<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 for the fiscal year ended December 31, 1997

                                       OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 For the transition period from ____________ to

    -----------

                         Commission file number 0-16023

                            UNIVERSITY BANCORP, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                         38-2929531
(State or other jurisdiction of                        (I.R.S. Employer
      incorporation)                                   Identification No.)

959 Maiden Lane, Ann Arbor, Michigan                   48105
(Address of principal executive offices)             (Zip Code)

        Registrant's telephone number, including area code (734) 741-5858

Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:

                     Common Stock, par value $.010 per share

         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X    No
                                              ---       ---

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant based on the average bid and asked price for the Registrant's
Common Stock on March 16, 1998, as reported by NASDAQ, was approximately
$2,642,123.* The number of shares outstanding of the Registrant's Common Stock
as of March 18, 1997: 1,984,227 shares.

* For purposes of this calculation shares of the Registrant held by directors
and officers of the Registrant and officers of its subsidiaries and other
affiliates have been excluded.

         Documents Incorporated by Reference: Portions of the registrant's Proxy
Statement, to be filed by April 30, 1998 for the 1998 Annual Meeting of
Stockholders, are incorporated by reference into Part III of this Report.

                               page 1 of 108 pages

                 Exhibit index on sequentially numbered page 73
<PAGE>   2
PART I.

ITEM 1. - BUSINESS

         GENERAL

         University Bancorp, Inc. a Delaware corporation (individually and on a
consolidated basis with its subsidiary where the context indicates, the
"Company" or the "Corporation"), operates as a bank holding company for its
wholly-owned subsidiary, University Bank. University Bank (the "Bank") is a
state chartered community bank. The Bank was chartered by the state of Michigan
in 1908 as successor to a banking organization organized in 1890. The Bank
changed its name from "The Newberry State Bank" to its current name in July 1995
to more closely identify the name of the Bank with its current place of
business. Ann Arbor, the home of the University of Michigan, is a university
town. The Bank's accounts are insured by the Federal Deposit Insurance
Corporation.

         University Bancorp, Inc. is essentially a holding company for the Bank
and it invests available cash resources in marketable equity and debt securities
and interest bearing deposits. At December 31, 1997 University Bancorp, Inc. had
cash on deposit of $41,676 and available for sale investments at fair value of
$282,420. University Bancorp, Inc. changed its name to University Bancorp, Inc.
from Newberry Bancorp, Inc. in June 1996, to more closely identify the bank
holding company with the Bank.

         University Bank is headquartered in the town of Ann Arbor, Michigan,
which is the largest city in Washtenaw County, in the western suburbs of the
Detroit Metropolitan Statistical Area ("Detroit MSA"). Following the closing of
its sale of bank office assets and liabilities relating to its former main
office in Newberry, Michigan and its two branch offices in Sault Ste. Marie,
Michigan on December 5, 1994, more fully described below, during 1995, the Bank
relocated its main office to the former offices of its mortgage operation in
Sault Ste. Marie, Michigan. Sault Ste. Marie is the largest city in the eastern
Upper Peninsula of Michigan and the county seat of Chippewa County. During 1995
the Bank was primarily engaged in residential mortgage lending and servicing
operations, and the investment of deposits and other bank borrowings in various
investments, including investment securities issued by government agencies and
U.S. Treasury securities. On February 6, 1996, the Bank opened its new Ann Arbor
main office.

         The Bank conducts its banking business from its headquarters office in
Ann Arbor. During the fourth quarter of 1997, the Bank closed its Sault Ste.
Marie office and centralized its accounting function in Ann Arbor. The Bank's
primary market area is defined as the City of Ann Arbor and surrounding areas in
greater Washtenaw County. In addition, the Bank retains a portfolio of loans
from the eastern Upper Peninsula of Michigan and Sault Ste. Marie, Ontario,
Canada which are serviced from a one-person collection office located in
Newberry, Michigan which is located approximately 60 miles east of Sault Ste.
Marie, Michigan.

         Mortgage Banking. In October 1995, the Bank established a new mortgage
banking subsidiary, Varsity Funding, L.L.C. ("Varsity Funding"). Varsity Funding
specializes in the purchase and


                                     - 2 -
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origination of impaired credit, or subprime quality, residential mortgages, for
sale to non-U.S. government agency-backed mortgage conduits. Varsity Funding's
offices are located in Farmington Hills, Michigan, which is located on the
northwest side of the Detroit MSA. During early 1997, Varsity Funding also
established a retail residential mortgage operation through an office in
Farmington Hills, Michigan. The retail division was expanded to include an
office in Columbus, Ohio in January 1998.

         In February 1996, Varsity Funding expanded the scope of its operations
by establishing another subsidiary of the Bank, Varsity Mortgage, L.L.C.
("Varsity Mortgage"). The Varsity Mortgage mortgage banking operation purchases
residential home loans which generally qualify for sale to secondary market
investors under the underwriting criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") from
correspondents in Michigan and in adjacent states. Loans purchased from
correspondents or originated internally by the Bank are then either pooled into
mortgage-backed securities and the securities are sold to investors or they are
sold directly to FHLMC or FNMA. The Bank sells on a continuous basis the
servicing rights to the loans or securities its originates. The Bank also
retains a portfolio of residential mortgage servicing rights for mortgages
located in Washtenaw County, Michigan and throughout the country which are
guaranteed by government agencies.

         The Bank itself also originates residential loans from its Ann Arbor
office and sells them to secondary mortgage correspondents including Varsity
Mortgage. The Bank, through its Sault Ste. Marie mortgage banking office,
previously operated in similar fashion to Varsity Mortgage, by purchasing, from
correspondents in Michigan, or by originating, residential home loans which
generally qualify for sale to secondary market investors under the underwriting
criteria of the FHLMC and FNMA. In November 1996, the Bank discontinued its
wholesale operation in Sault Ste. Marie and transferred all pooling and
packaging of residential loans to Varsity Mortgage. The Bank's accounting
department continues to administer the Bank's table funding mortgage broker
lending operation from the Ann Arbor office.

         The profits of both Varsity Mortgage and Varsity Funding are subject to
agreements (the "Net Branch Agreements") with the executives who have organized
and supervised their operations under which profits and/or revenues are shared
between the Bank and the employees of the subsidiaries. In future years, as a
result of a profit sharing agreement, the Bank is entitled to share profits of
Varsity Mortgage on a 50/50 basis with the managers and employees of this
subsidiary. As of October 1, 1997, the Bank does not receive further profits
from the pre-tax income of Varsity Funding, except that the Bank is entitled to
10% of the gross revenue (as defined in the LLC's operating agreement) of
Varsity Funding on an ongoing basis, and the Bank provides a tablefunding
lending facility to Varsity Funding at an above market interest rate in excess
of 10%.

         Mortgage Subservicing. In July 1995 the Bank terminated its mortgage
servicing operation in Sault Ste. Marie by outsourcing its servicing operations
under a contract with Midwest Loan Services, Inc., of Houghton, Michigan
("Midwest Loan Services"). In December 1995, the Bank acquired 80% of the common
stock of Midwest Loan Services, which specializes in subservicing, for the
account of other



                                     - 3 -
<PAGE>   4
financial institutions and mortgage brokers, of residential mortgage loans sold
to FNMA, FHLMC and other private residential mortgage conduits.

         Michigan BIDCO. In May 1993, the Company established a Business and
Industrial Development Company (the "BIDCO") called Michigan BIDCO, Inc.
("Michigan BIDCO"). The BIDCO is licensed by the Michigan Financial Institutions
Bureau under the State of Michigan BIDCO program. Michigan BIDCO invests in
businesses in Michigan with the objective of fostering job growth and economic
development. Michigan BIDCO is currently 44.1%-owned by the Bank, and is
accounted for under the equity method. Such percentage is subject to reduction
in the event of conversion of the BIDCO's outstanding convertible bonds. The
BIDCO changed its name to Michigan BIDCO, Inc. from Northern Michigan BIDCO,
Inc. in late 1995 to reflect its strategic plan of seeking investment
opportunities throughout the entire state of Michigan. Originally, the BIDCO
limited its investments to the northern half of Michigan.

         Northern Michigan Foundation. In December 1995, the BIDCO donated
$225,000 to capitalize Northern Michigan Foundation (the "Foundation"), and in
early 1996, donated an additional $75,000 to the Foundation. A portion of the
BIDCO's overhead is borne by the Foundation through a monthly fee reflecting
reimbursement for expenses incurred. The BIDCO and the Foundation share
administrative staffs and offices, with the Foundation reimbursing the BIDCO for
these services. As a result of its capitalization by the BIDCO, the Foundation
was able to gain the right to borrow a total of up to $2,000,000 from the U.S.
Rural Economic Community Development Service Agency ("U.S. RECDS") at 1%
interest with a 30 year term.

         University Insurance & Investment Services. On December 31, 1996, the
Bank established a new insurance and investment sales agency subsidiary, called,
University Insurance & Investment Services, Inc., based in its Ann Arbor main
office. The agency is licensed by the State of Michigan as an insurance agency.
The focus of the insurance agency is life and healthcare insurance brokerage,
and mutual fund and annuity sales.

         EMPLOYEES

         The Company employed 65 full-time persons at January 31, 1998,
including the following:

<TABLE>
<S>                                                         <C>
                  University Bank, Ann Arbor                21
                  University Bank, Newberry                  1
                  Michigan BIDCO                             3
                  Midwest Loan Services                     10
                  University Insurance & Investment          1
                  Varsity Funding                           11
                  Varsity Mortgage                          18
</TABLE>



                                     - 4 -
<PAGE>   5
         LINES OF BUSINESS

         COMMUNITY BANKING, ANN ARBOR

         The Bank opened its office in Ann Arbor on February 6, 1996. The retail
savings products and services of the Bank 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
sixty months. The Bank also offers self-directed retirement accounts, free
access to 24-Hour ATM machines and Gold VISA accounts. The Bank also is a member
of Mastercard, but currently is not offering a Mastercard product. The Bank also
offers a Canadian Dollar denominated, FDIC-insured savings account to its
customers, and foreign exchange services. From time to time to raise liquidity,
the Bank sells CDs through brokers.

         The Bank's community banking operation offers a range of traditional
lending products, including commercial small business loans, residential real
estate mortgage loans, commercial real estate mortgage loans, consumer
installment loans, and land development and construction loans.

         Pursuant to the Branch Sale in late 1994 and early 1995 the Bank sold a
net amount of $20,787,407 of loans, leaving the Bank with approximately
$6,000,000 in loans originated by the Bank's eastern Upper Peninsula banking
operations. At December 31, 1997, the Bank retained approximately $1,300,000 of
these commercial and installment loans, and $1,000,000 of residential real
estate loans. The loans are generally secured by small business and real estate
assets in the area.

         MORTGAGE BANKING

         The Bank became a seller/servicer of Federal Home Loan Mortgage
Corporation insured mortgages ("FHLMC mortgages") in late 1991 and began to
originate FHLMC mortgages for sale into the secondary market. In late 1994 the
Bank became a seller/servicer of Federal National Mortgage Association insured
mortgages ("FNMA mortgages") and began to originate FNMA mortgages for sale into
the secondary market. Varsity Mortgage utilizes the Bank's seller/servicer
licenses to pool, package and sell both FNMA and FHLMC mortgages.

         Varsity Funding, which began operations in late 1995, specializes in
the purchase and origination of impaired credit, or subprime quality,
residential mortgages, for sale to mortgage conduits. Borrowers who have
substantial downpayments or equity in their homes, may as a result of past
credit problems be unable to obtain home mortgages or may be in danger of losing
their home to foreclosure. Impaired credit lenders provide fixed rate higher
interest loans to these borrowers. Typically, within two years, borrowers who
have improved their credit rating can qualify for conventional home mortgages
and refinance into a lower interest rate at that time. Varsity Funding typically
sells all of the mortgages it purchases to secondary market investors.

         The Bank is currently, and Varsity Mortgage and Varsity Funding have
since inception been, selling the servicing right on all mortgages originated.
The Bank's accounting department administers



                                     - 5 -
<PAGE>   6
the Bank's table funding mortgage broker lending operation from the Ann Arbor
office.

         Reference is made 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.

         MORTGAGE SUBSERVICING

         The Bank's 80% owned subsidiary, Midwest Loan Services, specializes in
subservicing, for the account of other financial institutions and mortgage
brokers, residential mortgage loans sold to FNMA and FHLMC and other non-agency
private conduits. Mortgage servicing firms receive monthly payments from loan
customers, aggregate and account for these payments, and send the funds to
mortgage-backed securities holders, such as pension funds and financial
institutions. Mortgage servicers also dun delinquent accounts and foreclose
loans, if required. Midwest is regulated by FHLMC and FNMA. Mortgage servicers
receive a fixed monthly fee for performing this service. As of December 31,
1997, Midwest Loan Services subserviced a total of 4,989 loans, 3,864 for
non-affiliated companies, and 1,125 loans serviced for the Bank and Midwest Loan
Service's own account.

         INVESTMENT SECURITIES

         The Bank maintains surplus available funds in investments consisting of
short-term money market instruments, U.S. federal agency obligations, and
mortgage-backed securities backed by federal agency obligations. The Bank's
investments and the Company's cash and equity portfolio are managed by the
President of the Company, subject to the review and approval of the Board of
Directors of the applicable corporate entity. The securities of the Company and
the Bank provide a source of liquidity to meet operating needs. At December 31,
1997 the Bank's investments had a net unrealized loss of approximately $18,880
versus a net unrealized loss of approximately $30,154 at December 31, 1996.



                                     - 6 -
<PAGE>   7
         The following table discloses certain information regarding securities
held by the Company, the amortized cost of which exceeded more than 10% of
stockholders' equity as of December 31, 1997:
<TABLE>
<CAPTION>
                                                          Final         Market        Amortized
Issuer                     Coupon       Yield          Maturity          Value             Cost
------                     ------       -----          --------          -----        ---------
<S>                        <C>          <C>            <C>             <C>              <C>
RTC 91-12-A1 (1)              FRN       5.48%          01/25/21        533,650          561,335
FNMA CMO92-190F (2)           FRN       6.78%          11/25/07        511,875          502,813
FHLBI equity (3)              VAR       8.00%              None        848,400          848,400
</TABLE>

-----------------------

(1)     The floating rate Resolution Trust Corporation bond is backed by a
        portfolio of single family home mortgages. Due to the structure of the
        issue, the expected average life is 3-4 years. Although issued by a
        government sponsored agency they are not government guaranteed. The
        bonds are rated "AA" by Standard & Poor's and the coupon floats at 100
        basis points over the 11th District Cost of Funds Index, adjusted
        monthly.

(2)     The coupon of these FNMA securities adjusts every month to 1.60% over
        the three month T-Bill rate, with a 9% life of security cap.

(3)     The rate varies quarterly. The Bank is required to maintain the
        investment in Federal Home Loan Bank of Indianapolis (the "FHLBI")
        common stock in an amount related to the Bank's single family mortgage
        related assets and FHLBI advances. Shares are redeemed or sold at par
        value by the FHLBI as required from time to time.

         MICHIGAN BIDCO

         Michigan BIDCO, Inc., which was founded in May 1993, is licensed by the
Michigan Financial Institutions Bureau under the State of Michigan BIDCO Act.
The BIDCO is 44.1%-owned by the Bank, and is accounted for under the equity
method. There are $3,000,000 in convertible bonds outstanding. An initial
investment of $280,000 to buy 280 shares of common stock was made by the Bank in
Michigan BIDCO in 1993.

         At the time of establishment, the BIDCO received $3,000,000 in
financing from the Michigan Strategic Fund. This investment was made in the form
of a ten year loan which carries concessionary terms allowing it to be converted
to a grant over time under certain circumstances. The BIDCO earns grants applied
against the $3,000,000 Michigan Strategic Fund financing if there is growth in
the sales and jobs of the businesses the BIDCO invests in. At the time of
establishment, Michigan BIDCO sold in installments $3,000,000 in 9% Senior
Convertible Bonds to match the State of Michigan's commitment, all of which
amount had been issued at December 31, 1997.

         The Bank's investment in the BIDCO is accounted for under the equity
method, and $94,538, $50,301 and ($55,499) of income (loss) from the BIDCO was
included in the results of operations for the years ended December 31, 1995,
1996, and 1997, respectively. At year-end 1997, the Company owned a total of
$197,000 of the convertible bonds at an amortized cost of $200,916. If the
$3,000,000 of convertible bonds were converted, the Company's consolidated
ownership of the BIDCO upon conversion would be 411 shares of common stock, or
15.61%. Joseph and Stephen Ranzini, officers and directors of the Company, and,
together with members of their family and family trusts, together the principal
stockholders of the Company, hold 55 shares of common



                                     - 7 -
<PAGE>   8
stock of the BIDCO, and $693,000 principal amount of convertible bonds,
convertible into 462 shares of common stock, or a total of an additional 19.62%
of the common stock on a fully diluted basis (assuming conversion of all
convertible bonds referred to above). Consideration is currently being given to
the possibility of selling to the Company some or all of the BIDCO convertible
bonds held by the Ranzini family for cash or shares of the Company or the BIDCO.
If the bonds are converted and the Company's ownership of the BIDCO at that time
is less than 20%, the net income of the BIDCO may not be included in the
Company's statement of operations under the equity method. There is no assurance
that the Company's ownership of the BIDCO will not drop under 20% in the future.

         Michigan BIDCO invests in businesses in Michigan with the objective of
fostering job growth and economic development. The BIDCO has, by general policy
of its board of directors, a loan to one borrower limit of $500,000. In order to
be able to make investments larger than this lending limit, Michigan BIDCO will
leverage its investment with loan guarantees from government agencies, the
guaranteed portion of which is sold in the form of a participation, or if a
government agency loan guarantee is unavailable, a participation may be sold to
one or more investors, including BIDCO management, bondholders and directors. As
of December 31, 1997, the BIDCO had made twenty-six investments, amounting to a
total of $13,036,100 at original cost. At December 31, 1997, Michigan BIDCO had
total assets of $5,683,808.

         Michigan BIDCO makes its investments in the form of loans or direct
equity investments, or a combination thereof. The BIDCO typically receives
warrants or participation rights in the companies in which it invests. As a
matter of policy, the Bank restricts itself from investing or lending to a
business that the BIDCO finances, and related parties which co-invest with the
BIDCO must do so on a basis equal to or less favorable than the BIDCO's. As of
December 31, 1997, investments (at original investment cost) have been made in
the following types of businesses:


                                     - 8 -
<PAGE>   9
         Michigan BIDCO, investments:
<TABLE>
<CAPTION>
                                                          Total       Equity
         Industry                                    Investment       Participation?
<S>                                                 <C>               <C>
         ABC-TV affiliate                           $ 1,472,000               yes
         Adult foster care                               40,000                no
         Bridal shop                                     16,000                no
         Cable TV                                       545,000               yes
         Children's clothing manufacturer               200,000       repurchased
         Commercial laundry                             180,000                no
         Environmental engineering                      100,000       repurchased
         Home health care                                20,000                no
         Hunting supplies                                60,000                no
         Industrial supply                               85,000                no
         Limited service hotels                         738,600               yes
         Manufacturing                                  200,000                no
         Manufacturing                                  200,000                no
         Manufacturing                                  200,000                no
         Metal manufacturing                             80,000                no
         Paper converting                             2,762,000               yes
         Plastic injection molding                    2,000,000       repurchased
         Plastic mold manufacturing                      25,000                no
         Railcar parts manufacturing                    125,000               yes
         Railroad boxcar leasing                      1,500,000                no
         Recycled paper pulp mill                       780,000               yes
         Residential mortgage subservicing              450,000       repurchased
         Secured credit card issuer                     540,000               yes
         Tissue paper mill                              700,000               yes
         Truck maintenance                               17,500                no
                                                     ----------
         Total                                      $13,036,100
                                                    ===========
</TABLE>

         The $1,600,000 80% guaranteed portion of the $2,000,000 loan to the
plastic injection molding firm was sold to Federal Agricultural Mortgage
Corporation and subsequently the loan was paid off. The $1,245,150 guaranteed
portion of the $1,962,000 loan to the paper converting firm was sold to Federal
Agricultural Mortgage Corporation. An $800,000 participation in the railroad
boxcar lease was sold to a private investor group of nine individuals including
Joseph and Stephen Ranzini. This same investor group purchased a $280,000
participation in the recycled paper pulp mill financing, and also purchased a
$28,000 investment in one limited service hotel project to reduce the BIDCO's
net exposure to $500,000. The BIDCO's investment in the recycled paper pulp mill
consisted of an equity investment and a royalty on sales of a new $238,000,000
mixed office waste paper recycling/de-inking pulp mill in Menominee, Michigan.

         In December 1995, the Bank acquired 80% of the common stock of the
residential mortgage servicing business, Midwest Loan Services. In connection
with this acquisition, the BIDCO received 34,500 shares of Common Stock of the
Company, puttable to the Company for $115,000 in December 1996, in exchange for
its ownership of 10% of the common stock of Midwest Loan Services and options to
buy an additional 30% of the common stock of that company. The consideration the
BIDCO received for its stake was on substantially similar terms to the terms the
other selling shareholders of Midwest Loan Services received from the Bank and
the Company.

                                     - 9 -
<PAGE>   10
         Reference is made 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.

         COMPETITION

         COMMUNITY BANKING, ANN ARBOR

         The Bank's attraction and retention of deposits depends on its 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 competitive rates, personal service, a
variety of savings programs, tax-deferred retirement programs and foreign
currency deposits.

