As filed with the Securities and Exchange Commission on October 31, 2001
Registration No. 333-47056.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 6 TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES EXCHANGE ACT OF 1933
UNIVERSITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
38-2929531
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(I.R.S. Employer Identification No.)
959 Maiden Lane, Ann Arbor, Michigan 48105
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(734) 741-5858
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Stephen Lange Ranzini, President, University Bancorp, Inc.
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959 Maiden Lane, Ann Arbor, Michigan 48105
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(734) 741-5858
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Copies to: Leamon R. Sowell, Lewis & Munday PC
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1300 First National Building, 660 Woodward Avenue, Detroit, Michigan 48226
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(313) 961-2550
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(Address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public is: As soon as
practicable after this registration statement becomes effective
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11 (a)(1)
of this form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462 (d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Calculation of Registration Fee
Proposed
Proposed Maximum
maximum offering Aggregate Amount of
Title of each class of Amount to be price Offering Registration
securities to be registered registered per unit Price Fee
---------------------------------- ------------------------- --------------------- ------------------- -------------------
Common Stock, 2,092,801 shares $ 1.00 $ 2,092,801 $ 582
$0.01 par value
Rights 2,092,801 rights $ 0.00 $0 $0
The registrant hereby amends this registration statement on the date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on the date as the Commission, acting pursuant to said section 8(a),
may determine.
1
PROSPECTUS
2,092,801 Shares
UNIVERSITY BANCORP, INC.
Common Stock
University Bancorp's common stock is listed on the NASDAQ Small-Cap
market under the symbol "UNIB". University Bancorp owns University Bank, a full
service community bank serving Ann Arbor, Michigan and the surrounding area.
Rights to purchase common stock are being offered to University Bancorp
shareholders as of August 30, 2001. Each shareholder will receive one right for
each share of common stock held on August 30, 2001. Each subscription right
represents the right to purchase one share of common stock. The exercise price
per share will be $1. The rights are transferable and any holder of the rights
will be entitled to purchase shares. Shareholders may sell their right to
purchase the shares to anyone else.
Holders of less than 100 shares of common stock will also receive a
non-transferable "Step-Up Privilege" entitling each shareholder, along with the
rights they receive, to purchase up to 100 shares of common stock for $1 per
share. To illustrate, a shareholder owning 60 shares will receive 60 rights that
would enable the purchase of 60 shares at $1 per share and will receive a
Step-Up Privilege to purchase an additional 40 shares for $1 per share. In
addition, subject to availability, shareholders may purchase additional shares
not purchased by other shareholders through the "Over-Subscription Privilege".
The subscription offer will expire at 5:00 p.m., New York time, on
Tuesday, November 13, 2001. Interest will be paid on amounts tendered for
over-subscriptions from the time these amounts are received by the subscription
agent through Tuesday, November 13, 2001 at 4.00%. Interest will be paid to
Monday, November 12, 2001.
As of October 30, 2001, the trading price for University Bancorp's
common stock was $1.95 per share. The majority shareholders of University
Bancorp (the Ranzini Group) intend to exercise rights to purchase approximately
$1,500,000 of common stock available from this offering.
THE SHARES OF COMMON STOCK OFFERED THROUGH THIS PROSPECTUS ARE NOT AN
OBLIGATION OF A BANK, ARE NOT DEPOSITS OR SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. UNIVERSITY BANCORP HAS NOT HIRED AN UNDERWRITER
OR BROKER DEALER TO CONDUCT THIS OFFERING. INVESTING IN COMMON STOCK INVOLVES
RISKS. (SEE "RISK FACTORS" ON PAGE 8)
Subscription Price Proceeds, before expenses
------------------ -------------------------
Per Share of Common Stock $1.00 $1.00
Total $2,092,801 (1) $2,092,801 (1)
(1) If the entire amount is not sold upon exercise of the Basic
Subscription Privilege or pursuant to the Step-Up Privilege or pursuant
to the Over-Subscription Privilege, the Total Subscription Price and
Total Proceeds to would be correspondingly less than the amounts shown.
The date of this Prospectus is October 31, 2001.
2
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY 4
RISK FACTORS 8
USE OF PROCEEDS 11
DIVIDEND POLICY 11
MARKET FOR COMMON STOCK 12
CAPITALIZATION 13
DILUTION 15
BUSINESS 16
SELECTED FINANCIAL DATA 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 27
PRINCIPAL SHAREHOLDERS 59
MANAGEMENT 62
CERTAIN RELATED TRANSACTIONS 65
SUPERVISION AND REGULATION 66
DESCRIPTION OF CAPITAL STOCK 75
PLAN OF DISTRIBUTION 78
LEGAL PROCEEDINGS 83
LEGAL MATTERS 83
EXPERTS 84
FORWARD LOOKING STATEMENTS 84
AVAILABLE INFORMATION 84
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE 85
3
PROSPECTUS SUMMARY
Shareholders should read this prospectus with the December 31, 2000
Form 10-K, the June 30, 2001 Form 10-Q and the April 30, 2001 Proxy Statement.
Except as otherwise specified, financial information and other references to
University Bancorp include University Bank in this prospectus.
University Bancorp
University Bancorp owns University Bank, a full service community bank
serving Ann Arbor, Michigan and the surrounding area, which also specializes in
mortgage loan servicing. University Bank operates from its main office in Ann
Arbor. In addition, the bank's mortgage subsidiary, Midwest Loan Services, has
its main office in Houghton, Michigan. University Bancorp had consolidated net
losses from continuing operations of $914,647, $723,725, and $801,291 in 2000,
1999, and 1998 respectively. This along with the impact of discontinued
operations has resulted in an accumulated deficit of $1,846,627 and $931,980 at
December 31, 2000 and 1999, respectively. For the six months ended June 30,
2001, University Bancorp realized a profit of $81,783 which reduced accumulated
deficit to $1,792,095. At June 30, 2001, University Bancorp had consolidated
total assets of $47.7 million, deposits of $39.5 million and shareholders'
equity of $2.5 million. A primary reason for this stock rights offering is to
raise sufficient capital to avoid losing the public listing with NASDAQ and to
raise capital by selling shares in a way that doesn't discriminate against
non-management shareholders.
Products and Services
University Bank is a full service bank offering a wide range of
commercial and personal banking, investment and insurance services. Our services
include checking and savings accounts, certificates of deposit, money orders,
commercial, mortgage and consumer loans, credit cards, investment services and
insurance services. Midwest Loan Services specializes in servicing mortgage
loans for other financial institutions.
Market Area
The market area in which University Bancorp operates its community bank
includes the cities of Ann Arbor and Ypsilanti and the surrounding area in
Washtenaw County, Michigan. This area includes several growing communities and
has a stable and diverse economic base. Ann Arbor has a population of
approximately 109,000, Ypsilanti has a population of approximately 23,000 and
Washtenaw County has a population of approximately 300,000. The largest employer
in Ann Arbor is the University of Michigan, and other major employers include
the automotive supply, book publishing and distribution and pharmaceutical
industries, and state and local units of government. Midwest Loan Services
provides loan subservicing to financial institutions nationwide.
4
Management
University Bancorp's Board of Directors and management team represent a
wide range of business, community, banking and investment knowledge and
experience. Most of our management team has over 10 years of banking experience
and has demonstrated a successful track record in attracting and retaining new
customer relationships while working for substantially larger organizations.
Most of our key management have significant equity or pay incentives tied to
performance of the business unit they manage on a daily basis.
Strategy
Personal service, designed to distinguish University Bank from the
large national banks (who are the Bank's primary competitors) and emphasize the
L.O.C.A.L. nature of the Bank. University Bank offers:
* Local Decision-Making
* Our Customers Receive Personal Service and Attention
* Competitive Pricing
* All Financial Services Products Available
* Low Fees
University Bank solicits retail customers and competes for deposits by
offering customers personal attention, professional service, fair interest rates
and low fees. University Bank's experienced staff provides a superior level of
personalized service, which enables us to generate competitively priced loans
and deposits, and to cross-sell other quality financial services such as
investments and insurance. Investments are offered through an affiliation with a
brokerage firm called Equitas America, LLC and insurance products are offered as
an independent agent for insurance companies.
University Bank utilizes its own computers using software licensed from
reliable vendors to provide cost effective services to our customers. Where the
Bank does not have the ability to provide cost effective services in-house, it
has entered into agreements with third-party service providers to provide
products and services using our brand name on the products. Examples of these
products are ATMs and credit cards. Sometimes, the Bank sells products to its
customers using the brand name of a third-party service provider, when the Bank
cannot sell its own product by law. Examples of these products are mutual funds,
annuities, and insurance products.
About University Bancorp
University Bancorp incorporated in Delaware and owns University Bank.
University Bank was organized as a Michigan Bank in 1908, and sold most of its
operations in northern Michigan in December 1994. In February 1996, University
Bank opened for business in Ann Arbor, Michigan, which is now the main office.
In addition, University Bank's mortgage subsidiary, Midwest Loan Services has
its main office in Houghton, Michigan. Deposit accounts held at University Bank
are insured by the Federal Deposit Insurance Corporation to the extent permitted
by law. University Bancorp's main office is located at 959 Maiden Lane, Ann
Arbor, Michigan 48105. University Bancorp's telephone number is (734) 741-5858.
5
THE OFFERING
Rights offered: 2,092,801 rights to purchase up to 2,092,801 shares of common
stock. (See "Description of Capital Stock").
Offering price: $1.00 per share of common stock.
Common stock to be outstanding after this Offering: 4,185,602 (assuming all
2,092,801 shares are sold). If all rights are not exercised, we may sell fewer
than 2,092,801 shares in this offering.
How University Bancorp plans to use the proceeds: To replace $1,458,000 of
preferred stock outstanding as of October 31, 2001 with common stock and to
provide $534,801 of working capital for general operating purposes net of the
expenses of the offering. (See "Use of Proceeds").
Plan of distribution: University Bancorp is offering the rights to purchase
shares of common stock at a price of $1.00 per share to shareholders of record
on the August 30, 2001, record date. Shareholders will receive rights enabling
them to purchase one share of common stock for each share owned as of the record
date. No fractional shares may be purchased. For example, a shareholder who
owned 100 shares on the record date would be able to purchase up to 100 shares.
University Bancorp is providing a special benefit to its small
shareholders through the Step-Up Privilege. Holders of less than 100 shares of
common stock will receive rights as indicated above plus a non-transferable
Step-up Privilege entitling each such shareholder to purchase 100 shares of
common stock through a combination of the rights and the Step-Up Privilege. For
example, a shareholder who owned 25 shares on the record date would receive 25
rights enabling the purchase of 25 shares for $1 per share plus a Step-Up
Privilege enabling the purchase of 75 shares for $1 a share. To the extent our
shareholders do not choose to purchase some or all of the shares they are
entitled to purchase, these shares will be offered to the other shareholders who
share in the initial phase of the offering. To subscribe, you must complete and
return to us the subscription agreement together with payment of $1.00 for each
share to be purchased.
Common Stock NASDAQ Small-Cap Symbol: UNIB
Rights NASDAQ Small-Cap Symbol: UNIBR
For additional details about the offering and how to participate in the
offering, please see pages 74 to 78, which contain additional information about:
- Plan of Distribution
- Payment of Interest on Subscriptions and Over-subscriptions
- Rights to be Issued
- Basic and Step-Up Privileges
- Over-Subscription Privilege
- Exercise and Payment
- Federal Income Tax Consequences of the Subscription Offer
- Restrictions on Certain Holders of Common Stock:
- Residents of Florida
- Residents of Texas
6
SUMMARY OF FINANCIAL DATA
The following selected consolidated financial and other data are
derived from our financial statements and should be read with the consolidated
financial statements the related notes, and Management's Discussion and Analysis
of Financial Condition and Results of Operations. The consolidated balance
sheets as of June 30, 2001 and December 31, 2000 and the consolidated statements
of income for the year ended December 31, 2000 and the six months ended June 30,
2001 are incorporated by reference in this prospectus.
(Dollars in Thousands, Except Share and Per Share Data)
At/For Six Months At/For the
Ended Year Ended
June 30, December 31,
2001 2000
Financial Condition:
Total assets $ 47,692 $ 47,671
Loans held for portfolio, net (1) 35,003 35,644
Loans held for sale 1,516 268
Securities 1,921 1,945
Deposits 39,483 38,179
Shareholders' equity 2,501 2,042
Share Information:
Basic income (loss) per common share $ 0.03 $ (0.45)
Book value per common share $ 0.65 $ 0.65
Weighted average shares outstanding 2,045,436 2,026,735
Shares outstanding at end of period 2,087,801 2,027,801
Operations:
Interest income $ 1,775 $ 3,315
Interest expense 1,058 2,074
Net interest income 717 1,241
Provision for loan losses(1) 45 111
Net interest income after provision
for loan losses 672 1,130
Total noninterest income 2,609 2,650
Total noninterest expense 3,199 4,695
Net income (loss) 82 (915)
(1) Management has established an allowance for loan losses based on past
loan loss experience, known and inherent risks in its loan portfolio,
economic conditions and other factors.
7
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks and uncertainties described below and the other information
in this prospectus 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 you may lose
all or part of your investment.
Described below, are the material risks of investing in University
Bancorp's common stock. You should carefully consider these prior to purchasing
any shares.
IF WE ARE DELISTED FROM THE NASDAQ SMALL-CAP MARKET THE MARKETABILITY OF YOUR
SHARES COULD DECREASE
NASDAQ has informed management that the Company's common 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 October 31, 2001,
598,038 shares of University Bancorp common stock were owned by non-insiders of
the Company. A floor bid price of $1.67 per share is needed to meet the public
float requirement of $1,000,000. As of October 30, 2001, the current bid price
was $1.95 per share of common stock. Management anticipates that sufficient
rights will be subscribed to by non-insiders from this offering to correct this
problem. If the Company's common stock is de-listed from NASDAQ, the shares will
be less marketable in the future and there will be a smaller potential pool of
investors for the stock. This would significantly limit the ability of
shareholders deciding 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.
YOU MAY NOT BE ABLE TO SELL YOUR SHARES UPON DEMAND
Although the Company's common stock is currently listed for trading on the
NASDAQ Small-Cap Market, the trading market for University Bancorp historically
has been less active than the average trading market for companies listed on the
exchange. In addition, the share price of University Bancorp has been volatile
as it has ranged from $0.25 to $3.50 in the past 12 months. 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 Company's common
stock. Even if an active market develops, there can be no assurance that a
market will continue, or that shareholders will be able to sell their shares at
or above the offering price. Purchasers of the Company's common stock should
carefully consider the potentially illiquid and long-term nature of their
investment in the shares being offered.
8
THE COMPANY'S STOCK IS CONTROLLED BY INSIDERS OF THE COMPANY, WHICH MAY NOT
PROVIDE YOU WITH THE BEST POSSIBLE RETURN ON YOUR INVESTMENT
A majority of the shares outstanding are held by insiders of the
Company. The Ranzini Group (Mr. Joseph L. Ranzini, Mr. Stephen Lange Ranzini,
Mrs. Mildred Ranzini, the various Ranzini Family Trusts) beneficially owns
1,377,863, or 66% of the issued and outstanding shares at October 30, 2001.
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
shareholders from possibly realizing any possible premium which may be offered
for the common stock by a potential acquirer.
YOUR OWNERSHIP OF THE COMPANY MAY BE FURTHER DILUTED IF THE BANK REQUIRES
ADDITIONAL CAPITAL
Even if University Bancorp sells all 2,092,801 shares in this offering,
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. Further,
additional capital may be necessary if University Bancorp does not sell all
2,092,801 shares in this offering, or if University Bank is unprofitable, or if
University Bank continues to expand operations. Funds necessary to meet the
Bank's working capital needs and to finance this expansion might not be
available. If additional equity securities are needed to finance future
expansion, such sale could result in significant dilution to the interests of
persons purchasing shares in this offering.
