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, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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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
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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 May 10, 1998
2,000,858 shares
page 1 of 31 pages
Exhibit index on sequentially numbered page 29
2
FORM 10-Q 2
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TABLE OF CONTENTS
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PART I - Financial Information
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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 20
PART II - Other Information
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Item 1. Legal Proceedings 24
Item 5. Other Information
Parent Company Condensed
Financial Information 25
Item 6. Exhibits & Reports on Form 8-K 28
Signature 28
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Exhibit Index 29
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
March 31, 1998 and December 31,1997
(Unaudited)
March 31, December 31,
ASSETS 1998 1997
------------ ------------
Cash and due from banks $ 1,816,303 $ 2,062,307
Federal funds sold 7,181,483 314,652
------------ ------------
Total cash and cash equivalents 8,997,786 2,376,959
Securities available for sale at market 1,873,739 1,980,327
Loans held for sale 20,879,858 18,156,671
Loans 27,137,298 28,236,183
Allowance for Loan Loss (547,304) (520,953)
------------ ------------
Loans, net 26,589,994 27,715,230
Premises and equipment 1,928,993 1,955,919
Mortgage servicing rights 1,351,456 1,430,190
Investment in and advances to
Michigan BIDCO 782,462 742,669
Other real estate owned 1,002,903 433,003
Other assets 2,102,459 2,737,815
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Total other assets 7,168,273 7,299,596
------------ ------------
TOTAL ASSETS $ 65,509,649 $ 57,528,783
============ ============
-Continued-
4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 4
Consolidated Balance Sheets
March 31, 1998 and December 31,1997
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
Liabilities
Deposits:
Demand - non interest bearing $ 2,305,564 $ 2,458,211
Demand - interest bearing 16,073,052 19,120,122
Savings 155,867 143,604
Time 28,075,398 23,545,234
------------ ------------
Total Deposits 46,609,881 45,267,171
FHLB advances 0 0
Mortgage escrow 287,302 86,686
Short term borrowings 4,663,574 2,744,188
Long term borrowings 1,612,435 1,749,070
Deferred noncompete income 58,321 67,072
Other liabilities 8,545,289 4,015,003
Minority Interest 201,090 201,149
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
Issued - 0 shares in both 1998 and 1997 -- --
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
Issued - 2,000,858 shares in 1998
and 2,087,861 shares in 1997 14,029 13,919
Treasury Stock - 103,146 shares in 1998
and 103,461 in 1997 (302,446) (302,446)
Additional Paid-in-Capital 3,546,489 3,493,154
Retained earnings 288,308 181,549
Net unrealized gain/(loss) on securities
available for sale, net of tax
of $6,320 in 1997, and
($7,311) in 1998 (14,622) 12,268
------------ ------------
Total Stockholders' equity 3,531,757 3,398,444
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 65,509,649 $ 57,528,783
============ ============
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 5
Consolidated Statements of Operations and Comprehensive Income
For the Three Month Periods Ended March 31, 1998, 1997
(Unaudited)
1998 1997
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Interest income:
Interest and fees on loans $ 1,028,350 $ 960,169
Interest on securities:
U.S. Government agencies 15,032 94,594
Other securities 16,736 20,569
Interest on bank deposits 2,676 7,607
Interest on federal funds 27,877 64,147
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Total interest income 1,090,671 1,147,086
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Interest expense:
Interest on deposits:
Demand deposits 201,018 229,563
Savings deposits 913 6,437
Time certificates of deposit 380,518 387,926
Bank and other short term borrowings 32,279 86,215
Long Term Notes Payable 20,898 75,271
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Total interest expense 635,626 785,412
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Net interest income 455,045 361,674
Provision for loan losses 22,500 22,500
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Net interest income after
provision for loan losses 432,545 339,174
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Other income:
Net security gains 66,660 (22,351)
Service charges and fees 8,418 4,384
Mortgage banking income 1,126,236 1,446,358
Profit(loss) from equity investment in
Michigan BIDCO 40,564 4,818
Other 27,578 77,397
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Total other income 1,269,456 1,510,606
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-Continued-
6
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 6
Consolidated Statements of Operations (continued)
For the Three Month Periods Ended March 31, 1998, 1997
(Unaudited)
1998 1997
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Salaries and wages $ 865,973 $ 853,622
Employee benefits 181,538 113,998
Occupancy, net 111,548 103,799
Taxes other than income (15,580) 6,813
Data processing and equipment expense 76,163 95,573
Correspondent bank service charges 5,118 9,350
Advertising 24,192 36,073
Net expense of other real estate owned 1,161 (3,790)
Legal and audit expense 82,954 68,128
Other operating expenses 300,905 387,662
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Total other expenses 1,633,974 1,671,228
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Income (Loss) before income taxes 68,027 178,552
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Income taxes (benefit) (38,734) 53,918
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Net Income $ 106,761 $ 124,634
