (209,524)
Property, and other fixed assets (623,622)
Miscellaneous assets (18,436)
Liabilities Transferred
-----------------------
Deposits & accrued interest $ 46,308,134
Miscellaneous liabilities 69,713
Expenses associated with sale (197,269)
Write-off of goodwill on balance sheet (109,343)
Deferred income attributable to
non-compete agreement (175,000)
Cash delivered to buyer (19,641,424)
===========
Gain on sale, before tax $ 3,018,408
===========
The loans sold by the Bank were without recourse with the exception of
approximately $1,722,891 in loans which were put back to the Bank on
February 28, 1995. No more loans can be put back to the Bank under the
terms of the agreement.
3. Securities available for sale
The following is a summary of the amortized cost and fair value of
securities available for sale at December 31, 1995 and 1994:
December 31, 1995
--------------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
U.S. agency mortgage-backed $10,243 $163 $(63) $10,343
Other mortgage-backed 1,680 29 - 1,709
U.S. agency equity 842 13 - 855
Other equity 111 73 - 184
Total securities
available for sale $12,876 $278 $(63) $13,091
======= ==== ===== =======
Since mortgage-backed securities have variable payments, they are not
reported by specific maturity grouping at December 31, 1995. In addition,
equity securities have no stated maturity.
- 59 -
59
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
3. Securities available for sale (continued)
December 31, 1994
--------------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
U.S. agency mortgage-backed $16,819 $10 $(865) $15,964
Other U.S. agency 1,740 3 - 1,743
U.S. agency equity 739 14 - 753
State and municipal 101 - - 101
Other equity 58 39 - 97
Total securities
available for sale $19,457 $66 $(865) $18,658
======= === ====== =======
Investment securities with an amortized cost of approximately $10,733,883
at December 31, 1995 and $16,297,000 at December 31, 1994 were pledged to
secure certain borrowings.
Proceeds from sales of securities available for sale were $12,181,096
during 1995. Gross gains and gross losses on sales of securities available
for sale were $210,960 and $153,080 in 1995, respectively. Proceeds from
sales of trading account securities were $6,098,191 during 1995, with gross
gains of $60,584 and gross losses of $62,783. Sales of trading account
securities consist of loans pooled into mortgage backed securities in
connection with the Bank's mortgage banking activities.
In 1994, proceeds from sales of securities available for sale were
$2,515,942, with gross gains of $-0-, and gross losses of $6,647. Proceeds
from sales of trading account securities were $34,246,269 during 1994, with
gross gains of $263,300 and gross losses of $434,414.
Proceeds from sales of securities available for sale were $18,779,402
during 1993. Proceeds from sales of trading account securities were
$33,092,138 during 1993, with gross gains of $290,158, and gross losses of
$131,392.
The nontaxable income included in interest income on available for sale
securities was $4,056, $19,852 and $22,562 for the years ended December 31,
1995, 1994 and 1993, respectively.
4. Secondary mortgage market operations
The Bank, and its subsidiaries Midwest Loan Services and Varsity Funding,
originate, purchase and sell and service single family mortgage loans
guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC) and the
Federal National Mortgage Association (FNMA). The following summarizes the
secondary market activities of the Bank, Midwest & Varsity, for the years
ended:
- 60 -
60
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
4. Secondary mortgage market operations (continued)
December 31,
--------- ------------ ---------
1995 1994 1993
--------- ------------ ---------
Interest income
allocation $ 645,092 $ 530,960 $ 374,832
Origination
fees 59,327 96,740 126,079
Loan servicing
fees, net 368,333 260,401 42,648
Gain (loss) on
sale of
mortgages 63,894 (184,569) 63,367
Lower of cost or
market, loans
held for sale 64,661 (64,661) -
Direct costs (171,639) (110,542) (195,224)
Operating
expense
allocation (418,007) (250,881) (166,989)
Interest
expense
allocation (382,570) (370,189) (322,199)
--------- -------- --------
Pretax profit
(loss) from
secondary market
activities $ 229,091 $ (92,741) $(77,486)
========= ============ =========
Certain assumptions were used to calculate the profit and loss from the
Bank's secondary market activities. Interest expense was calculated using
the average annual balance of loans held for sale, less escrow account
balances, multiplied by the Bank's average cost of funds for the year in
1995, 1994 and 1993. A portion of the operating expense allocation for
1995 is based upon management's estimates utilizing the best available
information, while 1994 and 1993 reflect expenses segregated by specific
department.
Years Ended December 31,
---------- --------------------------
1995 1994 1993
---------- ------------ ------------
Loans held for
sale, Jan. 1 $4,129,321 $14,317,493 $ 172,433
Origination or
acquisition of
loans held for
sale 84,750,145 24,044,097 47,097,857
Proceeds from
sale of loans
originated for
sale 80,896,312 34,232,269 32,952,797
---------- ------------ ------------
Loans held for
sale, Dec. 31 $7,983,154 $ 4,129,321 $14,317,493
========== ============ ============
4. Secondary mortgage market operations (continued)
A reserve of $64,661 was deducted from income for the year ended December
31, 1994 as a lower of cost or market provision for loans held for sale.
The aggregate market value of the loans held for sale exceeded the cost at
December 31, 1995 and 1993, thus no reserve was required.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. Such mortgage loans have been sold without
recourse. The unpaid principal balances of these loans, including loans
acquired from the acquisition of Midwest, were $269,000,000, $151,000,000
and $143,000,000 at December 31, 1995, 1994 and 1993, respectively.
- 61 -
61
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
Custodial balances maintained in connection with the foregoing loan
servicing were $1,049,179, $1,214,313 and $3,565,333 at December 31,
1995, 1994 and 1993, respectively.
