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 June 30, 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 of incorporation) (IRS Employer Identification Number)
209 East Portage Avenue,
Sault Ste. Marie, Michigan 49783
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 635-9794
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, $0.010 par value Outstanding at August 12, 1997
1,310,599 shares
page 1 of 62 pages
Exhibit index on sequentially numbered page 32
2
FORM 10-Q 2
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 23
PART II - Other Information
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 5. Other Information
Parent Company Condensed
Financial Information 27
Item 6. Exhibits & Reports on Form 8-K 31
Signature 31
Exhibit Index 32
- -----------------------------------------------------------------------
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.
3
Part 1. - Financial Information
Item 1.- Financial Statements 3
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,1997 and December 31,1996
(Unaudited)
June 30 December 31
1997 1996
--------- ------------
ASSETS
Cash and due from banks $ 4,910,397 $ 1,866,917
Federal funds sold 11,463,180 10,683,895
----------- -----------
Total cash and cash equivalents 16,373,577 12,550,812
Securities available for sale at
market (note 2) 3,217,781 7,346,856
Loans held for sale 6,436,301 30,534,574
Loans 28,488,449 20,966,290
Allowance for Loan Loss (513,055) (297,783)
----------- -----------
Loans, net 27,975,394 20,668,507
Premises and equipment 1,988,551 1,955,294
Mortgage servicing rights 2,428,672 2,312,436
Investment in and advances to
Michigan BIDCO 858,058 815,790
Other real estate owned 597,570 266,079
Other assets 2,753,855 1,910,331
----------- -----------
Total other assets 8,626,706 7,259,930
----------- -----------
TOTAL ASSETS $ 62,629,759 $ 78,360,679
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 4
Consolidated Balance Sheets
June 30,1997 and December 31,1996
(Unaudited)
June 30 December 31
1997 1996
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand - non interest bearing $ 2,500,872 $ 6,814,000
Demand - interest bearing 20,419,535 15,786,832
Savings 316,478 976,479
Time 28,622,910 29,529,050
-------------- --------------
Total Deposits 51,859,796 53,106,361
FHLB advances 2,500,000 6,000,000
Mortgage escrow 687,824 1,064,650
Short term borrowings 1,764,218 12,941,266
Deferred noncompete income 84,572 102,076
Other liabilities 1,227,731 1,032,130
-------------- --------------
Total Liabilities 58,124,141 74,246,483
-------------- --------------
Minority Interest 210,552 201,427
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 1,379,364 shares in 1997
and 1,295,366 shares in 1996 13,794 12,954
Treasury Stock - 68,765 shares in 1997
and 1996 (300,883) (300,883)
Additional Paid-in-Capital 3,454,562 2,906,389
Retained earnings 1,106,740 1,299,473
Net unrealized gain/(loss) on securities
available for sale, net of tax
of $10,742 in 1997, and
($2,659) in 1996. 20,853 (5,164)
-------------- --------------
Total Stockholders' equity 4,295,066 3,912,769
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 62,629,759 $ 78,360,679
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 5
Consolidated Statements of Income
(Unauditied)
For the Three For the Six Month
Periods Ended Periods Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---------- ----------- ----------- ----------
Interest income:
Interest and fees on loans $ 1,071,185 $ 797,007 2,031,354 $ 1,200,978
Interest on securities:
U.S. Treasury Securities - 28,293 - 32,904
U.S. Government agencies 90,178 123,319 184,772 297,373
Other securities 20,793 21,108 41,362 34,457
Interest on bank deposits 8,155 11,625 15,762 24,690
Interest on federal funds 76,515 36,883 140,662 92,927
------------- ------------ ------------ ------------
Total interest income 1,266,826 1,018,235 2,413,912 1,683,329
------------- ------------ ------------ ------------
Interest expense:
Interest on deposits:
Demand deposits 251,197 112,055 480,760 157,258
Savings deposits 4,266 19,595 10,703 43,369
Time certificates of deposit 425,857 383,943 813,783 686,705
Bank and other short term borrowings 163,037 169,243 324,523 341,733
------------- ------------ ------------ ------------
Total interest expense 844,357 684,836 1,629,769 1,229,065
------------- ------------ ------------ ------------
Net interest income 422,469 333,399 784,143 454,264
Provision for loan losses 216,500 18,000 239,000 30,000
------------- ------------ ------------ ------------
Net interest income after
provision for loan losses 205,969 315,399 545,143 424,264
------------- ------------ ------------ ------------
Other income:
Net security gains (losses) 30,066 9,340 7,715 95,861
Decrease in market value of
loans held for sale (8,902) (75,697) (12,641) (165,388)
Service charges and fees 1,465 6,917 5,849 7,513
Foreign exchange income (13,787) 12,364 (6,527) 30,852
Mortgage banking income 1,225,690 541,742 2,672,048 835,801
Profit from equity investment in
Michigan BIDCO 38,704 20,000 43,522 40,000
Other 46,067 60,342 119,943 104,109
------------- ------------ ------------ ------------
Total other income 1,319,303 575,008 2,829,909 948,748
------------- ------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 6
Consolidated Statements of Income (continued)
(Unaudited)
For the Three Month For the Six Month
Periods Ended Periods Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---------- ---------- --------- ----------
Other expenses:
Salaries and wages $ 1,220,413 $ 531,605 2,074,035 $ 902,432
Employee benefits 158,921 93,236 272,919 151,256
Occupancy, net 96,482 77,695 200,281 148,941
Taxes other than income 8,580 6,958 15,393 11,756
Data processing and equipment expense 99,736 94,392 195,309 167,126
Correspondent bank service charges 4,664 4,470 14,014 8,649
Advertising 27,217 43,207 63,290 69,259
Net expense of other real estate owned (2,570) 602 (6,360) 1,016
FDIC insurance 1,066 500 3,064 1,000
Legal and audit expense 45,343 72,307 113,471 129,351
Other operating expenses 418,903 266,357 804,567 448,023
------------ ---------- ----------- -----------
Total other expenses 2,078,755 1,191,329 3,749,983 2,038,809
------------ ---------- ----------- -----------
Income (Loss) before income taxes (553,483) (300,922) (374,931) (665,797)
------------ ---------- ----------- -----------
Income taxes (benefit) (226,970) (116,181) (173,052) (243,823)
------------ ---------- ----------- -----------
Net Income (Loss) $ (326,513) $ (184,741) (201,879) $ (421,974)
============ ========== =========== ==========
Earnings (loss) per common share (Note 1) ($0.26) ($0.15) ($0.16) ($0.34)
============ ========== =========== ==========
