ITEM 1. - BUSINESS
General
University Bancorp, Inc. The Company is a Delaware corporation which operates as a bank holding company for its wholly-owned subsidiary, University Bank. The Company changed its name to `University Bancorp, Inc.' from `Newberry Bancorp, Inc.' in 1996, in order to better identify with the Bank.
University Bank. The Bank is a state chartered community bank. The Bank was chartered by the state of Michigan in 1908 and began business in 1890. In 1994, we sold the bank's offices in Newberry, Michigan and Sault Ste. Marie, Michigan. As part of a non-compete agreement with the purchaser of the bank's offices, we relocated the Bank's main office to the former offices of its mortgage operation in Sault Ste. Marie, Michigan. In 1995, the Bank changed its name from `The Newberry State Bank' to `University Bank' to more closely identify with its current place of business, Ann Arbor, Michigan. Ann Arbor is a university town, home to the University of Michigan and is the largest city in Washtenaw County, just west of the Detroit Metropolitan Statistical Area. The Bank's primary market area is defined as the City of Ann Arbor and surrounding areas in greater Washtenaw County.
Midwest Loan Services. In 1995, University Bank acquired 80% of the common stock of Midwest Loan Services. Midwest specializes in the servicing and subservicing of mortgage loans for various credit unions, financial institutions and mortgage brokers. Most of their servicing and subservicing portfolio is comprised of residential mortgage loans sold to Fannie Mae, Freddie Mac and other private residential mortgage conduits.
Varsity Funding. In 1995, University Bank established a mortgage-banking subsidiary, Varsity Funding, L.L.C. to specialize in the purchase and origination of impaired credit, or subprime quality, residential mortgages, for sale to non-U.S. government agency-backed mortgage conduits. In 1999, this subsidiary was sold to another financial institution and is no longer included with the current operations of the Bank.
Varsity Mortgage. In 1996, University Bank established Varsity Mortgage, L.L.C. to purchase residential home loans which generally qualify for sale to secondary market investors under the underwriting criteria of the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association from correspondents in Michigan and in adjacent states. In 1999, this subsidiary was sold to another financial institution and is no longer included with the current operations of the Bank.
Michigan BIDCO. In 1993, Stephen Lange Ranzini and Joseph Louis Ranzini founded a BIDCO, which is a Business and Industrial Development Company, called Michigan BIDCO, Inc. The BIDCO is licensed by the Michigan Financial Institutions Bureau under the State of Michigan BIDCO program. Michigan BIDCO (formerly known as Northern Michigan BIDCO) invests in businesses in Michigan with the objective of fostering job growth and economic development. University Bancorp currently owns 28.82% of the BIDCO. The Bancorp holds 1.74% directly, and 27.08% is held by the Bank.
Northern Michigan Foundation. In 1995, Michigan BIDCO donated $225,000 to capitalize Northern Michigan Foundation, and in 1996, donated an additional $75,000 to the Foundation. The Foundation is an IRS-approved 501c(3) non-profit which is an intermediary lender to rural small businesses under the U.S. Department of Agriculture's Intermediary Re-lending Program. The Foundation has the right to borrow a total of up to $2 million from the U.S. Rural Economic Community Development at 1% interest with a 30-year term because of a $300,000 donation received from Michigan BIDCO. Pursuant to a management services agreement with the BIDCO, the BIDCO and the Foundation share administrative staffs and offices, with the Foundation reimbursing the BIDCO for these management services.
University Insurance & Investment Services. In 1996, University Bank established an insurance and investment sales agency. This subsidiary of the Bank, called "University Insurance & Investment Services, Inc." is based in the Bank's Ann Arbor office. The agency is licensed by the State of Michigan to sell insurance as agent for licensed insurance companies. The focus of the insurance agency is life and health care insurance brokerage, and mutual fund and annuity sales. In 1998, the agency acquired University Insurance Center, a fully-licensed commercial insurance agency. University Insurance Center, commenced business in 1999 and is a full service property and casualty insurance agency offering insurance for homes, autos, apartments and businesses.
Employees
The Company employed 106 full-time equivalents as of March 26, 2001:
University Bank, Ann Arbor 25 Midwest Loan Services 78 University Insurance & Investment 3
Properties
The Bank purchased a building in Ann Arbor, Michigan for use as the Bank's main office. Currently 42% of the building is leased to the University of Michigan. The lease expires September 2001.
The Bank leases a site which includes a registered historic building in Ann Arbor, at the corner of Washtenaw Avenue and Stadium Boulevard as a multiple ATM drive-through location, a BIDCO office and an off-site storage facility.
The Bank leases an ATM location with an adjacent meeting room in Dexter, Michigan under a three year lease.
The Bank owns a former loan office in Sault Ste. Marie and such space is leased to an unrelated third-party. Management is in negotiations to sell this property.
Midwest Loan Services leases an office in Houghton, Michigan under a year-to-year lease.
The Company believes that the office facilities are adequate to support the anticipated level of future expansion of business.
Lines of Business
DEPOSIT PRODUCTS & SERVICES
University Bank offers traditional retail savings products and services to its customers. These include demand deposit and NOW interest-bearing checking accounts, money market deposit accounts, regular savings accounts and term deposit certificates ranging in maturity from three to three hundred months. The Bank also offers self-directed retirement accounts, free access to 24-Hour ATM machines, telephone banking, VISA debit cards and Gold VISA accounts. In December 2000, we began to offer a full internet banking package, including business cash management functions. In March 2001, we added our a bill payment function of the internet banking package. The Bank is also a member of MasterCard, but currently is not offering a MasterCard product. The Bank also offers Canadian dollar foreign exchange services. From time to time to raise liquidity, the Bank relies on brokers to sell CDs. At December 31, 2000, the Bank had approximately $13.0 million in CDs issued through brokers.
LENDING PRODUCTS
University Bank offers a range of traditional lending products, including commercial small business loans, residential real estate mortgage loans, home equity loans, commercial real estate mortgage loans, consumer installment loans, and land development and construction loans.
Classifications of the loan portfolio as of December 31, 2000 are as follows:
(1) - Excludes loans held for sale.
The Bank's loan portfolio is geographically concentrated in Ann Arbor and Washtenaw County, Michigan. The ability of loan customers to honor their debts is partially dependent on the local economy. The Ann Arbor area is primarily dependent on the education, healthcare, services, and manufacturing (automotive and other) industries.
Commercial real estate loans have a loan to value ratio typically less than 80% at the time the loan is originated. In no cases is the loan to value ratio for commercial real estate loans greater than 85% (except for one SBA guaranteed loan which had a 90% loan to value ratio at the time of origination). The primary risk of commercial loans is that the area's economy declines and rents decrease while vacancy increases, thereby decreasing the value of the building. If the guarantor suffers a financial reverse, the Bank is then exposed to a loss.
Residential loans typically have a loan to value ratio less than 90% at the time the loan is originated, unless the borrower's financial position is very strong, in which case a loan to value ratio of up to 90% is considered. To
meet the Bank's goals for first time homebuyers, the Bank has originated a portfolio of 97% loan to value residential loans totaling about $3 million, although real estate prices in Washtenaw County where these loans were originated have been rising at 10-12% per year for two years in a row, and most of these loans were originated in 1998 and 1999. Home equity secured residential loans have loan to value ratios of less than 90% at time of origination in the case of fixed rate fully-amortizing loans and 80% for home equity lines of credit. The primary risk of residential lending is that home prices drop (typically this occurs in a recession) and borrowers walk away from their home or file for bankruptcy. All of the Bank's construction loans, are secured by residential properties with a loan to value ratio of 80% or less. The Bank controls the risk of construction lending by performing inspections prior to disbursing interim construction funds to avoid cost overruns.
The Bank makes very few unsecured loans, typically for borrowers who are multi-millionaires, but even in these cases, the Bank typically takes collateral out of an abundance of caution. Most of the Bank's credit card loans are secured by residential properties. Consumer loans are generally secured by vehicles (primarily cars or trucks). The primary risk of these loans is that the value of the car depreciates faster than the loan balance amortizes, and the borrower loses their job or has a severe medical problem in their family. In these circumstances, the collateral could be insufficient to repay the loan and the borrower files for bankruptcy. In addition, if the economy is soft, used vehicle prices tend to deteriorate creating additional risk of insufficient collateral in the event of a default.
The Bank makes very few business loans that are not secured by real estate, but in those cases, a 50% ratio of inventory and other equipment at current market value, and 70% of current receivables, is used as the amount against which a term loan or line of credit is loaned. The primary risk of this type of lending is that if the business suffers a financial reverse, the collateral is easily dissipated by an unscrupulous borrower, causing the Bank a loss. For this reason, the Bank de-emphasizes this type of lending.
Typically with respect to all personal and residential loans, a ratio of total debt payments to total income of all borrowers and guarantors less than 42% is required. With respect to commercial real estate and business loans, a ratio of income to all debt payments of greater than 1.25x is required. Therefore, the Bank typically has both income and asset backing to secure its loans. However, there can always exist valid reasons to have exceptions to each rule and the Bank's loan committee retains the power to take unusual circumstances into account when evaluating each loan request versus the Bank's policies. Loans that are lacking both current demonstrated income or asset backing are classified and increased reserves are established for those loans.
MORTGAGE LENDING
University Bank became a seller/servicer of Federal Home Loan Mortgage Corporation (FHLMC) insured mortgages in 1991 and began to originate FHLMC mortgages for sale into the secondary market. In 1994, University Bank became a seller/servicer of Federal National Mortgage Association (FNMA) insured mortgages and began to originate FNMA mortgages for sale into the secondary market. The Bank has also been approved as a seller/servicer of Government National Mortgage Association (GNMA) mortgages for many years but only began using our license in 1999 to originate and sell these loans without retaining the servicing rights.
With the exception of Midwest Loan Services, the Bank is currently selling the servicing rights on all mortgages originated that are sold to the secondary market.
MORTGAGE SUBSERVICING
Mortgage servicing firms receive monthly payments from loan customers, aggregate and account for these payments, and send the funds to mortgage-backed securities holders, including pension funds and financial institutions. Mortgage servicers also dun delinquent accounts and foreclose loans, if required. Mortgage servicers receive a fixed monthly fee for performing this service. When these services are performed for the Bank, it is called `servicing'. When these services are performed for other institutions, it is called `subservicing'. The Bank's 80%-owned subsidiary, Midwest Loan Services, specializes in subservicing residential mortgage loans sold to FNMA and FHLMC and other non-agency private conduits for the account of credit unions, other financial institutions and mortgage brokers. Midwest is regulated by FHLMC and FNMA.
During the year 2000, Midwest Loan Services increased its mortgage subservicing contracts by 280% (from $0.5 billion to $1.9 billion) as a result of continued increases in business with the mortgage banking subsidiaries of two of the top five mortgage banking firms on Wall Street. Although there is no assurance that further increases will occur, loans subserviced had increased to $3.0 billion as of February 28, 2001 and management of Midwest has been told by to expect additional increases of $4.0 billion by June 1, 2001, as these firms shift additional existing business from their primary subservicing firm to Midwest. There is of course, no assurance that this business will materialize or in the amount or timeframe currently contemplated.
INVESTMENT SECURITIES
The Bank maintains surplus available funds in investments consisting of short-term money market instruments, U.S. government bonds, U.S. federal agency obligations, mortgage-backed securities backed by federal agency obligations and obligations of local units of government. These investments are managed by the Bank's President, and purchase/sale decisions are subject to the review and approval of the Board of Directors. The securities portfolio provides a source of liquidity to meet Bank operating needs. At December 31, 2000, the portfolio had a net unrealized loss of approximately $335,000 versus a net unrealized loss of $585,000 at December 31, 1999, and $183,000 at December 31, 1998.
Information regarding securities which cost exceeded more than 10% of the Company's stockholders' equity at December 31, 2000 are as follows:
(1) The rate varies quarterly. The Bank is required to maintain the investment in Federal Home Loan Bank of Indianapolis common stock in an amount related to the Bank's single family mortgage related assets and FHLBI advances. Shares can be redeemed or sold at par value to the FHLBI as required from time to time.
(2) This Principal Only strip has an expected average life of eleven years. The decrease in market value is due to interest rate movements which have extended the average life and not any credit issues. Accrued net interest income on this zero coupon bond was decreased in 1998 and 1999 to reflect the increased average life. The bond is rated AAA.
Competition
COMMUNITY BANKING, ANN ARBOR
The attraction and retention of deposits depend on the Bank's ability to provide investment opportunities that satisfy the requirements of investors with respect to rate of return, liquidity, risk and other factors. The Bank competes for these deposits by offering personal service and attention, fair and competitive rates, low fees, and a variety of savings programs including tax-deferred retirement programs.
The Bank competes for loan originations primarily through the quality of services provided to the loan customers, competitive interest rates and reasonable loan fees, rapid and local decision-making and the range of services offered. Competition in originating loans comes principally from other commercial banks, credit unions, insurance companies, mortgage banking companies and savings and loans.