         The Bank competes for loan originations primarily through the interest
rates and loan fees it charges, the quality of services it provides to its loan
customers, and the range of services it offers. The Bank's competition in
originating loans comes principally from other commercial banks, credit unions,
insurance companies and savings and loans.

         The following table shows market share of deposits for Washtenaw County
by financial institution for June 1995 and June 1996 (from the FDIC's annual
branch deposit survey (June 1997 data is not yet available)):



                                     - 10 -
<PAGE>   11
         WASHTENAW COUNTY FINANCIAL INSTITUTION DEPOSITS:
<TABLE>
<CAPTION>
                                                         1996           1995          Change
<S>                                                      <C>            <C>           <C>
                  Great Lakes Bancorp                    18.2%          19.0%         -0.8%
                  First of America Bank                  17.0%          17.4%         -0.4%
                  NBD First Chicago Bank                 10.4%           9.6%         +0.8%
                  Comerica Bank                          10.3%           9.3%         +1.0%
                  Key Bank                                9.4%          13.4%         -4.0%
                  Republic Bank                           5.8%           5.5%         +0.3%
                  Standard Federal FSB                    5.0%           4.9%         +0.1%
                  Citizens Bank                           3.6%           3.4%         +0.2%
                  Chelsea State Bank                      3.0%           3.2%         -0.2%
                  University of Michigan CU               2.8%           2.7%         +0.1%
                  Michigan Natl Bank                      2.7%           2.5%         +0.2%
                  Huron River Area CU                     2.5%           2.3%         +0.2%
                  Ann Arbor Commerce Bank                 2.3%           1.8%         +0.5%
                  Hospital & Health Services CU           1.9%           1.7%         +0.2%
                  Automotive FCU                          1.4%           1.4%          0.0%
                  Charter One                             0.9%           0.9%          0.0%
                  Bank of Ann Arbor                       0.6%           0.0%         +0.6%
                  Old Kent                                0.6%           0.2%         +0.4%
                  University                              0.3%           0.0%         +0.3%
                  5 Credit Unions, 1 S&L                  1.3%           0.8%         +0.5%

                  Total Deposits (Bn)                 $ 3.503        $ 3.545
</TABLE>

         Total deposits in the county declined 1.2% from June 1995 to June 1996.
In attracting deposits, the Bank's primary competitors are other commercial
banks, credit unions and savings and loans operating outside of the Upper
Peninsula of Michigan. At year-end 1997, the Bank had approximately $30,000,000
in retail deposits from Washtenaw County, which is approximately a 0.86% market
share.

         The Bank's main office is adjacent to the University of Michigan
Hospital Complex. The Complex employs a total of 8,500 persons. The nearest
competitors to the Bank's main office are First of America Bank and Hospital &
Health Services Credit Union. The Bank's main office was formerly the
headquarters of the latter credit union, which moved its office to a new office
building three miles from the Complex.

         The Ann Arbor banking market is dominated by banks which are owned by
out-of-area 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 the Hospital & Health Services Credit Union and Bank of Ann Arbor, a new
start-up bank.



                                     - 11 -
<PAGE>   12
         MORTGAGE BANKING

         Origination. The Bank's Ann Arbor community bank, Varsity Mortgage and
to a lesser extent Varsity Funding's retail origination offices purchase or
originate internally residential home loans which generally qualify for sale to
secondary market investors under the underwriting criteria of the Federal Home
Loan Mortgage Corporation (FHLMC) or the Federal National Mortgage Association
(FNMA) from correspondents in Michigan and in the eastern United States. Loans
purchased or originated internally are either sold directly to FHLMC or FNMA, or
are pooled into mortgage-backed securities and the securities are sold to
investors in the secondary market.

         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. Most loans sold into the
secondary market, however, go to the same sources, those being Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
and Government National Mortgage Association ("GNMA") guaranteed securities.
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 and its affiliates 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 the Bank's staff.

         During lower interest rate environments, competition for loans is less
intense due to the large number of loans available for origination. As interest
rates rise and the number of loans available for origination diminishes,
competition becomes quite intense and companies with larger investor bases,
flexibility with respect to type of product offered and greater experience in
dealing in these types of markets tend to be the most successful.

         The Bank also originates residential loans to be held in portfolio, and
management believes that this product together with the product offerings which
FHLMC and FNMA have is sufficient for its competitive needs. Although the Bank
is currently licensed as a HUD Title 1, Title 2 and Multifamily seller/servicer,
it has no plans at this time to expand its utilization of HUD or GNMA programs.
However, Varsity Funding recently initiated a GNMA single family retail lending
capability utilizing the Bank's HUD seller/servicer licenses. The Bank and
Varsity Funding also are correspondents for several impaired credit conduits and
sell this type of residential mortgage on a non-recourse, servicing released
basis.

                                     - 12 -
<PAGE>   13
         Varsity Funding operates in similar fashion to Varsity Mortgage and the
Bank's Ann Arbor community bank, in that it purchases or originates internally
residential home loans which generally qualify for sale to secondary market
investors under the underwriting criteria of a wide variety of secondary market
correspondents in Michigan and the midwest United States. Loans purchased or
originated internally are either sold directly to private conduits, or are
pooled into mortgage-backed securities and the securities are sold to private
conduit investors in the secondary market. Varsity Funding's retail origination
operation also sells secondary market conforming loans to Varsity Mortgage on a
correspondent basis. Varsity Funding competes primarily with other mortgage
banking firms, insurance companies, commercial banks, and savings and loans.

         The Bank's accounting department continues to administer the Bank's
table funding mortgage broker lending operation from the Ann Arbor office. By
providing working capital funding for mortgage bankers, the Bank is able to earn
interest income on the amount of loans outstanding at any given time. The Bank
competes in providing this service on interest rate and service. The Bank
encounters competition in table funding of mortgage brokers primarily from
savings institutions, commercial banks, insurance companies, other mortgage
banking firms and Wall Street broker/dealer conduits. Varsity Funding and
Varsity Mortgage are the Bank's largest tablefunding customers.

         Mortgage Subservicing and Servicing. The Bank currently retains 1/3 of
all FHLMC and FNMA mortgage servicing rights originated or purchased to date. In
the third quarter of 1996, the Bank sold 1/3 of its portfolio of accumulated
servicing rights to reduce its investment in this class of asset for a gain of
$256,840. In the third quarter of 1997, the Bank sold an additional 1/3 of its
accumulated portfolio at no significant gain. 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 such 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 a small group of specialized servicing units of mortgage banking companies,
and a few specialized units owned by banks and savings and loans. Most of these
companies have substantially larger financial resources than Midwest Loan
Services.

         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 substantially below the national average.
As a result,



                                     - 13 -
<PAGE>   14
the Company believes that Midwest Loan Services' mortgage servicing operation
potentially offer its mortgage banking operations a competitive advantage in the
future if the mortgage servicing operation were to continue to grow. During 1997
growth in loans serviced for third parties was partially offset by sales of Bank
owned servicing, so that the amount of loans serviced by Midwest rose by
approximately 10% during the year. If Midwest Loan Services adds additional
subservicing customers in the future, the Company intends to continue to pursue
this strategy of selling Company owned servicing rights so that its subservicing
operation is not dependent upon Company owned mortgage servicing rights to
maintain a critical mass and economies of scale. However, at year-end 1997, just
1,125 loans serviced by Midwest Loan Services were serviced for the Bank or
Midwest Loan Services' own account. Since the Bank acquired Midwest Loan
Services, the annual compound growth in mortgages subserviced for others has
been 85%.

         MICHIGAN BIDCO AND NORTHERN MICHIGAN FOUNDATION

         Michigan BIDCO seeks to invest in businesses located in Michigan. The
BIDCO's objective is to seek profit while fostering job growth and economic
development in its market area. Michigan BIDCO makes its investments directly,
or through investment entities formed with other participants, to make
investments, in the form of loans or direct equity investments, or a combination
thereof. As such, it competes with other specialized lenders and wealthy
investors who make risk-oriented investments in businesses located in Michigan.
The BIDCO assumes more credit risk in a typical investment than commercial banks
generally are willing to assume when they make loans. The BIDCO does not make an
investment in a company unless it can be shown that the funds are not available
from a traditional bank lender; therefore, the BIDCO does not compete with
banks. There is only one other BIDCO in Northern Michigan; the BIDCO is one of
eleven BIDCOs in Michigan. At year-end 1996, the BIDCO was essentially fully
invested. The source of funds for new loans will come from loan payoffs,
scheduled amortization of loans, the sale of investments or from additional
pools of investment capital. The BIDCO is investigating its options in expanding
its funds under management.

         The BIDCO's staff manages under contract a 501(c)3 IRS-qualified
non-profit relending company, Northern Michigan Foundation, which has received
the right to borrow $2,000,000 at 1% interest for 30-years from the U.S. RECDS
under the RECDS-sponsored intermediate relending program. The Foundation is one
of three non-profit, privately-run, U.S. Rural Economic Community Development
Service intermediate relending programs located in Northern Michigan. U.S. RECDS
was formerly the Farmers Home Administration. Each of these community
development loan funds covers six counties as its primary market area.



                                     - 14 -
<PAGE>   15
CERTAIN FINANCIAL INFORMATION
for the years ended December 31, 1997, 1996 and 1995 (in thousands)(1):
<TABLE>
<CAPTION>
Revenues:                                                 1997                1996                1995
<S>                                                    <C>                 <C>                 <C>
         Banking
                  Mortgage banking                         882               1,000               1,051
                  Other banking                          3,467               2,970               1,976
                  Midwest Loan Services (2)                713                 603                  49
                  Varsity (3)                            5,032               2,327                  66
         Corporate Office                                   61                  84                 102
                                                       -------             -------             -------
         Total                                          10,155               6,984               3,244
         Michigan BIDCO                                    624               1,439               1,820
Expenses:
         Banking
                  Mortgage banking                         759                 826                 769
                  Other banking                          4,954               4,169               2,572
                  Midwest Loan Services (2)                808                 601                  40
                  Varsity (3)                            4,769               2,125                  99
         Corporate Office                                  276                 209                 166
                                                       -------             -------             -------
         Total                                          11,566               7,930               3,646
         Michigan BIDCO                                    864               1,389               1,495
Pre-tax income:
         Banking
                  Mortgage banking                         123                 174                 282
                  Other banking                         (1,487)             (1,199)               (711)
                  Midwest Loan Services (2)                (95)                  2                   9
                  Varsity (3)                              263                 202                 (33)
         Corporate Office                                 (215)               (125)                (44)
                                                       -------             -------             -------
         Total                                          (1,411)               (896)               (402)
         Michigan BIDCO (1)                                (55)                 50                  95

Assets, at Dec. 31, 1997, 1996 and 1995:
         Banking
                  Other banking &
                    Mortgage banking                    39,269              53,016              35,781
                  Midwest Loan Services (2)              1,340               2,391               1,576
                  Varsity (3)                           15,902              22,379                  32
         Corporate Office                                1,203                 575                 886
                                                       -------             -------             -------
         Total                                          57,714              78,361              38,275
         Michigan BIDCO (1)                              5,684               6,526               6,798
Liabilities and Stockholders' Equity
         Banking
                  Other banking
                    & Mortgage banking                  40,114              54,360              36,641
                  Midwest Loan Services (2)                334               1,286                 548
                  Varsity (3)                           15,502              21,582                  32
         Corporate Office                                1,764               1,133               1,054
                                                       -------             -------             -------
         Total                                          57,714              78,361              38,275
         Michigan BIDCO (1)                              5,684               6,526               6,798
(table continued on following page)


                                                - 15 -
</TABLE>
<PAGE>   16
Inter-office Information, at Dec. 31, 1997, 1996 and 1995:
<TABLE>
<S>                                                     <C>               <C>                 <C>
         Assets:
                  Other banking
                   & Mortgage banking                    (845)            (1,344)              (860)
                  Midwest Loan Services (2)             1,006              1,105              1,028
                  Varsity (3)                             400                797                 --
         Corporate Office                                (561)              (558)              (168)
         Michigan BIDCO (1)                                --                 --                 --
</TABLE>

NOTES TO CERTAIN FINANCIAL INFORMATION TABLE
for the years ended December 31, 1997, 1996 and 1995 (in thousands)

(1)   Reflects only the Bank's share of Michigan BIDCO's net income in 1995,
      1996 and 1997 under the equity method was 44.1%.

(2)   80% of the common stock of Midwest Loan Services was acquired effective as
      of December 1, 1995. Revenues, expenses and pre-tax income for the month
      ended December 31, 1995 is included above, with a reduction for minority
      interest. Midwest Loan Services' pre-tax profit (loss) for the years ended
      December 31, 1995 was 17.

(3)   Includes all Varsity LLCs. Varsity Funding commenced operations in October
      1995, and Varsity Mortgage commenced operations in March 1996.

         REGULATION

         The Company and the Bank are extensively regulated under federal law
and state law.

         As a bank holding company under the Federal Bank Holding Company Act of
1956, as amended, the Company is required to file semi-annual reports and other
information as required under the rules of the Board of Governors of the Federal
Reserve System (the "FRB") and is also subject to examination by the FRB.
         In connection with obtaining the consent of the FRB to a 1989 merger
transaction involving the Bank and University Bancorp, Inc., the Company has
made certain commitments to the Federal Reserve Bank of Minneapolis providing
that the Company will not incur additional debt, and that its Employee Stock
Ownership Plan would not purchase more than 10% of the common stock or 5% of any
other class of voting shares of the Company, without the prior approval of such
Reserve Bank.

         Michigan-chartered commercial banks, such as the Bank, are regulated
and supervised by the Michigan Department of Commerce, Financial Institutions
Bureau, Bank and Trust Division (the "FIB"). As an insured bank, the Bank is
also subject to supervision and regulation by the Federal Deposit Insurance
Corporation (the "FDIC") and is required to file quarterly reports and other
information as required. As subsidiaries of the Bank, Midwest Loan Services,
Varsity Funding, Varsity Mortgage and University Insurance & Investment Services
(the "Agency") are all also subject to examination by both the FIB and the FDIC.
In addition, the Agency is also subject to examination by the State of
Michigan's Financial Institutions Bureau, Insurance Division


                                     - 16 -
<PAGE>   17
         As a FHLMC, FNMA, and HUD Title 1 and Title 2 and HUD multifamily
seller/servicer, the Bank's mortgage banking operation, and the Bank's mortgage
operation subsidiaries, including Midwest Loan Services and Varsity Mortgage are
subject to regulation and examination by FHLMC, FNMA and HUD.

         Michigan BIDCO is also regulated and supervised by the FIB. The BIDCO
is examined annually by the FIB, 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. The BIDCO is also required to permit an observer from
the Michigan Department of Commerce, Michigan Strategic Fund, BIDCO Program to
attend its Board of Directors meetings, and is required to make regular reports
and filings of its activities with this department, as a result of the terms of
the loan agreement between the Michigan Strategic Fund and Michigan BIDCO.

ITEM 2. - PROPERTIES

         In May 1995, the Bank purchased a building in Ann Arbor, Michigan. The
Bank leased 58% of the building to the University of Michigan effective October
1, 1995. The lease calls for minimum payments of $68,000 (adjusted annually for
inflation) plus a pro rata share of the building's expenses. The initial term of
the lease is three years.

         In mid-1996, the Bank purchased a bank branch building in Saline,
Michigan, a rapidly growing community in Washtenaw County, south of Ann Arbor.
The Bank is prevented by a deed restriction from utilizing this property as a
bank branch until June 1998.

         In mid-1996, the Bank leased a site which includes a registered
historic landmark building in Ann Arbor, at the corner where Washtenaw Avenue
and Stadium Boulevard merge. The Bank also loaned a limited liability company,
Tuomy, L.L.C. (associated with non-affiliated third-parties), a sum sufficient
to acquire the site, and earned a 1/3 L.L.C. membership interest in the L.L.C.
as additional consideration for making the loan. The Bank is now renovating the
historic building for its intended use as a remote ATM multiple drive-through
location.

         Until January 1998 the Company leased space in Sault Ste. Marie under a
month to month agreement for its corporate headquarters and the Bank's
accounting and support operations. Michigan BIDCO and Northern Michigan
Foundation also utilized a portion of this space for their office. The office
was closed in January 1998.

         The Bank leases its former loan office in Sault Ste. Marie to an
unrelated third-party. Management hopes to either develop this 16-acre site or
to sell it in the future.

         The Bank owns a small commercial office building in Newberry, Michigan,
which the Bank purchased in early 1995.


                                     - 17 -
<PAGE>   18
         Varsity Funding and Varsity Mortgage lease a small office in Farmington
Hills, Michigan under a three-year agreement. Varsity Funding leases two small
offices for retail origination branches in Farmington Hills, Michigan and
Columbus, Ohio under short term rental agreements.

         Midwest Loan Services leases an office in Houghton, Michigan under a
year-to-year lease.

         Management believes that its office facilities are adequate to support
the anticipated level of future expansion of the Bank's business.

         The following table sets forth certain information relating to real
estate owned and leased at December 31, 1997. The Bank believes that the fair
market value of the real estate which it owns exceeds the book value of such
real estate. Based upon its assessment of current market conditions, management
believes the 16-acre site where the former loan office is located has a fair
market value substantially more than its carrying cost as of December 31, 1997
of $266,079. This property is carried as other real estate owned in the
Company's financial statements as of December 31, 1997 since it is surplus to
the Bank's requirements.

<TABLE>
<CAPTION>
                                                               Year          Owned or
Office Location                                               Opened          Leased                Cost
---------------                                               ------          ------                ----
<S>                                                           <C>             <C>                 <C>
Corporate Office,
Bank Main Office
   959 Maiden Lane
   Ann Arbor, MI 48105                                        1996            Owned               $689,877

Former Loan Office
   Easterday & I-75
   Sault Ste. Marie, Michigan                                 1991            Owned               $266,079

Newberry Loan Collection Office
   207 W. John St.
   Newberry, Michigan                                         1995            Owned                $30,000

Future Bank Branch Site
   West Michigan Ave.
   Saline, Michigan                                           1996            Owned               $170,000

Tuomy ATM Drive-through
   Washtenaw & Stadium
   Ann Arbor, Michigan                                        1996            Leased (1)                 -

Varsity Funding & Varsity Mortgage
   33493 14 Mile Rd., Ste. 20
   Farmington Hills, Michigan                                 1995            Leased                     -
[continued on following page]


                                     - 18 -
</TABLE>
<PAGE>   19
<TABLE>
<S>                                                           <C>             <C>                 <C>
Varsity Funding Retail Offices
   7125 Orchard Lake Rd., Ste. 106
   West Bloomfield, Michigan                                  1997            Leased                     -

   2525-C Oak Stone Drive,
   Columbus, Ohio                                             1998            Leased                     -

Midwest Loan Services
   616 Sheldon Ave., Ste. 300
   Houghton, Michigan                                         1991            Leased                     -
</TABLE>

(1)   The Bank owns a 1/3 L.L.C. membership interest in the L.L.C. which owns
      the site.

ITEM 3. - LEGAL PROCEEDINGS

         There are no material pending legal proceedings to which the Company or
any of its subsidiaries is party to or to which any of their properties are
subject other than the following:
         RTC Loan Pool. In mid-March 1995, the Bank purchased four Participation
Certificates in sub-performing home equity loans with approximately $6,600,000
in unpaid principal balance and $1,000,000 of unpaid accrued interest from a
private investor group (which had purchased them from the Resolution Trust
Corporation (RTC)) for approximately $1,903,000 (the "RTC Loan Pool"). In
September 1996 an additional $700,000 in home equity loans purchased from a home
equity loan originator were added to the RTC Loan Pool as a fifth Participation
Certificate at a cost of $115,000.
         Substantially all of the remaining loans underlying the first four
Participation Certificates were sold as of March 28, 1997 for $1,725,000. As a
result the Bank's investment in the RTC Loan Pool was reduced to zero, and the
balance of the proceeds from the sale, per the terms of the RTC Loan Pool
acquisition agreement, was split 50/50 with the servicer of the RTC Loan Pool.
The Bank's gain on this transaction to date, included in mortgage banking
income, is $408,237. Additional proceeds are anticipated from the loans
underlying the Fifth Participation Certificate with a face value of $215,000.
         In mid-1996, the servicer submitted a request to the RTC for a $650,000
refund of loans that had previously been paid off, but were included in the RTC
Loan Pool, pursuant to the original purchase agreement. If received, this amount
would be split 50/50 with the RTC servicer of the RTC Loan Pool. In April 1997,
the servicer was notified that the RTC had accepted the refund request in the
amount of $300,000 with a request for additional information regarding the
remaining $350,000. After the additional information was submitted, the RTC
rejected the claim in total. As a result, the Bank filed a lawsuit in late
October 1997 against the RTC in the U.S. District Court for the District of
Columbia seeking recovery of the requested $650,000 refund. In March 1998, the
Bank filed an amended and reduced refund request in the amount of $505,000. In
addition, in March 1998, the Bank signed an agreement to sell the loans
underlying the Fifth Participation Certificate and the remainder of the loans
underlying the first four Participation Certificates for $200,000. If additional


                                     - 19 -
<PAGE>   20
proceeds are realized from either the RTC or the Participation Certificates, any
of the amounts received would also be split 50/50 with the servicer of the RTC
Loan Pool, and any amount received by the Bank would be income.

ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.

PART II.

ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK AND DIVIDEND INFORMATION

The Company's Common Stock trades on The NASDAQ Small-Cap Market under the
symbol UNIB. As of the March 1, 1998 there were approximately 375 stockholders
including approximately 240 beneficial owners of shares held by brokerage firms
or other institutions. The high and low sales prices of the Company's common
stock as quoted by NASDAQ, for each quarter of the two year period ended
December 31, 1997 are listed below. The quotations represent interdealer prices
only, without retail markups, markdowns or commissions:

<TABLE>
<CAPTION>
                                         High            Low
<S>                                     <C>              <C>
1996
First Quarter                           $4 3/16            $3 1/3
Second Quarter                           4 3/16             3 1/3
Third Quarter                            4 1/3              3 1/2
Fourth Quarter                           5 2/3              4

1997
First Quarter                           $5 1/3             $4 1/2
Second Quarter                           5 1/3              3 2/3
Third Quarter                            4 1/2              3 2/3
Fourth Quarter                           4 3/16             3
</TABLE>

         The Company effected a three for two stock split of its common stock
(effected as a stock dividend) in February 1998 (see "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations, Recent
Events"). All per share and number of share amounts in this Report are adjusted
to reflect the stock split. No cash dividends have been paid on the Company's
Common Stock. The Company does not currently anticipate declaring or paying
dividends.

CERTAIN SALES OF EQUITY SECURITIES

         In the first half of 1997, the Company sold to four trusts, a
corporation and a life insurance company an aggregate of 64,446 shares (after
adjustment for the three for two stock split) of Common Stock, par value $0.01
per share, of the Company for an aggregate purchase price of $435,011. The
Company claimed exemption from registration requirements under the Securities
Act of 1933 based on Section 4(2) of


                                     - 20 -
<PAGE>   21
said Act. Such claims were based on agreements and certifications executed by
the entities in connection with such issuances of shares to them containing
certain representations and covenants, among other matters, as to their
financial experience, information reviewed and relied upon by them, their
intentions as holders of such shares, and restrictions on the sale or transfer
of such shares by them.

         During 1997, the Company issued to three key executives of one or both
of its subsidiaries, Varsity Funding, L.L.C. and Varsity Mortgage, L.L.C., an
aggregate of 13,869 shares (after adjustment for the three for two stock split)
of Common Stock, par value $0.01 per share, of the Company, for an aggregate
purchase price of $83,214. Such shares were issued pursuant to the exercise of
options for an equivalent number of such shares granted under the Company's 1995
Stock Plan, and such options were granted in satisfaction of provisions of the
agreements with such executives relating to the operations of such subsidiaries
and providing for compensation to such executives based on profits of such
subsidiaries and for a portion of such compensation to be utilized for the
purchase of shares of common stock of the Company. The Company claimed exemption
from registration requirements under the Securities Act of 1933 based on Section
4(2) of said Act. Such claim was based on the status of the purchasers of the
subject shares as key executives of one or both of the subsidiaries of the
Company referred to above, the nature of the contractual arrangements providing
for stock issuances to such executives and agreements and certifications
executed by the executives in connection with such issuances of shares to them
containing certain representations and covenants, among other matters, as to
their financial experience, information reviewed and relied upon by them, their
intentions as holders of such shares, and restrictions on the sale or transfer
of such shares by them.

         In October 1997, the Company issued to an individual who was the spouse
and beneficiary of the estate of a former director of the Company, an aggregate
of 15,000 shares (after adjustment for the three for two stock split) of Common
Stock, par value $0.01 per share, of the Company, for an aggregate purchase
price of $31,250. Such shares were issued pursuant to the exercise of options
for an equivalent number of such shares granted under a written option
agreement. The Company claimed exemption from registration requirements under
the Securities Act of 1933 based on Section 4(2) of said Act. Such claim was
based on the identity of the individual (being a member of the Ranzini family)
and restrictions on the sale or transfer of such shares by her.


                                     - 21 -
<PAGE>   22
ITEM 6. - SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                          UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                                        SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
                                         (Dollars in Thousands Except Per Share Data)

                                               1997              1996              1995              1994              1993
                                             --------          --------          --------          --------          --------
<S>                                          <C>               <C>               <C>               <C>               <C>
SUMMARY OF OPERATIONS
Interest income                                 4,736             3,724             2,379          $  3,987          $  3,852
Interest expense                                3,208             2,733             1,845             2,104             1,660
Net interest income                             1,528               991               534             1,883             2,192

Provision for loan losses                         260               191                17               210               203
Net interest income after
  provision for loan losses                     1,268               800               517             1,673             1,989

Net gain (loss) on investments                      8               399                56              (178)              203
Profit from equity investment
  in Michigan BIDCO                               (55)               50                95               178                13
Other non-interest income                       5,236             2,770               631               702               580
Gain on sale of branches & loans                   --                --                --             3,018                --
Non-interest expense                            7,868             4,915             1,699             2,782             2,624

Income (loss) before income tax                (1,411)             (896)             (402)            2,611               161
Income tax expense (benefit)                     (478)             (359)             (107)              770                23

Net income (loss)                                (933)             (537)             (295)         $  1,841          $    138

SELECTED YEAR END BALANCES
Total assets                                   57,714            78,366            38,275            31,827            64,468
Loans receivable, net                          27,715            20,669             8,954             4,221            27,409
Loans held for sale                            18,157            30,534             7,983             4,129            14,138
Cash, cash equivalents
  and securities                                4,357            19,898            15,028            19,264            14,741
Deposits                                       45,267            53,106            20,745            13,128            48,222
Note payable                                      923               963             1,000             1,000             2,294
FHLB advances                                      --             6,000            10,000             9,800             7,000
Minority interest                                 201               201               201                --                --
Stockholders' equity                            3,583             3,913             4,651             4,096             2,411

SHARES OUTSTANDING AND PER SHARE DATA
Common shares, year-end                         1,984             1,943             1,914             1,800             1,760
Weighted average shares, year                   1,922             1,866             1,802             1,779             1,748
Cash dividends                                     --                --                --                --                --
Net income (loss)                            ($  0.51)         ($  0.29)         ($  0.17)         $   1.03          $   0.08
Book value                                    $  1.81          $   2.01          $   2.43          $   2.27          $   1.37

SELECTED RATIOS
Net average interest rate spread                 3.43%             2.09%             1.09%             3.03%             4.01%
Net yield on average
  earning assets                                 3.07%             2.17%             1.69%             3.42%             4.38%
Return on average assets                        (1.47%)           (1.08%)           (0.84%)            3.02%             0.24%
Return on average equity                       (24.39%)           (13.85)           (6.94%)           54.47%             5.83%
Avg. equity to asset ratio                       5.90%             7.77%            12.14%             5.55%             4.14%
[See the Notes on the following page]


                                                           - 22 -
</TABLE>
<PAGE>   23
(1) The Bank sold three branches and associated loans and deposits on December
5, 1994. Income and expense associated with these branches are included up until
the date of the sale. Net income includes a gain from the Branch Sale of $1.11
per share. (2) Share and per share data have been retroactively restated to
reflect a 3 for 2 stock split in February 1998.


ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

         The purpose of the following discussion and analysis is to assist the
reader in understanding and evaluating the changes in financial position and
results of operations over the past three years. The discussion should be read
in conjunction with the consolidated financial statements, the related notes
thereto, and statistical information presented elsewhere in this report.

         This report contains certain forward looking statements which reflects
the Company's expectation or belief containing future events that involve risks
and uncertainties. Among others, certain forward looking statements relate to
the continued growth of various aspects of the Company's community banking,
mortgage banking and money management operations and the nature and adequacy of
allowances for loan losses. The Company can give no assurance that the
expectations reflected in its forward looking statements will prove to be
correct. Various factors could cause results to differ materially from the
Company's expectations.

         Without intending to be exhaustive, these factors include: reliance on
key personnel and the potential inability of the Company to attract or retain
qualified managers; the risks inherent in the establishment of a new business
enterprise, including substantial operating losses, associated with the
establishment and growth of the Bank's Ann Arbor branch, without any assurance
of future profitability; significant competition from other financial
institutions with far greater assets and resources than the Company; credit and
loan loss risks associated with the relative lack of geographic diversity of the
Bank's borrowers (who tend to be concentrated in the Ann Arbor, Michigan area);
the sensitivity of the Company's operations to many factors beyond its control,
including general economic conditions and monetary policies; and the effects of
extensive governmental regulation and supervision, including risks that
regulatory examiners give negative examination ratings.

         The above cautionary statement is for the purpose of qualifying for the
"safe harbor" provisions of Section 21E of the Securities Exchange Act of 1934.

GENERAL

         The discussion below must be considered in light of the fundamental
changes resulting from 1) the opening in February 1996 of a new main office of
the Bank in Ann Arbor, and 2) the closing on December 5, 1994 of the sale by the
Bank of assets pertaining to its Newberry, Michigan headquarters office and its
two branches in Sault


                                     - 23 -
<PAGE>   24
Ste. Marie, Michigan, which included the sale of deposits and loan portfolios
(the "Branch Sale"). Accordingly, historical results of operations of the
commercial banking division are not indicative of future operations. In
addition, results of operations for 1997, 1996, and 1995, were significantly
affected by the opening in February 1996 of the Bank's office in Ann Arbor.

         The operations of the Company and the banking industry in general are
significantly influenced by general economic conditions, related monetary and
fiscal policies of the federal government, and policies of financial institution
regulatory authorities, including the Federal Reserve Board (FRB), the Michigan
State Financial Institutions Bureau (FIB), and the Federal Deposit Insurance
Corporation (FDIC). Deposit flows and cost of funds are influenced by interest
rates in competing investments and general market rates of interest. Lending
activities are affected by the demand for loan borrowing, which in turn is
affected by the interest rates at which such financing may be offered and other
factors affecting the economy and the availability of funds.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

         Total assets of the Company at December 31, 1997 amounted to $57.71
million compared to $78.36 million at December 31, 1996. Loans receivable, net
of reserves, increased by $7.05 million to $27.72 million from $20.67 million.
Cash and cash equivalents (including Federal Funds sold on an overnight basis)
at the end of 1997 decreased by $10.17 million from the prior year, while
securities decreased by $5.37 million. Loans held for sale in the Bank's
mortgage banking division decreased by $12.37 million from $30.53 million to
$18.16 million. During the second half of 1997, management of the Bank pursued a
policy of decreasing reliance on certain high cost deposits and borrowings,
reducing low yielding assets such as Federal Funds sold and increasing the rate
at which loans held for sale were sold to improve profitability. This reduced
total assets, loans held for sale, Federal Funds sold, FHLB borrowings, and
deposits.

         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. Agency securities and
cash. In addition the bank holding company had $0.32 million in cash and equity
securities at the end of 1997 to meet cash needs, primarily operating expenses
and interest and principal reductions on the holding company's bank loan. The
balance of the loan was $922,688 and $962,500 at year end 1997 and 1996. 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 the Company during 1998. Management believes that the
cash and securities on hand is currently sufficient to cover any required
principal reductions during 1998 on the holding company's loan.

         Total stockholders' equity of the Company at December 31, 1997 was
approximately $3.58 million (or 6.2% of total assets) compared to $3.91 million
(or 5.0% of total assets) the year earlier. The Bank's regulatory capital at
year end was $4.70 million or 8.24% of the Bank's total regulatory assets and
the risk-adjusted capital ratio of


                                     - 24 -
<PAGE>   25
<TABLE>
<CAPTION>
                                                   University Bank
                                           Risk-Based Capital Calculation
                                                  December 31, 1997


                                                                             Balance                Risk Weighted
0% RISK CATEGORY                                                           Sheet (000)              Assets (000)
<S>                                                                        <C>                      <C>
              Mort-Backed Sec Guaran by GNMA                                              3                        -
              Currency & Coin                                                           207                        -
              Federal Reserve Balance                                                   311                        -
                                                                      -----------------------------------------------
              TOTAL                                                                     521                        -

20% RISK CATEGORY
              Interest-bearing Balances                                                  71                       14
              Fed Funds Sold                                                            314                       63
              U.S. Gov't sponsored Agency Sec                                         1,067                      213
              Cash Items                                                                357                       71
              FHLB Stock                                                                848                      170
              Balances due from depository Inst                                       1,116                      223
                                                                      -----------------------------------------------
              TOTAL                                                                   3,773                      755

50% RISK CATEGORY
              Qualifying 1st liens on 1-4 family                                     26,939                   13,470
                                                                      -----------------------------------------------
              TOTAL                                                                  26,939                   13,470

100% RISK CATEGORY
              ALL OTHER ASSETS                                                       25,680                   25,680

              TOTAL ASSETS                                                           56,913                   39,904
                                                                      ===============================================
</TABLE>

<TABLE>
<CAPTION>
                                               TIER 1 CAPITAL                                         Balance
<S>                                                                                                  <C>
              Common Stock                                                                                200
              Surplus                                                                                   4,262
              Undivided Profits & Capital Reserves                                                       (490)
              Minority Interest                                                                           201
              Other identifiable Intangible Assets                                                       (143)
              Unrealized loss on Securities                                                               (12)
              TOTAL TIER 1 CAPITAL                                                                      4,018

                                               TIER 2 CAPITAL
              Allowance for loans & Lease losses                                                          521
              Excess LLR (limited to 1.25% gross risk-weighted assets)                                    (23)
              TOTAL TIER 2 CAPITAL                                                                        498

              TOTAL TIER 1 & TIER 2 CAPITAL                                                             4,516

              TIER 1/TOTAL ASSETS                                                                        7.06%
              TIER 1 & 2/TOTAL ASSETS                                                                    7.93%

              TIER 1/TOTAL RISK-WEIGHTED ASSETS                                                         10.07%
              TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS                                                     11.32%
</TABLE>

                                     - 25 -
<PAGE>   26
11.75% exceeded the minimum regulatory risk-based capital requirement of 8% of
the risk-adjusted assets for the Bank. The preceding table provides additional
information about the risk-adjusted assets of the Bank and the Company's actual
capital percentages.

IMPACT OF INFLATION AND CHANGING PRICES

         The consolidated financial statements and the notes thereto have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial condition and operating results in terms of
historical dollars (with the exception of the BIDCO, which uses the investment
company method of accounting), without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on operations is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services, since
such prices are affected by inflation. In the current interest rate environment,
where there are rapid increases and decreases of interest rates, liquidity and
the maturity structure of the Bank's assets and liabilities are crucial
determinants of the Bank's profitability.

ASSET/LIABILITY MANAGEMENT

         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 positive gap position will result in generally
higher earnings as short-term assets are repricing upward faster than
longer-term liabilities. However during a declining rate environment, the
opposite effect on earnings is true, with earnings being reduced due to
short-term assets repricing downward faster than longer-term liabilities.

         The following table presents the Bank's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities at December 31,
1997. The table is based upon various assumptions of management which may not
necessarily reflect future experience. The one-year gap position at December 31,
1997 was estimated to be ($7,283,000) or -14.46%:


                                     - 26 -
<PAGE>   27
<TABLE>
<CAPTION>
                                                       UNIVERSITY BANK
                                              Asset/Liability Position Analysis
                                                         ($ in 000's)
                                                   Maturing or Repricing in

                                         3 Mos         91 Days to         1 - 5           Over 5      ALL
             ASSETS                     or Less          1 Year           Years           Years       OTHERS           TOTAL
             ------                     -------          ------           -----           -----       ------           -----
<S>                                     <C>             <C>               <C>              <C>         <C>             <C>
    Fed Funds                               315                0               0                0           0             315
    Loans (1)                             2,101            4,143           6,409            2,009           0          14,662
    Canadian Investments                      0                0               0                0           0               0
    Securities Available for Sale         1,064                0               3              913           0           1,980
    Securities held for Sale                  0                0               0                0           0               0
    Loans held for Sale                  18,157                0               0                0           0          18,157
    Matured Loans                           928                0               0                0           0             928
    Variable Rate Loans                  11,503                0               0                0           0          11,503
    Other Assets                              0            2,193               0            3,151           0           5,344
    Fixed Assets                              0              317               0            1,639           0           1,956
    Cash and Due from Banks                   0              500               0            1,562           0           2,062
    Overdrafts                               36                0               0                0           0              36
    Non-Accrual Loans                         0                0               0              586           0             586
    Discount FHA Title 1                      0                0               0                0           0               0
    Valuation Adjustment                      0                0               0                0           0               0
                                           ----            ----             ----            ----        ----             ----
      TOTAL ASSETS                       34,104            7,153           6,412            9,860           0          57,529

             LIABILITIES

    CD's over $100,000                    3,983            8,019             207                0           0          12,209
    CD's under $100,000                   1,732            7,460           2,089               55           0          11,336
    MMDA                                 15,135                0               0                0           0          15,135
    NOW                                   3,985                0               0                0           0           3,985
    Demand                                    0               88               0            2,370           0           2,458
    Savings                                   0              115               0                0           0             115
    Canadian Savings                          0               29               0                0           0              29
    Other Liabilities                         0              175               0            4,195           0           4,370
    Borrowings                                0            2,744           1,749                0           0           4,493
    Equity                                    0                0               0            3,399           0           3,399
                                           ----            ----             ----            ----        ----             ----
      TOTAL LIABILITIES                  24,835           18,630           4,045           10,019           0          57,529


             GAP                          9,269          (11,477)          2,367             (159)          0


             CUMULATIVE
             GAP                          9,269           (2,208)            159                0           0

             GAP
             PERCENTAGE                   16.11%           -3.84%           0.28%            0.00%       0.00%

    Notes:
     (1) Net of bad debt reserves.
</TABLE>

                                     - 27 -
<PAGE>   28
         The following additional information is provided with respect to the
Bank's investment portfolio, at book value, as of December 31, 1997:

    Investment Portfolio Maturities (in $000s) and Yield by Type:

<TABLE>
<CAPTION>
                                                            Maturity or Repricing Interval
                                         -------------------------------------------------------------------
                                           Under          1 Year to           5 Years to           More Than
                                         One Year         5 Years             10 Years             10 Years
                                         --------         -------             --------             --------
<S>                                      <C>              <C>                 <C>                  <C>
Treasuries and
Gov't Agencies
  - Amount                               $    -0-          $    3              $ 503               $1,411
  - Yield                                     --%           4.90%               6.65%                6.99%

All Other Securities
  - Amount                               $    -0-         $   201             $  -0-               $   44
  - Yield                                     --%           9.00%                --%                   --%
</TABLE>

         Additional information regarding the Bank's investments as of December
31, 1997 and 1996 is set forth under note 3 to the Company's consolidated
financial statements included with this report.

         The following information pertaining to maturities and sensitivities of
the Bank's loan portfolio to changes in interest rates is provided as of
December 31, 1997:

         Loan Portfolio Maturities by Type (in $000s):

<TABLE>
<CAPTION>
                                                            Maturity
                                         -------------------------------------------
                                          Under 1         Year to            After 5
                                         One Year         5 Years             Years
                                         --------         -------            -------
<S>                                      <C>              <C>                 <C>
Commercial & Financial                   $5,361           $2,984              $2,711
Agricultural                             $  -0-           $  -0-              $  -0-
Real Estate:
  Construction                           $  775           $  809              $  -0-
  Mortgage (1)                           $1,013           $2,274              $5,550
Consumer                                 $  577           $3,251              $2,931
                                         ------           ------              ------
Total                                    $7,726           $9,318             $11,192
</TABLE>

<TABLE>
<CAPTION>
                                                         Maturity             Maturity
                                                         Under                One Year             Total
                                                         One Year             or More              Loans
                                                         --------             --------             -----
<S>                                                      <C>                  <C>                  <C>
Total Variable Rate Loans                                $ 5,228              $ 8,267              $13,495
Total Fixed Rate Loans                                   $ 2,497              $12,244              $14,741

Total Loans (1)                                          $ 7,725              $20,511              $28,236
                                                         =======              =======              =======
</TABLE>

(1) Excludes residential loans held for sale of $18,157, and the allowance for
loan losses.


                                     - 28 -
<PAGE>   29
SUMMARY OF RESULTS OF OPERATIONS

         The net loss from operations of the Company was $1,117,924 in 1997,
$536,758 in 1996 and $294,976 in 1995. Earnings (loss) per share for 1997, 1996
and 1995 were $(0.58), $(0.29) and ($0.16), respectively.

         The increased loss in 1997 versus 1996 was principally due to increased
losses at the Bank's new Ann Arbor main office. During the year fixed costs were
higher than revenues, and although certain aspects of underlying operating
results including key indicators such as net interest income improved, the
break-even point was only reached from ongoing operations in the fourth quarter.
A change in management at the Bank also led to high severance and other expenses
in the fourth quarter. The Bank's mortgage banking and other specialized
financial subsidiaries had total increased profits of $245,292 in 1997, a 13%
return on average investment and offset a portion of the losses from the
community bank operations.

         The increased loss in 1996 versus 1995 was principally due to start-up
losses of the Bank's new Ann Arbor main office. 1996 was a year where the Bank
grew its deposits in Ann Arbor from zero to a market share of 1%. Ann Arbor
originated loans also grew, with an increase in porfolio loans of $7.27 million.
Although certain aspects of underlying operating results including key
indicators such as net interest income improved each quarter, the main office's
fixed costs were higher than available revenue. The Bank's mortgage banking and
other specialized financial subsidiaries were substantially more profitable in
1996 than 1995 and offset a portion of the losses from the community bank
operations.

         1995 was primarily a transition year following the sale in December
1994 of the Bank's former main office in Newberry and two branch offices in
Sault Ste. Marie, including deposits and associated loan portfolios (the "Branch
Sale"). During 1995 plans were laid to establish a new main office of the Bank
in Ann Arbor and to expand the Bank's mortgage banking activities. Expenses
associated with these initiatives and other unusual expenses decreased income in
1995. Also, the Bank sold most of its core loan portfolio in December 1994, and
a 42.7% decrease in average earning assets together with the resulting decrease
in net interest income as a percent of earning assets depressed the income of
the Bank in 1995.

