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, 1999
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, $0.01 par value Outstanding at May 12, 1999
1,989,139 shares
page 1 of 29 pages
Exhibit index on sequentially numbered page 28
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FORM 10-Q
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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 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
PART II - Other Information
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Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 5. Other Information
Parent Company Condensed
Financial Information 23
Item 6. Exhibits & Reports on Form 8-K 27
Signature 27
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Exhibit Index 28
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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 3
Item 1.- Financial Statements
UNIVERSITY BANCORP, INC.
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
March 31, December 31,
ASSETS 1999 1998
------------ ------------
Cash and due from banks $ 1,329,852 $ 703,015
Short term investments 2,417,784 8,543,000
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Total cash and cash equivalents 3,747,636 9,246,015
Securities available for sale at market 2,239,630 2,945,832
Federal Home Loan Bank Stock 848,400 848,400
Michigan Bidco equity security investments 459,532 -
Loans held for sale 13,911,841 11,862,665
Loans 25,189,158 23,652,103
Allowance for Loan Loss (496,706) (459,001)
------------ ------------
Loans, net 24,692,452 23,193,102
Premises and equipment 1,448,832 1,439,440
Mortgage servicing rights 800,629 948,208
Investment in and advances to
Michigan BIDCO - 725,733
Other real estate owned 506,841 707,730
Net tax assets 144,999 377,088
Accounts receivable 496,380 1,198,661
Other assets 1,848,311 1,042,684
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TOTAL ASSETS $ 51,145,484 $ 54,535,558
============ ============
-Continued-
4
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 4
Consolidated Balance Sheets (continued)
March 31, 1999 and December 31, 1998
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------ ------------
Liabilities
Deposits:
Demand - non interest bearing $ 2,116,724 $ 1,801,347
Demand - interest bearing 15,074,280 16,373,832
Savings 190,153 177,093
Time 18,228,089 24,867,369
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Total Deposits 35,609,246 43,219,641
Mortgage escrow 134,051 140,673
Short term borrowings 277,000 277,000
Long term borrowings 4,428,357 1,196,097
Deferred noncompete income 23,317 32,068
Drafts payable 6,469,526 5,065,281
Accounts payable 320,629 744,928
Accrued interest payable 309,876 415,060
Other Liabilities 250,800 157,081
------------ ------------
Total Liabilities 47,822,800 51,247,829
Minority Interest 385,778 204,949
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
Issued - 0 shares in both 1999 and 1998 - -
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
Issued - 2,104,323 shares in 1999
and 2,104,323 shares in 1998 21,043 21,043
Treasury Stock - 115,184 shares in 1999
and 115,184 in 1998 (340,530) (340,530)
Additional Paid-in-Capital 3,736,463 3,539,474
Retained earnings (deficit) (239,558) (16,500)
Net unrealized gain/(loss) on securities
available for sale, net of tax
of $124,141 in 1999, and
$62,182 in 1998 (240,514) (120,707)
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Total Stockholders' equity 2,936,905 3,082,780
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 51,145,484 $ 54,535,558
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
5
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 5
Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
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Interest income:
Interest and fees on loans $ 783,563 $1,028,350
Interest on securities:
U.S. Government agencies 33,739 15,032
Other securities 18,535 16,736
Interest on bank deposits 505 2,676
Interest on federal funds 48,250 27,877
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Total interest income 884,593 1,090,671
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Interest expense:
Interest on deposits:
Demand deposits 164,383 201,018
Savings deposits 1,122 913
Time certificates of deposit 315,263 380,518
Bank and other short term borrowings 2,482 32,279
Long Term Notes Payable 17,100 20,898
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Total interest expense 500,351 635,626
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Net interest income 384,242 455,045
Provision for loan losses 22,500 22,500
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Net interest income after
provision for loan losses 361,742 432,545
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Other income:
Net security gains(losses) (23,009) 66,660
Service charges and fees 13,518 8,418
Mortgage banking income 732,412 1,126,236
Profit(loss) from equity investment in
Michigan BIDCO 2,690 40,564
Insurance and investment fee income 19,387 12,036
Other 47,565 15,542
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Total other income 792,564 1,269,456
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-Continued-
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UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 6
Consolidated Statements of Operations (continued)
For the Three Month Periods Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
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Salaries and wages $ 726,000 $ 865,973
Employee benefits 136,283 181,538
Occupancy, net 101,589 111,548
Taxes other than income (7,740) (15,580)
Data processing and equipment expense 85,668 76,163
Correspondent bank service charges 3,311 5,118
Advertising 41,849 24,192
Net expense of other real estate owned 8,487 1,161
Legal and audit expense 66,789 82,954
Other operating expenses 226,328 300,905
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Total other expenses 1,388,564 1,633,974
