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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 for the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
-----------
Commission file number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
959 Maiden Lane, Ann Arbor, Michigan 48105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (734) 741-5858
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.010 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the average bid and asked price for the Registrant's
Common Stock on March 16, 1998, as reported by NASDAQ, was approximately
$2,642,123.* The number of shares outstanding of the Registrant's Common Stock
as of March 18, 1997: 1,984,227 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 30, 1998 for the 1998 Annual Meeting of
Stockholders, are incorporated by reference into Part III of this Report.
page 1 of 108 pages
Exhibit index on sequentially numbered page 73
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PART I.
ITEM 1. - BUSINESS
GENERAL
University Bancorp, Inc. a Delaware corporation (individually and on a
consolidated basis with its subsidiary where the context indicates, the
"Company" or the "Corporation"), operates as a bank holding company for its
wholly-owned subsidiary, University Bank. University Bank (the "Bank") is a
state chartered community bank. The Bank was chartered by the state of Michigan
in 1908 as successor to a banking organization organized in 1890. The Bank
changed its name from "The Newberry State Bank" to its current name in July 1995
to more closely identify the name of the Bank with its current place of
business. Ann Arbor, the home of the University of Michigan, is a university
town. The Bank's accounts are insured by the Federal Deposit Insurance
Corporation.
University Bancorp, Inc. is essentially a holding company for the Bank
and it invests available cash resources in marketable equity and debt securities
and interest bearing deposits. At December 31, 1997 University Bancorp, Inc. had
cash on deposit of $41,676 and available for sale investments at fair value of
$282,420. University Bancorp, Inc. changed its name to University Bancorp, Inc.
from Newberry Bancorp, Inc. in June 1996, to more closely identify the bank
holding company with the Bank.
University Bank is headquartered in the town of Ann Arbor, Michigan,
which is the largest city in Washtenaw County, in the western suburbs of the
Detroit Metropolitan Statistical Area ("Detroit MSA"). Following the closing of
its sale of bank office assets and liabilities relating to its former main
office in Newberry, Michigan and its two branch offices in Sault Ste. Marie,
Michigan on December 5, 1994, more fully described below, during 1995, the Bank
relocated its main office to the former offices of its mortgage operation in
Sault Ste. Marie, Michigan. Sault Ste. Marie is the largest city in the eastern
Upper Peninsula of Michigan and the county seat of Chippewa County. During 1995
the Bank was primarily engaged in residential mortgage lending and servicing
operations, and the investment of deposits and other bank borrowings in various
investments, including investment securities issued by government agencies and
U.S. Treasury securities. On February 6, 1996, the Bank opened its new Ann Arbor
main office.
The Bank conducts its banking business from its headquarters office in
Ann Arbor. During the fourth quarter of 1997, the Bank closed its Sault Ste.
Marie office and centralized its accounting function in Ann Arbor. The Bank's
primary market area is defined as the City of Ann Arbor and surrounding areas in
greater Washtenaw County. In addition, the Bank retains a portfolio of loans
from the eastern Upper Peninsula of Michigan and Sault Ste. Marie, Ontario,
Canada which are serviced from a one-person collection office located in
Newberry, Michigan which is located approximately 60 miles east of Sault Ste.
Marie, Michigan.
Mortgage Banking. 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
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origination of impaired credit, or subprime quality, residential mortgages, for
sale to non-U.S. government agency-backed mortgage conduits. Varsity Funding's
offices are located in Farmington Hills, Michigan, which is located on the
northwest side of the Detroit MSA. During early 1997, Varsity Funding also
established a retail residential mortgage operation through an office in
Farmington Hills, Michigan. The retail division was expanded to include an
office in Columbus, Ohio in January 1998.
In February 1996, Varsity Funding expanded the scope of its operations
by establishing another subsidiary of the Bank, Varsity Mortgage, L.L.C.
("Varsity Mortgage"). The Varsity Mortgage mortgage banking operation purchases
residential home loans which generally qualify for sale to secondary market
investors under the underwriting criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") from
correspondents in Michigan and in adjacent states. Loans purchased from
correspondents or originated internally by the Bank are then either pooled into
mortgage-backed securities and the securities are sold to investors or they are
sold directly to FHLMC or FNMA. The Bank sells on a continuous basis the
servicing rights to the loans or securities its originates. The Bank also
retains a portfolio of residential mortgage servicing rights for mortgages
located in Washtenaw County, Michigan and throughout the country which are
guaranteed by government agencies.
The Bank itself also originates residential loans from its Ann Arbor
office and sells them to secondary mortgage correspondents including Varsity
Mortgage. The Bank, through its Sault Ste. Marie mortgage banking office,
previously operated in similar fashion to Varsity Mortgage, by purchasing, from
correspondents in Michigan, or by originating, residential home loans which
generally qualify for sale to secondary market investors under the underwriting
criteria of the FHLMC and FNMA. In November 1996, the Bank discontinued its
wholesale operation in Sault Ste. Marie and transferred all pooling and
packaging of residential loans to Varsity Mortgage. The Bank's accounting
department continues to administer the Bank's table funding mortgage broker
lending operation from the Ann Arbor office.
The profits of both Varsity Mortgage and Varsity Funding are subject to
agreements (the "Net Branch Agreements") with the executives who have organized
and supervised their operations under which profits and/or revenues are shared
between the Bank and the employees of the subsidiaries. In future years, as a
result of a profit sharing agreement, the Bank is entitled to share profits of
Varsity Mortgage on a 50/50 basis with the managers and employees of this
subsidiary. As of October 1, 1997, the Bank does not receive further profits
from the pre-tax income of Varsity Funding, except that the Bank is entitled to
10% of the gross revenue (as defined in the LLC's operating agreement) of
Varsity Funding on an ongoing basis, and the Bank provides a tablefunding
lending facility to Varsity Funding at an above market interest rate in excess
of 10%.
Mortgage Subservicing. In July 1995 the Bank terminated its mortgage
servicing operation in Sault Ste. Marie by outsourcing its servicing operations
under a contract with Midwest Loan Services, 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
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financial institutions and mortgage brokers, of residential mortgage loans sold
to FNMA, FHLMC and other private residential mortgage conduits.
Michigan BIDCO. In May 1993, the Company established a Business and
Industrial Development Company (the "BIDCO") called Michigan BIDCO, Inc.
("Michigan BIDCO"). The BIDCO is licensed by the Michigan Financial Institutions
Bureau under the State of Michigan BIDCO program. Michigan BIDCO invests in
businesses in Michigan with the objective of fostering job growth and economic
development. Michigan BIDCO is currently 44.1%-owned by the Bank, and is
accounted for under the equity method. Such percentage is subject to reduction
in the event of conversion of the BIDCO's outstanding convertible bonds. The
BIDCO changed its name to Michigan BIDCO, Inc. from Northern Michigan BIDCO,
Inc. in late 1995 to reflect its strategic plan of seeking investment
opportunities throughout the entire state of Michigan. Originally, the BIDCO
limited its investments to the northern half of Michigan.
Northern Michigan Foundation. In December 1995, the BIDCO donated
$225,000 to capitalize Northern Michigan Foundation (the "Foundation"), and in
early 1996, donated an additional $75,000 to the Foundation. A portion of the
BIDCO's overhead is borne by the Foundation through a monthly fee reflecting
reimbursement for expenses incurred. The BIDCO and the Foundation share
administrative staffs and offices, with the Foundation reimbursing the BIDCO for
these services. As a result of its capitalization by the BIDCO, the Foundation
was able to gain the right to borrow a total of up to $2,000,000 from the U.S.
Rural Economic Community Development Service Agency ("U.S. RECDS") at 1%
interest with a 30 year term.
University Insurance & Investment Services. On December 31, 1996, the
Bank established a new insurance and investment sales agency subsidiary, called,
University Insurance & Investment Services, Inc., based in its Ann Arbor main
office. The agency is licensed by the State of Michigan as an insurance agency.
The focus of the insurance agency is life and healthcare insurance brokerage,
and mutual fund and annuity sales.
EMPLOYEES
The Company employed 65 full-time persons at January 31, 1998,
including the following:
University Bank, Ann Arbor 21
University Bank, Newberry 1
Michigan BIDCO 3
Midwest Loan Services 10
University Insurance & Investment 1
Varsity Funding 11
Varsity Mortgage 18
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LINES OF BUSINESS
COMMUNITY BANKING, ANN ARBOR
The Bank opened its office in Ann Arbor on February 6, 1996. The retail
savings products and services of the Bank include demand deposit and NOW
interest-bearing checking accounts, money market deposit accounts, regular
savings accounts and term deposit certificates ranging in maturity from three to
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 also
offers a Canadian Dollar denominated, FDIC-insured savings account to its
customers, and foreign exchange services. From time to time to raise liquidity,
the Bank sells CDs through brokers.
The Bank's community banking operation offers a range of traditional
lending products, including commercial small business loans, residential real
estate mortgage loans, commercial real estate mortgage loans, consumer
installment loans, and land development and construction loans.
Pursuant to the Branch Sale in late 1994 and early 1995 the Bank sold a
net amount of $20,787,407 of loans, leaving the Bank with approximately
$6,000,000 in loans originated by the Bank's eastern Upper Peninsula banking
operations. At December 31, 1997, the Bank retained approximately $1,300,000 of
these commercial and installment loans, and $1,000,000 of residential real
estate loans. The loans are generally secured by small business and real estate
assets in the area.
MORTGAGE BANKING
The Bank became a seller/servicer of Federal Home Loan Mortgage
Corporation insured mortgages ("FHLMC mortgages") in late 1991 and began to
originate FHLMC mortgages for sale into the secondary market. In late 1994 the
Bank became a seller/servicer of Federal National Mortgage Association insured
mortgages ("FNMA mortgages") and began to originate FNMA mortgages for sale into
the secondary market. Varsity Mortgage utilizes the Bank's seller/servicer
licenses to pool, package and sell both FNMA and FHLMC mortgages.
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, may as a result of past
credit problems 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 typically
sells all of the mortgages it purchases to secondary market investors.
The Bank is currently, and Varsity Mortgage and Varsity Funding have
since inception been, selling the servicing right on all mortgages originated.
The Bank's accounting department administers
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the Bank's table funding mortgage broker lending operation from the Ann Arbor
office.
Reference is made to the discussion of the mortgage banking business in
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, in the section entitled "Non-Interest Income and
Non-Interest Expense", under the heading Mortgage Banking.
MORTGAGE SUBSERVICING
The Bank's 80% owned subsidiary, Midwest Loan Services, specializes in
subservicing, for the account of other financial institutions and mortgage
brokers, residential mortgage loans sold to FNMA and FHLMC and other non-agency
private conduits. Mortgage servicing firms receive monthly payments from loan
customers, aggregate and account for these payments, and send the funds to
mortgage-backed securities holders, such as pension funds and financial
institutions. Mortgage servicers also dun delinquent accounts and foreclose
loans, if required. Midwest is regulated by FHLMC and FNMA. Mortgage servicers
receive a fixed monthly fee for performing this service. As of December 31,
1997, Midwest Loan Services subserviced a total of 4,989 loans, 3,864 for
non-affiliated companies, and 1,125 loans serviced for the Bank and Midwest Loan
Service's own account.
INVESTMENT SECURITIES
The Bank maintains surplus available funds in investments consisting of
short-term money market instruments, U.S. 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,
1997 the Bank's investments had a net unrealized loss of approximately $18,880
versus a net unrealized loss of approximately $30,154 at December 31, 1996.
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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, 1997:
Final Market Amortized
Issuer Coupon Yield Maturity Value Cost
- ------ ------ ----- -------- ----- ---------
RTC 91-12-A1 (1) FRN 5.48% 01/25/21 533,650 561,335
FNMA CMO92-190F (2) FRN 6.78% 11/25/07 511,875 502,813
FHLBI equity (3) VAR 8.00% None 848,400 848,400
- -----------------------
(1) The floating rate Resolution Trust Corporation bond is backed by a
portfolio of single family home mortgages. Due to the structure of the
issue, the expected average life is 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.
(2) The coupon of these FNMA securities adjusts every month to 1.60% over
the three month T-Bill rate, with a 9% life of security cap.
(3) The rate varies quarterly. The Bank is required to maintain the
investment in Federal Home Loan Bank of Indianapolis (the "FHLBI")
common stock in an amount related to the Bank's single family mortgage
related assets and FHLBI advances. Shares are redeemed or sold at par
value by the FHLBI as required from time to time.
MICHIGAN BIDCO
Michigan BIDCO, Inc., which was founded in May 1993, is licensed by the
Michigan Financial Institutions Bureau under the State of Michigan BIDCO Act.
The BIDCO is 44.1%-owned by the Bank, and is accounted for under the equity
method. There are $3,000,000 in convertible bonds outstanding. An initial
investment of $280,000 to buy 280 shares of common stock was made by the Bank in
Michigan BIDCO in 1993.
At the time of establishment, the BIDCO received $3,000,000 in
financing from the Michigan Strategic Fund. This investment was made in the form
of a ten year loan which carries concessionary terms allowing it to be converted
to a grant over time under certain circumstances. The BIDCO earns grants applied
against the $3,000,000 Michigan Strategic Fund financing if there is growth in
the sales and jobs of the businesses the BIDCO invests in. At the time of
establishment, Michigan BIDCO sold in installments $3,000,000 in 9% Senior
Convertible Bonds to match the State of Michigan's commitment, all of which
amount had been issued at December 31, 1997.
The Bank's investment in the BIDCO is accounted for under the equity
method, and $94,538, $50,301 and ($55,499) of income (loss) from the BIDCO was
included in the results of operations for the years ended December 31, 1995,
1996, and 1997, respectively. At year-end 1997, the Company owned a total of
$197,000 of the convertible bonds at an amortized cost of $200,916. If the
$3,000,000 of convertible bonds were converted, the Company's consolidated
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
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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 BIDCO.
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, 1997, the BIDCO had made twenty-six investments, amounting to a
total of $13,036,100 at original cost. At December 31, 1997, Michigan BIDCO had
total assets of $5,683,808.
Michigan BIDCO makes its investments in the form of loans or direct
equity investments, or a combination thereof. The BIDCO typically receives
warrants or participation rights in the companies in which it invests. As a
matter of policy, the Bank restricts itself from investing or lending to a
business that the BIDCO finances, and related parties which co-invest with the
BIDCO must do so on a basis equal to or less favorable than the BIDCO's. As of
December 31, 1997, investments (at original investment cost) have been made in
the following types of businesses:
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Michigan BIDCO, investments:
Total Equity
Industry Investment Participation?
ABC-TV affiliate $ 1,472,000 yes
Adult foster care 40,000 no
Bridal shop 16,000 no
Cable TV 545,000 yes
Children's clothing manufacturer 200,000 repurchased
Commercial laundry 180,000 no
Environmental engineering 100,000 repurchased
Home health care 20,000 no
Hunting supplies 60,000 no
Industrial supply 85,000 no
Limited service hotels 738,600 yes
Manufacturing 200,000 no
Manufacturing 200,000 no
Manufacturing 200,000 no
Metal manufacturing 80,000 no
Paper converting 2,762,000 yes
Plastic injection molding 2,000,000 repurchased
Plastic mold manufacturing 25,000 no
Railcar parts manufacturing 125,000 yes
Railroad boxcar leasing 1,500,000 no
Recycled paper pulp mill 780,000 yes
Residential mortgage subservicing 450,000 repurchased
Secured credit card issuer 540,000 yes
Tissue paper mill 700,000 yes
Truck maintenance 17,500 no
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Total $13,036,100
===========
The $1,600,000 80% guaranteed portion of the $2,000,000 loan to the
plastic injection molding firm was sold to Federal Agricultural Mortgage
Corporation and subsequently the loan was paid off. The $1,245,150 guaranteed
portion of the $1,962,000 loan to the paper converting firm was sold to Federal
Agricultural Mortgage Corporation. An $800,000 participation in the railroad
boxcar lease was sold to a private investor group of nine individuals including
Joseph and Stephen Ranzini. This same investor group purchased a $280,000
participation in the recycled paper pulp mill financing, and also purchased a
$28,000 investment in one limited service hotel project to reduce the BIDCO's
net exposure to $500,000. The BIDCO's investment in the recycled paper pulp mill
consisted of an equity investment and a royalty on sales of a new $238,000,000
mixed office waste paper recycling/de-inking pulp mill in Menominee, Michigan.
In December 1995, the Bank acquired 80% of the common stock of the
residential mortgage servicing business, Midwest Loan Services. In connection
with this acquisition, the BIDCO received 34,500 shares of Common Stock of the
Company, puttable to the Company for $115,000 in December 1996, in exchange for
its ownership of 10% of the common stock of Midwest Loan Services and options to
buy an additional 30% of the common 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.