Following is an analysis of the change in the asset balance of acquired
loan servicing rights:
Balance, January 1, 1993 $ -
Additions 1,921,577
Amortization (190,237)
----------
Balance, December 31, 1993 1,731,340
Additions 65,110
Amortization (170,561)
----------
Balance, December 31, 1994 1,625,889
Additions 534,112
Additions from acquisition
of Midwest 906,598
Amortization (129,896)
----------
Balance, December 31, 1995 $2,936,703
==========
5. Loans
Major classifications of loans are as follows as of December 31, 1995 and 1994:
1995 1994
---------- ----------
Commercial $3,320,270 $2,504,428
Real estate - mortgage 5,027,952 1,777,192
Real estate - construction - 91,127
Installment 922,481 210,445
---------- ----------
9,270,703 4,583,192
Allowance for loan losses (317,185) (362,559)
---------- ----------
Net loans $8,953,518 $4,220,633
========== ==========
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62
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
5. Loans (continued)
Changes in the allowance for loan losses were as follows:
1995 1994 1993
--------- --------- ---------
Balance at beginning of period $362,559 $292,290 $343,449
Provision charged to
operating expense 16,800 210,000 202,500
Recoveries 45,617 84,549 110,333
Provision sold with loans - (125,457) -
Charge-offs (107,791) ( 98,823) (363,992)
--------- --------- ---------
Balance, end of year $317,185 $362,559 292,290
========= ========= =========
The Bank had a Michigan Strategic Fund reserve balance of $5,212 and
$64,816 available at December 31, 1995 and 1994, respectively, to offset
loan losses on a group of commercial loans amounting to $564,000 at
December 31, 1995 and $534,893 at December 31, 1994. Accordingly, the
Corporation does not include in its allowance for loan loss determination
the level of loss associated with the reserve balance. The Michigan
Strategic Fund (the "MSF") is a State of Michigan sponsored program. Under
the terms of the program, the Bank can assign, at the Bank's sole
discretion, business loans to be covered by MSF guarantees. The funds
which are paid to the Bank by the MSF are held at the Bank in a segregated
account to offset such loan losses. If there are no losses and the loans
are all liquidated, the MSF would retain ownership of the funds in the
segregated account.
Past due and non accrual loans are as follows:
At December 31,
1995 1994
-------- -------
Past due loans
90 days and more and still accruing:
Real estate $ 52,401 $ 76,576
Installment loans 34,400 92,947
Commercial loans 9,557 112,219
------------------ -------
$ 96,358 $281,742
======== ========
Non accrual loans:
Real estate $ 85,666 $108,056
Installment loans - -
Commercial loans 326,312 4,893
------------------ -------
$411,978 $112,949
======== ========
If the non-accrual loans had performed in accordance with their original
terms, additional interest income would have been recorded for the years
ended December 31, 1995, 1994 and 1993 of $4,480 and $6,994 and $12,661,
respectively.
5. Loans (continued)
Included in past due loans 90 days and still accruing at December 31, 1994
and 1993 was $21,796 and $34,076, respectively, of installment loans which
are 90% insured by the FHA. Not included in past due loans 90 days and
more and still accruing and non accrual loans at December 31, 1995 and 1994
were loans to other borrowers on management's watch list of $358,400 and
$173,844, respectively. As
- 63 -
63
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
of December 31, 1995 and 1994 the Bank had no loans which would be
considered troubled debt restructurings.
Information regarding impaired loans for the year ended December 31, is as
follows:
1995
Average investment in impaired loans $328,731
Interest income recognized on impaired loans
including interest income recognized on
cash basis 44,104
Interest income recognized on impaired loans
on cash basis 44,104
Information regarding impaired loans at year-end is as follows:
At December 31,
1995
----------------
Balance of impaired loans $403,599
Less portion for which no allowance for loan
losses is allocated ($163,555)
Portion of impaired loan balance for which an
allowance for credit losses is allocated $240,044
Portion of allowance for loan losses allocated
to the impaired loan balance $91,973
6. Loans to related parties
Certain directors and executive officers of the Bank, including their
immediate families, related companies and companies in which they are 10%
or more shareholders were loan customers during the year. A summary of
this loan activity is as follows:
Balance, December 31, 1994 $5,000
Additional loans made during the year 200,550
Sale of loans (160,550)
Principal payments made during
the year ( 40,000)
---------
Balance, December 31, 1995 $5,000
=========
- 64 -
64
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
7. Premises and equipment
Premises and equipment classifications at December 31, 1995 and 1994 are
summarized as follows:
1995 1994
---------- ---------
Land $281,306 $174,336
Buildings and improvements 730,580 106,591
Furniture, fixtures, and equipment 675,795 337,623
---------- ---------
1,687,681 618,550
Less accumulated depreciation 327,398 244,673
---------- ---------
Net $1,360,283 $373,877
========== =========
Depreciation expense amounted to $82,725, $112,375 and $125,773 for the
years ended December 31, 1995, 1994 and 1993, respectively.
The Corporation and Bank lease space for their main office in Sault Ste
Marie, Michigan for $965 per month on a month-to-month basis. Varsity
leases space for its office for $23,748 per year, and Midwest leases its
space for a nominal amount from the city of Houghton. Total rental expense
for the operating leases was $17,522 in 1995, $51,503 in 1994 (including
two branch offices sold in December 1994), and $35,468 in 1993. As of
December 31, 1995, the Corporation and the Bank had no minimum rental
commitments under noncancelable operating leases. Varsity had an annual
minimum rent as of December 31, 1995 of $23,748, with a total minimum
amount of future rent payable over the next three years of $69,700.
The Bank remains contingently liable in the event that the purchaser of one
of its branch locations in Sault Ste. Marie does not meet its future
obligations to the lessor. As of December 31, 1995 management believes
that the purchaser was in compliance with these lease terms. The annual
base rent for such branch is currently $32,000, and the future minimum rent
due is $250,000.
In May 1995, the Bank purchased a building in Ann Arbor, Michigan. The
Bank leased 58% of the building to the University of Michigan effective
October 1, 1995. The lease calls for minimum payments of $68,000 (adjusted
annually for inflation) plus the pro rata share of the building's expenses.
The initial term of the lease is three years.
- 65 -
65
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
8. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more at
December 31, 1995 and 1994, were $200,000 and $0, respectively. The
following table lists the scheduled maturity of these deposits for each
date:
As of 0-3 3-6 6-12 12+
December 31 Months Months Months Months Total
1995 $- $- $- $200,000 $200,000
In addition, at December 31, 1995 and 1994, the Bank had issued through
brokers $16,240,000 and $7,723,700 in time deposits with a maturity of 6-60
months and 6-12 months, respectively.