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Income (Loss) before income taxes (234,257) 68,027
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Income taxes (benefit) (11,200) (38,734)
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Net Income $ (223,057) $ 106,760
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Comprehensive Income $ (178,873) $ 103,386
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Earnings (loss) per common share
Primary $ (0.11) $ 0.05
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Fully Diluted $ (0.11) $ 0.05
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Weighted average shares outstanding
Primary 1,989,139 1,984,896
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Fully Diluted 1,989,139 1,984,896
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7
UNIVERSITY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements of Cash Flows
For the three-month periods ended March 31, 1999 and 1998
(Unaudited)
1999 1998
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Cash flow from operating activities:
Net income (loss) $ (223,058) $ 106,760
Adjustments to reconcile net loss to net cash from Operating Activities:
Depreciation and amortization 88,809 144,247
Provision for loan loss 22,500 22,500
Mortgage loans originated for sale (98,991,412) (189,978,757)
Proceeds from sale of loans and mortgage backed trading securities 97,362,666 187,981,802
Net loss/(gain) on loan sales and securitization (419,862) (723,252)
Market adjustment on loans held for sale (569) (2,980)
Net amortization/accretion on securities (18,918) 352
Loss/(Gain) on sale of securities available for sale 18,029 (66,660)
Change in:
Investment in Michigan BIDCO, Inc. 725,733 (39,793)
Purchased Mortgage Servicing Rights 119,019 -
Other real estate 200,889 (569,900)
Increase in other assets 128,743 635,298
Increase/(Decrease) in other liabilities 1,021,689 4,534,613
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Net cash from (used in) operating activities $ 34,258 $ 2,044,230
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Cash flow from investing activities:
Purchase of securities available for sale - -
Proceeds from sales of securities available for sale 31,971 110,755
Proceeds from maturities and paydowns of securites available for sale 33,821 22,171
Loans granted net of repayments (1,521,850) 1,102,736
Premises and equipment expenditures (69,641) (38,587)
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Net cash from (used in) investing activities (1,525,699) 1,197,075
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Cash flow used in financing activities:
Net increase (decrease) in deposits (7,610,395) 1,342,710
Net increase(decrease) in mortgage escrow accounts (6,621) 200,616
Net increase (decrease) in other short term borrowings (33,000) 1,919,386
Net increase (decrease) in other long term borrowings 3,265,260 (136,635)
Increase in minority interest 180,829 0
Addition to paid-in-capital 196,989 0
Issuance of common stock 0 53,445
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Net cash from financing activities (4,006,938) 3,379,522
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Net change in cash and cash equivalents (5,498,379) 6,620,827
Cash and cash equivalents:
Beginning of period 9,246,015 2,376,959
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End of period $ 3,747,636 $ 8,997,786
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Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 500,351 $ 703,984
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UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See note 1 of Notes to Financial Statements incorporated by reference
in the Company's 1998 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 1998 Annual Report on Form 10-K. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year.
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 1,984,896 and
1,984,896 for the three months ended March 31, 1999 and 1998, respectively.
Stock options are considered not dilutive for the 1999 period and, therefore,
are not included in earnings per share calculations.
(2) Available-for-sale Securities
The Bank's available-for-sale securities portfolio at March 31, 1999
had a net unrealized loss of approximately $365,000 as compared with a net
unrealized loss of approximately $183,000 at December 31, 1998, a decrease of
$182,000.
Securities available for sale
March 31, 1999
------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
U.S. Treasury 480 - (84) 396
U.S. agency mortgage-backed 2,197 7 (306) 1,898
Other agency mortgage-backed 387 18 - 405
U.S. agency equity 848 - - 848
Total investment securities
available for sale $3,912 $ 25 $ (390) $3,547
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9
Securities available-for-sale (continued) 9
December 31, 1998
------------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
U.S. Treasury $ 467 $ - $ (25) $ 442
U.S. agency mortgage-backed 2,191 4 (136) 2,059
Other mortgage-backed 421 4 - 425
U.S. agency equity 848 - - 848
Other equity 50 (30) 20
Total securities
available for sale $3,977 $ 8 $ (191) $3,794
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains certain forward looking statements which reflect
the Company's expectation or belief concerning future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
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, 1998, 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, 1999, a net loss of $223,057 was
realized versus net income of $106,760 in the same period in 1998. Net interest
income decreased to $384,242 in the 1999 period from $455,044 in the 1998
period, and other income was $792,564 in the 1999 period versus $1,269,456 in
the 1998 period. Operating expenses decreased to $1,388,564 in the 1999 period
from $1,633,974 in the 1998 period. Primary and fully diluted net loss per share
in the three months ended March 31, 1999 was ($0.11), compared to net income of
$0.05 for the three months ended March 31, 1998.
