1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------- ---------------
Commission File Number 0-16023
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
(State of incorporation) (IRS Employer Identification Number)
959 Maiden Lane, Ann Arbor, Michigan 48105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (734) 741-5858
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value Outstanding at May 4, 2000:
2,027,801 shares
page 1 of 27 pages
Exhibit index on sequentially numbered page 26
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FORM 10-Q
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements PAGE
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Summary 9
Results of Operations 10
Liquidity and Capital Resources 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
PART II - Other Information
Item 1. Legal Proceedings 21
Item 5. Other Information:
Parent Company Condensed Financial
Information 21
Item 6. Exhibits & Reports on Form 8-K 25
Signature 25
Exhibit Index 26
- ----------------------------------------------------------------------------
The information furnished in these interim statements reflects all
adjustments and accruals which are, in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
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3
Part I.- Financial Information
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2000 (Unaudited) and December 31,1999
UNAUDITED
March 31, December 31,
ASSETS 2000 1999
------------------- -------------------
Cash and due from banks $ 1,685,706 $ 1,542,567
Short term investments 8,874 8,753
------------------- -------------------
Total cash and cash equivalents 1,694,580 1,551,320
Securities available for sale at market 2,738,672 2,626,415
Federal Home Loan Bank Stock 848,400 848,400
Equity investments of Michigan BIDCO 595,663 892,965
Loans held for sale 259,625 305,049
Loans 31,707,439 31,112,496
Allowance for loan losses (517,751) (532,585)
------------------- -------------------
Loans, net 31,189,688 30,579,911
Premises and equipment 1,387,895 1,405,210
Mortgage servicing rights 665,425 704,164
Other real estate owned 697,164 683,784
Accounts receivable 167,366 159,584
Accrued interest receivable 253,804 234,252
Investment in Michigan Capital Fund LP I 631,904 656,904
Other assets 185,382 174,580
=================== ===================
TOTAL ASSETS $ 41,315,568 $ 40,822,538
=================== ===================
-Continued-
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4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
March 31, 2000 (Unaudited) and December 31,1999
UNAUDITED
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------------- ------------------
Liabilities
Deposits:
Demand - non interest bearing $ 2,948,052 $ 2,126,157
Demand - interest bearing 15,294,391 13,840,469
Savings 308,999 294,487
Time 14,440,269 15,789,866
------------------- ------------------
Total Deposits 32,991,711 32,050,979
Mortgage escrow 2,622 3,058
Short term borrowings 2,961,636 3,113,860
Long term borrowings 2,655,116 2,627,116
Accounts payable 19,018 230,802
Accrued interest payable 221,124 240,106
Other liabilities 89,401 100,442
------------------- ------------------
Total Liabilities 38,940,628 38,366,363
Minority Interest 520,898 505,795
Stockholders' equity:
Preferred stock, $0.001 par value;
Authorized - 500,000 shares;
Issued - 0 shares in 2000 and 1999 - -
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
Issued - 2,142,985 shares in 2000 and
2,127,985 shares in 1999 21,430 21,280
Treasury stock - 115,184 shares in 2000
and 1999. (340,530) (340,530)
Additional paid-in-capital 3,817,608 3,786,508
Retained deficit (1,107,372) (931,980)
Accumulated other comprehensive loss (537,094) (584,898)
------------------- ------------------
Total Stockholders' Equity 1,854,042 1,950,380
------------------- ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 41,315,568 $ 40,822,538
=================== ==================
See accompanying notes to consolidated financial statements (unaudited).