9. Stock options
Incentive Stock Option Plan
In 1986, the Corporation adopted an employee incentive stock option plan.
The stock option plan provides for the grant to officers and key employees
of the Corporation options to purchase a maximum of 28,700 shares of common
stock. Options granted pursuant to the stock option plan are incentive
stock options within the meaning of the Internal Revenue Code.
None of such options will be granted to directors of the Corporation who
are not employees. The exercise price of options granted under the plan
will not be less than the fair market value of the common stock at the date
of grant (110% for anyone who owns 10% or more of the Corporation's voting
stock at the date of grant). Options shall expire on the date specified by
the Board of Directors as follows: (1) within five years from the date of
grant, if the individual exercising them owned 10% or more of the
Corporation's voting stock at the date of grant of the option, and (2)
within 10 years from the date of grant for all other individuals. The plan
is administered by the Board of Directors, which may establish installment
exercise terms such that the option becomes fully exercisable in a series
of cumulating portions. No options have been granted as of December 31,
1995 or 1994.
Non-Statutory Stock Option Plan
In 1987, the Corporation adopted a non-statutory stock option plan. The
stock option plan provides for the grant to officers, directors and key
employees of the Corporation, and independent contractors providing
services to the Corporation, options to purchase a maximum of 20,000 shares
of common stock. The exercise price of options granted under the plan
shall be as determined by the Board of Directors. Options shall expire on
the date specified by the Board of Directors but not more than 10 years
from the date of grant.
- 66 -
66
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
9. Stock options (continued)
The plan is administered by the Board of Directors, which may establish
either cumulative or non-cumulative installment exercise terms. The plan
expires on April 8, 1997 (except as to any options which would be
outstanding on that date). No options were outstanding as of December 31,
1995 or 1994.
Director Stock Options
In 1993, the Board of Directors approved the grant of options to purchase
10,000 shares of common stock to each of the four non-executive directors,
in lieu of compensation. The exercise price of options granted was set at
$3.125 per share, which was the then current bid price per share as
reported by the NASDAQ Stock Market. The options are immediately
exercisable and expire July 19, 2003. All 40,000 options originally
granted remain outstanding under this plan at December 31, 1995.
1995 Stock Plan
In 1995, the Board of Directors approved, subject to approval by the
stockholders of the Corporation, the adoption of a stock option and stock
award plan (the 1995 Stock Plan), which provides for the grant of incentive
stock options, as defined in Section 422(b) of the Internal Revenue Code of
1986, as amended, as well as the grant of non-qualified stock options and
other stock awards. The plan provides for the grant to officers, directors
and key employees of the Corporation, and independent contractors providing
services to the Corporation, of options to purchase and other awards for a
maximum of 300,000 shares of common stock. The exercise price of options
granted under the plan shall be as determined by the Board of Directors, or
a compensation committee thereof. Options shall expire on the date
specified by the Board of Directors or such committee, but not more than 10
years from the date of grant (or five years from the date of grant for
incentive stock options if the grantee owned 10% of the Corporation's
voting stock at the date of grant). Unless amended, the 1995 Stock Plan
will terminate on November 15, 2005. Adoption of the 1995 Stock Plan is
subject to the approval of the Company's stockholders at the 1996 Annual
Meeting of Stockholders, however, individuals holding a majority of the
Company's outstanding common stock have agreed to vote their shares in
favor of adoption of the Plan. Management has approved the issuance of
270,500 options subject to shareholder approval at the above mentioned
meeting.
The following table summarizes the activity relating to options to purchase
the Corporation's common stock (including options granted under the 1995
Stock Plan, subject to stockholder approval):
- 67 -
67
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
9. Stock options (continued)
Weighted Aggregate
Average Total
Number of Option Price Purchase
Shares Per Share Price
--------- ------------ ---------
Outstanding at December 31,
1993 88,700 $2.608 $231,312
Expired - 1994 48,700 $2.183 $106,312
--------- ---------
Outstanding at December 31,
1995 and 1994 40,000 $3.125 $125,000
========= ============ =========
10. Employee stock ownership plan
The employees allocation of ESOP assets is based on their current
compensation, after 1 year of service and upon reaching the age of twenty
one. The annual contribution to the ESOP is at the discretion of the
Corporation. The assets of the ESOP are held in trust and were valued at
approximately $218,206 and $279,120 as of December 31, 1995 and 1994,
respectively. The assets of the plan are comprised entirely of shares of
the Corporation, 39,228 and 74,432 shares at December 31, 1995 and 1994,
respectively, all of which were fully allocated at December 31, 1995. Upon
retirement from the plan, participants have distributed to them their
allocated shares of the Corporation's stock. The Corporation made an
additional contribution to the plan for the years ended December 31, 1995
and 1994 of 10,000 and 7,147 shares of common stock with an approximate
fair market value at the time of the contribution of $35,000 and $25,008,
respectively. The Corporation chose not to make additional contributions
to the plan for the year ended December 31, 1993.
11. Minority Interest
The Bank acquired an 80% ownership interest in the common stock of Midwest
Loan Services in December 1995, with the remaining 20% owned by the
employees of Midwest. The acquisition was accounted for as a purchase with
no goodwill recorded. At December 31, 1995, total common shareholders'
equity of Midwest was $1,005,671, resulting in a $201,135 minority interest
reflected on the Company's consolidated balance sheet. The results of
Midwest's operations are included in the Company's consolidated statement
of income since the date acquired.
In connection with the acquisition, 48,000 shares of common stock of the
Company were given as part consideration by the Bank, subject to repurchase
at the holders' request by the Company at $5.00 per share in December 1996.
Of the 48,000 shares, the BIDCO received 23,000 shares, in exchange for
its ownership interest in Midwest.
- 68 -
68
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
12. Commitments and contingencies
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans and to sell
loans, letters of credit and unused lines of credit. The Bank's exposure
to credit loss in the event of non-performance is equal to or less than the
contractual amount of these instruments. The Bank follows the same credit
policy to make such commitments as is followed by those loans recorded in
the consolidated financial statements.