The loss in 1999 versus 1998 was principally due to decreased fee based
income and decreased net interest income as a result of decreased profitability
from the Bank's mortgage banking subsidiaries. Of note, the Company's paid in
capital increased by $196,989 during the 1999
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period as a result of the buy-out of certain minority shareholders of Michigan
BIDCO on March 31, 1999 at a discount to current book value. Pursuant to the
GAAP accounting treatment of this transaction, the Company booked an after-tax
loss of $13,427 and did not book the $196,989 as income.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the three months ended March 31, 1999 and 1998 (in
thousands):
THREE MONTHS ENDED MARCH 31, 1999 PRE-TAX INCOME (LOSS) SUMMARY
Banking
Community & mortgage banking $(266)
Midwest Loan Services (23)
Varsity Mortgage 102
Equity in the earnings of Michigan BIDCO 3
Corporate Office (50)
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Total $(234)
THREE MONTHS ENDED MARCH 31, 1998 PRE-TAX INCOME (LOSS) SUMMARY
Banking
Community & mortgage banking $ (88)
Midwest Loan Services (0)
Varsity Mortgage & Varsity Funding 136
Equity in earnings of Michigan BIDCO 41
Corporate Office (21)
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Total $ 68
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.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased to $384,242 for the three months ended
March 31, 1999 from $455,044 for the three months ended March 31, 1998. Net
interest income fell from the year ago period because of a decrease in portfolio
loans (which was reversed subsequent to quarter-end) and a decrease in mortgage
banking loans held for sale due to lower mortgage banking activity. The yield on
interest earning assets decreased from 9.03% in the 1998 period to 8.32% in the
1999 period. The cost of interest bearing liabilities decreased from 5.63% in
the 1999 period to 5.12% in the 1998 period. Net interest income as a percentage
of total earning assets decreased from 3.77% to 3.62%, because of the decrease
in interest spread.
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11
Interest income
Interest income decreased to $884,593 in the quarter ended March 31,
1999 from $1,090,671 in the quarter ended March 31, 1998. The average volume of
interest earning assets decreased to $43,094,933 in the 1999 period from
$48,982,763 in the 1998 period, a decrease of 12.0%. The decreased volume of
earning assets was due to a decrease in loans. Interest income also decreased
because of a decrease in the yield on earning assets. The overall yield on the
loan portfolio decreased to 8.32% from 9.03%.
The average volume of investment securities in the three months ended
March 31, 1999 increased 44.1% over the same period in 1999, as the Bank took a
position in long term bonds to shift its overall interest rate exposure to
increase the duration of assets. The yield on the securities portfolio increased
to 7.03% in the three month period ended March 31, 1999 from 6.59% in the 1998
period.
Interest Expense
Interest expense decreased to $500,351 in the three months ended March
31, 1999 from $635,626 in the 1998 period. The decrease was due to a decrease in
interest bearing liabilities as a result of decreased total deposits and
decreased borrowed funds and a decrease in rates paid on deposits and borrowed
funds. The decrease in rates was due to increased retail deposits (which
typically have lower rates) and decreased wholesale deposits. The cost of funds
decreased to 5.12% in the 1999 period from 5.63% in the 1998 period. The average
volume of interest bearing liabilities decreased 13.3% in the 1999 period versus
the 1998 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, 1999 and 1998.
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12
Three Months Ended March 31,
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1999 1998
---------- --------- ------- ------------ ---------- -------
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 $ 88,802 $ 505 2.31% $ 28,181 $ 440 6.33%
Federal Funds Sold $ 4,156,072 48,250 4.71% 1,797,279 27,877 6.29%
Securities:
Non-taxable(1) - - - - - -
Taxable 3,014,526 52,275 7.03% 2,091,514 34,004 6.59%
------------ ---------- ------- ----------- ---------- -------
Total Securities 7,259,400 101,030 5.64% 3,916,974 62,321 6.45%
------------ ---------- ------- ----------- ---------- -------
Loans:
Commercial 9,783,266 232,579 9.64% 12,752,842 349,730 11.12%
Real Estate Mortgage 24,839,610 519,179 8.48% 27,506,984 557,588 8.22%
Installment/Consumer 1,212,657 31,805 10.64% 4,805,963 121,032 10.21%
------------ ---------- ------- ----------- ---------- -------
Total Loans 35,835,533 783,563 8.87% 45,065,789 1,028,350 9.25%
------------ ---------- ------- ----------- ---------- -------
Total Interest Bearing Assets 43,094,933 884,593 8.32% 48,982,763 1,090,671 9.03%
------------ ---------- ------- ----------- ---------- -------
Less allowance for possible
loan losses & deferred fees (440,382) (527,359)
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42,654,551 48,455,404
Mortgage servicing rights 874,419 1,395,585
Non earning assets 8,803,032 18,802,332
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Total Assets $ 53,332,002 $68,653,321
============ ===========
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 3,289,254 $ 25,459 3.14% $ 3,354,392 $ 33,319 4.03%
Savings 183,346 1,122 2.48% 113,532 704 2.51%
Canadian Dollar Savings 0 0 0.00% 38,919 209 2.18%
Time 22,052,300 315,263 5.80% 25,426,376 380,518 6.07%
Borrowed Funds 192,975 2,482 5.22% 2,006,299 32,279 6.52%
Money Market Accounts 13,123,532 138,924 4.29% 13,896,831 167,699 4.89%
Holding Company Debt 809,867 17,100 8.56% 922,688 20,898 9.19%
------------ ---------- ------- ----------- ---------- -------
Total interest bearing
liabilities $ 39,651,274 500,351 5.12% $45,759,037 635,626 5.63%
============ ========== ======= =========== ========== =======
Net interest income $ 384,242 $ 455,044
========== ==========
Weighted average rate spread 3.21% 3.40%
====== =======
Net yield on average earning
assets 3.62% 3.77%
(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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13
Allowance for Loan Losses
The monthly allowance for loan loss remained at a rate of $7,500 in the
first quarter of 1999. With the allowance currently above the 2% ratio target,
management is monitoring the growth of new portfolio loans originated by the
Bank. Portfolio loan growth in the second quarter of 1999 has been strong (an
increase of over $1,600,000 to date). If the amount of portfolio loans does not
continue to increase from current levels, the monthly allowance may be
discontinued until the ratio falls under 2% to a level management believes would
be appropriate for the size of the portfolio. The actual loan losses were zero
in the three month period ended March 31, 1999 versus $5,556 in the three month
period ended March 31, 1998.