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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 1996 (from the FDIC's annual
branch deposit survey (June 1997 data is not yet available)):
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WASHTENAW COUNTY FINANCIAL INSTITUTION DEPOSITS:
1996 1995 Change
Great Lakes Bancorp 18.2% 19.0% -0.8%
First of America Bank 17.0% 17.4% -0.4%
NBD First Chicago Bank 10.4% 9.6% +0.8%
Comerica Bank 10.3% 9.3% +1.0%
Key Bank 9.4% 13.4% -4.0%
Republic Bank 5.8% 5.5% +0.3%
Standard Federal FSB 5.0% 4.9% +0.1%
Citizens Bank 3.6% 3.4% +0.2%
Chelsea State Bank 3.0% 3.2% -0.2%
University of Michigan CU 2.8% 2.7% +0.1%
Michigan Natl Bank 2.7% 2.5% +0.2%
Huron River Area CU 2.5% 2.3% +0.2%
Ann Arbor Commerce Bank 2.3% 1.8% +0.5%
Hospital & Health Services CU 1.9% 1.7% +0.2%
Automotive FCU 1.4% 1.4% 0.0%
Charter One 0.9% 0.9% 0.0%
Bank of Ann Arbor 0.6% 0.0% +0.6%
Old Kent 0.6% 0.2% +0.4%
University 0.3% 0.0% +0.3%
5 Credit Unions, 1 S&L 1.3% 0.8% +0.5%
Total Deposits (Bn) $ 3.503 $ 3.545
Total deposits in the county declined 1.2% from June 1995 to June 1996.
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. At year-end 1997, the Bank had approximately $30,000,000
in retail deposits from Washtenaw County, which is approximately a 0.86% market
share.
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.
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MORTGAGE BANKING
Origination. The Bank's Ann Arbor community bank, Varsity Mortgage and
to a lesser extent Varsity Funding's retail origination offices purchase or
originate internally residential home loans which generally qualify for sale to
secondary market investors under the underwriting criteria of the Federal Home
Loan Mortgage Corporation (FHLMC) or the Federal National Mortgage Association
(FNMA) from correspondents in Michigan and 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 retail mortgage origination operations encounter competition
for the origination of residential real estate loans primarily from savings
institutions, commercial banks, insurance companies and other mortgage banking
firms. Many of these firms have a well established customer and/or borrower
client base. Some competitors, primarily savings institutions, insurance
companies and commercial banks, have the ability to create unique loan products
from time to time because they are able to close the loans for their own
portfolio rather than sell into the secondary market. Most loans sold into the
secondary market, however, go to the same sources, those being Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
and Government National Mortgage Association ("GNMA") guaranteed securities.
Most lenders have access to these secondary market sources; therefore,
competition often becomes more a matter of service and pricing than that of
product. As a mortgage loan originator and a purchaser of mortgage loans through
correspondents, the Bank and its affiliates must be able to compete with respect
to the types of loan products offered by competitors to borrowers and
correspondents, including the price of the loan in terms of origination fees or
fee premium or discount, loan processing costs, interest rates, and the service
provided by the Bank's staff.
During lower interest rate environments, competition for loans is less
intense due to the large number of loans available for origination. As interest
rates rise and the number of loans available for origination diminishes,
competition becomes quite intense and companies with larger investor bases,
flexibility with respect to type of product offered and greater experience in
dealing in these types of markets tend to be the most successful.
The Bank also originates residential loans to be held in portfolio, and
management believes that this product together with the product offerings which
FHLMC and FNMA have is sufficient for its competitive needs. Although the Bank
is currently licensed as a HUD Title 1, Title 2 and Multifamily seller/servicer,
it has no plans at this time to expand its utilization of HUD or GNMA programs.
However, Varsity Funding recently initiated a GNMA single family retail lending
capability utilizing the Bank's HUD seller/servicer licenses. The Bank and
Varsity Funding also are correspondents for several impaired credit conduits and
sell this type of residential mortgage on a non-recourse, servicing released
basis.
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Varsity Funding operates in similar fashion to Varsity Mortgage and the
Bank's Ann Arbor community bank, in that it purchases or originates internally
residential home loans which generally qualify for sale to secondary market
investors under the underwriting criteria of a wide variety of secondary market
correspondents in Michigan and the midwest United States. Loans purchased or
originated internally are either sold directly to private conduits, or are
pooled into mortgage-backed securities and the securities are sold to private
conduit investors in the secondary market. Varsity Funding's retail origination
operation also sells secondary market conforming loans to Varsity Mortgage on a
correspondent basis. Varsity Funding competes primarily with other mortgage
banking firms, insurance companies, commercial banks, and savings and loans.
The Bank's accounting department continues to administer the Bank's
table funding mortgage broker lending operation from the Ann Arbor office. By
providing working capital funding for mortgage bankers, the Bank is able to earn
interest income on the amount of loans outstanding at any given time. The Bank
competes in providing this service on interest rate and service. The Bank
encounters competition in table funding of mortgage brokers primarily from
savings institutions, commercial banks, insurance companies, other mortgage
banking firms and Wall Street broker/dealer conduits. Varsity Funding and
Varsity Mortgage are the Bank's largest tablefunding customers.
Mortgage Subservicing and Servicing. The Bank currently retains 1/3 of
all FHLMC and FNMA mortgage servicing rights originated or purchased to date. In
the third quarter of 1996, the Bank sold 1/3 of its portfolio of accumulated
servicing rights to reduce its investment in this class of asset for a gain of
$256,840. In the third quarter of 1997, the Bank sold an additional 1/3 of its
accumulated portfolio at no significant gain. Servicing competition is somewhat
less intense than the loan origination aspect of mortgage banking. Due to net
worth and management requirements, many mortgage origination companies do not
have the capacity to service loans. Falling interest rates present competitive
challenges for the mortgage servicing operation in that mortgagors are more
likely to refinance existing mortgages. The quality of service and the ability
of the origination operation to compete on price and service is important in
retaining such customers by refinancing them internally, rather than losing the
refinancing transaction to a competitor. Increased refinancing activity as a
result of falling interest rates should decrease profitability of mortgage
servicing by increasing amortization charges on purchased mortgage servicing
rights.
In the subservicing business, Midwest Loan Services competes primarily
with a small group of specialized servicing units of mortgage banking companies,
and a few specialized units owned by banks and savings and loans. Most of these
companies have substantially larger financial resources than Midwest Loan
Services.
Midwest Loan Services is located in Houghton, Michigan in the western
Upper Peninsula of Michigan. Personnel and occupancy costs are the largest costs
in a mortgage servicing operation, and the prevailing wages and occupancy costs
in the Upper Peninsula of Michigan are substantially below the national average.
As a result,
- 13 -
14
the Company believes that Midwest Loan Services' mortgage servicing operation
potentially offer its mortgage banking operations a competitive advantage in the
future if the mortgage servicing operation were to continue to grow. During 1997
growth in loans serviced for third parties was partially offset by sales of Bank
owned servicing, so that the amount of loans serviced by Midwest rose by
approximately 10% during the year. If Midwest Loan Services adds additional
subservicing customers in the future, the Company intends to continue to pursue
this strategy of selling Company owned servicing rights so that its subservicing
operation is not dependent upon Company owned mortgage servicing rights to
maintain a critical mass and economies of scale. However, at year-end 1997, just
1,125 loans serviced by Midwest Loan Services were serviced for the Bank or
Midwest Loan Services' own account. Since the Bank acquired Midwest Loan
Services, the annual compound growth in mortgages subserviced for others has
been 85%.
MICHIGAN BIDCO AND NORTHERN MICHIGAN FOUNDATION
Michigan BIDCO seeks to invest in businesses located in Michigan. The
BIDCO's objective is to seek profit while fostering job growth and economic
development in its market area. Michigan BIDCO makes its investments directly,
or through investment entities formed with other participants, to make
investments, in the form of loans or direct equity investments, or a combination
thereof. As such, it competes with other specialized lenders and wealthy
investors who make risk-oriented investments in businesses located in Michigan.
The BIDCO assumes more credit risk in a typical investment than commercial banks
generally are willing to assume when they make loans. The BIDCO does not make an
investment in a company unless it can be shown that the funds are not available
from a traditional bank lender; therefore, the BIDCO does not compete with
banks. There is only one other BIDCO in Northern Michigan; the BIDCO is one of
eleven BIDCOs in Michigan. At year-end 1996, the BIDCO was essentially fully
invested. The source of funds for new loans will come from loan payoffs,
scheduled amortization of loans, the sale of investments or from additional
pools of investment capital. The BIDCO is investigating its options in expanding
its funds under management.
The BIDCO's staff manages under contract a 501(c)3 IRS-qualified
non-profit relending company, Northern Michigan Foundation, which has received
the right to borrow $2,000,000 at 1% interest for 30-years from the U.S. RECDS
under the RECDS-sponsored intermediate relending program. The Foundation is one
of three non-profit, privately-run, U.S. Rural Economic Community Development
Service intermediate relending programs located in Northern Michigan. U.S. RECDS
was formerly the Farmers Home Administration. Each of these community
development loan funds covers six counties as its primary market area.
- 14 -
15
CERTAIN FINANCIAL INFORMATION
for the years ended December 31, 1997, 1996 and 1995 (in thousands)(1):
Revenues: 1997 1996 1995
Banking
Mortgage banking 882 1,000 1,051
Other banking 3,467 2,970 1,976
Midwest Loan Services (2) 713 603 49
Varsity (3) 5,032 2,327 66
Corporate Office 61 84 102
------- ------- -------
Total 10,155 6,984 3,244
Michigan BIDCO 624 1,439 1,820
Expenses:
Banking
Mortgage banking 759 826 769
Other banking 4,954 4,169 2,572
Midwest Loan Services (2) 808 601 40
Varsity (3) 4,769 2,125 99
Corporate Office 276 209 166
------- ------- -------
Total 11,566 7,930 3,646
Michigan BIDCO 864 1,389 1,495
Pre-tax income:
Banking
Mortgage banking 123 174 282
Other banking (1,487) (1,199) (711)
Midwest Loan Services (2) (95) 2 9
Varsity (3) 263 202 (33)
Corporate Office (215) (125) (44)
------- ------- -------
Total (1,411) (896) (402)
Michigan BIDCO (1) (55) 50 95
Assets, at Dec. 31, 1997, 1996 and 1995:
Banking
Other banking &
Mortgage banking 39,269 53,016 35,781
Midwest Loan Services (2) 1,340 2,391 1,576
Varsity (3) 15,902 22,379 32
Corporate Office 1,203 575 886
------- ------- -------
Total 57,714 78,361 38,275
Michigan BIDCO (1) 5,684 6,526 6,798
Liabilities and Stockholders' Equity
Banking
Other banking
& Mortgage banking 40,114 54,360 36,641
Midwest Loan Services (2) 334 1,286 548
Varsity (3) 15,502 21,582 32
Corporate Office 1,764 1,133 1,054
------- ------- -------
Total 57,714 78,361 38,275
Michigan BIDCO (1) 5,684 6,526 6,798
(table continued on following page)
- 15 -
16
Inter-office Information, at Dec. 31, 1997, 1996 and 1995:
Assets:
Other banking
& Mortgage banking (845) (1,344) (860)
Midwest Loan Services (2) 1,006 1,105 1,028
Varsity (3) 400 797 --
Corporate Office (561) (558) (168)
Michigan BIDCO (1) -- -- --
NOTES TO CERTAIN FINANCIAL INFORMATION TABLE
for the years ended December 31, 1997, 1996 and 1995 (in thousands)
(1) Reflects only the Bank's share of Michigan BIDCO's net income in 1995,
1996 and 1997 under the equity method was 44.1%.
(2) 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' pre-tax profit (loss) for the years ended
December 31, 1995 was 17.
(3) Includes all Varsity LLCs. Varsity Funding commenced operations in October
1995, and Varsity Mortgage commenced operations in March 1996.
REGULATION
The Company and the Bank are extensively regulated under federal law
and state law.
As a bank holding company under the Federal Bank Holding Company Act of
1956, as amended, the Company is required to file semi-annual reports and other
information as required under the rules of the Board of Governors of the Federal
Reserve System (the "FRB") and is also subject to examination by the FRB.
In connection with obtaining the consent of the FRB to a 1989 merger
transaction involving the Bank and University Bancorp, Inc., the Company has
made certain commitments to the Federal Reserve Bank of Minneapolis providing
that the Company will not incur additional debt, and that its Employee Stock
Ownership Plan would not purchase more than 10% of the common stock or 5% of any
other class of voting shares of the Company, without the prior approval of such
Reserve Bank.
Michigan-chartered commercial banks, such as the Bank, are regulated
and supervised by the Michigan Department of Commerce, Financial Institutions
Bureau, Bank and Trust Division (the "FIB"). As an insured bank, the Bank is
also subject to supervision and regulation by the Federal Deposit Insurance
Corporation (the "FDIC") and is required to file quarterly reports and other
information as required. As subsidiaries of the Bank, Midwest Loan Services,
Varsity Funding, Varsity Mortgage and University Insurance & Investment Services
(the "Agency") are all also subject to examination by both the FIB and the FDIC.
In addition, the Agency is also subject to examination by the State of
Michigan's Financial Institutions Bureau, Insurance Division
- 16 -
17
As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD multifamily
seller/servicer, the Bank's mortgage banking operation, and the Bank's mortgage
operation subsidiaries, including Midwest Loan Services and Varsity Mortgage are
subject to regulation and examination by FHLMC, FNMA and HUD.
Michigan BIDCO is also regulated and supervised by the FIB. The BIDCO
is examined annually by the FIB, and is required to make annual filings of
financial statements and to maintain a license from the Bureau. Licensing under
the terms of the Michigan BIDCO Act conveys certain exemptions upon the BIDCO
under Michigan law, which are beneficial to the operations and investment
flexibility of the BIDCO. The BIDCO is also required to permit an observer from
the Michigan Department of Commerce, Michigan Strategic Fund, BIDCO Program to
attend its Board of Directors meetings, and is required to make regular reports
and filings of its activities with this department, as a result of the terms of
the loan agreement between the Michigan Strategic Fund and Michigan BIDCO.
ITEM 2. - PROPERTIES
In May 1995, the Bank purchased a building in Ann Arbor, Michigan. 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 a pro rata share of the building's expenses. The initial term of
the lease is three years.
In mid-1996, the Bank purchased a bank branch building in Saline,
Michigan, a rapidly growing community in Washtenaw County, south of Ann Arbor.
The Bank is prevented by a deed restriction from utilizing this property as a
bank branch until June 1998.
In mid-1996, the Bank leased a site which includes a registered
historic landmark building in Ann Arbor, at the corner where Washtenaw Avenue
and Stadium Boulevard merge. The Bank also loaned a limited liability company,
Tuomy, L.L.C. (associated with non-affiliated third-parties), a sum sufficient
to acquire the site, and earned a 1/3 L.L.C. membership interest in the L.L.C.
as additional consideration for making the loan. The Bank is now renovating the
historic building for its intended use as a remote ATM multiple drive-through
location.
Until January 1998 the Company leased space in Sault Ste. Marie under a
month to month agreement for its corporate headquarters and the Bank's
accounting and support operations. Michigan BIDCO and Northern Michigan
Foundation also utilized a portion of this space for their office. The office
was closed in January 1998.
The Bank 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 Bank owns a small commercial office building in Newberry, Michigan,
which the Bank purchased in early 1995.
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18
Varsity Funding and Varsity Mortgage lease a small office in Farmington
Hills, Michigan under a three-year agreement. Varsity Funding leases two small
offices for retail origination branches in Farmington Hills, Michigan and
Columbus, Ohio under short term rental agreements.
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, 1997. 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, 1997
of $266,079. This property is carried as other real estate owned in the
Company's financial statements as of December 31, 1997 since it is surplus to
the Bank's requirements.
Year Owned or
Office Location Opened Leased Cost
- --------------- ------ ------ ----
Corporate Office,
Bank Main Office
959 Maiden Lane
Ann Arbor, MI 48105 1996 Owned $689,877
Former Loan Office
Easterday & I-75
Sault Ste. Marie, Michigan 1991 Owned $266,079
Newberry Loan Collection Office
207 W. John St.
Newberry, Michigan 1995 Owned $30,000
Future Bank Branch Site
West Michigan Ave.
Saline, Michigan 1996 Owned $170,000
Tuomy ATM Drive-through
Washtenaw & Stadium
Ann Arbor, Michigan 1996 Leased (1) -
Varsity Funding & Varsity Mortgage
33493 14 Mile Rd., Ste. 20
Farmington Hills, Michigan 1995 Leased -
[continued on following page]
- 18 -
19
Varsity Funding Retail Offices
7125 Orchard Lake Rd., Ste. 106
West Bloomfield, Michigan 1997 Leased -
2525-C Oak Stone Drive,
Columbus, Ohio 1998 Leased -
Midwest Loan Services
616 Sheldon Ave., Ste. 300
Houghton, Michigan 1991 Leased -
(1) The Bank owns a 1/3 L.L.C. membership interest in the L.L.C. which owns
the site.
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 other than the following:
RTC Loan Pool. In mid-March 1995, the Bank purchased four Participation
Certificates in sub-performing home equity loans with approximately $6,600,000
in unpaid principal balance and $1,000,000 of unpaid accrued interest from a
private investor group (which had purchased them from the Resolution Trust
Corporation (RTC)) for approximately $1,903,000 (the "RTC Loan Pool"). In
September 1996 an additional $700,000 in home equity loans purchased from a home
equity loan originator were added to the RTC Loan Pool as a fifth Participation
Certificate at a cost of $115,000.