UNIVERSITY BANK HAS INCURRED SIGNIFICANT START-UP LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY
University Bank's operations were relocated to Ann Arbor in 1996.
University Bank has a history of losses and has incurred substantial operating
losses. Shareholders are subject to the risks inherent in starting a new
business. The Bank's profitability will depend primarily upon operations which
might never become profitable. Management of the Bank believes that as the size
of loan portfolio and retail deposits increase 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 University Bank
will grow to a size that will enable it to become profitable. University Bancorp
had a consolidated net loss of $914,647 during 2000 and an accumulated deficit
of $1,792,095 at June 30, 2001.
9
THE SMALL SIZE OF UNIVERSITY BANK LIMITS ITS ABILITY TO COMPETE WITH LARGER
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. Some of the financial
institutions with which University Bank competes with are not subject to the
same degree of regulation as University Bank is. Many of these financial
institutions aggressively compete for business in the Ann Arbor area. Most of
the Bank's competitors have been in business for many years, have established
customer bases, have numerous branches, have substantially higher lending
limits, and offer certain services that we do not provide. The dominant
competitors in the Ann Arbor area are Great Lakes Bank, National City Bank,
Comerica Bank, Bank One, Key Bank and Republic Bank. There can be no assurance
that University Bank will be able to compete effectively with these competitors
unless it can continue to grow its operations.
THE OFFERING PRICE WAS SET ARBITRARILY AND MAY NOT REFLECT A MARKET VALUE
The offering price of $1.00 per share for this offering was set by the
Company's Board of Directors upon review of a number of key factors described
below. The present or future value of the common stock could be more or less
than $1.00. When determining the offering price, management considered the
recent market price of the common stock, the impact of this offering on the
price of the common stock and the Board of Director's desire that shareholders
be permitted to buy additional shares at a price below the market price as of
early July 2001. The market price of the Company's common stock following this
offering may be greater or less than the offering price. If the market price is
lower the than offering price following this offering, investors may incur a
loss on their investment upon the sale of their investment.
10
USE OF PROCEEDS
Assuming all 2,092,801 shares of common stock are sold in this offering
and that the expenses of this offering are $100,000, the Company will receive
net proceeds of $1,992,801. Of the proceeds received, $1,458,000 will be used to
replace preferred stock outstanding as of October 31, 2001 with common stock and
$534,801 will provide working capital for the Company net of the expenses of the
offering. The proceeds from the retirement of the equity conversion notes will
be re-invested into the common stock from this offering. The Company has 1,458
shares of 6% cumulative, non-voting, convertible preferred stock outstanding as
of October 30, 2001, with a liquidation value of $1,000 per share. 725 shares of
preferred stock was issued on November 28, 2000 for the purpose of maintaining
the $2,000,000 net worth requirement for continued listing on NASDAQ. Another
733 shares were issued in 2001 for purposes of bolstering capital levels at
University Bank and to provide working capital to the company. The preferred
stock is held by various members of the Ranzini family. Upon redemption of the
1,458 shares of preferred stock, the proceeds will be re-invested into the
common stock from this offering. The Ranzini family has committed to invest a
minimum of $1,500,000 in common stock from this offering.
DIVIDEND POLICY
The Company has not previously paid any cash dividends on its common
stock, and does not intend to pay dividends in the near future. The Company
expects that all earnings, if any, will be retained to finance growth and the
growth of University Bank. If and when dividends are declared, the Company will
be primarily dependent upon dividends paid by the Bank for funds to pay
dividends on the common stock. It is also possible, but not anticipated, that
the Company could pay dividends in the future generated from our investment
income and other activities, if any, outside of the Bank.
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. A Michigan state
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. At
June 30, 2001, the Bank's accumulated deficit was $1,605,948. The Company's
ability and Bank's ability to pay dividends are also affected by various
regulatory requirements and policies, including the requirement to maintain
adequate capital above regulatory guidelines. (See "Supervision and Regulation")
These requirements and policies may limit the Bank's ability to pay dividends
for the Company's working capital needs, including funds for expansion, payment
of dividends to shareholders and the payment of operating expenses.
11
MARKET FOR COMMON STOCK
University Bancorp's common stock is traded on the NASDAQ Small-Cap Market
under the symbol `UNIB'. The high and low closing prices for the Company's
common stock (as quoted by NASDAQ) are listed below:
1998 High Low
---- ---- ---
First Quarter $ 5 31/64 $ 2 2/3
Second Quarter 5 1/8 2 3/8
Third Quarter 4 19/32 3 1/16
Fourth Quarter 3 7/16 1 31/32
1999 High Low
---- ---- ---
First Quarter $ 3 3/8 $ 2 1/8
Second Quarter 4 3/16 2
Third Quarter 3 1/2 2 9/16
Fourth Quarter 2 3/4 1 1/4
2000 High Low
---- ---- ---
First Quarter $ 2 5/8 $ 1 3/4
Second Quarter 1 7/8 1
Third Quarter 1 13/16 0 1/4
Fourth Quarter 3 1/2 0 1/2
2001 High Low
---- ---- ---
First Quarter $ 1 7/8 $ 1
Second Quarter 2 3/4 1 3/4
Third Quarter 2.95 1.70
Fourth Quarter (through October 30, 2001) 2.50 1.75
These quotations represent inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions. As of October
30, 2001, the Company had approximately 375 stockholders including approximately
240 beneficial owners of shares held by brokerage firms or other institutions.
As of October 30, 2001, the bid price was $1.95 per share and the ask price was
$2.00 per share of the Company's common stock.
The Company had a three for two stock split of our common stock in February
1998. All per share and number of share amounts in this prospectus are adjusted
to reflect the stock split. No cash dividends have been paid on common stock and
the Company does not anticipate declaring or paying dividends in the near
future. (See "Dividend Policy")
12
b
CAPITALIZATION
The following table sets forth University Bancorp's capitalization as
of June 30, 2001, and as adjusted to reflect the sale of the shares of common
stock from this offering (amounts in thousands):
June 30, 2001 June 30, 2001
Actual As Adjusted
Debt (1):
Short-term Debt 0 0
Long-term Debt (3) 908 724
Minority Interest 362 362
Stockholder's Equity:
Preferred Stock, $.001 par value; $1,000
liquidation value; 500,000 shares
authorized; 1,144 issued(4) 1,144 0
Common stock, $.01 par value; 5,000,000
shares authorized; 2,202,985 shares issued;
4,295,786 as adjusted if 2,092,801
shares are sold (2) 3,937 5,929
Treasury Stock, at cost (115,184 shares) (341) (341)
Net unrealized gain (loss) on securities
available-for-sale, net of tax (447) (447)
Accumulated deficit (1,792) (1,792)
Total Stockholders' Equity 2,501 3,349
Total Capitalization 3,771 4,435
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity"; "Interest Rate Sensitivity"; and
Notes 15 & 16 to the consolidated financial statements for additional
information regarding short and long-term debt.
(2) Adjusted to reflect the estimated proceeds if 2,092,801 shares are
sold. (See "Use of Proceeds"). This amount does not include 30,000
shares that can be issued under University Bancorp's Directors Stock
Options or 134,909 shares that can be issued under the 1995 Stock Plan.
(See Note 9 to the Notes to consolidated financial statements for
additional information regarding stock options)
(3) At June 30, 2001, the Company had outstanding $184,082 of equity
conversion notes held by various members of the Ranzini family. The
Company plans to redeem these notes with the proceeds re-invested into
the common stock from this offering.
(4) On November 28, 2000, the Company issued $725,000 of cumulative,
non-voting, convertible preferred stock. During the first six months of
2001, the Company issued an additional $419,000 of cumulative,
non-voting, convertible preferred
13
stock. The Company plans to redeem this preferred stock with
the proceeds re-invested into the common stock from this offering.
The information set forth above should be read in conjunction with the
consolidated financial statements incorporated by reference in this prospectus.
14
DILUTION
The share offering is dilutive to shareholders who exercise their right to buy
additional shares of common stock because the Company are offering to sell
shares at $1.00 per share, and the book value per share of our common stock as
of June 30, 2001 was $0.65 per share.
Net Tangible Book Value. The net tangible common book value (total assets minus
total liabilities and preferred stock) of the Company as of June 30, 2001, was
$1,357,141 or $0.65 per shares of common stock outstanding on such date.
If 2,092,801 Shares are Sold. Assuming the sale of 2,092,801 of the shares of
common stock offered hereby (at the public offering price of $1.00 per share)
and the application of the net proceeds there from (after deducting the
estimated offering expenses of $100,000), the pro-forma net tangible common book
value of the company as of June 30, 2001, would have been $3,349,942 or $0.80
per share of common stock outstanding on such date. This represents an immediate
increase in pro forma net tangible common book value per share of $0.15 as
compared to the net tangible common book value per share for all shares
outstanding prior to this offering.
The following table illustrates the per share dilution:
If 2,092,801
Shares are sold
Offering price per share: $1.00
=====
Net tangible common book value per share
before the offering
as of June 30, 2001: $0.65
Increase per common share attributable to
the new shares: $0.15
-----
Pro-forma net tangible common book value per
Common share after the offering $0.80
=====
Dilution per share to shareholders
Purchasing shares $0.20
=====
(1) Excludes the 164,909 shares of common stock which may be issued upon
the exercise of stock options outstanding as of June 30, 2001, which
have exercise prices ranging from $1.75-$3.00. Also excludes shares of
common stock that could be contributed to the Employee's Stock
Ownership Plan in any future period.
15
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 Office of Financial
and Insurance Services 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 31.53% of the BIDCO. The Bancorp holds 4.45% directly,
and 27.08% is held by the Bank.
16
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 92 full-time equivalents as of June 30, 2001:
University Bank, Ann Arbor 25
Midwest Loan Services 64
University Insurance & Investment 3
Properties
The Bank purchased a building in Ann Arbor, Michigan for use as the
Bank's main office.
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 leases an ATM location in downtown Ann Arbor, Michigan under a
five year lease.
The Bank owns a former loan office in Sault Ste. Marie and such space
is leased to an unrelated third-party. Management has executed an agreement 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.
17
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, a full
internet banking package, including business cash management functions, and a
bill payment function through 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:
Amount Outstanding(1) % of Total
--------------------- ----------
Commercial $13,686,729 37.8%
Construction 1,061,950 2.9%
Real estate 15,525,725 42.9%
Home equity 4,545,720 12.5%
Consumer 1,293,920 3.6%
Credit Card 92,500 0.3%
------------ ------
Gross Loans $ 36,206,544 100.0%
============ ======
(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%. 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,
18
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.
19
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 one
of the top five mortgage banking firms on Wall Street.
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:
Final Market Amortized
Issuer Coupon Yield Maturity Value Cost
------ ------ ----- --------- ----- ----
FHLBI equity (1) VAR 10.00% None $ 848,400 $ 848,400
FNMA CMO 93-205H (2) PO 4.15% 9/25/23 1,478,963 1,771,835
US Treasury Strip PO 5.33% 2/15/27 464,060 506,020
(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
20
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:
2000 1999 1998
---- ---- ----
TCF National Bank 16.5% 17.8% 16.2%
National City Bank 12.8% 12.8% 14.4%
Comerica Bank 11.6% 10.7% 9.8%
Bank One 10.5% 11.1% 9.5%
Key Bank 8.0% 7.3% 7.1%
Ann Arbor Commerce Bank 4.9% 4.5% 3.6%
Flagstar Bank FSB 4.9% 4.0% 1.9%
Standard Federal FSB 4.1% 4.2% 4.1%
University of Michigan CU 3.9% 3.5% 2.9%
Bank of Ann Arbor 3.5% 2.8% 2.2%
Chelsea State Bank 3.5% 3.3% 3.1%
Huron River Area CU 3.1% 3.0% 2.5%
Citizens Bank 3.0% 3.2% 3.3%
Michigan National Bank 2.4% 2.5% 2.3%
Midwest Financial CU 2.1% 2.0% 1.7%
Republic Bank 1.9% 2.3% 11.1%
United Bank & Trust 1.1% 0.9% 0.0%
University Bank 0.9% 0.9% 1.0%
Charter One FSB 0.7% 0.7% 0.6%
Other institutions 0.6% 2.6% 2.6%
Total deposits (in billions) $3.942 $3.865 $4.060
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
21
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 unions.
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.
22
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.
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 Office of Financial and Insurance Services 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
23
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 pre-tax profit from the investment in BIDCO was $114,081,
$543,174, 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 Office of Financial and
Insurance Services.
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.
24
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 in formation and Northern Michigan
Foundation).
25
SELECTED FINANCIAL DATA
University Bancorp, Inc.
Selected Consolidated Financial and Other Data at December 31st (unless noted)
(Dollars in Thousands Except Per Share Data)
June June
30, 30,
2001 2000 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
SUMMARY OF OPERATIONS (1)
Interest income $1,775 $1,591 $3,315 $3,195 $3,544 $4,474
Interest expense 1,058 943 2,074 1,967 2,359 3,208
Net interest income 717 648 1,241 1,228 1,185 1,266
Provision for loan losses 45 66 111 93 110 260
Net interest income after
provision for loan losses 672 582 1,130 1,135 1,075 1,006
Net gain(loss)on securities 0 4 18 (15) 98 8
Profit (loss) from
Invest. in Michigan BIDCO 0 235 235 917 128 (55)
Other non-interest income 2,609 812 2,397 1,387 1,903 1,867
Non-interest expense 3,199 2,174 4,695 4,116 4,204 4,500
Income (loss) before tax 82 (541) (915) (692) (1,000) (1,674)
Income tax expense(benefit) 0 5 0 32 (199) (293)
Net income (loss) from
continuing operations 82 (546) (915) (724) (801) (1,381)
Net income (loss) 82 (546) (915) (915) (198) (1,118)
SELECT PERIOD END BALANCES
Total assets 47,692 42,276 47,671 40,823 54,536 57,529
Loans, net 35,003 31,600 35,644 30,580 23,193 27,715
Loans, held for sale 1,516 259 268 305 11,863 18,157
Cash, cash equivalents and
investment securities 4,226 4,029 5,340 5,919 13,040 4,357
Deposits 39,483 35,680 38,179 32,051 43,220 45,267
Short-term borrowings 1,764 3,097 4,094 3,114 277 0
Long-term borrowings 908 1,559 926 2,627 1,196 923
Minority interest 362 138 283 506 205 201
Stockholders' equity 2,501 1,381 2,042 1,950 3,083 3,398
PER SHARE DATA (2)
Common shares, period-end 2,088 2,028 2,028 2,013 1,989 1,984
Wtd. Avg. shares, per.-end 2,045 2,026 2,027 1,994 1,991 1,922
Cash dividends 0 0 0 0 0 0
Net income (loss) from
continuing operations $0.03 ($0.27) ($0.45) ($0.36) ($0.40) ($0.72)
Net income (loss) $0.03 ($0.27) ($0.45) ($0.46) ($0.10) ($0.58)
Book value of common shares $0.65 $0.68 $0.65 $0.97 $1.55 $1.81
SELECTED ANNUALIZED RATIOS
Net yield on earning assets 3.53% 3.66% 3.33% 3.14% 2.86% 2.69%
Return on average assets 0.34% 2.63) (2.06%) (1.92%) (0.35%) (1.76%)
Return on average equity 7.20% (65.6%) (53.6%) (36.4%) (6.2%) (29.2%)
Avg. equity to avg. assets 4.76% 4.01% 3.84% 5.28% 5.79% 5.76%
(1) Excludes results from discontinued operations.