=========== ===========
Comprehensive Income $ 79,870 $ 133,603
=========== ===========
Earnings (loss) per common share
Basic $ 0.05 $ 0.07
=========== ===========
Diluted $ 0.05 $ 0.07
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Weighted average shares outstanding
Basic 1,984,586 1,841,532
=========== ===========
Diluted 1,986,333 1,856,490
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7
UNIVERSITY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements of Cash Flows
For the three-month periods ended March 31, 1998 and 1997
(Unaudited)
1998 1997
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Cash flow from operating activities:
Net income (loss) $ 106,760 $ 124,634
Adjustments to reconcile net loss to net cash from Operating Activities:
Depreciation and amortization 144,247 173,518
Provision for loan loss 22,500 22,500
Mortgage loans originated for sale (189,978,757) (70,790,128)
Proceeds from sale of loans and mortgage backed trading securities 187,981,802 74,457,898
Net loss/(gain) on loan sales and securitization (723,252) (986,552)
Market adjustment on loans held for sale (2,980) 3,739
Net amortization/accretion on securities 352 7,249
Loss/(Gain) on sale of securities available for sale (66,660) 22,351
Change in:
Investment in Michigan BIDCO, Inc. (39,793) (4,534)
Purchased Mortgage Servicing Rights -- (190,755)
Other real estate (569,900) (370,908)
Increase in other assets 635,298 (955,268)
Increase/(Decrease) in other liabilities 4,534,613 (62,718)
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Net cash from (used in) operating activities $ 2,044,230 $ 1,451,026
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Cash flow from investing activities:
Purchase of securities available for sale -- (885,795)
Proceeds from sales of securities available for sale 110,755 927,262
Proceeds from maturities and paydowns of securites available for sale 22,171 162,817
Loans granted net of repayments 1,102,736 (3,351,776)
Premises and equipment expenditures (38,587) (134,052)
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Net cash from (used in) investing activities 1,197,075 (3,281,544)
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Cash flow used in financing activities:
Net increase (decrease) in deposits 1,342,710 (3,853,785)
Net increase(decrease) in mortgage escrow accounts 200,616 (691,127)
Net increase (decrease) in other short term borrowings 1,919,386 (1,784,020)
Payments on other long term borrowings (136,635) (12,500)
Issuance of common stock 53,445 135,000
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Net cash from financing activities 3,379,522 (6,206,432)
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Net change in cash and cash equivalents 6,620,827 (8,036,950)
Cash and cash equivalents:
Beginning of period 2,376,959 12,550,812
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End of period $ 8,997,786 $ 4,513,862
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Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 703,984 $ 800,071
8
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See note 1 of Notes to Financial Statements in the Company's 1997 Annual
Report on Form 10-K, which should be read in conjunction with this Report, 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 1997 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.
Under a new accounting standard, comprehensive income is now reported for
all periods. Comprehensive income includes net income and other comprehensive
income. Other comprehensive income includes the change in net unrealized gains
and losses on securities available for sale, net of tax.
(2) Available-for-sale Securities
The Bank's available-for-sale securities portfolio at March 31, 1998 had a
net unrealized loss of approximately $22,000 as compared with a net unrealized
loss of approximately $19,000 at December 31, 1997, a decrease of $3,000. The
securities portfolio continues to shrink to provide for increased loan demand.
Securities available for sale
March 31, 1998
-------------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
U.S. agency mortgage-backed $ 508 $ 7 $ -- $ 515
Other agency mortgage-backed 539 -- (29) 510
Other mortgage-backed -- -- -- --
U.S. agency equity 848 -- -- 848
Other equity -- -- -- --
- ---------------------------------------------------------------------------------------------
Total investment securities
available for sale $1,895 $ 7 $ (29) $1,873
====== ====== ====== ======
9
Securities available-for-sale (continued) 9
December 31, 1997
-------------------------------------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
U.S. agency mortgage-backed $ 509 $ 9 $ -- $ 518
Other agency mortgage-backed 561 -- (28) 533
U.S. agency equity 848 -- -- 848
Other equity 44 37 -- 81
- ---------------------------------------------------------------------------------------------
Total securities
available for sale $1,962 $ 46 $ (28) $1,980
====== ====== ====== ======
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 involves risks and
uncertainties. Among others, certain forward looking statements relate to the
continued growth of various aspects of the Company's community banking, mortgage
banking and 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, 1997, 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, 1998, a net income of $106,760 was
realized versus a net income of $124,634 in the same period in 1997. Net
interest income increased to $455,045 in the 1998 period from $361,674 in the
1997 period, and other income was $1,269,456 in the 1998 period versus
$1,510,606 in the 1997 period. Operating expenses decreased to $1,633,974 in the
1998 period from $1,671,228 in the 1997 period. Basic and diluted net income per
share in the three months ended March 31, 1998 was $0.05 and $0.05, compared to
basic and diluted net income per share of $0.07 and $0.07 for the three months
ended March 31, 1997.