Substantially all of the remaining loans underlying the first four
Participation Certificates were sold as of March 28, 1997 for $1,725,000. As a
result the Bank's investment in the RTC Loan Pool was reduced to zero, and the
balance of the proceeds from the sale, per the terms of the RTC Loan Pool
acquisition agreement, was split 50/50 with the servicer of the RTC Loan Pool.
The Bank's gain on this transaction to date, included in mortgage banking
income, is $408,237. Additional proceeds are anticipated from the loans
underlying the Fifth Participation Certificate with a face value of $215,000.
In mid-1996, the servicer submitted a request to the RTC for a $650,000
refund of loans that had previously been paid off, but were included in the RTC
Loan Pool, pursuant to the original purchase agreement. If received, this amount
would be split 50/50 with the RTC servicer of the RTC Loan Pool. In April 1997,
the servicer was notified that the RTC had accepted the refund request in the
amount of $300,000 with a request for additional information regarding the
remaining $350,000. After the additional information was submitted, the RTC
rejected the claim in total. As a result, the Bank filed a lawsuit in late
October 1997 against the RTC in the U.S. District Court for the District of
Columbia seeking recovery of the requested $650,000 refund. In March 1998, the
Bank filed an amended and reduced refund request in the amount of $505,000. In
addition, in March 1998, the Bank signed an agreement to sell the loans
underlying the Fifth Participation Certificate and the remainder of the loans
underlying the first four Participation Certificates for $200,000. If additional
- 19 -
20
proceeds are realized from either the RTC or the Participation Certificates, any
of the amounts received would also be split 50/50 with the servicer of the RTC
Loan Pool, and any amount received by the Bank would be income.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK AND DIVIDEND INFORMATION
The Company's Common Stock trades on The NASDAQ Small-Cap Market under the
symbol UNIB. As of the March 1, 1998 there were approximately 375 stockholders
including approximately 240 beneficial owners of shares held by brokerage firms
or other institutions. The high and low sales prices of the Company's common
stock as quoted by NASDAQ, for each quarter of the two year period ended
December 31, 1997 are listed below. The quotations represent interdealer prices
only, without retail markups, markdowns or commissions:
High Low
1996
First Quarter $4 3/16 $3 1/3
Second Quarter 4 3/16 3 1/3
Third Quarter 4 1/3 3 1/2
Fourth Quarter 5 2/3 4
1997
First Quarter $5 1/3 $4 1/2
Second Quarter 5 1/3 3 2/3
Third Quarter 4 1/2 3 2/3
Fourth Quarter 4 3/16 3
The Company effected a three for two stock split of its common stock
(effected as a stock dividend) in February 1998 (see "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations, Recent
Events"). All per share and number of share amounts in this Report are adjusted
to reflect the stock split. No cash dividends have been paid on the Company's
Common Stock. The Company does not currently anticipate declaring or paying
dividends.
CERTAIN SALES OF EQUITY SECURITIES
In the first half of 1997, the Company sold to four trusts, a
corporation and a life insurance company an aggregate of 64,446 shares (after
adjustment for the three for two stock split) of Common Stock, par value $0.01
per share, of the Company for an aggregate purchase price of $435,011. The
Company claimed exemption from registration requirements under the Securities
Act of 1933 based on Section 4(2) of
- 20 -
21
said Act. Such claims were based on agreements and certifications executed by
the entities in connection with such issuances of shares to them containing
certain representations and covenants, among other matters, as to their
financial experience, information reviewed and relied upon by them, their
intentions as holders of such shares, and restrictions on the sale or transfer
of such shares by them.
During 1997, the Company issued to three key executives of one or both
of its subsidiaries, Varsity Funding, L.L.C. and Varsity Mortgage, L.L.C., an
aggregate of 13,869 shares (after adjustment for the three for two stock split)
of Common Stock, par value $0.01 per share, of the Company, for an aggregate
purchase price of $83,214. Such shares were issued pursuant to the exercise of
options for an equivalent number of such shares granted under the Company's 1995
Stock Plan, and such options were granted in satisfaction of provisions of the
agreements with such executives relating to the operations of such subsidiaries
and providing for compensation to such executives based on profits of such
subsidiaries and for a portion of such compensation to be utilized for the
purchase of shares of common stock of the Company. The Company claimed exemption
from registration requirements under the Securities Act of 1933 based on Section
4(2) of said Act. Such claim was based on the status of the purchasers of the
subject shares as key executives of one or both of the subsidiaries of the
Company referred to above, the nature of the contractual arrangements providing
for stock issuances to such executives and agreements and certifications
executed by the executives in connection with such issuances of shares to them
containing certain representations and covenants, among other matters, as to
their financial experience, information reviewed and relied upon by them, their
intentions as holders of such shares, and restrictions on the sale or transfer
of such shares by them.
In October 1997, the Company issued to an individual who was the spouse
and beneficiary of the estate of a former director of the Company, an aggregate
of 15,000 shares (after adjustment for the three for two stock split) of Common
Stock, par value $0.01 per share, of the Company, for an aggregate purchase
price of $31,250. Such shares were issued pursuant to the exercise of options
for an equivalent number of such shares granted under a written option
agreement. The Company claimed exemption from registration requirements under
the Securities Act of 1933 based on Section 4(2) of said Act. Such claim was
based on the identity of the individual (being a member of the Ranzini family)
and restrictions on the sale or transfer of such shares by her.
- 21 -
22
ITEM 6. - SELECTED FINANCIAL DATA
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands Except Per Share Data)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
SUMMARY OF OPERATIONS
Interest income 4,736 3,724 2,379 $ 3,987 $ 3,852
Interest expense 3,208 2,733 1,845 2,104 1,660
Net interest income 1,528 991 534 1,883 2,192
Provision for loan losses 260 191 17 210 203
Net interest income after
provision for loan losses 1,268 800 517 1,673 1,989
Net gain (loss) on investments 8 399 56 (178) 203
Profit from equity investment
in Michigan BIDCO (55) 50 95 178 13
Other non-interest income 5,236 2,770 631 702 580
Gain on sale of branches & loans -- -- -- 3,018 --
Non-interest expense 7,868 4,915 1,699 2,782 2,624
Income (loss) before income tax (1,411) (896) (402) 2,611 161
Income tax expense (benefit) (478) (359) (107) 770 23
Net income (loss) (933) (537) (295) $ 1,841 $ 138
SELECTED YEAR END BALANCES
Total assets 57,714 78,366 38,275 31,827 64,468
Loans receivable, net 27,715 20,669 8,954 4,221 27,409
Loans held for sale 18,157 30,534 7,983 4,129 14,138
Cash, cash equivalents
and securities 4,357 19,898 15,028 19,264 14,741
Deposits 45,267 53,106 20,745 13,128 48,222
Note payable 923 963 1,000 1,000 2,294
FHLB advances -- 6,000 10,000 9,800 7,000
Minority interest 201 201 201 -- --
Stockholders' equity 3,583 3,913 4,651 4,096 2,411
SHARES OUTSTANDING AND PER SHARE DATA
Common shares, year-end 1,984 1,943 1,914 1,800 1,760
Weighted average shares, year 1,922 1,866 1,802 1,779 1,748
Cash dividends -- -- -- -- --
Net income (loss) ($ 0.51) ($ 0.29) ($ 0.17) $ 1.03 $ 0.08
Book value $ 1.81 $ 2.01 $ 2.43 $ 2.27 $ 1.37
SELECTED RATIOS
Net average interest rate spread 3.43% 2.09% 1.09% 3.03% 4.01%
Net yield on average
earning assets 3.07% 2.17% 1.69% 3.42% 4.38%
Return on average assets (1.47%) (1.08%) (0.84%) 3.02% 0.24%
Return on average equity (24.39%) (13.85) (6.94%) 54.47% 5.83%
Avg. equity to asset ratio 5.90% 7.77% 12.14% 5.55% 4.14%
[See the Notes on the following page]
- 22 -
23
(1) The Bank sold three branches and associated loans and deposits on December
5, 1994. Income and expense associated with these branches are included up until
the date of the sale. Net income includes a gain from the Branch Sale of $1.11
per share. (2) Share and per share data have been retroactively restated to
reflect a 3 for 2 stock split in February 1998.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of the following discussion and analysis is to assist the
reader in understanding and evaluating the changes in financial position and
results of operations over the past three years. The discussion should be read
in conjunction with the consolidated financial statements, the related notes
thereto, and statistical information presented elsewhere in this report.
This report contains certain forward looking statements which reflects
the Company's expectation or belief containing future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
mortgage banking and money management operations and the nature and adequacy of
allowances for loan losses. The Company can give no assurance that the
expectations reflected in its forward looking statements will prove to be
correct. Various factors could cause results to differ materially from the
Company's expectations.
Without intending to be exhaustive, these factors include: reliance on
key personnel and the potential inability of the Company to attract or retain
qualified managers; the risks inherent in the establishment of a new business
enterprise, including substantial operating losses, associated with the
establishment and growth of the Bank's Ann Arbor branch, without any assurance
of future profitability; significant competition from other financial
institutions with far greater assets and resources than the Company; credit and
loan loss risks associated with the relative lack of geographic diversity of the
Bank's borrowers (who tend to be concentrated in the Ann Arbor, Michigan area);
the sensitivity of the Company's operations to many factors beyond its control,
including general economic conditions and monetary policies; and the effects of
extensive governmental regulation and supervision, including risks that
regulatory examiners give negative examination ratings.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
GENERAL
The discussion below must be considered in light of the fundamental
changes resulting from 1) the opening in February 1996 of a new main office of
the Bank in Ann Arbor, and 2) the closing on December 5, 1994 of the sale by the
Bank of assets pertaining to its Newberry, Michigan headquarters office and its
two branches in Sault
- 23 -
24
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 1997, 1996, and 1995, were significantly
affected by the opening in February 1996 of the Bank's office in Ann Arbor.
The operations of the Company and the banking industry in general are
significantly influenced by general economic conditions, related monetary and
fiscal policies of the federal government, and policies of financial institution
regulatory authorities, including the Federal Reserve Board (FRB), the Michigan
State Financial Institutions Bureau (FIB), and the Federal Deposit Insurance
Corporation (FDIC). Deposit flows and cost of funds are influenced by interest
rates in competing investments and general market rates of interest. Lending
activities are affected by the demand for loan borrowing, which in turn is
affected by the interest rates at which such financing may be offered and other
factors affecting the economy and the availability of funds.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets of the Company at December 31, 1997 amounted to $57.71
million compared to $78.36 million at December 31, 1996. Loans receivable, net
of reserves, increased by $7.05 million to $27.72 million from $20.67 million.
Cash and cash equivalents (including Federal Funds sold on an overnight basis)
at the end of 1997 decreased by $10.17 million from the prior year, while
securities decreased by $5.37 million. Loans held for sale in the Bank's
mortgage banking division decreased by $12.37 million from $30.53 million to
$18.16 million. During the second half of 1997, management of the Bank pursued a
policy of decreasing reliance on certain high cost deposits and borrowings,
reducing low yielding assets such as Federal Funds sold and increasing the rate
at which loans held for sale were sold to improve profitability. This reduced
total assets, loans held for sale, Federal Funds sold, FHLB borrowings, and
deposits.
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. Agency securities and
cash. In addition the bank holding company had $0.32 million in cash and equity
securities at the end of 1997 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 $922,688 and $962,500 at year end 1997 and 1996. The
note was refinanced in late 1997, into a seven-year fully amortizing loan. In an
effort to maintain the Bank's Tier 1 capital to assets ratio above 7% and to
increase capital through retained earnings, management does not expect that the
Bank will pay dividends to the Company during 1998. Management believes that the
cash and securities on hand is currently sufficient to cover any required
principal reductions during 1998 on the holding company's loan.
Total stockholders' equity of the Company at December 31, 1997 was
approximately $3.58 million (or 6.2% of total assets) compared to $3.91 million
(or 5.0% of total assets) the year earlier. The Bank's regulatory capital at
year end was $4.70 million or 8.24% of the Bank's total regulatory assets and
the risk-adjusted capital ratio of
- 24 -
25
University Bank
Risk-Based Capital Calculation
December 31, 1997
Balance Risk Weighted
0% RISK CATEGORY Sheet (000) Assets (000)
Mort-Backed Sec Guaran by GNMA 3 -
Currency & Coin 207 -
Federal Reserve Balance 311 -
-----------------------------------------------
TOTAL 521 -
20% RISK CATEGORY
Interest-bearing Balances 71 14
Fed Funds Sold 314 63
U.S. Gov't sponsored Agency Sec 1,067 213
Cash Items 357 71
FHLB Stock 848 170
Balances due from depository Inst 1,116 223
-----------------------------------------------
TOTAL 3,773 755
50% RISK CATEGORY
Qualifying 1st liens on 1-4 family 26,939 13,470
-----------------------------------------------
TOTAL 26,939 13,470
100% RISK CATEGORY
ALL OTHER ASSETS 25,680 25,680
TOTAL ASSETS 56,913 39,904
===============================================
TIER 1 CAPITAL Balance
Common Stock 200
Surplus 4,262
Undivided Profits & Capital Reserves (490)
Minority Interest 201
Other identifiable Intangible Assets (143)
Unrealized loss on Securities (12)
TOTAL TIER 1 CAPITAL 4,018
TIER 2 CAPITAL
Allowance for loans & Lease losses 521
Excess LLR (limited to 1.25% gross risk-weighted assets) (23)
TOTAL TIER 2 CAPITAL 498
TOTAL TIER 1 & TIER 2 CAPITAL 4,516
TIER 1/TOTAL ASSETS 7.06%
TIER 1 & 2/TOTAL ASSETS 7.93%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 10.07%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 11.32%
- 25 -
26
11.75% exceeded the minimum regulatory risk-based capital requirement of 8% of
the risk-adjusted assets for the Bank. The preceding table provides additional
information about the risk-adjusted assets of the Bank and the Company's actual
capital percentages.
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,
1997. The table is based upon various assumptions of management which may not
necessarily reflect future experience. The one-year gap position at December 31,
1997 was estimated to be ($7,283,000) or -14.46%:
- 26 -
27
UNIVERSITY BANK
Asset/Liability Position Analysis
($ 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 315 0 0 0 0 315
Loans (1) 2,101 4,143 6,409 2,009 0 14,662
Canadian Investments 0 0 0 0 0 0
Securities Available for Sale 1,064 0 3 913 0 1,980
Securities held for Sale 0 0 0 0 0 0
Loans held for Sale 18,157 0 0 0 0 18,157
Matured Loans 928 0 0 0 0 928
Variable Rate Loans 11,503 0 0 0 0 11,503
Other Assets 0 2,193 0 3,151 0 5,344
Fixed Assets 0 317 0 1,639 0 1,956
Cash and Due from Banks 0 500 0 1,562 0 2,062
Overdrafts 36 0 0 0 0 36
Non-Accrual Loans 0 0 0 586 0 586
Discount FHA Title 1 0 0 0 0 0 0
Valuation Adjustment 0 0 0 0 0 0
---- ---- ---- ---- ---- ----
TOTAL ASSETS 34,104 7,153 6,412 9,860 0 57,529
LIABILITIES
CD's over $100,000 3,983 8,019 207 0 0 12,209
CD's under $100,000 1,732 7,460 2,089 55 0 11,336
MMDA 15,135 0 0 0 0 15,135
NOW 3,985 0 0 0 0 3,985
Demand 0 88 0 2,370 0 2,458
Savings 0 115 0 0 0 115
Canadian Savings 0 29 0 0 0 29
Other Liabilities 0 175 0 4,195 0 4,370
Borrowings 0 2,744 1,749 0 0 4,493
Equity 0 0 0 3,399 0 3,399
---- ---- ---- ---- ---- ----
TOTAL LIABILITIES 24,835 18,630 4,045 10,019 0 57,529
GAP 9,269 (11,477) 2,367 (159) 0
CUMULATIVE
GAP 9,269 (2,208) 159 0 0
GAP
PERCENTAGE 16.11% -3.84% 0.28% 0.00% 0.00%
Notes:
(1) Net of bad debt reserves.
- 27 -
28
The following additional information is provided with respect to the
Bank's investment portfolio, at book value, as of December 31, 1997:
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 $ -0- $ 3 $ 503 $1,411
- Yield --% 4.90% 6.65% 6.99%
All Other Securities
- Amount $ -0- $ 201 $ -0- $ 44
- Yield --% 9.00% --% --%
Additional information regarding the Bank's investments as of December
31, 1997 and 1996 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, 1997:
Loan Portfolio Maturities by Type (in $000s):
Maturity
-------------------------------------------
Under 1 Year to After 5
One Year 5 Years Years
-------- ------- -------
Commercial & Financial $5,361 $2,984 $2,711
Agricultural $ -0- $ -0- $ -0-
Real Estate:
Construction $ 775 $ 809 $ -0-
Mortgage (1) $1,013 $2,274 $5,550
Consumer $ 577 $3,251 $2,931
------ ------ ------
Total $7,726 $9,318 $11,192
Maturity Maturity
Under One Year Total
One Year or More Loans
-------- -------- -----
Total Variable Rate Loans $ 5,228 $ 8,267 $13,495
Total Fixed Rate Loans $ 2,497 $12,244 $14,741
Total Loans (1) $ 7,725 $20,511 $28,236
======= ======= =======
(1) Excludes residential loans held for sale of $18,157, and the allowance for
loan losses.