The Bank is also a party to foreign exchange financial instruments with
off-balance sheet risk for internal hedging of exchange rate risk. At
December 31, 1995, the Bank had commitments to deliver $700,000 of Canadian
denominated dollars in March of 1996.
The Bank is also a party to commitments to sell loan pool securities
($5,066,000 at December 31, 1995 with fixed interest rates between 7.50%
and 8.00%) to hedge the interest rate risk of its mortgage banking
operation. The Bank had loans held for sale of $7,983,154 and $4,129,321
at December 31, 1995 and 1994, respectively, to meet a portion of the
commitment to sell loans.
New commitments to purchase $781,000 of single family residential loans
(with fixed interest rates between 6.50% and 8.25%) underwritten to FHLMC
standards are included in the total of commitments to buy loans.
Included in commitments to buy loans and in commitments to sell loans at
December 31, 1995, was a 9% $1,245,000 participation in a U.S. Rural
Economic Community Development Service guaranteed loan originated by the
BIDCO, which the Bank had not yet funded, where the Bank had an agreement
to sell its participation to the Federal Agricultural Mortgage Corporation.
Also included was commitments to buy ($1,011,000 at December 31, 1995 with
a fixed interest rate of 7.50%) loan pool securities in connection with
hedging activity of the Bank's mortgage banking operation.
All unused lines of credit were at variable interest rates.
The following is a summary of commitments as of December 31, 1995 and 1994:
1995 1994
------------ -----------
Commitments to buy loans $3,037,000 $2,163,021
Standby letters of credit - 114,000
Unused lines of credit 729,000 1,210,000
Commitments to sell loans $6,311,000 $1,503,000
Foreign exchange contracts Can$700,000 Can$500,000
- 69 -
69
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
13. Related party transactions
During 1994 and 1993, the Corporation had an agreement with Arete, a
partnership, to provide management services to the Corporation. Officers
and shareholders of the Corporation also serve as partners in Arete. The
agreement, which called for payment of $5,000 per month, had been approved
by the Board of Directors of the Corporation. The agreement was terminated
as of December 31, 1994.
The BIDCO invested $500,000 and a limited liability company (an LLC) formed
for the purpose invested $800,000 of a $1,300,000, 5.5 year fully
amortizing lease at 24% interest, plus an upfront $100,000 origination fee,
secured by railroad boxcars through Northern Federal Leasing LLC. The
BIDCO invested $500,000 and an LLC invested $280,000 of $780,000 in
Northern Federal Pulp and Paper LLC, which made an equity investment in
Austin Trading Partners, LP (a partner in the Great Lakes Pulp and Fibre
recycle pulp mill being built in Menominee, Michigan). The BIDCO invested
$42,000 and an LLC invested $28,000 in Northern Federal Hotels, LLC, which
made an equity investment in a firm which built a hotel near Lansing,
Michigan. In each of these LLCs, the Company's Chairman and President each
contributed 1/9th of the LLCs' investment.
See Note 6 for a summary of loans to related parties.
14. Income taxes
The provision for federal income taxes is composed of the following amounts:
1995 1994 1993
------------------- ------------------- -------------------
Current expense $33,642 $775,262 $4,197
Deferred expense (benefit) (140,591) 5,589 19,446
------------------- ------------------- -------------------
Total year $(106,949) $769,673 $23,643
=================== =================== ===================
The net deferred tax asset at December 31, 1995 and 1994 is comprised of
the following:
1995 1994
-------- --------
Loans available for sale $15,133 $-
Core deposit intangible 3,554 8,590
Allowance for loan losses 60,243 75,670
Other real estate owned write-downs - 18,533
Nonaccrual loan interest income 3,381 2,378
Deferred loan fees - 4,672
Unrealized gain
on investments available for sale - 270,860
Net operating loss carryforward 220,162 -
Other 457 11,870
-------- --------
Deferred tax assets $302,930 $392,573
======== ========
- 70 -
70
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
14. Income taxes (continued)
Unrealized loss
on investments available for sale ( 73,181) -
Servicing rights ( 36,820) -
Other ( 3,806) -
---------- --------
Deferred tax liabilities $(113,807) $-
========== ========
Net Deferred Tax Asset $189,123 $392,573
========== ========
No allowance account for deferred tax assets is considered necessary at
December 31, 1995 and 1994.
The difference between the financial statement tax expense and amounts
computed by applying the statutory federal tax rate of 34% to pretax income
is reconciled as follows:
1995 1994 1993
---------- --------- ---------
Statutory rate applied to
income before taxes $(136,655) $887,595 $54,800
Add (Deduct)
Effect of tax exempt
interest ( 1,178) ( 14,701) ( 9,756)
Earnings of unconsolidated
subsidiary ( 32,287) ( 59,480) -
Other 63,171 ( 43,741) ( 12,710)
---------- --------- ---------
Current year provision
(benefit) for income tax $(106,949) $769,673 $23,643
========== ========= =========
Earnings of unconsolidated subsidiary are expected to ultimately be
realized through dividends.
15. Note payable
The Corporation has a $1,000,000 note payable to First Northern Bank &
Trust (FNB&T) secured by the stock of the Bank at December 31, 1995. The
note has a maturity date of November 1, 1996. Interest is payable
quarterly at the prime rate of FNB&T plus .50 percent.
Dividends by the Bank to the holding company in excess of the prior year's
annual net income are not permitted without prior permission from FNB&T
under the terms of the Corporation's credit facility.
- 71 -
71
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
16. Federal Home Loan Bank advances
Advances from the Federal Home Loan Bank (the FHLB) at December 31, 1995
consisted of:
Interest Rate Maturity Advance
------------- -------------- -----------
5.83% Fixed rate advance June 20, 1996 $3,000,000
5.85% Fixed rate advance Oct. 4, 1996 $4,500,000
5.62% Adjustable rate advance
(3 month LIBOR rate less
6 basis points) Sept. 24, 1996 $2,500,000
-----------
Total advances $10,000,000
===========
The advances are secured by specific mortgage collateral with unpaid
principal balances of $1,514,071 and available-for-sale securities with a
balance of $10,783,883. Interest is payable in monthly installments
through maturity. With payment of a penalty, prepayments of advances up to
10% of the principal balance will be accepted by the FHLB given the Bank's
notification to the FHLB of its intention to prepay.