RECENT EVENTS

         The Company approved and declared a partial stock split to be effected
in the form of a stock dividend, by distributing to the holders of record at
5:00 p.m. Central Standard Time, on February 23, 1998, shares of Common Stock of
the Company, par value $0.01 per share, at a rate of 0.5 shares for each share
of Common Stock issued and outstanding on such record date. Such distribution
had the equivalent effect on the outstanding Common Stock as would a 3 for 2
stock split. Whole shares of Common Stock were distributed in lieu of any
resulting fractional shares.

         The stock split effected in the form of a stock dividend, as described
above, was approved in order to comply with one of the new requirements for
continued listing on the NASDAQ Small Cap Stock Market, specifically the
requirement that a listed company have at


                                     - 29 -
<PAGE>   30
shares not held directly or indirectly by an officer or director of the issuer
or any other person who is the beneficial owner of more than 10 percent of the
total shares outstanding).

Towards the end of 1997, the management of the Company determined that the
future success of the Bank was dependent upon firm management response to
regulatory criticism of past performance of the Bank with respect to earnings
and compliance, and the fact that the Bank did not meet its internal budgetary
goals for 1997. Since mid-November 1997, a variety of measures have been taken
by the Company's CEO acting as the Bank's new President, including replacing
senior management at the Bank, replacing the Bank's board of directors, cutting
employment levels at the Bank approximately 1/3, reducing substandard loans via
an aggressive collection effort by over 1/3, outsourcing the internal audit
function to an independent CPA firm under the direction of the Bank's internal
audit coordinator, and hiring an experienced compliance officer who is also an
attorney to ensure ongoing quality results. As a result, the Company and the
Bank reported an unaudited profit in both January and February 1998.

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 and investment securities,
and the principal cost of funds is the interest paid on deposit accounts and
other borrowings. Net interest income is affected by (i) the difference between
the average rate of interest earned on the Bank's interest-earning assets and
the average rate paid on its interest-bearing liabilities ("interest rate
spread") and (ii) the relative amounts of its average interest-earning assets
and interest-bearing liabilities. In order to maintain and increase earnings
during periods of fluctuating interest rates, it is imperative that
interest-earning assets and interest-bearing liabilities be managed effectively.
Trends in net interest income provide a measure of the effectiveness by which a
financial institution manages its interest rate sensitivity.

         In each period, net interest income on a consolidated basis was reduced
by interest expense associated with the holding company's bank loan
indebtedness. Such interest expense was $0.11 million in 1997, $0.09 million in
1996 and $0.08 million in 1995.

         In the following table, non-accrual loans are included in the average
balances. The table presents, for the periods and dates indicated, the average
balances (all averages are calculated using monthly averages) of, the interest
earned or paid on, and the weighted average yield earned or rate paid on, the
Company's interest-bearing assets and liabilities:


                                     - 30 -
<PAGE>   31
<TABLE>
<CAPTION>
                                                                                        Net Interest Income

                                                                                      Years Ended December 31,
                                                         At           ------------------------------------------------
                                                       Dec-97                                    1997         1996
                                                  -----------------   ------------------------------------------------
                                                       Average     Average         Interest    Average       Average
                                                        Yield      Balance         Inc(Exp)     Yield        Balance
<S>                                                    <C>        <C>              <C>         <C>         <C>
Interest Earning Assets:
     Loans:
          Commercial                                     8.92%    12,343,131       1,115,893     9.04%      5,783,396
          Real Estate Construction                       8.98%       536,673          42,742     7.96%        145,197
          Real Estate Mortgage                           6.60%    24,323,766       2,444,817    10.05%     22,337,028
          Installment/Consumer                           9.97%     4,786,743         471,542     9.85%      2,647,155
                                                        -----    -----------     -----------    -----     -----------
     Total Loans                                         8.62%    41,990,313       4,074,994     9.70%     30,912,776

     Investment Securities(1)                            7.06%     2,272,225         305,966    13.47%      9,908,962
     Federal Funds & Bank Deposits                       5.03%     5,498,798         355,151     6.46%      4,903,898
                                                        -----    -----------     -----------    -----     -----------
          Total Interest Bearing Assets                  7.96%    49,761,336       4,736,111     9.52%     45,725,636

Interest Bearing Liabilities:
     Deposit Accounts:
         Now/S-Now                                       4.24%     3,360,913         156,902     4.67%        906,551
         Savings                                         2.80%       126,081           3,113     2.47%         77,600
         Canadian Dollar Savings                         1.28%       446,470          10,632     2.38%        989,805
         Time                                            4.78%    27,885,534       1,672,477     6.00%     25,052,321
         Borrowed Funds                                  0.00%     3,256,164         424,419    13.03%      8,193,989
         Money Markets                                   4.90%    16,686,401         832,345     4.99%      8,918,471
                                                        -----    -----------     -----------    -----     -----------
             Total                                       4.93%    51,761,563       3,099,888     5.99%     44,138,737

     Holding Company Debt                                9.50%       937,363         108,195    11.54%        977,500
                                                        -----    -----------     -----------    -----     -----------
          Total Interest Bearing
               Liabilities                               5.02%    52,698,926       3,208,083     6.09%     45,116,237
                                                        -----    -----------     -----------    -----     -----------
Net Earning Assets, net interest
   income, and interest rate spread                      2.94%    (2,937,590)      1,528,028     3.43%        609,399

Net yield on interest-earning assets                     3.55%                                   3.07%

<CAPTION>
                                                                       Net Interest Income

                                                                    Years Ended December 31,
                                                  -------------------------------------------------------------
                                                     1996                                  1995
                                                  -------------------------------------------------------------
                                                    Interest    Average       Average       Interest     Yield/
                                                    Inc(Exp)    Yield         Balance       Inc(Exp)     Rate
<S>                                                 <C>         <C>          <C>            <C>          <C>
Interest Earning Assets:
     Loans:
          Commercial                                  598,353    10.35%      2,799,197        312,643    11.17%
          Real Estate Construction                     13,134     9.05%        137,524         12,251     8.91%
          Real Estate Mortgage                      1,930,956     8.64%      9,352,940        813,909     8.70%
          Installment/Consumer                        278,564    10.52%        958,889        103,825    10.83%
                                                  -----------    -----     -----------    -----------    -----
     Total Loans                                    2,821,007     9.13%     13,248,550      1,242,628     9.38%

     Investment Securities(1)                         623,854     6.30%     16,579,737      1,042,855     6.29%
     Federal Funds & Bank Deposits                    278,665     5.68%      1,704,543         93,494     5.48%
                                                  -----------    -----     -----------    -----------    -----
          Total Interest Bearing Assets             3,723,526     8.14%     31,532,830      2,378,977     7.54%

Interest Bearing Liabilities:
     Deposit Accounts:
         Now/S-Now                                     45,578     5.03%         61,212          1,774     2.90%
         Savings                                        1,910     2.46%         63,381          1,658     2.62%
         Canadian Dollar Savings                       49,948     5.05%      1,225,086         59,169     4.83%
         Time                                       1,537,908     6.14%     12,924,479        838,019     6.48%
         Borrowed Funds                               534,500     6.52%     11,088,914        739,898     6.67%
         Money Markets                                477,002     5.35%      2,344,207        123,708     5.28%
                                                  -----------    -----     -----------    -----------    -----
             Total                                  2,646,846     6.00%     27,707,279      1,764,226     6.37%

     Holding Company Debt                              85,867     8.78%        903,127         81,181     8.99%
                                                  -----------    -----     -----------    -----------    -----
          Total Interest Bearing
               Liabilities                          2,732,713     6.06%     28,610,406      1,845,407     6.45%
                                                  -----------    -----     -----------    -----------    -----
Net Earning Assets, net interest
   income, and interest rate spread                   990,813     2.09%      2,922,424        533,570     1.09%

Net yield on interest-earning assets                              2.17%                                   1.69%


(1)  Actual yields; not adjusted to take into account tax-equivalent yields resulting from tax-free municipal income and
includes bank deposits.
</TABLE>

                                     - 31 -
<PAGE>   32
         The table above does not specify the average level of non-interest
bearing demand deposits, which were $3,510,337, $3,377,101 and $2,156,136 for
the years ended December 31, 1997, 1996 and 1995, respectively, as computed
using month-end balances for such years.

         Net interest income of the Bank increased to $1.53 million in 1997 from
$0.99 million in 1996, mainly as a result of an increase in both yield on
interest-earning assets, and an increase in average interest-earning assets,
which was only partially offset by the rise in interest-earning liabilities.
During the year ended December 31, 1997, the Bank's average interest-earning
asset base rose by $4.04 million or 8.8% over 1996, while average
interest-bearing liabilities increased by $7.62 million or 17.3%. Due to the
growth of loans versus securities in the mix of interest-earning assets, the
average yield on interest-earning assets increased to 9.52% from 8.14% in 1996.
Due to the increase of retail deposits versus wholesale funds in the mix of
interest-earning liabilities, the average cost of deposits decreased from 6.00%
in 1996 to 5.99% in 1997. As a result of an expansion in loans and retail
deposits, the net interest margin increased to 3.43% in 1997 from 2.09% in 1996.
Interest rates were mostly stable for the entire year, and had a minor impact on
net interest margins during 1997.

         Net interest income of the Bank increased to $0.99 million in 1996 from
$0.53 million in 1995, mainly as a result of an increase in the average
interest-earning assets, which was only partially offset by the rise in
interest-earning liabilities. During the year ended December 31, 1996, the
Bank's average interest-earning asset base rose by $14.19 million or 45.0% over
1995, while average interest-bearing liabilities increased by $16.43 million or
59.3%. Due to the growth of loans versus securities in the mix of
interest-earning assets, the average yield on interest-earning assets increased
from 7.54% to 8.14% in 1996. Due to the increase of retail deposits versus
wholesale funds in the mix of interest-earning liabilities, the average cost of
funds decreased from 6.45% in 1995 to 6.06% in 1996. As a result of an expansion
in loans and retail deposits, the net interest margin increased to 2.09% in 1996
from 1.09% in 1995. Interest rates rose slightly in early 1996, but were mostly
stable for the remainder of the year, and had a minor impact on net interest
margins during 1996.

         At December 31, 1997, the net yield on the Bank's interest-earning
assets was 3.55% up from the average net spread for the 1997 year of 3.07%,
principally as a result of further increases in loans and lower cost retail
deposits. Fee income from the Bank's mortgage banking originations, income from
the Bank's portfolio of mortgage servicing rights and the Bank's investment in
its subsidiaries are not included in these calculations.


                                     - 32 -
<PAGE>   33
     The following table presents information regarding fluctuations in
interest income and interest expense of the Company 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:

<TABLE>
<CAPTION>
                                                                                               Rate / Volume Analysis
                                                                                              Years Ended December 31,
                                         -------------------------------------------------------------------------------------------
                                                                   1997                                            1996
                                         -------------------------------------------------------------------------------------------
                                              Volume               Rate               Total              Volume             Rate
                                              ------               ----               -----              ------             ----
<S>                                         <C>                 <C>               <C>                 <C>                 <C>
Interest Income
     Loans:
          Commercial                           648,516          (153,899)            494,617             333,306          (47,596)
          Real Estate Construction              61,778            (9,247)             52,531                 684              199
          Real Estate Mortgage                 171,746           342,115             513,861           1,129,898          (12,851)
          Installment/Consumer                 225,152           (32,174)            192,978             182,799           (8,060)
                                            ----------          --------          ----------          ----------          -------
     Total Loans                             1,107,193           146,794           1,253,987           1,646,687          (68,308)

     Investment Securities                    (480,798)          162,910            (317,888)           (419,588)             587
     Federal Funds                              33,805            42,681              76,486             175,484            9,687
                                            ----------          --------          ----------          ----------          -------
Total Interest Income                          660,200           352,385           1,012,585           1,402,583          (58,034)

Interest Bearing Liabilities:
     Deposit Accounts:
         Now/S-Now                             123,396           (12,072)            111,324              24,499           19,305
         Savings                                 1,193                10               1,203                 372             (120)
         Canadian Dollar Savings               (27,418)          (11,898)            (39,316)            (11,364)           2,143
         Time                                  173,925           (39,356)            134,569             786,365          (86,476)
         Borrowed Funds                       (322,098)          212,017            (110,081)           (193,161)         (12,237)
         Money Markets                         415,466           (60,123)            355,343             346,936            6,358
                                            ----------          --------          ----------          ----------          -------
     Total Deposit Interest Expense            364,464            88,578             453,042             953,647          (71,027)

     Holding Company Debt Interest              (3,526)           25,854              22,328               6,685           (1,999)

          Total Interest Expense               360,938           114,432             475,370             960,332          (73,026)
                                            ----------          --------          ----------          ----------          -------
Net Interest Income                            299,262           237,953             537,215             442,251           14,992
                                            ==========          ========          ==========          ==========          =======
</TABLE>


<TABLE>
<CAPTION>
                                                                         Rate / Volume Analysis
                                                                        Years Ended December 31,
                                         ----------------------------------------------------------------------
                                               1996                                  1995
                                         ----------------------------------------------------------------------
                                               Total              Volume             Rate            Total
                                               -----              ------             ----            -----
<S>                                         <C>                 <C>               <C>               <C>
Interest Income
     Loans:
          Commercial                           285,710           (54,781)           55,178               397
          Real Estate Construction                 883            (6,179)           (2,057)           (8,236)
          Real Estate Mortgage               1,117,047          (123,348)          (78,899)         (202,247)
          Installment/Consumer                 174,739           (60,079)           95,428            35,349
                                            ----------          --------          --------          --------
     Total Loans                             1,578,379          (244,387)           69,650          (174,737)

     Investment Securities                    (419,001)          396,094          (113,243)          282,851
     Federal Funds                             185,171               470            26,517            26,987
                                            ----------          --------          --------          --------
Total Interest Income                        1,344,549           152,177           (17,076)          135,101

Interest Bearing Liabilities:
     Deposit Accounts:
         Now/S-Now                              43,804              (878)           (5,695)           (6,573)
         Savings                                   252            (2,080)           (5,347)           (7,427)
         Canadian Dollar Savings                (9,221)           48,818            23,222            72,040
         Time                                  699,889           (30,237)          (42,577)          (72,814)
         Borrowed Funds                       (205,398)          168,031            91,360           259,391
         Money Markets                         353,294           (36,894)          183,102           146,208
                                            ----------          --------          --------          --------
     Total Deposit Interest Expense            882,620           146,760           244,065           390,825

     Holding Company Debt Interest               4,686            16,937            36,445            53,382

          Total Interest Expense               887,306           163,697           280,510           444,207
                                            ----------          --------          --------          --------
Net Interest Income                            457,243           (11,520)         (297,586)         (309,106)
                                            ==========          ========          ========          ========
</TABLE>



                                      -33-
<PAGE>   34
LOAN PORTFOLIO

         Information regarding the Bank's loan portfolio as of December 31, 1997
and 1996 is set forth under Note 5 to the Company's consolidated financial
statements included with this report.

PROVISION FOR LOAN LOSSES

         The Bank charges to operations a provision for possible loan losses
which is intended to create an allowance for future loan losses. 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 such factors as 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 5 of
the Consolidated Financial Statements for additional information regarding
impaired and past due loans.

         Non-performing loans amounted to $1,121,605, and $753,916 at December
31, 1997 and 1996, respectively. The increase in non-performing loans during
1997 is the result of an increase in delinquent single family loans associated
with the repurchase of loans from the Bank's portfolio of residential mortgage
servicing rights. Approximately $295,000 of the non-performing commercial loans
at December 31, 1997 were paid in full with no loss, subsequent to year-end.

         The provision for loan losses in 1997 was $260,000, an increase of
$69,500 from the 1996 level, which in turn was an increase of $173,700 from the
1995 level of $16,800. Loans charged off net of recoveries were $36,830,
$209,432 and $62,174 in 1997, 1996 and 1995, respectively. The allowance for
possible loan losses totaled $520,953, $297,783 and $317,185 at the end of 1997,
1996, and 1995, respectively.

                                      -34-
<PAGE>   35
         A summary of loan loss expense for the Bank for the years indicated is
presented below:
<TABLE>
<CAPTION>
                    Analysis of the Allowance for Loan Losses
                                ($ in thousands)
                                                           Years Ending December 31,
                                                        --------------------------------
                                                        1997          1996          1995
                                                        ----          ----          ----
<S>                                                     <C>           <C>           <C>
Balance at beginning of period                          $298          $317          $363
                                                        ----          ----          ----
Chargeoffs:
      Domestic:
         Commercial, financial and agricultural           55           178            36
         Real estate-construction                          0             0             0
         Real estate-mortgage                              0             0            61
         Installment loans to individuals                 28            47            31
         Lease financing                                   0             0             0
      Foreign                                              0             0             0
                                                        ----          ----          ----
                                                          83           225           108
                                                        ----          ----          ----
Recoveries:
      Domestic:
         Commercial, financial and agricultural            3            10            30
         Real estate-construction                          0             0             0
         Real estate-mortgage                             24             0             2
         Installment loans to individuals                 19             5            13
         Lease financing                                   0             0             0
      Foreign                                              0             0             0
                                                        ----          ----          ----
                                                          46            15            45
                                                        ----          ----          ----
Net charge-offs                                           37           210            63
                                                        ----          ----          ----
Provision for loan losses                                260           191            17
                                                        ----          ----          ----
Balance at end of period                                $521          $298          $317
                                                        ====          ====          ====
Ratio of net charge-offs during period
to average loans outstanding during period              0.09%         0.68%         0.05%
                                                        ====          ====          ====
</TABLE>

                                      -35-

<PAGE>   36
                  Analysis of the Allowance for Loan Losses
                              ($ in thousands)


<TABLE>
<CAPTION>
                                      At December 31,
                                                               Percent of
                                                               loans in each
Balance at End of Period                                       category to
 Applicable to:                    Amount                      total loans
-------------------------       ------------                   -----------
                               1997     1996                  1997     1996
<S>                          <C>      <C>                    <C>      <C>
Domestic
 Commercial, financial,
 agricultural                  $ 177    $ 156                   34.0%   40.0%
 Real estate-construction          3        -                    0.6%    0.0%
 Real estate-mortgage            163       83                   31.3%   41.8%
 Installment loans to
 individuals                      68       59                   13.0%   18.2%
Unallocated                      110        -                   21.1%    N/A%
                               -----    -----                  ------  ------
                                 521      298                  100.0%  100.0%
                               =====    =====                  ======  ======

</TABLE>



<TABLE>
<CAPTION>
                                      December 31,    December 31,
                                         1997            1996
                                      ------------   -------------
<S>                                   <C>            <C>
Total loans (1)                         28,236          20,966
Reserve for loan losses                    521             298
Reserve/Loans, % (1)                      1.85%           1.42%
</TABLE>


(1) Excludes loans held for sale.

     With the opening of the Bank's new Ann Arbor operation, management
increased the monthly loan loss provision to a rate of $6,000 in February 1996
from $400 in the prior-year period.  In September 1996, management accrued a
special increase of $80,000 in the loan loss provision and increased the
monthly rate beginning in October 1996 to $7,500 per month.  The special
increase and the increase in the monthly rate was the result of a specific
charge-off of $132,074 on one Upper Peninsula commercial loan, which had a
targeted reserve of $90,000 at December 31, 1995, combined with management's
desire to build reserves at a faster rate, as new loan activity in Ann Arbor
exceeded original management projections.  At year-end 1996, management added
another $40,000 to the reserve based upon its analysis of the growth of the
loan portfolio.  A special loan loss provision of $165,000 was charged to
income in June 1997 as directed by the Bank's regulatory examiners.  They
required the special provision as a result of ratio analysis rather than
specific loan problems, expected loan losses or actual loss experience.  Using
the same methodology as at June 1997, an additional provision of $5,000 was
added in December 1997 based upon management's analysis based on all available
data at that time.  Subsequent to year-end several substandard commercial loans
were paid in full, which would tend to increase the adequacy of the loan loss
reserve.
     The historic and current levels of the reserve have been set at a level
which management believes will be sufficient to maintain the overall allowance
at an appropriate amount.  At year-end 1997, such ratio was 1.85%, or $521,000.
Management believes that the 1.85%

                                   - 36 -
<PAGE>   37
ratio reflects a relatively conservative allowance level compared to
expected future experience of the Bank's loan portfolio based upon currently
available facts. With few exceptions, the Bank no longer has loans to commercial
borrowers located in the eastern Upper Peninsula of Michigan, and the remaining
loans generally appear to be well secured.

         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.

         Based upon current economic conditions in the Ann Arbor and eastern
Upper Peninsula market area, management currently anticipates that net loan
losses in 1998 will not exceed $120,000. While the Bank has just begun lending
in the Ann Arbor area, and the local economy is among the fastest growing in the
state of Michigan, management needs to complete another full year to create a
historical basis upon which to predict credit losses from this new lending
activity.

         Management believes that the current reserve level is adequate to
absorb future losses inherent in the loan portfolio, although the ultimate
adequacy of the reserve is dependent upon future economic factors beyond the
Company's control. A downturn in the general nationwide economy will tend to
aggravate, for example, the problems of local loan customers currently facing
some difficulties. A general nationwide business expansion could conversely tend
to diminish the severity of any such difficulties.