The following table shows market share of deposits for Washtenaw County by financial institution for June 2000, June 1999, and June 1998, respectively from the FDIC's annual branch deposit survey.
WASHTENAW COUNTY FINANCIAL INSTITUTION DEPOSITS:
Total deposits in the county increased 2.0% from June 1999 to June 2000. Total deposits in the county decreased 4.8% from June 1998 to June 1999. In attracting deposits, the Bank's primary competitors for deposits are mutual
funds, other commercial banks, credit unions, savings and loans and insurance companies.
The Bank's main office is adjacent to the University of Michigan Hospital complex. The complex employs a total of 7,800 persons. In February 1999, the nearest competitor to the Bank's main office, a National City Bank branch, was permanently closed. While the Bank competes with all of these financial institutions for loans and deposits and in particular the eight financial institutions that have branch offices in the northeast Ann Arbor market area, the other major competitor in the immediate local deposit market near the Medical Center complex is Midwest Financial Credit Union, formerly known as Hospital & Health Services Credit Union. The Bank's main office was formerly the headquarters of this credit union, which moved its office to a new office building three miles from the Medical Center Complex.
The Ann Arbor banking market is dominated by banks owned by out-of-state holding companies. In the city of Ann Arbor, the University of Michigan Credit Union is the largest locally-owned financial institution. The only locally-owned community financial institutions, excluding University Bank, are Huron River Area Credit Union, Midwest Financial Credit Union, Bank of Ann Arbor, Automotive Federal Credit Union and several smaller credit union.
MORTGAGE BANKING
Origination. The Bank originates internally or via other financial institutions residential home loans which generally qualify for sale to secondary market investors under the underwriting criteria of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Government National Mortgage Association. Loans purchased or originated internally are either sold directly to FHLMC, FNMA or GNMA, or are pooled into mortgage-backed securities and the securities are sold to investors in the secondary market. Some residential mortgages are held in the Bank's loan portfolio as an investment.
The Bank's retail mortgage origination operations encounter competition for the origination of residential real estate loans primarily from savings institutions, commercial banks, insurance companies and other mortgage banking firms. Many of these firms have a well-established customer and/or borrower client base. Some competitors, primarily savings institutions, insurance companies and commercial banks, have the ability to create unique loan products from time to time because they are able to close the loans for their own portfolio rather than sell into the secondary market. The Bank's ability to hold mortgage loans for our portfolio helps us to compete more effectively. Most loans sold into the secondary market, however, go to the same sources, those being FHLMC, FNMA, and GNMA. Most lenders have access to these secondary market sources; therefore, competition often becomes more a matter of service and pricing than that of product. As a mortgage loan originator and a purchaser of mortgage loans through correspondents, the Bank must be able to compete with respect to the types of loan products offered by competitors to borrowers and correspondents, including the price of the loan in terms of origination fees or fee premium or discount, loan processing costs, interest rates, and the service provided by our staff. An important element to competing is master purchase agreements negotiated periodically with FNMA and FHLMC with low and competitive loan guarantee fees, a wide variety of mortgage programs, and a variety of flexible underwriting criteria. The Bank's ability to secure these master purchase agreements is dependent upon the performance from a quality perspective of loans previously sold to the agencies.
During lower interest rate environments, competition for loans is less intense due to the large number of loans available for origination. As interest rates rise and the number of loans available for origination diminishes, competition becomes quite intense and companies with larger investor bases, flexibility with respect to type of product offered and greater experience in dealing in these types of markets tend to be the most successful.
The Bank also originate residential loans to be held in portfolio, and management believes that this product together with the product offerings from FHLMC, FNMA and GNMA are sufficient for the Bank. The Bank also is licensed as a HUD Title 1 and Multifamily seller/servicer, but has no plans at this time to expand utilization of HUD or GNMA programs.
Mortgage Servicing and Subservicing. Servicing competition is somewhat less intense than the loan origination aspect of mortgage banking. Due to net worth and management requirements, many mortgage origination companies do not have the capacity to service loans. Falling interest rates present competitive challenges for the mortgage servicing operation in that mortgagors are more likely to refinance existing mortgages. The quality of service and the ability of the origination operation to compete on price and service is important in retaining these customers by refinancing them internally, rather than losing the refinancing transaction to a competitor. Increased refinancing activity as a result of falling interest rates should decrease profitability of mortgage servicing by increasing amortization charges on purchased mortgage servicing rights.
In the subservicing business, Midwest Loan Services competes primarily with about 30 firms nationwide, including specialized subservicing units of mortgage banking companies, and specialized firms owned by banks and savings and loans. Most of these companies have substantially larger financial resources than Midwest Loan Services, and some of them are located in rural areas with low prevailing wages.
Midwest Loan Services is located in Houghton, Michigan in the western upper peninsula of Michigan. Personnel and occupancy costs are the largest costs in a mortgage servicing operation, and the prevailing wages and occupancy costs in the upper peninsula of Michigan are generally lower than the national average. Midwest Loan Services has developed a unique business extranet website for its business partners and their retail customers. Through its website at www.subservice.com, Midwest Loan Services provides the opportunity for all customers to access their mortgage information 24 hours a day 7 days a week in an environment which provides seamless access to all information. Business partners have access to all mortgage data as easily as if it were serviced on their in-house computer system. Customers can access all information about their accounts and perform any type of transaction through the internet. As a result of both low personnel costs and its internet technology, the Company believes that Midwest Loan Services' mortgage servicing operation has a competitive advantage.
Please also refer to the discussion of the mortgage banking business in Item 7. - - Management's Discussion and Analysis of Financial Condition and Results of Operations, in the section entitled "Non-Interest Income and Non-Interest Expense", under the heading Mortgage Banking for additional information regarding Midwest Loan Services.
MICHIGAN BIDCO
Michigan BIDCO (BIDCO) was founded in 1993 and is licensed by the Michigan Financial Institutions Bureau under the State of Michigan BIDCO Act. In 1993, BIDCO received $3 million in financing from the Michigan Strategic Fund (MSF). This investment was made in the form of a 10-year loan, which carried concessionary terms allowing it to be converted to a grant over time under certain circumstances. BIDCO earned job and sales credits to be applied against the principal and interest owed to the Michigan Strategic Fund. Credits were earned from the growth of businesses invested in by BIDCO. The loan has been fully repaid from these credits.
Initially, Michigan BIDCO made both loans and direct equity investments. As a matter of policy, University Bank restricts itself from investing or lending to a business that the BIDCO finances, and related parties which co-invest with BIDCO must do so on a basis equal to or less favorable than BIDCO's. BIDCO has a loan to borrower limit of $500,000, but sells participations and/or seeks loan guarantees from government agencies for larger financings. As of December 31, 2000, approximately $16.5 million in loans and/or investments (at original cost) had been made to various types of businesses in the state of Michigan.
In 1993, Michigan BIDCO issued $3,000,000 in 9% senior convertible bonds to match the State of Michigan's commitment. University Bank purchased $27,000 in bonds and contributed $280,000 for 298 shares of Michigan BIDCO stock. This represented a 44.1% interest in Michigan BIDCO. The financial results of Michigan BIDCO were accounted for under the equity method of accounting until March 1999. In April 1999, $1,850,000 of Michigan BIDCO bonds were repurchased by the BIDCO, and University Bancorp converted its $27,000 of bonds into common stock, thereby increasing the Bank's equity ownership to 80.1%. Effective April 1999, Michigan BIDCO's financial results became consolidated into the results of University Bancorp. The remaining Michigan BIDCO bonds were converted into common stock on May 31, 2000, and thus diluted University Bank's equity ownership down to 28.8%. As a result, the BIDCO is no longer consolidated in the financial statements of University Bancorp and the investment is now accounted for under the equity method of accounting.
The financial statements of BIDCO are presented using the investment company method, and, accordingly, BIDCO's investments in stocks, stock rights, limited liability companies and loans are reported at fair value. BIDCO typically invests in companies for which current market quotations are not readily available; therefore we estimate the fair value of BIDCO investments on a quarterly basis and the Board of Directors approves the fair value estimates. In deriving its estimates, BIDCO management reviews the financial condition and operating performance of investee companies, as well as performance of the company with its contractual arrangements with BIDCO. BIDCO management estimates the fair value of by using cash flow multiples applicable to a company's industry, discounted cash flow analyses, and other valuation techniques. The Company believes the procedures used and assumptions made are reasonable in the circumstances; however, the fair value estimates may differ significantly from the values that would have been used had current market quotations been available.
The Company's profit from the investment in BIDCO was $234,740, $916,991, and $128,219 for the years ended December 31, 2000, 1999, and 1998.
BIDCO is currently offering to repurchase the Bank's shares of BIDCO, but is awaiting approval from the Commissioner of the Michigan Financial Institutions Bureau.
Please refer to the discussion of the BIDCO's investments and operations in Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations, in the section entitled "Non-Interest Income and Non-Interest Expense", under the heading Michigan BIDCO for additional information.
NORTHERN MICHIGAN FOUNDATION
BIDCO management operates a 501(c)3 tax-exempt non-profit re-lending organization, Northern Michigan Foundation under a management contract. The Foundation has received the right to borrow $2 million at 1% interest for 30-years from the U.S. Department of Agriculture (USDA) Intermediate Relending Program. The Foundation one of the non-profit, privately-run, USDA Intermediate Re-lending Programs located in northern Michigan. Each of these community development loan funds covers six counties as its primary market area. Generally, the Foundation competes with other specialized non-bank lenders and wealthy investors who make risk-oriented investments in businesses located in northern Michigan.
Since 1996, the BIDCO has pursued a strategy of liquidating its existing investment portfolio to raise cash for two purposes: 1) the buyout of some of the investors in the BIDCO; and 2) expanding its funds under management through other government agency economic development programs (Conifer Capital L.P. - a small business investment company and Northern Michigan Foundation).
Regulation
The Bank is extensively regulated under federal law and state laws. These regulations are generally applicable to financial institutions and their holding companies, and include things such as the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, collateral for loans, establishment of branches, mergers, acquisitions and consolidations, payment of dividends, and internal controls.
These laws and regulations are primarily intended to protect depositors and the deposit insurance fund of the Federal Deposit Insurance Corporation (FDIC), not the Bank nor the Company's stockholders. The following is a summary of certain statutes and regulations affecting University Bank. The following information is qualified in its entirety by reference to the particular statutory and regulatory provisions.
Any change in applicable laws, regulations or regulatory policies of various governmental regulatory authorities may have a material effect on the Company's business, operations and prospects. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System, the FDIC, the Commissioner of the Michigan Financial Institutions Bureau, the Internal Revenue Service, and state taxing authorities. The Company is unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls or new federal or state legislation may have on future business and earnings.
Primary Regulators of University Bancorp. The Company is bank holding company registered under the Federal Bank Holding Company Act of 1956. The Federal Reserve Bank of Chicago is the Company's primary regulator. The Company is also subject to regulation, supervision and examination by the Federal Reserve. The Company is required to file semi-annual reports with the Federal Reserve and other information as required under the rules of the Board of Governors of the Federal Reserve System. Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Acquisitions. The Company is generally prohibited from engaging in a non-banking activities since it is a bank holding company. The Company cannot acquire more than 5% of the shares of another company engaged in non-banking activities. The Company can only acquire direct or indirect control of more than 5% of the voting shares of a company engaged in a banking related activity with the prior approval by the Federal Reserve Board to acquire these shares or by regulatory exemption. The Federal Reserve Board has identified specific banking related activities in which a bank holding company may engage with notice to the Federal Reserve. The Federal Reserve considers managerial, capital, and other financial factors, including the impact on local competition of any proposal and past performance under the Community Reinvestment Act in acting on acquisition or merger application. Bank holding companies may acquire other banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring company and all of its insured depository institution affiliates.
Commitments. In connection with obtaining the consent of the Federal Reserve to a 1989 merger transaction when the Company obtained public listing on the NASDAQ Small-Cap Market, certain commitments were made to the Federal Reserve. Management agreed that the Employee Stock Ownership Plan would not purchase more than 10% of the common stock or 5% of any other class of our voting shares, without the prior approval of the Federal Reserve. Management also agreed not to incur additional debt or to have the Bank pay dividends to us without the prior approval of the Federal Reserve.
Capital Requirements. The Federal Reserve Board imposes certain capital requirements for the Company under the Federal Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted assets. These requirements are described below under "Capital Regulations". The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses. The "prompt corrective action" provisions of federal law and regulation authorizes the Federal Reserve to restrict the payment of dividends to us from an insured bank which fails to meet specified capital levels.
Source of Strength. In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Company may not otherwise do so. Under the Federal Bank Holding Company Act, the Federal Reserve may require a bank holding company to terminate any activity or
relinquish control of a bank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. In addition, if the Commissioner deems our Bank's capital to be impaired, the Commissioner may require the Bank to restore its capital by a special assessment upon us as University Bank's sole stockholder. If the Company were to fail to pay an assessment, the directors of the Bank would be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital.