Advances from the FHLB at December 31, 1994 consisted of the following:
Interest Rate Maturity Advance
------------- -------------- ----------
5.87% Overnight advance n/a $2,800,000
6.43% Adjustable rate advance
(3 month LIBOR rate less
7 basis points) Oct. 2, 1995 $4,500,000
6.25% Adjustable rate advance
(3 month LIBOR rate less
6 basis points) Sept. 24, 1996 $2,500,000
----------
Total advances $9,800,000
==========
17. Short-term borrowings
The Bank from time to time enters into agreements to sell securities with
an agreement to repurchase the securities at a later date. Such agreements
generally mature within one to seven days from the transaction date.
Mortgage-backed securities were pledged as collateral towards the
repurchase agreements. No repurchase agreements were outstanding at
December 31, 1995.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1995
----
Average balance during the year $1,335,277
Average interest rate during the year 6.70%
Maximum month-end balance during the year $3,426,000
18. Newberry Bancorp (Parent Company Only) Condensed Financial Information
Dividend restrictions
- 72 -
72
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
Federal and state banking laws and regulations place certain restrictions
on the amount of dividends and loans a bank can pay to its parent company.
Under the most restrictive dividend limitations, as described in Note 15,
the Bank may not pay dividends to the parent company without prior approval
from a note holder. Should the Bank receive such approval, it could pay
dividends to the parent company equal to $942,000 in 1996 (before
considering 1996 net income and any changes in risk-based assets).
- 73 -
73
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
18. Newberry Bancorp (Parent Company Only) Condensed Financial Information
(continued)
Summarized financial information for Newberry Bancorp, Inc. for 1995 and
1994 is presented below:
BALANCE SHEETS
December 31,
ASSETS 1995 1994
-------------------------------------- ----------- ----------
Cash in bank $239,868 $54,151
Investment in subsidiary 5,023,367 4,746,808
Other assets 441,957 1,107,544
---------- ----------
Total assets $5,705,192 $5,908,503
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities 1,054,294 1,812,814
Stockholders' equity 4,650,898 4,095,689
---------- ----------
Total liabilities and
stockholders' equity $5,705,192 $5,908,503
========== ==========
STATEMENTS OF INCOME
1995 1994 1993
--------- --------- -------
Income:
Dividends from subsidiaries 1,350,000 1,584,000 234,394
Other 102,182 21,193 102,973
--------- --------- -------
Total income 1,452,182 1,605,193 337,367
Expense:
Interest 81,181 181,510 128,128
Other 99,066 369,669 371,554
--------- --------- -------
Total expense 180,247 551,179 499,682
Income (loss) before
federal income taxes
(benefit) and equity in
undistributed net income
of subsidiaries 1,271,935 2,156,372 837,049
Federal income taxes
(benefit) ( 9,630) (213,819) (88,727)
--------- --------- -------
- 74 -
74
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
Income (loss) before
equity in
undistributed
net income
of subsidiaries 1,281,565 2,370,191 925,776
Equity in undistributed
net income of
subsidiaries (1,576,541) (529,190) (788,244)
--------- ---------- --------
Net income (loss) $(294,976) $1,841,001 $137,532
========= ========== ========
- 75 -
75
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
1995 1994 1993
--------- --------- ---------
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net income (loss) $ (294,976) $ 1,841,001 $ 137,532
Depreciation 3,001 3,002 2,227
Amortization - 122,060 95,557
Compensation 35,000 25,008 -
Proceeds from sales of trading securities - - 267,503
Purchases of trading securities - - (128,254)
Loss (gain) on sale of investments (46,243) (13,456) (68,838)
Decrease (increase) in receivable
from affiliate 973,211 (973,211) 127,641
Decrease (increase) in Other Assets (55,839) 31,372 68,357
Increase (decrease) in interest payable (54,319) 19,068 35,945
Increase (decrease) in Other Liabilities (704,202) 679,708 1,475
Subsidiary net income 226,542 (2,157,168) (445,514)
--------- --------- ---------
Net cash provided by (used in)
operating activities 82,175 (422,616) 93,631
--------- --------- ---------
Cash flow from investing activities:
Subsidiary dividends received 1,350,000 1,564,800 234,394
Contributions of capital to subsidiary (920,000) - (750,000)
Purchase of available for sale securities (236,418) (14,000) -
Proceeds from sale of available for sale securities 253,268 14,000 -
Advances to Michigan BIDCO (203,500) - -
Capital expenditures - - (1,607)
--------- --------- ---------
Net cash provided by (used in)
investing activities: 243,350 1,564,800 (517,213)
--------- --------- ---------
Cash flow from financing activities:
Proceeds from bank financing 500,000
Principal payment on notes payable - (1,294,000) (114,000)
Proceeds from sale of common stock - 100,000 82,500
Purchase of treasury stock (139,808) - -
--------- --------- ---------
Net cash provided by (used in)
financing activities: (139,808) (1,194,000) 468,500
--------- --------- ---------
Net changes in cash and cash equivalents 185,717 (51,816) 44,918
Cash:
Beginning of year 54,151 105,967 61,049
--------- --------- ---------
End of year $ 239,868 $ 54,151 $ 105,967
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 135,500 $ 162,442 $ 92,182
Income tax $ 746,547 $ 18,750 $ (18,575)
- 76 -
76
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
19. Capital resources
Regulators have established "risk-based" capital guidelines which became
effective December 31, 1990. Under the guidelines, minimum capital levels,
which may include all or a portion of the reserve for loan losses, are
based on the perceived risk in asset categories and certain off-balance
sheet items, such as loan commitments and standby letters of credit. At
December 31, 1995 and 1994, the Bank's capital position was as follows:
Actual Required Excess
------------ ---------------------
Amount % Amount % Amount
Capital (in Thousands)
December 31, 1995
Risk-based $5,586 26.41% $1,692 8.00% $3,894
Leverage $6,051 15.97% $1,515 4.00% $4,536
December 31, 1994
Risk-based $4,997 38.17% $1,065 8.00% $3,932
Leverage $4,831 15.37% $1,268 4.00% $3,563
20. Fair Value of Financial Instruments
The following disclosure of the fair value of financial instruments is made
in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of Financial Instruments
(SFAS No. 107). The Company formally adopted SFAS No. 107 in 1995. Where
quoted market prices are not available, as in the case for a significant
portion of the Company's financial instruments, the fair values are based
on estimates using present value of expected cash flows or other valuation
techniques. These techniques are significantly affected by the assumptions
used, including the discount rate and the timing of estimated cash payments
and receipts. Accordingly, certain of the fair value estimates presented
herein cannot be substantiated by comparison to independent markets and are
not necessarily indicative of the amounts the Company could realize in a
current market exchange.