Weighted average shares outstanding (Note 1) 1,264,930 1,250,843 1,246,084 1,249,524
============ ========== =========== ==========
Dividends declared per share $ --- $ --- $ --- $ ---
============ ========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
7
UNIVERSITY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements of Cash Flows
(Unaudited)
For the Six-Month
Periods Ended
June 30,
1997 1996
-------- --------
Cash flow from operating activities:
Net income (loss) $ (201,879) $ (421,974)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 201,559 251,173
Provision for loan loss 239,000 30,000
Mortgage loans originated for sale (162,322,413) (127,676,772)
Proceeds from sale of loans and mortgage backed
trading securities 187,959,745 108,051,816
Net loss/(gain) on loan sales and securitization (1,756,153) (345,150)
Market adjustment on loans held for sale 23,061 0
Net amortization/accretion on securities 9,198 (25,241)
Loss/(Gain) on sale of securities available for sale (7,715) (95,861)
Loss/(Gain) on sale of trading account securities 62,336
Proceeds from sale of trading account securities 0 8,948,897
Change in:
Investment in Northern Michigan BIDCO (42,268) (39,469)
Purchased mortgage servicing rights (116,236) (386,251)
Other real estate (331,491) 130,596
Increase in other assets (843,524) (514,849)
Increase/(Decrease) in other liabilities 193,597 1,322,104
------------ ------------
Net cash from (used in)
operating activities 23,004,481 (10,708,645)
------------ ------------
Cash flow from investing activities:
Purchase of securities available for sale (1,890,921) (9,079,973)
Proceeds from sales of securities available
for sale 5,879,886 8,627,779
Loans granted net of repayments (7,522,159) (6,048,597)
Premises and equipment expenditures (185,238) (744,389)
Principal paydowns on securities available
for sale 313,142 5,622,375
------------ ------------
Net cash from (used in)
investing activities (3,405,290) (1,622,805)
------------ ------------
Cash flow from financing activities:
Net increase (decrease) in deposits (1,246,565) 17,872,548
Net increase(decrease) in mortgage escrow accounts (376,826) 492,964
Principal payment on notes payable (25,000) (25,000)
Net decrease in other short term borrowings (14,677,048) (3,000,000)
Issuance of common stock 549,013 66,750
------------ ------------
Net cash from
financing activities (15,776,426) 15,407,262
------------ ------------
Net change in cash and
cash equivalents 3,822,765 3,075,812
Cash and cash equivalents:
Beginning of period 12,550,812 1,937,631
------------ ------------
End of period $ 16,373,577 $ 5,013,443
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 1,879,692 $ 1,166,519
Cash paid (received) for income taxes - -
The accompanying notes are an integral part of the financial
statements.
8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 1997
(1) General
See note 1 of Notes to Financial Statements incorporated by reference in
the Company's 1996 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 1996 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 is calculated based on the weighted average number of
common shares outstanding during each period as follows: 1,264,930 and
1,246,084, and 1,250,843 and 1,249,524 for the three and six months ended June
30, 1997 and 1996, respectively. Stock options are not dilutive and are not
included in earnings per share calculations.
(2) Securities available-for-sale
The Bank's securities available-for-sale portfolio at June 30, 1997 had a
net unrealized loss of approximately $6,000 versus an unrealized gain at March
31, 1997 of approximately $1,000, and a net unrealized loss of approximately
$8,000 at December 31, 1996. The securities portfolio continues to shrink to
provide for increased loan demand.
Securities available for sale
June 30, 1997
----------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------
U.S. agency mortgage-backed 1,636 31 - 1,667
Other agency mortgage-backed 628 - (37) 591
U.S. agency equity 848 - - 848
Other equity 75 37 - 112
- --------------------------------------------------------------------
Total investment securities
available for sale $ 3,187 $ 68 $ (37) $ 3,218
========= ===== ====== =======
9
9
Securities available-for-sale (continued)
December 31, 1996
----------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------
U.S. agency mortgage-backed $ 5,367 $ 38 $ (30) $ 5,375
Other agency mortgage-backed 681 - (35) 646
Other mortgage-backed 367 - (3) 364
U.S. agency equity 848 - - 848
Other equity 92 22 - 114
- --------------------------------------------------------------------
Total securities
available for sale $ 7,355 $ 60 $ (68) $ 7,347
========= ===== ====== =======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
For the three months ended June 30, 1997, a net loss of $326,513 was
realized versus a net loss of $184,741 in the same period in 1996. Net
interest income increased to $422,469 in the 1997 period from $333,399 in the
1996 period, and other income was $1,319,303 in the 1997 period versus $575,008
in the 1996 period. The increase in net loss was primarily the result of a
$194,000 special loan loss provision, $145,000 in one-time additional
profit-sharing expense at Varsity Mortgage resulting from a restructuring of
the Varsity Mortgage operating agreement and a faster rate of accrual of bonus
under the Bank President's five year employment contract in the amount of
$210,000 during the quarter. Other operating expense increased to $2,094,255
in the 1997 period from $1,191,329 in the 1996 period.
For the six months ended June 30, 1997, a net loss of $201,879 was
realized versus a net loss of $421,974 in the same period in 1996. Net
interest income increased to $784,143 in the 1997 period from $454,264 in the
1996 period, and other income was $2,829,909 in the 1997 period versus $948,748
in the 1996 period. Other operating expense increased to $3,765,483 in the
1997 period from $2,038,809 in the 1996 period.
The decreased net loss in the six months ended June 30, 1997 versus the
1996 period were principally due to increased fee based income and increased
net interest income. The improved results were caused by improvements in the
underlying operating results of the Bank's mortgage banking subsidiaries,
increased net interest margin in the Bank's retail operations, and $426,797 in
gains from the sale of loans from the Bank's own mortgage banking wholesale
operations. Partially offsetting these positive factors were the special loan
loss reserve provision, one-time profit-sharing expense and accelerated
contract bonus accrual noted in the three months period comparison, above. The
1996 period also reflected initial start-up losses of the Ann Arbor main
office, which opened February 6, 1996.