The decreased profit in the first quarter of 1998 versus the profit in the
first quarter of 1997 followed an intervening period of three quarters in 1997
when the Company was unprofitable. When the first quarter of 1998 is compared to
the first quarter of 1997, the 1997 period benefited from higher non-interest
income as a result of a $395,356 gain on the sale of Participation Certificates
in sub-performing home equity loans which the Bank had purchased in mid-March
1995. The 1998 period benefited from higher net interest income, lower other
expenses and increased earnings at Michigan BIDCO.
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10
The following table summarizes the pre-tax income of each profit center of
the Company for the three months ended (in thousands):
PRE-TAX INCOME SUMMARY 1998 1997
Banking
Community & wholesale mtg. banking $ (88) $ (45)
Midwest Loan Services (0) 48
Varsity Mortgage & Varsity Funding 136 213
Equity in the earnings of Michigan BIDCO 41 5
Corporate Office (21) (42)
----- -----
Total $ 68 $ 179
The net income of the Company for the three months ended March 31, 1998 was
principally a result of profits from the Bank's mortgage subsidiaries Varsity
Mortgage and Varsity Funding and the equity in the earnings of Michigan BIDCO.
The Bank itself had a greater loss in 1998 than 1997, however, the 1997 period
benefited from better results at the Bank's wholesale mortgage banking
operations.
The net income of the Company for the three months ended March 31, 1997 was
principally a result of profits from the Bank's mortgage subsidiaries Varsity
Mortgage, Varsity Funding and Midwest Loan Services. The Bank had a loss because
of losses in community banking, as operating expenses exceeded net interest
income and other income, which more than offset a positive contribution from the
Bank's own wholesale mortgage banking operations.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased to $455,045 for the three months ended March
31, 1998 from $361,674 for the three months ended March 31, 1997. Net interest
income rose from the year ago period because of an increase in average loans and
and a decrease in the cost of interest bearing liabilities. The yield on
interest earning assets increased to 9.03% in the 1998 period from 8.59% in the
1997 period. The cost of interest bearing liabilities decreased to 5.63% in the
1998 period from 5.76% in the 1997 period. Net interest income as a percentage
of total earning assets increased to 3.77% from 2.71%, because of the increase
in interest spread, which more than offset a 8.3% decline in the amount of
interest earning assets.
Interest income
Interest income decreased to $1,090,671 in the quarter ended March 31, 1998
from $1,147,086 in the quarter ended March 31, 1997. The average volume of
interest earning assets decreased to $48,982,763 in the 1998 period from
$53,423,189 in the 1997 period, a decrease of 8.3%. The decreased volume of
earning assets was due to a decrease in fed funds sold and lower yielding
securities which were used to repay higher cost wholesale borrowed funds.
Partially offsetting the decline
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in interest earning assets was an increase in the yield on earning assets.
However, the yield on the loan portfolio decreased to 9.25% from 9.44% as a
result in a decrease in the earnings yield on loans held for sale.
The average volume of investment securities in the three months ended March
31, 1998 decreased 70.9% over the same periods in 1997, as the Bank's portfolio,
which consists of adjustable rate agency backed mortgage securities, was
liquidated and the funds used to repay higher cost wholesale borrowings or
repositioned into loans from the Ann Arbor main office. The yield on the
securities portfolio increased to 6.59% in the three month period ended March
31, 1998 from 6.40% in the 1997 period. The increase in yields was the result of
the sale of lower yielding securities.
Interest Expense
Interest expense decreased to $635,626 in the three months ended March 31,
1998 from $785,412 in the 1997 period. The decrease was due to a decrease in
interest bearing liabilities as a result of decreased wholesale borrowed funds
and to a lesser extent, a decrease in deposits, and by a decrease in rates paid
on deposits. The decrease in rates was due to increased retail deposits and
decreased wholesale deposits. The cost of funds decreased to 5.63% in the 1998
period from 5.76% in the 1997 period. The average volume of interest bearing
liabilities decreased 16.1% in the 1998 period versus the 1997 period.
MONTHLY AVERAGE BALANCE SHEET AND
INTEREST MARGIN ANALYSIS
The following tables summarize monthly average balances, revenues from
earning assets, expenses of interest bearing liabilities, their associated yield
or cost and the net return on earning assets for the three months ended March
31, 1998 and 1997.