- 28 -
29
SUMMARY OF RESULTS OF OPERATIONS
The net loss from operations of the Company was $1,117,924 in 1997,
$536,758 in 1996 and $294,976 in 1995. Earnings (loss) per share for 1997, 1996
and 1995 were $(0.58), $(0.29) and ($0.16), respectively.
The increased loss in 1997 versus 1996 was principally due to increased
losses at the Bank's new Ann Arbor main office. During the year fixed costs were
higher than revenues, and although certain aspects of underlying operating
results including key indicators such as net interest income improved, the
break-even point was only reached from ongoing operations in the fourth quarter.
A change in management at the Bank also led to high severance and other expenses
in the fourth quarter. The Bank's mortgage banking and other specialized
financial subsidiaries had total increased profits of $245,292 in 1997, a 13%
return on average investment and offset a portion of the losses from the
community bank operations.
The increased loss in 1996 versus 1995 was principally due to start-up
losses of the Bank's new Ann Arbor main office. 1996 was a year where the Bank
grew its deposits in Ann Arbor from zero to a market share of 1%. Ann Arbor
originated loans also grew, with an increase in porfolio loans of $7.27 million.
Although certain aspects of underlying operating results including key
indicators such as net interest income improved each quarter, the main office's
fixed costs were higher than available revenue. The Bank's mortgage banking and
other specialized financial subsidiaries were substantially more profitable in
1996 than 1995 and offset a portion of the losses from the community bank
operations.
1995 was primarily a transition year following 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 (the "Branch
Sale"). During 1995 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.
RECENT EVENTS
The Company approved and declared a partial stock split to be effected
in the form of a stock dividend, by distributing to the holders of record at
5:00 p.m. Central Standard Time, on February 23, 1998, shares of Common Stock of
the Company, par value $0.01 per share, at a rate of 0.5 shares for each share
of Common Stock issued and outstanding on such record date. Such distribution
had the equivalent effect on the outstanding Common Stock as would a 3 for 2
stock split. Whole shares of Common Stock were distributed in lieu of any
resulting fractional shares.
The stock split effected in the form of a stock dividend, as described
above, was approved in order to comply with one of the new requirements for
continued listing on the NASDAQ Small Cap Stock Market, specifically the
requirement that a listed company have at
- 29 -
30
shares not held directly or indirectly by an officer or director of the issuer
or any other person who is the beneficial owner of more than 10 percent of the
total shares outstanding).
Towards the end of 1997, the management of the Company determined that the
future success of the Bank was dependent upon firm management response to
regulatory criticism of past performance of the Bank with respect to earnings
and compliance, and the fact that the Bank did not meet its internal budgetary
goals for 1997. Since mid-November 1997, a variety of measures have been taken
by the Company's CEO acting as the Bank's new President, including replacing
senior management at the Bank, replacing the Bank's board of directors, cutting
employment levels at the Bank approximately 1/3, reducing substandard loans via
an aggressive collection effort by over 1/3, outsourcing the internal audit
function to an independent CPA firm under the direction of the Bank's internal
audit coordinator, and hiring an experienced compliance officer who is also an
attorney to ensure ongoing quality results. As a result, the Company and the
Bank reported an unaudited profit in both January and February 1998.
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 $0.11 million in 1997, $0.09 million in
1996 and $0.08 million in 1995.
In the following table, non-accrual loans are included in the average
balances. The table presents, for the periods and dates indicated, the average
balances (all averages are calculated using monthly averages) of, the interest
earned or paid on, and the weighted average yield earned or rate paid on, the
Company's interest-bearing assets and liabilities:
- 30 -
31
Net Interest Income
Years Ended December 31,
At ------------------------------------------------
Dec-97 1997 1996
----------------- ------------------------------------------------
Average Average Interest Average Average
Yield Balance Inc(Exp) Yield Balance
Interest Earning Assets:
Loans:
Commercial 8.92% 12,343,131 1,115,893 9.04% 5,783,396
Real Estate Construction 8.98% 536,673 42,742 7.96% 145,197
Real Estate Mortgage 6.60% 24,323,766 2,444,817 10.05% 22,337,028
Installment/Consumer 9.97% 4,786,743 471,542 9.85% 2,647,155
----- ----------- ----------- ----- -----------
Total Loans 8.62% 41,990,313 4,074,994 9.70% 30,912,776
Investment Securities(1) 7.06% 2,272,225 305,966 13.47% 9,908,962
Federal Funds & Bank Deposits 5.03% 5,498,798 355,151 6.46% 4,903,898
----- ----------- ----------- ----- -----------
Total Interest Bearing Assets 7.96% 49,761,336 4,736,111 9.52% 45,725,636
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 4.24% 3,360,913 156,902 4.67% 906,551
Savings 2.80% 126,081 3,113 2.47% 77,600
Canadian Dollar Savings 1.28% 446,470 10,632 2.38% 989,805
Time 4.78% 27,885,534 1,672,477 6.00% 25,052,321
Borrowed Funds 0.00% 3,256,164 424,419 13.03% 8,193,989
Money Markets 4.90% 16,686,401 832,345 4.99% 8,918,471
----- ----------- ----------- ----- -----------
Total 4.93% 51,761,563 3,099,888 5.99% 44,138,737
Holding Company Debt 9.50% 937,363 108,195 11.54% 977,500
----- ----------- ----------- ----- -----------
Total Interest Bearing
Liabilities 5.02% 52,698,926 3,208,083 6.09% 45,116,237
----- ----------- ----------- ----- -----------
Net Earning Assets, net interest
income, and interest rate spread 2.94% (2,937,590) 1,528,028 3.43% 609,399
Net yield on interest-earning assets 3.55% 3.07%
Net Interest Income
Years Ended December 31,
-------------------------------------------------------------
1996 1995
-------------------------------------------------------------
Interest Average Average Interest Yield/
Inc(Exp) Yield Balance Inc(Exp) Rate
Interest Earning Assets:
Loans:
Commercial 598,353 10.35% 2,799,197 312,643 11.17%
Real Estate Construction 13,134 9.05% 137,524 12,251 8.91%
Real Estate Mortgage 1,930,956 8.64% 9,352,940 813,909 8.70%
Installment/Consumer 278,564 10.52% 958,889 103,825 10.83%
----------- ----- ----------- ----------- -----
Total Loans 2,821,007 9.13% 13,248,550 1,242,628 9.38%
Investment Securities(1) 623,854 6.30% 16,579,737 1,042,855 6.29%
Federal Funds & Bank Deposits 278,665 5.68% 1,704,543 93,494 5.48%
----------- ----- ----------- ----------- -----
Total Interest Bearing Assets 3,723,526 8.14% 31,532,830 2,378,977 7.54%
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 45,578 5.03% 61,212 1,774 2.90%
Savings 1,910 2.46% 63,381 1,658 2.62%
Canadian Dollar Savings 49,948 5.05% 1,225,086 59,169 4.83%
Time 1,537,908 6.14% 12,924,479 838,019 6.48%
Borrowed Funds 534,500 6.52% 11,088,914 739,898 6.67%
Money Markets 477,002 5.35% 2,344,207 123,708 5.28%
----------- ----- ----------- ----------- -----
Total 2,646,846 6.00% 27,707,279 1,764,226 6.37%
Holding Company Debt 85,867 8.78% 903,127 81,181 8.99%
----------- ----- ----------- ----------- -----
Total Interest Bearing
Liabilities 2,732,713 6.06% 28,610,406 1,845,407 6.45%
----------- ----- ----------- ----------- -----
Net Earning Assets, net interest
income, and interest rate spread 990,813 2.09% 2,922,424 533,570 1.09%
Net yield on interest-earning assets 2.17% 1.69%
(1) Actual yields; not adjusted to take into account tax-equivalent yields resulting from tax-free municipal income and
includes bank deposits.
- 31 -
32
The table above does not specify the average level of non-interest
bearing demand deposits, which were $3,510,337, $3,377,101 and $2,156,136 for
the years ended December 31, 1997, 1996 and 1995, respectively, as computed
using month-end balances for such years.
Net interest income of the Bank increased to $1.53 million in 1997 from
$0.99 million in 1996, mainly as a result of an increase in both yield on
interest-earning assets, and an increase in average interest-earning assets,
which was only partially offset by the rise in interest-earning liabilities.
During the year ended December 31, 1997, the Bank's average interest-earning
asset base rose by $4.04 million or 8.8% over 1996, while average
interest-bearing liabilities increased by $7.62 million or 17.3%. Due to the
growth of loans versus securities in the mix of interest-earning assets, the
average yield on interest-earning assets increased to 9.52% from 8.14% in 1996.
Due to the increase of retail deposits versus wholesale funds in the mix of
interest-earning liabilities, the average cost of deposits decreased from 6.00%
in 1996 to 5.99% in 1997. As a result of an expansion in loans and retail
deposits, the net interest margin increased to 3.43% in 1997 from 2.09% in 1996.
Interest rates were mostly stable for the entire year, and had a minor impact on
net interest margins during 1997.
Net interest income of the Bank increased to $0.99 million in 1996 from
$0.53 million in 1995, mainly as a result of an increase in the average
interest-earning assets, which was only partially offset by the rise in
interest-earning liabilities. During the year ended December 31, 1996, the
Bank's average interest-earning asset base rose by $14.19 million or 45.0% over
1995, while average interest-bearing liabilities increased by $16.43 million or
59.3%. Due to the growth of loans versus securities in the mix of
interest-earning assets, the average yield on interest-earning assets increased
from 7.54% to 8.14% in 1996. Due to the increase of retail deposits versus
wholesale funds in the mix of interest-earning liabilities, the average cost of
funds decreased from 6.45% in 1995 to 6.06% in 1996. As a result of an expansion
in loans and retail deposits, the net interest margin increased to 2.09% in 1996
from 1.09% in 1995. Interest rates rose slightly in early 1996, but were mostly
stable for the remainder of the year, and had a minor impact on net interest
margins during 1996.
At December 31, 1997, the net yield on the Bank's interest-earning
assets was 3.55% up from the average net spread for the 1997 year of 3.07%,
principally as a result of further increases in loans and lower cost retail
deposits. Fee income from the Bank's mortgage banking originations, income from
the Bank's portfolio of mortgage servicing rights and the Bank's investment in
its subsidiaries are not included in these calculations.
- 32 -
33
The following table presents information regarding fluctuations in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume multiplied by old rate); and (2) changes in rate (changes in
rate multiplied by old volume); with the rate/volume variance allocated to
changes in rate:
Rate / Volume Analysis
Years Ended December 31,
-------------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate
------ ---- ----- ------ ----
Interest Income
Loans:
Commercial 648,516 (153,899) 494,617 333,306 (47,596)
Real Estate Construction 61,778 (9,247) 52,531 684 199
Real Estate Mortgage 171,746 342,115 513,861 1,129,898 (12,851)
Installment/Consumer 225,152 (32,174) 192,978 182,799 (8,060)
---------- -------- ---------- ---------- -------
Total Loans 1,107,193 146,794 1,253,987 1,646,687 (68,308)
Investment Securities (480,798) 162,910 (317,888) (419,588) 587
Federal Funds 33,805 42,681 76,486 175,484 9,687
---------- -------- ---------- ---------- -------
Total Interest Income 660,200 352,385 1,012,585 1,402,583 (58,034)
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 123,396 (12,072) 111,324 24,499 19,305
Savings 1,193 10 1,203 372 (120)
Canadian Dollar Savings (27,418) (11,898) (39,316) (11,364) 2,143
Time 173,925 (39,356) 134,569 786,365 (86,476)
Borrowed Funds (322,098) 212,017 (110,081) (193,161) (12,237)
Money Markets 415,466 (60,123) 355,343 346,936 6,358
---------- -------- ---------- ---------- -------
Total Deposit Interest Expense 364,464 88,578 453,042 953,647 (71,027)
Holding Company Debt Interest (3,526) 25,854 22,328 6,685 (1,999)
Total Interest Expense 360,938 114,432 475,370 960,332 (73,026)
---------- -------- ---------- ---------- -------
Net Interest Income 299,262 237,953 537,215 442,251 14,992
========== ======== ========== ========== =======
Rate / Volume Analysis
Years Ended December 31,
----------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------
Total Volume Rate Total
----- ------ ---- -----
Interest Income
Loans:
Commercial 285,710 (54,781) 55,178 397
Real Estate Construction 883 (6,179) (2,057) (8,236)
Real Estate Mortgage 1,117,047 (123,348) (78,899) (202,247)
Installment/Consumer 174,739 (60,079) 95,428 35,349
---------- -------- -------- --------
Total Loans 1,578,379 (244,387) 69,650 (174,737)
Investment Securities (419,001) 396,094 (113,243) 282,851
Federal Funds 185,171 470 26,517 26,987
---------- -------- -------- --------
Total Interest Income 1,344,549 152,177 (17,076) 135,101
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now 43,804 (878) (5,695) (6,573)
Savings 252 (2,080) (5,347) (7,427)
Canadian Dollar Savings (9,221) 48,818 23,222 72,040
Time 699,889 (30,237) (42,577) (72,814)
Borrowed Funds (205,398) 168,031 91,360 259,391
Money Markets 353,294 (36,894) 183,102 146,208
---------- -------- -------- --------
Total Deposit Interest Expense 882,620 146,760 244,065 390,825
Holding Company Debt Interest 4,686 16,937 36,445 53,382
Total Interest Expense 887,306 163,697 280,510 444,207
---------- -------- -------- --------
Net Interest Income 457,243 (11,520) (297,586) (309,106)
========== ======== ======== ========
-33-
34
LOAN PORTFOLIO
Information regarding the Bank's loan portfolio as of December 31, 1997
and 1996 is set forth under Note 5 to the Company's consolidated financial
statements included with this report.
PROVISION FOR LOAN LOSSES
The Bank charges to operations a provision for possible loan losses
which is intended to create an allowance for future loan losses. Each year's
provision reflects management's analysis of the amount necessary to maintain the
allowance for possible loan losses at a level adequate to absorb anticipated
losses. In its evaluation, management considers such factors as historical loan
loss experience, specifically identified problem loans, composition and growth
of the loan portfolio, current and projected economic conditions, and other
pertinent factors. A loan is charged-off by management as a loss when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
Non-performing loans are defined as loans which have been placed on
non-accrual status and loans over 90 days past due as to principal or interest
and still in an accrual status. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued. See Note 5 of
the Consolidated Financial Statements for additional information regarding
impaired and past due loans.
Non-performing loans amounted to $1,121,605, and $753,916 at December
31, 1997 and 1996, respectively. The increase in non-performing loans during
1997 is the result of an increase in delinquent single family loans associated
with the repurchase of loans from the Bank's portfolio of residential mortgage
servicing rights. Approximately $295,000 of the non-performing commercial loans
at December 31, 1997 were paid in full with no loss, subsequent to year-end.
The provision for loan losses in 1997 was $260,000, an increase of
$69,500 from the 1996 level, which in turn was an increase of $173,700 from the
1995 level of $16,800. Loans charged off net of recoveries were $36,830,
$209,432 and $62,174 in 1997, 1996 and 1995, respectively. The allowance for
possible loan losses totaled $520,953, $297,783 and $317,185 at the end of 1997,
1996, and 1995, respectively.
-34-
35
A summary of loan loss expense for the Bank for the years indicated is
presented below:
Analysis of the Allowance for Loan Losses
($ in thousands)
Years Ending December 31,
--------------------------------
1997 1996 1995
---- ---- ----
Balance at beginning of period $298 $317 $363
---- ---- ----
Chargeoffs:
Domestic:
Commercial, financial and agricultural 55 178 36
Real estate-construction 0 0 0
Real estate-mortgage 0 0 61
Installment loans to individuals 28 47 31
Lease financing 0 0 0
Foreign 0 0 0
---- ---- ----
83 225 108
---- ---- ----
Recoveries:
Domestic:
Commercial, financial and agricultural 3 10 30
Real estate-construction 0 0 0
Real estate-mortgage 24 0 2
Installment loans to individuals 19 5 13
Lease financing 0 0 0
Foreign 0 0 0
---- ---- ----
46 15 45
---- ---- ----
Net charge-offs 37 210 63
---- ---- ----
Provision for loan losses 260 191 17
---- ---- ----
Balance at end of period $521 $298 $317
==== ==== ====
Ratio of net charge-offs during period
to average loans outstanding during period 0.09% 0.68% 0.05%
==== ==== ====
-35-
36
Analysis of the Allowance for Loan Losses
($ in thousands)
At December 31,
Percent of
loans in each
Balance at End of Period category to
Applicable to: Amount total loans
- ------------------------- ------------ -----------
1997 1996 1997 1996
Domestic
Commercial, financial,
agricultural $ 177 $ 156 34.0% 40.0%
Real estate-construction 3 - 0.6% 0.0%
Real estate-mortgage 163 83 31.3% 41.8%
Installment loans to
individuals 68 59 13.0% 18.2%
Unallocated 110 - 21.1% N/A%
----- ----- ------ ------
521 298 100.0% 100.0%
===== ===== ====== ======
December 31, December 31,
1997 1996
------------ -------------
Total loans (1) 28,236 20,966
Reserve for loan losses 521 298
Reserve/Loans, % (1) 1.85% 1.42%
(1) Excludes loans held for sale.