Recent Regulatory Developments. Effective March 11, 2000, bank holding companies may apply to become Financial Holding Companies. Financial Holding Companies may engage in a wider range of non-banking activities than Bank Holding Companies, including greater authority to engage in securities and insurance activities. The expanded powers are available to a bank holding company only if the bank holding company and its bank subsidiaries remain well-capitalized and well-managed. The new law also imposes various restrictions on transactions between the depository institution subsidiaries of bank holding companies and their non-bank affiliates. These restrictions are intended to protect the depository institutions from the risks of the new non-banking activities permitted to affiliates.
Primary Regulators of University Bank. The Bank is a Michigan banking corporation and its deposit accounts are insured by the Bank Insurance Fund (BIF) of the FDIC. As a Michigan-chartered commercial bank, University Bank is subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Michigan banks, and the FDIC, as administrator of the BIF. These agencies and the federal and state laws applicable to the Bank and its operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices. As an insured bank, University Bank is also required to file quarterly reports and other information as required with the FDIC.
All subsidiaries of University Bank including Midwest Loan Services and University Insurance & Investment Services are all also subject to all regulations applicable to University Bank itself, including regular on-site examination by both the FIB and the FDIC.
Other Regulators. As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD multifamily seller/servicer, University Bank's mortgage banking operation, and Midwest Loan Services are subject to regulation and regular on-site examination by FHLMC, FNMA and HUD. In addition, University Insurance & Investment Services are also subject to examination by the State of Michigan's Financial Institutions Bureau, Insurance Division, the National Association of Securities Dealers, and the Securities & Exchange Commission.
Other Regulations. University Bank and its subsidiaries are also subject to various regulations including the Community Reinvestment Act, the federal Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Act, the Right to Privacy Act, the Real Estate Settlement Procedures Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, Federal Reserve regulations, state usury laws and federal laws concerning interest rates. Also, University Bank may not engage in any activity not authorized by the Michigan Banking Code
unless it is authorized by the Commissioner of the FIB as being closely related to banking.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their respective levels of capital and results of supervisory evaluation. Banks classified as well-capitalized, as defined by the FDIC, and considered healthy pay the lowest premium while institutions that are less than adequately capitalized, as defined by the FDIC, and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act (FDIA) requires the FDIC to establish assessment rates at levels which will maintain the Deposit Insurance Fund at a mandated reserve ratio of not less than 1.25% of estimated insured deposits.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution or its directors have engaged or are engaging in unsafe or unsound practices, or have violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC, or if the institution is in an unsafe or unsound condition to continue operations. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to fund the operations of the Commissioner. The amount of supervisory fees paid by a bank is based upon the bank's total assets, as reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted in 1996, University Bank, as a member of the BIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation (FICO). FICO was created in 1987 to finance the re-capitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC's Savings Association Insurance Fund (SAIF)which insures the deposits of thrift institutions. Between January 1, 2000 and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.
Capital Regulations. The FDIC has established the following minimum capital standards for state-chartered, FDIC-insured non-member banks, like University Bank:
- a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others;
- and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
Tier 1 capital consists principally of stockholders' equity. These capital requirements are minimum requirements. Higher capital levels will be required
if warranted by the particular circumstances or risk profiles of individual institutions. For example, FDIC regulations provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock, including additional voting stock, or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.
The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." An institution is critically undercapitalized if it has a tangible equity to total assets ratio that is equal to or less than 2%. An institution is well capitalized if it has a total risk-based capital ratio of 10% or greater, core risk-based capital of 6% or greater, and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An institution is adequately capitalized if it has a total risk-based capital ratio of not less than 8%, a core risk-based capital of not less than 4%, and a leverage ratio of not less than 4%.
These capital guidelines can affect the Bank in several ways. Capital levels are currently adequate, however, rapid growth, poor loan portfolio performance, or poor earnings performance, or a combination of these factors, could change our capital position in a relatively short period of time, making an additional capital infusion necessary. In general, if the FDIC's assessment of a Bank's financial and managerial strength changes negatively, the Bank's cost of FDIC insurance will rise in subsequent semi-annual periods. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.
Dividends. Under Michigan law, the Bank is restricted as to the maximum amount of dividends it may pay on its common stock. The Bank may not pay dividends except out of net profits after deducting its losses and bad debts. The Bank may not declare or pay a dividend unless the Bank will have a surplus
amounting to at least 20% of its capital after the payment of the dividend. If the Bank has a surplus less than the amount of its capital, it may not declare or pay any dividend until an amount equal to at least 10% of net profits for the preceding one-half year (in the case of quarterly or semi-annual dividends) or full-year (in the case of annual dividends) has been transferred to surplus. The Bank may not declare or pay any dividend until the cumulative dividends on preferred stock have been paid in full.
Federal law generally prohibits the Bank from making any capital distribution, including payment of a dividend, or paying any management fee to us if the Bank would thereafter be undercapitalized. The FDIC may prevent the Bank from paying dividends if the Bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by the Bank, if a payment is determined, by reason of the financial condition of the Bank, to be an unsafe and unsound banking practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by the Federal Reserve Act including any extensions of credit to us, investments in our stock or other securities, and the acceptance of our stock as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to our directors and officers, to our principal stockholders, and to "related interests" of the directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming one of our directors or officers or one of our principal stockholders may obtain credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. Federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the standards is of the severity that it could threaten the safe and sound operation of the institution. Failure to submit an acceptable compliance plan, or failure to adhere to a compliance plan that has been accepted by the appropriate regulator, would constitute grounds for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC in accordance with federal law.
Consumer Protection Laws. The Bank's business includes making a variety of types of loans to individuals. In making these loans, the Bank is subject to state usury and regulatory laws and to various federal statutes, including the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act. Regulations flowing from these laws which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing.
In receiving deposits, the Bank is subject to extensive regulation under State and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages and fines upon the Bank and its directors and officers.
Real Estate Lending Regulations. Federal regulators have adopted uniform standards for appraisals of loans secured by real estate or made to finance improvements to real estate. Banks are required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. The regulations establish loan to value ratio limitations on real estate loans, which generally are equal to or less than the loan to value limitations established under the Bank's lending policies.
Branching Authority. Michigan banks, including University Bank, have authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals, including approval of the Commissioner and the FDIC. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state, rather than the acquisition of an out-of-state bank in its entirety, is allowed only if specifically authorized by state law.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allowed individual states to "opt-out" of interstate branching authority by enacting appropriate legislation prior to June 1, 1997. Michigan did not opt out, and now permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits the following in appropriate circumstances and with the approval of the Commissioner:
- acquisition of all or substantially all of the assets of a Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and loan association located in another state;
- acquisition by a Michigan-chartered bank of all or substantially all of the assets of an FDIC-insured bank, savings bank or savings and loan association located in another state;
- consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting this consolidation, with the resulting organization chartered by Michigan;
- establishment by a foreign bank, which has not previously designated any other state as its home state under the International Banking Act of 1978, of branches located in Michigan
- establishment or acquisition of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting Michigan-chartered banks to establish branches in these jurisdictions.
Further, the Michigan Banking Code permits the following, upon written notice to the Commissioner:
- acquisition by a Michigan-chartered bank of one or more branches, not comprising all or substantially all of the assets, of an FDIC-insured bank, savings bank or savings and loan association located in another state, the District of Columbia, or a U.S. territory or protectorate;
- establishment by Michigan-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates; and
- consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states, with the resulting organization chartered by one of the other states.
Primary Regulators for Michigan BIDCO. BIDCO is regulated and supervised by the Michigan Department of Commerce, Financial Institutions Bureau, Bank & Trust Division. BIDCO is examined annually by the Bank & Trust Division, and is required to make annual filings of financial statements and to maintain a license from the Bureau. Licensing under the terms of the Michigan BIDCO Act conveys certain exemptions upon BIDCO under Michigan law, which are beneficial to the operations and investment flexibility of the BIDCO. Most importantly, BIDCO is partially exempt from the state's usury law. As a result, BIDCO can lend money and take equity participation in the firm it lends to, with the result that BIDCO's overall combined yield on the investment and loan can exceed the state's usury limit. The amount of BIDCO's return from the equity participation or contingent payments is excluded from the calculation to determine compliance with the state's usury limits.
ITEM 3.
ITEM 3. - LEGAL PROCEEDINGS
We are not currently involved in any material pending legal disputes.
ITEM 4.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5.
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK AND DIVIDEND INFORMATION
Our common stock trades on the NASDAQ Small-Cap Market under the symbol UNIB. The high and low sales prices of our common stock as quoted by NASDAQ, for each quarter since January 1, 1998 are listed below:
These quotations represent inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions. As of the March 26, 2001 we had approximately 375 stockholders including approximately 240 beneficial owners of shares held by brokerage firms or other institutions.
We effected a three for two stock split of our common stock (effected as a stock dividend) in February 1998. All per share and number of share amounts in this report are adjusted to reflect the stock split. No cash dividends have been paid on our common stock. We do not currently anticipate declaring or paying dividends.
CERTAIN SALES OF EQUITY SECURITIES
Not applicable.
ITEM 6.
ITEM 6. - SELECTED FINANCIAL DATA
University Bancorp, Inc. Selected Consolidated Financial and Other Data (Dollars in Thousands Except Per Share Data)
(1) Excludes results from discontinued operations. (2) Retroactively restated to reflect a 3 for 2 stock split in 1998.
ITEM 7.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of the following discussion and analysis is to assist the reader in understanding and evaluating the changes in financial position and results of operations over the past several years. Investors should refer to the consolidated financial statements, the related notes thereto, and statistical information presented elsewhere in this report when reading this section of the report.
The cautionary statements described below are for the purpose of qualifying for the "safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.
RISK FACTORS
Our business involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this report before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business, financial condition and results of operations could be materially adversely affected. This could cause the trading price of our common stock to decline, and investors may lose all or part of your investment.
Described below, are the material risks of investing in University Bancorp's common stock. Investors should carefully consider these prior to purchasing any shares.
THE BANK MAY NEVER ACHIEVE PROFITABILITY
University Bank's operations were relocated to Ann Arbor, Michigan in 1996. University Bank has not been profitable in the past 5 years. Stockholders are subject to the risks inherent in starting a new business. Profitability will depend primarily upon the Bank's operations and might never become profitable. Management of the Bank believes that as the size of portfolio loans and retail deposits at the Bank increases that the Bank should become profitable, but there is no assurance that expenses will not rise at a faster rate than expected as the Bank grows. There is no assurance that the Bank will grow to a size that will enable it to become profitable.
THE BANK MUST EXPAND TO REACH PROFITABILITY, BUT THIS MAY NOT HAPPEN
If University Bank's operations do not expand, it will not reach profitability. The Bank's strategy includes growing the loan portfolio and retail deposits, adding internet banking customers, selling more financial services such as insurance and investment products, and expanding our the operations of Midwest Loan Services. The Company's inability to implement these goals could result in further losses at the Bank. The Company's ability to achieve and manage our growth and expansion, manage internal controls, and to attract and retain capable management and operations personnel will determine the success of our growth strategy.
OWNERSHIP OF THE COMPANY MAY BE DILUTED IF THE BANK REQUIRES ADDITIONAL CAPITAL
There can be no assurance that the Bank will not need additional capital in the near future to support the Bank's growth to counter operating losses. Funds
necessary to meet the Bank's working capital needs and to finance this expansion might not be available. If we sell additional equity securities to finance future expansion, such sale could result in significant dilution to the interests of persons purchasing shares of the Company.
THE BANK MAY NOT BE ABLE TO GROW AS FAST AS COMPETITORS
University Bank is subject to extensive state and federal governmental supervision and regulation which could negatively impact the Bank's operations. Existing state and federal banking laws subject the Bank to substantial limitations with respect to the size and quality of our loans, purchase of securities, payment of dividends and many other aspects of our banking business. These limitations include a requirement that we maintain a ratio of Tier 1 leverage capital to total assets of at least 7% and maintain an adequate loan loss reserve. We currently do not maintain this ratio at December 31, 2000. Federal economic, monetary and tax policy also affect the Bank's ability to attract deposits, make loans and achieve satisfactory interest spreads. Further, these regulations may place banks in general, and University Bank specifically, at a competitive disadvantage compared to less regulated competitors. Such regulations could consequently have an adverse effect on University Bancorp's ability to provide any return on investments made by its stockholders.
BECAUSE THERE IS NOT CURRENTLY A DIVIDEND BEING PAID, THE STOCK MAY BE MORE VOLATILE
A stock which pays a dividend has a less volatile share price and attracts a wider base of potential investors. Investors in our common stock must rely upon capital gains for a return on their investment for at least the next two years because University Bancorp has never paid a dividend, and does not anticipate paying dividends for at least the next two years. University Bancorp's future earnings may not be sufficient to permit the legal payment of dividends to its stockholders at any time in the future. Even if University Bancorp may legally declare dividends, the amount and timing of any dividends will be at the discretion of our Board of Directors. University Bancorp's payment of any cash dividends in the future will depend to a large extent on the receipt of dividends from the Bank. The ability of the Bank to pay cash dividends to University Bancorp and by University Bancorp to its stockholders are both subject to certain statutory and regulatory restrictions.