(2) Retroactively restated to reflect a 3 for 2 stock split in 1998.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
SUMMARY
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 pre-tax profit by Michigan BIDCO in 2000
from $543,174 to $114,081, 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 expenses from our
former external auditing firm related to both audit and other services 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 pre-tax contribution from Michigan BIDCO of $543,174.
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
27
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.
At
-----------------------------------------------------
31-Dec-00 2000
---------------------------------------------------------------------
Average Average Interest Average
Yield Balance Inc(Exp) Yield
---------------------------------------------------------------------
Interest Earning Assets:
Commercial Loans 10.77% $13,524,876 $1,339,022 9.90%
Real Estate Loans (1) 8.70% 14,769,498 1,288,810 8.73%
Installment Loans 10.51% 4,726,444 481,837 10.19%
---------------------------------------------------------------------
Total Loans 9.82% 33,020,818 3,109,669 9.42%
---------------------------------------------------------------------
Investment Securities (2) 4.65% 4,172,915 203,862 4.89%
Federal Funds & Bank Deposits 3.02% 59,305 1,914 3.23%
---------------------------------------------------------------------
Total Interest Bearing Assets 9.22% 37,253,038 3,315,445 8.90%
---------------------------------------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 3.16% 2,838,835 80,160 2.82%
Savings 2.10% 325,536 6,542 2.01%
Time 6.85% 16,940,251 1,082,828 6.39%
Money Market Accts 4.99% 12,210,290 535,561 4.39%
Short-term Borrowings 7.40% 3,589,958 241,782 6.73%
Long-term Borrowings (3) 6.37% 1,457,221 127,574 8.75%
---------------------------------------------------------------------
Total Interest Bearing Liabilities 6.10% 37,362,091 2,074,447 5.55%
---------------------------------------------------------------------
Net earning assets, net interest
income, and interest rate spread 3.12% (109,053) 1,240,998 3.35%
=====================================================================
Net yield on interest-earning assets 3.30% 3.33%
================= =============
(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.
28
NET INTEREST INCOME
----------------------------------------------------------
1999
----------------------------------------------------------
Average Interest Average
Balance Inc(Exp) Yield
----------------------------------------------------------
Interest Earning Assets:
Commercial Loans $12,242,253 $1,220,318 9.97%
Real Estate Loans (1) 18,142,245 1,317,127 7.26%
Installment Loans 4,115,908 404,801 9.84%
----------------------------------------------------------
Total Loans 34,500,406 2,942,246 8.53%
----------------------------------------------------------
Investment Securities (2) 3,482,913 197,367 5.67%
Federal Funds & Bank Deposits 1,177,852 54,981 4.67%
----------------------------------------------------------
Total Interest Bearing Assets 39,161,171 3,194,594 8.16%
----------------------------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 3,169,317 100,543 3.17%
Savings 225,017 4,799 2.13%
Time 18,992,483 1,071,991 5.64%
Money Market Accts 11,747,329 487,866 4.15%
Short-term Borrowings 1,751,173 111,245 6.35%
Long-term Borrowings (3) 2,550,827 190,117 7.45%
----------------------------------------------------------
Total Interest Bearing Liabilities 38,436,146 1,966,561 5.12%
----------------------------------------------------------
Net Earning Assets, net interest income
and interest rate spread 725,025 1,228,033 3.04%
==========================================================
Net yield on interest-earning assets 3.14%
============
29
NET INTEREST INCOME
----------------------------------------------------
1998
----------------------------------------------------
Average Interest Average
Balance Inc (Exp) Yield
----------------------------------------------------
Interest Earning Assets:
Commercial Loans $10,324,738 $1,075,474 10.42%
Real Estate Loans (1) 22,419,974 1,726,354 7.70%
Installment Loans 4,590,026 464,041 10.11%
----------------------------------------------------
Total Loans 37,334,738 3,265,869 8.75%
----------------------------------------------------
Investment Securities (2) 1,796,853 153,418 8.54%
Federal Funds & Bank Deposits 2,255,064 125,024 5.54%
----------------------------------------------------
Total Interest Bearing Assets 41,386,655 3,544,311 8.56%
----------------------------------------------------
Interest Bearing Liabilities:
Deposit Accounts:
Demand 2,956,611 118,622 4.01%
Savings 158,350 3,900 2.46%
Time 24,238,176 1,444,236 5.96%
Money Market Accts 13,218,519 617,431 4.67%
Short-term Borrowings 1,481,112 85,604 5.78%
Long-term Borrowings (3) 884,764 88,893 10.05%
----------------------------------------------------
Total Interest Bearing Liabilities 42,937,532 2,358,686 5.49%
----------------------------------------------------
Net earning assets, net interest income
and interest rate spread (1,550,877) 1,185,625 3.07%
====================================================
Net yield on interest-earning assets 2.86%
=============
30
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:
31
RATE VOLUME TABLE
-------------------------------------------------
2000 - 1999
-------------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
------ ---- ------
Interest Income:
Commercial Loans $ 127,038 $ (8,334) $ 118,704
Real Estate Mortgage Loans (268,564) 240,247 (28,317)
Installment/Consumer Loans 61,807 15,229 77,036
Investment Securities 35,922 (29,427) 6,495
Federal Funds & Bank Deposits (40,052) (13,015) (53,067)
-----------------------------------------------
Total Interest Income (83,849) 204,700 120,851
-----------------------------------------------
Interest Bearing Liabilities:
Demand Deposits (9,923) (10,460) (20,383)
Savings Deposits 2,034 (291) 1,743
Time Deposits (122,728) 133,565 10,837
Money Market Accounts 19,672 28,023 47,695
Short-term Borrowings 123,460 7,077 130,537
Long-term Borrowings (91,622) 29,079 (62,543)
-----------------------------------------------
Total Interest Expense (79,107) 186,993 107,886
-----------------------------------------------
Net Interest Income $ (4,742) $ 17,707 $ 12,965
===============================================
-----------------------------------------------
1999 - 1998
-----------------------------------------------
Change Change
Due To Due To Total
Volume Rate Change
------ ---- ------
Interest Income
Commercial Loans $ 190,976 $ (46,132) $ 144,844
Real Estate Mortgage Loans (314,902) (94,325) (409,227)
Installment/Consumer Loans (46,901) (12,339) (59,240)
Investment Securities 108,318 (64,369) 43,949
Federal Funds & Bank Deposits (52,630) (17,413) (70,043)
-----------------------------------------------
Total Interest Income (115,139) (234,578) (349,717)
-----------------------------------------------
Interest Bearing Liabilities:
Demand Deposits 8,077 (26,156) (18,079)
Savings Deposits 1,475 (576) 899
Time Deposits (299,312) (72,933) (372,245)
Money Market Accounts (64,902) (64,663) (129,565)
Short-term Borrowings 16,611 9,030 25,641
Long-term Borrowings 98,596 2,628 101,224
-----------------------------------------------
Total Interest Expense (239,455) (152,670) (392,125)
-----------------------------------------------
Net Interest Income $ 124,316 $ (81,908) $ 42,408
===============================================
32
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
2000 1999 1998
---- ---- ----
Balance at beginning of the period $ 533 $ 459 $ 521
Chargeoffs - Domestic:
Commercial loans 135 0 25
Real estate mortgages 9 60 157
Installment loans 1 6 66
--------------- -------------- ---------------
Subtotal 145 66 248
--------------- -------------- ---------------
Recoveries - Domestic:
Commercial loans 27 28 10
Real estate mortgages 21 0 42
Installment loans 16 19 24
--------------- -------------- ---------------
Subtotal 64 47 76
--------------- -------------- ---------------
Net chargeoffs 81 19 172
--------------- -------------- ---------------
Provision for loan losses 111 93 110
--------------- -------------- ---------------
Balance at end of period $ 563 $ 533 $ 459
=============== ============== ===============
Ratio of net chargeoffs during
period to average loans
outstanding during period 0.24% 0.06% 0.48%
=============== ============== ===============
33
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ($ amounts in thousands)
Allocated portion
of allowance Percentage of loans in each
at December 31 category to total loans
-------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
Loan category:
Domestic:
Commercial loans $ 216 $ 268 38.1% 39.6%
Real estate construction 10 2.9% 3.2%
Real estate mortgages 178 110 42.9% 37.8%
Installment loans 128 47 16.1% 19.4%
Unallocated 41 98 N/A N/A
-------------------------------------------------------------------------
$ 563 $ 533 100.0% 100.0%
=========================================================================
At At
December 31, 2000 December 31, 1999
------------------------------ ---------------------------
Total loans (1) 36,206,544 31,112,496
Allowance for loan losses 562,997 532,585
Allowance/Loans % 1.55% 1.71%
(1) Excludes loans held for sale.
Assumptions used in the Analysis of the Allowance for Loan Losses
Bank's Ratio Used
Average Peer Group By Bank in
5 Year Average Allowance
Loss Ratio Loss Ratio Calculation
---------- ---------- -----------
Commercial loans, performing (1) 0.61% 0.43% 0.61%
Commercial loans, classified (2) N/A N/A (2)
Commercial loan commitments to lend 0.00% N/A 0.20%
Real estate mortgage, performing 0.22% 0.07% 0.30%
Real estate mortgage, classified (3) N/A N/A (3)
Installment loans to individuals (4) 0.00% 0.74% 1.00%
Home Equity loans, performing (5) 0.00% 0.04% 0.50%
Credit Cards (6) 0.00% 1.83% 2.76%
Overdrafts (7) N/A N/A 15.00%
(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.
34
(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 allowance is the greater of the collateral deficiency or the required
loan loss allowance 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 has executed an agreement to sell the property to a third-party for
35
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 one of the top five mortgage banking firms on Wall
Street.
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 $50,000 was
incurred in December 2000 as a result of impairment of the servicing rights
portfolio due to the decline in long term interest rates.
Mortgage interest rates hit 30-year lows in October 1998 and rose
steadily from that point throughout 1999. Rates peaked in early 2000, and fell
during the rest of the year. Refinancing activity picked up sharply in December
2000, as 30-year mortgage rates hit 7%.
Based on recent comparable sales and indications of market value from
industry brokers, management believes that the current market value of the
Bank's portfolio of mortgage servicing rights equals cost. Market interest rate
conditions can quickly affect the value of mortgage servicing rights in a
positive or negative fashion, as long term interest rates rise and fall.
36
SERVICING RIGHTS HELD BY UNIVERSITY BANK ($ amounts in 000's)
December 31, December 31,
2000 1999
---- ----
Book value of servicing $ 582 $ 704
Total loans serviced $55,443 $ 64,366
Ratio of book value of servicing to
loans serviced 1.05% 1.09%
Estimated market value of servicing:
Management estimate (1) - $ 755
Discounted cash flow (2) - $ 869
Outside appraisal $ 582 -
Estimated excess of market over book value (3) $ 0 $51-$165
(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 in 2000, $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.
37
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, which in early
July 2001 were over $10 million, will be transferred to the Bank, as a result.
38
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. In 2001, they
also provided $300,000 in additional financing through the purchase of
additional convertible preferred stock to increase the Bank's capital to match
the Bank's asset growth, and purchased an additional $222,000 to provide working
capital to support the Company.
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 $3.56 million or 7.42% of the Bank's total regulatory
assets and the risk-adjusted capital ratio of 9.7% exceeded the minimum
regulatory risk-based capital requirement of 8% of the risk-adjusted assets for
the Bank. The following table provides detailed information about the Bank's
risk-adjusted assets and actual capital percentages:
39
RISK ADJUSTED ASSETS & CAPITAL RATIOS ($ amounts in 000's)
Balance Risk Weighted
0% RISK CATEGORY Sheet Assets
---------------------------------
Currency & Coin 420 -
US Treasury Strip 464 -
Federal Reserve Balance 25 -
---------------------------------
TOTAL 909 -
20% RISK CATEGORY
Interest-bearing balances and Fed Funds Sold 96 19
U.S. Gov't sponsored Agency Sec 1,481 296
Cash Items 355 71
FHLB Stock 848 170
Balances due from depository Inst 1,650 330
---------------------------------
TOTAL 4,430 886
50% RISK CATEGORY
Qualifying 1st liens on 1-4 family 13,848 6,924
---------------------------------
TOTAL 13,848 6,924
100% RISK CATEGORY
All other Assets 29,046 29,046
On Balance Sheet Items Excluded from Calculation:
Portion of Mortgage Servicing Rights 58
Unrealized Loss on Securities available for sale (335)
---------------------------------
TOTAL ASSETS 47,956 36,856
=================================
TIER 1 CAPITAL BALANCE
--------------
Common Stock 200
Surplus 4,433
Undivided Profits & Capital Reserves (1,762)
Minority Interest 283
Other identifiable Intangible Assets (58)
TOTAL TIER 1 CAPITAL 3,096
TIER 2 CAPITAL
--------------
Allowance for loans & Lease losses 563
Excess LLR (limited to 1.25% gross risk-weighted assets) (102)
TOTAL TIER 2 CAPITAL 461
TOTAL TIER 1 & TIER 2 CAPITAL 3,557
TIER 1/TOTAL ASSETS 6.46%
TIER 1 & 2/TOTAL ASSETS 7.42%
TIER 1/TOTAL RISK-WEIGHTED ASSETS 8.40%
TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS 9.65%
40
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.
The Bank also performs 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
41
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
3 Mos 91 Days to 1 - 3 3 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years Years OTHERS TOTAL
------ ------- ------ ----- ----- ----- ------ -----
Fed Funds $ 9 - - - - - $ 9
Loans - Net 4,779 4,672 11,343 4,684 10,331 - 35,809
Non-Accrual Loans - - - - 72 72
Securities - - - - 2,793 - 2,793
Other Assets - - - - - 5,066 5,066
Cash and Due from Banks - - - - - 1,581 1,581
----------------------------------------------------------------------------------------
TOTAL ASSETS 4,788 4,672 11,343 4,684 13,124 6,719 45,330
----------------------------------------------------------------------------------------
LIABILITIES
-----------
CD's under $100,000 $ 732 2,725 987 4 667 - $ 5,115
CD's over $100,000 10,605 5,600 214 - 108 - 16,527
MMDA 5,011 5,011 - - - - 10,022
NOW - - 3,088 - - - 3,088
Demand and Escrow - - - - 3,073 3,073
Savings - - 377 - - - 377
Other Borrowings 4,094 - - - 4,094
Other Liabilities - - - 464 464
Equity - - - - - 2,570 2,570
----------------------------------------------------------------------------------------
TOTAL LIABILITIES 20,442 13,336 4,666 4 775 6,107 45,330
----------------------------------------------------------------------------------------
GAP $(15,654) $ (8,664) $6,677 $ 4,680 $12,349 $ 612 -
========================================================================================
CUMULATIVE GAP $(15,654) $(24,318) $(17,641) $(12,961) $ (612) -
=============================================================================
GAP PERCENTAGE -34.53% -53.65% -38.92% -28.59% -1.35% 0.00%
=============================================================================
42
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:
Maturity or Repricing Interval:
------------------------------
Less Than 1 Year to 5 Years to More Than
One Year 5 Years 10 Years 10 Years
-------- ------- -------- --------
U.S. Treasuries and Government Agencies:
Amount $0 $0 $0 $2,280
Yield 0% 0% 0% 4.41%
The following information illustrates maturities and sensitivities of
the Bank's loan portfolio to changes in interest rates as of December 31, 2000:
Loan Portfolio Maturities by Type ($ amounts in thousands):
Maturity Interval:
------------------
Less Than 1 Year to More Than
One Year 5 Years 5 Years Total
-------- ------- ------- -----
Commercial $ 5,051 $ 4,962 $ 4,828 $ 14,841
Real Estate Mortgage (1) $ 3,300 $ 10,035 $ 2,190 $ 15,525
Installment/Consumer $ 1,795 $ 984 $ 3,061 $ 5,840
-------- -------- -------- --------
Total $ 10,146 $ 15,981 $ 10,079 $ 36,206
======== ======== ======== ========
Maturity Maturity
Less Than More Than
One Year One Year Total
-------- -------- -----
Total Variable Rate Loans $ 7,156 $ 13,966 $ 21,122
Total Fixed Rate Loans $ 2,990 $ 12,094 $ 15,084
-------- -------- --------
Total Loans (1) $ 10,146 $ 26,060 $ 36,206
======== ======== ========
(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
43
future taxable income. Realization of income tax benefits not recorded in the
financial statements is dependent upon generating sufficient future taxable
revenue.