Three Months Ended
March 31
1999 1998
-----------------------------------------
Provision for loan losses 22,500 22,500
Loan charge-offs ( 0) ( 5,556)
Recoveries 15,205 9,407
Net increase (decrease) -------- -------
in allowance 37,705 26,351
At At
March 31, 1999 December 31, 1998
-----------------------------------------
Total loans (1) 22,755,421 23,652,103
Reserve for loan losses 496,706 459,001
Reserve/Loans (1), % 2.18% 1.94%
(1) Excludes loans held for sale and Michigan BIDCO loans which are valued at
fair market value net of specific required reserves.
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14
The following schedule summarizes the Company's nonperforming loans for
the periods indicated (1):
At At
March 31, 1999 December 31, 1998
-----------------------------------
Past due 90 days and over
and still accruing:
Real estate 8,065 4,430
Installment - -
Commercial - -
------- ---------
Subtotal 8,065 4,430
Nonaccrual loans:
Real estate 466,527 467,402
Installment - -
Commercial - -
------- ---------
Subtotal 466,527 467,402
Other real estate owned 506,841 707,730
------- -------
Total 981,433 1,179,562
As % of loans (1) 3.90% 4.99%
Ratio of reserve for loan
losses to all loans
90 days and over 104.7% 97.3%
(1) Excludes loans held for sale and Michigan BIDCO loans which are valued at
fair market value net of specific required reserves.
Other real estate owned at March 31, 1999 and December 31, 1998
includes a commercial development site in Sault Ste. Marie, Michigan. Based upon
a recent appraisal, management believes the 16-acre site where a former loan
office is located has a fair market value substantially more than its carrying
cost as of March 31, 1999 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. The carrying period for the property expires during the
second quarter and the asset may not be able to be carried on the Bank's books
for regulatory capital calculation purposes as a result. There is no assurance
that a sale of the property will be consummated. If written off, this may or may
not affect the Bank's "well-capitalized" status, depending upon other actions
that management takes in response. See below, "Liquidity and Capital Resources".
The Bank's loan portfolio continues to have very low delinquencies
other than residential real estate properties. With the exception of one
commercial real estate building carried at $3,000, the other real estate owned,
other than the property mentioned above, is 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 which
is carried at cost.
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15
Economic conditions in the Bank's primary market area in Ann Arbor were
strong in the period. Management believes that the current 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 $792,564 for the three months
ended March 31, 1999 from $1,269,456 for the three months ended March 31, 1998.
The decrease was principally a result of a $393,824 decrease in the Bank's
mortgage banking income, net securities losses versus gains, and the BIDCO
acquisition transaction, which reduced the BIDCO's income contribution during
the quarter under the GAAP accounting treatment of the transaction.
Securities. During the three months ended March 31, 1999, there were no
securities sales from the Bank's available-for-sale securities portfolio. During
the first quarter of 1999, the Company realized a $23,009 loss on the sale of
the Company's investment in AmTec (AMEX-ATC) to raise working capital. Gross
proceeds from this sale were $32,049.
Mortgage Banking. Mortgage banking income decreased to $732,412 in the
three months ended March 31, 1999 from $1,126,236 in the three months ended
March 31, 1998. Sharply decreased loan purchase and origination volumes during
the 1999 period as well as the absence of a $100,000 gain on sale of
participation certificates in sub-performing home equity loans previously
purchased from the RTC were responsible for the drop.
At March 31, 1999, the Bank and its subsidiaries owned the right to
service mortgages for FHLMC, FNMA and others, most of which was owned by Midwest
Loan Services, and the remainder by the Bank. The carrying value is currently
$800,629, including approx. $100,000 receivable from the Bank's recent sale of
the remainder of its 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
approximates cost. Market interest rate conditions can quickly affect the value
of mortgage servicing rights in a positive or negative fashion, as long term
interest rates rise and fall.
At March 31, 1999, the Bank had outstanding purchase commitments to buy
single family FNMA and FHLMC qualifying mortgage loans of $25,752,050 and
outstanding forward commitments to deliver FNMA and FHLMC loans of $20,478,250,
substantially all of which commitments were for delivery within three months or
less.