THE BANK'S SIZE LIMITS ITS ABILITY TO COMPETE WITH OTHER FINANCIAL INSTITUTIONS
University Bank faces strong competition for deposits, loans and other financial services from numerous Michigan and out-of-state banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as we are. Many of these financial institutions aggressively compete for business in our market area. Most of our competitors have been in business for many years, have established customer bases, are larger, have substantially higher lending limits than we do and offer certain services, including numerous branches and international banking services that we do not provide. There can be no assurance that the Bank will be able to compete effectively with these competitors unless it can continue to grow its operations.
WE MAY NOT CONTINUE TO BE ABLE TO INVEST IN MODERN TECHNOLOGY
The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Changes in technology are likely to require additional capital investments to remain competitive. Although we have invested in new technology in the past, there can be no assurance that we will have sufficient financial resources or access to the proprietary technology which might be necessary to remain competitive in the future. Many of our competitors have substantially greater resources to invest in technological improvements. The Company might not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to customers.
THE SENIOR MANAGEMENT TEAM COULD LEAVE
The Company is dependent upon the services of its management team, including President, Stephen Lange Ranzini, and our other senior managers. While the Bank maintains key man life insurance on Mr. Ranzini, losing one or more key members of the management team could adversely affect operations if the Company is unable to maintain or attract new senior managers due to the history of operating losses.
THE BANK COULD EXPERIENCE LOSSES WITHIN THE LOAN PORTFOLIO
University Bank is in the business of making loans, and there is an inherent risk that loans might not be repaid. If its customers fail to repay their loans, this could materially adversely affect our earnings and overall financial condition, as well as the price of our common stock. University Bank also focuses on loans to individuals and loans to small-to-medium sized businesses that may be riskier than loans to larger companies. The Bank's management attempts to manage credit exposure by monitoring the concentration of loans within specific industries and through specified loan application and approval procedures. However, there can be no guarantee that the Bank's monitoring system and procedures will reduce lending risks sufficiently to avoid material losses. Typically banks have five to ten times as many loans as equity capital. Therefore, poor lending can quickly deplete a bank's capital base.
THE BANK MAY NOT BE ABLE TO ATTRACT LARGE CUSTOMERS
University Bank's legal lending limit is currently approximately $800,000. The Board of Directors has established an internal lending limit of $500,000. Accordingly, the size of the loans for which the Bank can offer to potential customers is less than the size of loans that many of its competitors are able to offer. These limits affect to some degree the ability to seek relationships with the area's larger businesses. The Bank can expand loan volumes in excess of its lending limit through the sale of participations in these loans to other banks. However, due to its lending limits, the Bank might not be successful in attracting or maintaining customers seeking larger loans. In addition, the Bank may not be able to sell participations on favorable terms to the Bank.
MARKET CONDITIONS MAY ADVERSELY AFFECT THE COMPANY
The results of operations for financial institutions, including the Bank, may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate market values, rapid changes in interest rates and the monetary and fiscal policies of the federal government. Profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. In the early 1990s, many banking organizations experienced historically high interest rate spreads. More recently, interest rate spreads have generally narrowed due to changing market conditions and competitive pricing pressure, and there can be no assurance that these factors will not continue to exert negative pressure on the profitability of University Bank or that high interest rate spreads will return. Substantially all of the Bank's loans are to businesses and individuals in southeastern Michigan and any decline in the economy of this area could adversely affect the net income or loss of the Bank. The positive trends or developments discussed in this prospectus might not continue. Negative trends or developments might have a material adverse effect on us.
MINORITY STOCKHOLDERS MAY NOT RECEIVE THE BEST POSSIBLE RETURN ON THEIR INVESTMENT
The Ranzini Group (Mr. Joseph L. Ranzini, Mr. Stephen Lange Ranzini, Mrs. Mildred Ranzini, the two Ranzini Family Trusts, and ESOP shares beneficially owned by Stephen Lange Ranzini) own 1,395,863 shares, or 65% of the common stock issued and outstanding shares at December 31, 2000. The Ranzini Group also owns 725 shares, or 100% of the convertible preferred stock issued and outstanding at December 31, 2000. These individuals are able to exert a significant measure of control over University Bancorp's affairs and policies. This control could be used, for example, to help prevent an acquisition of University Bancorp, precluding stockholders from possibly realizing any premium offered for the common stock by a potential acquirer. Individuals, alone or together with others, who seek to acquire more than 10% of our common stock must comply with the Change in Bank Control Act. Anyone who seeks to acquire 5% or more of our common stock must comply with the Bank Holding Company Act. Accordingly, prospective investors should be aware of these requirements and to comply with these requirements.
DECISIONS MADE BY COMPANY MANAGEMENT AND ITS DIRECTORS MAY ADVERSELY IMPACT STOCKHOLDERS' RETURN ON INVESTMENT
University Bancorp's Articles of Incorporation provide for the indemnification of its officers and directors and protects University Bancorp's officers and directors from liability for certain limited breaches of the duty of care. It is possible that the indemnification obligations imposed under these provisions could reduce University Bancorp's earnings and adversely affect its ability to pay dividends causing an adverse impact on the share price. The Articles of Incorporation of University Bank contains similar provisions.
WE CANNOT GUARANTEE THAT THE COMPANY WILL CONTINUE TO BE LISTED ON THE NASDAQ SMALL-CAP MARKET
In August 2000, NASDAQ has informed the Company that our stock was to be de-listed from the NASDAQ Small-Cap Market unless stockholders' equity was increased to at least $2,000,000. In November 2000, the Company exchanged debt of $712,827 and cash of $12,173 for cumulative, convertible preferred stock
totaling $725,000, to increase stockholder's equity above $2,000,000. The Company is also in the process of conducting a common stock rights offering in 2001, which is anticipated to raise an additional $1,525,000 of Capital to the Company. If the Company does not make profits in future periods, stockholders' equity could again fall below NASDAQ's required level of $2,000,000 despite the new stockholders' equity that is raised under this offering.
NASDAQ has also informed us that our stock would be de-listed from the NASDAQ Small Cap Market if the market value of shares held by non-insiders of the Company falls below $1,000,000. As of March 26, 2001, 521,279 shares of common stock are held by non-insiders of the Company and a floor bid price of $1.92 per share is needed to meet this requirement. As of March 27, 2001, the current bid price was $2.00 per share of common stock.
If University Bancorp's stock is de-listed from the NASDAQ Small-Cap Market, the shares will be less marketable in the future and there will be a smaller potential pool of investors for the Company's stock. This would significantly limit the ability of stockholders who decide to sell their shares to do so. If the Company is de-listed, the management of University Bancorp intends to list its common stock on the NASDAQ Bulletin Board.
INVESTORS MAY NOT BE ABLE TO TRADE THE COMPANY'S STOCK UPON DEMAND
Although the common stock is listed for trading on the NASDAQ Small-Cap Market, the trading market in the Company's common stock on the exchange historically has been less active than the average trading market for companies listed on the exchange. In addition, share price has been volatile. The price of University Bancorp common stock in the past year has ranged from $0.25 to $3.50. A public trading market having the positive characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of common stock at any given time, which presence is dependent upon the individual decisions of investors and general economic and market conditions over which management has no control.
Even with market makers, factors such as the limited number of shares outstanding, the lack of earnings history and the absence of a reasonable expectation of dividends within the near future mean that there might not be an active and liquid market for the common stock. Even if an active market develops, there can be no assurance that a market will continue, or that stockholders will be able to sell their shares at or above the offering price. Purchasers of common stock should carefully consider the potentially illiquid and long-term nature of their investment.
THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEARS ENDED DECEMBER 31, 1999 AND 1998
SUMMARY OF RESULTS OF OPERATIONS
Our net loss from continuing operations was $914,647 in 2000, $723,725 in 1999 and $801,291 in 1998. Earnings (loss) per share from continuing operations for 2000, 1999 and 1998 were $(0.45), $(0.36) and $(0.40), respectively. Including both continuing operations and discontinued operations, our net loss was $914,647 in 2000, $915,480 in 1999 and $198,049 in 1998.
Including both continuing operations and discontinued operations, the loss in 2000 was similar in amount to the loss in 1999, however, the losses flowed from primarily different causes. Results in 2000 were negatively impacted by a decrease in the contribution to profit by Michigan BIDCO in 2000 from $916,991 to $234,740, goodwill amortization of $139,412 related to an earn-out payment related to the acquisition of Midwest Loan Services, legal expense related to the successful defense of a lawsuit related to the sale of Varsity Mortgage of approximately $60,000, and unusually high external auditor expenses of over $300,000. These negative developments in 2000 overwhelmed the underlying profit improvement at the community banking operation and the increased profits at Midwest Loan Services. As a result of the trend toward improved underlying operating results, University Bank had a profit in four of the last six months of 2000. Results in 1999 were negatively impacted by losses at discontinued operations of $191,755, losses caused by an adverse judgment in a lawsuit totaling $192,000, losses at the community banking operation, and only break-even results at Midwest Loan Services, which were only partially offset by a record contribution from Michigan BIDCO of $916,991.
Including both continuing operations and discontinued operations, the increased loss in 1999 versus 1998 was principally due to losses at the Bank's mortgage subsidiary, Varsity Mortgage, which was sold in November 1999 and the loss of a legal suit, which were only partially offset by improved results at the Ann Arbor main office as a result of a 28% increase in portfolio loans and Michigan BIDCO. The Bank's mortgage banking subsidiaries, Varsity Mortgage and Varsity Funding had total losses of $191,755 in 1999 versus profits of $603,242 in 1998, and the $794,997 swing accounted for more than 100% of the Bank's overall shortfall in pre-tax income versus management's budget. The lawsuit caused a loss of $152,000 plus legal expenses of about $40,000.
NET INTEREST INCOME
Net interest income represents the dollar amount by which interest income generated by interest-earning assets exceeds the cost of funds. Interest-earning assets consist primarily of loans, short term investments and investment securities, and the principal cost of funds is the interest paid on deposit accounts and other borrowings. Net interest income is affected by (i) the difference between the average rate of interest earned on the Bank's interest-earning assets and the average rate paid on its interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of its average interest-earning assets and interest-bearing liabilities. In order to maintain and increase earnings during periods of fluctuating interest rates, it is imperative that interest-earning assets and interest-bearing liabilities be managed effectively. Trends in net interest income provide a measure of the effectiveness by which a financial institution manages its interest rate sensitivity.
The following tables present for the average balances, the interest earned or paid, and the weighted average yield for the period indicated.
(1) Amounts for 1999 and 1998 were adjusted to eliminate discontinued operations. (2) Actual yields; not adjusted to take into account tax-equivalent yields. (3) The convertible bonds at Michigan BIDCO were converted on May 31,2000, resulting in the deconsolidation of BIDCO related interest earning assets and interest bearing liabilities.
NET INTEREST INCOME
NET INTEREST INCOME
The table above does not specify the average level of non-interest bearing demand deposits, which were $2,827,295, $2,306,983 and $2,626,160 for the years ended December 31, 2000, 1999 and 1998, respectively, as computed using month-end balances for these years.
Including only activity from continuing operations, net interest income increased to $1.24 million in 2000 from $1.23 million in 1999, mainly as a result of an increase in the yield on net interest-earning assets faster than an increase in the rate on interest-bearing liabilities. During the year ended December 31, 2000, the average interest-earning asset base fell by $1.91 million or 4.9% from 1999, while average interest-bearing liabilities decreased by $1.07 million or 2.8%. Due to the rise in short term interest rates, the average cost of interest-bearing deposits increased from 5.12% in 1999 to 5.55% in 2000. As a result of an increase in yield on interest-earning assets in an amount greater than the increase in the rate on interest-bearing liabilities which more than offset the decrease of interest-bearing assets at a rate greater than the decrease in interest-bearing liabilities, the net interest margin increased to 3.33% in 2000 from 3.14% in 1999. Short term interest rates bottomed in mid-year 1999, and by year-end 2000, short term interest rates were 1.75% higher. Long term interest rates hit an interim peak in 1999, but trended lower throughout 2000.
Including only activity from continuing operations, net interest income increased from $1.19 million in 1998 to $1.23 million in 1999, mainly as a result of an increase in net interest-earning assets and the net yield on interest-earning assets. During the year ended December 31, 1999, the average interest-earning asset base fell by $2.23 million or 5.4% from 1998, while average interest-bearing liabilities decreased by $4.50 million or 10.5%. Net interest earning assets increased by $2.28 million as a result of the BIDCO's sale of various non-interest-earning assets during 1999. Due to the decrease of wholesale deposits in the mix of interest-bearing liabilities, the average cost of interest-bearing deposits decreased from 5.38% in 1998 to 4.88% in 1999. As a result of the decrease of interest-bearing liabilities at a rate greater than the decrease in interest-earning assets which more than offset a decrease in yield on interest-earning assets in an amount greater than the decline in the rate on interest-bearing liabilities, the net interest margin increased to 3.14% in 1999 from 2.86% in 1998. Short term interest rates in both 1998 and 1999 were mostly stable until mid-year 1999, and since then short term interest rates have risen sharply. Long term interest rates hit 30-year lows in October 1998 and trended sharply higher throughout 1999.