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5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the Three Month Periods Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
------------------- ------------------
Interest income:
Interest and fees on loans $ 719,855 $ 644,713
Interest on securities:
U.S. Government agencies 35,277 33,739
Other securities 16,875 18,535
Interest on federal funds and other 388 48,755
------------------- ------------------
Total interest income 772,395 745,742
------------------- ------------------
Interest expense:
Interest on deposits:
Demand deposits 146,806 164,383
Savings deposits 1,441 1,122
Time certificates of deposit 218,604 315,263
Bank and other short term borrowings 46,355 2,482
Long term notes payable 48,795 17,100
------------------- ------------------
Total interest expense 462,001 500,350
------------------- ------------------
Net interest income 310,394 245,392
Provision for loan losses 1,000 22,500
------------------- ------------------
Net interest income after
provision for loan losses 309,394 222,892
------------------- ------------------
Other income:
Net security gains(losses) 3,501 (23,009)
Service charges and fees 14,585 13,518
Loan origination and other fees 131,738 99,107
Loan servicing and subservicing fees 156,053 116,030
Gain on sale of mortgage loans 6,806 34,412
Merchant banking income (BIDCO) 209,811 2,690
Insurance and investment fee income 23,554 19,387
Other 6,338 21,680
------------------- ------------------
Total other income 552,386 283,815
------------------- ------------------
-Continued-
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UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
for the Three Month Periods Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
------------------- ------------------
Salaries and wages $ 391,667 $ 315,276
Employee benefits 76,057 60,437
Occupancy, net 70,371 64,214
Taxes other than income 15 (16,210)
Data processing and equipment expense 83,897 65,241
Correspondent bank service charges 3,184 3,311
Advertising 21,262 41,849
Supplies and postage 37,319 54,718
Net (income) expense of other real estate owned (1,099) 8,487
Legal and audit expense 134,771 66,789
Servicing rights amortization 50,031 28,560
Mortgage banking expense 22,855 41,716
Travel and entertainment 17,645 16,155
Insurance 11,440 7,797
Consultant fees 14,707 22,800
Other operating expenses 93,677 61,949
------------------- ------------------
Total other expenses 1,027,799 843,089
------------------- ------------------
Loss from continuing operations
before income taxes (166,019) (336,382)
------------------- ------------------
Income tax expense (benefit) 9,373 (11,200)
------------------- ------------------
Net loss from continuing operations (175,392) (325,182)
Discontinued operations
Income from Varsity Mortgage
and Varsity Funding 102,123
------------------- ------------------
Net loss $ (175,392) $ (223,059)
=================== ==================
Comprehensive loss $ (127,588) $ (178,873)
=================== ==================
Basic and diluted loss from continuing
operations per common share $ (0.09) $ (0.16)
=================== ==================
Basic and diluted loss per common share $ (0.09) $ (0.11)
=================== ==================
Weighted average shares outstanding 2,023,515 1,989,139
=================== ==================
See accompanying notes to consolidated financial statements (unaudited).
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UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2000 and 1999
(Unaudited)
2000 1999
------------ ------------
Cash flow from operating activities:
Net loss $ (175,392) (223,058)
Adjustments to reconcile net loss to net cash from Operating Activities:
Depreciation and amortization 136,323 88,809
Provision for loan loss 1,000 22,500
Mortgage loans originated for sale and securitization 0 (98,991,412)
Proceeds from sale of mortgage loans 52,230 97,362,666
Net loss/(gain) on loan sales and securitization (6,806) (419,862)
Net accretion/(amortization) on securities (29,759) (18,918)
Net loss/(gain) on sale of securities available for sale (3,501) 23,009
Change in:
Investment in Michigan BIDCO, Inc. 0 725,733
Mortgage servicing rights 0 119,019
Other real estate (13,380) 200,889
Increase/(Decrease) in other assets (38,136) 128,743
Increase/(Decrease) in other liabilities (226,704) 1,021,120
------------ ------------
Net cash from (used in) operating activities (304,125) 39,238
------------ ------------
Cash flow from investing activities:
Purchase of securities available for sale (37,500) 0
Proceeds from sales of securities available for sale 103,501 36,951
Proceeds from maturities and paydowns of securities available sale 2,806 33,821
Net change in Michigan BIDCO investments 197,302 0
Capitalized mortgage servicing rights (11,292) 0
Loans granted net of repayments (610,777) (1,521,850)
Premises and equipment expenditures (43,977) (69,641)
------------ ------------
Net cash from (used in) investing activities (399,937) (1,520,719)
------------ ------------
Cash flow used in financing activities:
Net increase (decrease) in deposits 940,732 (7,610,395)
Net increase(decrease) in mortgage escrow accounts (436) (6,621)
Net increase (decrease) in short term borrowings (152,224) 3,068,271
Issuance of long term notes 61,000 196,989
Principal payments on long term notes (33,000) (33,000)
Issuance of common stock 31,250 0
Conversion of BIDCO bonds and buyout of minority interests 0 180,829
Addition to paid in-capital 0 196,989
------------ ------------
Net cash from (used in) financing activities 847,322 (4,006,938)
------------ ------------
Net change in cash and cash equivalents 143,260 (5,488,419)
Cash and cash equivalents:
Beginning of period 1,551,320 9,246,015
------------ ------------
End of period $ 1,694,580 3,757,596
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 480,983 $ 500,351
See accompanying notes to consolidated financial statements (unaudited).