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

         Non-interest income. Non-interest income in 1997 rose to $5,189,104
from $3,219,520 in 1996, an increase of $1,969,584, or 61.2%. The increase in
1997 was mainly the result of mortgage banking income, which increased 108%, or
$2,563,735, partially offset by decreased gains from securities sales and sales
of portfolio mortgage servicing rights.

         Non-interest income in 1996 rose to $3,219,520 from $780,960 in 1995,
an increase of $2,438,560. The increase in 1996 was mainly the result of
mortgage banking income, which increased 383%, or $1,873,725, and net gains from
securities sales, which increased $341,402 primarily as a result of the sale of
the Bank's investment in Farmer Mac class A and class C common stock (NASDAQ-
FAMCA & FAMCK).

         Mortgage Banking. Mortgage banking, servicing and origination fees
increased to $4,926,815 in 1997 from $2,363,080 in 1996. The increase in
mortgage banking fee income was the result of a 108% increase in loan purchase
and origination volumes during 1997 and profits from the Bank's mortgage banking
subsidiaries, Varsity Mortgage and Varsity Funding.

         Including the mortgage servicing rights held directly by Midwest Loan
Services, at December 31, 1997, the Bank and its subsidiaries serviced
$124,719,166 of FHLMC and FNMA mortgages for others, versus $214,046,211 at
December 31, 1996. The amount decreased as a result of a portfolio sale of
servicing rights by the Bank in the third quarter of 1997. The following table
summarizes the portfolio by type and mortgage note rate:

                                     - 37 -
<PAGE>   38
        Interest Rate Stratification of the Company's Mortgage Servicing

<TABLE>
<CAPTION>
($ in 000s)                                                            FIXED RATE - BY MATURITY (in years)
                                                                       -----------------------------------
MORTGAGE RATE (%)                    ARMs                  UNDER 10               10-25                       OVER 25
<S>                                <C>                     <C>                   <C>                          <C>
9.00 and up                           541                      -                    221                        2,207
8.50 - 8.99                         7,388                      -                    537                        5,531
8.00 - 8.49                         4,012                      -                  1,232                       17,050
7.50 - 7.99                         1,683                     64                  3,927                       38,106
7.00 - 7.49                         1,396                      -                  7,678                       18,449
6.50 - 6.99                             -                    174                  4,852                        7,384
6.00 - 6.49                             -                      -                    918                        1,357
under 6.00                              -                      -                      -                           12
                                   ------                  -----                 ------                       ------
                                   15,020                    238                 19,365                       90,096

Current market
  interest rates                    6.25%                  7.00%                  7.13%                        7.38%
Average annual
  servicing fee                     0.38%                  0.28%                  0.26%                        0.25%
</TABLE>

         Interest rates have recently declined to levels briefly seen during the
Summer of 1993 and the Winter of 1995, and as a result, the portfolio is
currently experiencing increased refinancings and payoffs, which are likely to
hurt income if it persists.

         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 exceeds 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.


                                     - 38 -
<PAGE>   39
                      Servicing Rights Held by the Company

<TABLE>
<CAPTION>
(amounts in $000s)                                December 31,          December 31,
                                                      1997                  1996
                                                  ------------------------------------
<S>             <C>                               <C>                    <C>
Total servicing (1)                               124,719                214,046
Book value of servicing                             1,430                  2,312
Estimated market value of servicing:
  Management estimate (2)                           1,440                  2,371
  Discounted cash flow (3)                          1,583                  2,466
Estimated excess of market
  over book value (4)                             153- 10                154- 59
</TABLE>

(1)      Includes servicing related to loans held for delivery of $30,535 at
         December 31, 1996.

(2)      Assumes a price based upon market transactions at December 31, 1997 of
         4.6x (4.6 times the servicing fee) for 30-year servicing, 3.5x for
         15-year servicing, 1.9x for Balloon servicing and 2.0x for ARM
         servicing. The market value of servicing at December 31, 1996 was based
         on a price of 4.9x for 30-year servicing, 3.75x for 15-year servicing,
         2.3x for Balloon servicing and 2.1x for ARM servicing. Excess servicing
         is discounted from these amounts at a multiple of one times the
         servicing fee.

(3)      Uses net present value analysis of future cash flows, discounted back
         at rates ranging from 10 to 12% in 1997 and at 13.14% in 1996 (the
         original rate used to price a major bulk portfolio purchased in 1993,
         the majority of the remainder of which was sold in the 1997 portfolio
         sale).

(4)      Range based upon the two methods used in (2) and (3), above. During
         1997 purchases and sales of mortgage servicing rights by third-parties
         evidenced a declining trend in price as long term interest rates
         declined throughout the year.

         Additional information regarding the Bank's mortgage banking activities
for the past three years is set forth in Note 4 to the Company's consolidated
financial statements.

         Michigan BIDCO. Michigan BIDCO (the "BIDCO"), an equity affiliate,
invests in businesses in Michigan with the objective of fostering job growth and
economic development. As of December 31, 1997, the BIDCO had made twenty-six
such investments, amounting to a total of $13,036,100 at original cost. At
December 31, 1997, Michigan BIDCO had total assets of $5,683,808.

         The BIDCO's financial results for 1997 reflect a loss in the amount of
$163,539 as a result of a negative market value adjustment on securities and
loans of $309,144 for the year. Two BIDCO investments have run into financial
difficuly. One was restructured during 1997, with the BIDCO's investment reduced
in value by approximately half. The second is still in the process of being
restructured, and the BIDCO has taken a substantial write-down on its investment
there. At December 31, 1997, the BIDCO had no outstanding conditional
commitments to lend.

         Securities. Proceeds from sales of marketable equity securities
(included in proceeds from sales of investment securities) were $166,498,
$631,278 and $238,481 for the years ended December 31, 1997, 1996 and 1995,
respectively. Gross gains of approximately $41,155,


                                     - 39 -
<PAGE>   40
$346,495 and $46,240 and no gross losses were realized on 1997, 1996 and 1995
sales, respectively.

         Proceeds from sales of available for sale securities were $5,740,991,
$10,888,145 and $12,181,096 for the years ended December 31, 1997, 1996 and
1995, respectively (including sales of marketable equity securities and
excluding sales associated with the Bank's mortgage banking operation). Gross
gains of approximately $29,726 and gross losses of approximately $63,166 were
realized on 1997 sales. Gross gains of approximately $433,222 and gross losses
of approximately $33,940 were realized on 1996 sales. Gross gains of
approximately $164,717 and gross losses of approximately $153,080 were realized
on 1995 sales.

         At December 31, 1997 gross unrealized losses in the Company's
available-for-sale securities were $27,961 and gross unrealized gains were
$46,549. At December 31, 1996 gross unrealized losses in the Company's
available-for-sale securities were $68,000 and gross unrealized gains were
$60,000. At December 31, 1995 gross unrealized losses in the Bank's
available-for-sale securities were $63,000 and gross unrealized gains were
$278,000. Sales of loans pooled into mortgage backed securities in connection
with the Bank's mortgage banking activities were $171,639,196 in 1997,
$54,137,028 in 1996 and $7,690,957 in 1995.

         Non-interest expense. Non-interest expense for the Company increased by
$2,952,525 or 60.0% in 1997 to $7,867,874 from $4,915,349 in 1996. Increased
personnel, occupancy and state income tax expense resulting from the development
of the Bank's new full-service branch office in Ann Arbor and the Varsity
Funding and Varsity Mortgage mortgage banking subsidiaries during 1997 was the
major factor in the increase. Legal and audit expense remained unusually high as
a result of various projects and loan collection legal expense. Bonuses and
severance pay to the Bank's former President added $405,000 in salary expense.
As a result of a variety of actions, in late 1997 and January 1998, management
cut the Bank's ongoing non-interest expenses by a total of $850,000 per year,
when compared to the annualized rate during the first nine months of 1997.
Holding company total expense increased $45,470 primarily as a result of
increases in public listing expense and legal expense associated with various
projects.

         Non-interest expense for the Company increased by $3,215,694 or 189% in
1996 to $4,915,349 from $1,699,655 in 1995. Increased personnel, occupancy, data
processing, advertising and depreciation expense resulting from the start-up of
the Bank's new full-service branch office in Ann Arbor during the 1996 was the
major factor in the increase. Legal expense remained unusually high as a result
of various projects and loan collection legal expense. Bonuses to a key manager
related to value creation with respect to the growth of the Ann Arbor main
office's deposits and loans added $255,000 in salary expense. Holding company
total expense increased $23,404 primarily as a result of increases in public
listing expense and legal expense associated with various projects.

         Year 2000 Readiness. The Bank has formed a Year 2000 coordination
committee with key members of management from the Bank and each operating
subsidiary and appointed its Compliance Officer as Year 2000 Coordinator. The
Bank and Midwest rely on mainframe


                                     - 40 -
<PAGE>   41
computers, which are IBM A/S 400s, and are certified as Year 2000 compliant. The
Bank's main bank software application is a product of Peerless Group, and is
anticipated to be fully Year 2000 compliant by September 1998. Midwest's main
application software is LSAMS servicing software, which is anticipated to be
Year 2000 compliant by year-end 1998. The Bank, Varsity Mortgage and Varsity
Funding also rely on Novell Local Area Networks, which are in the process of
being upgraded to a Year 2000 certified version of Novell Local Area Network
software. Internally generated Year 2000 issues are unlikely to have any
material financial impact on the Company or any of its subsidiaries. The cost of
Year 2000 compliance is included in the Company's ongoing annual software
licensing fees for the most part and is otherwise not currently expected to be
material.

         The impact of external Year 2000 problems from outside service
providers such as the Federal Reserve, the Bank's credit card processor, the
Bank's ATM processor or other vendors is not predictable at this time. The Bank
is requesting Year 2000 readiness information from large commercial borrowers.

INCOME TAXES

         Income tax expense (benefit) in 1997 was $(292,818) versus $(358,758)
in 1996 and $(106,949) in 1995. The effective tax (benefit) rate was (33.9)% in
1997, (40.1)% in 1996 and (26.6)% in 1995. A tax benefit was realized in 1997,
1996 and 1995 for net operating loss carryforwards as a result of the net losses
from operations.

         In February 1996, the Bank, through its 98%-owned subsidiary, Arbor
Street LLC, 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 "Partnership"). The initial
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 (the "Note").
Additional capital contributions are made over time. The purchase of the tax
credits increased the Company's federal income tax refund receivable in 1996 and
1997 and is expected to decrease the amount of federal income taxes the Company
would otherwise pay annually through 2005.

ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements provided pursuant to this item are listed
under Item 14(a) below and appear beginning on page 43.

ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURES.

         None.


                                     - 41 -
<PAGE>   42
                            UNIVERSITY BANCORP, INC.
                                       AND
                                  SUBSIDIARIES
                               ------------------


                        CONSOLIDATED FINANCIAL STATEMENTS

                               -------------------

                          DECEMBER 31, 1997, 1996, 1995




                                     - 42 -
<PAGE>   43
                                  CROWE CHIZEK

                         REPORT OF INDEPENDENT AUDITORS


Board of Directors and Shareholders
University Bancorp, Inc.
Ann Arbor, Michigan


We have audited the accompanying consolidated balance sheets of University
Bancorp, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of University Bancorp,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.





                                                /s/Crowe, Chizek and Company LLP
                                                Crowe, Chizek and Company LLP


Grand Rapids, Michigan
March 20, 1998



                                     - 43 -
<PAGE>   44
Part 1. - Financial Information
Item 1.- Financial Statements



                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                            December 31,1997 and 1996



<TABLE>
<CAPTION>
ASSETS                                            1997                1996
                                              ------------        ------------
<S>                                           <C>                 <C>
Cash and due from banks                       $  2,062,307        $  1,866,917
Federal funds sold                                 314,652          10,683,895
                                              ------------        ------------
     Total cash and cash equivalents             2,376,959          12,550,812

Securities available for sale at market          1,980,327           7,346,856

Loans held for sale                             18,156,671          30,534,574

Loans                                           28,236,183          20,966,290
Allowance for Loan Loss                           (520,953)           (297,783)
                                              ------------        ------------
     Loans, net                                 27,715,230          20,668,507

Premises and equipment                           1,955,919           1,955,294
Mortgage servicing rights                        1,430,190           2,312,436
Investment in and advances to
    Michigan BIDCO                                 742,669             815,790
Other real estate owned                            433,003             266,079
Other assets                                     2,737,815           1,910,331
                                              ------------        ------------
      Total other assets                         7,299,596           7,259,930
                                              ------------        ------------
      TOTAL ASSETS                            $ 57,528,783        $ 78,360,679
                                              ============        ============
</TABLE>











                                   -Continued-



                                     - 44 -
<PAGE>   45
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                     Consolidated Balance Sheets (continued)
                            December 31,1997 and 1996



<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                   1997                1996
                                                   ------------        ------------

Liabilities
Deposits:
<S>                                                <C>                 <C>
  Demand - non interest bearing                    $  2,458,211        $  3,648,170
  Demand - interest bearing                          19,120,122          15,786,832
  Savings                                               143,604             976,479
  Time                                               23,545,234          29,529,050
                                                   ------------        ------------
     Total Deposits                                  45,267,171          49,940,531

FHLB advances                                                 0           6,000,000
Mortgage escrow                                          86,686              87,552
Short term borrowings                                 2,744,188          11,978,766
Long term borrowings                                  1,749,070             962,500
Deferred noncompete income                               67,072             102,076
Other liabilities                                     4,015,003           5,175,058

Minority Interest                                       201,149             201,427

Stockholders' equity:
  Preferred Stock, $0.001 par value;
   Authorized - 500,000 shares;
    Issued -  0 shares in both 1997 and 1996               --                  --
  Common stock, $0.01 par value;
   Authorized - 2,500,000 shares;
    Issued - 1,391,907 shares in 1997
    and 1,295,366 shares in 1996                         13,919              12,954
  Treasury Stock - 68,977 shares in 1997
    and 68,765 in 1996                                 (302,446)           (300,883)
  Additional Paid-in-Capital                          3,493,154           2,906,389
  Retained earnings                                     181,549           1,299,473
  Net unrealized gain/(loss) on securities
   available for sale, net of tax
   of $6,320 in 1997, and
   ($2,659) in 1996                                      12,268              (5,164)
                                                   ------------        ------------

     Total Stockholders' equity                       3,398,444           3,912,769
                                                   ------------        ------------
     TOTAL LIABILITIES AND
       STOCKHOLDERS' EQUITY                        $ 57,528,783        $ 78,360,679
                                                   ============        ============
</TABLE>





The accompanying notes are an integral part of the consolidated financial
statements.


                                     - 45 -
<PAGE>   46
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
              For the Years Ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
                                                   1997              1996             1995
                                               -----------        ----------       ----------
<S>                                            <C>                <C>              <C>
Interest income:
  Interest and fees on loans                   $ 4,074,994        $2,821,007       $1,242,628
  Interest on securities:
   U.S. Treasury Securities                           --              34,310             --
   U.S. Government agencies                        238,190           568,141        1,014,804
   Other securities                                 67,776            21,403           28,051
  Interest on bank deposits                         50,458            41,212             --
  Interest on federal funds                        304,693           237,453           93,494
                                               -----------        ----------       ----------
     Total interest income                       4,736,111         3,723,526        2,378,977
                                               -----------        ----------       ----------

Interest expense:
  Interest on deposits:
   Demand deposits                                 989,247           522,580          125,482
   Savings deposits                                 13,745            51,858           60,827
   Time certificates of deposit                  1,672,477         1,537,908          838,019
  Bank and other short term borrowings             424,419           480,189          739,898
  Long Term Notes Payable                          108,195           140,178           81,181
                                               -----------        ----------       ----------
     Total interest expense                      3,208,083         2,732,713        1,845,407
                                               -----------        ----------       ----------

     Net interest income                         1,528,028           990,813          533,570

Provision for loan losses                          260,000           190,500           16,800
                                               -----------        ----------       ----------

     Net interest income after
       provision for loan losses                 1,268,028           800,313          516,770
                                               -----------        ----------       ----------

Other income:
  Net security gains                                 7,715           399,282           57,880
  Service charges and fees                          17,910             9,428              128
  Foreign exchange income (losses)                  (4,375)           31,847           49,656
  Mortgage banking income                        4,926,815         2,363,080          489,355
  Gain on sale of servicing rights                    --             256,840             --
  Profit(loss) from equity investment in
    Michigan BIDCO                                 (55,499)           50,301           94,538
  Other                                            296,538           108,742           89,403
                                               -----------        ----------       ----------
     Total other income                          5,189,104         3,219,520          780,960
                                               -----------        ----------       ----------
</TABLE>

                                   -Continued-



                                     - 46 -
<PAGE>   47

                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                Consolidated Statements of Operations (continued)
              For the Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                    1997               1996               1995
                                                -----------        -----------        -----------
<S>                                             <C>                <C>                <C>
Other expenses:
  Salaries and wages                            $ 4,228,467        $ 2,431,561        $   507,204
  Employee benefits                                 523,771            346,059            149,397
  Occupancy, net                                    499,838            355,950            101,464
  Taxes other than income                            96,009             26,475            (41,059)
  Data processing and equipment expense             269,820            351,796            194,419
  Correspondent bank service charges                 44,133             20,756             27,243
  Advertising                                       103,332            138,957             18,574
  Net expense of other real estate owned               (782)             7,016             12,365
  Legal and audit expense                           274,093            293,862            354,268
  Other operating expenses                        1,829,193            942,917            375,780
                                                -----------        -----------        -----------
     Total other expenses                         7,867,874          4,915,349          1,699,655
                                                -----------        -----------        -----------

Income (Loss) before income taxes                (1,410,742)          (895,516)          (401,925)
                                                -----------        -----------        -----------

Income taxes (benefit)                             (292,818)          (358,758)          (106,949)
                                                -----------        -----------        -----------

     Net Income (Loss)                          $(1,117,924)       $  (536,758)       $  (294,976)
                                                ===========        ===========        ===========

Basic and diluted (loss) per common share       $     (0.58)       $     (0.29)       $     (0.16)
                                                ===========        ===========        ===========

Weighted average shares outstanding               1,921,721          1,866,519          1,801,518
                                                ===========        ===========        ===========
</TABLE>


     The accompanying notes are an integral part of the consolidated financial
statements.

                                     - 47 -
<PAGE>   48
                            UNIVERSITY BANCORP, INC.
                 Consolidated Statements of Stockholders' Equity
              For the years ended December 31, 1997, 1996, and 1995

<TABLE>
<CAPTION>


                                     Common Stock $.01    Treasury Stock                               Unrealized
                                        Par Value                                                       gain/(loss)
                                     ---------------------------------------   Additional              on securities   Total
                                     Number of    Par   Number of               Paid In      Retained    available  Stockholders'
                                       Shares    Value   Shares      Cost       Capital      Earnings    for sale      Equity
                                     -----------------------------------------------------------------------------------------------
<S>                                  <C>        <C>      <C>       <C>         <C>         <C>           <C>         <C>
Balance January 1, 1995              1,200,000  $12,000     --     $    --     $2,478,270  $ 2,131,207   $(525,788)  $ 4,095,689

  Issuance of Shares at $4.35 per
               share                    76,125      761     --          --        321,386         --          --         322,147

  Purchase of shares at $3.75 per
               share                      --       --    (37,282)   (139,808)        --           --          --        (139,808)

Net change in unrealized gain(loss)
 on securities available for sale,
             net of tax                   --       --       --          --           --           --       667,846       667,846

         Net Income (Loss)                --       --       --          --           --       (294,976)       --        (294,976)
                                     -----------------------------------------------------------------------------------------------
     Balance December 31, 1995       1,276,125   12,761  (37,282)   (139,808)   2,799,656    1,836,231     142,058     4,650,898

Issuance of shares weighted average
         at $5.56 per share             19,241      193     --          --        106,733         --          --         106,926

  Purchase of shares at $5.12 per
               share                      --       --    (31,483)   (161,075)        --           --          --        (161,075)

Net change in unrealized gain(loss)
 on securities available for sale,
             net of tax                   --       --       --          --           --           --      (147,222)     (147,222)

         Net Income (Loss)                --       --       --          --           --       (536,758)       --        (536,758)
                                     -----------------------------------------------------------------------------------------------
     Balance December 31, 1996       1,295,366   12,954  (68,765)   (300,883)   2,906,389    1,299,473      (5,164)    3,912,769

Issuance of shares weighted average
         at $6.43 per share             86,541      865     --          --        555,615         --          --         556,480

  Exercised option shares at $3.13
             per share                  10,000      100     --          --         31,150         --          --          31,250

  Purchase of shares at $7.37 per
               share                      --       --       (212)     (1,563)        --           --          --          (1,563)

Net change in unrealized gain(loss)
 on securities available for sale,
             net of tax                   --       --       --          --           --           --        17,432        17,432

         Net Income (Loss)                --       --       --          --           --     (1,117,924)       --      (1,117,924)
                                     -----------------------------------------------------------------------------------------------
     Balance December 31, 1997       1,391,907  $13,919  (68,977)  $(302,446)  $3,493,154  $   181,549   $  12,268   $ 3,398,444
                                     ===============================================================================================
</TABLE>