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12
Three Months Ended March 31,
-----------------------------------------------------------------------------------------
1998 1997
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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 $ 28,181 $ 440 6.33% $ 600,905 $ 7,607 5.06%
Federal Funds Sold 1,797,279 27,877 6.29% 4,938,916 64,147 5.20%
Securities:
Non-taxable (1) -- -- -- -- -- --
Taxable 2,091,514 34,004 6.59% 7,194,166 115,163 6.40%
-------------- ----------- ------- ------------- ---------- -------
Total Securities 3,916,974 62,321 6.45% 12,733,987 186,917 5.87%
-------------- ----------- ------- ------------- ---------- -------
Loans:
Commercial 12,752,842 349,730 11.12% 10,215,593 263,164 10.30%
Real Estate Mortgage 27,506,984 557,588 8.22% 26,652,650 603,179 9.05%
Installment/Consumer 4,805,963 121,032 10.21% 3,820,959 93,826 9.82%
-------------- ----------- ------- ------------- ---------- -------
Total Loans 45,065,789 1,028,350 9.25% 40,689,202 960,169 9.44%
-------------- ----------- ------- ------------- ---------- -------
Total Interest Bearing Assets 48,982,763 1,090,671 9.03% 53,423,189 1,147,086 8.59%
-------------- ----------- ------- ------------- ---------- -------
Less allowance for possible
loan losses & deferred fees (527,359) (309,873)
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48,455,404 53,113,316
Mortgage servicing rights 1,395,585 2,374,613
Non earning assets 18,802,332 6,696,449
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Total Assets $ 68,653,321 $ 62,184,378
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LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 3,354,392 $ 33,319 4.03% $ 3,161,083 $ 32,476 4.11%
Savings 113,532 704 2.51% 112,461 694 2.47%
Canadian Dollar Savings 38,919 209 2.18% 689,666 5,743 3.33%
Time 25,426,376 380,518 6.07% 25,329,296 387,926 6.13%
Borrowed Funds 2,006,299 32,279 6.52% 9,133,833 138,078 6.05%
Money Market Accounts 13,896,831 167,699 4.89% 15,138,760 197,087 5.21%
Holding Company Debt 922,688 20,898 9.19% 956,250 23,408 9.79%
-------------- ----------- ------- ------------- ---------- -------
Total interest bearing
liabilities $ 45,759,037 635,626 5.63% $ 54,521,349 785,412 5.76%
============== ----------- ------- ============= ---------- -------
Net interest income $ 455,045 $ 361,674
=========== ==========
Weighted average rate spread 3.40% 2.83%
======= =======
Net yield on average earning
assets 3.77% 2.71%
(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.
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Provision for Loan Losses
The monthly loan loss provision remained at a rate of $7,500 in the first
quarter of 1998. The amount of the monthly provision for loan losses is the
result of management's desire to build reserves, as new loans are originated in
Ann Arbor. The actual loan losses were $5,556 in the three month period ended
March 31, 1998 versus $1,041 in the three month period ended March 31, 1997.
Three Months Ended
March 31
1998 1997
-----------------------------------------
Provision for loan losses 22,500 22,500
Loan charge-offs (5,556) (1,041)
Recoveries 9,407 3,618
------ ------
Net increase (decrease)
in allowance 26,351 25,077
At At
March 31, 1998 December 31, 1997
-----------------------------------------
Total loans (1) 27,137,298 28,236,184
Reserve for loan losses 547,304 520,953
Reserve/Loans (1), % 2.02% 1.84%
(1) Excludes loans held for sale.
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The following schedule summarizes the Company's nonperforming loans for the
periods indicated:
At At
March 31, 1998 December 31, 1997
------------------------------------------------
Past due 90 days and over and still accruing:
Real estate 45,140 233,697
Installment 55,531 5,556
Commercial 43,699 295,643
---------- ----------
Subtotal 144,370 534,896
Nonaccrual loans:
Real estate 397,381 532,821
Installment -- 44,409
Commercial 34,255 9,479
---------- ----------
Subtotal 431,636 586,709
Other real estate owned 1,002,903 433,003
---------- ----------
Total 1,578,909 1,554,608
As % of loans (1) 5.82% 5.51%
Ratio of reserve for loan
losses to all loans
90 days and over 95.0% 46.5%
(1) Excluding loans held for sale
Other real estate owned at March 31, 1998 and December 31, 1997 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, there is
no assurance that a sale will be consummated.
The 1.5% increase in non-performing assets mainly relates to single family
residential 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, all of the other real estate owned, other than
the property mentioned above, consists of residential single family properties.
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. Other real estate
owned is carried at the lower of cost or fair value less estimated costs to
sell. The Bank's greatest loan credit risks relate to the commercial and
installment loan portfolios, and these
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levels decreased from December 31, 1997 to March 31, 1998.