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 was $35,000 and $25,000, respectively, most of
which was incurred in the fourth quarter of 2000.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001.
SUMMARY
For the three months ended June 30, 2001, the Company had net revenue
of $55,883 compared to a net loss of $370,978 for the three months ended June
30, 2000. Net interest income decreased to $326,013 in the 2001 period from
$337,763 in the 2000 period, and other income increased to $1,472,028 the 2001
period from $498,353 in the 2000 period. Operating expenses increased to
$1,719,658 in the 2001 period from $1,146,241 in the 2000 period. Basic and
diluted net income per share of common in the three months ended June 30, 2001
was $0.02, compared to a net loss of ($0.18) for the three months ended June 30,
2000.
For the six months ended June 30, 2001, a net income of $81,783 was
realized versus a net loss of $546,370 in the same period in 2000. Net interest
income increased to $717,000 in the 2001 period from $648,157 in the 2000
period. Other income was $2,609,044 in the 2001 period versus $1,050,739 in the
2000 period. Operating expenses increased to $3,199,261 in the 2001 period from
$2,174,220 in the 2000 period. Basic and diluted net income per share in the six
months ended June 30, 2001 was $0.03, compared to a net loss of ($0.27) for the
six months ended June 30, 2000.
The Company's return to profitability in 2001 is due to improved
results at Midwest Loan Services and decreased losses at University Bank's
community banking operation. The following table summarizes the pre-tax income
(loss) of each profit center of the Company for the three months ended June 30,
2001 and 2000 (in thousands):
Pre-tax income (loss) summary for the three and six months ended June
30, 2001
Three Months Six Months
Community Banking $ (280) $ (402)
Midwest Loan Services 397 601
Corporate Office (61) (117)
------------------------------------
Total $ 56 $ 82
====================================
Pre-tax income (loss) summary for the three and six months ended June
30,2000:
Three Months Six Months
Community Banking $ (447) $ (677)
Midwest Loan Services 101 86
Merchant Banking (Michigan BIDCO) 8 114
Corporate Office (37) (64)
------------------------------------
Total $ (375) $ (541)
====================================
45
NET INTEREST INCOME
Net interest income decreased to $326,013 for the three months ended
June 30, 2001 from $337,763 for the three months ended June 30, 2000. Net
interest income declined from the year ago period primarily as a result of a
lower interest rate spread because the yield on earning assets decreased more
than the cost of earning liabilities. The yield on interest earning assets
decreased from 9.04% in the 2000 period to 8.36% in the 2001 period. The cost of
interest bearing liabilities decreased from 5.17% in the 2000 period to 5.02% in
the 2000 period. Net interest income as a percentage of total average earning
assets decreased from 3.73% to 3.28%.
Net interest income increased to $717,000 for the six months ended June
30, 2001 from $648,157 for the six months ended June 30, 2000. Net interest
income rose from the year ago period primarily because of higher net earning
assets only partially mitigated by a decline in the net interest rate spread.
The yield on interest earning assets decreased from 8.99% in the 2000 period to
8.74% in the 2001 period. The cost of interest bearing liabilities increased
from 5.18% for the 2000 period to 5.29% for the June 30, 2001. Net interest
income as a percentage of total average earning assets decreased from 3.66% to
3.53%.
INTEREST INCOME
Interest income increased to $830,761 in the quarter ended June 30,
2001 from $818,490 in the quarter ended June 30, 2000. The average volume of
interest earning assets increased to $39,872,682 in the 2001 period from
$36,311,151 in the 2000 period, an increase of 9.81%. The increased volume of
earning assets was attributable to overall growth in all types of loans. The
overall yield on the loan portfolio increased to 8.99% from 9.35%.
The average volume of investment securities in the three months ended
June 30, 2001 decreased 20.9% over the same period in 2000. The yield on the
securities portfolio decreased from 6.19% in the three month period ended June
30, 2000 to 2.67% in the 2001 period.
Interest income increased to $1,774,559 in the six months ended June
30, 2001 from $1,590,885 in the six months ended June 30, 2000. The average
volume of interest earning assets increased to $40,925,216 in the 2001 period
from $35,686,673 in the 2000 period, an increase of 14.7%. The overall yield on
the loan portfolio decreased to 8.85% from 9.30%.
The average volume of investment securities in the six months ended
June 30, 2001 decreased 18.7% over the same period in 2000. The yield on the
securities portfolio increased from 6.15% in the six month period ended June 30,
2000 to 8.75% in the 2001 period.
INTEREST EXPENSE
Interest expense increased to $504,748 in the three months
ended June 30, 2001 from $480,727 in the 2000 period. The increase was due to a
large increase in interest bearing liabilities, particularly in the category of
brokered and other time deposits. The average volume of interest bearing
liabilities increased 8.1% in the 2001 period versus the 2000 period. The cost
of funds decreased to 5.02% in the 2001 period from 5.17% in the 2000 period.
46
Interest expense increased 12.2% to $1,057,559 in the six months ended
June 30, 2001 from $942,728 in the 2000 period. The increase was due to a large
increase in interest bearing liabilities as a result of increased brokered time
deposits and other time deposits. These deposits generally pay a higher rate as
compared with other interest bearing deposits. As a result, the overall cost of
funds increased from the prior period. The cost of funds increased to 5.29% in
the 2001 period from 5.18% in the 2000 period. The average volume of interest
bearing liabilities increased 9.7% in the 2001 period versus the 2000 period.
47
AVERAGE BALANCE SHEET AND INTEREST MARGIN ANALYSIS
The following tables summarize average balances, revenues from earning
assets, expenses of interest bearing liabilities, their associated yield or cost
and the net return on earning assets for the three and six months ended June 30,
2001 and 2000.
Three Months Ended June 30, Three Months Ended June 30,
----------------------------------------------- -------------------------------------------
2001 2000
----------------------------------------------- -------------------------------------------
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
--------------------------------------
Loans:
--------------------------------------
Commercial 15,779,582 365,251 9.28% 12,988,281 331,002 10.22%
Real Estate 14,957,765 316,565 8.49% 14,860,969 317,738 8.58%
Installment/Consumer 4,675,120 111,582 9.57% 4,934,216 115,578 9.40%
Total Loans 35,412,467 793,398 8.99% 32,783,466 764,318 9.35%
Investment Securities 2,753,756 18,325 2.67% 3,479,185 53,695 6.19%
Federal Funds & Bank
Deposits 1,706,459 19,038 4.47% 48,500 477 3.94%
Total Interest Bearing
Assets 39,872,682 830,761 8.36% 36,311,151 818,490 9.04%
Interest Bearing Liabilities:
Deposit Accounts:
Demand 3,354,528 19,574 2.34% 2,907,452 21,046 2.90%
Savings 339,465 1,693 2.00% 290,465 1,437 1.98%
Time 25,534,561 373,004 5.86% 15,388,978 234,340 6.11%
Money Market Accts 10,084,692 88,619 3.52% 13,327,101 137,079 4.13%
Short-term borrowings 222,093 4,174 7.54% 3,604,525 54,728 6.09%
Long-term borrowings 796,134 17,684 8.91% 1,792,429 32,097 7.18%
Total Interest Bearing
Liabilities 40,331,473 504,748 5.02% 37,310,950 480,727 5.17%
Net Earning Assets, net interest
income, and interest rate spread (458,791) 326,013 3.34% (999,799) 337,763 3.87%
Net yield on interest-earning assets 3.28% 3.73%
48
Six Months Ended June 30, Six Months Ended June 30,
---------------------------------------------- ----------------------------------------------
2001 2000
---------------------------------------------- ----------------------------------------------
Average Interest Average Average Interest Average
Balance Inc(Exp) Yield (1) Balance Inc(Exp) Yield (1)
Interest Earning Assets:
Loans:
Commercial 15,476,696 742,132 9.67% 13,089,733 645,353 9.94%
Real Estate 15,188,745 646,980 8.59% 14,429,305 617,917 8.59%
Installment/Consumer 6,502,402 241,474 7.49% 4,651,027 223,903 9.71%
Total Loans 37,167,843 1,630,586 8.85% 32,170,065 1,484,173 9.30%
Investment Securities 2,821,050 122,456 8.75% 3,470,750 105,847 6.15%
Federal Funds & Bank
Deposits 936,323 21,517 4.63% 45,858 865 3.80%
Total Interest Bearing
Assets 40,925,216 1,774,559 8.74% 35,686,673 1,590,885 8.99%
Interest Bearing Liabilities:
Deposit Accounts:
Demand 3,264,353 41,753 2.58% 2,952,898 41,483 2.83%
Savings 362,893 3,605 2.00% 288,500 2,878 2.01%
Time 24,445,378 734,627 6.06% 15,076,851 452,943 6.06%
Money Market Accts 10,029,729 201,895 4.06% 13,051,709 263,449 4.07%
Short-term borrowings 1,364,454 41,812 6.18% 3,383,157 101,083 6.03%
Long-term borrowings 815,938 33,867 8.37% 1,969,508 80,892 8.28%
Total Interest Bearing
Liabilities 40,282,745 1,057,559 5.29% 36,722,623 942,728 5.18%
Net Earning Assets, net
interest income, and
interest rate spread 642,471 717,000 3.45% (1,035,950) 648,157 3.81%
Net yield on interest-earning assets 3.53% 3.66%
(1) Yield is annualized.
49
ALLOWANCE FOR LOAN LOSSES
The provision to the allowance for loan loss was $45,000 for the six
months ended June 30, 2001. In the six month period ended June 30,2000, the
provision was $66,000. The Bank went from net charge-offs of $8,735 for the six
month period ended June 30,2000 to net charge-offs of $5,875 for the same period
in 2001. Illustrated below is the activity within the allowance for the six
month period ended June 30, 2001 and 2000, respectively.
2001 2000
---- ----
Balance, January 1 $ 562,997 $ 532,585
Provision for loan losses 45,000 66,000
Loan charge-offs (17,465) (56,536)
Recoveries 11,590 47,801
----------------------------------
Balance, June 30 $ 602,122 $ 589,850
==================================
At June 30, 2001 At December 31, 2000
---------------- --------------------
Total loans (1) $35,605,545 $36,206,544
Reserve for loan losses $ 602,122 $ 562,997
Reserve/Loans % (1) 1.69% 1.55%
The allowance for loan losses is calculated using the following assumptions:
Bank's Ratio Used
Average Peer Group By Bank in
5 Year Average Allowance
Loss Ratio Loss Ratio Calculation
---------- ---------- -----------
Commercial loans, performing (1) 0.61% 0.43% 0.61%
Commercial loans, classified (2) N/A N/A (2)
Commercial loan commitments to lend 0.00% N/A 0.20%
Real estate mortgage, performing 0.22% 0.07% 0.30%
Real estate mortgage, classified (3) N/A N/A (3)
Installment loans to individuals (4) 0.00% 0.74% 1.00%
Home Equity loans, performing (5) 0.00% 0.04% 0.50%
Credit Cards (6) 0.00% 1.83% 2.76%
Overdrafts (7) N/A N/A 15.00%
(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 allowance is the greater of the collateral deficiency or the required
loan loss allowance 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.
50
(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.
51
The following schedule summarizes the Company's non-performing assets
for the periods indicated:
At June 30, 2001 At December 31, 2000
---------------- --------------------
Past due 90 days and over
and still accruing (1):
Real estate $ 353,748 $ 457,486
Installment 98,767 4,059
Commercial 199,702 158,299
-----------------------------------------------------------
Subtotal 652,217 619,844
Non-accrual loans (1):
Real estate 334,646 72,375
Installment - -
Commercial - -
-----------------------------------------------------------
Subtotal 334,646 72,375
Other real estate owned 399,426 340,881
-----------------------------------------------------------
Total non-performing $1,386,289 $1,033,100
===========================================================
Ratio of non-performing to
total loans (1) 3.89% 2.85%
===========================================================
Ratio of loans past due
over 90 days and non-
accrual loans to loan loss
reserve 164% 123%
===========================================================
(1) Excludes loans held for sale which are valued at fair market value.
52
In July 2001, the Bank's loan portfolio has a level of loan
delinquencies slightly less than the level at December 31, 2000. Loan
originations during the first quarter of 2001 were modest and the size of the
portfolio actually decreased as management directed lending personnel to focus
on reducing delinquencies during the quarter and act proactively in light of a
possible recession. If the current economic slowdown becomes a recession, loan
delinquencies would likely increase, negatively impacting net interest income.
By focusing on administration rather than origination, lower loan originations
in the first quarter of 2001 reduced potential net interest income in future
periods.
Other real estate owned at June 30, 2001 and December 31, 2000 includes
a commercial development site in Sault Ste. Marie, Michigan, which based on a
recent appraisal, management believes has a fair market value more than its
carrying cost of $266,079 at June 30, 2001. The Bank executed an agreement to
sell the property to a commercial developer who is planning a major development
on the site. The purchase price will be determined by averaging two new
appraisals.
Economic conditions in the Bank's primary market area in Ann Arbor were
strong during the period. Management believes that the current allowance for
loan losses is adequate to absorb losses inherent in the loan portfolio,
although the ultimate adequacy of the allowance is dependent upon future
economic factors beyond the Company's control. A downturn in the general
nationwide economy will tend to aggravate, for example, the problems of local
loan customers currently facing some difficulties, and could decrease
residential home prices. A general nationwide business expansion could
conversely tend to diminish the severity of any such difficulties.
NON-INTEREST INCOME
Total non-interest income increased 195% to $1,472,028 for the three
months ended June 30, 2001 from $498,353 for the three months ended June
30,2000. The significant increase was primarily due to loan servicing and
sub-servicing fees and other loan set-up fees resulting from the increased
servicing and sub-servicing portfolios at Midwest Loan Services.
Total non-interest income increased 148% to $2,609,044 for the six months
ended June 30, 2001 from $1,050,739 for the six months ended June 30, 2000. The
increase was principally a result of increases in loan origination and loan
sub-servicing fee income primarily as a result of an increase in volume at
Midwest Loan Services. Midwest Loan Services posted pre-tax income of $600,847
for the six months ended June 30, 2001. During the second quarter, Midwest's
largest customer, the mortgage division of one of the top five mortgage firms on
Wall Street, decided to significantly scale back the amount of business it was
providing to Midwest. As of July 1, 2001, 18,500 loans or 95% of the mortgages
sub-serviced by Midwest for this customer had been transferred to other
sub-servicers including a subsidiary of this Wall Street firm. As of July 1,
2001, Midwest was sub-servicing approximately 5,600 loans, including 1,000 for
this customer.
Midwest has been increasing its emphasis on mortgage loan originations
through its credit union customers. In the first quarter of 2001, Midwest
originated an average of 26 loans per month. This has increased to an average of
74 loans per month, including 98 loans originated in June. Management of
53
Midwest expects to be able to replace a substantial portion of the monthly
revenue lost from the decreased business from the Wall Street firm with fee
income from mortgage originations from its credit union focused Members for Life
mortgage origination program. The Wall Street firm generated an average of
$154,000 in revenue per month for Midwest in the first quarter of 2001, and an
average $209,000 in revenue per month for Midwest in the second quarter of 2001.