10
10
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the six months ended June 30, 1997 and 1996 (in
thousands):
SIX MONTHS ENDED JUNE 30, 1997 PRE-TAX INCOME (LOSS) SUMMARY
Banking
Community & mortgage banking $(500)
Midwest Loan Services 37
Varsity Mortgage & Varsity Funding 148
Equity in the earnings of Michigan BIDCO 44
Corporate Office (104)
-----
Total $(375)
SIX MONTHS ENDED JUNE 30, 1996 PRE-TAX INCOME (LOSS) SUMMARY
Banking
Community & mortgage banking $(693)
Midwest Loan Services (1)
Varsity Mortgage & Varsity Funding 60
Equity in the earnings of Michigan BIDCO 40
Corporate Office (72)
-----
Total $(666)
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased to $422,469 for the three months ended June
30, 1997 from $333,399 for the three months ended June 30, 1996. Net interest
income rose from the year ago period because of an increase in the average
balance of loans and a decrease in the percentage cost of interest bearing
liabilities. In addition, the yield on interest earning assets increased to
9.73% in the 1997 period from 8.21% in the 1996 period. The cost of interest
bearing liabilities was unchanged at 5.91% in the 1997 period, causing net
interest income as a percentage of total earning assets to increase to 3.25%
from 2.69% in the 1996 period.
For the six month period ended June 30, 1997, net interest income
increased to $784,143 from $454,264 in the 1996 period. The yield on interest
earning assets increased to 9.43% in the 1997 period from 7.82% in the 1996
period. The cost of interest bearing liabilities decreased to 5.85% in the
1997 period from 6.00% in 1996 period, resulting in an increase in net interest
income as a percent of total average earning assets to 3.06% from 2.11%.
Interest income
Interest income increased to $1,266,826 in the quarter ended June 30, 1997
from $1,018,235 in the quarter ended June 30, 1996. The average volume of
interest earning assets increased to $52,054,913 in the 1996 period from
$49,602,663 in the 1996 period, an increase of 4.9%. The increased volume of
earning assets was due to a 16.7%
11
11
increase in loans, only partially offset by a decline in investment securities.
Interest income increased as a result of an increase in earning assets and the
yield on earning assets. The overall yield on earning assets increased to
9.73% from 8.21%, as more earning assets were invested in loans, and lower
yielding investment securities were sold to fund loan growth.
Interest income increased in the six months ended June 30, 1996 from
$1,683,329 to $2,413,912 in the six months ended June 30, 1997. The average
volume of interest earning assets increased from $43,040,892 in the 1996 period
to $51,221,509 in the 1997 period, an increase of 19.0%. The increase in
interest income was attributable to the increase in the volume of earning
assets and an increase in the average yield on earning assets. The overall
yield on earning assets increased from 7.82% to 9.43%, as more earning assets
were invested in loans, and lower yielding investment securities were sold to
fund loan growth. The increases in loans are the result of the new activity
generated from the Bank's Ann Arbor office and the activity generated by
Varsity Funding and Varsity Mortgage.
The average volume of securities and investments in the three months ended
June 30, 1997 decreased 23.6% over the same period in 1996, as the Bank sold
investment securities to fund loan growth. In the six month period, the
average volume of securities and investments decreased 27.9% over the same
period in 1996, as the Bank sold investment securities to fund loan growth.
The yield increased from 6.10% in the three month period ended June 30,
1996 to 7.06% in the 1997 period. The increase in yields was in line with the
general increase in short term interest rates between 1996 and 1997, partially
offset by an increase in lower yielding fed funds for liquidity management
purposes. In the six month periods, the yield increased from 5.89% in the 1996
period to 6.47% in the 1997 period. The increase in yields was the result of
the same factors as in the three month period. The overall yield on the
investments was restrained by the increased amount of fed funds the Bank has
maintained during 1997, as a result of the increased loan origination activity
associated with the Bank's Ann Arbor office, Varsity Funding and Varsity
Mortgage.
Interest Expense
Interest expense increased to $844,357 in the three months ended June 30,
1997 from $684,836 in the 1996 period. The increase was due to an increase in
interest bearing liabilities as a result of the growth of the Bank's Ann Arbor
operation, only partially offset by a decrease in wholesale funds and
borrowings. The cost of funds was unchanged at 5.91% in the 1997 period from
the 1996 period. The average volume of interest bearing liabilities increased
23.2% in the 1997 period versus the 1996 period.
In the six month periods ending June 30, 1997 and 1996, interest expense
increased to $1,629,769 in 1997 from $1,229,065 in the 1996 period. The
increase was due to the same factors as in the three months periods discussed
above, partially offset by a decline in the cost of funds. The cost of funds
decreased to 5.85% in the 1997 period
12
12
from 6.00% in the 1996 period. The average volume of interest bearing
liabilities increased 36.0% in the 1997 period versus the 1996 period. The
increase in deposits is a result of the increased deposit activity associated
with the Bank's Ann Arbor office. As of August 6, 1997 (the eighteen month
anniversary date of the opening of the Ann Arbor office), a total of just over
$31,500,000 in new deposits had been generated in the Ann Arbor office.
DAILY AVERAGE BALANCE SHEET AND
INTEREST MARGIN ANALYSIS
The following tables summarize daily 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 and six months
ended June 30, 1997 and 1996.
13
13
Three Months Ended June 30,
----------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposit $ 672,605 $ 8,155 4.85% $ 1,052,677 $ 11,625 4.42%
Federal Funds Sold 4,535,797 62,823 5.54% 2,872,448 36,883 5.14%
Securities:
Non-taxable (1) - - - - - -
Taxable 5,875,726 124,663 8.49% 10,574,961 172,720 6.53%
----------- ----------- ------ ------------ ---------- -------
Total Securities 11,084,128 195,641 7.06% 14,500,086 221,228 6.10%
----------- ----------- ------ ------------ ---------- -------
Loans:
Commercial 12,821,639 267,756 8.35% 5,918,915 146,837 9.92%
Real Estate Mortgage 23,567,143 688,784 11.69% 26,968,583 583,503 8.65%
Installment/Consumer 4,582,003 114,645 10.01% 2,215,079 66,667 12.04%
----------- ----------- ------ ------------ ---------- -------
Total Loans 40,970,785 1,071,185 10.46% 35,102,577 797,007 9.08%
----------- ----------- ------ ------------ ---------- -------
Total Interest Bearing Assets 52,054,913 1,266,826 9.73% 49,602,663 1,018,235 8.21%
----------- ----------- ------ ------------ ---------- -------
Less allowance for possible
loan losses & deferred fees (333,842) (331,575)
----------- ------------
51,721,071 49,271,088
Mortgage servicing rights 2,412,980 3,078,194
Non earning assets 6,553,457 584,359
----------- ------------
Total Assets $60,687,508 $ 52,933,641
=========== ============
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 2,978,844 $ 36,167 4.86%$ $ 422,033 $ 5,320 5.04%
Savings 110,009 690 2.51% 81,225 502 2.47%
Canadian Dollar Savings 605,963 3,576 2.36% 1,490,797 19,093 5.12%
Time 26,752,691 425,857 6.37% 25,539,678 383,943 6.01%
Borrowed Funds 8,791,209 139,710 6.36% 9,635,360 147,062 6.11%
Money Market Accounts 16,951,616 215,030 5.07% 8,221,038 106,735 5.19%
Holding Company Debt 940,000 20,923 8.90% 986,000 22,181 9.00%
----------- ----------- ------ ------------ ---------- -------
Total interest bearing
liabilities $57,130,332 841,953 5.89% $ 46,376,131 684,836 5.91%
---------- ----------- ------ ------------ ---------- -------
Net interest income $ 424,873 $ 333,399
=========== ==========
Weighted average rate spread 3.84% 2.30%
===== =======
Net yield on average earning
assets 3.26% 2.69%
(1) Actual yields; not adjusted for tax-equivalent yields
(2) For purposes of computing average yields on the loan portfolio as
presented in the above analysis, loans on non-accrual status are included
in the average loan balances.