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 growing because of an expansion of a major prison
complex in the town by the State Department of Corrections. Less than 7.5% of
the Bank's loans now relate to credits located in the Upper Peninsula of
Michigan.
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 decreased to $1,269,456 for the three months
ended March 31, 1998 from $1,510,606 for the three months ended March 31, 1997.
The decrease was principally a result of a $320,122 decrease in the Bank's
mortgage banking income.
Securities. Taking into account realized and unrealized gains and losses on
the securities portfolio, during the first quarter of 1998, the yield on the
Company's investment securities portfolio was 11.50%. During the three months
ended March 31, 1998, there were no securities sales from the Bank's
available-for-sale securities portfolio. During the three months ended March 31,
1998, the Company realized a $66,660 gain from the sale of the majority of its
available-for-sale investment in Central Bank Corporation. Gross proceeds from
this sale were $110,755.
Mortgage Banking. Mortgage banking income decreased to $1,126,236 in the
three months ended March 31, 1998 from $1,446,358 in the three months ended
March 31, 1997. A $395,356 gain on sale of participation certificates in
sub-performing home equity loans boosted income in 1997. Increased income from
mortgage banking activity from higher origination volume was partially offset by
increased amortization of the Company's mortgage servicing rights portfolio due
to increased refinancing activity.
At March 31, 1998, the Bank and its subsidiaries owned the right to service
$116,794,586 of FHLMC mortgages for others, of which approximately 60% was owned
by Midwest Loan Services, and the remainder by the Bank. The following table
summarizes the portfolio by type and mortgage note rate:
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Interest Rate Stratification of the Company's Servicing
($ in 000s) FIXED RATE - BY MATURITY
----------------------------------------
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 539 -- 218 1,816
8.50 - 8.99 6,056 -- 486 5,029
8.00 - 8.49 4,314 -- 1,035 15,554
7.50 - 7.99 930 64 3,873 36,725
7.00 - 7.49 1,390 -- 7,358 17,525
6.50 - 6.99 -- 174 4,773 6,788
6.00 - 6.49 -- -- 902 1,245
under 6.00 -- -- -- --
------ ----- ------ ------
13,229 238 18,645 84,682
Current market
interest rates 6.50% 7.13% 7.00% 7.25%
Average annual
servicing fee 0.39% 0.29% 0.27% 0.26%
Short term interest rates have been very stable for nearly twenty-six
months. Long term interest rates recently fell to levels which have prompted
increased refinancing activity. As a result, the portfolio is experiencing
increased refinancings and payoffs, which hurts income. In the first quarter of
1998, $78,734 was charged to income to amortize the Company's servicing rights.
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 is slightly above 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.
At March 31, 1998, the Bank had outstanding purchase commitments to buy
single family FHLMC qualifying mortgage loans of $47,006,525 and outstanding
forward commitments to deliver FHLMC mortgage-backed securities of $28,530,000,
substantially all of which commitments were for delivery within three months or
less.
17
17
Servicing Rights Held by the Company
(amounts in $000s) March 31, December 31,
1998 1997
------------------------------------
Total servicing 116,795 124,719
Book value of servicing 1,351 1,430
Estimated market value of servicing:
Management estimate (1) 1,354 1,440
Discounted cash flow (2) 1,465 1,583
Estimated excess of market
over book value (3) 114- 3 153- 10
(1) Assumes a price based upon market transactions at March 31, 1998 and
December 31, 1997 of 4.6x (4.6 times the servicing fee) for 30-year
servicing, 3.5x for 15-year servicing, 1.9x for Balloon servicing and 2.0x
for ARM servicing. Excess servicing is discounted from these amounts at a
multiple of one times the servicing fee.
(2) Uses net present value analysis of future cash flows, discounted back at
rates ranging from 10 to 12%.
(3) Range based upon the two methods used in (1) and (2), above.
During the period ended March 31, 1998 purchases and sales of mortgage
servicing rights by third-parties evidenced a slight decrease in price because
of a decrease in long term interest rates.
RTC Loan Pool. In mid-March 1995, the Bank purchased four Participation
Certificates in sub-performing home equity loans with approximately $6,600,000
in unpaid principal balance and $1,000,000 of unpaid accrued interest from a
private investor group (which had purchased them from the Resolution Trust
Corporation (RTC)) for approximately $1,903,000 (the "RTC Loan Pool"). In
September 1996 an additional $700,000 in home equity loans purchased from a home
equity loan originator were added to the RTC Loan Pool as a fifth Participation
Certificate at a cost of $115,000.
Substantially all of the remaining loans underlying the first four
Participation Certificates were sold as of March 28, 1997 for $1,725,000. As a
result the Bank's investment in the RTC Loan Pool was reduced to zero, and the
balance of the proceeds from the sale, per the terms of the RTC Loan Pool
acquisition agreement, was split 50/50 with the servicer of the RTC Loan Pool.