Midwest's revenues and profits are likely to be lower in the third and possibly
fourth quarters of 2001 than in the first half of 2001 as this transition
towards higher mortgage origination volume continues.
At June 30, 2001, the Bank and Midwest owned the rights to service
mortgages for Freddie Mac, Fannie Mae and other institutions, most of which was
owned by Midwest Loan Services, and the remainder by the Bank. The carrying
value of these servicing rights was $588,653 at June 30, 2001. Based on recent
comparable sales and indications of market value from industry brokers,
management believes that the current market value of the Bank's portfolio of
mortgage servicing rights approximates cost. Market interest rate conditions can
quickly affect the value of mortgage servicing rights in a positive or negative
fashion, as long-term interest rates rise and fall. The amortization of these
rights is based upon the level of principal paydowns received from respective
mortgage loan customers of Midwest and the Bank.
Michigan BIDCO. In May 2000, the BIDCO converted or redeemed all
outstanding bonds into common stock of Michigan BIDCO, thus diluting the
Company's ownership to 28.8%. The BIDCO has agreed to repurchase the shares held
by University Bank, but is awaiting regulatory approval to do so. Management of
the Bank and BIDCO have already approved the transaction.
NON-INTEREST EXPENSE
Non-interest expense increased to $1,719,658 in the three months ended
June 30, 2001 from $1,146,421 for the three months ended June 30, 2000. The
increase was primarily the result of increased operational expenses, principally
personnel costs, at Midwest Loan Services due to the increased sub-servicing
volume. The increased expenses at Midwest more than offset cost control efforts
in other areas at the Bank.
Non-interest expense increased to $3,199,261 in the six months ended
June 30, 2001 from $2,174,220 for the six months ended June 30, 2000. The
increase was primarily the result of increased operational expenses at Midwest
Loan Services, which more than offset cost control efforts in other areas at the
Bank.
Non-interest operating expense for the parent company increased to
$54,525 for the three month 2001 period from $21,115 for the 2000 period. The
increase was primarily the result of increased compensation due to the parent
company issuing common shares to a key executive as a hiring bonus.
Non-interest operating expense for the parent company increased to
$83,299 for the six month period June 30, 2001 from $29,058 for the same period
in 2000. The increase was primarily due to amortization and higher consulting
costs for accounting services and compensation cost.
54
CAPITAL RESOURCES
The table below sets forth the Bank's risk based assets, capital ratios
and risk-based capital ratios of the Bank. At June 30, 2001, the Bank was
considered "well-capitalized".
Allocation by Risk Weight Category
Items not
Balance Sheet Asset Categories Subject to
Total Assets Weighting 0% 20% 50% 100%
------------ --------- -- --- --- ----
Cash and Balances due from
Depository Institutions 2,305 - 341 1,964 - -
Available-for-sale
Securities 1,921 (447) 519 1,849 - -
Loan Held for Sale 1,516 - - 1,445 71
Loans 35,606 - 163 - 12,982 22,461
Allowance for loan losses (602) (602) - - - -
All Other Assets 6,412 59 - 848 - 5,505
------------------------------------------------------------------------------
Total Assets 47,158 (990) 1,023 4,661 14,427 28,037
==============================================================================
TOTAL AVERAGE ASSETS
Average Total Assets for Leverage Capital Purposes 47,878
Other identifiable Intangible Assets (59)
----------------
Total Average Assets 47,819
================
35,862
Total Average Risk-Based Assets
TIER 1 CAPITAL
Total Equity Capital 2,880
Unrealized losses on available-for-Sale Securities 447
Minority Interest 362
Other identifiable Intangible Assets (59)
----------------
Total Tier 1 Capital 3,630
TIER 2 CAPITAL
Allowance for loans & Lease losses 602
Less: Excess Allowance (152)
----------------
Total Tier 2 Capital 450
----------------
Total Tier 1 & Tier 2 Capital 4,080
CAPITAL RATIOS
Tier 1/Total Average Assets 7.59%
Tier 1/Total Risk-Weighted Assets 10.12%
Tier 1 & 2/Total Risk-Weighted Assets 11.38%
55
LIQUIDITY
Bank Liquidity. The Bank's primary sources of liquidity are customer
deposits, scheduled amortization and prepayments of loan principal, cash flow
from operations, maturities of various investments, borrowings from
correspondent lenders secured by securities, residential mortgage loans and/or
commercial loans. In addition, the Bank invests in overnight federal funds. At
June 30, 2001, the Bank had cash and cash equivalents of $2,304,790. The Bank
has a $6,500,000 line of credit secured by investment securities and residential
mortgage loans and a $2,300,000 line of credit secured by commercial loans. In
order to bolster liquidity from time to time, the Bank also sells brokered time
deposits. At June 30, 2001, the Bank had $10.5 million of these deposits
outstanding.
Parent Company Liquidity. In an effort to maintain the Bank's Tier 1
capital to assets ratio above 7% and to increase capital through retained
earnings, management does not expect that the Bank will pay dividends to the
Company during 2001 or 2002. Management intends to raise additional capital
through a stock rights offering anticipated to take place during 2001. This
capital is needed for the Company's operating expenses and for the expected
principal reductions on the Company's long-term borrowings. These borrowings
totaled $907,588 and $926,130 at June 30, 2001 and at December 31, 2000,
respectively. Long-term borrowings at June 30, 2001 also include $184,082 of
equity conversion notes of the Company which are redeemable by the Company only
in the context of an offering of additional shares of common stock, have no set
maturity date and have interest payments deferred until maturity.
The Company also has authorized 500,000 shares of preferred stock with
a liquidation value of $1,000. 725 shares or $725,000 was issued in November
2000 to help boost capital levels, and another 300 shares or $300,000 was issued
in March 2001 and contributed to University Bank. During April and May of 2001,
119 shares of preferred stock were issued. These shares are 6% cumulative,
non-voting, and convertible into common stock of the Company. It is anticipated
that these shares will be redeemed with proceeds from the expected stock rights
offering scheduled for 2001.
IMPACT OF INFLATION
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of the
Company are primarily monetary in nature, changes in interest rates have a more
significant impact on the Company's performance than the general effects of
inflation. However, to the extent that inflation affects interest rates, it also
affects the net income of the Company.
56
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All financial institutions are significantly affected by fluctuations in
interest rates commonly referred to as "interest rate risk." The principal
exposure of a financial institution's earnings to interest rate risk is the
difference in time between interest rate adjustments or maturities on
interest-earning assets compared to the time between interest rate adjustments
or maturities on interest-bearing liabilities. Such difference is commonly
referred to as a financial institution's "gap position." In periods when
interest rates are increasing, a negative gap position will result in generally
lower earnings as long-term assets are re-pricing 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 re-pricing
downward slower than short-term liabilities.
Rising long term and short term interest rates tend to increase the
value of Midwest Loan Services' investment in mortgage servicing rights and
improve Midwest Loan Services' current return on such rights by lowering
required amortization rates on the rights. Rising interest rates tends to
decrease new mortgage origination activity, negatively impacting current income
from the retail mortgage banking operations of the Bank and Midwest Loan
Services. Rising interest rates also slow Midwest Loan Services' rate of growth,
but increases the duration of its existing sub-servicing contracts.
The Bank performs a static gap analysis that has limited value as a
simulation because of competitive and other influences that are beyond the
control of the Bank. The table on the following page details the Bank's interest
sensitivity gap between interest-earning assets and interest-bearing liabilities
at June 30, 2001. The table is based upon various assumptions of management that
may not necessarily reflect future experience. As a result, certain assets and
liabilities indicated in the table as maturing or re-pricing within a stated
period may, in fact, mature or re-price in other periods or at different
volumes. The one-year static gap position at June 30, 2001 was estimated to be
($18,829,000) or -39.93%.
57
UNIVERSITY BANK
Asset/Liability Position Analysis as of June 30, 2001
(Dollar amount in Thousand's)
Maturing or Re-pricing in
91 Days
3 Mos to 1 - 3 3 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years Years Other Total
------- ------ ----- ----- ----- ----- -----
Fed Funds - - - - - - -
Loans - Net 8,825 3,445 12,690 6,188 5,639 (602) 36,185
Non-Accrual Loans - - - - - 335 335
Securities - - - - 2,770 - 2,770
Other Assets - 883 - - - 4,680 5,563
Cash and Due from Banks 73 - - - - 2,232 2,305
--------------------------------------------------------------------------------------------
TOTAL ASSETS 8,898 4,328 12,690 6,188 8,409 6,645 47,158
--------------------------------------------------------------------------------------------
LIABILITIES
-----------
CD's under $100,000 8,330 6,623 1,285 407 - - 16,645
CD's over $100,000 2,374 2,176 203 112 - 4,865
MMDA 5,327 5,326 - - - - 10,653
NOW - - 3,986 - - - 3,986
Demand and Escrow - - - - 3,001 3,001
Savings - - 335 - - - 335
Other Borrowings 1,764 135 92 - - - 1,991
Other Liabilities - - - 2,802 2,802
Equity - - - - - 2,880 2,880
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES 17,795 14,260 5,901 407 112 8,683 47,158
--------------------------------------------------------------------------------------------
GAP (8,897) (9,932) 6,789 5,781 8,297 (2,038) -
============================================================================================
CUMULATIVE
GAP (8,897) (18,829) (12,040) (6,259) 2,038 -
================================================================================
GAP
PERCENTAGE -18.87% -39.93% -25.53% -13.27% 4.32% 0.00%
================================================================================
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party or to which any of their properties are
subject.
58
PRINCIPAL SHAREHOLDERS
Set forth below is information with respect to number and percentage of
outstanding shares of University Bancorp beneficially owned by certain persons,
including those known to us to own beneficially more than 5% of University
Bancorp's outstanding common stock, the directors of University Bancorp
individually and the directors and officers of University Bancorp as a group.
The information in the table is as of October 30, 2001, except as otherwise
indicated.
Amount and
Nature of
Title of Beneficial Percent
Name and Address Class Ownership (1) Notes Of Class
---------------- ----- ------------- ----- --------
Joseph Louis Ranzini, Esq. Common 201,556 (4)(11) 8.25%
c/o University Bank Stock
959 Maiden Lane
Ann Arbor, MI 48105
Preferred 344 (4)(11) 23.59%
Stock
Mildred Ranzini Common 60,000 (5) 3.62%
c/o University Bank Stock
959 Maiden Lane
Ann Arbor, MI 48105
Preferred 214 14.68%
Stock
Stephen Lange Ranzini Common 1,017,640 (3)(6)(10) 41.66%
c/o University Bank Stock (11)
959 Maiden Lane
Ann Arbor, MI 48105
Preferred 896 (11) (12) 61.45%
Stock
Paul Lange Ranzini Common 1,150,623 (2)(3)(10) 48.44%
5312 Manitowoc Pkwy Stock
Madison, WI 53705-4711
Dr. Joseph Lange Ranzini Common 1,008,060 (2)(3)(10) 41.27%
675 Cherry Avenue Stock
Waynesboro, VA 22980
Dr. Angela Ranzini Preferred 345 (12) 23.66%
21 Williamsburg Court Stock
Skillman, NJ 08538
Keith E. Brenner Common 35,822 (7)(9) 1.47%
135 Green Meadow Lane Stock
Boulder, CO 80302
Robert Goldthorpe Common 42,810 (9) 1.75%
2564 Helmer Street Stock
McMillan, MI 49853
59
Amount and
Nature of
Title of Beneficial Percent
Name and Address Class Ownership (1) Notes Of Class
---------------- ----- ------------- ----- --------
Michael Talley Common 15,000 (9) 0.61%
55 Payson Ave. #4I Stock
New York, NY 10034
Ranzini Family Trust Common 480,000 (2) 19.65%
(dated 11/8/90) Stock
c/o University Bank
959 Maiden Lane
Ann Arbor, MI 48105
Ranzini Family Trust Common 290,958 (3) 13.25%
(dated 12/20/89) Stock
c/o University Bank
959 Maiden Lane
Ann Arbor, MI 48105
Preferred 99 6.79%
Stock
Ranzini Family Trusts Common 379,665 (10) 15.54%
(of 1996) Stock
c/o University Bank
959 Maiden Lane
Ann Arbor, MI 48105
Mildred Ranzini Trust Preferred 289 (5)(12) 19.82%
c/o University Bank Stock
959 Maiden Lane
Ann Arbor, MI 48105
Clare Family Trust Common 15,000 (11) 1.77%
c/o University Bank Stock
959 Maiden Lane
Ann Arbor, MI 48105
Preferred 151 (11) 10.36%
Stock
All Current Officers and Directors, as a Common 1,408,495 65.89%
Group Stock
Preferred 1,188 81.48%
Stock
(1) Unless otherwise indicated, the indicated person is believed to have
sole voting and investment power over shares indicated as beneficially
owned by this person.
(2) Includes 480,000 shares of common stock held by an irrevocable trust,
the primary beneficiary of which is Stephen Lange Ranzini. The trustees
of the trust are Dr. Joseph Lange Ranzini and Paul Lange Ranzini.
60
(3) Includes 290,958 shares of common stock and 99 shares of preferred
stock held by an irrevocable trust, the primary beneficiaries of which
are Joseph Louis Ranzini's five adult children, including Stephen Lange
Ranzini, Dr. Joseph Lange Ranzini and Paul Lange Ranzini. The trustees
of the trust are Stephen Lange Ranzini, Dr. Joseph Lange Ranzini and
Paul Lange Ranzini. Stephen Lange Ranzini and each of his siblings are
entitled to one-fifth or 58,192 of the shares of common stock and 19.8
shares of the preferred stock held under the terms of the trust.
(4) Excludes 480,000 shares of common stock referred to in note (2) above,
the 290,958 shares of common stock and 99 shares of preferred stock
referred to in note (3) above, or the 379,665 shares of common stock
referred to in note (11)below, as to which Joseph Louis Ranzini
disclaims voting and investment power.
(5) Mildred Ranzini disclaims beneficial ownership of shares of common
stock owned by her spouse, Joseph Louis Ranzini. Does not include the
shares held in the trust referred to in note 12 as to which Mildred
Ranzini is the primary beneficiary.
(6) Includes 22,132 shares of common stock which represent Stephen Lange
Ranzini's current accrued allocation of shares of common stock under
the University Bancorp, Inc. Employee Stock Ownership Plan (ESOP). Does
not include the shares held in the trust referred to above in note (2)
as to which Stephen Lange Ranzini is the primary beneficiary.
(7) Includes shares of common stock owned beneficially by Keith Brenner's
retirement plan, and also includes 531 shares of common stock owned by
Keith Brenner's minor children.
(8) Does not include shares held by the University Bancorp, Inc. ESOP,
other than the accrued allocation of shares thereunder to Stephen Lange
Ranzini referred to in note (6) above.
(9) Currently exercisable options on 15,000 shares of common stock are held
by each of Keith Brenner, Robert Goldthorpe, and Michael Talley option
to purchase 15,000 shares each of common stock. The shares subject to
their respective option have been included with their respective
holdings and in the total shares held by all current officers and
directors as a group.
(10) Includes shares held by the thirteen Ranzini Family Trusts of 1996,
which collectively hold 379,665 shares of common stock. Stephen Lange
Ranzini and Paul Lange Ranzini as trustees disclaim beneficial
ownership of 379,665 shares of common stock each held by trusts for
which they are trustees, and which are included in the shares above.
Dr. Joseph Lange Ranzini as trustee disclaims beneficial ownership of
204,435 shares of common stock held by trusts for which he is trustee.
(11) Includes shares held by Clare Family Trust, which holds 15,000 shares
of common stock and 151 shares of preferred stock. Stephen Lange
Ranzini and Joseph Louis Ranzini as trustees disclaim beneficial
ownership of these shares held by the Trust for which they are
trustees.