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UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See note 1 of Notes to Financial Statements incorporated by reference in
the Company's 1999 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from the
books of the Company in accordance with generally accepted accounting principles
and reflect all adjustments which are, in the opinion of management, necessary
to provide a fair statement of the results of operations and financial position
for the interim periods. Such financial statements generally conform to the
presentation reflected in the Company's 1999 Annual Report on Form 10-K. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year.
Earnings per share are calculated based on the weighted average number of
common shares outstanding during each period as follows: 2,023,515 and 1,989,139
for the three months ended March 31, 2000 and 1999, respectively. Stock options
are considered not dilutive for the 2000 period and, therefore, are not included
in earnings per share calculations.
(2) Available-for-sale Securities
The Bank's available-for-sale securities portfolio at March 31, 2000 had a
net unrealized loss of approximately $537,000 as compared with a net unrealized
loss of approximately $585,000 at December 31, 1999, an improvement of $48,000.
Securities available for sale at March 31, 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury $ 486 $ 0 $ (63) $ 423
U.S. agency note 490 0 (19) 471
U.S. agency mortgage-backed 1,750 0 (562) 1,188
Municipal bonds 512 0 (44) 468
Other equity securities 38 151 0 189
Total investment securities
available-for-sale $ 3,276 $ 151 $ (688) $ 2,739
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Securities available-for-sale at December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury $ 480 $ 0 $ (138) $ 342
U.S. agency note 490 0 (29) 461
U.S. agency mortgage-backed 1,738 0 (368) 1,370
Municipal bonds 503 0 (50) 453
Total investment securities
available-for-sale $ 3,211 $ 0 $ (585) $ 2,626
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain forward looking statements which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
merchant banking, mortgage banking and investment activities, and the nature and
adequacy of allowances for loan losses. The Company can give no assurance that
the expectations reflected in forward looking statements will prove correct.
Various factors could cause results to differ materially from the Company's
expectations. Among these factors are those referred to in the introduction to
the Company's Management Discussion and Analysis of Financial Condition and
Results of Operations which appears at Item 7. of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, which should be read in
conjunction with this Report.
The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
SUMMARY
For the three months ended March 31, 2000, a net loss of $175,392 was
realized versus a net loss of $223,058 in the same period in 1999. Net interest
income from continuing operations increased to $310,394 in the 2000 period from
$245,392 in the 1999 period, and other income from continuing operations was
$552,386 in the 2000 period versus $283,816 in the 1999 period. Operating
expenses from continuing operations increased to $1,027,799 in the 2000 period
from $843,089 in the 1999 period. Basic and diluted net loss per share in the
three months ended March 31, 2000 was ($0.09), compared to a net loss of ($0.11)
for the three months ended March 31, 1999 (and a loss of ($0.16) from continuing
operations in the 1999 period).
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10
The decreased loss in 2000 versus 1999 was due to improved results at University
Bank, Michigan BIDCO and Midwest Loan Services which more than offset the
decrease in income from the discontinued operations at Varsity Mortgage, which
was profitable during the 1999 quarter.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three months ended March 31, 2000 and 1999 (in
thousands):
Three months ended March 31, 2000 Pre-tax Income (Loss) Summary:
Community Banking $ (230)
Midwest Loan Services (15)
Merchant Banking (Michigan BIDCO) 106
Corporate Office (27)
Total $ (166)
Three months ended March 31, 1999 Pre-tax Income (Loss) Summary:
Community Banking $ (266)
Midwest Loan Services (23)
Merchant Banking (Michigan BIDCO) 3
Corporate Office (50)
Total from continuing operations (336)
Income from discontinued $ 102
operations (Varsity Mortgage)
Total $ (234)
RESULTS OF OPERATIONS
Net Interest Income
Net interest income from continuing operations increased to $310,394 for
the three months ended March 31, 2000 from $245,392 for the three months ended
March 31, 1999. Net interest income rose from the year ago period primarily
because of a higher interest rate spread. The yield on interest earning assets
increased from 7.99% in the 1999 period to 8.99% in the 2000 period. The cost of
interest bearing liabilities increased from 5.12% in the 1999 period to 5.19% in
the 2000 period. Net interest income as a percentage of total earning assets
increased from 2.63% to 3.61%.