16
16
Michigan BIDCO. The Company received permission from the Michigan
Financial Institutions Bureau for the BIDCO to repurchase the shares and
convertible bonds held by certain minority shareholders of the BIDCO. The shares
were repurchased on March 31, 1999 and the bonds in mid-April. As a result of
the transaction, the Company's ownership of the BIDCO increased to 80.1% from
44.1%, and the BIDCO became part of the Company's tax filing group for federal
income tax purposes. As a result, certain deferred tax assets are expected to be
realized during 1999, as the BIDCO's taxable income is offset by the Company's
net operating tax loss carryforward. Since the purchase price for the shares was
at a discount to the BIDCO's per share book value, the transaction generated an
immediate increase in the Company's paid-in-capital of $196,989 during the 1999
period. However, pursuant to the GAAP accounting treatment of this transaction,
the Company booked an after-tax loss of $13,427 and did not book the $196,989 as
income.
For the three months ended March 31, 1999 and 1998, the Bank's 44.1%
equity share in the earnings of the BIDCO's reported net income was $2,690 and
$40,564, respectively. Income for the 1999 first quarter was negatively impacted
by the charge noted above as a result of the buy-out of the minority
shareholders. During the 1999 period, the Company converted $27,000 of Michigan
BIDCO convertible bonds into 18 shares of Michigan BIDCO common stock, pursuant
to the terms of the bonds.
Effective March 31, 1999, the Company owns 298 shares of common stock
in the BIDCO, currently representing a 80.1% equity interest. The Company's
consolidated fully diluted ownership in the BIDCO is 28.6%, after considering
the impact of convertible bonds. As a result of the buy-out of the minority
shareholders, a total of $1,850,000 in 9% convertible bonds were retired by the
BIDCO from cash on hand which had been on deposit at the Bank earning an average
rate of 4%. The elimination of this negative interest rate spread is expected to
improve the BIDCO's net interest margin by over $90,000 per year going forward,
although there is no assurance that the BIDCO will have such increased earnings.
During the three months ended March 31, 1999, the BIDCO made no new
investments, although its equity interest in the Tissue Paper Mill was sold in
exchange for a fully amortizing 15 month loan for $750,000, resulting in a
realized gain of $500,000. This transaction did not result in a gain or loss for
GAAP accounting purposes since the Company was carrying the stock at 12/31/98 at
the estimated fair value of $750,000.
Non-Interest Expense
Non-interest expense decreased to $1,388,564 in the three months ended
March 31, 1999 from $1,633,974 for the three months ended March 31, 1998. The
decrease was primarily the result of expense control at the Bank and decreased
profit sharing wages due to the lower profits at Varsity Mortgage.
Non-interest operating expense for the parent company only decreased to
$12,293 for the three month 1999 period from $66,558 for
17
17
the 1998 period. Expenses for the 1998 period included a $53,479 expense for the
1998 ESOP contribution. The 1999 ESOP expense will be booked in the second
quarter this year, since the calculations of the plan administrator are not yet
completed.
Year 2000 Readiness. The following statements are Year 2000 Readiness
Disclosures for purposes of the Federal Year 2000 Information and Readiness
Disclosure Act, and you are entitled to protection in accordance with that act.
The Year 2000 issue concerns the potential impact of computer software code that
only utilizes two digits to represent the calendar year (e.g. "99" for "1999").
Software of this type, if not corrected, could produce inaccurate or
unpredictable results at any time, and especially after January 1, 2000, when
current and future dates have a lower two digit year number than dates in this
century. The Company, similar to most financial services providers, is
significantly subject to the potential of the Year 2000 issue due, among other
matters, to the nature of financial information. Potential impacts to the
Company may arise from software, computer hardware, and other equipment both
within the Company's direct control and outside of the Company's ownership, yet
with which the Company electronically or operationally interfaces. Financial
institution regulators have focused intensively on Year 2000 exposures in the
institutions they regulate, issuing guidance concerning the responsibilities of
senior management and directors. Year 2000 testing and certification is being
addressed as a key safety and soundness issue in conjunction with regulatory
exams. The failure to implement an adequate Year 2000 program can be identified
as an unsafe and unsound banking practice.
In order to address the Year 2000 issue, the Bank has formed a Year 2000
coordination committee with key members of management from the Bank and each
operating subsidiary and appointed its Compliance Officer as Year 2000
Coordinator. The Bank and Midwest rely on mainframe computers, which are IBM A/S
400s, and are tested as Year 2000 compliant. The Bank's main bank software
application is a product of Peerless Group, which has also been upgraded to a
Year 2000 compliant version which has been tested as Year 2000 compliant.
Midwest's main application software is LSAMS servicing software which has been
upgraded to a Year 2000 compliant version which has been tested as Year 2000
compliant. The Bank, Varsity Mortgage and Varsity Funding also rely on Novell
Local Area Networks, which have been upgraded to a Year 2000 certified version
of Novell Local Area Network software, which has also been tested as Year 2000
compliant. All PC systems and PC software at the Bank and its subsidiaries have
been tested and as Year 2000 compliant.