61
(12) Includes shares held by the Mildred Ranzini Trust, which holds 289
shares of preferred stock. Stephen Lange Ranzini and Dr. Angela Ranzini
as trustees disclaim beneficial ownership of these shares held by the
Trust for which they are trustees.
(13) The total number of shares of common stock held by the Ranzini Group
(Joseph Louis Ranzini, Stephen Lange Ranzini, Mildred Ranzini, Paul
Lange Ranzini, Dr. Angela Ranzini, Dr. Joseph Lange Ranzini and the
various Ranzini Family Trusts) and the shares included in note (6),
above, is 1,377,863. The total number of shares of preferred stock held
by the Ranzini Group is 1,458.
MANAGEMENT
Joseph Louis Ranzini and Stephen Lange Ranzini are the executive
officers of University Bancorp. Officers serve at the discretion of the Board of
Directors and generally are elected annually by the shareholders.
The Board of Directors oversees the management of our Company. The
Board of Directors held 5 regular meetings in 1999 and one director missed one
meeting as a result of conflicting travel plans. The Board of Directors had four
meetings in 2000, and one in 2001. The Board of Directors has an Audit Committee
consisting of Board members Keith Brenner, Michael Talley and Robert Goldthorpe.
This committee met once during 2000 and once during 2001. The Compensation
Committee consists of Board members Stephen Lange Ranzini, Joseph Louis Ranzini
and Michael Talley. The Compensation Committee met once in each 2000 and 2001.
The Board does not have a Nominating Committee.
Biographical information concerning the directors and officers of
University Bancorp is set forth below:
Stephen Lange Ranzini, age 36, has been President, CEO and a director
of University Bancorp or its Predecessors since July 1988, and served as the
Treasurer of University Bancorp and its Predecessors from July 1988 to December
1995. Since July 1991, Mr. Ranzini has been a director of CityFed Financial
Corp., a former savings and loan holding company now based in Massachusetts.
Since May 1993, Mr. Ranzini has also served as the Treasurer and a Director of
Michigan BIDCO. Since December 1995, Mr. Ranzini has been Treasurer and a
Director of Northern Michigan Foundation, a non-profit community development
lending organization that shares common senior management with BIDCO. Since
March 1994, Mr. Ranzini has served as a director of University Bank and has held
various senior management positions with the bank, including that of President
of the Bank between October 1994 and November 1995 and again since November
1997. Between December 1995 and October 1997 he served as the Bank's Senior Vice
President - Mortgage Banking, supervising the Bank's subsidiaries: Arbor Street
LLC, Midwest Loan Services, Inc., Varsity Funding, LLC., and Varsity Mortgage,
LLC. Since May 1997, he has been a director of Municipal Bankers Corporation, a
Toronto Stock Exchange listed financial services company based in Toronto,
Canada. Stephen is the son of Joseph Louis and Mildred Ranzini and the brother
of Joseph Lange Ranzini and Paul Lange Ranzini.
Joseph Louis Ranzini, Esq., age 72, has been Chairman of the Board, a
director and Secretary of University Bancorp or of predecessor corporations
merged into University Bancorp (the "Predecessors") since July 1988. Mr.
62
Ranzini has been a Director of University Bank since July 1988 and served as
Chairman of the Board from March 1994 to January 1996 and Secretary since
November 1997. Since May 1993, Mr. Ranzini has served as the President and
Chairman of the Board of Michigan BIDCO, Inc. Since December 1995, Mr. Ranzini
has been President and Chairman of the Board of Northern Michigan Foundation.
Joseph Louis Ranzini is the father of Stephen Lange Ranzini.
Keith Brenner, age 56, has served as a director since October 1985, and
also as the President and Treasurer of the Predecessors of our firm when it was
known as Fortune 44 Company and manufactured and sold fortune cookies, from
inception until December 31, 1989. Since the fourth quarter of 1988, Mr. Brenner
has been President and owner of Brenner & Associates, a strategic planning and
marketing consulting firm, located in Boulder, Colorado.
Robert Goldthorpe, age 64, has served as a director of University
Bancorp since April 1996. Mr. Goldthorpe also served as a Director of University
Bank from September 1992 to January 1996. For more than the past five years, Mr.
Goldthorpe has been President of Goldthorpe Enterprises, a diversified holding
company with operations in the central and eastern portion of the Upper
Peninsula of Michigan, with investments in hotels, restaurants, apartment
buildings, a hardware store, and the construction and contracting business.
Dr. Joseph Lange Ranzini, age 41, has served as a director of
University Bancorp since April 1996. Mr. Ranzini has a B.A. from Dartmouth
College and a medical degree from the University of Virginia. Mr. Ranzini has
been in a general surgery private practice since 1992 when he completed his
residency. Dr. Joseph Lange Ranzini is the brother of Stephen Lange Ranzini.
Mildred Lange Ranzini, age 68, has been a director of University
Bancorp or its Predecessors since July 1988, and has served as Assistant
Secretary since January 1990. Mrs. Ranzini holds a M. Div. from Princeton
Theological Seminary, a Masters Degree in Education from Columbia University and
a B.A. from Wellesley College. Mrs. Ranzini has not otherwise held an active
business position during the prior five years. Mildred Lange Ranzini is the
mother of Stephen Lange Ranzini.
Paul Lange Ranzini, age 40, has served as a director of University
Bancorp since April 1996. He is Managing Editor at A-R Editions and a Doctoral
Candidate in Music History and Theory at the University of Chicago. He has
attended the University of Chicago since 1989, except in 1994 and 1995, when he
earned a Fulbright Fellowship to Germany for Dissertation Research. At the
University of Chicago, he was also employed part-time as the computer data
center manager at the University's International House. Mr. Ranzini has two
Masters, an M.A. in Musicology and an M.M. in Organ and Church Music from the
University of Michigan and a B.A. in Philosophy from the College of William and
Mary. Paul Lange Ranzini is the brother of Stephen Lange Ranzini.
Michael Talley, age 49, has served as a director of University Bancorp
or its predecessors since 1988. Since March 1990, Mr. Talley has served as an
Account Executive at Ladenburg, Thalmann & Co. Inc, a financial services firm in
New York, New York.
There is no family relationship between any current director or
executive officer of University Bancorp and any other current director or
executive officer of University Bancorp, except as indicated above.
63
DIRECTOR COMPENSATION
The Company has not paid any directors' fees and does not intend to pay
directors' fees in the forseeable future. Generally, in lieu of directors' fees
non-employee directors receive options to purchase stock upon becoming a member
of the Board.
EXECUTIVE COMPENSATION
The Company is required to disclose information for all persons who had
total annual salary and bonus in excess of $100,000. Compensation information is
provided for Stephen Lange Ranzini, the only executive officer who met such
criteria:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Name and Restricted Underlying
Principal Stock Options/
Position Year Salary Bonus Other awards SARs (#)
-------- ---- ------ ----- ----- ------ --------
Stephen Lange Ranzini, 2000 $ 82,404 $ 0 $ 3,863 $ 0 None
President & CEO (1) (2)
Stephen Lange Ranzini, 1999 $ 105,365 $ 0 $6,750 $ 0 None
President & CEO (1) (2)(3)
Stephen Lange Ranzini, 1998 $ 110,281 $ 0 $ 10,715 $ 0 None
President & CEO (1) (2)(4)
(1) Includes salary of $18,750, $45,400, and $45,500, from Michigan BIDCO
for 2000, 1999, 1998, respectively, for which Mr. Ranzini served as
Treasurer.
(2) Includes SEP IRA pension payments of $3,863, $6,750, and $6,750 from
Michigan BIDCO for 2000, 1999, 1998, respectively.
(3) At the end of fiscal year ended December 31, 1999, 22,132 shares of our
common stock were allocated to Mr. Ranzini under the University Bancorp
ESOP. Mr. Ranzini's rights in all of all these shares are vested.
Valued at $1.25 per share, the last sale price of the Company's common
stock on December 31, 2000, the aggregate value of such shares was
$27,665. Mr. Ranzini is entitled to an allocation for 1999 and 2000,
however, the allocation has not yet been finalized.
(4) Allocation under the University Bancorp ESOP of 1,220 shares of our
common stock to Mr. Ranzini in June 1998.
No options to purchase shares of common stock were granted to Stephen Lange
Ranzini during 2000, 1999 or 1998. Except as indicated in the table above,
Stephen Lange Ranzini did not receive during the three fiscal years ended
December 31, 2000 or hold at December 31, 2000, any stock options, SAR grants or
long term incentive plan awards. The Company does not have a defined benefit or
actuarial pension plan.
64
CERTAIN RELATED TRANSACTIONS
In May 1993, a Rural Business and Industrial Development Company now
called Michigan BIDCO, Inc. was established. In 1995 and 1996, University
Bancorp purchased a total of $197,000 principal amount of 9% convertible
debentures of BIDCO for $203,000, convertible into 131 shares of BIDCO's shares,
representing 4.97% of BIDCO's shares on a fully diluted basis. In order to fund
our working capital needs, during 1998 a total of $136,000 convertible
debentures of BIDCO were sold to various affiliates of Joseph L. Ranzini and
Stephen Lange Ranzini at the then current adjusted book value of BIDCO, for a
total of $157,436. During 1999 a total of $34,000 convertible debentures of
BIDCO were sold to various affiliates of Joseph L. Ranzini and Stephen Lange
Ranzini and employees of the BIDCO at the then current adjusted book value of
BIDCO, for a total of $42,337.
Joseph L. Ranzini is the President and Chairman of the Board of BIDCO
and Stephen Lange Ranzini is the Treasurer. Stephen Lange Ranzini received
$52,150 in salary, SEP IRA and board fee compensation from BIDCO in 1999. Joseph
L. Ranzini received $98,338 in salary, SEP IRA and board fee compensation from
BIDCO.
The BIDCO has, by general policy of its Board of Directors, a loan and
investment in one borrower limit of $500,000. From time to time, the BIDCO
receives loan and investment proposals from third parties requesting an
investment by the BIDCO in excess of this $500,000 limit. In this event, the
BIDCO has in certain instances formed single purpose limited liability companies
whose members, including Joseph and Stephen Ranzini, are directors, shareholders
and bondholders of the BIDCO to fund amounts over the $500,000 limit. The
outside investor groups invest on a pro rata, parri passu (equal) basis with the
BIDCO.
In 1995, the Bank, through a 98%-owned subsidiary, Arbor Street LLC
(Michigan), purchased $1,000,000 in federal low income housing tax credits
through a partnership investment in Michigan Capital Fund for Housing Limited
Partnership I, a Michigan limited partnership. The investment consisted of a
$50,000 equity purchase and the execution by Arbor Street LLC of a $950,000
promissory note held by the Partnership. In connection with the execution of the
Partnership Note, the Partnership required Joseph L. Ranzini and the Ranzini
Family Trust dated 12/20/89 to personally guarantee the Note, because the Bank
was prohibited from doing so by state banking regulations. In exchange for
arranging for the guaranty of the Note, Joseph L. Ranzini and Stephen Lange
Ranzini each received a 1% interest in Arbor Street LLC. At year-end 1998,
Stephen Lange Ranzini and Joseph L. Ranzini conveyed their 2% interest in Arbor
Street LLC to a subsidiary of the Bank for no consideration. During 1999, Arbor
Street LLC was dissolved and the partnership investment in the low income
housing tax credit limited partnership was conveyed to University Insurance &
Investment Services, another subsidiary of University Bank. In August 2000,
Joseph L. Ranzini paid on behalf of University Insurance & Investment Services
the annual installment of $141,142 on the promissory note (and subsequently paid
interest of $7,585) to the Partnership and we continue to reflect this as a
liability until we resolve this matter.
We maintain an investment securities account with Ladenburg Thalmann &
Co. Inc. Michael Talley, a director of University Bancorp, receives commissions
on the transactions in this account. We pay commissions at rates which are
comparable to those paid in its other investment securities accounts at other
brokerage firms.
65
SUPERVISION AND REGULATION
We are extensively regulated under federal law and state laws. Federal
and state laws and regulations generally applicable to financial institutions
and their holding companies regulate, among other things:
- the scope of business;
- investments;
- reserves against deposits;
- capital levels relative to operations;
- lending activities and practices;
- the nature and amount of collateral for loans;
- the establishment of branches;
- mergers, acquisitions and consolidations;
- dividends;
- internal controls
These laws and regulations are primarily intended to protect depositors
and the deposit insurance fund of the Federal Deposit Insurance Corporation, not
the Company or its shareholders. The following is a summary of certain statutes
and regulations affecting us. 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 our
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 Office of Financial and Insurance Services, the
Internal Revenue Service, and state taxing authorities. We are 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 our future business and
earnings.
66
UNIVERSITY BANCORP, INC.
General. We are a bank holding company registered under the Federal
Bank Holding Company Act of 1956. The Federal Reserve Bank of Chicago is our
primary regulator. We are also subject to regulation, supervision and
examination by the Federal Reserve. We are 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. We are generally prohibited from engaging in a
non-banking activity because we are a bank holding company. We cannot acquire
more than 5% of the shares of a company engaged in non-banking activities. We
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.
Effective September 29, 1995, bank holding companies may acquire 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 we gained our listing on the NASDAQ
Small-Cap Market, we made certain commitments to the Federal Reserve. We agreed
that our 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. We 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 on us 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, we
are expected to act as a source of financial strength to the Bank and to commit
67
resources to support the Bank in circumstances in which we might 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
shareholder. If we were to fail to pay any assessment, the directors of the Bank
would be required, under Michigan law, to sell the shares of the Bank's stock
owned by us 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. Various bills have been introduced in
the Congress that would allow bank holding companies to engage in a wider range
of nonbanking activities, including greater authority to engage in securities
and insurance activities. While the scope of permissible non-banking activities
and the conditions under which the new powers could be exercised varies among
the bills, the expanded powers generally would be available to a bank holding
company only if the bank holding company and its bank subsidiaries remain
well-capitalized and well-managed. The bills also impose 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. At this time, we are unable to predict
whether any of the pending bills will be enacted and, therefore, are unable to
predict the impact this legislation may have on our operations.
UNIVERSITY BANK
Primary Regulators. University Bank is a Michigan banking corporation
and its deposit accounts are insured by the Bank Insurance Fund (the "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,
University Insurance & Investment Services and University Insurance Center 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
its mortgage operation subsidiaries, including Midwest Loan Services and Varsity
Mortgage are subject to regulation and regular on-site examination by FHLMC,
FNMA and HUD. In addition, University Insurance Center and University Insurance
& Investment Services are also subject to examination by the State of Michigan's
Office of Financial and Insurance Services, Insurance Division.
68
Other Regulations. University Bank and its subsidiaries are also
subject to various regulations including:
- the Community Reinvestment Act;
- federal Truth-in-Lending Act;
- the Home Mortgage Disclosure Act of 1975;
- the Equal Credit Opportunity Act;
- the Fair Credit Reporting Act of 1978;
- the Fair Debt Collection Act;
- the federal Right to Privacy Act;
- the Real Estate Settlement Procedures Act;
- the Bank Secrecy Act;
- the Electronic Funds Transfer Act;
- all Federal Reserve regulations;
- state usury laws; and
- certain 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. Accordingly, the FDIC established the schedule of BIF insurance
assessments for the first semi-annual assessment period of 1999, ranging from 0%
of deposits for institutions in the lowest risk category to .27% of deposits for
institutions in the highest risk category.
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.