                                     - 48 -
<PAGE>   49
                     UNIVERSITY BANCORP, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
              For the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                     1997               1996              1995
                                                                                -------------      -------------      ------------
<S>                                                                             <C>                <C>                <C>
Cash flow from operating activities:
Net income (loss)                                                               $  (1,117,924)     $    (536,758)     $   (294,976)
Adjustments to reconcile net loss to net cash from Operating Activities:
    Depreciation and amortization                                                     663,076            562,141           212,621
    Compensation Expense                                                               36,322             15,056           101,750
    Provision for loan loss                                                           260,000            190,500            16,800
    Gain on sale of mortgage servicing rights                                            --             (256,840)             --
    Mortgage loans originated for sale                                           (396,723,436)      (193,356,147)      (84,528,789)
    Proceeds from sale of loans and mortgage backed trading securities            413,672,875        171,985,016        80,896,312
    Net loss/(gain) on loan sales and securitization                               (2,564,188)        (1,180,289)          (61,695)
    Market adjustment on loans held for sale                                             --                 --             (64,661)
    Gain on sale of home equity loans                                                (429,260)              --                --
    Net amortization/accretion on securities                                           14,856            (18,932)           (4,506)
    Loss/(Gain) on sale of securities available for sale                               (7,715)          (399,282)          (57,880)
    Change in:
      Investment in Michigan BIDCO, Inc.                                               73,121            (50,301)          (94,538)
      Other real estate                                                              (166,924)          (135,483)             (581)
      Increase in other assets                                                     (2,736,723)          (717,937)         (544,425)
      Increase/(Decrease) in other liabilities                                     (1,204,317)           512,506        (2,698,358)
                                                                                -------------      -------------      ------------
       Net cash from (used in) operating activities                             $   9,769,763      $ (23,386,750)     $ (7,122,926)
                                                                                -------------      -------------      ------------

    Cash flow from investing activities:
      Purchase of securities available for sale                                    (1,890,921)       (11,701,033)       (7,974,794)
      Proceeds from sales of securities available for sale                          5,879,886         10,888,145        12,181,096
      Proceeds from maturities and paydowns of securites available for sale         1,396,835          6,751,784         2,453,703
      Acquisition of Midwest Loan Services, net of cash received                         --                 --            (161,882)
      Capitalized mortgage servicing rights                                          (275,680)          (616,436)         (534,112)
      Proceeds from sale of servicing rights                                          835,396          1,216,952              --
      Purchase of home equity loans                                                      --                 --          (1,903,212)
      Loans granted net of repayments                                              (6,877,463)       (11,905,489)       (2,846,473)
      Investment in Michigan BIDCO, Inc.                                                 --                 --            (203,500)
      Premises and equipment expenditures                                            (439,280)          (876,561)         (983,436)
                                                                                -------------      -------------      ------------
       Net cash from (used in) investing activities                                (1,371,227)        (6,242,638)           27,390
                                                                                -------------      -------------      ------------

    Cash flow used in financing activities:
      Net increase (decrease) in deposits                                          (4,673,360)        32,361,195         7,617,272
      Proceeds from FHLB advances                                                                      7,000,000         7,500,000
      Payments of FHLB advances                                                    (6,000,000)       (11,000,000)       (7,300,000)
      Net increase(decrease) in mortgage escrow accounts                                 (866)             9,313          (158,976)
      Net increase (decrease) in other short term borrowings                       (9,234,578)        11,978,766              --
      Principal payment/borrowings on notes payable                                   786,570            (37,500)             --
      Issuance of common stock                                                        551,408             91,870              --
      Purchase of treasury stock                                                       (1,563)          (161,075)         (139,808)
                                                                                -------------      -------------      ------------
       Net cash from financing activities                                         (18,572,389)        40,242,569         7,518,488
                                                                                -------------      -------------      ------------

          Net change in cash and cash equivalents                                 (10,173,853)        10,613,181           422,952
   Cash and cash equivalents:
     Beginning of period                                                           12,550,812          1,937,631         1,514,679
                                                                                -------------      -------------      ------------
     End of period                                                              $   2,376,959      $  12,550,812      $  1,937,631
                                                                                =============      =============      ============

    Supplemental disclosure of cash flow information:

    Cash paid for interest expense                                              $   3,356,692      $   2,599,547      $  1,773,595
    Cash paid for income taxes                                                           --                 --             740,108

    Supplemental disclosure of noncash investing activities:
    Par value of mortgage loans securitized                                     $ 171,639,196      $  54,137,028      $  6,100,390
    Debt assumed in exchange for Midwest acquisition                                     --                 --             312,500
    Fair value of shares exchanged for Midwest acquisition                               --                 --             287,147

    Assets and liabilities acquired in acquisition of Midwest:
        Other equity securities                                                          --                 --              17,946
        Loans held for sale                                                              --                 --              95,000
        Premises and equipment, net                                                      --                 --              85,695
        Purchased mortgage servicing rights                                              --                 --             906,598
        Other assets                                                                     --                 --             198,559
        Other liabilities                                                                --                 --             342,357
        Minority interest                                                                --                 --             199,912
</TABLE>


The accompanying notes are an integral part of the financial statements.


                                     - 49 -
<PAGE>   50
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997


1.       Summary of significant accounting policies

        Principles of Consolidation and Nature of Operations
        The consolidated financial statements of University Bancorp, Inc. (the
        Company) include the operations of its wholly-owned subsidiary,
        University Bank (the Bank), the Bank's wholly-owned subsidiaries,
        Varsity Funding Services, L.L.C. (Varsity Funding), Varsity Mortgage,
        L.L.C. (Varsity Mortgage), and University Insurance & Investment
        Services, Inc. (Agency), 98% owned subsidiary, Arbor Street, L.L.C.
        (Arbor) and 80% owned subsidiary, Midwest Loan Services, Inc. (Midwest).
        The accounts are maintained on an accrual basis in accordance with
        generally accepted accounting principles and predominant practices
        within the banking industry. All significant intercompany balances and
        transactions have been eliminated in preparing the consolidated
        financial statements.

        The Company is a bank holding company. The subsidiary Bank, which is
        located in Michigan, is a full service community bank, which offers all
        customary banking services, including the acceptance of checking,
        savings and time deposits. The Bank also makes commercial, real estate,
        personal, home improvement, automotive and other installment, credit
        card and consumer loans, and provides fee based services such as annuity
        and mutual fund sales, life insurance and foreign currency exchange. The
        Bank considers its customer base to be primarily located in the Ann
        Arbor, Michigan area. The Bank established it's main office in Ann Arbor
        in February 1996, by relocating from the eastern Upper Peninsula of
        Michigan. The Ann Arbor office is the focus of the Bank's future
        business development plan. The consolidated assets of the Company of
        $57,713,783 as of December 31, 1997, primarily represent commercial and
        retail banking activity. Mortgage loans which were sold into the
        secondary market and are being serviced by the Bank and Midwest for
        others of $125,000,000 as of December 31, 1997, are not included in the
        Company's consolidated balance sheet. The Bank uses brokers to arrange
        time deposits, and during 1997, a significant portion of the Bank's time
        deposits were brokered deposits (See Note 7).

        The Bank's operating subsidiaries, Midwest, Varsity Funding and Varsity
        Mortgage, are engaged in the residential home "mortgage banking"
        business. Midwest Loans Services began operations in 1992 and was
        acquired by University Bank in December, 1995. Midwest Loan Services is
        based in Houghton, Michigan, and is a specialist in servicing
        residential mortgage loans for itself and other financial institutions,
        including the Bank (See Notes, 4 & 10.) Varsity Funding commenced
        operations in October 1995 and Varsity Mortgage commenced operations in
        March 1996 (See Note 4). Varsity Funding and Varsity Mortgage which are
        based in Farmington Hills, Michigan, specialize in the purchase, from
        correspondents, and the sale to the secondary market, of nonconforming
        and conforming residential loans, respectively.

        The consolidated financial statements include operating results of the
        Agency since its acquisition on December 31, 1996. The Agency is engaged
        in the sale of insurance products including life and health, and
        investment products including annuities and mutual funds. The Agency is
        located in the Bank's Ann Arbor main office.

        The Bank's 98%-owned subsidiary, Arbor Street LLC, has purchased
        $1,000,000 in low income Michigan Capital Fund for Housing Limited
        Partnership I with the assistance of $950,000 in initial financing in
        the form of a loan from the Michigan Housing Development Authority.

        The Company's loan portfolio is concentrated in Ann Arbor, and to a
        lesser extent in the eastern Upper Peninsula of Michigan. While the loan
        portfolio is diversified, the customers' ability to honor their debts is
        partially dependent on the local economies. The Ann Arbor area is
        primarily dependent on the education, healthcare, services, and
        manufacturing (automotive and other) industries. The eastern Upper
        Peninsula of Michigan is primarily dependent on the recreation,
        gambling, government, cross-border shopping and manufacturing
        industries. Most real estate loans are secured by federal agency
        guarantees and residential or commercial real estate and most business
        loans are secured by business assets. Generally, installment loans are
        secured by various items of personal property. A large portion of time
        deposits consist of certificates of deposit obtained through brokers and
        are subject to withdrawal (with penalties for early withdrawal) should
        the Company's credit worthiness downgrade.


                                     - 50 -
<PAGE>   51
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997

1.      Summary of significant accounting policies (continued)

        Michigan BIDCO, Inc.
        The Bank's investment in Michigan BIDCO, Inc. (the BIDCO) is accounted
        for under the equity method of accounting. The Bank owns 44.1% of the
        outstanding shares of the BIDCO at December 31, 1997, which began
        operations in May, 1993. At December 31, 1997, the Company owned
        $201,562 in bonds issued by the BIDCO. If there were a conversion of
        outstanding convertible bonds, the Bank and the Company would together
        own 15.61% at December 31, 1997 and 1996. In addition, upon conversion,
        certain Corporation officers and directors and their immediate family
        (two of whom serve as President and Chairman of the Corporation) would
        have an ownership interest in the BIDCO of 19.6%. The conversion may
        take place, at the election of the BIDCO, subsequent to any time that
        the BIDCO's equity pursuant to an audit performed using generally
        accepted auditing standards exceeds $1,500,000. The financial statements
        of Michigan BIDCO, Inc. are stated using the prescribed accounting
        practices of investment companies. As a result, investments made by the
        BIDCO are evaluated by management and carried at estimated fair value.
        Total equity of the BIDCO was $1,227,001 at December 31, 1997.

        Use of Estimates in Preparing Financial Statements: The preparation of
        financial statements in conformity with generally accepted accounting
        principles requires management to make estimates and assumptions based
        upon available information. These estimates and assumptions affect the
        reported amounts and disclosures. Actual results could differ from those
        estimates.

        The significant estimates incorporated into these consolidated financial
        statements which are more susceptible to change in the near term include
        the value of mortgage servicing rights, the allowance for loan losses,
        the identification and valuation of impaired loans, the equity interest
        in the fair value and the change in the fair value of investments made
        by the BIDCO, the fair value of financial instruments, and the valuation
        of deferred tax assets.

        Cash flow reporting
        For purposes of the Consolidated Statements of Cash Flows, cash and cash
        equivalents is defined to include the cash on hand, non-interest bearing
        deposits in other institutions, federal funds sold and other investments
        with a maturity of three months or less when purchased. Net cash flows
        are reported for customer loan and deposit transactions and interest
        bearing deposits with other banks.

        Securities
        Securities are classified as held to maturity and carried at amortized
        cost when management has the positive intent and ability to hold them to
        maturity. Securities are classified as available for sale when they
        might be sold before maturity. Securities available for sale are carried
        at fair value, with unrealized holding gains and losses reported
        separately in stockholders' equity, net of tax. Realized gains are based
        on specific identification of amortized cost. Securities are written
        down to fair value when a decline in fair value is not temporary.
        Interest income includes amortization of purchase premium or discount.
        Trading securities are carried at fair value, with changes in unrealized
        holding gains and losses included in income. Other securities such as
        Federal Home Loan Bank stock are carried at cost.

        Loans
        Loans are reported at the principal balance outstanding, net of unearned
        interest, deferred loan fees and costs, and an allowance for loan
        losses.

        Mortgage banking activities
        Mortgage banking activities include the purchase of loans from
        correspondents. The agreements with the correspondents and the degree of
        underwriting the Bank performs on the loans determine whether the loans
        are purchased with or without recourse. Mortgage loans held for sale as
        part of the Bank's mortgage banking activities are valued at the lower
        of cost or market as determined by bid prices for loans in the secondary
        market. Certain loans are securitized into mortgage backed trading
        securities. Upon securitization, the loans are transferred at market
        value to trading securities, and a gain or loss on securitization of
        loans is recorded.


                                     - 51 -
<PAGE>   52
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997

1.       Summary of significant accounting policies (continued)

        Allowance for loan losses
        The allowance for loan losses is a valuation allowance for probable
        credit losses, increased by the provision for loan losses and decreased
        by charge-offs less recoveries. Management estimates the allowance
        balance required based on past loan loss experience, known and inherent
        risks in the portfolio, information about specific borrower situations
        and estimated collateral values, economic conditions, and other factors.
        Allocations of the allowance may be made for specific loans, but the
        entire allowance is available for any loan that, in managment's
        judgement, should be charged-off.

        Loan impairment is reported when full payment under the loan terms is
        not expected. Impairment is evaluated in total for smaller-balance loans
        of similar nature such as residential mortgage, consumer, and credit
        card loans, and on an individual loan basis for other loans. If a loan
        is impaired, a portion of the allowance is allocated so that the loan is
        reported, net, at the present value of estimated future cash flows using
        the loan's existing rate or at the fair value of collateral if repayment
        is expected solely from the collateral. Loans are evaluated for
        impairment when payments are delayed, typically 90 days or more, or when
        it is probable that all principal and interest amounts will not be
        collected according to the original terms of the loan.

        Loan income
        Interest income is reported on the interest method and includes
        amortization of net deferred loan fees and costs over the loan term.
        Interest income is not reported when full loan repayment is in doubt,
        typically when payments are past due over 90 days. Payments received on
        such loans are reported as principal reductions.

        Premises and equipment
        Bank premises and equipment are stated at cost less accumulated
        depreciation. Provisions for depreciation are computed primarily on the
        straight-line method for bank premises and the accelerated methods for
        equipment and land improvements over their estimated useful lives. These
        assets are reviewed for impairment when events indicate the carrying
        amount may not be recoverable.

        Other real estate owned
        Real estate properties acquired in collection of a loan are recorded at
        fair value at the acquisition. Any reduction to fair value from the
        carrying value of the related loan is accounted for as a loan loss.
        After acquisition, a valuation allowance reduces the reported amount to
        the lower of the initial amount or fair value less costs to sell.
        Expenses, gains and losses on disposition, and changes in the valuation
        allowance are reported in other expenses.

        Servicing rights
        Servicing rights represent both purchased rights and the allocated value
        of servicing rights retained on loans sold. Servicing rights are
        expensed in proportion to, and over the period of, estimated net
        servicing revenues. Impairment is evaluated based on the fair value of
        the rights, using grouping of the underlying loans as to type, term and
        interest rates. Any impairment of a grouping is reported as a valuation
        allowance.

        Income taxes
        Income tax expense is the sum of the current year estimated tax
        obligation or refund per the income tax return, and the change in the
        estimated future tax effects of temporary differences and carryforwards.
        Deferred tax assets or liabilities are computed by applying enacted
        income tax rates to the expected reversals of temporary differences
        between financial reporting and income tax reporting, and by considering
        carryforwards for operating losses and tax credits. A valuation
        allowance, if needed, adjusts deferred tax assets to the net amount that
        is more likely than not to be realized.




                                     - 52 -
<PAGE>   53
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997

1.       Summary of significant accounting policies (continued)

        Retirement plan
        The Bank replaced a SEP IRA plan with a 401-K Plan, effective January 1,
        1996, which allowed an employee to contribute up to 15% of salary
        pre-tax, to the allowable limit prescribed by the Internal Revenue
        Service. Management has discretion to make matching contributions to the
        Plan, however, no matching contributions were made by the Bank for the
        years ended December 31, 1997 and 1996.

        Employees Stock Ownership Plan (ESOP)
        The Corporation has a noncontributory ESOP covering all full-time
        employees who have met certain service requirements. The employees'
        share in the Corporation's contribution is based on their current
        compensation as a percentage of the total employee compensation. As
        shares are contributed to the plan they are allocated to employees and
        compensation expense is recorded at the shares' fair value.

        Stock options
        No expense for stock options is recorded, as the grant price equals the
        market price of the stock at grant date. Pro-forma disclosures show the
        effect on income and earnings per share had the options' fair value been
        recorded using an option pricing model. The pro-forma effect is expected
        to increase in the future.

        Dividend restriction
        Banking regulations require the maintenance of certain capital levels
        and may limit the amount of dividends which may be paid by the bank to
        the holding company or by the holding company to shareholders.

        Earnings per share
        Basic earnings per share is based on weighted-average common shares
        outstanding. Diluted earnings per share further assumes issue of any
        dilutive potential common shares. The accounting standard for computing
        earnings per share was revised for 1997, and all earnings per share
        previously reported are restated to follow the new standard. Earnings
        per share and share amounts are restated for all subsequent stock
        dividends and splits.

        Fair Values of Financial Instruments
        Fair values of financial instruments are estimated using relevant market
        information and other assumptions, as more fully disclosed in a separate
        note. Fair value estimates involve uncertainties and matters of
        significant judgment regarding interest rates, credit risk, prepayments,
        and other factors, especially in the absence of broad markets for
        particular items. Changes in assumptions or in market conditions could
        significantly affect the estimates.

        Future Accounting Changes
        New accounting standards have been issued which will require future
        reporting of comprehensive income (net income plus other changes in
        equity, including holding gains and losses on available for sale
        securities) and may require redetermination of industry segment
        financial information.

        Reclassifications
        Certain amounts for 1996 and 1995 have been reclassified to conform
        with the 1997 presentation.

2.        Sale of branches and associated loans

        On December 5, 1994 the Bank sold three branches, certain deposits and
        associated loans to another bank. A portion of the sales price,
        $175,000, was allocated to deferred income attributable to the
        non-compete agreement. This deferred income is being amortized into
        income over the five year term of the agreement.



                                     - 53 -
<PAGE>   54
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997





3.      Securities available for sale

        The following is a summary of the amortized cost and fair value of
        securities available for sale at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                               December 31, 1997
                                               -----------------
                                   Amortized    Gross Unrealized        Fair
(in thousands)                       Cost        Gains   Losses         Value
                                   ---------     ----- ----------       -----

<S>                                  <C>          <C>      <C>          <C>
U.S. agency mortgage-backed          $  509       $ 9      $ --         $  518
Other mortgage-backed                   561        --        (28)          533
U.S. agency equity                      848        --        --            848
Other equity                             44        37        --             81
                                     ------       ---       ----        ------
Total securities
  available for sale                 $1,962       $46       $(28)       $1,980
                                     ======       ===       ====        ======
</TABLE>

<TABLE>
<CAPTION>
                                              December 31, 1996
                                              -----------------
                                   Amortized     Gross Unrealized     Fair
(in thousands)                       Cost        Gains     Losses      Value
                                   ---------     ----- -----------     -----
<S>                                  <C>          <C>      <C>          <C>

U.S. agency mortgage-backed          $5,367       $38       $(30)       $5,375
Other mortgage-backed                   681        --        (35)          646
U.S. agency equity                      848        --        --            848
Other mortgage-backed                   367        --         (3)          364
Other equity                             92        22        --            114
                                     ------       ---       ----        ------
Total securities available for
sale                                 $7,355       $60       $(68)       $7,347
                                     ======       ===       ====        ======
</TABLE>

        Since mortgage-backed securities have variable payments, they are not
reported by specific maturity grouping.

        Investment securities with an amortized cost of approximately $1,067,624
        at December 31, 1997 and $6,356,433 at December 31, 1996 were pledged to
        secure certain borrowings.

<TABLE>
<CAPTION>
Sales of available for sale securities        1997              1996              1995
                                              ----              ----              ----
<S>                                          <C>              <C>               <C>
         Proceeds                            $5,907,489       $10,888,145       $12,181,096
         Realized gains                          70,881           433,222           210,960
         Realized losses                         63,166            33,940           153,080
</TABLE>

                                     - 54 -
<PAGE>   55
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997

4.      Secondary mortgage market operations

        The Bank, and its subsidiaries Midwest Loan Services, Varsity Mortgage
        and Varsity Funding, originate, purchase, sell and service single family
        mortgage loans. The following summarizes the secondary market activities
        of the Bank, Midwest, Varsity Funding and Varsity Mortgage, for the
        years ended:

<TABLE>
<CAPTION>
                                                                        December 31,
                                                          1997               1996             1995
                                                      -----------        -----------        ---------
<S>                                                   <C>                <C>                <C>
Origination and other fees                            $ 1,521,292        $   609,499        $  59,327
Gain on sale and securitization of
  mortgages                                             2,993,448          1,180,289           61,695
Loan servicing and subservicing fees, net                 412,075            573,292          368,333
                                                      -----------        -----------        ---------

Mortgage banking income reflected in statements
  of operations                                         4,926,815          2,363,080          489,355
Gain on sale of servicing rights                             --              256,840             --

Market value adjustments  included in other
  operating expense                                          --                 --             64,661
Interest income allocation                              1,699,400          1,310,062          645,092
Interest expense allocation                            (1,332,100)          (927,578)        (382,570)
Operating expense allocation                           (5,003,798)        (2,625,456)        (589,646)
                                                      -----------        -----------        ---------
Pretax profit (loss) from secondary
market activities                                     $   290,317        $   376,948        $ 226,892
                                                      ===========        ===========        =========
</TABLE>

        Certain assumptions were used to calculate the profit and loss from
        secondary market activities. Interest income was calculated using the
        average annual balance of loans held for sale at the Bank's average
        yield on mortgage loans. Interest expense was calculated using the
        average annual balance of loans held for sale, net of escrow balances,
        at the Bank's average cost of funds rate.