Approximately all of the $93,000 Year 2000 readiness budget has been spent
in the process of upgrading and certifying the systems as being Year 2000
compliant. The bulk of the Year 2000 budget was allocated to capital
expenditures for software upgrades for software updates and hardware updates and
Year 2000 testing which was expensed in 1998. At this point in time, the Company
and its subsidiaries have renovated and tested as Year 2000 compliant all
systems identified as mission critical. The focus of the Company's Year 2000
effort is now
18
18
shifting towards less critical systems and contingency planning to deal with
unforseen events external to the Company. Actual and budgeted Year 2000
readiness costs do not include the implicit costs associated with the
reallocation of internal staff hours to Year 2000 readiness related efforts.
These costs are not included because the Bank does not separately track those
expenses. Budgeted costs also do not include normal ongoing costs for computer
hardware and software that would be replaced even without the presence of the
Year 2000 issue in conjunction with the Company's ongoing programs for updating
its infrastructure. Additional Year 2000 costs may be incurred as the Company
progresses in its Year 2000 program and obtains additional information and
conducts further testing regarding the Year 2000 readiness of third parties.
The Company has communicated and will continue to communicate with various
significant suppliers and major borrowers and customers to determine the extent
to which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company is requesting that such third party
vendors indicate whether their products and services are Year 2000 compliant,
whether they have a program to test for that compliance, and the status of the
program. However, the activities of third parties in responding to the Year 2000
issue is beyond the control of the Company.
Despite the Company's activities to address the Year 2000 issue, there is no
assurance that certain mission critical vendors such as the Federal Reserve Bank
of Chicago, the Bank's correspondent banks (Bank One, the Federal Home Loan Bank
of Indianapolis and Associated Bank), the Bank's credit card processor
(Equifax), the Bank's ATM processor (Magic Line), or local power (Detroit Edison
Electric) and phone utilities (Ameritech and ATT) will be Year 2000 compliant by
year-end 1999, and if not this could have a material adverse effect on the
Company's operations, and the Company's borrowers and customers. There can also
be no assurance that partial or total systems interruptions or the costs
necessary to implement contingency plans, or Year 2000 systems failures
affecting borrowers, customers or third party vendors would not have a material
adverse effect on the Company's operations and business prospects. Further, the
Company cannot estimate the additional cost, if any, of implementing any such
contingency plan.
The Bank has evaluated the Year 2000 readiness of its major borrowers and
determined that it has a below average risk (relative to its peer group) from
Year 2000 related potential loan losses, due to its primary focus on real estate
secured lending. All business loans and loan renewals by the Bank are being
evaluated in the context of the Year 2000 readiness of each business. However,
it is impossible for the Company to know with any certainty that the Bank or its
subsidiaries will not sustain Year 2000 related credit losses, and whether or
not such losses would be material.
The Bank and its subsidiaries have established back-up contingency plans to
continue operations in the event of a Year 2000 systems failure, based on the
assumption that all mission critical computer systems are Year 2000 tested but
that non-traditional power sources may be required for a short period of time.
In addition, a final
19
19
contingency plan has been established to conduct manual operations using paper
forms until such time as a systems failure can be corrected. A full scale live
contingency plan test is currently planned to occur shortly. Management believes
that as a temporary measure, it is feasible with the volume of current activity
to continue operations in this manner, but there is no assurance that it is
possible or that the cost would not be material.
Internet Banking. With the substantial progress which has been made
towards preparing the Bank for the Year 2000 issue, management has set in motion
a project to add transactional internet banking for all bank products. The
internet banking product is expected to be available in production mode during
the third quarter of 1999. Implementation of the project, which has a capital
budget of approximately $100,000, will add ongoing depreciation and operating
expenses which are expected to be more than offset by the addition of the escrow
accounts controlled by Midwest Loan Services. These escrow deposit accounts are
currently held by another bank due to the inability of the Bank currently to
offer PC banking to Midwest to facilitate their daily operational needs.
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 March 31, 1999, the Bank was "well-capitalized" (the
required ratio for "well-capitalized" was 10% of total risk-based assets).
Long term borrowings at 3/31/99 included $2,973,000 face amount of
Michigan BIDCO's 9% convertible bonds due January 15, 2002. Subsequent to
quarter-end $1,850,000 of the bonds were repurchased by the BIDCO for
$1,966,304, leaving a balance of $1,123,000 outstanding. At March 31, 1999, the
BIDCO bonds were carried at fair market value of $3,089,304 (the premium to face
value was due to the bond repurchase transaction which occurred following
quarter-end.
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 March 31, 1999, the bank had cash and due from banks and fed funds on
hand of $3,747,636. The Bank has a $6,500,000 line of credit secured by
investment securities and portfolio mortgage loans. 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 March
31, 1999 from $24,867,369 to $18,228,089 was the result of a decrease of approx.