14
14
Six Months Ended June 30,
------------------------------------------------------------------------------------
1997 1996
-------------------------------- -------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits $ 669,191 $ 15,762 4.71%$ $ 1,046,828 $ 24,690 4.72%
Federal Funds Sold 4,736,243 140,662 5.94% 3,608,546 92,927 5.15%
Securities:
Non-taxable (1) - - - - - -
Taxable 6,415,145 226,134 7.05% 11,728,818 364,734 6.22%
----------- ----------- ------- ------------ ----------- -------
Total Securities & Investments 11,820,579 382,558 6.47% 16,384,192 482,351 5.89%
----------- ----------- ------- ------------ ----------- -------
Loans:
Commercial 11,876,210 530,920 8.94% 4,660,916 231,487 9.93%
Real Estate Mortgage 23,321,137 1,291,963 11.08% 19,964,438 870,711 8.72%
Installment/Consumer 4,203,583 208,471 9.92% 2,031,346 98,780 9.73%
----------- ----------- ------- ------------ ----------- -------
Total Loans 39,400,930 2,031,354 10.31% 26,656,700 1,200,978 9.01%
----------- ----------- ------- ------------ ----------- -------
Total Interest Bearing Assets 51,221,509 2,413,912 9.43% 43,040,892 1,683,329 7.82%
----------- ----------- ------- ------------ ----------- -------
Less allowance for possible
loan losses & deferred fees (273,879) (336,876)
----------- ------------
50,947,630 42,704,016
Mortgage servicing rights 2,403,974 3,003,773
Non earning assets 6,010,802 677,853
----------- ------------
Total Assets $59,362,406 $ 46,385,642
=========== ============
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 2,820,842 $ 68,643 4.87% $ 372,007 $ 9,359 5.03%
Savings 111,064 1,384 2.49% 55,207 685 2.48%
Canadian Dollar Savings 783,683 9,319 2.38% 1,540,036 42,684 5.54%
Time 26,044,926 813,783 6.25% 22,586,228 686,705 6.08%
Borrowed Funds 8,959,182 277,788 6.20% 9,817,680 297,402 6.06%
Money Market Accounts 16,050,196 412,117 5.14% 5,612,685 147,899 5.27%
Holding Company Debt 937,500 43.331 9.46% 985,000 46,735 9.49%
----------- ----------- ------- ------------ ----------- -------
Total interest bearing
liabilities $55,707,393 1,627,769 5.84%$ 40,968,843 1,231,469 6.01%
----------- ----------- ------- ------------ ----------- -------
Net interest income $ 786,547 $ 451,880
----------- -----------
Weighted average rate spread 3.58% 1.81%
------- -------
Net yield on average earning
assets 3.06% 2.10%
(1) Actual yields; not adjusted for tax-equivalent yields
(2) For purposes of computing average yields on the loan portfolio as
presented in the above analysis, loans on non-accrual status are included
in the average loan balances.
15
15
Allowance for Loan Losses
The monthly loan loss allowance remained at a rate of $7,500 in the second
quarter of 1997. In the 1996 period, the monthly allowance was increased in
February 1996 from $400 to $6,000. The increased monthly allowance for loan
losses is the result of management's desire to build reserves, as new loans are
originated in Ann Arbor. A special loan loss allowance of $194,000 was charged
to income in June 1997 as directed by the Bank's regulatory examiners. They
required the special allowance as a result of ratio analysis rather than
specific loan problems, expected loan losses or actual loss experience. The
Bank had net loan loss recoveries of $5,273 in the six month period ended June
30, 1997 versus net loan losses of $31,634 in the six month period ended June
30, 1996.
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------------------------------------
Allowance for loan losses $ 216,500 $ 18,000 $ 239,000 $ 30,000
Loan charge-offs (16,731) (33,662) (17,772) (35,834)
Recoveries 19,427 1,016 23,045 4,200
--------- --------- --------- --------
Net increase (decrease)
in allowance $ 219,196 $ (14,646) $ 244,273 $ (1,634)
========= ========= ========= ========
At At At
June 30, March 31, December 31,
1997 1997 1996
-----------------------------------------
Total loans (1) $28,488,449 $23,424,375 $20,966,290
Reserve for loan losses 513,055 322,860 297,783
Reserve/Loans, % (1) 1.80% 1.38% 1.42%
(1) Excludes loans held for sale.
16
16
The following schedule summarizes the Company's nonperforming loans for
the periods indicated:
At At At
June 30, March 31, December 31,
1997 1997 1996
-----------------------------------------
Past due 90 days and over
and still accruing:
Real estate 337,879 234,352 226,144
Installment 24,331 45,044 34,096
Commercial 94,738 64,717 29,479
--------- --------- ---------
Subtotal 456,948 344,113 289,719
Nonaccrual loans:
Real estate 578,725 506,376 336,468
Installment - 1,840 1,968
Commercial 85,263 83,277 125,761
--------- --------- ---------
Subtotal 663,988 591,493 464,197
Other real estate
owned (2) 597,570 636,987 266,079
--------- --------- ---------
Total 1,718,506 1,572,593 1,019,995
As % of loans (1) 6.03% 6.71% 4.86%
Ratio of reserve for loan
losses to all loans
90 days and over 45.8% 34.5% 39.5%
(1) Excluding loans held for sale.
(2) Other real estate owned at June 30, 1997, March 31, 1997 and December 31,
1996 includes a commercial development site in Sault Ste. Marie, Michigan.
Based upon its assessment of current market conditions, management believes the
16-acre site where a former loan office is located has a fair market value
substantially more than its carrying cost of $266,079. This property is
carried as other real estate owned in the Company's financial statements since
it is surplus to the Bank's requirements. While it is management's goal to
sell this site in 1997, and the Bank is in negotiations at this time to sell a
significant portion of the property, there is no assurance that a sale will be
consummated.