With the opening of the Bank's new Ann Arbor operation, management
increased the monthly loan loss provision to a rate of $6,000 in February 1996
from $400 in the prior-year period. In September 1996, management accrued a
special increase of $80,000 in the loan loss provision and increased the
monthly rate beginning in October 1996 to $7,500 per month. The special
increase and the increase in the monthly rate was the result of a specific
charge-off of $132,074 on one Upper Peninsula commercial loan, which had a
targeted reserve of $90,000 at December 31, 1995, combined with management's
desire to build reserves at a faster rate, as new loan activity in Ann Arbor
exceeded original management projections. At year-end 1996, management added
another $40,000 to the reserve based upon its analysis of the growth of the
loan portfolio. A special loan loss provision of $165,000 was charged to
income in June 1997 as directed by the Bank's regulatory examiners. They
required the special provision as a result of ratio analysis rather than
specific loan problems, expected loan losses or actual loss experience. Using
the same methodology as at June 1997, an additional provision of $5,000 was
added in December 1997 based upon management's analysis based on all available
data at that time. Subsequent to year-end several substandard commercial loans
were paid in full, which would tend to increase the adequacy of the loan loss
reserve.
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
at an appropriate amount. At year-end 1997, such ratio was 1.85%, or $521,000.
Management believes that the 1.85%
- 36 -
37
ratio reflects a relatively conservative allowance level compared to
expected future experience of the Bank's loan portfolio based upon currently
available facts. With few exceptions, the Bank no longer has loans to commercial
borrowers located in the eastern Upper Peninsula of Michigan, and the remaining
loans generally appear to be well secured.
The Bank's overall loan portfolio is geographically concentrated in Ann
Arbor and the future performance of these loans is dependent upon the
performance of relatively limited geographical areas.
Based upon current economic conditions in the Ann Arbor and eastern
Upper Peninsula market area, management currently anticipates that net loan
losses in 1998 will not exceed $120,000. While the Bank has just begun lending
in the Ann Arbor area, and the local economy is among the fastest growing in the
state of Michigan, management needs to complete another full year to create a
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. Non-interest income in 1997 rose to $5,189,104
from $3,219,520 in 1996, an increase of $1,969,584, or 61.2%. The increase in
1997 was mainly the result of mortgage banking income, which increased 108%, or
$2,563,735, partially offset by decreased gains from securities sales and sales
of portfolio mortgage servicing rights.
Non-interest income in 1996 rose to $3,219,520 from $780,960 in 1995,
an increase of $2,438,560. The increase in 1996 was mainly the result of
mortgage banking income, which increased 383%, or $1,873,725, and net gains from
securities sales, which increased $341,402 primarily as a result of the sale of
the Bank's investment in Farmer Mac class A and class C common stock (NASDAQ-
FAMCA & FAMCK).
Mortgage Banking. Mortgage banking, servicing and origination fees
increased to $4,926,815 in 1997 from $2,363,080 in 1996. The increase in
mortgage banking fee income was the result of a 108% increase in loan purchase
and origination volumes during 1997 and profits from the Bank's mortgage banking
subsidiaries, Varsity Mortgage and Varsity Funding.
Including the mortgage servicing rights held directly by Midwest Loan
Services, at December 31, 1997, the Bank and its subsidiaries serviced
$124,719,166 of FHLMC and FNMA mortgages for others, versus $214,046,211 at
December 31, 1996. The amount decreased as a result of a portfolio sale of
servicing rights by the Bank in the third quarter of 1997. The following table
summarizes the portfolio by type and mortgage note rate:
- 37 -
38
Interest Rate Stratification of the Company's Mortgage Servicing
($ in 000s) FIXED RATE - BY MATURITY (in years)
-----------------------------------
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 541 - 221 2,207
8.50 - 8.99 7,388 - 537 5,531
8.00 - 8.49 4,012 - 1,232 17,050
7.50 - 7.99 1,683 64 3,927 38,106
7.00 - 7.49 1,396 - 7,678 18,449
6.50 - 6.99 - 174 4,852 7,384
6.00 - 6.49 - - 918 1,357
under 6.00 - - - 12
------ ----- ------ ------
15,020 238 19,365 90,096
Current market
interest rates 6.25% 7.00% 7.13% 7.38%
Average annual
servicing fee 0.38% 0.28% 0.26% 0.25%
Interest rates have recently declined to levels briefly seen during the
Summer of 1993 and the Winter of 1995, and as a result, the portfolio is
currently experiencing increased refinancings and payoffs, which are likely to
hurt income if it persists.
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. 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.
- 38 -
39
Servicing Rights Held by the Company
(amounts in $000s) December 31, December 31,
1997 1996
------------------------------------
Total servicing (1) 124,719 214,046
Book value of servicing 1,430 2,312
Estimated market value of servicing:
Management estimate (2) 1,440 2,371
Discounted cash flow (3) 1,583 2,466
Estimated excess of market
over book value (4) 153- 10 154- 59
(1) Includes servicing related to loans held for delivery of $30,535 at
December 31, 1996.
(2) Assumes a price based upon market transactions at December 31, 1997 of
4.6x (4.6 times the servicing fee) for 30-year servicing, 3.5x for
15-year servicing, 1.9x for Balloon servicing and 2.0x for ARM
servicing. The market value of servicing at December 31, 1996 was based
on a price of 4.9x for 30-year servicing, 3.75x for 15-year servicing,
2.3x for Balloon servicing and 2.1x 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 rates ranging from 10 to 12% in 1997 and at 13.14% in 1996 (the
original rate used to price a major bulk portfolio purchased in 1993,
the majority of the remainder of which was sold in the 1997 portfolio
sale).
(4) Range based upon the two methods used in (2) and (3), above. During
1997 purchases and sales of mortgage servicing rights by third-parties
evidenced a declining trend in price as long term interest rates
declined throughout the year.
Additional information regarding the Bank's mortgage banking activities
for the past three years is set forth in Note 4 to the Company's consolidated
financial statements.
Michigan BIDCO. Michigan BIDCO (the "BIDCO"), an equity affiliate,
invests in businesses in Michigan with the objective of fostering job growth and
economic development. As of December 31, 1997, the BIDCO had made twenty-six
such investments, amounting to a total of $13,036,100 at original cost. At
December 31, 1997, Michigan BIDCO had total assets of $5,683,808.
The BIDCO's financial results for 1997 reflect a loss in the amount of
$163,539 as a result of a negative market value adjustment on securities and
loans of $309,144 for the year. Two BIDCO investments have run into financial
difficuly. One was restructured during 1997, with the BIDCO's investment reduced
in value by approximately half. The second is still in the process of being
restructured, and the BIDCO has taken a substantial write-down on its investment
there. At December 31, 1997, the BIDCO had no outstanding conditional
commitments to lend.
Securities. Proceeds from sales of marketable equity securities
(included in proceeds from sales of investment securities) were $166,498,
$631,278 and $238,481 for the years ended December 31, 1997, 1996 and 1995,
respectively. Gross gains of approximately $41,155,
- 39 -
40
$346,495 and $46,240 and no gross losses were realized on 1997, 1996 and 1995
sales, respectively.
Proceeds from sales of available for sale securities were $5,740,991,
$10,888,145 and $12,181,096 for the years ended December 31, 1997, 1996 and
1995, respectively (including sales of marketable equity securities and
excluding sales associated with the Bank's mortgage banking operation). Gross
gains of approximately $29,726 and gross losses of approximately $63,166 were
realized on 1997 sales. Gross gains of approximately $433,222 and gross losses
of approximately $33,940 were realized on 1996 sales. Gross gains of
approximately $164,717 and gross losses of approximately $153,080 were realized
on 1995 sales.
At December 31, 1997 gross unrealized losses in the Company's
available-for-sale securities were $27,961 and gross unrealized gains were
$46,549. At December 31, 1996 gross unrealized losses in the Company's
available-for-sale securities were $68,000 and gross unrealized gains were
$60,000. At December 31, 1995 gross unrealized losses in the Bank's
available-for-sale securities were $63,000 and gross unrealized gains were
$278,000. Sales of loans pooled into mortgage backed securities in connection
with the Bank's mortgage banking activities were $171,639,196 in 1997,
$54,137,028 in 1996 and $7,690,957 in 1995.
Non-interest expense. Non-interest expense for the Company increased by
$2,952,525 or 60.0% in 1997 to $7,867,874 from $4,915,349 in 1996. Increased
personnel, occupancy and state income tax expense resulting from the development
of the Bank's new full-service branch office in Ann Arbor and the Varsity
Funding and Varsity Mortgage mortgage banking subsidiaries during 1997 was the
major factor in the increase. Legal and audit expense remained unusually high as
a result of various projects and loan collection legal expense. Bonuses and
severance pay to the Bank's former President added $405,000 in salary expense.
As a result of a variety of actions, in late 1997 and January 1998, management
cut the Bank's ongoing non-interest expenses by a total of $850,000 per year,
when compared to the annualized rate during the first nine months of 1997.
Holding company total expense increased $45,470 primarily as a result of
increases in public listing expense and legal expense associated with various
projects.
Non-interest expense for the Company increased by $3,215,694 or 189% in
1996 to $4,915,349 from $1,699,655 in 1995. Increased personnel, occupancy, data
processing, advertising and depreciation expense resulting from the start-up of
the Bank's new full-service branch office in Ann Arbor during the 1996 was the
major factor in the increase. Legal expense remained unusually high as a result
of various projects and loan collection legal expense. Bonuses to a key manager
related to value creation with respect to the growth of the Ann Arbor main
office's deposits and loans added $255,000 in salary expense. Holding company
total expense increased $23,404 primarily as a result of increases in public
listing expense and legal expense associated with various projects.
Year 2000 Readiness. The Bank has formed a Year 2000 coordination
committee with key members of management from the Bank and each operating
subsidiary and appointed its Compliance Officer as Year 2000 Coordinator. The
Bank and Midwest rely on mainframe
- 40 -
41
computers, which are IBM A/S 400s, and are certified as Year 2000 compliant. The
Bank's main bank software application is a product of Peerless Group, and is
anticipated to be fully Year 2000 compliant by September 1998. Midwest's main
application software is LSAMS servicing software, which is anticipated to be
Year 2000 compliant by year-end 1998. The Bank, Varsity Mortgage and Varsity
Funding also rely on Novell Local Area Networks, which are in the process of
being upgraded to a Year 2000 certified version of Novell Local Area Network
software. Internally generated Year 2000 issues are unlikely to have any
material financial impact on the Company or any of its subsidiaries. The cost of
Year 2000 compliance is included in the Company's ongoing annual software
licensing fees for the most part and is otherwise not currently expected to be
material.
The impact of external Year 2000 problems from outside service
providers such as the Federal Reserve, the Bank's credit card processor, the
Bank's ATM processor or other vendors is not predictable at this time. The Bank
is requesting Year 2000 readiness information from large commercial borrowers.
INCOME TAXES
Income tax expense (benefit) in 1997 was $(292,818) versus $(358,758)
in 1996 and $(106,949) in 1995. The effective tax (benefit) rate was (33.9)% in
1997, (40.1)% in 1996 and (26.6)% in 1995. A tax benefit was realized in 1997,
1996 and 1995 for net operating loss carryforwards as a result of the net losses
from operations.
In February 1996, the Bank, through its 98%-owned subsidiary, Arbor
Street LLC, purchased $1,000,000 in federal low income housing tax credits
through a partnership investment in Michigan Capital Fund for Housing Limited
Partnership I, a Michigan limited partnership (the "Partnership"). The initial
investment consisted of a $50,000 equity purchase and the execution by Arbor
Street LLC of a $950,000 promissory note held by the Partnership (the "Note").
Additional capital contributions are made over time. The purchase of the tax
credits increased the Company's federal income tax refund receivable in 1996 and
1997 and is expected to decrease the amount of federal income taxes the Company
would otherwise pay annually through 2005.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements provided pursuant to this item are listed
under Item 14(a) below and appear beginning on page 43.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
- 41 -
42
UNIVERSITY BANCORP, INC.