        Operating expenses included certain direct costs, but a significant
        portion is based upon management's estimates using the best available
        information.


<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                                  ------------------------
                                      1997                 1996                1995
                                      ----                 ----                ----
<S>                              <C>                  <C>                  <C>
Loans held for sale,
 January 1                       $  30,534,574        $   7,983,154        $  4,129,321

Origination or acquisition
 of loans held for sale            401,294,972          193,356,147          84,528,789

Sale of loans originated
 for sale                         (242,033,679)        (116,667,699)        (74,639,227)
Securitization of loans           (171,639,196)         (54,137,028)         (6,100,390)

Market value adjustments                  --                   --                64,661
                                 -------------        -------------        ------------

Loans held for sale,
 December 31                     $  18,156,671        $  30,534,574        $  7,983,154
                                 =============        =============        ============
</TABLE>

        The bank and third parties will alternatively provide funding sources
        for the mortgage banking pipeline. Included within other liabilities at
        December 31, 1997, and 1996, are $3,300,000 and $4,100,000 of recently
        closed loans which the Bank is funding internally.

                                     - 55 -
<PAGE>   56
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997


4.      Secondary mortgage market operations (continued)
        A reserve of $64,661 was deducted from income for the year ended
        December 31, 1995 as a lower of cost or market provision for loans held
        for sale. The aggregate market value of the loans held for sale exceeded
        the cost at December 31, 1997 and 1996, thus no reserve was required.

        Mortgage loans serviced for others are not included in the accompanying
        consolidated balance sheets. Such mortgage loans have been sold
        predominately without recourse or with limited recourse. The unpaid
        principal balances of these loans, including loans acquired from the
        acquisition of Midwest, were $125,000,000, $214,000,000 and $269,000,000
        at December 31, 1997, 1996 and 1995, respectively.

        Midwest also provides sub-servicing of loans for other financial
        institutions. At December 31, the principal balance of loans for which
        sub-servicing was provided was $321,896,000 in 1997 and $217,297,000 in
        1996.

        Custodial balances maintained in connection with the foregoing loan
        servicing were $425,756, $1,064,650 and $1,055,337 at December 31, 1997,
        1996 and 1995, respectively.

        Following is an analysis of the change in the asset balance of mortgage
servicing rights:

<TABLE>
<S>                                        <C>
Balance, January 1, 1995                    $ 1,625,889
Additions                                       534,112
Additions from acquisition of Midwest           906,598
Amortization                                   (129,896)
                                            -----------
Balance, December 31, 1995                    2,936,703
Additions                                       616,436
Bulk sale of servicing                         (960,112)
Amortization                                   (280,591)
                                            -----------
Balance, December 31, 1996                    2,312,436
Additions                                       275,680
Bulk sale of servicing                         (835,396)
Amortization                                   (322,530)
                                            -----------
Balance, December 31, 1997                  $ 1,430,190
                                            ===========
</TABLE>

        There was no valuation allowance necessary at December 31, 1997, 1996 or
        1995. Additions to mortgage servicing rights in 1997 consisted of
        purchased rights of $113,905 and originated rights capitalized of
        $161,775. Additions to mortgage servicing rights in 1996 consisted of
        purchased rights of $319,715 and originated rights capitalized of
        $296,721.

5.      Loans
        Major classifications of loans are as follows as of December 31, 1997
        and 1996:
<TABLE>
<CAPTION>
                                     1997                1996
                                 ------------        ------------
<S>                              <C>                 <C>
Commercial                       $ 11,056,374        $  7,568,996
Real estate - mortgage              8,836,241           8,755,737
Real estate - construction          1,584,390             826,028
Installment                         6,759,178           3,815,529
                                 ------------        ------------
                                   28,236,183          20,966,290
Allowance for loan losses            (520,953)           (297,783)
                                 ------------        ------------
Net loans                        $ 27,715,230        $ 20,668,507
                                 ============        ============
</TABLE>

                                     - 56 -
<PAGE>   57
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997



5.         Loans (continued)
        Changes in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
                                                1997             1996             1995
                                             ---------        ---------        ---------
<S>                                          <C>              <C>              <C>
Balance at beginning of period               $ 297,783        $ 317,185        $ 362,559
Provision charged to operating expense         260,000          190,500           16,800
Recoveries                                      46,435           14,757
Charge-offs                                    (83,265)        (224,659)        (107,791)
                                             ---------        ---------        ---------

Balance, end of year                         $ 520,953        $ 297,783        $ 317,185
                                             =========        =========        =========
</TABLE>

Past due and non accrual loans are as follows:
<TABLE>
<CAPTION>
                                                       1997           1996
                                                     --------       --------
Past due loans
  90 days and more and still accruing:
<S>                                                  <C>            <C>
     Real estate                                     $233,697       $226,144
     Installment loans                                  5,556         34,096
     Commercial loans                                $295,643         29,479
                                                     --------       --------
                                                     $534,896       $289,719
                                                     ========       ========
Non accrual loans:
     Real estate                                     $532,821       $336,468
     Installment loans                                 44,409
                                                                       1,968
     Commercial loans                                   9,479        125,761
                                                     --------       --------
                                                     $586,709       $464,197
                                                     ========       ========
</TABLE>

        Information regarding impaired loans for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
                                                           1997           1996
                                                         --------       --------
Impaired loans:
<S>                                                      <C>            <C>
     Loans with no allowance allocated                   $ 34,255       $   --
     Loans with allowance allocated                       314,201        220,671
     Amount of allowance for loan losses allocated         10,085         39,539
</TABLE>


<TABLE>
<CAPTION>
                                                     1997           1996           1995
                                                     ----           ----           ----
Impaired loans:
<S>                                              <C>            <C>            <C>
     Average balance during the year             $350,459       $227,345       $328,731
     Interest Income recognized thereoon           23,626          1,097         44,104
     Cash-basis interest income recognized         23,626          1,097         44,104
</TABLE>

                                     - 57 -
<PAGE>   58
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997


6.      Premises and equipment

        Premises and equipment classifications at December 31, 1997 and 1996
        are summarized as follows:

<TABLE>
<CAPTION>
                                            1997               1996
                                         -----------        -----------
<S>                                      <C>                <C>
Land                                     $   163,290        $   157,575
Buildings and improvements                 1,184,292          1,185,283
Furniture, fixtures, and equipment         1,407,928          1,341,455
                                         -----------        -----------
                                           2,755,510          2,684,313

Less accumulated depreciation               (916,315)          (729,019)
                                         -----------        -----------
Net                                      $ 1,955,919        $ 1,955,294
                                         ===========        ===========
</TABLE>

        Depreciation expense amounted to $242,376, $279,807 and $82,725 for the
        years ended December 31, 1997, 1996 and 1995, respectively.

        The Bank leases its ATM Drive-thru location in Ann Arbor for $24,720 per
        year. Varsity Funding and Varsity Mortgage lease space for their office
        for $55,599 per year, and Midwest leases its space for a nominal amount
        from the city of Houghton. Total rental expense for the operating leases
        was $131,774 in 1997, $74,831 in 1996 and $17,522 in 1995. As of
        December 31, 1997, the Corporation had no minimum rental commitments
        under noncancelable operating leases. The Bank had an annual minumum
        rent as of December 31, 1997 of $24,720, with a total minimum amount of
        future rent payable over the next 8 years of $217,416. Varsity had an
        annual minimum rent as of December 31, 1997 of $55,599, with a total
        minimum amount of future rent payable over the next two years of
        $111,198.

        The Bank remains contingently liable in the event that the purchaser of
        one of its branch locations in Sault Ste. Marie does not meet its future
        obligations to the lessor. As of December 31, 1997 management believes
        that the purchaser was in compliance with these lease terms. The annual
        base rent for such branch is currently $32,000, and the future minimum
        rent due is $186,000.

        In May 1995, the Bank purchased a building in Ann Arbor, Michigan. The
        Bank leased 58% of the building to the University of Michigan effective
        October 1, 1995. The lease calls for minimum payments of $68,000
        (adjusted annually for inflation) plus the pro rata share of the
        building's expenses. The initial term of the lease is three years.

7.      Time deposits

        Time deposit liabilities issued in denominations of $100,000 or more at
        December 31, 1997 and 1996, were $12,208,952 and $20,857,605
        respectively.

        At year-end 1997, stated maturities of time deposits were:

                        1998                        $20,446,553
                        1999                          1,874,030
                        2000                            414,558
                        2001                            427,860
                        2002                            327,734
                  thereafter                             54,499
                                                    -----------
                                                    $23,545,234
                                                    ===========

        At December 31, 1997 and 1996, the Bank had issued through brokers
        $5,334,000 and $15,401,000 of time deposits with a maturity of 1-60
        months.

        Related party deposits totalled $473,978 and $1,189,507 at year-end 1997
        and 1996.

                                     - 58 -
<PAGE>   59
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997





8.      Stock options

        Director Stock Options
        In 1993, the Board of Directors approved the grant of options to
        purchase 15,000 shares of common stock to each of the four non-executive
        directors, in lieu of compensation. The exercise price of options
        granted was set at $2.08 per share, which was the then current bid price
        per share as reported by NASDAQ. The options are immediately exercisable
        and expire July 19, 2003. Options covering 15,000 shares were exercised
        during 1997. Options granted on 45,000 shares remain outstanding under
        this plan at December 31, 1997.

        1995 Stock Plan

        In 1995, the Corporation adopted a stock option and stock award
        plan (the 1995 Stock Plan), which provides for the grant of incentive
        stock options, as defined in Section 422(b) of the Internal Revenue
        Code of 1986, as amended, as well as the grant of non-qualified stock
        options and other stock awards. The plan provides for the grant to
        officers, directors and key employees of the Corporation, and
        independent contractors providing services to the Corporation, of
        options to purchase and other awards for a maximum of 525,000 shares of
        common stock. The exercise price of options granted under the plan
        shall be as determined by the Board of Directors, or a compensation
        committee thereof. Options shall expire on the date specified by the
        Board of Directors or such committee, but not more than 10 years from
        the date of grant (or five years from the date of grant for incentive
        stock options if the grantee owned 10% of the Corporation's voting
        stock at the date of grant). Unless amended, the 1995 Stock Plan will
        terminate on November 15, 2005.

        The following table summarizes the activity relating to options to
purchase the Corporation's common stock:

<TABLE>
<CAPTION>
                                                            Weighted Average
                                               Number of     Exercise Price
                                                Options         Per Share
                                              -----------   ----------------
<S>                                           <C>           <C>
Outstanding at December 31, 1995 and 1994         60,000        $   2.08

Granted - 1996 ($0.76 Fair Value)                423,812            3.11
Exercised - 1996                                  (6,812)
                                                                    3.69
Forfeited - 1996                                 (26,250)           3.33
                                                 -------
Outstanding at December 31, 1996                 450,750            2.95
                                                 -------

Granted - 1997 ($0.21 Fair Value)                140,700            3.67
Exercised - 1997                                 (37,753)           3.03
Forfeited - 1997                                 (93,750)           3.67
                                                 -------
Outstanding at December 31, 1997                 459,947        $   3.05
                                                 =======        ========
</TABLE>


        Options outstanding have been restated for a 3 for 2 stock split in
        1998.

        At December 31, 1997:
        Number of options immediately exercisable                       379,547
        Weighted average exercise price of immediately
           exercisable options                                            $3.04
        Range of exercise price of options outstanding               $2.08 - $4
        Weighted-average remaining life of options outstanding        1.1 years

        SFAS No. 123, which became effective for 1996, requires pro forma
        disclosures for companies that do not adopt its fair value accounting
        method for stock-based employee compensation. Accordingly, the following
        pro forma information presents net income and earnings per share had the
        Standard's fair value method been used to measure compensation cost for
        stock options granted in 1996. Compensation cost recognized for stock
        options under APB No. 25 was $0 for 1997 and 1996, because options were
        granted at exercise prices equal to the underlying stock prices at date
        of grant. At year-end 1997, 80,489 shares were authorized for future
        grants.

                                     - 59 -
<PAGE>   60
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997


8.      Stock options (continued)

<TABLE>
<CAPTION>
                                                                        1997              1996
                                                                    -----------         ---------
Estimated fair value stock options granted: Assumptions used:
<S>                                                                <C>               <C>
        Risk-free interest rate                                             5.7%              6.0%
        Expected option life                                            2 years         3.1 years
        Expected stock price volatility                                      14%               14%
        Expected dividends                                          $         0         $       0

Pro-forma net loss and loss earnings per share, assuming FAS
       123 fair value method was used for stock options:
        Net Loss                                                     (1,154,765)         (674,874)
        Loss per share                                              $     (0.60)        $   (0.36)
</TABLE>


9.        Employee stock ownership plan
        The employees allocation of ESOP assets is based on their current
        compensation, after 1 year of service and upon reaching the age of
        twenty one. The annual contribution to the ESOP is at the discretion of
        the Corporation. The assets of the ESOP are held in trust and were
        valued at approximately $204,989 and $261,407 as of December 31, 1997
        and 1996, respectively. The assets of the plan are comprised entirely of
        shares of the Corporation, 63,074 and 53,168 shares at December 31, 1997
        and 1996, respectively, all of which were fully allocated at December
        31, 1997. Upon retirement from the plan, participants have distributed
        to them their allocated shares of the Corporation's stock. The
        Corporation made an additional contribution to the plan for the years
        ended December 31, 1997, 1996 and 1995 of 9,906, 4,050 and 15,000 shares
        of common stock with an approximate fair market value at the time of the
        contribution of $36,322, $15,056 and $35,000, respectively.

10.     Minority Interest
        The Bank acquired an 80% ownership interest in the common stock of
        Midwest Loan Services in December 1995, with the remaining 20% owned by
        the President of Midwest. The acquisition was accounted for as a
        purchase with no goodwill recorded. At December 31, 1997 and 1996, total
        common shareholders' equity of Midwest was $1,005,747 and $1,007,135,
        resulting in a $201,149 and $201,427 minority interest reflected on the
        Company's consolidated balance sheet, respectively. The results of
        Midwest's operations are included in the Company's consolidated
        statement of income since the date acquired.

11.     Commitments and contingencies
        The Bank and Varsity Mortgage is a party to financial instruments with
        off-balance sheet risk in the normal course of business to meet the
        financing needs of its customers. These financial instruments include
        commitments to make loans and to sell loans, letters of credit and
        unused lines of credit. The Bank and Varsity Mortgage's exposure to
        credit loss in the event of non-performance is equal to or less than the
        contractual amount of these instruments. The Bank follows the same
        credit policy to make such commitments as is followed by those loans
        recorded in the consolidated financial statements.

        The following is a summary of commitments as of December 31, 1997 and
        1996:

<TABLE>
<CAPTION>
                                                            1997                    1996
                                                            ----                    ----
<S>                                                     <C>                  <C>
        Commitments to buy loans                        $35,356,400          $14,531,000
        Unused lines of credit                            5,364,049            3,578,309
        Commitments to sell loans                       $21,184,400          $22,000,000
        Foreign exchange contracts                              -          Can$  800,000
</TABLE>

                                     - 60 -
<PAGE>   61
                   Notes to Consolidated Financial Statements
                                December 31, 1997



12.      Related party transactions
        The Company's Chairman and President also serve as officers and
        directors of BIDCO. As such, the Chairman and President are actively
        involved in BIDCO operations, including investment activity and
        estimation of the fair value of investments. In addition, in the
        ordinary course of business the BIDCO has invested in several limited
        liability companies (LLCs), and the Chairman and President have also
        personally invested in certain of the same LLCs.

        In connection with the Arbor Street investment of $1,000,000 in federal
        low income housing tax credits through a partnership, the Bank was not
        permitted by regulation to guarantee a $950,000 loan from the Michigan
        Housing Development Authority to Arbor Street. Such loan was instead
        personally guaranteed by the Chairman of the Company, and common stock
        of the Company held by a trust for the benefit of the President of the
        Company was pledged as additional security for the loan. In exchange,
        the Chairman and President of the Company were each granted a 1%
        membership interest in Arbor Street and the Bank's ownership reduced to
        98%.

13.     Income taxes
        The provision for federal income taxes is composed of the following
amounts:
<TABLE>
<CAPTION>
                                    1997             1996             1995
                                 ---------        ---------        ---------
<S>                              <C>              <C>              <C>
Current expense (benefit)        $(257,738)       $(329,533)       $(186,520)
Deferred expense (benefit)         (35,080)         (29,225)          79,571
                                 ---------        ---------        ---------
Total year                       $(292,818)       $(358,758)       $(106,949)
                                 =========        =========        =========
</TABLE>

        The net deferred tax asset at December 31, 1997 and 1996 is comprised of
the following:
<TABLE>
<CAPTION>
                                                           1997             1996
                                                        ---------        ---------
<S>                                                     <C>              <C>
Loans available for sale                                $  18,673        $    --
Core deposit intangible                                       190            1,109
Allowance for loan losses                                 121,232           53,646
Temporary differences from LLCs                              --             56,085
Nonaccrual loan interest income                            12,874           12,876
Capital loss                                                7,695            8,611
Net Operating Loss Carryforward                           156,269             --
Tax Credit Carryforward                                   127,445             --
Unrealized loss
  on investments available for sale                          --              2,659
Other                                                      30,677            9,905
                                                        ---------        ---------
Deferred tax assets                                       475,055          144,891
                                                        =========        =========
Unrealized gain on investments available for sale          (6,320)            --
Servicing rights                                         (173,292)         (64,452)
Other                                                     (10,316)          (6,413)
                                                        ---------        ---------
Deferred tax liabilities                                 (189,928)         (70,865)
                                                        =========        =========
Valuation allowance for deferred tax assets              (185,000)            --
Net Deferred Tax Asset                                  $ 100,127        $  74,026
                                                        =========        =========
</TABLE>

        The Company has net operating loss carryforwards of approximately
        $460,000 which expire 2017; capital loss carryforwards of approximately
        $23,000 which expire in 2002; and general business credit carryforwards
        of approximately $119,000 which expire in 2017. In addition, The Company
        has an alternative minimum tax (AMT) credit carryforward of
        approximately $9,000. The AMT credit can be carried forward
        indefinitely. Management has established an allowance for deferred tax
        assets that are not considered realizable at December 31, 1997.



                                     - 61 -
<PAGE>   62
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997


13.     Income taxes (continued)
        The difference between the financial statement tax expense and amounts
        computed by applying the statutory federal tax rate of 34% to pretax
        income is reconciled as follows:
<TABLE>
<CAPTION>
                                                         1997             1996             1995
                                                      ---------        ---------        ---------
<S>                                                   <C>              <C>              <C>
Statutory rate applied to income before taxes         $(479,652)       $(304,475)       $(136,655)
Add (Deduct)
   Effect of tax exempt interest                           --               --             (1,178)
   Undistributed earnings of
     unconsolidated subsidiary                           24,495          (17,102)         (32,287)
   Tax Credits                                         (118,742)            --              --

   Change in valuation allowance                        185,000             --              --

   Other                                                 96,081          (37,181)          63,171
                                                      ---------        ---------        ---------
Current year provision (benefit) for income tax       $(292,818)       $(358,758)       $(106,949)
                                                      =========        =========        =========
</TABLE>

14.       Short and Long-Term Borrowings
        The Corporation has a note payable to North Country Bank & Trust (NCB&T)
        secured by the stock of the Bank with a balance of $922,688 and $962,500
        at December 31, 1997 and 1996. The note has a maturity date of February
        15, 2005. Interest is payable quarterly at the prime rate of NCB&T plus
        1.00 percent. Required principal payments under the loan for the next
        five years are:
                           1998                                    $  99,000
                           1999                                     $132,000
                           2000                                     $132,000
                           2001                                     $132,000
                           2002                                     $132,000
                           Thereafter                               $295,688

        Dividends by the Bank to the holding company in excess of the prior
        year's annual net income are not permitted without prior permission from
        NCB&T under the terms of the Corporation's credit facility.

        Arbor Street, LLC has an obligation of $826,382 at December 31, 1997
        payable to the Michigan Housing Development Authority in connection with
        its investment in a low income housing limited partnership. Payments are
        due on demand, but are expected to be funded as follows:

                           1998                                     $147,000
                           1999                                     $145,000
                           2000                                     $142,000
                           2001                                     $140,000
                           2002                                     $137,000
                           Thereafter                               $115,382

        At year-end 1997, the Bank has a short-term borrowing of $2,744,188 from
        FNMA. The advance was due the following business day, carried a rate of
        8.25%, and was collateralized by mortgage loans held for sale with a
        current market value of $2,744,188, which were committed to be sold to
        FNMA the following business day.

15.      Federal Home Loan Bank advances
        At December 31, 1997, the Bank has a line of credit from the Federal
        Home Loan Bank (the FHLB) in the amount of $3,000,000. Subsequent to
        year-end, the amount of the line was increased to $5,000,000. There were
        no outstanding advances from the FHLB at December 31, 1997.

        Advances are secured by the pledge of specific mortgage loans held for
        investment with unpaid principal balances of $2,728,245 and
        available-for-sale securities with a balance of $1,067,624.


                                     - 62 -
<PAGE>   63
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1997

16.      Earnings per share
       Due to the net losses in 1997, 1996, and 1995, the stock options
       outstanding were considered anti-dilutive and are not included in
       earnings per share calculations. As a result, both basic and diluted
       earnings per share are equal to net loss divided by weighted average
       common shares outstanding.