The increases in non-performing assets mainly relate to loans originated
for the secondary market which have become delinquent and are either under
modification agreements to bring the loans current or in the process of
foreclosure. With the exception of one $42,470 commercial real estate
building, the other real estate owned, other than the property mentioned above,
is residential single family properties. Based upon management's review of
appraisal information
17
17
and current broker price opinions, management believes that with few
exceptions, the Bank is well secured with respect to these loans and the other
real estate owned which is carried at cost. The Bank's greatest loan credit
risks relate to the commercial and home equity/installment loan portfolios, and
these levels were similar at June 30, 1997, March 31, 1997 and December 31,
1996, although non-accrual commercial loans (perhaps the highest credit risk
category of loans) decreased 32.2% during the period.
Economic conditions in the Bank's primary market area in Ann Arbor were
strong in the period. The Sault Ste. Marie area appears not to be growing.
The Newberry area appears to be rapidly growing because of the establishment of
a major prison complex in the town by the State Department of Corrections. A
new expansion of the prison is now occurring.
Management believes that the current reserve level and the ongoing reserve
for loan losses is adequate to absorb 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, 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 from $575,008 for the three months
ended June 30, 1996 to $1,319,303 for the three months ended June 30, 1997.
The increase was principally a result of a $683,948 increase in the Bank's
mortgage banking income.
Total non-interest income increased to $2,829,909 for the six months ended
June 30, 1997 from $948,748 for the six months ended June 30, 1996. The
increase was principally a result of a $1,836,247 increase in the Bank's
mortgage banking income.
Securities. During the six months ended June 30, 1997, securities
totalling $5,774,430 were sold from the Bank's available-for-sale securities
portfolio with gross realized losses of $63,166 and gains of $35,310. During
the first half, the Bank sold most of its COFI-index and LIBOR-index linked
adjustable rate mortgage-backed securities. Taking into account realized and
unrealized gains and losses on the securities portfolio, during the first half
of 1997, the yield on the Company's investment securities portfolio was 8.74%.
During the six months ended June 30, 1997, securities totalling $138,883 were
sold from the Company's available-for-sale securities portfolio with gross
realized gains of $35,571 and no losses.
Mortgage Banking. Mortgage banking income increased to $1,225,690 in the
three months ended June 30, 1997 from $541,742 in the three months ended June
30, 1996. Sharply increased loan purchase and origination volumes during the
1997 period as well as the gain on sale of participation certificates in
sub-performing home equity loans (see
18
18
the discussion of the "RTC Loan Pool" below) were offset by a decrease in
return from the Bank's investment in FHLMC and FNMA single family mortgage
loans serviced for others, as a result of amortization of servicing right
assets due to mortgage payoffs. There was also a lower of cost or market
adjustment of $8,902 charged against income in the 1997 period to mark the
mortgages held for sale to the lower of cost or market, versus a charge of
$75,697 in the 1996 period.
Although loan purchase and origination volumes increased during the
period, the amount of loans held for sale at June 30, 1997 decreased 78.9% from
the level at December 31, 1996 as management changed its operating procedures
so that more loans held for sale which were purchased or originated just prior
to month-end were pooled or sold prior to month-end. This also decreased the
need for temporary month-end short term borrowings, which dropped 86.4% at June
30, 1997 from the amount at December 31, 1996. Management anticipates that the
restructuring of the Varsity Mortgage operating agreement (see below) will
further reduce average daily volumes of loans held for sale per unit of monthly
volume, and reduce the Bank's need for temporary short term borrowings secured
by loans held for sale.
At June 30, 1997, the Bank and its subsidiaries owned the right to service
$204,178,439 of FHLMC, FNMA and private conduit mortgages for others, of which
approximately 37% was owned by Midwest Loan Services, and the remainder by the
Bank. The following table summarizes the portfolio by type and mortgage note
rate:
Interest Rate Stratification of the Company's Servicing
($ in 000s) FIXED RATE - BY MATURITY
----------------------------------------
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 1,103 41 325 3,822
8.50 - 8.99 6,780 480 1,337 13,063
8.00 - 8.49 5,281 508 2,943 29,360
7.50 - 7.99 537 787 8,321 62,065
7.00 - 7.49 259 1,152 17,711 22,590
6.50 - 6.99 - 741 10,084 8,316
6.00 - 6.49 234 398 1,887 1,238
under 6.00 2,799 17 - -
------ ------ ------- -------
16,993 4,124 42,608 140,454
Current market
interest rates 6.38% 7.38% 7.38% 7.88%
Average annual
servicing fee 0.47% 0.29% 0.27% 0.26%
Interest rates have been very stable for nearly seventeen months. If
interest rates were to decline to levels briefly seen during the Summer of
1993, the portfolio would experience significant refinancings and payoffs,
which would hurt income. Based on recent comparable sales and indications of
market value from industry brokers, management believes that the current market
value of the Bank's portfolio of
19
19
mortgage servicing rights approximates cost. Subsequent to quarter-end,
management entered into an agreement to sell approximately $83,900,000 of the
Bank's servicing rights portfolio at a price which approximates cost, prior to
sale expenses. 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.
At June 30, 1997, the Bank had outstanding purchase commitments to buy
single family FHLMC qualifying mortgage loans of $31,098,000 and outstanding
forward commitments to deliver FHLMC mortgage-backed securities of $12,500,000,
substantially all of which commitments were for delivery within three months or
less.
Servicing Rights Held by the Company
(amounts in $000s) June 30, March 31, December 31,
1997 1997 1996
---------------------------------
Total servicing (1) 204,178 208,104 214,046
Book value of servicing 2,429 2,408 2,312
Estimated market value
of servicing:
Management estimate (2) 2,528 2,504 2,371
Discounted cash flow (3) 2,644 2,730 2,466
Estimated excess of market
over book value (4) 215-99 322-96 154-59
(1) Excludes servicing related to FHLMC and FNMA qualified loans held for
delivery.
(2) Assumes a price based upon market transactions at June 30, 1997, March
31, and December 31, 1996 of 4.7x, 4.9x and 4.9x (4.9 times the servicing
fee) for 30-year servicing, 3.6x, 3.75x and 3.75x for 15-year servicing,
2.2x, 2.3x and 2.3x for Balloon servicing and 2.1x, 2.1x and 2.1x for ARM
servicing, respectively. Excess servicing is discounted from these
amounts at a multiple of one times the servicing fee.
(3) Uses net present value analysis of future cash flows, discounted back at
13.14%.
(4) Range based upon the two methods used in (2) and (3), above.