AND
SUBSIDIARIES
------------------
CONSOLIDATED FINANCIAL STATEMENTS
-------------------
DECEMBER 31, 1997, 1996, 1995
- 42 -
43
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
University Bancorp, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of University
Bancorp, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 University Bancorp,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 20, 1998
- 43 -
44
Part 1. - Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,1997 and 1996
ASSETS 1997 1996
------------ ------------
Cash and due from banks $ 2,062,307 $ 1,866,917
Federal funds sold 314,652 10,683,895
------------ ------------
Total cash and cash equivalents 2,376,959 12,550,812
Securities available for sale at market 1,980,327 7,346,856
Loans held for sale 18,156,671 30,534,574
Loans 28,236,183 20,966,290
Allowance for Loan Loss (520,953) (297,783)
------------ ------------
Loans, net 27,715,230 20,668,507
Premises and equipment 1,955,919 1,955,294
Mortgage servicing rights 1,430,190 2,312,436
Investment in and advances to
Michigan BIDCO 742,669 815,790
Other real estate owned 433,003 266,079
Other assets 2,737,815 1,910,331
------------ ------------
Total other assets 7,299,596 7,259,930
------------ ------------
TOTAL ASSETS $ 57,528,783 $ 78,360,679
============ ============
-Continued-
- 44 -
45
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31,1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ ------------
Liabilities
Deposits:
Demand - non interest bearing $ 2,458,211 $ 3,648,170
Demand - interest bearing 19,120,122 15,786,832
Savings 143,604 976,479
Time 23,545,234 29,529,050
------------ ------------
Total Deposits 45,267,171 49,940,531
FHLB advances 0 6,000,000
Mortgage escrow 86,686 87,552
Short term borrowings 2,744,188 11,978,766
Long term borrowings 1,749,070 962,500
Deferred noncompete income 67,072 102,076
Other liabilities 4,015,003 5,175,058
Minority Interest 201,149 201,427
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
Issued - 0 shares in both 1997 and 1996 -- --
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
Issued - 1,391,907 shares in 1997
and 1,295,366 shares in 1996 13,919 12,954
Treasury Stock - 68,977 shares in 1997
and 68,765 in 1996 (302,446) (300,883)
Additional Paid-in-Capital 3,493,154 2,906,389
Retained earnings 181,549 1,299,473
Net unrealized gain/(loss) on securities
available for sale, net of tax
of $6,320 in 1997, and
($2,659) in 1996 12,268 (5,164)
------------ ------------
Total Stockholders' equity 3,398,444 3,912,769
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 57,528,783 $ 78,360,679
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
- 45 -
46
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ---------- ----------
Interest income:
Interest and fees on loans $ 4,074,994 $2,821,007 $1,242,628
Interest on securities:
U.S. Treasury Securities -- 34,310 --
U.S. Government agencies 238,190 568,141 1,014,804
Other securities 67,776 21,403 28,051
Interest on bank deposits 50,458 41,212 --
Interest on federal funds 304,693 237,453 93,494
----------- ---------- ----------
Total interest income 4,736,111 3,723,526 2,378,977
----------- ---------- ----------
Interest expense:
Interest on deposits:
Demand deposits 989,247 522,580 125,482
Savings deposits 13,745 51,858 60,827
Time certificates of deposit 1,672,477 1,537,908 838,019
Bank and other short term borrowings 424,419 480,189 739,898
Long Term Notes Payable 108,195 140,178 81,181
----------- ---------- ----------
Total interest expense 3,208,083 2,732,713 1,845,407
----------- ---------- ----------
Net interest income 1,528,028 990,813 533,570
Provision for loan losses 260,000 190,500 16,800
----------- ---------- ----------
Net interest income after
provision for loan losses 1,268,028 800,313 516,770
----------- ---------- ----------
Other income:
Net security gains 7,715 399,282 57,880
Service charges and fees 17,910 9,428 128
Foreign exchange income (losses) (4,375) 31,847 49,656
Mortgage banking income 4,926,815 2,363,080 489,355
Gain on sale of servicing rights -- 256,840 --
Profit(loss) from equity investment in
Michigan BIDCO (55,499) 50,301 94,538
Other 296,538 108,742 89,403
----------- ---------- ----------
Total other income 5,189,104 3,219,520 780,960
----------- ---------- ----------
-Continued-
- 46 -
47
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Other expenses:
Salaries and wages $ 4,228,467 $ 2,431,561 $ 507,204
Employee benefits 523,771 346,059 149,397
Occupancy, net 499,838 355,950 101,464
Taxes other than income 96,009 26,475 (41,059)
Data processing and equipment expense 269,820 351,796 194,419
Correspondent bank service charges 44,133 20,756 27,243
Advertising 103,332 138,957 18,574
Net expense of other real estate owned (782) 7,016 12,365
Legal and audit expense 274,093 293,862 354,268
Other operating expenses 1,829,193 942,917 375,780
----------- ----------- -----------
Total other expenses 7,867,874 4,915,349 1,699,655
----------- ----------- -----------
Income (Loss) before income taxes (1,410,742) (895,516) (401,925)
----------- ----------- -----------
Income taxes (benefit) (292,818) (358,758) (106,949)
----------- ----------- -----------
Net Income (Loss) $(1,117,924) $ (536,758) $ (294,976)
=========== =========== ===========
Basic and diluted (loss) per common share $ (0.58) $ (0.29) $ (0.16)
=========== =========== ===========
Weighted average shares outstanding 1,921,721 1,866,519 1,801,518
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 47 -
48
UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1997, 1996, and 1995
Common Stock $.01 Treasury Stock Unrealized
Par Value gain/(loss)
--------------------------------------- Additional on securities Total
Number of Par Number of Paid In Retained available Stockholders'
Shares Value Shares Cost Capital Earnings for sale Equity
-----------------------------------------------------------------------------------------------
Balance January 1, 1995 1,200,000 $12,000 -- $ -- $2,478,270 $ 2,131,207 $(525,788) $ 4,095,689
Issuance of Shares at $4.35 per
share 76,125 761 -- -- 321,386 -- -- 322,147
Purchase of shares at $3.75 per
share -- -- (37,282) (139,808) -- -- -- (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 1,276,125 12,761 (37,282) (139,808) 2,799,656 1,836,231 142,058 4,650,898
Issuance of shares weighted average
at $5.56 per share 19,241 193 -- -- 106,733 -- -- 106,926
Purchase of shares at $5.12 per
share -- -- (31,483) (161,075) -- -- -- (161,075)
Net change in unrealized gain(loss)
on securities available for sale,
net of tax -- -- -- -- -- -- (147,222) (147,222)
Net Income (Loss) -- -- -- -- -- (536,758) -- (536,758)
-----------------------------------------------------------------------------------------------
Balance December 31, 1996 1,295,366 12,954 (68,765) (300,883) 2,906,389 1,299,473 (5,164) 3,912,769
Issuance of shares weighted average
at $6.43 per share 86,541 865 -- -- 555,615 -- -- 556,480
Exercised option shares at $3.13
per share 10,000 100 -- -- 31,150 -- -- 31,250
Purchase of shares at $7.37 per
share -- -- (212) (1,563) -- -- -- (1,563)
Net change in unrealized gain(loss)
on securities available for sale,
net of tax -- -- -- -- -- -- 17,432 17,432
Net Income (Loss) -- -- -- -- -- (1,117,924) -- (1,117,924)
-----------------------------------------------------------------------------------------------
Balance December 31, 1997 1,391,907 $13,919 (68,977) $(302,446) $3,493,154 $ 181,549 $ 12,268 $ 3,398,444
===============================================================================================
- 48 -
49
UNIVERSITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- ------------
Cash flow from operating activities:
Net income (loss) $ (1,117,924) $ (536,758) $ (294,976)
Adjustments to reconcile net loss to net cash from Operating Activities:
Depreciation and amortization 663,076 562,141 212,621
Compensation Expense 36,322 15,056 101,750
Provision for loan loss 260,000 190,500 16,800
Gain on sale of mortgage servicing rights -- (256,840) --
Mortgage loans originated for sale (396,723,436) (193,356,147) (84,528,789)
Proceeds from sale of loans and mortgage backed trading securities 413,672,875 171,985,016 80,896,312
Net loss/(gain) on loan sales and securitization (2,564,188) (1,180,289) (61,695)
Market adjustment on loans held for sale -- -- (64,661)
Gain on sale of home equity loans (429,260) -- --
Net amortization/accretion on securities 14,856 (18,932) (4,506)
Loss/(Gain) on sale of securities available for sale (7,715) (399,282) (57,880)
Change in:
Investment in Michigan BIDCO, Inc. 73,121 (50,301) (94,538)
Other real estate (166,924) (135,483) (581)
Increase in other assets (2,736,723) (717,937) (544,425)
Increase/(Decrease) in other liabilities (1,204,317) 512,506 (2,698,358)
------------- ------------- ------------
Net cash from (used in) operating activities $ 9,769,763 $ (23,386,750) $ (7,122,926)
------------- ------------- ------------
Cash flow from investing activities:
Purchase of securities available for sale (1,890,921) (11,701,033) (7,974,794)
Proceeds from sales of securities available for sale 5,879,886 10,888,145 12,181,096
Proceeds from maturities and paydowns of securites available for sale 1,396,835 6,751,784 2,453,703
Acquisition of Midwest Loan Services, net of cash received -- -- (161,882)
Capitalized mortgage servicing rights (275,680) (616,436) (534,112)
Proceeds from sale of servicing rights 835,396 1,216,952 --
Purchase of home equity loans -- -- (1,903,212)
Loans granted net of repayments (6,877,463) (11,905,489) (2,846,473)
Investment in Michigan BIDCO, Inc. -- -- (203,500)
Premises and equipment expenditures (439,280) (876,561) (983,436)
------------- ------------- ------------
Net cash from (used in) investing activities (1,371,227) (6,242,638) 27,390
------------- ------------- ------------
Cash flow used in financing activities:
Net increase (decrease) in deposits (4,673,360) 32,361,195 7,617,272
Proceeds from FHLB advances 7,000,000 7,500,000
Payments of FHLB advances (6,000,000) (11,000,000) (7,300,000)
Net increase(decrease) in mortgage escrow accounts (866) 9,313 (158,976)
Net increase (decrease) in other short term borrowings (9,234,578) 11,978,766 --
Principal payment/borrowings on notes payable 786,570 (37,500) --
Issuance of common stock 551,408 91,870 --
Purchase of treasury stock (1,563) (161,075) (139,808)
------------- ------------- ------------
Net cash from financing activities (18,572,389) 40,242,569 7,518,488
------------- ------------- ------------
Net change in cash and cash equivalents (10,173,853) 10,613,181 422,952
Cash and cash equivalents:
Beginning of period 12,550,812 1,937,631 1,514,679
------------- ------------- ------------
End of period $ 2,376,959 $ 12,550,812 $ 1,937,631
============= ============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 3,356,692 $ 2,599,547 $ 1,773,595
Cash paid for income taxes -- -- 740,108
Supplemental disclosure of noncash investing activities:
Par value of mortgage loans securitized $ 171,639,196 $ 54,137,028 $ 6,100,390
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 financial statements.
- 49 -
50
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements of University Bancorp, Inc. (the
Company) include the operations of its wholly-owned subsidiary,
University Bank (the Bank), the Bank's wholly-owned subsidiaries,
Varsity Funding Services, L.L.C. (Varsity Funding), Varsity Mortgage,
L.L.C. (Varsity Mortgage), and University Insurance & Investment
Services, Inc. (Agency), 98% owned subsidiary, Arbor Street, L.L.C.
(Arbor) and 80% owned subsidiary, Midwest Loan Services, Inc. (Midwest).
The accounts are maintained on an accrual basis in accordance with
generally accepted accounting principles and predominant practices
within the banking industry. All significant intercompany balances and
transactions have been eliminated in preparing the consolidated
financial statements.
The Company is a bank holding company. The subsidiary Bank, which is
located in Michigan, is a full service community bank, which offers all
customary banking services, including the acceptance of checking,
savings and time deposits. The Bank also makes commercial, real estate,
personal, home improvement, automotive and other installment, credit
card and consumer loans, and provides fee based services such as annuity
and mutual fund sales, life insurance and foreign currency exchange. The
Bank considers its customer base to be primarily located in the Ann
Arbor, Michigan area. The Bank established it's main office in Ann Arbor
in February 1996, by relocating from the eastern Upper Peninsula of
Michigan. The Ann Arbor office is the focus of the Bank's future
business development plan. The consolidated assets of the Company of
$57,713,783 as of December 31, 1997, 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 $125,000,000 as of December 31, 1997, are not included in the
Company's consolidated balance sheet. The Bank uses brokers to arrange
time deposits, and during 1997, a significant portion of the Bank's time
deposits were brokered deposits (See Note 7).
The Bank's operating subsidiaries, Midwest, Varsity Funding and Varsity
Mortgage, are engaged in the residential home "mortgage banking"
business. Midwest Loans Services began operations in 1992 and was
acquired by University Bank in December, 1995. Midwest Loan Services is
based in Houghton, Michigan, and is a specialist in servicing
residential mortgage loans for itself and other financial institutions,
including the Bank (See Notes, 4 & 10.) Varsity Funding commenced
operations in October 1995 and Varsity Mortgage commenced operations in
March 1996 (See Note 4). Varsity Funding and Varsity Mortgage which are
based in Farmington Hills, Michigan, specialize in the purchase, from
correspondents, and the sale to the secondary market, of nonconforming
and conforming residential loans, respectively.
The consolidated financial statements include operating results of the
Agency since its acquisition on December 31, 1996. The Agency is engaged
in the sale of insurance products including life and health, and
investment products including annuities and mutual funds. The Agency is
located in the Bank's Ann Arbor main office.
The Bank's 98%-owned subsidiary, Arbor Street LLC, has purchased
$1,000,000 in low income Michigan Capital Fund for Housing Limited
Partnership I with the assistance of $950,000 in initial financing in
the form of a loan from the Michigan Housing Development Authority.
The Company's loan portfolio is concentrated in Ann Arbor, and to a
lesser extent in the eastern Upper Peninsula of Michigan. While the loan
portfolio is diversified, the customers' ability to honor their debts is
partially dependent on the local economies. The Ann Arbor area is
primarily dependent on the education, healthcare, services, and
manufacturing (automotive and other) industries. The eastern Upper
Peninsula of Michigan is primarily dependent on the recreation,
gambling, government, cross-border shopping and manufacturing
industries. Most real estate loans are secured by federal agency
guarantees and residential or commercial real estate and most business
loans are secured by business assets. Generally, installment loans are
secured by various items of personal property. A large portion of time
deposits consist of certificates of deposit obtained through brokers and
are subject to withdrawal (with penalties for early withdrawal) should
the Company's credit worthiness downgrade.
- 50 -
51
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of significant accounting policies (continued)
Michigan BIDCO, Inc.
The Bank's investment in Michigan BIDCO, Inc. (the BIDCO) is accounted
for under the equity method of accounting. The Bank owns 44.1% of the
outstanding shares of the BIDCO at December 31, 1997, which began
operations in May, 1993. At December 31, 1997, the Company owned
$201,562 in bonds issued by the BIDCO. If there were a conversion of
outstanding convertible bonds, the Bank and the Company would together
own 15.61% at December 31, 1997 and 1996. 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 pursuant to an audit performed using generally
accepted auditing standards exceeds $1,500,000. The financial statements
of Michigan BIDCO, Inc. are stated using the prescribed accounting
practices of investment companies. As a result, investments made by the
BIDCO are evaluated by management and carried at estimated fair value.
Total equity of the BIDCO was $1,227,001 at December 31, 1997.
Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions based
upon available information. These estimates and assumptions affect the
reported amounts and disclosures. Actual results could differ from those
estimates.
The significant estimates incorporated into these consolidated financial
statements which are more susceptible to change in the near term include
the value of mortgage servicing rights, the allowance for loan losses,
the identification and valuation of impaired loans, the equity interest
in the fair value and the change in the fair value of investments made
by the BIDCO, the fair value of financial instruments, and the valuation
of deferred tax assets.
Cash flow reporting
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents is defined to include the cash on hand, non-interest bearing
deposits in other institutions, federal funds sold and other investments
with a maturity of three months or less when purchased. Net cash flows
are reported for customer loan and deposit transactions and interest
bearing deposits with other banks.
Securities
Securities are classified as held to maturity and carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities are classified as available for sale when they
might be sold before maturity. Securities available for sale are carried
at fair value, with unrealized holding gains and losses reported
separately in stockholders' equity, net of tax. Realized gains are based
on specific identification of amortized cost. Securities are written
down to fair value when a decline in fair value is not temporary.
Interest income includes amortization of purchase premium or discount.
Trading securities are carried at fair value, with changes in unrealized
holding gains and losses included in income. Other securities such as
Federal Home Loan Bank stock are carried at cost.
Loans
Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan
losses.
Mortgage banking activities
Mortgage banking activities include the purchase of loans from
correspondents. The agreements with the correspondents and the degree of
underwriting the Bank performs on the loans determine whether the loans
are purchased with or without recourse. Mortgage loans held for sale as
part of the Bank's mortgage banking activities are valued at the lower
of cost or market as determined by bid prices for loans in the secondary
market. Certain loans are securitized into mortgage backed trading
securities. Upon securitization, the loans are transferred at market
value to trading securities, and a gain or loss on securitization of
loans is recorded.
- 51 -
52
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of significant accounting policies (continued)
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable
credit losses, increased by the provision for loan losses and decreased
by charge-offs less recoveries. Management estimates the allowance
balance required based on past loan loss experience, known and inherent
risks in the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in managment's
judgement, should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage, consumer, and credit
card loans, and on an individual loan basis for other loans. If a loan
is impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using
the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or when
it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Loan income
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on
such loans are reported as principal reductions.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Provisions for depreciation are computed primarily on the
straight-line method for bank premises and the accelerated methods for
equipment and land improvements over their estimated useful lives. These
assets are reviewed for impairment when events indicate the carrying
amount may not be recoverable.
Other real estate owned
Real estate properties acquired in collection of a loan are recorded at
fair value at the acquisition. Any reduction to fair value from the
carrying value of the related loan is accounted for as a loan loss.
After acquisition, a valuation allowance reduces the reported amount to
the lower of the initial amount or fair value less costs to sell.
Expenses, gains and losses on disposition, and changes in the valuation
allowance are reported in other expenses.
Servicing rights
Servicing rights represent both purchased rights and the allocated value
of servicing rights retained on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of
the rights, using grouping of the underlying loans as to type, term and
interest rates. Any impairment of a grouping is reported as a valuation
allowance.
Income taxes
Income tax expense is the sum of the current year estimated tax
obligation or refund per the income tax return, and the change in the
estimated future tax effects of temporary differences and carryforwards.
Deferred tax assets or liabilities are computed by applying enacted
income tax rates to the expected reversals of temporary differences
between financial reporting and income tax reporting, and by considering
carryforwards for operating losses and tax credits. A valuation
allowance, if needed, adjusts deferred tax assets to the net amount that
is more likely than not to be realized.
- 52 -
53
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of significant accounting policies (continued)
Retirement plan
The Bank replaced a SEP IRA plan with a 401-K Plan, effective January 1,
1996, which allowed an employee to contribute up to 15% of salary
pre-tax, to the allowable limit prescribed by the Internal Revenue
Service. Management has discretion to make matching contributions to the
Plan, however, no matching contributions were made by the Bank for the
years ended December 31, 1997 and 1996.
Employees Stock Ownership Plan (ESOP)
The Corporation has a noncontributory ESOP covering all full-time
employees who have met certain service requirements. The employees'
share in the Corporation's contribution is based on their current
compensation as a percentage of the total employee compensation. As
shares are contributed to the plan they are allocated to employees and
compensation expense is recorded at the shares' fair value.
Stock options
No expense for stock options is recorded, as the grant price equals the
market price of the stock at grant date. Pro-forma disclosures show the
effect on income and earnings per share had the options' fair value been
recorded using an option pricing model. The pro-forma effect is expected
to increase in the future.
Dividend restriction
Banking regulations require the maintenance of certain capital levels
and may limit the amount of dividends which may be paid by the bank to
the holding company or by the holding company to shareholders.
Earnings per share
Basic earnings per share is based on weighted-average common shares
outstanding. Diluted earnings per share further assumes issue of any
dilutive potential common shares. The accounting standard for computing
earnings per share was revised for 1997, and all earnings per share
previously reported are restated to follow the new standard. Earnings
per share and share amounts are restated for all subsequent stock
dividends and splits.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments,
and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Future Accounting Changes
New accounting standards have been issued which will require future
reporting of comprehensive income (net income plus other changes in
equity, including holding gains and losses on available for sale
securities) and may require redetermination of industry segment
financial information.
Reclassifications
Certain amounts for 1996 and 1995 have been reclassified to conform
with the 1997 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. A portion of the sales price,
$175,000, was allocated to deferred income attributable to the
non-compete agreement. This deferred income is being amortized into
income over the five year term of the agreement.
- 53 -
54
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
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, 1997 and 1996:
December 31, 1997
-----------------
Amortized Gross Unrealized Fair
(in thousands) Cost Gains Losses Value
--------- ----- ---------- -----
U.S. agency mortgage-backed $ 509 $ 9 $ -- $ 518
Other mortgage-backed 561 -- (28) 533
U.S. agency equity 848 -- -- 848
Other equity 44 37 -- 81
------ --- ---- ------
Total securities
available for sale $1,962 $46 $(28) $1,980
====== === ==== ======
December 31, 1996
-----------------
Amortized Gross Unrealized Fair
(in thousands) Cost Gains Losses Value
--------- ----- ----------- -----
U.S. agency mortgage-backed $5,367 $38 $(30) $5,375
Other mortgage-backed 681 -- (35) 646
U.S. agency equity 848 -- -- 848
Other mortgage-backed 367 -- (3) 364
Other equity 92 22 -- 114
------ --- ---- ------
Total securities available for
sale $7,355 $60 $(68) $7,347
====== === ==== ======
Since mortgage-backed securities have variable payments, they are not
reported by specific maturity grouping.
Investment securities with an amortized cost of approximately $1,067,624
at December 31, 1997 and $6,356,433 at December 31, 1996 were pledged to
secure certain borrowings.