In addition, the fair value estimates are limited to existing on and off
balance sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered financial
instruments include the Bank's investment in the BIDCO, and real estate
investments such as the Ann Arbor bank building and the Bank's 16-acre
property at Easterday & Portage in Sault Ste. Marie.
- 77 -
77
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
20. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments
were as follows:
December 31, 1995
----------------------
Carrying Fair
Amount Value
---------- ----------
Financial Assets
Cash and short term investments $1,937,631 1,937,631
Securities Available for sale 13,090,547 13,090,547
Loans held for sale 7,983,154 8,036,364
Loans, net 8,953,518 9,454,646
Purchased mortgage servicing rights 2,936,703 3,219,228
Accrued interest receivable 206,437 206,437
(note: carrying amount of all other assets $3,372,975)
Financial Liabilities
Deposits 20,745,166 20,849,213
FHLB advances 10,000,000 10,016,600
Mortgage escrow 1,055,337 1,055,337
Note payable 1,000,000 1,000,000
Accrued interest payable 198,395 198,395
(note: carrying amount of all other liabilities $621,992)
Unrecognized financial instruments
The fair value of commitments to extend
credit, futures contracts to deliver
Canadian currency and the fair value
of letters of credit are considered
immaterial. - -
Estimated fair values were determined using the following assumptions:
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
value is a reasonable estimate of fair value.
- 78 -
78
NEWBERRY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
SECURITIES AVAILABLE FOR SALE - For securities and derivative instruments
available-for-sale, fair values are based on quoted market prices or dealer
quotes.
LOANS HELD FOR SALE - The fair value of loans held for sale is the market
value as quoted by the prospective purchaser of each loan.
NET PORTFOLIO LOANS - For certain homogeneous categories of loans, such as some
residential mortgages, consumer loans, commercial real estate loans, etc., fair
value is estimated by discounting
- 79 -
79
20. Fair Value of Financial Instruments (continued)
the future cash flows over the life to maturity using the current rates at
which similar loans would be made to borrowers with similar credit ratings.
Both the carrying value and fair value of loans receivable are shown net
of the allowance for loan losses.
MORTGAGE SERVICING RIGHTS AND MORTGAGE ESCROW - The fair value of mortgage
servicing rights is determined based on the estimated discounted net cash
flows to be received less the estimated costs of servicing; this estimated
fair value approximates the amount for which the servicing could currently
be sold. The discounted cash flows from the mortgage escrow is included in
the discounted cash flows from the mortgage servicing rights and therefore
mortgage escrow is carried at cost.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - The carrying values of accrued
interest receivable and payable approximate their fair values.
DEMAND DEPOSITS AND TIME DEPOSITS - The fair values of demand deposits,
savings accounts, and certain money market deposits are the amount payable
on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits for similar remaining maturities.
NOTE PAYABLE - Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value.
21. Subsequent Event
The Bank opened a new bank office in Ann Arbor, Michigan on February 6,
1996. The Bank designated this location as its main office for regulatory
purposes.
Subsequent to December 31, 1995, the Bank, through a 98%-owned subsidiary,
Arbor Street LLC, purchased $1,000,000 in federal low income housing tax
credits through a partnership investment in Michigan Capital Fund for
Housing Limited Partnership I, a Michigan limited partnership (the
"Partnership"). The investment consisted of a $50,000 equity purchase and
the execution by Arbor Street LLC of a $950,000 promissory note held by the
Partnership (the "Note"). In connection with the execution of the 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, the Company's Chairman and
President each received a 1% interest in Arbor Street LLC.
- 80 -
80
PART III.
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference herein
from the portions of the Company's Proxy Statement for its 1996 Annual Meeting
(the "Proxy Statement") to be under the captions:
Election of Directors
Executive Officers
Certain Information With Regard to Section 16(a) of the
Exchange Act
ITEM 11. - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference herein
from the portions of the Company's Proxy Statement to be under the captions:
Executive Compensation
Compensation Plans
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference herein
from the portion of the Company's Proxy Statement to be under the caption:
Security Ownership of Certain Beneficial Owners and
Management
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference herein
from the portion of the Company's Proxy Statement to be under the caption:
Certain Relationships and Related Transactions
PART IV.
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) (1) Index of Financial Statements: The following financial statements
are filed as part of this Report:
Audited consolidated balance sheets as of December 31, 1995
and December 31, 1994, and consolidated statements of income, stockholders'
equity and cash flows for the years ended December 31, 1995, 1994 and 1993,
of the Company.
81
(b) Reports on Form 8-K. None.
82
(c) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Certificate of Incorporation of the Company, as amended through March
31, 1990 (incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1989 (the "1989 10-K")).
3.1.1 Certificate of Amendment to the Certificate of Incorporation of the
Company filed December 27, 1990 (incorporated by reference to Exhibit 3.1.1 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1990
(the "1990 10-K")).
3.1.2 Certificate of Amendment to the Certificate of Incorporation of the
Company filed May 15, 1992 (incorporated by reference to Exhibit 3.1.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1992 (the
"1992 10-K")).
3.1.3 Certificate of Ownership and Merger of Newberry Holding Inc. into
Newberry Bancorp, Inc. filed December 31, 1992 (incorporated by reference to
Exhibit 3.1.3 to the 1992 10-K).