During the period ended June 30, 1997 purchases and sales of mortgage
servicing rights by third-parties evidenced a stable trend in price which
mirrored the generally stable interest rates throughout the period. Subsequent
to June 30, 1997, the value of servicing rights decreased as interest rates
fell briefly to new cycle lows and then rose again.
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
20
20
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 is $426,797.
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 which has since been submitted. No monies
will be paid by the RTC however, until the entire refund request is finalized.
The Bank has not yet booked any of this receivable as income. Additional
proceeds are anticipated from residential real estate related assets owned and
the loans underlying the Fifth Participation Certificate, all with a carrying
value of $215,000. If realized, 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.
Varsity Mortgage. The Bank restructured the agreement with the managers
of Varsity Mortgage as of April 1, 1997. Under the revised agreement, the Bank
will have an ongoing profit participation equal to 50% of the net income of
Varsity Mortgage. Previously, the Bank's future profit participation was
capped at an amount related to its investment. The Bank also lowered it's
capital investment in Varsity Mortgage to $300,000 and extended a line of
credit in the amount of $500,000 at Wall Street Journal Prime Rate. In
exchange, the Bank lowered the tablefunding interest rate on its tablefunding
line to Varsity Mortgage so that it is now in line with market interest rates
on comparable tablefunding lines, and increased the Managers' annual salaries
by a total of $150,000 per year. As a result of the restructuring of the
agreement, the Bank's income from Varsity Mortgage for the quarter ending June
30, 1997 was decreased on a one-time basis by approximately $145,000 (see
"Non-interest Expense", below).
Michigan BIDCO. Michigan BIDCO (the "BIDCO") invests in businesses in
Michigan with the objective of fostering job growth and economic development.
As of June 30, 1997, the BIDCO had made twenty-three such investments,
amounting to a total of $13,002,600 at original cost (before repayments or
participations sold). At June 30, 1997, the BIDCO had total unaudited assets
of $6,091,950. For the three and six months ended June 30, 1997 and 1996, the
Bank's 44.1% equity share in the earnings of the BIDCO's reported net income
was $38,704 and $43,522, and $20,000 and $40,000, respectively.
The Bank owns 280 shares of common stock in the BIDCO, currently
21
21
representing a 44.1% equity interest. The Company's consolidated fully diluted
ownership in the BIDCO is 15.6%, after considering the impact of convertible
bonds.
Michigan BIDCO makes its investments in the form of loans or direct equity
investments, or a combination thereof. The BIDCO's limit on its investment in
one borrower is currently $500,000, and the BIDCO arranges participations for
investments in excess of this amount. By management policy, the Bank is
restricted from investing or lending to a business that the BIDCO finances.
The BIDCO typically receives warrants or participation rights in the companies
in which it invests. To date, investments (at original investment cost) have
been made in the following types of businesses:
Michigan BIDCO, investments:
----------------------------------
Total Equity
Industry Investment Participation?
#1 ABC-TV affiliate $ 1,472,000 yes
#2 Adult foster care 40,000 no
#3 Cable TV 545,000 yes
#4 Children's clothing manufacturer 200,000 repurchased
#5 Commercial laundry 180,000 no
#6 Environmental engineering 100,000 repurchased
#7 Home health care 20,000 no
#8 Hunting supplies 60,000 no
#9 Injection mold equip. manufacture 25,000 no
#10 Janitorial supplies 85,000 no
#11 Limited service hotels 738,600 yes
#12 Manufacturing 200,000 no
#13 Manufacturing 200,000 no
#14 Manufacturing 200,000 no
#15 Metal manufacturing 80,000 no
#16 Paper converting 2,762,000 yes
#17 Plastic injection molding 2,000,000 repurchased
#18 Railcar parts manufacturing 125,000 yes
#19 Railroad boxcar leasing 1,500,000 no
#20 Recycled paper pulp mill 780,000 yes
#21 Residential mortgage servicing 450,000 repurchased
#22 Specialty financial services 540,000 yes
#23 Tissue paper mill 700,000 yes
-----------
Total $13,002,600
===========
The loans associated with investments #2, 4, 5, 7, 17, and 21 have been
repaid in full. Loan participations have been sold in loans associated with
investments #1, 3, 5, 7, 10, 12, 13, 14, 16, 17, 19, 20 and 23. At June 30,
1997, the BIDCO had no outstanding conditional commitments to lend.
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. These donations
negatively impacted the BIDCO's and the Company's
22
22
earnings in the 1996 first quarter. The BIDCO anticipates that on an ongoing
basis a portion of its overhead will be borne by the Foundation. The BIDCO and
the Foundation share administrative staffs and offices, with the Foundation
reimbursing the BIDCO for these services. The monthly management fee paid by
the Foundation to the BIDCO for the first half of 1997 was $8,000, and
subsequent to June 30, 1997, the fee was raised to $10,000 per month. As a
result of its capitalization by the BIDCO, the Foundation was able to borrow a
total of $2,000,000 from the U.S. Rural Economic Community Development Service
Agency ("U.S. RECDS") at 1% interest with a 30 year term. As of June 30, 1997,
the Foundation had lent $1,520,000 of its available funds to eleven borrowers,
with $780,000 undrawn and available for lending from the U.S. RECDS loan, and
cash available for relending from paid off loans of $356,000.
Non-Interest Expense
Non-interest expense increased to $2,078,755 in the three months ended
June 30, 1997 from $1,191,329 for the three months ended June 30, 1996. The
increase was primarily the result of ongoing expansion of business at the Bank,
Varsity Mortgage and Varsity Funding. Also, comparisons of the first half of
1997 versus the first half of 1996 should take into account that fact that the
Bank started-up the Ann Arbor main office in February 1996, and Varsity
Mortgage started operations in March 1996, so the first half of 1997 reflects a
full two quarters of expenses as well as business expansion since the start-up.
Non-interest expense in the 1997 second quarter also reflects $145,000 in
one-time additional profit-sharing expense at Varsity Mortgage resulting from a
restructuring of the Varsity Mortgage operating agreement and a faster rate of
accrual of bonus under the Bank President's five year contract in the amount of
$210,000 during the quarter. A total of $285,000 in bonus remains available
under the contract, which has a remaining term of three and one-half years.
Taking into account these extra expenses, the non-interest expense in the three
months ended June 30, 1997 was similar to the expense in the three months ended
March 31, 1997. Non-interest expense increased to $3,749,983 in the six months
ended June 30, 1997 from $2,038,809 for the six months ended June 30, 1996.
Non-interest operating expense for only the parent company increased to
$95,487, for the three month 1997 period from $37,268 for the 1996 period.