Sales of available for sale securities 1997 1996 1995
---- ---- ----
Proceeds $5,907,489 $10,888,145 $12,181,096
Realized gains 70,881 433,222 210,960
Realized losses 63,166 33,940 153,080
- 54 -
55
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
4. Secondary mortgage market operations
The Bank, and its subsidiaries Midwest Loan Services, Varsity Mortgage
and Varsity Funding, originate, purchase, sell and service single family
mortgage loans. The following summarizes the secondary market activities
of the Bank, Midwest, Varsity Funding and Varsity Mortgage, for the
years ended:
December 31,
1997 1996 1995
----------- ----------- ---------
Origination and other fees $ 1,521,292 $ 609,499 $ 59,327
Gain on sale and securitization of
mortgages 2,993,448 1,180,289 61,695
Loan servicing and subservicing fees, net 412,075 573,292 368,333
----------- ----------- ---------
Mortgage banking income reflected in statements
of operations 4,926,815 2,363,080 489,355
Gain on sale of servicing rights -- 256,840 --
Market value adjustments included in other
operating expense -- -- 64,661
Interest income allocation 1,699,400 1,310,062 645,092
Interest expense allocation (1,332,100) (927,578) (382,570)
Operating expense allocation (5,003,798) (2,625,456) (589,646)
----------- ----------- ---------
Pretax profit (loss) from secondary
market activities $ 290,317 $ 376,948 $ 226,892
=========== =========== =========
Certain assumptions were used to calculate the profit and loss from
secondary market activities. Interest income was calculated using the
average annual balance of loans held for sale at the Bank's average
yield on mortgage loans. Interest expense was calculated using the
average annual balance of loans held for sale, net of escrow balances,
at the Bank's average cost of funds rate.
Operating expenses included certain direct costs, but a significant
portion is based upon management's estimates using the best available
information.
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Loans held for sale,
January 1 $ 30,534,574 $ 7,983,154 $ 4,129,321
Origination or acquisition
of loans held for sale 401,294,972 193,356,147 84,528,789
Sale of loans originated
for sale (242,033,679) (116,667,699) (74,639,227)
Securitization of loans (171,639,196) (54,137,028) (6,100,390)
Market value adjustments -- -- 64,661
------------- ------------- ------------
Loans held for sale,
December 31 $ 18,156,671 $ 30,534,574 $ 7,983,154
============= ============= ============
The bank and third parties will alternatively provide funding sources
for the mortgage banking pipeline. Included within other liabilities at
December 31, 1997, and 1996, are $3,300,000 and $4,100,000 of recently
closed loans which the Bank is funding internally.
- 55 -
56
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
4. Secondary mortgage market operations (continued)
A reserve of $64,661 was deducted from income for the year ended
December 31, 1995 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, 1997 and 1996, thus no reserve was required.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. Such mortgage loans have been sold
predominately without recourse or with limited recourse. The unpaid
principal balances of these loans, including loans acquired from the
acquisition of Midwest, were $125,000,000, $214,000,000 and $269,000,000
at December 31, 1997, 1996 and 1995, respectively.
Midwest also provides sub-servicing of loans for other financial
institutions. At December 31, the principal balance of loans for which
sub-servicing was provided was $321,896,000 in 1997 and $217,297,000 in
1996.
Custodial balances maintained in connection with the foregoing loan
servicing were $425,756, $1,064,650 and $1,055,337 at December 31, 1997,
1996 and 1995, respectively.
Following is an analysis of the change in the asset balance of mortgage
servicing rights:
Balance, January 1, 1995 $ 1,625,889
Additions 534,112
Additions from acquisition of Midwest 906,598
Amortization (129,896)
-----------
Balance, December 31, 1995 2,936,703
Additions 616,436
Bulk sale of servicing (960,112)
Amortization (280,591)
-----------
Balance, December 31, 1996 2,312,436
Additions 275,680
Bulk sale of servicing (835,396)
Amortization (322,530)
-----------
Balance, December 31, 1997 $ 1,430,190
===========
There was no valuation allowance necessary at December 31, 1997, 1996 or
1995. Additions to mortgage servicing rights in 1997 consisted of
purchased rights of $113,905 and originated rights capitalized of
$161,775. Additions to mortgage servicing rights in 1996 consisted of
purchased rights of $319,715 and originated rights capitalized of
$296,721.
5. Loans
Major classifications of loans are as follows as of December 31, 1997
and 1996:
1997 1996
------------ ------------
Commercial $ 11,056,374 $ 7,568,996
Real estate - mortgage 8,836,241 8,755,737
Real estate - construction 1,584,390 826,028
Installment 6,759,178 3,815,529
------------ ------------
28,236,183 20,966,290
Allowance for loan losses (520,953) (297,783)
------------ ------------
Net loans $ 27,715,230 $ 20,668,507
============ ============
- 56 -
57
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
5. Loans (continued)
Changes in the allowance for loan losses were as follows:
1997 1996 1995
--------- --------- ---------
Balance at beginning of period $ 297,783 $ 317,185 $ 362,559
Provision charged to operating expense 260,000 190,500 16,800
Recoveries 46,435 14,757
Charge-offs (83,265) (224,659) (107,791)
--------- --------- ---------
Balance, end of year $ 520,953 $ 297,783 $ 317,185
========= ========= =========
Past due and non accrual loans are as follows:
1997 1996
-------- --------
Past due loans
90 days and more and still accruing:
Real estate $233,697 $226,144
Installment loans 5,556 34,096
Commercial loans $295,643 29,479
-------- --------
$534,896 $289,719
======== ========
Non accrual loans:
Real estate $532,821 $336,468
Installment loans 44,409
1,968
Commercial loans 9,479 125,761
-------- --------
$586,709 $464,197
======== ========
Information regarding impaired loans for the years ended December 31, is
as follows:
1997 1996
-------- --------
Impaired loans:
Loans with no allowance allocated $ 34,255 $ --
Loans with allowance allocated 314,201 220,671
Amount of allowance for loan losses allocated 10,085 39,539
1997 1996 1995
---- ---- ----
Impaired loans:
Average balance during the year $350,459 $227,345 $328,731
Interest Income recognized thereoon 23,626 1,097 44,104
Cash-basis interest income recognized 23,626 1,097 44,104
- 57 -
58
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
6. Premises and equipment
Premises and equipment classifications at December 31, 1997 and 1996
are summarized as follows:
1997 1996
----------- -----------
Land $ 163,290 $ 157,575
Buildings and improvements 1,184,292 1,185,283
Furniture, fixtures, and equipment 1,407,928 1,341,455
----------- -----------
2,755,510 2,684,313
Less accumulated depreciation (916,315) (729,019)
----------- -----------
Net $ 1,955,919 $ 1,955,294
=========== ===========
Depreciation expense amounted to $242,376, $279,807 and $82,725 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Bank leases its ATM Drive-thru location in Ann Arbor for $24,720 per
year. Varsity Funding and Varsity Mortgage lease space for their office
for $55,599 per year, and Midwest leases its space for a nominal amount
from the city of Houghton. Total rental expense for the operating leases
was $131,774 in 1997, $74,831 in 1996 and $17,522 in 1995. As of
December 31, 1997, the Corporation had no minimum rental commitments
under noncancelable operating leases. The Bank had an annual minumum
rent as of December 31, 1997 of $24,720, with a total minimum amount of
future rent payable over the next 8 years of $217,416. Varsity had an
annual minimum rent as of December 31, 1997 of $55,599, with a total
minimum amount of future rent payable over the next two years of
$111,198.
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, 1997 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 $186,000.
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.
7. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more at
December 31, 1997 and 1996, were $12,208,952 and $20,857,605
respectively.
At year-end 1997, stated maturities of time deposits were:
1998 $20,446,553
1999 1,874,030
2000 414,558
2001 427,860
2002 327,734
thereafter 54,499
-----------
$23,545,234
===========
At December 31, 1997 and 1996, the Bank had issued through brokers
$5,334,000 and $15,401,000 of time deposits with a maturity of 1-60
months.
Related party deposits totalled $473,978 and $1,189,507 at year-end 1997
and 1996.
- 58 -
59
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
8. Stock options
Director Stock Options
In 1993, the Board of Directors approved the grant of options to
purchase 15,000 shares of common stock to each of the four non-executive
directors, in lieu of compensation. The exercise price of options
granted was set at $2.08 per share, which was the then current bid price
per share as reported by NASDAQ. The options are immediately exercisable
and expire July 19, 2003. Options covering 15,000 shares were exercised
during 1997. Options granted on 45,000 shares remain outstanding under
this plan at December 31, 1997.
1995 Stock Plan
In 1995, the Corporation adopted a stock option and stock award
plan (the 1995 Stock Plan), which provides for the grant of incentive
stock options, as defined in Section 422(b) of the Internal Revenue
Code of 1986, as amended, as well as the grant of non-qualified stock
options and other stock awards. The plan provides for the grant to
officers, directors and key employees of the Corporation, and
independent contractors providing services to the Corporation, of
options to purchase and other awards for a maximum of 525,000 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.
The following table summarizes the activity relating to options to
purchase the Corporation's common stock:
Weighted Average
Number of Exercise Price
Options Per Share
----------- ----------------
Outstanding at December 31, 1995 and 1994 60,000 $ 2.08
Granted - 1996 ($0.76 Fair Value) 423,812 3.11
Exercised - 1996 (6,812)
3.69
Forfeited - 1996 (26,250) 3.33
-------
Outstanding at December 31, 1996 450,750 2.95
-------
Granted - 1997 ($0.21 Fair Value) 140,700 3.67
Exercised - 1997 (37,753) 3.03
Forfeited - 1997 (93,750) 3.67
-------
Outstanding at December 31, 1997 459,947 $ 3.05
======= ========
Options outstanding have been restated for a 3 for 2 stock split in
1998.
At December 31, 1997:
Number of options immediately exercisable 379,547
Weighted average exercise price of immediately
exercisable options $3.04
Range of exercise price of options outstanding $2.08 - $4
Weighted-average remaining life of options outstanding 1.1 years
SFAS No. 123, which became effective for 1996, requires pro forma
disclosures for companies that do not adopt its fair value accounting
method for stock-based employee compensation. Accordingly, the following
pro forma information presents net income and earnings per share had the
Standard's fair value method been used to measure compensation cost for
stock options granted in 1996. Compensation cost recognized for stock
options under APB No. 25 was $0 for 1997 and 1996, because options were
granted at exercise prices equal to the underlying stock prices at date
of grant. At year-end 1997, 80,489 shares were authorized for future
grants.
- 59 -
60
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
8. Stock options (continued)
1997 1996
----------- ---------
Estimated fair value stock options granted: Assumptions used:
Risk-free interest rate 5.7% 6.0%
Expected option life 2 years 3.1 years
Expected stock price volatility 14% 14%
Expected dividends $ 0 $ 0
Pro-forma net loss and loss earnings per share, assuming FAS
123 fair value method was used for stock options:
Net Loss (1,154,765) (674,874)
Loss per share $ (0.60) $ (0.36)
9. 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 $204,989 and $261,407 as of December 31, 1997
and 1996, respectively. The assets of the plan are comprised entirely of
shares of the Corporation, 63,074 and 53,168 shares at December 31, 1997
and 1996, respectively, all of which were fully allocated at December
31, 1997. 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, 1997, 1996 and 1995 of 9,906, 4,050 and 15,000 shares
of common stock with an approximate fair market value at the time of the
contribution of $36,322, $15,056 and $35,000, respectively.
10. 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 President of Midwest. The acquisition was accounted for as a
purchase with no goodwill recorded. At December 31, 1997 and 1996, total
common shareholders' equity of Midwest was $1,005,747 and $1,007,135,
resulting in a $201,149 and $201,427 minority interest reflected on the
Company's consolidated balance sheet, respectively. The results of
Midwest's operations are included in the Company's consolidated
statement of income since the date acquired.
11. Commitments and contingencies
The Bank and Varsity Mortgage 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 and Varsity Mortgage's exposure to
credit loss in the event of non-performance is equal to or less than the
contractual amount of these instruments. The Bank follows the same
credit policy to make such commitments as is followed by those loans
recorded in the consolidated financial statements.
The following is a summary of commitments as of December 31, 1997 and
1996:
1997 1996
---- ----
Commitments to buy loans $35,356,400 $14,531,000
Unused lines of credit 5,364,049 3,578,309
Commitments to sell loans $21,184,400 $22,000,000
Foreign exchange contracts - Can$ 800,000
- 60 -
61
Notes to Consolidated Financial Statements
December 31, 1997
12. Related party transactions
The Company's Chairman and President also serve as officers and
directors of BIDCO. As such, the Chairman and President are actively
involved in BIDCO operations, including investment activity and
estimation of the fair value of investments. In addition, in the
ordinary course of business the BIDCO has invested in several limited
liability companies (LLCs), and the Chairman and President have also
personally invested in certain of the same LLCs.
In connection with the Arbor Street investment of $1,000,000 in federal
low income housing tax credits through a partnership, the Bank was not
permitted by regulation to guarantee a $950,000 loan from the Michigan
Housing Development Authority to Arbor Street. Such loan was instead
personally guaranteed by the Chairman of the Company, and common stock
of the Company held by a trust for the benefit of the President of the
Company was pledged as additional security for the loan. In exchange,
the Chairman and President of the Company were each granted a 1%
membership interest in Arbor Street and the Bank's ownership reduced to
98%.
13. Income taxes
The provision for federal income taxes is composed of the following
amounts:
1997 1996 1995
--------- --------- ---------
Current expense (benefit) $(257,738) $(329,533) $(186,520)
Deferred expense (benefit) (35,080) (29,225) 79,571
--------- --------- ---------
Total year $(292,818) $(358,758) $(106,949)
========= ========= =========
The net deferred tax asset at December 31, 1997 and 1996 is comprised of
the following:
1997 1996
--------- ---------
Loans available for sale $ 18,673 $ --
Core deposit intangible 190 1,109
Allowance for loan losses 121,232 53,646
Temporary differences from LLCs -- 56,085
Nonaccrual loan interest income 12,874 12,876
Capital loss 7,695 8,611
Net Operating Loss Carryforward 156,269 --
Tax Credit Carryforward 127,445 --
Unrealized loss
on investments available for sale -- 2,659
Other 30,677 9,905
--------- ---------
Deferred tax assets 475,055 144,891
========= =========
Unrealized gain on investments available for sale (6,320) --
Servicing rights (173,292) (64,452)
Other (10,316) (6,413)
--------- ---------
Deferred tax liabilities (189,928) (70,865)
========= =========
Valuation allowance for deferred tax assets (185,000) --
Net Deferred Tax Asset $ 100,127 $ 74,026
========= =========
The Company has net operating loss carryforwards of approximately
$460,000 which expire 2017; capital loss carryforwards of approximately
$23,000 which expire in 2002; and general business credit carryforwards
of approximately $119,000 which expire in 2017. In addition, The Company
has an alternative minimum tax (AMT) credit carryforward of
approximately $9,000. The AMT credit can be carried forward
indefinitely. Management has established an allowance for deferred tax
assets that are not considered realizable at December 31, 1997.
- 61 -
62
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
13. Income taxes (continued)
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:
1997 1996 1995
--------- --------- ---------
Statutory rate applied to income before taxes $(479,652) $(304,475) $(136,655)
Add (Deduct)
Effect of tax exempt interest -- -- (1,178)
Undistributed earnings of
unconsolidated subsidiary 24,495 (17,102) (32,287)
Tax Credits (118,742) -- --
Change in valuation allowance 185,000 -- --
Other 96,081 (37,181) 63,171
--------- --------- ---------
Current year provision (benefit) for income tax $(292,818) $(358,758) $(106,949)
========= ========= =========
14. Short and Long-Term Borrowings
The Corporation has a note payable to North Country Bank & Trust (NCB&T)
secured by the stock of the Bank with a balance of $922,688 and $962,500
at December 31, 1997 and 1996. The note has a maturity date of February
15, 2005. Interest is payable quarterly at the prime rate of NCB&T plus
1.00 percent. Required principal payments under the loan for the next
five years are:
1998 $ 99,000
1999 $132,000
2000 $132,000
2001 $132,000
2002 $132,000
Thereafter $295,688
Dividends by the Bank to the holding company in excess of the prior
year's annual net income are not permitted without prior permission from
NCB&T under the terms of the Corporation's credit facility.
Arbor Street, LLC has an obligation of $826,382 at December 31, 1997
payable to the Michigan Housing Development Authority in connection with
its investment in a low income housing limited partnership. Payments are
due on demand, but are expected to be funded as follows:
1998 $147,000
1999 $145,000
2000 $142,000
2001 $140,000
2002 $137,000
Thereafter $115,382
At year-end 1997, the Bank has a short-term borrowing of $2,744,188 from
FNMA. The advance was due the following business day, carried a rate of
8.25%, and was collateralized by mortgage loans held for sale with a
current market value of $2,744,188, which were committed to be sold to
FNMA the following business day.
15. Federal Home Loan Bank advances
At December 31, 1997, the Bank has a line of credit from the Federal
Home Loan Bank (the FHLB) in the amount of $3,000,000. Subsequent to
year-end, the amount of the line was increased to $5,000,000. There were
no outstanding advances from the FHLB at December 31, 1997.