69
FICO Assessments. Pursuant to federal legislation enacted September 30,
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 recapitalization 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. Until January 1, 2000, the FICO assessments made against BIF
members may not exceed 20% of the amount of FICO assessments made against SAIF
members. Currently, SAIF members pay FICO assessments at a rate equal to
approximately 0.063% of deposits while BIF members pay FICO assessments at a
rate equal to approximately 0.013% of deposits. 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 shareholders' 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
70
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%. Under these regulations, as of December 31, 2000 University Bank was
"adequately capitalized," and as of March 31, 2001, University Bank was "well
capitalized." At December 31, 2000 and March 31, 2001, the Bank's capital
position was as follows ($ amounts in thousands):
December 31, 2000 Adequately
Capitalized Actual Minimum Actual
Ratio Ratio Amount Amount
----- ----- ------ ------
Total Capital/Risk-Weighted Assets 8% 9.7% $2,948 $3,557
Tier 1 Capital/Risk-Weighted Assets 4% 8.4% $1,474 $3,096
Tier 1 Capital/Average Assets 4% 6.5% $1,918 $3,096
June 30, 2001 Well
Capitalized Actual Minimum Actual
Ratio Ratio Amount Amount
----- ----- ------ ------
Total Capital/Risk-Weighted Assets 10% 11.4% $3,586 $4,080
Tier 1 Capital/Risk-Weighted Assets 6% 10.1% $2,152 $3,630
Tier 1 Capital/Average Assets 5% 7.6% $2,358 $3,630
These capital guidelines can affect us is several ways. Our 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, should any preferred stock be issued and outstanding, have been
71
paid in full. The Bank's articles of incorporation do not authorize the issuance
of preferred stock and there are no current plans to seek this authorization.
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 shareholders, and to "related
interests" of the directors, officers and principal shareholders. 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 shareholders may obtain
credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The 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:
72
- 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.
The 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. The 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 practises 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 University Bank's lending
policies.
Branching Authority. Michigan banks, including the Bank, have the
authority under Michigan law to establish branches anywhere in the State of
Michigan, subject to receipt of all required regulatory approvals, including the
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, in appropriate circumstances and
with the approval of the Commissioner:
73
- the 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;
- the 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;
- the 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;
- the 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
- the 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, upon written notice to the
Commissioner:
- the 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;
- the establishment by Michigan-chartered banks of branches located in
other states, the District of Columbia, or U.S. territories or
protectorates; and
- the 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.
MICHIGAN BIDCO
Michigan BIDCO is regulated and supervised by the Michigan Department
of Commerce, Office of Financial and Insurance Services. The BIDCO is examined
annually by the Office of Financial and Insurance Services, 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 the BIDCO under Michigan law, which are beneficial to the
operations and investment flexibility of the BIDCO. Most importantly, the BIDCO
is partially exempt from the state's usury law. As a result, the BIDCO can lend
money to a firm and take equity participation in the firm it lends to, with the
result that the BIDCO's overall combined yield on the investment and loan can
exceed the state's usury limit. The amount of the BIDCO's return from the equity
participation or contingent payments is excluded from the calculation to
determine compliance with the state's usury limits.
74
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 5,000,000 shares of common
stock and 500,000 shares of preferred stock. As of the date of this prospectus,
there were 2,092,801 shares of common stock outstanding.
COMMON STOCK
Common stock does not have cumulative voting or preemptive rights. Each
share of common stock is entitled to:
- one vote per share on all matters;
- subject to the rights of any outstanding preferred shares, dividends as
may be declared by the Board of Directors out of funds legally
available to pay dividends;
- upon liquidation of University Bancorp, share pro rata in its remaining
net assets.
Funds for the payment of dividends by us are expected to be obtained
primarily from dividends of University Bank. There can be no assurance that we
will have funds available for dividends, or that if they are available, that
dividends will be declared by our Board of Directors. As University Bank is not
expected to be profitable during its start up period, we do not expect to be in
a position to declare dividends in the near future.
Shares Available for Issuance. The availability for issuance of a
substantial number of shares of common stock and preferred stock at the
discretion of the Board of Directors will provide us with the flexibility to
take advantage of opportunities to issue stock in order to obtain capital, as
consideration for possible acquisitions and for other purposes including, for
example, the issuance of additional shares through stock splits and stock
dividends in appropriate circumstances. There are, at present, no plans,
understandings, agreements or arrangements concerning the issuance of additional
shares of our capital stock, except for:
- the shares of common stock reserved for issuance under our stock option
plans;
- shares issued annually to our employees under our Employee Stock
Ownership Plan;
Uncommitted authorized but unissued shares of common stock may be
issued from time to time to any person and for the consideration as the Board of
Directors of University Bancorp may determine. Holders of the then outstanding
shares of common stock may or may not be given the opportunity to vote on any
share issue made by the Board of Directors, depending upon the nature of any
transaction, applicable law and the judgment of our Board of Directors regarding
the submission of the issuance to our shareholders. As noted, our shareholders
will have no preemptive rights to subscribe to newly issued shares.
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PREFERRED STOCK
The Company's preferred stock has a par value of $0.001 per share,
liquidation value of $1,000 per share, and may be issued from time to time
without further stockholder approval in one or more series with the dividend,
voting, redemption, liquidation and any other provisions as fixed by the Board
of Directors. For example, the Board of Directors, without stockholder approval,
can issue preferred stock with voting and conversion rights, which could
adversely affect the voting power of the common stockholders. As of October 30,
2001, there were 1,458 shares of 6% cumulative, non-voting, convertible,
preferred stock outstanding.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has included in its certificate of incorporation a
provision eliminating the personal liability of directors and officers to
University Bancorp or its shareholders for damages for breach of duty.
University Bank has a similar provision in its bylaws. The principal effect of
these provisions is to eliminate potential monetary damage actions against any
director for breach of his or her duties as a director unless a judgment or
other final adjudication establishes that:
- his or her acts or omissions were in bad faith;
- his or her acts or omissions involved intentional misconduct or a
knowing violation of law, or
- he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled.
This provision does not affect the liability of any director for acts or
omissions occurring prior to the date of adoption of this provision.
In addition, the Delaware Business Corporation Law empowers our Board
of Directors to grant indemnification to any officer or director except where it
determines that:
- his or her acts were committed in bad faith;
- his or her acts were the result of active and deliberate dishonesty
and were material to the cause of action in dispute;
- he or she personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
The Delaware Business Corporation Law also empowers our Board of Directors to
advance to an officer or director the expenses of defending the claims upon
receipt of his or her written agreement to repay any amount he or she is later
determined not to be entitled to. Our bylaws have been amended to provide that
we will advance expenses of defense to our officers and directors substantially
to the full extent authorized by the Delaware Business Corporation Law.
University Bank has a similar bylaw.
The description of our indemnification provisions is subject to the
detailed provisions of the Delaware Business Corporation Law and the Michigan
Business Corporation Act.
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FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by us or by University Bank to
directors or officers otherwise permitted under the Delaware Business
Corporation Law, the Michigan Business Corporation Act or the Michigan Banking
Code.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons under the
provisions discussed above or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Company does not maintain insurance to indemnify its directors and
officers. University Bank has purchased directors' and officers' liability
insurance for directors and officers of the Bank.
77
PLAN OF DISTRIBUTION
SUMMARY
The Company is offering to holders of record of our common stock at the
close of business on August 30, 2001 (the "Record Date") the right to subscribe
for and purchase shares of common stock at $1 per share. If all rights are
exercised a total of 2,092,801 shares of common stock would be issued.
Each shareholder will receive one right for every share they owned on
August 30, 2001. With the rights, right holders are entitled to purchase one
share of common stock, upon surrendering one right accompanied by payment of $1
per share purchased. For example, a shareholder who owned 100 shares on the
record date would be able to purchase up to 100 shares. Holders of less than 100
shares of common stock will also receive a non-transferable Step-up Privilege
entitling each shareholder, along with the rights they receive, to purchase 100
shares of common stock for $1 per share. To illustrate, for a shareholder
holding a total of between 1 and 100 shares, that shareholder will receive
rights to purchase shares, as described in the preceding paragraph, plus a
Step-Up Privilege to purchase additional shares, with the combination of the
rights and the Step-Up Privilege totaling 100 shares. Thus, a shareholder owning
60 shares will receive 60 rights that would enable the purchase of 60 shares at
$1 per share and will receive a Step-Up Privilege to purchase an additional 40
shares for $1 per share. A shareholder owning 10 shares will receive 10 rights
enabling the purchase of 10 shares for $1 per share and a Step-Up Privilege to
purchase an additional 90 shares for $1 per share.
To the extent our shareholders do not choose to purchase some or all of
the shares they are entitled to purchase, the shares will be offered to the
other shareholders who purchased shares in the initial phase of the offering. To
subscribe, you must complete and return to us the subscription agreement
together with payment for the shares.
Right holders must exercise their right to purchase by Tuesday,
November 13, 2001. The subscription offer will expire at 5:00 P.M., New York
time, on Tuesday, November 13, 2001. All subscriptions must be received by the
Company before 5:00 p.m., Michigan (EST) time, on November 13, 2001.
Although not required by Delaware or Michigan law or by our Articles of
Incorporation, our Board of Directors has authorized this offering in order to
permit existing shareholders with more than 100 shares to maintain their
approximate proportionate interest in the outstanding common stock and to allow
existing shareholders with less than 100 shares to purchase additional shares to
become shareholders of at least 100 shares, thus increasing their proportionate
interest in the outstanding common stock, to the disadvantage of shareholders
with more than 100 shares.
The offering price was established by the Board of Directors based on the
recent market price of the common stock, the impact of this offering on the
price of the common stock and the board's desire that the offering be attractive
to shareholders. The offering price is a 50% discount from the NASDAQ Small-Cap
Market closing price of $2.00 on August 8, 2001.
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PAYMENT OF INTEREST ON SUBSCRIPTIONS AND OVER-SUBSCRIPTIONS
Interest will be paid on amounts tendered for Over-subscriptions from
the time these amounts are received by the subscription agent through Tuesday,
November 13, 2001 at 4.00%. Interest will be paid to Monday, November 12, 2001.
RIGHTS TO BE ISSUED
Holders of common stock on the record date will receive one right with
respect to each share of common stock held.
Rights: Rights to subscribe are evidenced by transferable rights, each
right evidencing the total number of rights to which the holder is entitled.
Rights may be divided and transferred and rights may be combined at the office
of the subscription agent.
Expiration Date: The rights expire at 5:00 p.m., Michigan time, on
Tuesday, November 13, 2001 (the "Expiration Date"). To subscribe, the rights and
payment must be received by University Bancorp (the subscription agent), not
later than 5:00 p.m., Michigan time, on Tuesday, November 13, 2001. Right
holders who elect to send their rights to the subscription agent by mail should
allow adequate time for actual receipt prior to the times specified above.
Rights received by the subscription agent at the Office after 5:00 p.m.,
Michigan time, on the Expiration Date will not be accepted and will be returned
except under the circumstances described under "Exercise and Payment".
BASIC AND STEP-UP PRIVILEGES
Basic Subscription Privilege: Rights entitle the holders to subscribe
at the Subscription Price for one share of common stock for each right issued.
Fractional shares of common stock will not be issued.
Step-up Privilege: A right evidencing fewer than 100 rights will
entitle the holder who exercises a right, to subscribe, at the Subscription
Price, for 100 shares of common stock without furnishing any additional rights.
If, as a result of this Step-up Privilege, the common stock subscribed for by
all persons exceed the total number of common stock offered, all or a portion of
the subscriptions pursuant to this Step-up Privilege for the excess common stock
may be cancelled on the basis as management shall determine in our sole
discretion. The Step-up Privilege is available to holders of our common stock on
the record date and is not transferable.
No right may be divided in a way as to permit the holder to subscribe
to a greater number of shares of common stock than the number to which the Right
originally entitled its holder, except that a bank, trust company, securities
dealer or broker which holds common stock on the record date for more than one
beneficial owner may, upon proper showing to the Subscription Agent, exchange
its right on the same basis as if the beneficial owners were record holders on
the record date. The Company reserves the right to deny any division of rights
which could result in rights which are not exact multiples of 100 rights, where
the result in our opinion would be inconsistent with the intent of the Step-up
Privilege.
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OVER-SUBSCRIPTION PRIVILEGE
A holder who exercises his right may oversubscribe at the Subscription
Price, subject to the allotment described below, for any number of additional
shares of common stock.
Common stock will be available for purchase pursuant to the
Over-subscription Privilege to the extent that the maximum of 2,092,801 shares
of common stock is not subscribed for through the exercise of rights, including
the exercise of the Step-up Privilege, by the Expiration Date. If the common
stock so available are not sufficient to satisfy all subscriptions pursuant to
the Over-subscription Privilege, the available common stock will be allocated
pro rata among the holders of rights who exercise the Over-subscription
Privilege based upon the proportion that the number of rights exercised by each
holder of rights who exercises his Over-subscription Privilege bears to the
aggregate number of rights exercised by all holders of rights who exercise their
Over-subscription Privilege.
EXERCISE AND PAYMENT
Shareholders with questions on subscribing should contact Stephen Lange
Ranzini, our information agent, at telephone number (734) 741-5858 extension
226, by fax at (734)741-5859 or by email at ranzini@university-bank.com.
Rights to subscribe may be exercised by filling in and signing the
subscription form on the right and returning the right together with payment in
full for all common stock subscribed, to the subscription agent at:
Computershare
Attn: John Harmann
12039 Alameda Parkway, Suite Z-2
Lakewood, CO 80228
Payment in full of the Subscription Price must be received at the above
office of the subscription agent not later than 5:00 P.M., Michigan time, on
November 13, 2001. Except in cases of satisfactory late delivery of rights
provided for in the next paragraph, the rights being exercised must accompany
this payment. Checks or money orders should be made payable to `UNIVERSITY
BANCORP'. Please refer to the above paragraph regarding "Payment of Interest on
Subscriptions and Over-subscriptions".
If prior to the Expiration Date the subscription agent has received the
full Subscription Price, together with a written or telefaxed guarantee (use fax
number (734) 741-5859) from a bank, trust company or a member of the NYSE, other
national securities exchange or the National Association of Securities Dealers,
Inc. that states either:
- Rights with respect to the common stock subscribed for have been
mailed to the subscription agent, or;
- Rights will be delivered to the subscription agent prior to 3:00 P.M.,
Michigan time, on Tuesday, November 20, 2001;
80
The subscription will be accepted subject to receipt of the properly exercised
rights. Common stock certificates will be dated and authenticated as of November
20, 2001.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of any subscription (including any subscription pursuant
to the Step-up or Over-subscription Privilege) will be determined by management,
in its sole discretion, and its decisions shall be final and binding. The
Company reserves the absolute right to reject any subscription, including any
subscription pursuant to the Over-subscription Privilege, if the subscription is
not in proper form or if the acceptance could, in the opinion of our counsel, be
deemed unlawful. The Company also reserves the right to waive any defect with
regard to any particular subscription. Neither the Company nor the subscription
agent shall be under any duty to give notification of any defects or
irregularities in subscriptions, nor shall either incur any liability for
failure to give any notification. In the event a subscriber delivers to the
subscription agent a right or rights for more rights than required for the
shares of common stock for which the subscriber seeks to subscribe and does not
instruct the subscription agent what to do with the balance of the excess
rights, no right shall be issued for the extra amount.
Purchase and Sale of Rights: Rights may be sold through the usual
investment channels, including banks and brokers, however Rights may be only
purchased by or transferred to bona fide residents of the state of Michigan.
While rights may be traded on the NASDAQ Small-Cap Market or OTC Bulletin Board,
there can be no assurance of the extent, if any, that trading will take place or
how long it will continue.
FEDERAL INCOME TAX CONSEQUENCES OF THE SUBSCRIPTION OFFER
The following section describes the material United States Federal
income tax consequences of the rights offering and is the opinion of L.R. Sowell
and Associates PLLC, counsel to University Bancorp, Inc.