       In February of 1998, the Company declared a 3 for 2 share stock split in
       the form of a dividend. Calculated fractional shares were paid in whole
       share amounts. All weighted average share numbers have been adjusted for
       this stock split.




                                     - 63 -
<PAGE>   64
                    UNIVERSITY BANCORP, INC AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



17.      University Bancorp (Parent Company Only) Condensed Financial
         Information

                             CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>

                                                         December 31,      December 31,
                                                             1997              1996
                                                          ----------       ----------
<S>                                                       <C>              <C>
         ASSETS
         Cash and cash equivalents                        $   41,676       $   41,113
         Securities available for sale (Note 2)               81,504          114,070
         Michigan BIDCO senior debentures                    200,916          202,702
         Investment in subsidiary Bank                     3,958,927        4,529,503
         Other Assets                                        879,328          216,950
                                                          ----------       ----------
           Total Assets                                   $5,162,351       $5,104,338
                                                          ==========       ==========



         LIABILITIES AND SHAREHOLDERS' EQUITY
         Note payable                                     $  922,688       $  962,500
         Accounts payable and other liabilities              841,219          229,068
                                                          ----------       ----------
         Total Liabilities                                 1,763,907        1,191,568
         Stockholders Equity                               3,398,444        3,912,769
                                                          ----------       ----------
          Total Liabilities and Stockholders Equity       $5,162,351       $5,104,337
                                                          ==========       ==========
</TABLE>


                         CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                 1997               1996              1995
                                                             -----------        -----------        -----------
<S>                                                          <C>                <C>                <C>
         Income:
            Dividends from subsidiary                                 --                 --        $ 1,350,000
            Other                                            $    61,291        $    83,505            102,182
                                                             -----------        -----------        -----------
                        Total Income                              61,291             83,505          1,452,182
         Expense:
            Interest                                             108,195             85,867             81,181
            Other                                                167,938            122,468             99,066
                                                             -----------        -----------        -----------
                        Total Expense                            276,133            208,335            180,247

         Income (loss) before federal income taxes
             (benefit) and equity in undistributed
             net income (loss) of subsidiaries                  (214,842)          (124,830)         1,271,935
         Federal income taxes (benefit)                          (70,472)           (35,000)            (9,630)
                                                             -----------        -----------        -----------
         Income (loss) before equity in
              undistributed net income of subsidiaries          (144,370)           (89,830)         1,281,565
         Equity in undistributed net income (loss)
              of subsidiaries                                   (973,554)          (446,928)        (1,576,541)
                                                             -----------        -----------        -----------
         Net Loss                                            $(1,117,924)       $  (536,758)       $  (294,976)
                                                             ===========        ===========        ===========
</TABLE>


                                      -64-

<PAGE>   65
<TABLE>
<CAPTION>
  UNIVERSITY BANCORP, INC. (The Parent)

  Condensed Statement of Cash Flows

                                                                                      For Year Ended
                                                                      1997                 1996               1995
                                                                 ----------------------------------------------------
<S>                                                              <C>                <C>               <C>
  Reconciliation of net income (loss) to net cash used
  in operating activities:
     Net Income (Loss)                                           $    (1,117,924)   $      (536,758)  $     (294,976)
    Contribution to ESOP                                                  36,323             15,056           35,000
    Loss(gain) on sale of investments                                    (39,369)           (44,598)         (46,243)
     Decrease/(increase) in receivable from affiliate                    675,465                  0          973,211
     Decrease/(increase) in Other Assets                                (662,380)          (138,698)         (52,838)
     Increase(Decrease) in interest payable                                5,175            (14,196)         (54,319)
     Increase(Decrease) in other liabilities                             (88,527)           206,192         (704,202)
     Decrease(Increase) investment in subsidiaries                       920,576            446,928          226,542
                                                                   --------------     --------------    -------------
       Net cash provided by (used in) operating activities              (270,661)           (66,074)          82,175
                                                                   --------------     --------------    -------------

 Cash flow from investing activities:
   Subsidiary dividends received                                               0                  0        1,350,000
   Contributions of capital to subsidiary                               (350,000)           (66,750)        (920,000)
   Advances to Michigan BIDCO                                                  0                  0         (203,500)
   Purchase of available for sale securities                             (55,309)           (97,442)        (236,418)
   Proceeds from sale of available for sale securities                   166,498            138,216          253,268
                                                                   --------------     --------------    -------------
       Net cash provided by (used in) investing activities              (238,811)           (25,976)         243,350
                                                                   --------------     --------------    -------------

 Cash flow from financing activities:
   Principal payment on notes payable                                    (39,812)           (37,500)               0
   Proceeds from sale of common stock                                    551,410             91,870                0
   Purchase of treasury stock                                             (1,563)          (161,075)        (139,808)
                                                                   --------------     --------------    -------------
       Net cash provided by (used in) financing activities               510,035           (106,705)        (139,808)
                                                                   --------------     --------------    -------------

     Net changes in cash and cash equivalents                                563           (198,755)         185,717

 Cash and cash equivalents:
   Beginning of year                                                      41,113            239,868           54,151
                                                                   --------------     --------------    -------------

   End of period                                                 $        41,676    $        41,113   $      239,868
                                                                   ==============     ==============    =============

Supplemental disclosure of cash flow information:
Cash paid during the
 year for:
   Interest                                                      $        92,736    $       100,062   $      135,500
   Income Tax                                                                  0                  0          740,108
</TABLE>
                                      -65-


<PAGE>   66
                   UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                               December 31, 1997

18.     Regulatory matters

        The Bank is subject to regulatory capital requirements administered by
        federal banking agencies. Capital adequacy guidelines and prompt
        corrective action regulations involve quantitative measures of assets,
        liabilities, and certain off-balance-sheet items calculated under
        regulatory accounting practices. Capital amounts and classifications are
        also subject to qualitative judgments by regulators about components,
        risk weightings, and other factors, and the regulators can lower
        classifications in certain cases. Failure to meet various capital
        requirements can initiate regulatory action that could have a direct
        material effect on the financial statements.

        The prompt corrective action regulations provide five classifications,
        including well capitalized, adequately capitalized, undercapitalized,
        significantly undercapitalized, and critically undercapitalized,
        although these terms are not used to represent overall financial
        condition. If adequately capitalized, regulatory approval is required to
        accept brokered deposits. If undercapitalized, capital distributions are
        limited, as is asset growth and expansion, and plans for capital
        restoration are required. The minimum requirements are:


<TABLE>
<CAPTION>
                                                      Capital to risk-weighted assets           Tier 1 capital
                                                          Total             Tier 1             to average assets
                                                          -----             ------             -----------------
<S>                                                       <C>               <C>                <C>
        Well capitalized                                   10%                6%                        5%
        Adequately capitalized                              8%                4%                        4%
        Undercapitalized                                    6%                3%                        3%
</TABLE>

        The Bank presently has an agreement with its regulators that no
        dividends will be declared without prior regulatory approval, and the
        tier 1 to average assets be at 7% or more.

        At year end, actual capital levels of the bank (in millions) and minimum
        required levels were:

<TABLE>
<CAPTION>
         Total Cap to Risk-Weight Assets    Tier 1 Cap to Risk-Weight Assets   Tier 1 Cap to Avg Assets
         Regulatory       Actual              Regulatory       Actual          Regulatory      Actual
         Minimum      Ratio    Amount         Minimum      Ratio    Amount     Minimum      Ratio    Amount
         -------      -----    ------         -------      -----    ------     -------      -----    ------
<S>        <C>        <C>       <C>              <C>        <C>      <C>          <C>        <C>      <C>
1997       10%        11.3%     $4.5             6%         10.0%    $4.0         5%         7.1%     $4.0
1996        8%        9.4%      $4.7             4%          8.8%    $4.4         4%         6.0%     $4.4
</TABLE>

        At year-end 1997 the Bank was categorized as well capitalized.

19.     Fair Value of Financial Instruments

        The following methods and assumptions were used to estimate fair values
        for financial instruments. The carrying amount is considered to estimate
        fair value for cash and short-term instruments, demand deposits,
        short-term borrowings, accrued interest, and variable rate loans or
        deposits that reprice frequently and fully. Securities fair values are
        based on quoted market prices or, if no quotes are available, on the
        rate and term of the security and on information about the issuer. For
        fixed rate loans or deposits and for variable rate loan or deposits with
        infrequent repricing or repricing limits, the fair value is estimated by
        the discounted cash flow analysis using current market rates for the
        estimated life and credit risk. Fair values for impaired loans are
        estimated using discounted cash flow analyses or underlying collateral
        values, where applicable. Fair value of loans held for sale is based on
        market estimates. Fair value of mortgage servicing rights are estimated
        using discounted cash flows based on current market interest rates net
        of estimated costs of servicing loans. The fair value of debt is based
        on currently available rates for similar financing. The fair value of
        off-balance sheet items is based on the fees or cost that would normally
        be charged to enter into or terminate such agreements.

       Unrecognized financial instruments: The fair value of committments to
       extend credit and the fair value of letters of credit are considered
       immaterial.


                                      -66-
<PAGE>   67

                   UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                               December 31, 1997


20. Fair Value of Financial Instruments (continued)

         The carrying amounts and fair values of the Company's financial
instruments were as follows (in $000s):

<TABLE>
<CAPTION>
                                      December 31, 1997
                                     Carrying        Fair
                                      Amount        Value
Financial Assets
<S>                                   <C>           <C>
Cash and short term investments       $ 2,377       $ 2,377
Securities Available for sale           1,980         1,980
Loans held for sale                    18,157        18,246
Loans, net                             27,715        27,835
Mortgage servicing rights               1,430         1,583
Accrued interest receivable               184           184

Financial Liabilities
Deposits                               45,267        45,404
FHLB advances                            --            --
Mortgage escrow                            87            87
Short term borrowings                   2,744         2,744
Long term borrowings                    1,749         1,749
Accrued interest payable                  211           211
</TABLE>

<TABLE>
<CAPTION>
                                      December 31, 1996
                                     Carrying        Fair
                                      Amount        Value
Financial Assets
<S>                                   <C>           <C>
Cash and short term investments       $12,551       $12,551
Securities Available for sale           7,347         7,347
Loans held for sale                    30,535        30,865
Loans, net                             20,669        21,702
Mortgage servicing rights               2,312         2,466
Accrued interest receivable               302           302

Financial Liabilities
Deposits                               49,941        50,057
FHLB advances                           6,000         6,005
Mortgage escrow                            88            88
Short term borrowings                  12,941        12,941
Accrued interest payable                  356           356
</TABLE>



                                      -67-
<PAGE>   68
PART III.

ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement for its 1998 Annual
Meeting (the "Proxy Statement") to be under the captions:

         Election of Directors
         Executive Officers
         Section 16(a) Beneficial Ownership Reporting Compliance

ITEM 11. - EXECUTIVE COMPENSATION

         The information required by this item is incorporated by reference
herein from the portions of the Company's Proxy Statement to be under the
captions:

         Executive Compensation
         Compensation Plans

ITEM 12. -  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:

         Security Ownership of Certain Beneficial Owners and
                  Management

ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is incorporated by reference
herein from the portion of the Company's Proxy Statement to be under the
caption:

         Certain Relationships and Related Transactions

PART IV.

ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K

         (a) (1) Index of Financial Statements: The following financial
statements are filed as part of this Report:

                  Audited consolidated balance sheets as of December 31, 1997
and December 31, 1996, and consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1997, 1996 and 1995, of
the Company.

         (b) Reports on Form 8-K.  None.



                                      -68-
<PAGE>   69
         (c) Exhibits:

                  (3) Certificate of Incorporation and By-laws:

                  3.1 Composite Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996 (the "June 30, 1996
10-Q")).

                  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 (the "1989 10-K")).

                  (10) Material Contracts.

                  10.1 Loan Agreement and Promissory Note dated December 31,
1997 issued to North Country Bank & Trust.

                  10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated by reference to Exhibit
10.2 to the 1990 10-K). *

                  10.2.1 Amendment to the ESOP, effective as of December 31,
1991 (incorporated by reference to Exhibit 10.2.A to the 1991 10-K. *

                  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 (the "1996 10-K")). *

                  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 (the
"1993 10-K")). *

                  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 (the "1996 Proxy")). *

                  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 (the "1995 10-K")). *

                  10.6 Letter, dated December 1, 1989, from Federal Reserve Bank
of Minneapolis (incorporated by reference to Exhibit 10.9 to the 1989 10-K).

                  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 1992 10-K).

                                      -69-
<PAGE>   70
                  10.7.1 First Amendment to the Cascade Lease Agreement, dated
January 5, 1993 (incorporated by reference exhibit 10.9.1 to the 1992 10-K).

                  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 1991 10-K).

                  10.8.1 Federal Income Tax Allocation Agreement Between
Newberry Holding Inc. and University Bancorp, Inc. dated May 21, 1991
(incorporated by reference to Exhibit 10.11.1 to the 1991 10-K).

                  10.9 Purchase and Assumption Agreement Between First Northern
Bank & Trust and University Bank dated May 5, 1994 (incorporated by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1994).

                  10.10.1 First Amendment dated July 1, 1994 to Purchase and
Assumption Agreement Between First Northern Bank & Trust and University Bank
dated May 5, 1994 (incorporated by reference to Exhibit 10.12.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994
10-K")).

                  10.10.2 Second Amendment dated February 3, 1995 to Purchase
and Assumption Agreement Between First Northern Bank & Trust and University Bank
dated May 5, 1994 (incorporated by reference to Exhibit 10.12.2 to the 1994
10-K).

                  10.10.3 Order of the Commissioner of the Michigan Financial
Institutions Bureau Approving the Relocation of the Bank's Main Office from
Newberry to Sault Ste. Marie, Michigan, containing certain post-closing
conditions (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the Quarter Ended September 30, 1994).

                  10.10.4 Noncompetition Agreement Between First Northern Bank &
Trust and University Bank dated December 3, 1994 (incorporated by reference to
Exhibit 10.12.4 to the 1994 10-K).

                  10.10.5 Mortgage Origination Agreement Between First Northern
Bank & Trust and University Bank dated December 3, 1994 (incorporated by
reference to Exhibit 10.12.5 to the 1994 10-K).

                  10.10.6 Branch Services Agreement Between First Northern Bank
& Trust and University Bank dated December 5, 1994 (incorporated by reference to
Exhibit 10.12.6 to the 1994 10-K).

                  10.11 Employment Agreement, between Mark Ouimet and University
Bank and Newberry Bancorp, Inc., as amended (incorporated by reference to
Exhibit 10.13 to the 1995 10-K). *

                  10.11.1 Stock Option Agreement, dated as of December 15, 1995,
between Mark Ouimet and Newberry Bancorp, Inc. (incorporated by reference to
Exhibit 10.13.1 to the 1995 10-K). *

                                      -70-
<PAGE>   71
                  10.12 Revised Net Branch Agreement, dated October 1, 1997,
regarding Varsity Funding Services, L.L.C., among University Bank, Jess
Monticello and William Cook. *

                  10.13 Revised Operating Agreement for Varsity Mortgage LLC and
related Net Branch Agreement Modification, dated as of April 1, 1997, among
University Bank and the LLC Managers (incorporated by reference to Exhibit 10.13
to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997 (the "June 30, 1997 10-Q"). *

                  10.14 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 1995 10-K).

* Each of the exhibits noted by an "*" is a management compensatory plan or
arrangement.

         (21) Subsidiaries of Registrant: List of subsidiaries filed herewith.



                                      -71-
<PAGE>   72
                                   SIGNATURES

         Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                              UNIVERSITY BANCORP, INC.


                              By:      /s/Donald F. Rositano
                                       Donald F. Rositano,
                                       Chief Financial Officer


                              Date: March 30, 1997

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

         Signature                       Title                         Date

/s/Stephen Lange Ranzini           Director, President,           March 30, 1997
------------------------
Stephen Lange Ranzini              Chief Executive Officer,

/s/Donald Rositano                 Chief Financial Officer,       March 30, 1997
------------------
Donald Rositano

/s/Joseph L. Ranzini               Director, Secretary,           March 30, 1997
--------------------
Joseph L. Ranzini                  Chairman

/s/Keith Brenner                   Director                       March 30, 1997
Keith E. Brenner

/s/Robert Goldthorpe               Director                       March 30, 1997
Robert Goldthorpe

/s/Dr. Joseph L. Ranzini           Director                       March 30, 1997
------------------------
Dr. Joseph Lange Ranzini

/s/Mildred Lange Ranzini           Director                       March 30, 1997
Mildred Lange Ranzini

/s/Paul Lange Ranzini              Director                       March 30, 1997
Paul Lange Ranzini

/s/Michael Talley                  Director                       March 30, 1997
Michael Talley



                                      -72-
<PAGE>   73


                                Index of Exhibits


         Exhibit No. and Description

(3)      Certificate of Incorporation and By-laws:

3.1      Composite Certificate of Incorporation of the
         Company, as amended (incorporated by reference to
         Exhibit 3.1 to the Company's Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1996 (the
         "June 30, 1996 10-Q")).

3.2      Composite By-laws of the Company (incorporated by
         reference to Exhibit 3.2 to the 1989 10-K).

(10)     Material Contracts.

10.1     Loan Agreement and Promissory Note dated December
         31, 1997 issued to North Country Bank & Trust.

10.2     University Bancorp, Inc. Employee Stock Ownership
         Plan (the "ESOP"), as amended November 27, 1990
         (incorporated by reference to Exhibit 10.2 to the
         1990 10-K).

10.2.1   Amendment to the ESOP, effective as of December 31,
         1991 (incorporated by reference to Exhibit 10.2.A
         to the 1991 10-K).

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
         1996 10-K).

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 (the "1993 10-K")).

10.5     1995 Stock Plan of the Company (incorporated by
         reference to Exhibit A to the definitive Proxy
         Statement of the Company for the 1996 Annual
         Meeting of Stockholders (the "1996 Proxy).

10.5.1   Form of Stock Option Agreement related to the 1995
         Stock Plan (incorporated by reference to Exhibit
         10.7.1 to the the 1995 10-K).

10.6     Letter, dated December 1, 1989, from Federal
         Reserve Bank of Minneapolis (incorporated by
         reference to Exhibit 10.9 to the 1989 10-K).

                            -73-
<PAGE>   74

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
         1992 10-K).

10.7.1   First Amendment to the Cascade Lease Agreement,
         dated January 5, 1993 (incorporated by reference
         exhibit 10.9.1 to the 1992 10-K).

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 1991 10-K).

10.8.1   Federal Income Tax Allocation Agreement Between
         Newberry Holding Inc. and University Bancorp, Inc.
         dated May 21, 1991 (incorporated by reference to
         Exhibit 10.11.1 to the 1991 10-K).

10.9     Purchase and Assumption Agreement Between First
         Northern Bank & Trust and University Bank dated May
         5, 1994 (incorporated by reference to Exhibit 10 to
         the Company's Quarterly Report on Form 10-Q for the
         Quarter Ended March 31, 1994).

10.10.1  First Amendment dated July 1, 1994 to Purchase and
         Assumption Agreement Between First Northern Bank &
         Trust and University Bank dated May 5, 1994
         (incorporated by reference to Exhibit 10.12.1 to
         the Company's Annual Report on Form 10-K for the
         year ended December 31, 1994 (the "1994 10-K")).

10.10.2  Second Amendment dated February 3, 1995 to Purchase
         and Assumption Agreement Between First Northern
         Bank & Trust and University Bank dated May 5, 1994
         (incorporated by reference to Exhibit 10.12.2 to
         the 1994 10-K).

10.10.3  Order of the Commissioner of the Michigan Financial
         Institutions Bureau Approving the Relocation of the
         Bank's Main Office from Newberry to Sault Ste.
         Marie, Michigan, containing certain post-closing
         conditions (incorporated by reference to Exhibit
         10.1 to the Company's Quarterly Report on Form 10-Q
         for the Quarter Ended September 30, 1994).

                            -74-
<PAGE>   75
10.10.4  Noncompetition Agreement Between First Northern
         Bank & Trust and University Bank dated December 3,
         1994 (incorporated by reference to Exhibit 10.12.4
         to the 1994 10-K).

10.10.5  Mortgage Origination Agreement Between First
         Northern Bank & Trust and University Bank dated
         December 3, 1994 (incorporated by reference to
         Exhibit 10.12.5 to the 1994 10-K).

10.10.6  Branch Services Agreement Between First Northern
         Bank & Trust and University Bank dated December 5,
         1994 (incorporated by reference to Exhibit 10.12.6
         to the 1994 10-K).

10.11    Employment Agreement, between Mark Ouimet and
         University Bank and Newberry Bancorp, Inc., as
         amended (incorporated by reference to Exhibit 10.13
         to the 1995 10-K).

10.11.1  Stock Option Agreement, dated as of December 15,
         1995, between Mark Ouimet and Newberry Bancorp,
         Inc. (incorporated by reference to Exhibit 10.13.1
         to the 1995 10-K).

10.12    Revised Net Branch Agreement, dated October 1,
         1997, regarding Varsity Funding Services, L.L.C.,
         among University Bank, Jess Monticello and William
         Cook.

10.13    Revised Operating Agreement for Varsity Mortgage
         LLC and related Net Branch Agreement Modification,
         dated as of April 1, 1997, among University Bank
         and the LLC Managers (incorporated by reference to
         Exhibit 10.13 to the June 30, 1997 10-Q).

10.14    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
         1995 10-K).

(21)     Subsidiaries of Registrant.

(27)     Financial Data Schedule



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