3.1.4 Certificate of Designation of Series 2 6% Cumulative Preferred Stock
(incorporated by reference to Exhibit 3.1.4 to the Company's Quarterly Report
on Form 10-Q for the Quarter Ended September 30, 1994).
3.2 Composite By-laws of the Company (incorporated by reference to Exhibit
3.2 to the 1989 10-K).
(10) Material Contracts.
10.1 Promissory Note dated September 28, 1995 issued to First Northern
Bank & Trust and Related Loan Agreement (incorporated by reference to Exhibit
10.15 of the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 (the "3rd Quarter 1995 10-Q")).
10.2 Newberry Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"), as
amended November 27, 1990 (incorporated by reference to Exhibit 10.2 to the
1990 10-K.*
10.2.1 Amendment to the ESOP, effective as of December 31, 1991
(incorporated by reference to Exhibit 10.2.A to the 1991 10-K.*
10.2.2 Related Agreement with ProStar Group, as ESOP Administrator
(incorporated by reference to Exhibit 10.2.1 to the 1991 10-K).*
10.3 Newberry State Bank 401(k) Profit Sharing Plan (incorporated by
reference to Exhibit 10.3 to the 1989 10-K).*
83
10.4 Incentive Stock Option Plan of the Company and form of Option
Agreement (incorporated by reference to Exhibit 10.4 to the 1989 10-K).*
10.5 1987 Non-Statutory Stock Option Plan of the Company and form of
Option Agreement (incorporated by reference to Exhibit 10.5 to the 1989 10-K).
10.6 Letter regarding grant of options to outside directors, dated as of
July 20, 1993 (incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993
10-K")).*
10.7 1995 Stock Option Plan of the Company.*
10.7.1 Form of Stock Option Agreement related to 1995 Stock Plan.*
10.8 Letter, dated December 1, 1989, from Federal Reserve Bank of
Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989 10-K).
10.9 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 the 1992 10-K) .
10.9.1 First Amendment to the Cascade Lease Agreement, dated January 5,
1993 (incorporated by reference Exhibit 10.9.1 to the 1992 10-K).
10.10 Federal Income Tax Allocation Agreement Between Newberry State Bank
and Newberry Holding Inc. dated March 21, 1992 (incorporated by reference to
Exhibit 10.11 to the 1991 10-K).
10.10.1 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 1991 10-K).
10.11 FHLMC Mortgage Servicing Acquisition Agreement between the Company
and First Eastern Mortgage Corporation, dated February 28, 1993 (incorporated
by reference to Exhibit 10.11 to the 1992 10-K).
10.12 Purchase and Assumption Agreement Between First Northern Bank &
Trust and University Bank dated May 5, 1994 (incorporated by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1994).
10.12.1 First Amendment dated July 1, 1994 to Purchase and Assumption
Agreement Between First Northern Bank & Trust and University Bank dated May 5,
1994 (incorporated by reference to Exhibit 10.12.1 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 (the "1994 10-K").
84
10.12.2 Second Amendment dated February 3, 1995 to Purchase and Assumption
Agreement Between First Northern Bank & Trust and University Bank dated May 5,
1994 (incorporated by reference to Exhibit 10.12.2 of the 1994 10-K).
10.12.3 Order of the Commissioner of the Michigan Financial Institutions
Bureau Approving the Relocation of the Bank's Main Office from Newberry to
Sault Ste. Marie, Michigan, containing certain post-closing conditions
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1994).
10.12.4 Noncompetition Agreement Between First Northern Bank & Trust and
University Bank dated December 3, 1994 (incorporated by reference to Exhibit
10.12.4 of the 1994 10-K).
10.12.5 Mortgage Origination Agreement Between First Northern Bank & Trust
and University Bank dated December 3, 1994 (incorporated by reference to
Exhibit 10.12.5 of the 1994 10-K).
10.12.6 Branch Services Agreement Between First Northern Bank & Trust and
University Bank dated December 5, 1994 (incorporated by reference to Exhibit
10.12.6 of the 1994 10-K).
10.13 Employment Agreement, between Mark Ouimet and University Bank and
Newberry Bancorp, Inc., as amended.*
10.13.1 Stock Option Agreement, dated as of December 15, 1995, between
Mark Ouimet and Newberry Bancorp, Inc.*
10.14 Net Branch Agreement, dated September 15, 1995, establishing Varsity
Funding Services, L.L.C among University Bank, Jess Monticello and William Cook
(incorporated by reference to Exhibit 10.16 of the 3rd Quarter 1995 10-Q).
10.15 Net Branch Agreement, dated January 12, 1996, establishing Varsity
Mortgage, L.L.C among University Bank, Jess Monticello, William Cook and
Marianne Opt Thompson.
10.16 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.
* Each of the exhibits noted by an "*" is a management compensatory plan or
arrangement.
(21) Subsidiaries of Registrant: List of subsidiaries.
(27) Financial Data Schedule
85
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NEWBERRY BANCORP, INC.
By: /s/Thomas J. Vandermus
-----------------------
Thomas J. Vandermus,
Chief Financial Officer
Date: March 30, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
------------------------ ------------------------ --------------
/s/Stephen Lange Ranzini Director, President, March 30, 1996
------------------------ Chief Executive Officer,
Stephen Lange Ranzini
/s/Thomas J. Vandermus Chief Financial and
------------------------ Chief Financial Officer
Thomas J. Vandermus
/s/Joseph L. Ranzini Director, Secretary, March 30, 1996
------------------------ Chairman
Joseph L. Ranzini
/s/Keith Brenner Director March 30, 1996
------------------------
Keith E. Brenner
/s/Mark Ouimet Director March 30, 1996
------------------------
Mark Ouimet
/s/Mildred Lange Ranzini Director March 30, 1996
------------------------
Mildred Lange Ranzini
/s/Michael Talley Director March 30, 1996
------------------------
Michael Talley
86
Index of Exhibits
Sequentially
Exhibit No. and Description Numbered Page
--------------------------- -------------
(3) Certificate of Incorporation and By-laws:
3.1 Certificate of Incorporation of the Company,
as amended through March 31, 1990
(incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1989 (the "1989 10-K").