At December 31, 2000, the net yield on the Bank's interest-earning assets was 3.30% down from the average net spread during the year of 3.33%, principally as a result of higher rates on wholesale time deposits. Since year-end, the Bank's net interest margin has expanded, as short term interest rates have decreased by a total of 1.50%. Fee income from our mortgage servicing operations, income from our portfolio of mortgage servicing rights and the income or loss from the Bank's investment in its subsidiaries are not included in these calculations.
The following table presents information regarding fluctuations in our interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume); with the rate/volume variance allocated to changes in rate:
RATE VOLUME TABLE
LOAN PORTFOLIO
Information regarding the Bank's loan portfolio as of December 31, 2000 and 1999 is set forth under Note 5 to University Bancorp's consolidated financial statements included with this report.
PROVISION FOR LOAN LOSSES
The Bank charges to operations a provision for possible loan losses which is intended to create an allowance for future loan losses inherent in the Bank's portfolio. Each year's provision reflects management's analysis of the amount necessary to maintain the allowance for possible loan losses at a level adequate to absorb anticipated losses. In its evaluation, management considers factors like historical loan loss experience, specifically identified problem loans, composition and growth of the loan portfolio, current and projected economic conditions, and other pertinent factors. A loan is charged-off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur.
Non-performing loans are defined as loans which have been placed on non-accrual status and loans over 90 days past due as to principal or interest and still in an accrual status. Where serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued. See Note 6 of the Consolidated Financial Statements for additional information regarding impaired and past due loans.
Non-performing loans amounted to $692,219 and $758,310 at December 31, 2000 and 1999, respectively. The bulk of the non-performing loans at year-end 2000 are delinquent residential loans.
The provision for loan losses in 2000 was $111,000, an increase of $18,352 from the 1999 level, which in turn was a decrease of $17,407 from the 1998 level of $110,055. Loans charged off net of recoveries were $80,588, $19,064 and $172,007 in 2000, 1999 and 1998, respectively. The allowance for possible loan losses totaled $562,997, $532,585 and $459,001 at the end of 2000, 1999 and 1998, respectively.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands): Summary of loan loss expense for the Bank for the years ended December 31
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands)
(1) Excludes loans held for sale.
Assumptions used in the Analysis of the Allowance for Loan Losses - -----------------------------------------------------------------
(1) Performing Loans:
The Bank's actual 5-year average losses were 0.61%, and this is the rate used. Per the FDIC Quarterly Banking Profile (FDIC Profile) the loss rate for loans in the central region is .38%. Real estate construction loans are included in commercial loan balances.
(2) Commercial Classified Loans: The allocation for the classified loans was determined by a combination of the risk rating and the collateral value. The loan loss reserve is the greater of the collateral deficiency or the required loan loss reserve for the risk rating. All loans are rated 1 (highest quality) to 8 (lowest quality), with performing loans rated 1 to 4. A Special Mention or Watch List loan (5) requires a minimum of a 5% allocation, a Substandard loan (6) requires a minimum of a 15% allocation, a Doubtful loan (7) requires a minimum of a 50% allocation and a Loss loan (8) requires a complete charge off of the loan.
(3) Classified Residential Mortgages: A specific analysis is used, based on the Broker Price Opinion value of the home, less a 15% liquidation expense. If the estimated loss is $0, then a 5% (Watch List) allocation ratio is used to account for increased administration costs and risks associated with the foreclosure process.
(4) Installment loans to individuals: The FDIC Profile loss ratio is 1.39%. All Installment loans are rated A-D, with A being highest quality and D being lowest quality. For loans between 32 -120 days delinquent, an allocation can be taken as follows: "A" & "B" Loans - 2.5%, "C" - 5%, "D" - 15%. The Bank typically gives a 15% allocation for all installment loans over 32 days delinquent. However, a specific analysis, based on the FMV of the collateral, less liquidation costs was used for Secured Installment loans greater than 120 days past due. See the UB Classified Loan Report for specific allocations.
(5) Home Equity: Term Loans & Lines of Credit: The rate shown above of 0.50% is for Home Equity Term Loans. The allocation ratio for Home Equity Lines of Credit is .75% since they carry higher risk since they do not amortize during the life of the loan.
(6) Credit Cards: The FDIC Profile loss ratio is 4.13%.
(7) Overdrafts: Overdrafts generally carry an unusually high risk of loss as they are generally unsecured and are rated the same way as non-performing installment loans with an allocation ratio of 15%.
The Bank's overall loan portfolio is geographically concentrated in Ann Arbor and the future performance of these loans is dependent upon the performance of relatively limited geographical areas. Since the Bank has a limited experience with its loan portfolio in Ann Arbor, the Bank's historical loss ratios may be less than future loss ratios.
Management believes that the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio, although the ultimate adequacy of the allowance for loan losses is dependent upon future economic factors beyond our control. A downturn in the general nationwide economy will tend to aggravate, for example, the problems of local loan customers currently facing some difficulties. A general nationwide business expansion could result in fewer loan customers being unable to repay their loans.
Other real estate owned at December 31, 2000 and December 31, 1999 includes a commercial development site in Sault Ste. Marie, Michigan. Based upon an appraisal, management believes the 16-acre site where a former loan office is located has a fair market value more than its carrying value of $266,079 at December 31, 2000. The Bank no longer intends to utilize it for a branch location and accordingly has classified it as other real estate owned. Management is in negotiations to sell the property to a third-party for fair market value, to be determined by a new appraisal. There is no assurance that a sale of the Sault Ste Marie property will be consummated.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income. For continuing operations, non-interest income increased to $2,650,329 in 2000, from $2,289,126 in 1999, an increase of 15.8%. The increase in 2000 was mainly the result of increased revenues from Midwest Loan Services' loan subservicing and set-up fees, which more than offset a decline in income from merchant banking (BIDCO) income, because the BIDCO's results were deconsolidated after May 1, 2000.
For continuing operations, non-interest income increased from $2,129,494 in 1998 to $2,289,126 in 1999, an increase of 7.5%. The increase in 1999 was mainly the result of increased revenues from merchant banking (BIDCO) income, which was included because the BIDCO's results were consolidated for the first time and more than offset a decline in mortgage banking income. Other non-interest income in 1998 also included gains from the sale of excess property.
Mortgage banking. Mortgage banking, servicing and origination fees increased from $1,151,923 in 1999 to $2,183,209 in 2000. The increase in mortgage banking fee income was the result of an increase in the number of loans subserviced at Midwest Loan Services. Mortgage banking, servicing and origination fees decreased to $1,151,923 in 1999 from $1,493,095 in 1998. The decrease in mortgage banking fee income was the result of a decrease in loan purchase and origination volumes during 1999 and a decrease in the size of the servicing rights portfolio held for investment.
During 2000, Midwest Loan Services increased its mortgage subservicing contracts by 280% (from $0.5 billion to $1.9 billion) as a result of new business relationships with two of the top five mortgage banking firms on Wall Street. Management of Midwest has been told by these firms to expect as much as an additional $18 billion in mortgage subservicing by year-end 2001 as these firms shift additional existing business to Midwest from other subservicing firms. There is of course, no assurance that this business will materialize or in the amount or timeframe currently contemplated. There is also no assurance that the additional activity will be done on a profitable basis, especially considering the fact that a formal agreement is still being negotiated and is not yet finalized with either firm.
The servicing rights portfolio totaled $55,443,000 of FHLMC and FNMA mortgages at December 31, 2000, versus $64,366,000 at December 31, 1999. All residential mortgage loan servicing in 2000 and 1999 was done by Midwest Loan Services. The amount decreased as a result of payoff and refinancing of existing rights throughout the year. A special charge of approximately $50,000 was incurred in December 2000 as a result of impairment of the servicing rights portfolio due to the decline in long term interest rates.
Mortgage interest rates hit 30-year lows in October 1998 and rose steadily from that point throughout 1999. Rates peaked in early 2000, and fell
during the rest of the year. Refinancing activity picked up sharply in December 2000, as 30-year mortgage rates hit 7%.
Based on recent comparable sales and indications of market value from industry brokers, management believes that the current market value of the Bank's portfolio of mortgage servicing rights equals cost. Market interest rate conditions can quickly affect the value of mortgage servicing rights in a positive or negative fashion, as long term interest rates rise and fall.
Servicing Rights Held by University Bank ($ amounts in 000's)
(1) In addition to checking the market value of servicing rights with similar characteristics to our portfolio, we also analyze the portfolio using the following assumptions: The market value of servicing is based upon market transactions at December 31, 1999 of 5.3x (5.3 times the servicing fee) for 30-year servicing, 4.4x for 15-year servicing, 3.6x for Balloon servicing and 3.0x 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% in 1999.
(3) Based on outside appraisal in 2000. Range based upon the two methods used in (1) and (2), above, in 1999.
Additional information regarding the Bank's mortgage banking activities for the past three years is set forth in Note 4 to our consolidated financial statements.
Michigan BIDCO. BIDCO invests in businesses in Michigan with the objective of capital gains while fostering job growth and economic development. As of December 31, 2000, the BIDCO had made twenty-nine investments since its inception in 1993, amounting to a total of $16,569,800 at original cost, before repayments or participations sold. At December 31, 2000, Michigan BIDCO had total assets of $3,429,226 versus $3,228,441 at December 31, 1999.
The financial results of Michigan BIDCO were accounted for under the equity method of accounting until March 1999. In April 1999, $1,850,000 of Michigan BIDCO bonds were repurchased by the BIDCO, and University Bank converted its $27,000 of bonds into common stock, thereby increasing the Bank's equity ownership to 80.1%. Effective April 1999, Michigan BIDCO's financial results became consolidated into the results of University Bancorp. The remaining Michigan BIDCO bonds were converted into common stock on May 31, 2000,
and thus diluted University Bank's equity ownership down to 28.8%. As a result, the BIDCO is no longer consolidated in the financial statements of University Bancorp and the investment is now accounted for under the equity method of accounting. We realized pre-tax income from the investment in the BIDCO of $114,081, $543,174 in 1999 and $128,219 in 1998.
Securities. Proceeds from sales of marketable equity securities included in proceeds from sales of investment securities were $98,625, $74,550 and $142,088 for the years ended December 31, 2000, 1999 and 1998, respectively. Gross gains of approximately $20,625, $1,879 and $97,993 were realized on 2000, 1999 and 1998 sales, respectively. Gross losses of $17,981 were realized on 1999 sales and no gross losses were realized on 2000 and 1998 sales.
Proceeds from sales of available for sale debt securities were $1,123,594, $530,763 and $0 for the years ended December 31, 2000, 1999 and 1998, respectively, excluding sales associated with the Bank's mortgage banking operation. There was a gross loss of $2,839 on 2000 sales, a gross gain of $625 on 1999 sales, and no gain or loss on 1998 sales.
At December 31, 2000 gross unrealized losses in our available-for-sale securities were $335,000 and gross unrealized gains were $0. At December 31, 1999, gross unrealized losses in the available-for-sale securities were $585,000 and gross unrealized gains were $0. At December 31, 1998 gross unrealized losses in our available-for-sale securities were $191,000 and gross unrealized gains were $8,000.
Non-interest expense. Including only activity from continuing operations, our non-interest expense increased to $4,694,974 in 2000 from $4,115,712 in 1999, a 14.1% increase. During the year non-interest expenses at the retail bank division increased by $321,522 from $2,323,325 to $2,644,847 primarily as a result of higher legal and audit expenses. Increases in most other areas were the result of growth at Midwest Loan Services. Data processing expenses were higher primarily because of a variety of internet initiatives, including internet banking and development projects at Midwest Loan Services. University Bancorp's total non-interest expense decreased $56,408 despite $139,412 in goodwill amortization expense related to an earn-out payment from the Midwest Loan Services acquisition. The increase in goodwill amortization was more than offset by decreases in ESOP and legal costs. The remaining acquisition goodwill of $139,412 will be amortized at the rate of $27,882 per year over the next five years. The 1999 expenses were higher than 1998 because they included $160,502 in legal and audit expense related to the Midwest Loan Services acquisition lawsuit, which was only partially offset by declines in other categories including salaries and benefits, occupancy and other expense.
Including only activity from continuing operations, our non-interest expense decreased from $4,204,947 in 1998 to $4,115,712 in 1999, a 2.1% decrease. During the year non-interest expenses at the retail bank division were decreased as a result of continued efforts at cost control. Legal expenses remained high as a result of an adverse judgment in a lawsuit which resulted in about $192,000 in total costs. Data processing expenses were higher primarily because of a variety of Year 2000 expenses which were incurred and expensed and various internet initiatives, including internet banking and development projects at Midwest Loan Services. University Bancorp's total non-interest expense increased $113,443 because of an adverse legal judgment against University Bancorp, which caused the category of legal and audit expense to increase $160,502, including a substantial portion of the $192,000 legal expense
mentioned previously, which was only partially offset by declines in other categories including salaries and benefits, occupancy and other expense.