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Interest income
Interest income increased to $772,395 in the quarter ended March 31, 2000
from $745,743 in the quarter ended March 31, 1999. The average volume of
interest earning assets decreased to $34,845,007 in the 2000 period from
$37,860,656 in the 1999 period, a decrease of 8.0%. The decreased volume of
earning assets was due to a decrease in loans made to Varsity Mortgage, which
more than offset an increase in portfolio loans. The overall yield on the loan
portfolio increased to 9.29% from 8.54%.
The average volume of investment securities in the three months ended
March 31, 2000 increased 11.8% over the same period in 1999, as the Bank took a
position in long term bonds to shift its overall interest rate exposure to
increase the duration of assets. The yield on the securities portfolio decreased
from 7.03% in the three month period ended March 31, 1999 to 6.28% in the 2000
period.
Interest Expense
Interest expense decreased from $500,351 in the three months ended March
31, 1999 to $462,001 in the 2000 period. The decrease was due to a decrease in
interest bearing liabilities as a result of decreased brokered time deposits and
decreased rates paid on Now, Savings and Money Market accounts. The decrease in
retail deposit costs was only partially offset by inclusion of the BIDCO's term
debt and increased holding company debt. The cost of funds increased to 5.19% in
the 2000 period from 5.12% in the 1999 period. The average volume of interest
bearing liabilities decreased 8.9% in the 2000 period versus the 1999 period.
MONTHLY AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following table on page 12 summarizes monthly average balances,
revenues from earning assets, expenses of interest bearing liabilities, their
associated yield or cost and the net return on earning assets for the three
months ended March 31, 2000 and 1999.
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UNIVERSITY BANCORP
Net Interest Income Table
Three Months Ended March 31, Three Months Ended March 31,
------------------------------------------ ------------------------------------------
2000 1999
------------------------------------------ ------------------------------------------
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (3) Balance Inc(Exp) Yield (3)
Interest Earning Assets:
Loans:
Commercial 13,385,858 314,351 9.52% 9,898,266 235,538 9.65%
Real Estate(1) 16,985,367 371,850 8.88% 19,490,333 377,370 7.85%
Installment/Consumer 1,060,222 33,654 12.87% 1,212,657 31,805 10.64%
------------ ----------- ----------- -------------- ----------- ---------
Total Loans 31,431,447 719,855 9.29% 30,601,256 644,713 8.54%
Investment Securities(2) 3,370,345 52,152 6.28% 3,014,526 52,275 7.03%
Federal Funds & Bank Deposits 43,215 388 3.64% 4,244,874 48,755 4.66%
------------ ----------- ----------- -------------- ----------- ---------
Total Interest Bearing Assets 34,845,007 772,395 8.99% 37,860,656 745,743 7.99%
Interest Bearing Liabilities:
Deposit Accounts:
Now/Super-Now 3,011,687 20,437 2.75% 3,289,254 25,459 3.14%
Savings 285,701 1,441 2.05% 183,346 1,122 2.48%
Time 14,764,726 218,604 6.00% 22,052,300 315,263 5.80%
Borrowed Funds 3,161,974 46,355 5.95% 192,975 2,482 5.22%
Money Market Accts 12,776,317 126,370 4.01% 13,123,532 138,925 4.29%
------------ ----------- ----------- -------------- ----------- ---------
Total 34,000,405 413,207 4.93% 38,841,407 483,251 5.05%
BIDCO Debt 1,123,000 25,262 9.12%
Holding Company Debt 1,012,000 23,532 9.43% 809,867 17,100 8.56%
------------ ----------- ----------- -------------- ----------- ---------
Total Interest Bearing
Liabilities 36,135,405 462,001 5.19% 39,651,274 500,351 5.12%
------------ ----------- ----------- -------------- ----------- ---------
Net Earning Assets, net interest
income, and interest rate spread (1,290,398) 310,394 3.80% (1,790,618) 245,392 2.87%
Net yield on interest-earning assets 3.61% 2.63%
(1) The amounts for 1999 were adjusted to eliminate loans and income from
discontinued operations.
(2) Actual yields; not adjusted to take into account tax-equivalent yields
resulting from tax-free municipal income and includes bank deposits.
(3) Annualized.
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Allowance for Loan Losses
The monthly allowance for loan loss was decreased to $1,000 for the first
quarter of 2000 from the previous $7,500 per month rate as a result of
management's assessment of improved loan quality. The actual loan losses were
$47,779 in the three month period ended March 31, 2000 versus $256,668 in the
three month period ended March 31, 1999.