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
18
18
remaining $350,000. After the additional information was submitted, the RTC
rejected the claim in total. As a result, the Bank filed a lawsuit in late
October 1997 against the RTC in the U.S. District Court for the District of
Columbia seeking recovery of the requested $650,000 refund. In March 1998, the
Bank filed an amended and reduced refund request in the amount of $505,000. In
addition, in March 1998, the Bank sold all the remaining loans underlying the
five Participation Certificates for $200,000, generating a gain for the Bank of
$100,000. If additional proceeds are realized from the RTC, any of the amounts
received would also be split 50/50 with the former servicer of the RTC Loan
Pool, and any amount received by the Bank would be income.
Michigan BIDCO. Michigan BIDCO (the "BIDCO") invests in businesses in
Michigan with the objective of fostering job growth and economic development. As
of March 31, 1998, the BIDCO had made investments in twenty-five unrelated
entities, amounting to a total of $13,036,100 at original cost (before
repayments or participations sold). At March 31, 1998, the BIDCO had total
unaudited assets of $5,425,875. For the three months ended March 31, 1998 and
1997, the Bank's 44.1% equity share in the earnings of the BIDCO's reported net
income was $40,564 and $4,818, respectively.
The Bank owns 280 shares of common stock in the BIDCO, currently
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:
19
19
Michigan BIDCO, investments:
Total Equity
Industry Investment Participation?
#1 ABC-TV affiliate $1,472,000 yes
#2 Adult foster care 40,000 no
#3 Bridal shop 16,000 no
#4 Cable TV 545,000 yes
#5 Children's clothing manufacturer 200,000 repurchased
#6 Commercial laundry 180,000 no
#7 Environmental engineering 100,000 repurchased
#8 Home health care 20,000 no
#9 Hunting supplies 60,000 no
#10 Industrial supply 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 Plastic mold manufacturing 25,000 no
#19 Railcar parts manufacturing 125,000 yes
#20 Railroad boxcar leasing 1,500,000 no
#21 Recycled paper pulp mill 780,000 yes
#22 Residential mortgage subservicing 450,000 repurchased
#23 Secured credit card issuer 540,000 yes
#24 Tissue paper mill 700,000 yes
#25 Truck maintenance 17,500 no
-----------
Total $13,036,100
===========
The loans associated with investments #2, 5, 6, 7, 8, 12, 17, 18 and 22
have been repaid in full. Loan participations have been sold in loans associated
with investments #1, 3, 4, 6, 9, 10, 16, 17, 20, 21 and 25. At March 31, 1998,
the BIDCO had no outstanding conditional commitments to lend.
Northern Michigan Foundation. In 1995 and 1996, the BIDCO donated $300,000
to capitalize Northern Michigan Foundation (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 is currently approximately $16,000. 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. Department of Agriculture's Rural Development Service
("USDA RDS") at 1% interest with a 30 year term. As of March 31, 1998, the
Foundation had a portfolio of $1,088,000 of loans to eleven borrowers, with
$371,000 undrawn and available for lending from the USDA RDS loan, and cash
available for relending from paid off loans and the Foundation's initial equity
capital of $820,000.
20
20
Non-Interest Expense
Non-interest expense decreased to $1,633,974 in the three months ended
March 31, 1998 from $1,671,228 for the three months ended March 31, 1997. The
decrease was primarily the result of an increase in salary and benefits
resulting from ongoing expansion of business and staff levels at Varsity
Mortgage and Varsity Funding, which was more than offset by decreases in other
operating expenses, primarily due to cost containment efforts at the Bank.
Non-interest operating expense for the parent company only increased to
$66,557 for the three month 1998 period from $36,091 for the 1997 period. Public
listing expenses and other miscellaneous expenses were lower, but more than
offset by the annual ESOP benefit expense, which in 1998 was expensed in the
first quarter and not the second quarter as it was in 1997.
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. At March 31, 1998, the Bank was well capitalized (the required ratio for
"well capitalized" was 5% of total assets (Leverage), 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, and borrowings from correspondent lenders secured by securities and/or
residential mortgage loans. In addition, the Bank invests in overnight Federal
Funds. At March 31, 1998, the bank had cash and due from banks and fed funds on
hand of $8,997,786. The Bank has an unused $5,000,000 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.