Internet Banking. Management has begun a project to offer transactional internet banking for all bank products. The internet banking product is now in beta test. It is anticipated that Midwest Loan Services will be a major user of this product, and that a portion of Midwest's escrow accounts, currently totaling over $50 million, will be transferred to the Bank, as a result.
LIQUIDITY AND CAPITAL RESOURCES
Our total assets at December 31, 2000 amounted to $47.67 million compared to $40.82 million at December 31, 1999. Loans receivable, net of reserves, increased by $5.06 million to $35.64 million from $30.58 million. Cash and cash equivalents including Federal Funds sold on an overnight basis at the end of 2000 increased by $1.00 million from the prior year, while securities decreased by $0.68 million. At year-end 2000, the Bank had an unused line of credit from the Federal Home Loan Bank of Indianapolis of $1,906,046, and an unused line of credit from the Federal Reserve Bank of Chicago of $2,100,000.
University Bank, as an FDIC-insured bank, is subject to certain regulations which require the maintenance of minimum liquidity levels of cash and eligible investments. The Bank has historically exceeded this minimum as a result of its investments in federal funds sold, U.S. government and U.S. agency securities and cash. In addition, University Bancorp had $16,093 in cash and equity securities at the end of 2000 to meet cash needs, primarily operating expenses and interest and principal reductions on the University Bancorp's note payable. The balance of the loan was $562,000 and $694,000 at year-end 2000 and 1999. The note was refinanced in late 1997, into a seven-year fully amortizing loan. In an effort to maintain the Bank's Tier 1 capital to assets ratio above 7% and to increase capital through retained earnings, management does not expect that the Bank will pay dividends to us in 2000. Management intends that the cash and securities on hand, together with cash from the sale of common stock, preferred stock and the exercise of stock options to be sufficient to cover the required principal reductions during 2000 on University Bancorp's loan.
During 2000, University Bancorp raised working capital by issuing equity conversion notes, which bear interest at prime rate although all payment of interest is deferred until conversion into common stock or redemption. Notes are redeemable only through the proceeds of a future sale of common stock or preferred stock. The various equity conversion notes that were issued were converted into preferred stock in November 2000. The equity conversion notes were sold to our President, Chairman and members of their family. They have committed to provide at least $300,000 in additional financing during early 2000 through the purchase of additional equity conversion notes or convertible preferred stock to increase the Bank's capital to match the Bank's asset growth and any operating losses.
The Company's total stockholders' equity at December 31, 2000 was approximately $2.04 million (or 4.3% of total assets) compared to $1.95 million (or 4.8% of total assets) at December 31, 1999. The Bank's regulatory capital at December 31, 2000 was $3.56 million or 7.42% of the Bank's total regulatory assets and the risk-adjusted capital ratio of 9.7% exceeded the minimum regulatory risk-based capital requirement of 8% of the risk-adjusted assets for the Bank. The following table provides detailed information about the Bank's risk-adjusted assets and actual capital percentages:
RISK ADJUSTED ASSETS & CAPITAL RATIOS ($ amounts in 000's)
ITEM 7A.
ITEM 7A. MARKET RISK
IMPACT OF INFLATION
The primary impact of inflation on our operations is reflected in increased operating costs. Since our assets and liabilities are primarily monetary in nature, changes in interest rates have a more significant impact on our performance than the general effects of inflation. However, to the extent that inflation affects interest rates, it also affects our net income.
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. This 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 these rights by lowering required amortization rates on the rights. Rising interest rates tend to decrease new mortgage origination activity, negatively impacting current income from the Bank's retail mortgage banking operations. Rising interest rates also slow Midwest Loan Services' rate of growth, but increases the duration of its existing subservicing contracts.
The Bank utilizes a software risk model to determine its overall exposure to changes in interest rates. At December 31, 2000, the model predicts that the Bank's average 12 month GAP as a % of Earning Assets was -28.69%. The model predicts that in a 400 basis point shift upward that the Bank has $154,000 of annual net interest margin at risk, and $137,000 possible increase in annual net interest margin in a 400 basis point shift down environment.
However, the software model does not account entirely for the convexity of the Bank's long term zero coupon Treasury securities, the optionality of the Bank's Principal Only securities or our servicing rights which act as Interest Only securities. The Bank's securities portfolio is designed to offset a portion of the market value risk associated with the servicing rights. During 2000, the market value of the servicing rights versus book decreased by $51,000 to $165,000 while the market value of the Bank's zero coupon and PO securities increased by $250,000 based on year-end fair market values.
We also perform a static gap analysis which has limited value as a simulation because of competitive and other influences that are both within and beyond our control and does not take into account the historical variability of deposit balances based on interest rate shifts. The table on the following page details our interest sensitivity gap between interest-earning assets and interest bearing liabilities at December 31, 2000. Certain items in the table are based upon various assumptions that may not necessarily reflect future
experience, and therefore, certain assets and liabilities may in fact mature or re-price differently from what is illustrated. The one-year static gap position at December 31, 2000 was estimated at ($24,318,000) or -53.65%:
ASSET/LIABILITY POSITION ANALYSIS ($ IN 000'S) MATURING OR REPRICING IN
The following repricing information is provided for the Bank's investment portfolio, using book values, as of December 31, 2000:
Investment Portfolio Maturities ($ amounts in thousands) and Yield by Type:
Additional information regarding the Bank's investments is set forth under Note 5 to the consolidated financial statements.
The following information illustrates maturities and sensitivities of the Bank's loan portfolio to changes in interest rates as of December 31, 2000:
Loan Portfolio Maturities by Type ($ amounts in thousands):
(1) Excludes loans held for sale of $268 and the allowance for loan losses.
INCOME TAXES
Income tax expense (benefit) in 2000 was $0, versus $32,524 in 1999 and $(198,592) in 1998. The effective tax (benefit) rate was 0% in 2000, (3.7%) in 1999, and (50.1)% in 1998. No tax benefit was realized in 2000 or, 1999, due to loss carryforwards as a result of the net losses from operations.
In 1996, the Bank, through a subsidiary, purchased a $1,000,000 interest in a partnership investment in Michigan Capital Fund for Housing Limited Partnership I, a Michigan limited partnership, which invested in federal low income housing tax credits. The initial investment consisted of a $50,000 equity purchase and the execution by the subsidiary of a $950,000 promissory note held by this Partnership. Additional capital contributions are made over time to reduce the balance of the note. The purchase of the tax credits increased our deferred federal income tax assets in 2000, 1999 and 1998 and is expected to decrease the amount of federal income taxes we would otherwise pay annually through 2005.
At December 31, 2000, the Company had available federal income tax loss carryforwards that could be utilized to shelter approximately $2,885,000 in future taxable income. Realization of income tax benefits not recorded in the financial statements is dependent upon generating sufficient future taxable revenue. See footnote 14 to the financial statements
LEGAL PROCEEDINGS
Results in the fourth quarter of 2000 were negatively impacted by legal expense to defend and settle a lawsuit related to the Bank's sale, in November 1999, of its shares in Varsity Mortgage, LLC to Paramount Bank of Farmington Hills, Michigan. Subsequent to the sale, Varsity experienced management problems and a further drop in its business resulting in substantial operating losses. On May 19, 2000, Paramount Bank filed a complaint (Case No. 00-023299-CK) in Oakland County Circuit Court against University Bank and two of its former officers. On December 14, 2000, the parties settled the suit. Total expense to defend and settle the lawsuit were approximately $60,000, most of which was incurred in the fourth quarter of 2000.
RECENT EVENTS
On January 24, 2001, the Board of Directors of University Bank elected Rebecca David, Chief Executive Office and a Director of the Bank. Ms. David, an experienced bank executive, was previously President of Franklin Bank, N.A. of Southfield, Michigan. Stephen Lange Ranzini continues to serve as President and Chairman of University Bank.
UNIVERSITY BANCORP, INC.
--------------------
CONSOLIDATED FINANCIAL STATEMENTS
--------------------
DECEMBER 31, 2000, 1999, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders University Bancorp, Inc.
We have audited the accompanying consolidated statement of financial condition of University Bancorp, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for the year ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Midwest Loan Services, Inc., an 80 percent owned subsidiary, which statements reflect total assets and revenues constituting 5 percent and 33 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Midwest Loan Services, Inc., is based solely on the report of the other auditors. The consolidated financial statements as of and for the years ended December 31, 1999 and 1998, were audited by other auditors whose report dated March 17, 2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the 2000 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of University Bancorp, Inc. and subsidiaries as of December 31, 2000, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP - ---------------------- Southfield, Michigan March 16, 2001
UNIVERSITY BANCORP, INC. Consolidated Balance Sheets December 31, 2000 and 1999
-Continued-
UNIVERSITY BANCORP, INC. Consolidated Balance Sheets (continued) December 31, 2000 and 1999
The accompanying notes are an integral part of the consolidated financial statements.
UNIVERSITY BANCORP, INC. Consolidated Statements of Operations For the Years Ended December 31, 2000, 1999 and 1998
-Continued-
UNIVERSITY BANCORP, INC. Consolidated Statements of Operations (continued) For the Years Ended December 31, 2000, 1999 and 1998
-Continued-
UNIVERSITY BANCORP, INC. Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of the consolidated financial statements.
UNIVERSITY BANCORP, INC. Consolidated Statements of Stockholders' Equity For the years ended December 31, 2000, 1999, and 1998
The accompanying notes are an integral part of the consolidated financial statements.
UNIVERSITY BANCORP, INC. Consolidated Statements of Cash Flows For the years ended December 30, 2000, 1999 and 1998
The accompanying notes are an integral part of the consolidated financial statements.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
1. Summary of significant accounting policies
Principles of Consolidation and Nature of Operations The consolidated financial statements of University Bancorp, Inc. (the Company) include the operations of its wholly-owned subsidiary, University Bank (the Bank), the Bank's wholly-owned subsidiary, University Insurance & Investment Services, Inc. (Agency) and an 80% owned subsidiary, Midwest Loan Services, Inc. (Midwest). In 1999, the consolidated financial statements also include an 80% owned subsidiary, Michigan BIDCO (BIDCO). Due to the reduction in the Company's ownership percentage, this entity is accounted for using the equity method at December 31, 2000. The accounts are maintained on an accrual basis in accordance with generally accepted accounting principles and predominant practices within the banking and mortgage banking industries. All significant intercompany balances and transactions have been eliminated in preparing the consolidated financial statements.
The Company is a bank holding company. University Bank, which is located in Michigan, is a full service community bank, which offers all customary banking services, including the acceptance of checking, savings and time deposits. The Bank also makes commercial, real estate, personal, home improvement, automotive and other installment, credit card and consumer loans, and provides fee based services such as annuity and mutual fund sales, stock brokerage and money management, life insurance, property casualty insurance and foreign currency exchange. The Bank's customer base is primarily located in the Ann Arbor, Michigan area. The Bank established its main office in Ann Arbor in February 1996, by relocating from the eastern Upper Peninsula of Michigan.
University Bank's loan portfolio is concentrated in Ann Arbor and Washtenaw County, Michigan. While the loan portfolio is diversified, the customers' ability to honor their debts is partially dependent on the local economy. The Ann Arbor area is primarily dependent on the education, healthcare, services, and manufacturing (automotive and other) industries. Most real estate loans are secured by residential or commercial real estate and business assets secure most business loans. Generally, installment loans are secured by various items of personal property.
University Insurance and Investments Services (Agency) is engaged in the sale of insurance products including life, health, property and casualty, and investment products including annuities, mutual funds, stock brokerage and money management. The Agency is located in the Bank's Ann Arbor main office. The Agency also has a limited partnership investment in low-income housing tax credits through Michigan Capital Fund for Housing Limited Partnership I with the assisted financing from the General Partner, Michigan Capital Fund for Housing.
Midwest Loan Services (Midwest) is engaged in the business of servicing and subservicing residential mortgage loans. Midwest began operations in 1992 and was acquired by University Bank in December, 1995. Midwest is based in Houghton, Michigan, and is a specialist in servicing loans for itself and other financial institutions, including the Bank (See Note 4).
Use of Estimates in Preparing Financial Statements:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions based upon available information. These estimates and assumptions affect the reported amounts and disclosures. Actual results could differ from those estimates.
The significant estimates incorporated into these consolidated financial statements which are more susceptible to change in the near term include the value of mortgage servicing rights, the allowance for loan losses, the identification and valuation of impaired loans, the equity interest in the fair value and the change in the fair value of investments made by the BIDCO, the fair value of financial instruments, and the valuation of deferred tax assets.