Three Months Ended March 31, March 31,
2000 1999
---- ----
Provision for loan losses 1,000 118,433
Loan charge-offs (47,779) (256,668)
Recoveries 31,945 76,283
Net increase (decrease) in allowance (14,834) (61,952)
At At
March 31, 2000 December 31, 1999
Total loans (1) 30,871,407 29,565,921
Reserve for loan losses 517,751 532,585
Reserve/Loans % (1) 1.68% 1.80%
(1) Excludes loans held for sale and Michigan BIDCO loans which are valued at
fair market value net of specific required reserves.
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The following schedule summarizes the Company's nonperforming loans for
the periods indicated (1):
At At
March 31, 2000 December 31, 1999
-------------- -----------------
Past due 90 days and over
- -------------------------
and still accruing (1):
- -----------------------
Real estate 184,596 93,883
Installment 0 0
Commercial 0 123,688
Subtotal 184,596 217,571
Nonaccrual loans (1):
- ---------------------
Real estate 0 144,739
Installment 0 0
Commercial 0 0
Subtotal 0 144,739
Other real estate owned 697,164 683,784
- -----------------------
Total nonperforming 881,760 1,046,094
Ratio of nonperforming to 2.86% 3.54%
total loans(1)
Ratio of loans past due over 90 days and 35.7% 68.0%
nonaccrual loans to loan loss reserve
(1) Excludes loans held for sale and Michigan BIDCO loans which are valued at
fair market value net of specific loss reserves. Michigan BIDCO has a $396,000
commercial loan on nonaccrual status at March 31, 2000 and December 31, 1999.
Other real estate owned at March 31, 2000 and December 31, 1999 includes a
commercial development site in Sault Ste. Marie, Michigan. Based upon an
appraisal, management believes the 16-acre site where a former loan office is
located has a fair market value substantially more than its carrying cost as of
March 31, 2000 of $266,079. This property is carried as other real estate owned
in the Company's financial statements since the Bank no longer intends to
utilize it for a branch location. There is no assurance that a sale of the
property will be consummated.
The Bank's loan portfolio continues to have very low delinquencies other
than residential real estate properties. With the exception of the property
mentioned above, the other real estate consists of residential single family
properties. Subsequent to March 31, 2000 two additional properties were sold at
a small gain. Based upon management's review of appraisal information and
current broker price opinions, management believes that for the most part, the
Bank is well secured with respect to these loans and the other real estate owned
which is carried at cost.
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15
Economic conditions in the Bank's primary market area in Ann Arbor were
strong in the period. Management believes that the current allowance for loan
losses is adequate to absorb losses inherent in the loan portfolio, although the
ultimate adequacy of the allowance is dependent upon future economic factors
beyond the Company's control. A downturn in the general nationwide economy will
tend to aggravate, for example, the problems of local loan customers currently
facing some difficulties, and could decrease residential home prices. A general
nationwide business expansion could conversely tend to diminish the severity of
any such difficulties.
Non-Interest Income
Total non-interest income increased to $552,386 for the three months ended
March 31, 2000 from $283,816 for the three months ended March 31, 1999. The
increase was principally a result of an increase in the Bank's merchant banking
income because of the inclusion in consolidated results of the BIDCO's results.
Loan origination and loan subservicing fee income also increase during the
period primarily as a result of an increase in volume at Midwest Loan Services.
Securities. During the three months ended March 31, 2000, there were no
securities sales from the Bank's available-for-sale securities portfolio. During
the first quarter of 2000, the BIDCO realized a $3,501 gain on the sale of a
common stock investment. Gross proceeds from this sale were $103,501.
Mortgage Banking. Mortgage banking income (including loan origination,
gain on sale, servicing and subservicing fee income) increased to $294,597 in
the three months ended March 31, 2000 from $249,549 in the three months ended
March 31, 1999. Increased loan origination and subservicing activity at Midwest
Loan Services was responsible for the increase.
At March 31, 2000, the Bank and its subsidiaries owned the right to
service mortgages for FHLMC, FNMA and others, most of which was owned by Midwest
Loan Services, and the remainder by the Bank. The carrying value is currently
$665,425. Based on recent comparable sales and indications of market value from
industry brokers, management believes that the current market value of the
Bank's portfolio of mortgage servicing rights approximates cost. Market interest
rate conditions can quickly affect the value of mortgage servicing rights in a
positive or negative fashion, as long term interest rates rise and fall.
Subsequent to quarter-end, Midwest Loan Services increased its mortgage
subservicing contracts by over 50% in a single month as a result of increased
business with the mortgage banking subsidiary of a major Wall Street firm.