Legal, audit and ESOP benefit expenses were higher. Non-interest operating
expense for only the parent company increased to $131,577 for the six month
1997 period from $70,462 for the 1996 period. Legal, audit, public listing and
ESOP benefit expenses were higher.
23
23
Liquidity and Capital Resources
Capital Resources. The table on the following page sets forth the Bank's
risk based assets, and the capital ratios and risk based capital ratios of the
Bank and Company. At June 30, 1997, the Bank was well capitalized for bank
regulatory purposes (the required ratio for "well capitalized" was 5% of total
assets, 6% (Tier 1) of risk-based assets, and 10% (Tier 1 and 2) of risk-based
assets).
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 and/or
residential mortgage loans. In addition, the Bank invests in overnight Federal
Funds. At June 30, 1997, the bank had cash and due from banks and fed funds on
hand of $16,373,577. The Bank has an unused $3,000,000 line of credit secured
by investment securities and two lines of credit from correspondents secured by
mortgage loans for sale to the secondary market. In order to bolster
liquidity, the Bank has also sold brokered CDs from time to time.
The decline in time deposits during the three month period ended June 30,
1997 from $29,529,050 to $28,622,910 was the result of a decrease of
approximately $6,500,000 in brokered time deposits, offset by ongoing increases
in retail time deposits. Management is de-emphasizing brokered time deposits
as retail deposit levels increase as a result of the expansion of the Bank's
Ann Arbor main office deposit base.
Parent Company Liquidity. At year-end 1996, University Bancorp, Inc. held
cash and marketable equity securities of $155,183. This decreased by $23,197
to $131,986 at June 30, 1997. The decrease in cash and marketable equity
securities was due to an increase in the Company's investment in the Bank of
$350,000 during the quarter, mostly offset by the sale of shares of the
Company's common stock in a private placement. During the six months ended
June 30, 1997 no dividends were paid from the Bank, as a result of low
profitability at the Bank. Dividends from the Company's bank subsidiary
together with earnings from the cash and marketable equity securities held by
the parent company are the principal sources of cash used to fund the parent
company's indebtedness owing to North Country Bank & Trust ("NCB&T"), which
amounted to $937,500 and $962,500 at June 30, 1997 and at December 31, 1996,
respectively. The NCB&T note matures November 1, 1997, and the Company intends
to seek a renewal at that time. Management believes that the cash and
securities on hand, federal tax refunds receivable and the available
unrestricted retained earnings that University Bank is able to pay the Company
in the form of dividends, with permission of the Company's secured debt lender,
is currently sufficient to cover expected required principal reductions during
1997 on the holding company's loan, assuming its renewal.
24
24
UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio at June 30, 1997
($ in 000's)
- ------------------------------------------------------------------------------
Risk Adj.
Value Risk Asset
Asset (000's) Weight Value
- --------------------------------------------- -------- ------- --------
Cash and Federal Reserve Deposits 2,512 0% 0
U.S. Gov't Agency Securities 628 0% 0
U.S. Treasury Securities 0 0% 0
U.S. Gov't Guaranteed Loans 187 20% 37
Balances at Domestic and Canadian Banks 1,749 20% 350
Fed Funds Sold 11,463 20% 2,293
U.S. Gov't Agency Mortgage-backed Securities 1,516 20% 303
U.S. Gov't Equity Securities 848 20% 170
Other Mortgage-backed Securities 0 50% 0
1-4 Family Mortgage Loans 17,324 50% 8,662
Junior Liens 2,573 100% 2,573
All Other Loans 15,472 100% 15,472
Loan Loss Reserve (513) 0% 0
All Other Securities 0 100% 0
Real Estate Owned 598 100% 598
Premises & Equipment 1,946 100% 1,946
Mortgage Servicing Rights 2,429 100% 2,429
Other Assets 3,480 100% 3,480
- --------------------------------------------- --------
TOTAL ASSETS 62,212
Off Balance Sheet Items:
Letters of Credit and Committments > 1 Year 0 100.00% 0
Foreign Exchange Contracts 500 1.00% 5
Home Equity Lines of Credit 882 50.00% 441
Interest Rate Contracts 0 0.00%(1) 0
FHLMC/FNMA Loan Purchase Committments 31,098 50.00% 15,549
MBS FHLMC/FNMA Forward Sell Committments 12,500 0.00%(1) 174
Agency Guaranteed Commercial Loans Sold 203 20.00% 41
-------- ------- -------
TOTAL RISK-ADJUSTED ASSETS 54,522
=======
CAPITAL RESOURCES
Shareholders Equity 4,807
Net Unrealized Loss on AFS Securities 4
Minority interest in consolidated subsidiary 214
--------
Total Equity (Tier 1) 5,025
Qualifying Loan Loss Reserve (Tier 2) 513
--------
Regulatory Capital (Tier 1 & Tier 2) 5,538
========
Primary and Total Capital Ratio (Leverage) 8.90%
========
Risk-adjusted Capital Ratio (Tier 1) 9.22%
========
Risk-adjusted Capital Ratio (Tier 1 & Tier 2) 10.16%
========
University Bancorp Consolidated
Total Capital Ratio (Leverage Ratio) 6.83%
========
(1) Plus market value, or replacement cost valuation, as required.
25
25
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.
Rising long term and short term interest rates tend to increase the value
of the Bank's and Midwest Loan Services' investment in mortgage servicing
rights and improve the Bank's and Midwest Loan Services' current return on such
rights by lowering required amortization rates on the rights. Rising long and
short term interest rates also increases origination activity at Varsity
Funding as more residential borrowers need alternative sources of funding
outside of traditional secondary market loans. However, rising interest rates
tends to decrease new mortgage origination activity, negatively impacting
current income from the Bank's retail mortgage banking operations and Varsity
Mortgage's operations. Rising interest rates also slow Midwest Loan Services'
rate of growth, but increases the duration of its existing subservicing
contracts. The table on page 26 details the Bank's asset/liability sensitivity
as of June 30, 1997.