Cash flow reporting
For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents is defined to include the cash on hand, non-interest bearing deposits in other institutions, federal funds sold and other investments with a maturity of three months or less when purchased. Net cash flows are reported for customer loan and deposit transactions and interest bearing deposits with other banks.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
1. Summary of significant accounting policies (continued)
Securities
Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income or loss. Realized gains are based on specific identification of amortized cost. Securities are written down to fair value when a decline in fair value is not temporary. Interest income includes amortization of purchase premium or discount. Other securities such as Federal Home Loan Bank stock are carried at cost.
Loans
Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days. Payments received on such loans are reported as principal reductions, unless all interest and principal payments in arrears are paid in full.
Mortgage banking activities
Mortgage banking activities includes retail and servicing operations. Mortgage loans held for sale as part of the Bank's mortgage banking activities are valued at the lower of cost or market as determined by bid prices for loans in the secondary market. Certain loans are securitized into mortgage backed trading securities. Upon securitization, the loans are transferred at market value to trading securities, and a gain or loss on securitization of loans is recorded.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable credit losses, increased by the provision for loan losses and decreased by charge-offs, less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the original terms of the loan.
Premises and equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily on the straight-line method for bank premises and the accelerated methods for equipment and land improvements over their estimated useful lives. The Company uses the following useful lives as of December 31, 2000:
Other real estate owned
Real estate properties acquired in collection of a loan are recorded at fair value upon acquisition. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported in other expenses.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
1. Summary of significant accounting policies (continued)
Servicing rights
Servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans originated and sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using grouping of the underlying loans as to type, term and interest rates. Any impairment of a grouping is reported as a valuation allowance.
Income taxes
Income tax expense/benefit is the sum of the current year estimated tax obligation or refund per the income tax return, and the change in the estimated future tax effects of temporary differences and carryforwards. Deferred tax assets or liabilities are computed by applying enacted income tax rates to the expected reversals of temporary differences between financial reporting and income tax reporting, and by considering carryforwards for operating losses and tax credits. A valuation allowance adjusts deferred tax assets to the net amount that is more likely than not to be realized.
Retirement plan
The Bank has a 401-k Plan that allows an employee to contribute up to 15% of salary pre-tax, to the allowable limit prescribed by the Internal Revenue Service. Management has discretion to make matching contributions to the Plan. However, the Bank made no matching contributions for the years ended December 31, 2000, 1999 and 1998.
Employees Stock Ownership Plan (ESOP)
The Company has a noncontributory ESOP covering all full-time employees who have met certain service requirements. The employees' share in the Company's contribution is based on their current compensation as a percentage of the total employee compensation. As shares are contributed to the plan they are allocated to employees and compensation expense is recorded at the shares' fair value.
Stock options
No expense for stock options is recorded, as the grant price equals the market price of the stock at grant date. Pro-forma disclosures show the effect on income and earnings per share had the options' fair value been recorded using an option pricing model.
Dividend restriction
Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the bank to the holding company or by the holding company to shareholders. In addition, the Bank cannot pay a dividend until it has net retained earnings. The accumulated deficit of the Bank was $1,804,709 and $1,162,012 at December 31, 2000 and 1999, respectively.
Earnings (loss) per share
Basic earnings (loss) per share is net income (loss) of the Company (after the dividend requirement for preferred stock) divided by the weighted average common shares outstanding for the year. Diluted earnings per share includes the issuance of any additional dilutive potential common shares. Earnings (loss) per share and share amounts have been adjusted for stock dividends and splits.
Comprehensive Income (Loss):
Comprehensive income (loss) includes both the net loss and the change in unrealized gains and losses on securities available for sale.
Segment Reporting
The Company's segments are determined by the products and services offered, primarily distinguished between banking and mortgage banking operations. Loans, investments, and deposits provide the revenues in the banking operation, and servicing fees, underwriting fees and loan sales provide the revenues in mortgage banking. All operations are domestic.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
1. Summary of significant accounting policies (continued)
Reclassification
Certain items in the 1999 and 1998 consolidated financial statements and notes have been reclassified to conform to the 2000 presentation.
2. Discontinued Operations
In 1999, University Bank sold its investment in two mortgage banking subsidiaries, Varsity Mortgage, LLC and Varsity Funding Services, LLC, which were based in Farmington Hills, Michigan. These subsidiaries specialized in the wholesale mortgage banking business, which involved the purchase from correspondents, and the sale to the secondary market, of conforming and nonconforming residential loans, respectively. The Company sold Varsity Funding's operating subsidiary, MortgageQuest in a transaction that resulted in no gain or loss to the Company and effectively dissolved Varsity Funding. In November 1999, the Company sold Varsity Mortgage in a transaction that resulted in no gain or loss to the Company. Accordingly, the statement of operations reflects these disposals as discontinued operations for the years ended December 31, 1999 and 1998. The following schedule discloses the detail of income/loss from discontinued operations:
3. Michigan BIDCO, Inc.
BIDCO was incorporated for the purpose of providing financing to small businesses located in Michigan for the purpose of creating business and industrial development in the State of Michigan. BIDCO is licensed under the Michigan BIDCO Act, and is regulated by the Michigan Financial Institutions Bureau, Bank and Trust Division. The Chairman and President of the Company serve as officers and directors of BIDCO.
Upon formation, Michigan BIDCO received $2 million from the State of Michigan (Michigan Strategic Fund or MSF). As BIDCO monitors each loan and investment, it determines the increase or retention in number of jobs and annual sales volume of each investee company. This increase or retention is then used to determine the credits earned and applied against interest and principal due to the MSF. The financial statements of BIDCO are stated using the prescribed accounting practices of investment companies. Prior to March 31, 1999, the Company's investment in BIDCO was accounted for under the equity method of accounting. Subsequent to that date, the Company increased its ownership of BIDCO and it became a consolidated subsidiary of the Company. The Company owned 80.1% of BIDCO at December 31, 1999 (of which 75.3% was held by the Bank and 4.8% by the Company).
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
3. Michigan BIDCO, Inc. (continued)
On May 31, 2000, BIDCO converted its outstanding convertible bonds into common stock (a few convertible bonds were also redeemed at that time). With the conversion of these convertible bonds, the Company's consolidated ownership in BIDCO dropped from 80.1% to 28.8%. As a result, the Company's investment in BIDCO is now being accounted for using the equity method of accounting, and the BIDCO has been excluded from the Company's consolidated financial results subsequent to May 31, 2000.
As of December 31, 2000, BIDCO management had offered to repurchase the 280 shares of BIDCO stock owned by University Bank at year-end for $1.2 million. Directors for the BIDCO and Bank have approved the transaction but are awaiting regulatory approval. Total equity of BIDCO was $2.9 million and $1.5 million at December 31, 2000 and 1999, respectively.
4. Secondary Market Operations
Midwest Loan Services provides servicing and subservicing of real estate mortgage loans for University Bank and several other financial institutions. The unpaid principal balance of these loans was approximately $2.2 billion, $352 million and $116 million as of December 31, 2000, 1999 and 1998 respectively. Custodial escrow balances maintained in connection with these respective loans was $38.5 million, $6.5 million, and $1.7 million, at December 31, 2000, 1999 and 1998 respectively. The following summarizes the operations of Midwest for the years ended December 31:
University Bank sells conforming residential mortgage loans to the secondary market. These loans are owned by other institutions and are not included in the Company's consolidated balance sheets. Such mortgage loans have been sold predominately without recourse or with limited recourse. The unpaid principal balance of these loans was $3.6 million, $64.4 million and $95.6 million at December 31, 2000, 1999 and 1998 respectively.
Following is an analysis of the change the Company's mortgage servicing rights:
There was no valuation allowance necessary at December 31, 2000, 1999 or 1998.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
5. Securities available for sale
The following is a summary of the amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities available for sale at December 31, 2000 and 1999:
Investment securities with an amortized cost of approximately $2.3 million at December 31, 2000 and $2.7 million at December 31, 1999 were pledged to secure certain borrowings.
The scheduled maturity date of the securities available for sale at December 31, 2000 is:
6. Loans
Major classifications of loans are as follows as of December 31:
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
6. Loans (continued)
Changes in the allowance for loan losses were as follows:
Past due and non-accrual loans at December 31 are summarized as follows:
Information regarding impaired loans for the years ended December 31, is as follows:
Non-accrual and impaired loans at December 31, 1999 included one loan for $396,000 held by Michigan BIDCO.
The Bank had loans of $217,291 and $209,727 to related officers and directors at December 31, 2000 and 1999, respectively.
7. Premises and equipment
Classifications at December 31 are summarized as follows:
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
7. Premises and equipment (continued)
Depreciation expense amounted to $213,314, $357,647 and $321,005 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Bank leases part of its main office in Ann Arbor to the University of Michigan. Under this lease agreement (which expires in September 2001), the Bank is reimbursed for 40.4% of its occupancy expense. The Bank leases an ATM drive-thru location in Ann Arbor for approximately $25,000 per year. Midwest leases its office space for approximately $6,000 in Houghton, Michigan. Total rental expense for all operating leases was $61,892, $131,654 and $156,633 in 2000, 1999 and 1998. As of December 31, 2000, the Company had no minimum rental commitments under non-cancelable operating leases.
The Bank remains contingently liable in the event that the purchaser of one of its branch locations in Sault Ste. Marie does not meet its future obligations to the lessor. As of December 31, 2000, management believes that the purchaser was in compliance with these lease terms. The annual base rent for such branch is currently $32,000, and the future minimum rent due is $90,000.
8. Time deposits
Time deposit liabilities issued in denominations of $100,000 or more were $16,482,819 and $9,381,072 at December 31, 2000 and 1999 respectively.
At December 31, 2000, stated maturities of time deposits were:
The Bank had issued through brokers $13,021,000 and $6,843,000 of time deposits as of December 31, 2000 and 1999, respectively. These time deposits have maturities ranging from one to 60 months and are included in the table above.
The Bank had deposits of $1,646,812 and $618,403 from directors, officers and their affiliates as of December 31, 2000 and 1999, respectively.
9. Stock options
In 1993, the Board of Directors approved the grant of options to purchase 60,000 shares of common stock to the non-executive directors. The exercise price of options granted was set at $2.08 per share, which was the then current bid price per share as reported by NASDAQ. The options are immediately exercisable and expire July 19, 2003. Under this initial grant, options to purchase 30,000 shares remain outstanding as of December 31, 2000.
In 1995, the Company adopted a stock option and stock award plan (the 1995 Stock Plan), which provides for the grant of incentive stock options, as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended, as well as the grant of non-qualified stock options and other stock awards. The plan provides for the grant to officers, directors and key employees of the Company, and independent contractors providing services to the Company, of options to purchase and other awards of common stock. The exercise price of options granted under the plan shall be determined by the Board of Directors, or a compensation committee thereof. Options shall expire on the date specified by the Board of Directors or such committee, but not more than 10 years from the date of grant (or five years from the date of grant for incentive stock options if the grantee owned 10% of the Company's voting stock at the date of grant). Unless amended, the 1995 Stock Plan will terminate on November 15, 2005.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
9. Stock options (continued)
The following table summarizes the activity relating to options to purchase the Company's common stock:
Options outstanding have been restated for a 3 for 2 stock split in 1998. Options allowable for grant under the plan are not adjusted without shareholder approval. Due to forfeitures in 1998 prior to the split, the number of shares allowable for grant did not require adjustment, and the number of options has remained within allowable amounts.
SFAS No. 123 requires pro forma disclosures for companies that do not adopt the fair value accounting method for stock-based employee compensation. Accordingly, the following pro forma information presents net loss and loss per share had the Standard's fair value method been used to measure compensation cost for stock options granted since 1996. Compensation cost recognized for stock options under APB No. 25 was $0 for 2000 and 1999, because options were granted at exercise prices equal to the underlying stock prices at date of grant. At December 31, 2000, the Company had 124,776 shares authorized for future grants.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
10. Employee stock ownership plan (ESOP)
The employees' allocation of ESOP assets is based on their current compensation, after 1 year of service and upon reaching the age of 21. The annual contribution to the ESOP is at the discretion of the Board of Directors. For the years ended December 31, 1999 and 1998, the Company made contributions to the plan of 23,662, and 16,445 shares of University Bancorp common stock with an approximate fair market value at the time of the contribution of $50,282 and $53,445 respectively. Assets of the plan are comprised entirely of 91,462 shares of the Company's stock at December 31, 2000 and 1999, all of which were fully allocated at December 31, 2000. Upon retirement from the plan, participants can receive distributions of their allocated shares of the Company's stock. The assets of the ESOP are held in trust and were valued at approximately $172,000, and $274,000 at December 31, 2000 and 1999, respectively.
11. Minority Interest
The Bank owns an 80% interest in the common stock of Midwest Loan Services, with the remaining 20% owned by the President of Midwest. At December 31, 2000 and 1999, total common stockholders' equity of Midwest was $1,413,752 and $1,016,949 resulting in a $282,750 and $203,390 minority interest reflected on the Company's consolidated balance sheet, respectively. The results of Midwest's operations for 2000 and 1999 are included in the Company's consolidated statement of operations.