21
University Bank
Risk Adjusted Assets & Risk Adjusted Capital Ratio
March 31, 1998
Balance Risk Weighted
0% RISK CATEGORY Sheet (000) Assets (000)
Mort-Backed Sec Guaran by GNMA 3 --
Currency & Coin 201 --
Federal Reserve Balance 50 --
-----------------------------
Total 254 --
20% RISK CATEGORY
Interest-bearing Balances 61 12
Fed Funds Sold 7,181 1,436
U.S. Gov't sponsored Agency Sec 1,033 207
Other Mortgage-Back Securities -- --
Cash Items 323 65
FHLB Stock 848 170
Balances due from depository Inst 1,182 236
-----------------------------
Total 10,628 2,126
50% RISK CATEGORY
Qualifying 1st liens on 1-4 family 33,016 16,508
-----------------------------
Total 33,016 16,508
100% RISK CATEGORY
All other Assets 21,782 21,782
On Balance Sheet Items Excluded from Calculation 135
Total Assets 65,815 40,416
=============================
TIER 1 CAPITAL Balance
Common Stock 200
Surplus 4,262
Undivided Profits & Capital Reserves (368)
Minority Interest 201
Other identifiable Intangible Assets (135)
Unrealized loss on Securities (15)
Total Tier 1 Capital 4,145
TIER 2 CAPITAL
Allowance for loans & Lease losses 547
Excess LLR (limited to 1.25% gross risk-
weighted assets (42)
Total Tier 2 Capital 505
TOTAL TIER 1 & TIER 2 CAPITAL 4,650
TIER 1/TOTAL ASSETS 6.30%
TIER 1 & 2/TOTAL ASSETS 7.07%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 10.26%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 11.51%
22
22
Parent Company Liquidity. At year-end 1997, University Bancorp, Inc. held
cash, marketable equity securities of $123,180. Including the proceeds of a
pending security sale, this increased by $48,239 to $171,419 at March 31, 1998.
The increase in cash and marketable equity securities was due to the realization
of a capital gain on the Company's securities available for sale.
During the three months ended March 31, 1998 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 $922,688 at both March 31, 1998 and at
December 31, 1997. The NCB&T note calls for principal payments of $33,000 per
quarter beginning May 15, 1998. Management believes that the cash and securities
on hand and federal tax refunds receivable are currently sufficient to cover
expected required principal reductions during 1998 on the holding company's
loan.
Impact of Inflation
The primary impact of inflation on the Company's operations is reflected in
increased operating costs. Since the assets and liabilities of the Company are
primarily monetary in nature, changes in interest rates have a more significant
impact on the Company's performance than the general effects of inflation.
However, to the extent that inflation affects interest rates, it also affects
the net income of the Company.
Falling long term and short term interest rates tend to decrease the value
of the Bank's and Midwest Loan Services' investment in mortgage servicing rights
and decrease the Bank's and Midwest Loan Services' current return on such rights
by increasing required amortization rates on the rights. Falling long and short
term interest rates also decreases origination activity at Varsity Funding as
residential lenders focus on refinancing activity rather than borrowers who need
alternative sources of funding outside of traditional secondary market loans.
However, falling interest rates tends to increase new mortgage origination
activity, positively impacting current income from the Bank's retail mortgage
banking operations and Varsity Mortgage's operations. Falling interest rates
also increases Midwest Loan Services' rate of growth, but decreases the duration
of its existing subservicing contracts. The table on page 23 details the Bank's
asset/liability sensitivity as of March 31, 1998.
23
UNIVERSITY BANK 23
Asset/Liability Position Analysis 03/31/98
($ in 000's)
Maturing or Repricing in
3 Mos 91 Days to 1 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years OTHERS TOTAL
------ ------- ------ ----- ----- ------ -----
Fed Funds 7,181 0 0 0 0 7,181
Loans (1) 2,357 4,153 6,730 2,626 0 15,866
Canadian Investments 0 0 0 0 0 0
Securities Available for Sale 1,042 0 3 850 0 1,895
Securities held for Sale 0 0 0 0 0 0
Loans held for Sale 20,883 0 0 0 0 20,883
Matured Loans 509 0 0 0 0 509
Variable Rate Loans 9,635 0 0 0 0 9,635
Other Assets 0 1,674 0 3,336 0 5,010
Fixed Assets 0 0 0 1,929 0 1,929
Cash and Due from Banks 0 249 0 1,562 0 1,811
Overdrafts 146 0 0 0 0 146
Non-Accrual Loans 0 0 0 432 0 432
Discount FHA Title 1 0 0 0 0 0 0
Valuation Adjustment 0 0 0 0 0 0
------- ------- ------- ------- ------- -------
TOTAL ASSETS 41,753 6,076 6,733 10,735 0 65,297
LIABILITIES
CD's over $100,000 5,739 9,025 866 0 0 15,630
CD's under $100,000 1,609 7,803 2,979 55 0 12,446
MMDA 12,823 0 0 0 0 12,823
NOW 3,250 0 0 0 0 3,250
Demand 0 72 0 2,521 0 2,593
Savings 0 128 0 0 0 128
Canadian Savings 0 28 0 0 0 28
Other Liabilities 0 14,504 0 363 0 14,867
Borrowings 0 0 0 0 0 0
Equity 0 0 0 3,532 0 3,532
------- ------- ------- ------- ------- -------
TOTAL LIABILITIES 23,421 31,560 3,845 6,471 0 65,297
GAP 18,332 (25,484) 2,888 4,264 0
CUMULATIVE
GAP 18,332 (7,152) (4,264) 0 0
GAP
PERCENTAGE 28.07% -10.95% -6.53% 0.00% 0.00%
Notes:
(1) Net of bad debt reserves.