$5,000,000 in brokered time deposits and an overall decrease in retail time
deposits. Management is de-emphasizing
20
University Bank 20
Risk Adjusted Assets & Risk Adjusted Capital Ratio
31-Mar-99
Balance Risk Weighted
0% RISK CATEGORY Sheet (000) Assets (000)
Mort-Backed Sec Guaran by GNMA 1 -
Currency & Coin 295 -
US Treasury Strip 480 -
Federal Reserve Balance 26 -
------------------
TOTAL 802 -
20% RISK CATEGORY
Interest-bearing Balances 82 16
Fed Funds Sold 2,418 484
U.S. Gov't sponsored Agency Sec 2,582 516
Other Mortgage-Back Securities - -
Cash Items 484 97
FHLB Stock 848 170
Balances due from depository Inst 495 99
------
TOTAL 6,909 1,382
-----------------
50% RISK CATEGORY
Qualifying 1st liens on 1-4 family 22,102 11,051
------------------
TOTAL 22,102 11,051
100% RISK CATEGORY
ALL OTHER ASSETS 21,661 21,661
ON BALANCE SHEET ITEMS EXCLUDED FROM CALCULATION 80
TOTAL ASSETS 51,554 34,094
==================
TIER 1 CAPITAL Balance
Common Stock 200
Surplus 4,433
Undivided Profits & Capital Reserves (797)
Minority Interest 475
Other identifiable Intangible Assets (80)
TOTAL TIER 1 CAPITAL 4,231
TIER 2 CAPITAL
Allowance for loans & Lease losses 497
Excess LLR (limited to 1.25% gross risk-
weighted assets -
TOTAL TIER 2 CAPITAL 497
TOTAL TIER 1 & TIER 2 CAPITAL 4,728
TIER 1/TOTAL ASSETS 8.21%
TIER 1 & 2/TOTAL ASSETS 9.17%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 12.41%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 13.87%
21
21
brokered time deposits to decrease the cost of interest-earning liabilities. In
addition, management has lowered retail CD rates to reduce the overall cost of
funds.
Parent Company Liquidity. At year-end 1999, University Bancorp, Inc.
held cash and marketable equity securities of $37,882 (excluding Michigan BIDCO
common stock). This decreased by $84,125 to $122,007 at March 31, 1999. During
the three months ended March 31, 1999 no dividends were paid from the Bank, as a
result of low profitability at the Bank. In an effort to maintain the Bank's
Tier 1 capital to assets ratio above 7% and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during 1999. Management intends that the cash and securities on hand,
federal tax refunds receivable, and cash from the sale of common stock and the
exercise of stock options to be sufficient to cover the required principal
reductions during 1999 on the parent company's indebtedness owing to North
Country Bank & Trust ("NCB&T"). The NCB&T loans amounted to $793,000 and
$826,000 at March 31, 1999 and at December 31, 1998, respectively.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on such rights by lowering
required amortization rates on the rights. Rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the Bank's retail mortgage banking operations and Varsity Mortgage's
operations. Rising interest rates
22
UNIVERSITY BANK 22
Asset/Liability Position Analysis 3/31/99
($ 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 2,418 0 0 0 0 2,418
Loans (1) 2,471 4,038 7,290 2,061 0 15,860
Canadian Investments 0 0 0 0 0 0
Securities Available for Sale 890 0 1 3,021 0 3,912
Securities held for Sale 0 0 0 0 0 0
Loans held for Sale 13,912 0 0 0 0 13,912
Matured Loans 1,529 0 0 0 0 1,529
Variable Rate Loans 6,292 0 0 0 0 6,292
Other Assets 385 0 0 3,336 0 3,721
Fixed Assets 42 125 305 978 0 1,450
Cash and Due from Banks 0 0 0 1,287 0 1,287
Overdrafts 4 0 0 0 0 4
Non-Accrual Loans 0 0 0 897 0 897
Discount FHA Title 1 109 0 0 0 0 109
Valuation Adjustment 0 0 0 0 0 0
------ ------ ------- ------ ----- ------
TOTAL ASSETS 28,052 4,163 7,596 11,580 0 51,391
LIABILITIES
CD's over $100,000 1,374 6,965 766 0 0 9,105
CD's under $100,000 2,225 4,234 2,391 272 0 9,122
MMDA 11,882 0 0 0 0 11,882
NOW 3,194 0 0 0 0 3,194
Demand 553 0 0 1,698 0 2,251
Savings 0 191 0 0 0 191
Canadian Savings 0 0 0 0 0 0
Other Liabilities 0 2,609 2,609 363 0 5,581
Drafts Payable 6,470 0 0 0 0 6,470
Borrowings 0 0 0 0 0 0
Equity 0 0 0 3,595 0 3,595
------ ------ ------- ------ ----- ------
TOTAL LIABILITIES 25,698 13,999 5,766 5,928 0 51,391
GAP 2,354 (9,836) 1,830 5,652 0 0
CUMULATIVE
GAP 2,354 (7,482) (5,652) 0 0
GAP
PERCENTAGE 4.58% -14.56% -11.00% 0.00% 0.00%
Notes:
(1) Net of bad debt reserves.