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16
Michigan BIDCO. In 1999 the Company received permission from the Michigan
Financial Institutions Bureau for the BIDCO to repurchase the shares and
convertible bonds held by certain minority shareholders of the BIDCO. The shares
were repurchased on March 31, 1999 and the bonds in mid-April. As a result of
the transaction, the Company's ownership of the BIDCO increased to 80.1% from
44.1%, and the BIDCO became part of the Company's tax filing group for federal
income tax purposes and the BIDCO's financial results are consolidated in the
Company's from March 31, 1999 forward. The Company's consolidated fully diluted
ownership in the BIDCO is 28.8%, after considering the impact of convertible
bonds.
During the three months ended March 31, 2000, the BIDCO made no new
investments, although its equity interest in two investments were sold for an
amount equal to the carrying value at December 31, 1999.
Management is considering a transaction where the Bank would sell its
interest in the BIDCO to the BIDCO itself. The Bank's board has now approved the
transaction and we are awaiting regulatory approval for the transaction. For
additional details, please see the Company's Report on Form 10-K for the period
ended December 31, 1999. The BIDCO has called for conversion its remaining
convertible bonds. As a result, the BIDCO is expected to no longer be
consolidated in the Company's financial statements.
The BIDCO is pursuing development of a technology to send money securely
over the internet using e-mail file attachments under the web domain name
pay-it.net. The technology, for which a patent has been applied was developed in
connection with the National Center for Manufacturing Sciences, based in Ann
Arbor, and is based on patented technology of InterTrust Technologies of Palo
Alto, California. A pilot of the project has been agreed for a business to
business application in the auto industry and several additional pilots are
being discussed both domestically and internationally. There is no assurance
that the technology, if fully developed and deployed, will bring the BIDCO a
profit.
Non-Interest Expense
Non-interest expense increased to $1,027,799 in the three months ended
March 31, 2000 from $843,089 for the three months ended March 31, 1999. The
increase was primarily the result of increased salary and benefit expenses at
Midwest Loan Services, and increased audit expenses at the Bank, which more than
offset cost control efforts in other areas at the Bank.
Non-interest operating expense for the parent company only decreased from
$12,293 for the three month 1999 period to $7,943 for the 2000 period. The
decrease was primarily the result of ongoing efforts to keep holding company
expenses at a minimum.
Internet Banking. The Bank anticipates rolling out an internet banking
product to its customers within the next three months.
17
17
Liquidity and Capital Resources
Capital Resources. The table on page 18 sets forth the Bank's risk based
assets, and the capital ratios and risk based capital ratios of the Bank and
Company. At March 31, 2000, the Bank was "well-capitalized" (the required ratio
for "well-capitalized" was 10% of total risk-based assets).
Long term borrowings at 3/31/00 included $1,123,000 face amount of
Michigan BIDCO's 9% convertible bonds due January 15, 2002. Subsequent to
quarter-end a notice to call the bonds for cash to force conversion of the bonds
into common stock effective May 31, 2000 was issued by the BIDCO. All
bondholders except for one owner of $130,000 in face amount of bonds have
informed the BIDCO of their intent to convert into common stock.
Long term borrowings at 3/31/00 include $365,000 of equity conversion
notes of the Company which are redeemable by the Company only in the context of
an offering of additional shares of common stock, have no set maturity date and
have interest payments deferred until maturity.
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, the sale of loans held for
sale, borrowings from correspondent lenders secured by securities, residential
mortgage loans and/or commercial loans. In addition, the Bank invests in
overnight Federal Funds. At March 31, 2000, the bank had cash and due from banks
and Federal Funds on hand of $1,694,580. The Bank has a $5,500,000 line of
credit secured by investment securities and portfolio mortgage loans and a
$6,000,000 line of credit secured by commercial loans. In order to bolster
liquidity, the Bank has also sold brokered CDs from time to time.