Advances are secured by the pledge of specific mortgage loans held for
investment with unpaid principal balances of $2,728,245 and
available-for-sale securities with a balance of $1,067,624.
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63
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
16. Earnings per share
Due to the net losses in 1997, 1996, and 1995, the stock options
outstanding were considered anti-dilutive and are not included in
earnings per share calculations. As a result, both basic and diluted
earnings per share are equal to net loss divided by weighted average
common shares outstanding.
In February of 1998, the Company declared a 3 for 2 share stock split in
the form of a dividend. Calculated fractional shares were paid in whole
share amounts. All weighted average share numbers have been adjusted for
this stock split.
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64
UNIVERSITY BANCORP, INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
17. University Bancorp (Parent Company Only) Condensed Financial
Information
CONDENSED BALANCE SHEET
December 31, December 31,
1997 1996
---------- ----------
ASSETS
Cash and cash equivalents $ 41,676 $ 41,113
Securities available for sale (Note 2) 81,504 114,070
Michigan BIDCO senior debentures 200,916 202,702
Investment in subsidiary Bank 3,958,927 4,529,503
Other Assets 879,328 216,950
---------- ----------
Total Assets $5,162,351 $5,104,338
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 922,688 $ 962,500
Accounts payable and other liabilities 841,219 229,068
---------- ----------
Total Liabilities 1,763,907 1,191,568
Stockholders Equity 3,398,444 3,912,769
---------- ----------
Total Liabilities and Stockholders Equity $5,162,351 $5,104,337
========== ==========
CONDENSED STATEMENTS OF INCOME
1997 1996 1995
----------- ----------- -----------
Income:
Dividends from subsidiary -- -- $ 1,350,000
Other $ 61,291 $ 83,505 102,182
----------- ----------- -----------
Total Income 61,291 83,505 1,452,182
Expense:
Interest 108,195 85,867 81,181
Other 167,938 122,468 99,066
----------- ----------- -----------
Total Expense 276,133 208,335 180,247
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (214,842) (124,830) 1,271,935
Federal income taxes (benefit) (70,472) (35,000) (9,630)
----------- ----------- -----------
Income (loss) before equity in
undistributed net income of subsidiaries (144,370) (89,830) 1,281,565
Equity in undistributed net income (loss)
of subsidiaries (973,554) (446,928) (1,576,541)
----------- ----------- -----------
Net Loss $(1,117,924) $ (536,758) $ (294,976)
=========== =========== ===========
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65
UNIVERSITY BANCORP, INC. (The Parent)
Condensed Statement of Cash Flows
For Year Ended
1997 1996 1995
----------------------------------------------------
Reconciliation of net income (loss) to net cash used
in operating activities:
Net Income (Loss) $ (1,117,924) $ (536,758) $ (294,976)
Contribution to ESOP 36,323 15,056 35,000
Loss(gain) on sale of investments (39,369) (44,598) (46,243)
Decrease/(increase) in receivable from affiliate 675,465 0 973,211
Decrease/(increase) in Other Assets (662,380) (138,698) (52,838)
Increase(Decrease) in interest payable 5,175 (14,196) (54,319)
Increase(Decrease) in other liabilities (88,527) 206,192 (704,202)
Decrease(Increase) investment in subsidiaries 920,576 446,928 226,542
-------------- -------------- -------------
Net cash provided by (used in) operating activities (270,661) (66,074) 82,175
-------------- -------------- -------------
Cash flow from investing activities:
Subsidiary dividends received 0 0 1,350,000
Contributions of capital to subsidiary (350,000) (66,750) (920,000)
Advances to Michigan BIDCO 0 0 (203,500)
Purchase of available for sale securities (55,309) (97,442) (236,418)
Proceeds from sale of available for sale securities 166,498 138,216 253,268
-------------- -------------- -------------
Net cash provided by (used in) investing activities (238,811) (25,976) 243,350
-------------- -------------- -------------
Cash flow from financing activities:
Principal payment on notes payable (39,812) (37,500) 0
Proceeds from sale of common stock 551,410 91,870 0
Purchase of treasury stock (1,563) (161,075) (139,808)
-------------- -------------- -------------
Net cash provided by (used in) financing activities 510,035 (106,705) (139,808)
-------------- -------------- -------------
Net changes in cash and cash equivalents 563 (198,755) 185,717
Cash and cash equivalents:
Beginning of year 41,113 239,868 54,151
-------------- -------------- -------------
End of period $ 41,676 $ 41,113 $ 239,868
============== ============== =============
Supplemental disclosure of cash flow information:
Cash paid during the
year for:
Interest $ 92,736 $ 100,062 $ 135,500
Income Tax 0 0 740,108
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66
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
18. Regulatory matters
The Bank is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components,
risk weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized,
although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to
accept brokered deposits. If undercapitalized, capital distributions are
limited, as is asset growth and expansion, and plans for capital
restoration are required. The minimum requirements are:
Capital to risk-weighted assets Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
The Bank presently has an agreement with its regulators that no
dividends will be declared without prior regulatory approval, and the
tier 1 to average assets be at 7% or more.
At year end, actual capital levels of the bank (in millions) and minimum
required levels were:
Total Cap to Risk-Weight Assets Tier 1 Cap to Risk-Weight Assets Tier 1 Cap to Avg Assets
Regulatory Actual Regulatory Actual Regulatory Actual
Minimum Ratio Amount Minimum Ratio Amount Minimum Ratio Amount
------- ----- ------ ------- ----- ------ ------- ----- ------
1997 10% 11.3% $4.5 6% 10.0% $4.0 5% 7.1% $4.0
1996 8% 9.4% $4.7 4% 8.8% $4.4 4% 6.0% $4.4
At year-end 1997 the Bank was categorized as well capitalized.
19. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair values
for financial instruments. The carrying amount is considered to estimate
fair value for cash and short-term instruments, demand deposits,
short-term borrowings, accrued interest, and variable rate loans or
deposits that reprice frequently and fully. Securities fair values are
based on quoted market prices or, if no quotes are available, on the
rate and term of the security and on information about the issuer. For
fixed rate loans or deposits and for variable rate loan or deposits with
infrequent repricing or repricing limits, the fair value is estimated by
the discounted cash flow analysis using current market rates for the
estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable. Fair value of loans held for sale is based on
market estimates. Fair value of mortgage servicing rights are estimated
using discounted cash flows based on current market interest rates net
of estimated costs of servicing loans. The fair value of debt is based
on currently available rates for similar financing. The fair value of
off-balance sheet items is based on the fees or cost that would normally
be charged to enter into or terminate such agreements.
Unrecognized financial instruments: The fair value of committments to
extend credit and the fair value of letters of credit are considered
immaterial.
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67
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
20. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial
instruments were as follows (in $000s):
December 31, 1997
Carrying Fair
Amount Value
Financial Assets
Cash and short term investments $ 2,377 $ 2,377
Securities Available for sale 1,980 1,980
Loans held for sale 18,157 18,246
Loans, net 27,715 27,835
Mortgage servicing rights 1,430 1,583
Accrued interest receivable 184 184
Financial Liabilities
Deposits 45,267 45,404
FHLB advances -- --
Mortgage escrow 87 87
Short term borrowings 2,744 2,744
Long term borrowings 1,749 1,749
Accrued interest payable 211 211
December 31, 1996
Carrying Fair
Amount Value
Financial Assets
Cash and short term investments $12,551 $12,551
Securities Available for sale 7,347 7,347
Loans held for sale 30,535 30,865
Loans, net 20,669 21,702
Mortgage servicing rights 2,312 2,466
Accrued interest receivable 302 302
Financial Liabilities
Deposits 49,941 50,057
FHLB advances 6,000 6,005
Mortgage escrow 88 88
Short term borrowings 12,941 12,941
Accrued interest payable 356 356
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68
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 1998 Annual
Meeting (the "Proxy Statement") to be under the captions:
Election of Directors
Executive Officers
Section 16(a) Beneficial Ownership Reporting Compliance
ITEM 11. - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement to be under the
captions:
Executive Compensation
Compensation Plans
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Security Ownership of Certain Beneficial Owners and
Management
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:
Certain Relationships and Related Transactions
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, 1997
and December 31, 1996, and consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1997, 1996 and 1995, of
the Company.
(b) Reports on Form 8-K. None.
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69
(c) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996 (the "June 30, 1996
10-Q")).
3.2 Composite By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989 (the "1989 10-K")).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31,
1997 issued to North Country Bank & Trust.
10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated by reference to Exhibit
10.2 to the 1990 10-K). *
10.2.1 Amendment to the ESOP, effective as of December 31,
1991 (incorporated by reference to Exhibit 10.2.A to the 1991 10-K. *
10.3 University Bank 401(k) Profit Sharing Plan, adopted
August 1, 1996, effective as of January 1, 1996 (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 10-K")). *
10.4 Letter regarding grant of options to outside directors,
dated as of July 20, 1993 (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1993 (the
"1993 10-K")). *
10.5 1995 Stock Plan of the Company (incorporated by reference
to Exhibit A to the definitive Proxy Statement of the Company for 1996 Annual
Meeting of Stockholders (the "1996 Proxy")). *
10.5.1 Form of Stock Option Agreement related to the 1995
Stock Plan (incorporated by reference to Exhibit 10.7.1 to the Annual Report on
Form 10-K for the year ended December 31, 1995 (the "1995 10-K")). *
10.6 Letter, dated December 1, 1989, from Federal Reserve Bank
of Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989 10-K).
10.7 Lease Agreement (the "Cascade Lease Agreement") between
RG Properties, Inc., as agent for Sault Associates, a Michigan Limited
Partnership, and University Bank, dated September 30, 1992 (incorporated by
reference to exhibit 10.9 to the 1992 10-K).
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70
10.7.1 First Amendment to the Cascade Lease Agreement, dated
January 5, 1993 (incorporated by reference exhibit 10.9.1 to the 1992 10-K).
10.8 Federal Income Tax Allocation Agreement Between Newberry
State Bank and Newberry Holding Inc. dated March 21, 1992 (incorporated by
reference to Exhibit 10.11 to the 1991 10-K).
10.8.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc. dated May 21, 1991
(incorporated by reference to Exhibit 10.11.1 to the 1991 10-K).
10.9 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).
10.10.1 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 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994
10-K")).
10.10.2 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 to the 1994
10-K).
10.10.3 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).
10.10.4 Noncompetition Agreement Between First Northern Bank &
Trust and University Bank dated December 3, 1994 (incorporated by reference to
Exhibit 10.12.4 to the 1994 10-K).
10.10.5 Mortgage Origination Agreement Between First Northern
Bank & Trust and University Bank dated December 3, 1994 (incorporated by
reference to Exhibit 10.12.5 to the 1994 10-K).
10.10.6 Branch Services Agreement Between First Northern Bank
& Trust and University Bank dated December 5, 1994 (incorporated by reference to
Exhibit 10.12.6 to the 1994 10-K).
10.11 Employment Agreement, between Mark Ouimet and University
Bank and Newberry Bancorp, Inc., as amended (incorporated by reference to
Exhibit 10.13 to the 1995 10-K). *
10.11.1 Stock Option Agreement, dated as of December 15, 1995,
between Mark Ouimet and Newberry Bancorp, Inc. (incorporated by reference to
Exhibit 10.13.1 to the 1995 10-K). *
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71
10.12 Revised Net Branch Agreement, dated October 1, 1997,
regarding Varsity Funding Services, L.L.C., among University Bank, Jess
Monticello and William Cook. *
10.13 Revised Operating Agreement for Varsity Mortgage LLC and
related Net Branch Agreement Modification, dated as of April 1, 1997, among
University Bank and the LLC Managers (incorporated by reference to Exhibit 10.13
to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997 (the "June 30, 1997 10-Q"). *
10.14 Purchase and Sale Agreement, dated November 1, 1995,
concerning Common Stock of Midwest Loan Services, Inc., among its shareholders
and University Bank and Newberry Bancorp, Inc (incorporated by reference to
Exhibit 10.16 of the 1995 10-K).
* Each of the exhibits noted by an "*" is a management compensatory plan or
arrangement.
(21) Subsidiaries of Registrant: List of subsidiaries filed herewith.
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72
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIVERSITY BANCORP, INC.
By: /s/Donald F. Rositano
Donald F. Rositano,
Chief Financial Officer
Date: March 30, 1997
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, 1997
- ------------------------
Stephen Lange Ranzini Chief Executive Officer,
/s/Donald Rositano Chief Financial Officer, March 30, 1997
- ------------------
Donald Rositano
/s/Joseph L. Ranzini Director, Secretary, March 30, 1997
- --------------------
Joseph L. Ranzini Chairman
/s/Keith Brenner Director March 30, 1997
Keith E. Brenner
/s/Robert Goldthorpe Director March 30, 1997
Robert Goldthorpe
/s/Dr. Joseph L. Ranzini Director March 30, 1997
- ------------------------
Dr. Joseph Lange Ranzini
/s/Mildred Lange Ranzini Director March 30, 1997
Mildred Lange Ranzini
/s/Paul Lange Ranzini Director March 30, 1997
Paul Lange Ranzini
/s/Michael Talley Director March 30, 1997
Michael Talley
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Index of Exhibits
Exhibit No. and Description
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the
Company, as amended (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (the
"June 30, 1996 10-Q")).
3.2 Composite By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the 1989 10-K).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December
31, 1997 issued to North Country Bank & Trust.
10.2 University Bancorp, Inc. Employee Stock Ownership
Plan (the "ESOP"), as amended November 27, 1990
(incorporated by reference to Exhibit 10.2 to the
1990 10-K).
10.2.1 Amendment to the ESOP, effective as of December 31,
1991 (incorporated by reference to Exhibit 10.2.A
to the 1991 10-K).
10.3 University Bank 401(k) Profit Sharing Plan, adopted
August 1, 1996, effective as of January 1, 1996
(incorporated by reference to Exhibit 10.3 to the
1996 10-K).
10.4 Letter regarding grant of options to outside
directors, dated as of July 20, 1993 (incorporated
by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1993 (the "1993 10-K")).
10.5 1995 Stock Plan of the Company (incorporated by
reference to Exhibit A to the definitive Proxy
Statement of the Company for the 1996 Annual
Meeting of Stockholders (the "1996 Proxy).
10.5.1 Form of Stock Option Agreement related to the 1995
Stock Plan (incorporated by reference to Exhibit
10.7.1 to the the 1995 10-K).
10.6 Letter, dated December 1, 1989, from Federal
Reserve Bank of Minneapolis (incorporated by
reference to Exhibit 10.9 to the 1989 10-K).
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10.7 Lease Agreement (the "Cascade Lease Agreement")
between RG Properties, Inc., as agent for Sault
Associates, a Michigan Limited Partnership, and
University Bank, dated September 30, 1992
(incorporated by reference to exhibit 10.9 to the
1992 10-K).
10.7.1 First Amendment to the Cascade Lease Agreement,
dated January 5, 1993 (incorporated by reference
exhibit 10.9.1 to the 1992 10-K).
10.8 Federal Income Tax Allocation Agreement Between
Newberry State Bank and Newberry Holding Inc. dated
March 21, 1992 (incorporated by reference to
Exhibit 10.11 to the 1991 10-K).
10.8.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc.
dated May 21, 1991 (incorporated by reference to
Exhibit 10.11.1 to the 1991 10-K).
10.9 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).
10.10.1 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 to
the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 (the "1994 10-K")).
10.10.2 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 to
the 1994 10-K).
10.10.3 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).
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10.10.4 Noncompetition Agreement Between First Northern
Bank & Trust and University Bank dated December 3,
1994 (incorporated by reference to Exhibit 10.12.4
to the 1994 10-K).
10.10.5 Mortgage Origination Agreement Between First
Northern Bank & Trust and University Bank dated
December 3, 1994 (incorporated by reference to
Exhibit 10.12.5 to the 1994 10-K).
10.10.6 Branch Services Agreement Between First Northern
Bank & Trust and University Bank dated December 5,
1994 (incorporated by reference to Exhibit 10.12.6
to the 1994 10-K).
10.11 Employment Agreement, between Mark Ouimet and
University Bank and Newberry Bancorp, Inc., as
amended (incorporated by reference to Exhibit 10.13
to the 1995 10-K).
10.11.1 Stock Option Agreement, dated as of December 15,
1995, between Mark Ouimet and Newberry Bancorp,
Inc. (incorporated by reference to Exhibit 10.13.1
to the 1995 10-K).
10.12 Revised Net Branch Agreement, dated October 1,
1997, regarding Varsity Funding Services, L.L.C.,
among University Bank, Jess Monticello and William
Cook.
10.13 Revised Operating Agreement for Varsity Mortgage
LLC and related Net Branch Agreement Modification,
dated as of April 1, 1997, among University Bank
and the LLC Managers (incorporated by reference to
Exhibit 10.13 to the June 30, 1997 10-Q).
10.14 Purchase and Sale Agreement, dated November 1,
1995, concerning Common Stock of Midwest Loan
Services, Inc., among its shareholders and
University Bank and Newberry Bancorp, Inc
(incorporated by reference to Exhibit 10.16 of the
1995 10-K).
(21) Subsidiaries of Registrant.
(27) Financial Data Schedule
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