3.1.1 Certificate of Amendment to the Certificate
of Incorporation of the Company filed December
27, 1990 (incorporated by reference to
Exhibit 3.1.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990
(the "1990 10-K").
3.1.2 Certificate of Amendment to the Certificate
of Incorporation of the Company filed
May 15, 1992 (incorporated by reference to
Exhibit 3.1.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992
(the "1992 10-K").
3.1.3 Certificate of Ownership and Merger of Newberry
Holding Inc. into Newberry Bancorp, Inc. filed
December 31, 1992 (incorporated by reference to
Exhibit 3.1.3 to the 1992 10-K).
3.1.4 Certificate of Designation of Series 2
6% Cumulative Preferred Stock (incorporated by
reference to Exhibit 3.1.4 to the Company's
Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 1994).
3.2 Composite By-laws of the Company
(incorporated by reference to Exhibit 3.2 to
the 1989 10-K).
(10) Material Contracts.
10.1 Promissory Note dated December 8, 1994 issued
to Bank One Milwaukee, N.A. ("Bank One") and
87
Related Letter dated December 2, 1994.
10.1.1 Collateral Pledge Agreement between Newberry
Holding Inc. ("Newberry Holding") and Bank One
and letter dated January 14, 1988 (incorporated
by reference to Exhibit 10.1 to the 1989 10-K),
and Related Letter dated June 28, 1991
(incorporated by reference to Exhibit 10.1.1
to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991 (the "1991
10-K").
10.2 Newberry Bancorp, Inc. Employee Stock Ownership
Plan (the "ESOP"), as amended November 27,
1990 (incorporated by reference to Exhibit 10.2
to the 1990 10-K).
10.2.A Amendment to the ESOP, effective as of December
31, 1991 (incorporated by reference to
Exhibit 10.2.A to the 1991 10-K)
10.2.1 Related Agreement with ProStar Group, as
ESOP Administrator (incorporated by reference
to Exhibit 10.2.A to the 1991 10-K).
10.3 Newberry State Bank 401(k) Profit
Sharing Plan (incorporated by reference to
Exhibit 10.3 to the 1989 10-K).
10.4 Incentive Stock Option Plan of the Company and
form of Option Agreement (incorporated by
reference to Exhibit 10.4 to the 1989 10-K).
10.5 1987 Non-Statutory Stock Option Plan of the
Company and form of Option Agreement
(incorporated by reference to Exhibit 10.5 to
the 1989 10-K).
10.6 Letter regarding grant of options to outside
directors, dated as of July 20, 1993
(incorporated by reference to Exhibit 10.6 to
the 1993 10-K).
10.7 1995 Stock Option Plan of the Company. * 89
10.7.1 Form of Stock Option Agreement related to
1995 Stock Plan. ***
88
10.8 Letter, dated December 1, 1989, from
Federal Reserve Bank of Minneapolis
(incorporated by reference to Exhibit 10.9
to the 1989 10-K).
10.9 Lease Agreement (the "Cascade Lease Agreement")
between RG Properties, Inc., as agent for Sault
Associates, a Michigan Limited Partnership,
and University Bank, dated
September 30, 1992 (incorporated by reference
to Exhibit 10.9 to the 1992 10-K).
10.9.1 First Amendment to the Cascade Lease Agreement,
dated January 5, 1993. (incorporated by reference
to Exhibit 9.1 to the 1992 10-K)
10.10 Federal Income Tax Allocation Agreement
Between Newberry State Bank and Newberry
Holding Inc. dated March 21, 1992.
(incorporated by reference to Exhibit 10.11
to the 1991 10-K)
10.10.1 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 1991 10-K)
10.11 FHLMC Mortgage Servicing Acquisition Agreement
between the Company and First Eastern Mortgage
Corporation, dated February 28, 1993.
(incorporated by reference to Exhibit 10.11
to the 1992 10-K)
10.12 Purchase and Assumption Agreement Between
First Northern Bank & Trust and The Newberry
State Bank dated May 5, 1994 (incorporated by
reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 1994).
10.12.1 First Amendment dated July 1, 1994 to
Purchase and Assumption Agreement Between First
Northern Bank & Trust and The Newberry State
Bank dated May 5, 1994
89
10.12.2 Second Amendment dated February 3, 1995 to
Purchase and Assumption Agreement Between First
Northern Bank & Trust and The Newberry State
Bank dated May 5, 1994
10.12.3 Order of the Commissioner of the Michigan
Financial Institutions Bureau Approving the
Relocation of the Bank's Main Office from
Newberry to Sault Ste. Marie, Michigan,
containing certain post-closing conditions
(incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1994).
10.12.4 Noncompetition Agreement Between First
Northern Bank & Trust and The Newberry State
Bank dated December 3, 1994
10.12.5 Mortgage Origination Agreement Between First
Northern Bank & Trust and The Newberry State
Bank dated December 3, 1994
10.12.6 Branch Services Agreement Between First
Northern Bank & Trust and The Newberry State
Bank dated December 5, 1994
10.13 Employment Agreement, between Mark Ouimet
and University Bank and Newberry Bancorp,
Inc., as amended. ***
10.13.1 Stock Option Agreement, dated as of December
15, 1995, between Mark Ouimet and Newberry
Bancorp, Inc. ***
10.14 Net Branch Agreement, dated September 15,
1995, establishing Varsity Funding Services,
L.L.C among University Bank, Jess Monticello
and William Cook ((incorporated by reference
to Exhibit 10.16 of the 3rd Quarter 1995 10-Q"). **
10.15 Net Branch Agreement, dated January 12, 1996,
establishing Varsity Mortgage, L.L.C among
University Bank, Jess Monticello, William Cook
and Marianne Opt Thompson. **
10.16 Purchase and Sale Agreement, dated November 1,
1995, concerning Common Stock of Midwest Loan
90
Services, Inc., among its shareholders and
University Bank and Newberry Bancorp, Inc. **
(21) Subsidiaries of Registrant.
(27) Financial Data Schedule