18
18
UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio
31-Mar-00
Balance Risk Weighted
0% RISK CATEGORY Sheet (000) Assets (000)
Mort-Backed Sec Guaran by GNMA 1 -
Currency & Coin 310 -
US Treasury Strip 486 -
Federal Reserve Balance 26 -
------------------------------------
TOTAL 823 -
20% RISK CATEGORY
Interest-bearing Balances 26 5
Fed Funds Sold 9 2
U.S. Gov't sponsored Agency Sec 2,240 448
Other Mortgage-Back Securities - -
Cash Items 499 100
FHLB Stock 848 170
Balances due from depository Inst 825 165
------------------------------------
TOTAL 4,447 889
50% RISK CATEGORY
Revenue Oblig Sec issued by state 512 256
Qualifying 1st liens on 1-4 family 12,839 6,420
------------------------------------
TOTAL 13,351 6,676
100% RISK CATEGORY
ALL OTHER ASSETS 23,086 23,086
ON BALANCE SHEET ITEMS EXCLUDED FROM CALCULATION
10% of mtg serving right of $665 67
Valuation Adjustment for Govt Bond AFS (688)
TOTAL ASSETS 41,085 30,650
====================================
TIER 1 CAPITAL Balance
Common Stock 200
Surplus 4,432
Undivided Profits & Capital Reserves (1,310)
Minority Interest 598
Other identifiable Intangible Assets (67)
TOTAL TIER 1 CAPITAL 3,854
TIER 2 CAPITAL
Allowance for loans & Lease losses 518
Excess LLR (limited to 1.25% gross risk- (135)
weighted assets
TOTAL TIER 2 CAPITAL 383
TOTAL TIER 1 & TIER 2 CAPITAL 4,237
TIER 1/TOTAL ASSETS 9.38%
TIER 1 & 2/TOTAL ASSETS 10.31%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 12.57%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSET 13.82%
19
19
Parent Company Liquidity. At year-end 1999, University Bancorp, Inc. held
cash and marketable equity securities of $16,067 (excluding Michigan BIDCO
common stock). This increased by $176,381 to $192,418 at March 31, 2000. During
the three months ended March 31, 2000 no dividends were paid from the Bank, as a
result of low profitability at the Bank. In an effort to maintain the Bank's
Tier 1 capital to assets ratio above 7% and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during 2000 or 2001. Management intends that the cash and securities on
hand, federal tax refunds receivable, and cash from the sale of common stock and
the exercise of stock options to be sufficient to cover the required principal
reductions during 2000 on the parent company's indebtedness owing to North
Country Bank & Trust ("NCB&T"). The NCB&T loans amounted to $661,000 and
$694,000 at March 31, 2000 and at December 31, 1999, respectively.
Impact of Inflation
The primary impact of inflation on the Company's operations is reflected
in increased operating costs. Since the assets and liabilities of the Company
are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the value
of Midwest Loan Services' investment in mortgage servicing rights and improve
Midwest Loan Services' current return on such rights by lowering required
amortization rates on the rights. Rising interest rates tends to decrease new
mortgage origination activity, negatively impacting current income from the
retail mortgage banking operations of the Bank and Midwest Loan Services. Rising
interest rates also slow Midwest Loan Services' rate of growth, but increases
the duration of its existing subservicing contracts.
The Bank performs a static gap analysis which has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on page 20 details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at March 31, 2000. The table is based upon various assumptions of management
which may not necessarily reflect future experience. As a result, certain assets
and liabilities indicated in the table as maturing or re-pricing within a stated
period may, in fact, mature or re-price in other periods or at different
volumes. The one-year static gap position at March 31, 2000 was estimated to be
($15,608,000) or -37.99%.
20
20
UNIVERSITY BANK
Asset/Liability Position Analysis
($ in 000's)
Maturing or Repricing in
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years Years OTHERS TOTAL
- ------ ------- ------ ----- ----- ----- ------ -----
Fed Funds 9 -- -- -- -- -- 9
Loans 8,071 3,227 9,833 3,990 6,846 -- 31,967
Securities -- -- -- -- 3,398 -- 3,398
Other Assets -- -- -- -- -- 4,077 4,077
Cash and Due from Banks -- -- -- -- -- 1,634 1,634
-------------------------------------------------------------------------
TOTAL ASSETS 8,080 3,227 9,833 3,990 10,244 5,711 41,085
-------------------------------------------------------------------------
LIABILITIES
CD's over $100,000 868 1,127 870 -- 103 -- 2,968
CD's under $100,000 1,811 7,682 1,268 10 701 -- 11,472
MMDA 6,162 6,161 -- -- -- -- 12,323
NOW -- -- 2,974 -- -- -- 2,974
Demand and Escrow -- -- -- -- -- 2,950 2,950
Savings -- -- 309 -- -- -- 309
Other Borrowings 2,962 142 1,487 -- -- -- 4,591
Other Liabilities -- -- -- -- -- 864 864
Equity -- -- -- -- -- 2,634 2,634
-------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY 11,803 15,112 6,908 10 804 6,448 41,085
-------------------------------------------------------------------------
GAP (3,723) (11,885) 2,925 3,980 9,440 (737)
=========================================================================
CUMULATIVE
GAP (3,723) (15,608) (12,683) (8,703) 737 --
==============================================================
GAP
PERCENTAGE -9.06% -37.99% -30.87% -21.18% 1.79% 0.00%
==============================================================
21
21
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties are
subject.