26
UNIVERSITY BANK 26
Asset/Liability Position Analysis
($ in 000'S) 6-30-97
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 11,463 11,463
Loans (1) 761 1,503 4,272 5,560 12,096
Foreign Investments 49 49
Securities 2,283 3 4 2 2,292
Loans held for sale 9,729 9,729
Matured loans 971 971
Variable rate loans 9,446 4,809 14,255
Other assets 3,022 3,022
Cash & due from banks 4,866 4,866
Overdrafts 16 16
Non-accrual loans 664 664
Valuation adjustment (23) (23)
------- ------- ----- ----- ------ ------
TOTAL ASSETS 34,718 6,315 4,276 5,562 8,529 59,400
LIABILITIES
Large C.D.'s 3,470 3,632 4,777 11,879
Regular C.D.'s 2,313 13,410 968 53 16,744
MMDA 16,941 16,941
NOW 3,457 3,457
Demand and escrow 3,271 3,271
Savings 98 98
Canadian $ savings 219 219
Other liabilities 2,489 2,500 0 4,979
Equity 4,809 4,809
------- ------- ----- ----- ----- ------
TOTAL LIABILITIES 28,987 19,542 5,745 - 8,080 62,407
GAP 5,731 (13,227) (1,469) 5,562 449
CUMULATIVE GAP 5,731 (7,496) (8,965) (3,403)
GAP PERCENTAGE 9.19% -12.01% -14.37% -5.46%
NOTES:
(1) Net of bad debt reserve
27
27
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 2. Changes in Securities
(c) The Company sold in a private placement the following shares of common
stock, par value $0.01 per share, at a price of $6.75: 7,408 shares for total
aggregate proceeds of $50,000 on May 2, 1997; and 22,223 shares for total
aggregate proceeds of $150,001 on June 30, 1997. The common stock was sold to
three private investors, not otherwise affiliated with the Company, which the
Company believes met accredited investor criteria of Regulation D. The Company
claimed exemption under the Securities Act of 1933 based on Section 4(2) of
said Act. Such claim was based on certain representations and covenants set
forth in subscription agreements of the investors indicating, among other
matters, their status as accredited investors under Regulation D under said Act
and on such investors' agreement to the placement of restrictive legends on the
certificates for the shares issued to them. This private placement did not
entail the use of an underwriter and there were no underwriting commissions or
discounts.
Item 5. Other information
Parent Company Financial Information
Certain condensed financial information with respect to
University Bancorp, Inc. follows:
28
UNIVERSITY BANCORP, INC. (The Parent) 28
Condensed Balance Sheet (Unaudited)
June 30, December 31,
1997 1996
ASSETS ---------- ------------
Cash and due from banks $ 50,437 $ 41,113
---------- ------------
Investment in subsidiary 4,807,052 4,529,503
---------- ------------
Due from ESOP 1,000 1,000
Securities available for sale (Note 2) 81,548 114,070
Investment in Michigan BIDCO 201,448 202,702
Federal income tax receivable 806,304 173,372
Deferred taxes 4,640 8,537
Prepaid expenses and other assets 8,865 34,040
---------- ------------
Total other assets 1,103,804 533,721
TOTAL ASSETS 5,961,293 5,104,337
========== ============
March 31, December 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY ---------- ----------
Note payable 937,500 962,500
Accrued interest payable 15,668 10,284
Accounts payable 12,626 138,443
Due to subsidiary 687,695 80,342
Deferred Tax Liability 12,739 0
---------- ------------
Total Liabilities 1,666,228 1,191,569
Stockholders' equity:
Capital stock and paid in capital 3,167,472 2,618,459
Retained earnings 1,106,740 1,299,473
Net unrealized loss on
available-for-sale securities 20,853 (5,164)
---------- ------------
Total Stockholders' equity 4,295,066 3,912,768
---------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $5,961,293 $ 5,104,337
========== ============
29
UNIVERSITY BANCORP, INC. (The Parent) 29
Condensed Statement of Operations For the Three-Month For the Six-Month
(Unaudited) Periods Ended Periods Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Net income (loss) from bank subsidiary $ (245,401) $ (169,045) $ (97,706) $ (357,806)
Gain on sale of investments 18,089 28,318 41,155 28,318
Interest income 6,731 5,282 11,214 9,682
Other income (1) 2,153 88 4,625
---------- ------------- ---------- -----------
Total income (loss) (220,582) (133,292) (45,249) (315,181)
---------- ------------- ---------- -----------
Interest expense 23,327 22,181 46,735 44,331
Legal and Audit Expense 16,576 19,563 32,254 38,768
Public listing expense 40,452 1,390 42,905 2,390
Other expenses 38,458 16,315 56,418 29,304
---------- ------------- ---------- -----------
Total expenses 118,813 59,449 178,312 114,793
---------- ------------- ---------- -----------
Income (loss) before income taxes (339,395) (192,741) (223,561) (429,974)
---------- ------------- ---------- -----------
Income taxes (benefit) (12,882) (8,000) (21,682) (8,000)
---------- ------------- ---------- -----------
Net income (loss) (326,513) (184,741) (201,879) (421,974)
========== ============= ========== ===========
Net income (loss) per common share
Primary ($0.26) ($0.15) ($0.16) ($0.34)
========== ============= ========== ===========
30
UNIVERSITY BANCORP, INC. (The Parent) 30
Condensed Statement of Cash Flows
(Unaudited)
For the Six Month
Periods Ended
June 31,
1997 1996
------ -----------
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net Income (Loss) $ (201,879) $ (421,974)
Depreciation - 1,500
Amortization of Premium on Securities 1,254 (240)
Contribution to ESOP 36,322 -
Increase in Federal income tax receivable (632,932) -
Increase in payable to affiliate for federal
income tax receivable 607,353 -
Loss/(gain) on sale of investments (41,155) (28,318)
Decrease/(increase) in Other Assets 29,072 (144,531)
Increase(Decrease) in interest payable 5,384 (8,382)
Increase(Decrease) in other liabilities (113,078) 67,436
Subsidiary net (income)/loss 97,706 357,806
---------- -----------
Net cash provided by (used in)
operating activities (211,953) (176,703)
---------- -----------
Cash flow from investing activities:
Contributions of capital to subsidiary (350,000) -
Purchase of available for sale securities (55,309) (49,438)
Proceeds from sale of available
for sale securities 138,895 -
---------- -----------
Net cash provided by (used in)
investing activities: (266,414) (49,438)
---------- -----------
Cash flow from financing activities:
Principal payment on notes payable (25,000) (25,000)
Proceeds from sale of common stock 512,691 66,750
---------- -----------
Net cash provided by (used in)
financing activities: 487,691 41,750
---------- -----------
Net changes in cash and cash equivalents 9,324 (184,391)
Cash:
Beginning of year 41,113 239,868
---------- -----------
End of period $ 50,437 $ 55,477
========== ===========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 29,629 $ 36,717
Income tax $ - $ -
31
31
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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.
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: August 11, 1997 /s/ Donald F. Rositano
-------------------------
Donald F. Rositano
Chief Financial Officer
(On behalf of the registrant
and as
Principal Financial Officer)
32
32
Exhibit Index
------------- Sequentially
Numbered
Page
------------
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. 33
27. Financial Data Schedule 62