24
24
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. follows:
25
UNIVERSITY BANCORP, INC. (The Parent) 25
Condensed Balance Sheets
March 31, 1998 and December 31,1997
(Unaudited)
March 31, December 31,
1998 1997
---------- -----------
ASSETS
Cash and cash equivalents $ 60,496 $ 41,676
Securities available for sale 168 81,504
Michigan BIDCO senior debentures 200,631 200,916
Investment in subsidiary Bank 4,084,353 3,958,927
Other Assets 960,004 879,328
---------- ----------
Total Assets $5,305,652 $5,162,351
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 922,688 $ 922,688
Accounts payable and other liabilities 851,207 841,219
---------- ----------
Total Liabilities 1,773,895 1,763,907
Stockholders Equity 3,531,757 3,398,444
---------- ----------
Total Liabilities and Stockholders Equity $5,305,652 $5,162,351
========== ==========
26
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 26
Condensed Statements of Operations and Comprehensive Income
For the Three Month Periods Ended March 31, 1998, 1997
(Unaudited)
1998 1997
--------- ---------
Income:
Dividends from subsidiary -- $ --
Securities Gain 66,660 26,066
Other $ (100) 1,572
--------- ---------
Total Income 66,560 27,638
Expense:
Interest 20,898 23,408
Public Listing Expense 7,906 2,453
Benefits 54,695 --
Legal/Accounting 2,548 15,678
Other 1,408 17,960
--------- ---------
Total Expense 87,455 59,499
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (20,895) (31,861)
Federal income taxes (benefit) 0 (8,800)
--------- ---------
Income (loss) before equity in
undistributed net income of subsidiaries (20,895) (23,061)
Equity in undistributed net income (loss)
of subsidiaries 127,655 147,695
--------- ---------
Net Income $ 106,760 $ 124,634
========= =========
Comprehensive Income $ 79,870 $ 129,495
========= =========
Net Income per Common Share
Basic $ 0.05 $ 0.07
========= =========
Diluted $ 0.05 $ 0.07
========= =========
27
UNIVERSITY BANCORP, INC. (The Parent) 27
Condensed Statement of Cash Flows
For the Three Month Periods Ended March 31, 1998 and 1997
1998 1997
--------- ---------
Reconciliation of net income (loss) to net cash used in operating
activities:
Net Income (Loss) $ 106,760 $ 124,634
Loss(gain) on sale of investments (66,660) (23,066)
Decrease/(increase) in receivable from affiliate 21,215 0
Decrease/(increase) in Other Assets (101,890) (4,191)
Increase(Decrease) in interest payable 13,328 4,896
Increase(Decrease) in other liabilities 7,008 26,385
Decrease(Increase) investment in subsidiaries (125,141) (147,411)
--------- ---------
Net cash provided by (used in) operating activities (145,380) (18,753)
--------- ---------
Cash flow from investing activities:
Subsidiary dividends received 0 0
Contributions of capital to subsidiary 0 0
Advances to Michigan BIDCO 0 0
Purchase of available for sale securities 0 (53,309)
Proceeds from sale of available for sale securities 110,755 71,070
--------- ---------
Net cash provided by (used in) investing activities 110,755 17,761
--------- ---------
Cash flow from financing activities:
Principal payment on notes payable 0 (12,500)
Proceeds from sale of common stock 53,445 135,000
Purchase of treasury stock 0 0
--------- ---------
Net cash provided by (used in) financing activities 53,445 122,500
--------- ---------
Net changes in cash and cash equivalents 18,820 121,508
Cash and cash equivalents:
Beginning of year 41,676 41,113
--------- ---------
End of period $ 60,496 $ 162,621
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 11,532 $ 9,331
28
28
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11. Computation of Per Share Earnings.
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 14, 1998 /s/ Donald F. Rositano
-------------------------
Donald F. Rositano
Chief Financial Officer
(On behalf of the registrant
and as
Principal Financial Officer)
29
29
Exhibit Index
------------- Sequentially
Numbered
Page
------------
11. Computation of per share earnings
27. Financial Data Schedule