In April 1999, the Company and the Bank made additional investments in the common stock of Michigan BIDCO bringing their combined ownership to 80.1%. At December 31, 1999, total common stockholders' equity of the BIDCO was $1,519,546 resulting in a $302,405 minority interest reflected on the Company's consolidated balance sheet at December 31, 1999. In May 2000, Michigan BIDCO converted its bonds into common stock, thus diluting the Company's ownership to approximately 28%, and consequently eliminating the Company's minority interest as of December 31, 2000.
12. Commitments and contingencies
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to buy, sell and fund loans, letters of credit and unused lines of credit. The Bank's exposure to credit loss in the event of non-performance is equal to or less than the contractual amount of these instruments. The Bank follows the same credit policy to make such commitments as that followed by loans recorded in the consolidated financial statements. The following is a summary of commitments as of December 31:
13. Related party transactions
The Company's Chairman and President also serve as officers and directors of Michigan BIDCO. As such, the Chairman and President are actively involved in the BIDCO's operations, including investment activity and estimation of the fair value of its equity investments.
In connection with the Agency's investment in Michigan Capital Fund LPI, the Bank was not permitted by regulation to guarantee a loan from the Michigan Housing Development Authority. The loan to the Agency is personally guaranteed by the Company's Chairman and common stock of the Company held by a trust for the benefit of the President of the Company was pledged as additional security for the loan.
In July 2000, the Company's Chairman purchased equity securities from the Company for $58,125, resulting in a gain to the Company of $20,625.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
13. Related party transactions (continued)
In November 2000, the Company issued $725,000 of preferred stock to the Company's Chairman, the Chairman's wife, the President and related family trusts. The 6% cumulative, non-voting, convertible preferred stock issued by the Company was issued to retire equity conversion notes held by the Company's Chairman, the Chairman's wife, the President and related family trusts.
14. Income taxes
Federal income taxes consist of the following:
The net deferred tax asset at December 31, 2000 and 1999 is comprised of the following:
The Company has net operating loss carryforwards of approximately $2,885,000 which expire beginning in 2012; and general business credit carryforwards of approximately $570,000 which expire beginning in 2011. In addition, the Company has an alternative minimum tax (AMT) credit carryforward of approximately $115,000. Under current tax regulations, the AMT credit can be carried forward indefinitely. Management has established an allowance against deferred tax assets that are not considered realizable at December 31, 2000 and 1999.
Financial statement tax expense amounts differ from the amounts computed by applying the statutory federal tax rate of 34% to pretax income because of operating losses and valuation allowances recorded to reduce deferred tax assets as noted above.
15. Short Term Borrowings
The Bank has a line of credit available from the Federal Home Loan Bank (the FHLB) in the amount of $6 million. $4,093,954 was outstanding from the FHLB at December 31, 2000. Borrowings are secured by the pledge of specific mortgage loans held for investment with unpaid principal balances of $8.1 million and available-for-sale securities with a balance of $1.9 million.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
15. Short Term Borrowings (continued)
The Bank has a line of credit available from the Federal Reserve Bank of Chicago (the FRB) in the amount of $2.1 million. There were no amounts outstanding on this line from the FRB at December 31, 2000. Borrowings are secured by the pledge of specific commercial loans held for investment with unpaid principal balances of $3.0 million.
16. Long Term Borrowings
The Company has a note payable to North Country Bank & Trust (NCB&T) secured by the stock of the Bank with a balance of $562,000 at December 31, 2000. The note has a maturity date of February 15, 2005. Interest is payable quarterly at the prime rate (9.50%) of NCB&T plus 1.00 percent. Principal payments required are as follows:
Dividends by the Bank to the holding company in excess of the prior year's annual net income are not permitted without prior permission from NCB&T under the terms of the Company's credit facility.
University Insurance and Investment Services Inc. has an obligation of $364,130 at December 31, 2000 payable to the Michigan Capital Fund for Housing Nonprofit Housing Corporation in connection with its investment in a low-income housing limited partnership. Payments are due on demand, but are expected to be funded as follows:
University Bancorp issued equity conversion notes in the amount of $231,000 and $304,000 during 2000 and 1999, respectively. In November 2000, the notes were redeemed from the proceeds of the sale of convertible preferred stock. No conversion notes were issued by the Company as of December 31, 2000.
17. Earnings (loss) per common share
Due to the net losses in 2000, 1999 and 1998 the stock options outstanding were considered anti-dilutive and are not included in loss per share calculations. As a result, both basic and diluted earnings per share available to common are equal to net loss divided by weighted average common shares outstanding. The Company's non-voting, cumulative, convertible, preferred stock issued in November 2000 requires a 6% annual dividend.
In February 1998, the Company declared a 3 for 2 stock split in the form of a stock dividend. Calculated fractional shares were paid in whole share amounts. All weighted average share numbers have been adjusted for this stock split.
18. Regulatory matters
The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off- balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
18. Regulatory matters (continued)
If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
Actual capital levels of the Bank and minimum required levels to be considered `well capitalized' at December 31 were:
The Bank presently has an agreement with its regulators that no dividends to the Company will be declared without the ratio of Tier 1 capital to average assets at 7% or more and regulatory approval. At December 31, 2000, the Bank did not meet this requirement.
19. Management's Plan Regarding Continuing Operations
At December 31, 2000, University Bancorp had an accumulated deficit of $1,846,627 and recurring losses from operations for the past 4 years. Future operations of University Bancorp are intended to continue. Management has reviewed operating results, prepared projections of possible future results, performed other analyses of its operations to reduce operating costs and divested certain of its unprofitable subsidiaries. Management of the Company has developed a plan to improve core earnings by adding low-cost deposits, adjusting fees, growing the loan portfolio of the Bank, and eliminating inefficient or redundant costs at the Bank level. Midwest Loan Services is projected to have higher profits in 2001, however, the Company's continued existence is dependent upon its ability to achieve profitable operations and maintain adequate capital levels.
20. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for cash and short-term instruments, demand deposits, short-term borrowings, accrued interest, and variable rate loans or deposits that reprice frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed rate loans or deposits and for variable rate loan or deposits with infrequent repricing or repricing limits, the fair value is estimated by the discounted cash flow analysis using current market rates for the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analyses of underlying collateral values, where applicable. Fair value of loans held for sale is based on market estimates. Fair value of mortgage servicing rights is estimated using discounted cash flows based on current market interest rates net of estimated costs of servicing loans. Fair value of mortgage subservicing rights is based on a multiple of servicing contract revenue. The fair value of debt is based on currently available rates for similar financing. The fair value of off-balance sheet items is based on the fees or cost that would normally be charged to enter into or terminate such agreements. Fair value of unrecognized financial instruments include commitments to extend credit and the fair value of letters of credit are considered immaterial.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
20. Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments were as follows:
21. Segment Reporting
The Company's operations include three primary segments: retail banking, mortgage banking, and merchant banking. Through its banking subsidiary's branch in Ann Arbor, the Company provides traditional community banking services such as accepting deposits, making loans, and providing cash management services to individuals and local businesses. Mortgage banking activities includes servicing of residential mortgage loans for others and discontinued operations have been excluded for 1999 and 1999 (See Note 2). Merchant banking is conducted entirely through Michigan BIDCO, which makes loans to growing businesses. As additional consideration for the loans it makes, BIDCO typically receives equity or options in each business. (See Note 3)
The Company's three reportable segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies. In addition, both the merchant banking segment and mortgage banking segment service a different customer base from that of the retail banking segment.
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
21. Segment Reporting (continued)
The segment financial information provided below has been derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. The accounting policies of the three segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on profit or loss before income taxes, not including nonrecurring gains and losses. Certain indirect expenses have been allocated based on actual volume measurements and other criteria, as appropriate. The Company accounts for transactions between segments at current market prices. Segment profit is measured before allocation of corporate overhead and income tax expense.
Information about reportable segments for the year ended December 31, 2000 follows:
Information about reportable segments for the year ended December 31, 1999 follows:
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
21. Segment Reporting (continued)
Information about reportable segments for the year ended December 31, 1998:
22. Quarterly Financial Data -Unaudited
The following tables represent summarized data for each of the quarters in 2000 and 1999 (in thousands, except loss per share data).
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998
22. Quarterly Financial Data -Unaudited (continued)
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999
23. Parent Company Only Condensed Financial Information
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999
23. Parent Company Only Condensed Financial Information (continued)
UNIVERSITY BANCORP, INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999
23. Parent Company Only Condensed Financial Information (continued)
ITEM 8.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements provided pursuant to this item are listed under Item 14(a) below and appear beginning on page 44.
ITEM 9.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
The Company changed its independent accountants for the audit of the consolidated financial statements for the year ended December 31, 2000. The information required by this item is incorporated by reference herein from the Company's Form 8-K filed on September 12, 2000.
PART III.
ITEM 10.
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference herein from the portions of the Company's Proxy Statement for its 2001 Annual Meeting (the "Proxy Statement") to be under the captions:
Election of Directors Executive Officers Section 16(a) Beneficial Ownership Reporting Compliance
ITEM 11.
ITEM 11. - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference herein from the portions of the Company's Proxy Statement to be under the captions:
Executive Compensation Compensation Plans
ITEM 12.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference herein from the portion of the Company's Proxy Statement to be under the caption:
Security Ownership of Certain Beneficial Owners and Management
ITEM 13.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference herein from the portion of the Company's Proxy Statement to be under the caption:
Certain Relationships and Related Transactions
PART IV.
ITEM 14.
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) Index of Financial Statements: The following statements are filed as part of this Report:
Audited consolidated balance sheets as of December 31, 2000 and December 31, 1999, and consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years ended December 31, 2000, 1999, and 1998, of the Company.
(b) Reports on Form 8-K:
Form 8-K filed on September 12, 2000 is incorporated by reference as part of this report.
The Company issued a private placement of $725,000 of preferred stock to maintain its net tangible capital above $2 million as required by NASDAQ. Form 8-K filed on November 30, 2000 is incorporated by reference as part of this report.
(c) Exhibits:
(3) Certificate of Incorporation and By-laws:
3.1 Composite Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
3.1.1 Certificate of Amendment, dated June 10, 1998, of the Company's Certificate of Incorporation (incorporated by reference to Exhibit 3.1.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
3.2 Composite By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
(10) Material Contracts.
10.1 Loan Agreement and Promissory Note dated December 31, 1997 issued to North Country Bank & Trust (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
10.2 University Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP"), as amended November 27, 1990 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). *
10.2.1 Amendment to the ESOP, effective as of December 31, 1991 (incorporated by reference to Exhibit 10.2.A to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). *
10.3 University Bank 401(k) Profit Sharing Plan, adopted August 1, 1996, effective as of January 1, 1996 (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). *
10.4 Letter regarding grant of options to outside directors, dated as of July 20, 1993 (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *
10.5 1995 Stock Plan of the Company (incorporated by reference to Exhibit A to the definitive Proxy Statement of the Company for 1996 Annual Meeting of Stockholders). *
10.5.1 Form of Stock Option Agreement related to the 1995 Stock Plan (incorporated by reference to Exhibit 10.7.1 to the Annual Report on Form 10-K for the year ended December 31, 1995). *
10.6 Letter, dated December 1, 1989, from Federal Reserve Bank of Minneapolis (incorporated by reference to Exhibit 10.9).
10.7 Lease Agreement (the "Cascade Lease Agreement") between RG Properties, Inc., as agent for Sault Associates, a Michigan Limited Partnership, and University Bank, dated September 30, 1992 (incorporated by reference to exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992).
10.7.1 First Amendment to the Cascade Lease Agreement, dated January 5, 1993 (incorporated by reference exhibit 10.9.1).
10.8 Federal Income Tax Allocation Agreement Between Newberry State Bank and Newberry Holding Inc. dated March 21, 1992 (incorporated by reference to Exhibit 10.11).
10.8.1 Federal Income Tax Allocation Agreement Between Newberry Holding Inc. and University Bancorp, Inc. dated May 21, 1991 (incorporated by reference to Exhibit 10.11.1).
10.9 Purchase and Sale Agreement, dated November 1, 1995, concerning Common Stock of Midwest Loan Services, Inc., among its stockholders and University Bank and Newberry Bancorp, Inc (incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
10.10 Equity Conversion Note Agreements, between various related parties and University Bancorp, Inc. (incorporated by reference to Exhibit 10.15 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
10.10.1 Equity Conversion Note Agreements, between various related parties and University Bancorp, Inc. (incorporated by reference to Exhibit 10.10.1 of the Company's Annual Report of Form 10-K for year ended December 31, 1999).
21 Subsidiaries of Registrant: List of subsidiaries filed herewith.
23 Report of Independent Auditors dated March 17, 2000 as filed with the Company's Annual Report on Form 10-K for year ended December 31, 1999.
* Denotes a management compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSITY BANCORP, INC.
By: /s/Stephen Lange Ranzini ------------------------ Stephen Lange Ranzini, President
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX OF EXHIBITS