23
23
also slow Midwest Loan Services' rate of growth, but increases the duration of
its existing subservicing contracts.
The Bank performs a static gap analysis which has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on page 22 details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at March 31, 1999. The table is based upon various assumptions of management
which may not necessarily reflect future experience. As a result, certain assets
and liabilities indicated in the table as maturing or re-pricing within a stated
period may, in fact, mature or re-price in other periods or at different
volumes. The one-year static gap position at March 31, 1999 was estimated to be
($7,482,000) or -14.56%:
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:
24
UNIVERSITY BANCORP, INC. (The Parent) 24
Condensed Balance Sheets
March 31, 1999 and December 31, 1998
(Unaudited)
March 31, December 31,
1999 1998
----------- -------------
ASSETS
Cash and cash equivalents $ 2,139 $ 33,702
Securities available for sale 233 20,328
Michigan BIDCO senior debentures 35,431 67,977
Michigan BIDCO common stock 53,442 -
Investment in subsidiary Bank 3,594,633 3,736,157
Tax Assets 67,129 78,890
Other Assets 4,755 2,458
------------ -------------
Total Assets $ 3,757,761 $ 3,939,512
============ =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Note payable $ 793,000 $ 826,000
Accounts payable 13,325 13,325
Accrued interest payable 14,531 15,654
Tax liabilities 0 0
------------ -------------
Total Liabilities 820,855 854,979
Stockholder's Equity 2,936,905 3,084,533
------------- -------------
Total Liabilities and Stockholder's Equity $ 3,757,761 $ 3,939,512
============= =============
25
UNIVERSITY BANCORP, INC. AND SUBSIDIARIES 25
Condensed Statements of Operations
For the Three Month Periods Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
----- -----
Income:
Dividends from subsidiary $ - $ -
Interest & dividends on investments 2,038 59
net security gains (23,009) 66,501
Other $ 0 0
---------- ---------
Total Income (20,971) 66,560
Expense:
Interest 17,100 20,898
Salaries & benefits 1,085 1,219
ESOP contributions 0 53,479
Public listing 2,380 7,906
Audit & legal 7,060 2,548
Other taxes 1,270 0
Occupancy & other miscellaneous 498 1,406
---------- ---------
Total Expense 23,393 87,456
Income (loss) before federal income taxes
(benefit) and equity in undistributed
net income (loss) of subsidiaries (50,364) (20,895)
Federal income taxes (benefit) 0 0
---------- ---------
Income (loss) before equity in
undistributed net income of subsidiaries (50,364) (20,895)
Equity in undistributed net income (loss)
of subsidiaries. (172,693) 127,655
---------- ---------
Net Income $ (223,057) $ 106,760
========== =========
Net Income per Common Share
Primary $ (0.11) $ 0.05
========== =========
Fully Diluted $ (0.11) $ 0.05
========== =========
26
UNIVERSITY BANCORP, INC. (The Parent) 26
Condensed Statement of Cash Flows
For the Three Month Periods Ended March 31, 1999 and 1998
1999 1998
--------- ---------
Reconciliation of net income (loss) to net cash used in
operating activities:
Net Income (Loss) $(223,057) $ 106,760
Loss(gain) on sale of investments 18,029 (66,660)
Decrease/(increase) in receivable from affiliate 0 21,215
Decrease/(increase) in Other Assets (2,297) (101,890)
Increase(Decrease) in interest payable (1,123) 13,328
Increase(Decrease) in other liabilities (11,761) 7,008
Decrease(Increase) investment in subsidiaries 1,821 (125,141)
Decrease(Increase) income tax receivable 11,761 (125,141)
--------- ---------
Net cash provided by (used in) operating activities (206,627) (270,521)
--------- ---------
Cash flow from investing activities:
Subsidiary dividends received 0 0
Contributions of capital to subsidiary 0 0
Advances to Michigan BIDCO (20,896) 0
Purchase of available for sale securities 0 0
Proceeds from sale of available for sale securities 31,971 110,755
--------- ---------
Net cash provided by (used in) investing activities 11,075 110,755
--------- ---------
Cash flow from financing activities:
Principal payment on notes payable (33,000) 0
Addition to paid-in-capital 196,989 0
Proceeds from sale of common stock 0 53,445
Purchase of treasury stock 0 0
--------- ---------
Net cash provided by (used in) financing activities 163,989 53,445
--------- ---------
Net changes in cash and cash equivalents (31,563) (106,321)
Cash and cash equivalents:
Beginning of year 33,702 41,676
--------- ---------
End of period $ 2,139 $ (64,645)
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 18,224 $ 11,532
27
27
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSITY BANCORP, INC.
Date: May 14, 1999 /s/ Stephen Lange Ranzini
-------------------------
Stephen Lange Ranzini
President & CEO and
Principal Financial Officer)
28
28
Exhibit Index
------------- Sequentially
Numbered
Page
------------
27. Financial Data Schedule