Item 5. Other information
Parent Company Financial Information
Certain condensed financial information with respect to University
Bancorp, Inc. is presented on pages 22,23, and 24.
22
22
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Balance Sheets
March 31, 2000 and December 31,1999
(Unaudited)
March 31, December 31,
2000 1999
----------- -----------
ASSETS
Cash and cash equivalents $ 3,748 $ 15,834
Securities available for sale 188,670 233
Investment in University Bank 2,634,100 2,885,704
Investment in Michigan BIDCO 77,735 73,397
Other assets 7,689 3,584
---------- ----------
Total Assets $ 2,911,942 $ 2,978,752
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 661,000 $ 694,000
Equity conversion bonds 365,000 304,000
Accounts payable 5,293
Accrued interest payable 31,901 25,000
Tax liabilities 79
---------- ----------
Total Liabilities 1,057,901 1,028,372
Stockholders Equity 1,854,041 1,950,380
---------- ----------
Total Liabilities and Stockholders Equity $ 2,911,942 $ 2,978,752
========== ==========
23
23
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Statements of Operations
March 31, 2000 and December 31,1999
(Unaudited)
2000 1999
---------------- ----------------
Income:
Dividends from subsidiary $ 0 $ 0
Interest & dividends on investments 135 2,038
Income from Michigan BIDCO 4,338 0
Gain (loss) on sale of securities 0 (23,009)
---------------- ----------------
Total Income 4,473 (20,971)
Expense:
Interest 23,532 17,100
Salaries & benefits 0 1,085
Public listing 3,401 2,380
Audit & legal 4,249 7,060
Other taxes 0 1,270
Occupancy & other miscellaneous 293 498
---------------- ----------------
Total Expense 31,475 29,393
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (27,002) (50,364)
Federal income taxes (benefit) 0 0
---------------- ----------------
Income (loss) before equity in
undistributed net income of subsidiaries (27,002) (50,364)
Equity in undistributed net income (loss)
of subsidiaries. (148,390) (172,693)
---------------- ----------------
Net loss $ (175,392) $ (223,057)
================ ================
Basic and diluted net loss per common share $ (0.09) $ (0.11)
================ ================
24
24
UNIVERSITY BANCORP, INC. (PARENT ONLY)
Condensed Statement of Cash Flows
March 31, 2000 and December 31,1999
2000 1999
---------------- ----------------
Cash flow from operating activities:
Net loss $ (175,392) $ (223,057)
Reconciliation of net income (loss) to net cash used in
operating activities:
Loss(gain) on sale of investments 0 23,009
Decrease/(Increase) in other assets (4,105) (2,297)
Increase(Decrease) in accounts payable (5,293) (1,123)
Increase(Decrease) in other liabilities 6,901 (11,761)
Decrease(Increase) investment in Michigan BIDCO (4,337) 0
Decrease(Increase) investment in University Bank 148,390 11,761
---------------- ----------------
Net cash (used in) operating activities (33,836) (203,468)
---------------- ----------------
Cash flow from investing activities:
Advances to Michigan BIDCO 0 (20,896)
Purchase of securities available for sale (37,500) 0
Proceeds from sales of securities available for sale 0 36,951
---------------- ----------------
Net cash provided by (used in) investing activities (37,500) 16,055
---------------- ----------------
Cash flow from financing activities:
Principal payment on notes payable (33,000) (33,000)
Issuance of equity conversion bonds 61,000 196,989
Proceeds from sale of common stock 31,250 0
---------------- ----------------
Net cash provided by financing activities 59,250 163,989
---------------- ----------------
Net changes in cash and cash equivalents (12,086) (23,424)
Cash and cash equivalents:
Beginning of period 15,834 33,702
---------------- ----------------
End of period $ 3,748 $ 10,278
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 16,631 $ 18,224
25
25
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: May 13, 2000 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President & CEO and
Principal Financial Officer)
26
26
Exhibit Index Sequentially
------------- ------------
Numbered Page
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27. Financial Data Schedule 27