General: For federal income tax purposes, neither the distribution of
the rights to holders of our common stock nor the purchase of shares of common
stock by the exercise of the Basic Subscription Privilege, Step-up Privilege,
Fractional Step-up Privilege or Over-subscription Privilege will result in
taxable income to holders of the common stock or to us. If the rights received
by a holder of common stock are not exercised or sold but are allowed to expire,
no loss will be allowed to the holder and adjustment will be made to the tax
basis of the common stock held by the holder. If rights are purchased and are
allowed to expire, there will be a loss equal to the tax basis of the rights in
the hands of the purchaser. The loss will be a capital loss, long- or short
term, depending upon the holding period of the rights, if the rights are a
capital asset in the hands of the holder.
Tax Consequences of Exercise of the Rights: If the rights distributed
to a holder of common stock or held by a purchaser are exercised, the tax basis
of the common stock acquired will be equal to the Subscription Price plus the
tax basis in the rights, if any, calculated in the manner described below, and
the holding period for the common stock will commence on the date the rights are
exercised.
Tax Consequences of Sale of the Rights: If the rights distributed to a
holder of common stock or held by a purchaser are sold, gain or loss will be
81
realized on the sale, equal to the difference between the sale proceeds and the
seller's tax basis, if any, in the rights calculated upon the sale of rights
distributed to a holder of common stock calculated in the manner described
below. Any gain or loss realized upon the sale of rights distributed to a holder
of common stock will be capital gain or loss if the common stock is a capital
asset in the hands of the holder, and for purposes of determining whether the
capital gain is long- or short-term, the holding period of the rights will be
deemed to have commenced on the same date as the holding period of the related
common stock. Any gain or loss realized on the sale of rights previously
acquired by purchase will be a capital gain or loss, long- or short-term
depending on the holding period of the rights, if the rights are a capital asset
in the hands of the seller.
Basis in Rights: In the case of a holder of common stock who exercises
or sells the rights distributed to her or him by us, the determination of the
tax basis in the rights depends on their fair market value upon distribution. It
is anticipated that the fair market value of the rights distributed to each
holder of common stock will be less than 15% of the fair market value of the
common stock held by the holder. In that event, the tax basis of the rights will
be zero. Any holder may, however, elect to allocate to the rights part of the
tax basis of the related common stock in the same proportion which the fair
market value of the rights so received bears to the total of the fair market
fair of the common stock and the fair market value of the rights. Any election,
if made, must be filed with the federal income tax return for the taxable year
in which the rights are received. In the event that the fair market value of the
rights distributed to a holder of common stock is 15% or more of the fair market
value of the common stock held by the holder (which is likely), the rights will
have a tax basis calculated in the manner set forth above. For purposes of
allocating tax basis between the rights and the related common stock, the
respective fair market values are determined as of the date the rights are
distributed.
In the case of a purchase of rights who exercises or sells rights
acquired by him, the tax basis of the rights will be equal to the purchase price
paid.
Holders of common stock are advised to consult their own tax advisors
as to the federal income tax consequences of the subscription offer to them and
as to the tax consequences of the subscription offer under applicable state,
local and foreign laws.
RESTRICTIONS ON CERTAIN HOLDERS OF COMMON STOCK
In order to comply with securities laws of the States of Florida and
Texas, this offering is not being made to persons residing in those states who
are not holders of record of common stock on the record date. In addition, any
transfer of rights to residents of these states who were not holders of record
of common stock on the record date will not entitle those residents to exercise
the rights provided by these rights.
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LEGAL PROCEEDINGS
Other than the following, we have no outstanding disputes or threatened
litigation which is of a material nature:
In November 1999, the Bank sold its shares in Varsity Mortgage, LLC to
Paramount Bank of Farmington Hills, Michigan. Paramount purchased Varsity for
$10 and assumed all assets and liabilities of Varsity at the time of sale.
Subsequent to the sale, Varsity experienced management problems and a further
drop in its business. Paramount also discovered some accounting errors of
approximately $30,000 (although there may be offsetting accounting errors),
which were not revealed after certain due diligence procedures were performed by
an external accounting firm shortly after the sale. 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 was
$35,000 and $25,000, respectively, most of which was incurred in the fourth
quarter of 2000.
Management believes there is currently no other litigation threatened
in which we face potential loss or exposure which will materially affect
shareholders' equity or our business or financial condition.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Lewis & Munday PC, 1300 First National Building, 660 Woodward Avenue, Detroit,
Michigan 48226. The material Federal Income Tax consequences of the Offering
will be passed upon by L.R. Sowell & Associates, PLLC, 42860 Nine Mile Road,
P.O. Box 1029, Novi, Michigan 48376.
83
EXPERTS
The consolidated financial statements of University Bancorp, Inc. as of
December 31, 2000 and for the year ended December 31, 2000 included in the 2000
Annual Report on Form 10-K have been incorporated by reference in this
registration statement in reliance upon the audit report of Grant Thornton LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing. The Grant Thornton audit report references
the financial statements of Midwest Loan Services, Inc. as of December 31, 2000
and for the two years ended December 31, 2000 included in the 2000 Annual Report
on Form 10-K which has been incorporated by reference in this registration
statement in reliance upon the report of Richard C. Woodbury, PC, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of University Bancorp, Inc. as of
December 31, 1999 and for the two years ended December 31, 1999 included in the
1999 Annual Report on Form 10-K have been incorporated by reference in this
registration statement in reliance upon the report of Crowe, Chizek and Company
LLP, independent certified public accountants, and upon the authority of said
firm as experts in accounting and auditing.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We intend these
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and are including this statement for purposes of these safe harbor
provisions.
The outcome of the events described in these forward-looking statements
is subject to risks and actual results could differ materially. The sections
entitled "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" contain a discussion of some
of the factors that could contribute to those differences. The forward-looking
statements reflect management's expectation or belief containing future events
that involve risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words including "believes," "expects," "may," "will,"
"should," "seeks," "pro forma," or "anticipates," and similar expressions. Among
others, certain forward looking statements relate to the continued growth of
various aspects of our community banking, mortgage banking and money management
operations and the nature and adequacy of allowances for loan losses. We can
give no assurance that the expectations reflected in our forward looking
statements will prove to be correct. Various factors could cause results to
differ materially from management's expectations.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and as a result file reports and other
information with the Securities and Exchange Commission. Copies of these reports
can be inspected at and copied at the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices
84
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 606661, and Room 1400, 75 Park Place, New York, New York
10007. Copies of these materials can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the Company is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company has filed a registration statement with the Commission in
accordance with the provisions of the Securities Act. This prospectus does not
contain all of the information set forth in the registration statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information pertaining to the shares of common stock
offered in this prospectus and for further information on us, reference is made
to the registration statement, including the exhibits to the registration
statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference in this prospectus, the following
documents of University Bancorp (File No. 0-16023) previously filed with the
Commission:
- University Bancorp's Annual Report on Form 10-K for the year ended
December 31, 2000.
- University Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1999.
- University Bancorp's Amended Annual Report on Form 10-K for the year
ended December 31, 1999 (filed July 5, 2000).
- University Bancorp's Amended Proxy Statement, dated May 24, 2001 in
conjunction with its Annual Meeting of Stockholders to be held July
20, 2001.
- University Bancorp's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.
The Company will provide each person who receives this prospectus
(including beneficial owners) a copy of any or all of the information that has
been incorporated by reference in this prospectus, but not delivered with the
prospectus. The Company will provide this information (free-of-charge) upon
written or oral request to:
Stephen Lange Ranzini, President
University Bancorp
959 Maiden Lane, Ann Arbor, Michigan 48105
Telephone Number: (734) 741-5858
Fax Number: (734) 741-5859
Email: ranzini@university-bank.com
The Company files its annual (Form 10-K) and quarterly reports (Form
10-Q) with the Securities and Exchange Commission (SEC) on a regular basis. The
Company also files proxy statements, and current reports (Form 8-K) as
necessary. The public may read and copy any of these reports at:
85
SEC's Public Reference Room
450 Fifth Street N.W.
Washington, D.C. 20549
Telephone Number: (800) 732-0330
The SEC also maintains an internet site that contains all information
that the Company has filed electronically (reports, proxy, and other
information). This information is available at: www.sec.gov.
86
You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of common stock
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy these shares of the common stock in any circumstances under which
the offer or solicitation is unlawful.
================================================================================
TABLE OF CONTENTS PAGE
----------------- ----
Prospectus Summary................4
Risk Factors......................8
Use of Proceeds..................11
Dividend Policy..................11
Market for Common Stock..........12
Capitalization...................13
Dilution.........................15
Business.........................16
Selected Financial Data..........26
Management's Discussion
and Analysis...................27
Principal Shareholders...........59
Management.......................62
Certain Related Transactions.....65
Supervision and Regulation.......66
Description of Capital Stock.....75
Plan of Distribution.............78
Legal Proceedings................83
Legal Matters....................83
Experts..........................84
Forward-Looking Statements.......84
Available Information............84
Incorporation of Certain
Documents by Reference.........85
2,092,801 SHARES
COMMON STOCK
PAR VALUE $.01
[UNIVERSITY BANK LOGO]
UNIVERSITY BANCORP, INC.
-----------------------
Prospectus
-----------------------
Dated October 31, 2001
================================================================================
87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection
with the offering described in this registration statement:
Securities and Exchange Commission registration fee $ 582
Blue Sky filing and counsel fees - California (est) 3,250
Blue Sky filing and counsel fees - Colorado (est) 75
Blue Sky filing and counsel fees - Florida (est) 1,000
Blue Sky filing and counsel fees - Illinois (est) 763
Blue Sky filing and counsel fees - Indiana (est) 763
Blue Sky filing and counsel fees - Iowa (est) 1,000
Blue Sky filing and counsel fees - Maryland (est) 1,500
Blue Sky filing and counsel fees - Michigan (est) 1,250
Blue Sky filing and counsel fees - Minnesota (est) 300
Blue Sky filing and counsel fees - Missouri (est) 813
Blue Sky filing and counsel fees - New York (est) 3,200
Blue Sky filing and counsel fees - New Jersey (est) 0
Blue Sky filing and counsel fees - Nevada (est) 3,200
Blue Sky filing and counsel fees - Oklahoma (est) 0
Blue Sky filing and counsel fees - Pennsylvania (est) 500
Blue Sky filing and counsel fees - Texas (est) 1,535
Blue Sky filing and counsel fees - Virginia (est) 700
Blue Sky filing and counsel fees - Washington DC(est) 0
Less: state exemptions (est) -10,931
Printing registration statement, prospectus, and
other documents 2,500
Fees and expenses of subscription agent 1,000
Legal Fees 15,000
Accounting Fees 70,000
Miscellaneous expenses (including estimated
interest payable in respect of early subscriptions) 2,000
--------
Total $100,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Delaware Business Corporation Law we may or shall, subject to
various exceptions and limitations, indemnify our directors or officers and may
purchase and maintain insurance therefor.
We have included in our certificate of incorporation pursuant to the
Delaware Business Corporation Law a provision eliminating the personal liability
of directors and officers to us or our shareholders for damages for breach of
duty. The principal effect of this provision in our certificate of incorporation
is to eliminate potential monetary damage actions against any director for
breach of his or her duties as a director unless a judgment or other final
adjudication establishes that his or her acts or omissions were in bad faith;
his or her acts or omissions involved intentional misconduct or a knowing
violation of law; or he or she personally gained in fact a financial profit or
other advantage to which he or she was not legally entitled. This
88
provision does not affect the liability of any director for acts or omissions
occurring prior to the date of adoption of this provision.
In addition, the Delaware Business Corporation Law empowers a
corporation to grant indemnification to any officer or director except where it
is adjudged that his or her acts were committed in bad faith; or were the result
of active and deliberate dishonesty and were material to the cause of action so
adjudicated; or that he or she personally gained in fact a financial profit or
other advantage to which he was not legally entitled. Also, the Delaware
Business Corporation Law empowers a corporation to advance to an officer or
director the expenses of defending any covered claim upon receipt of his or her
written agreement to repay any amount he or she is later determined not to be
entitled to. Our bylaws have been amended to provide that we advance expenses of
defense to our officers and directors substantially to the full extent
authorized by the Business Corporation Law.
The above statement is subject to the detailed provisions of Sections
of the Delaware Business Corporation Law. We do not maintain insurance to
indemnify directors and officers.
ITEM 16. EXHIBITS.
3. Certificate of Incorporation and By-laws
3.1 Composite Certificate of Incorporation of the Company, as
amended (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).
3.3 Certificate of the Series 3 6% Cumulative Convertible
Preferred Stock (incorporated by reference to Exhibit 3.3 to the
Company's Current Report on Form 8-K as of November 30, 2000).
5. Opinion from Counsel
5.1 Legal Opinion of Lewis & Munday PC.
5.2 Tax Opinion of L.R. Sowell & Associates, PLLC.
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
89
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 from Federal Reserve Bank of Minneapolis, dated
December 1, 1989, (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1989).
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 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992).
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 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991).
10.8.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and Newberry Bancorp, Inc., dated May 21, 1991
(incorporated by reference to Exhibit 10.11.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991).
10.9 Purchase and Sale Agreement, dated November 1, 1995,
concerning Common Stock of Midwest Loan Services, Inc., among its
shareholders 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
90
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 on Form 10-K for the
year ended December 31, 1999).
21. Subsidiaries of Registrant
23. Consent and Legal Opinion of Experts and Counsel
23.1 Consent of Grant Thornton LLP, independent public
accountants.
23.2 Consent of Crowe, Chizek and Company LLP, independent
public accountants.
23.3 Consent of L.R. Sowell & Associates, PLLC and Consent of
Lewis & Munday PC, is included in Exhibit 5 to this Registration.
23.4 Consent of Richard C. Woodbury, P.C., independent public
accountants.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment) which, individually or in the
aggregate, represent a fundamental change in the information
set forth in the registration statement;
iii. To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to the information in the
registration statement; provided, however, that the
undertakings set forth in paragraphs (i) and (ii) above do not
apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section
13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in this registration
statement.
2) That, for the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities being
offered, and the offering of these securities at the time shall be
deemed to be the initial bona fide offering.
91
3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
4) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to
and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X
are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference
in the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions discussed in Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission this indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against these liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by any director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSITY BANCORP, INC.
(Registrant)
By: /s/Stephen Lange Ranzini
----------------------------------
Stephen Lange Ranzini, President
Date: October 31, 2001
Each person whose signature appears below hereby appoints Stephen Lange Ranzini,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to this Registration
Statement filed by University Bancorp, Inc., and to file the same with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof. In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated on October 31, 2001.
Pursuant to the requirements of the Securities Exchange Act of 1933,
this registration statement has been signed below by the following persons on
behalf of the registrant in the capacities and dates indicated.
Signature Title Date
--------- ----- ----
/s/Stephen Lange Ranzini Director, President, October 31, 2001
--------------------------- Chief Executive Officer
Stephen Lange Ranzini
/s/Joseph L. Ranzini Director, Secretary, October 31, 2001
--------------------------- Chairman
Joseph L. Ranzini
/s/Keith Brenner Director October 31, 2001
----------------
Keith E. Brenner
/s/Robert Goldthorpe Director October 31, 2001
--------------------
Robert Goldthorpe
/s/Dr. Joseph Lange Ranzini Director October 31, 2001
---------------------------
Dr. Joseph Lange Ranzini
/s/Paul Lange Ranzini Director October 31, 2001
---------------------------
Paul Lange Ranzini
/s/Michael Talley Director October 31, 2001
---------------------------
Michael Talley
93
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 5.1 LEGAL OPINION AND CONSENT OF LEGAL COUNSEL
Exhibit 5.2 TAX OPINION AND CONSENT OF SPECIAL COUNSEL
Exhibit 21. SUBSIDIARIES OF REGISTRANT
Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS
Exhibit 23.4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS