<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, 1998
                                       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 15, 1999, as reported by NASDAQ, was approximately
$1,508,285.*
         The number of shares outstanding of the Registrant's Common Stock as of
March 15, 1999: 1,989,139 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 29, 1999 for the 1999 Annual Meeting of
Stockholders, are incorporated by reference into Part III of this Report.


                               page 1 of 82 pages
                 Exhibit index on sequentially numbered page 74


<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, 1998 University Bancorp, Inc. had
cash on deposit of $33,702 and other investments at fair value of $88,305.
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, just west 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. During the fourth quarter of 1997, the Bank closed its Sault Ste.
Marie office and centralized its accounting function in Ann Arbor.

         The Bank conducts its banking business from its headquarters office in
Ann Arbor. The Bank's primary market area is defined as the City of Ann Arbor
and surrounding areas in greater Washtenaw County.

         Mortgage Banking. In October 1995, the Bank established a new mortgage
banking subsidiary, Varsity Funding, L.L.C. ("Varsity Funding"). Varsity Funding
specialized in the purchase and origination of impaired credit, or subprime
quality, residential mortgages, for sale to non-U.S. government agency-backed
mortgage 




                                      -2-
<PAGE>   3

conduits. Varsity Funding's offices were 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's mortgage banking operations sell on a
continuous basis the servicing rights to the loans or securities it originates.
In December 1998, the Bank sold the bulk of a small portfolio of owned mortgage
servicing rights.

         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 profit of Varsity Mortgage is subject to an agreement (the "Net
Branch Agreement") with the executives who have organized and supervised the
operation 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 a result of upheavals in the national secondary market for subprime
quality residential mortgages, in December 1998 Varsity Funding exited the
subprime business. Varsity Mortgage acquired the retail operations of Varsity
Funding, which will be operated as the Retail Division of Varsity Mortgage. As a
result of changes in the types of loans that FNMA and FHMLC are willing to buy,
in early 1999 Varsity Mortgage began purchasing and pooling A- credit quality
residential mortgages.

         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, 




                                      -3-
<PAGE>   4

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 credit unions, 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. The Foundation is
an IRS-approved 501c(3) non-profit which is an intermediary lender to rural
small businesses under the U.S. Rural Economic Community Development Service
Agency ("U.S. RECDS") Intermediary Relending Program. 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. RECDS at 1% interest with a 30 year
term. A portion of the BIDCO's overhead is reimbursed by the Foundation under
the terms of a management services contract. The BIDCO is paid 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 management services.

         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. On December 18, 1998, the agency acquired
University Insurance Center, Inc., a fully-licensed but inactive commercial
insurance agency. University Insurance Center, Inc. ("UIC") commenced business
on February 25, 1999 and is a full service property and casualty insurance
agency offering insurance for homes, autos, apartments and businesses.



                                      -4-
<PAGE>   5


         EMPLOYEES

         The Company employed 67 full-time persons at January 31, 1999,
including the following:

<TABLE>
<S>                                                        <C>
                  Michigan BIDCO                             3
                  Midwest Loan Services                     10
                  University Bank, Ann Arbor                23
                  University Insurance & Investment          3
                  Varsity Mortgage                          28
</TABLE>

         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
three hundred months. The Bank also offers self-directed retirement accounts,
free access to 24-Hour ATM machines, telephone banking, VISA debit cards and
Gold VISA accounts. The Bank also is a member of Mastercard, but currently is
not offering a Mastercard product. The Bank also offers Canadian Dollar foreign
exchange services. From time to time to raise liquidity, the Bank 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 and home equity loans, commercial real estate mortgage
loans, consumer installment loans, and land development and construction loans.

         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.

         The Bank is currently, and Varsity Mortgage has since inception been,
selling the servicing right on all mortgages originated. The Bank's accounting
department administers the Bank's table funding of its mortgage banking
subsidiaries 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 



                                      -5-
<PAGE>   6

"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,
1998, Midwest Loan Services subserviced a total of 4,029 loans, 3,113 for
non-affiliated companies, and 916 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. government bonds, 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, 1998, the Bank's investments had a net unrealized loss of
approximately $183,122 versus a net unrealized loss of approximately $18,880 at
December 31, 1997.

         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, 1998:

<TABLE>
<CAPTION>
                           Final    Market  Amortized
Issuer                   Coupon     Yield   Maturity        Value           Cost
------                   ------     -----   --------        -----           ----
<S>                      <C>        <C>     <C>          <C>           <C>    
RTC 91-12-A1 (1)           FRN      5.86%   01/25/21       424,514       420,737
FNMA CMO92-190F (2)        VAR      6.29%   11/25/07       506,400       502,813
FHLBI equity (3)           VAR      8.00%      None        848,400       848,400
FNMA CMO93-205H (4)        PO       4.15%   9/25/23      1,548,925     1,684,616
US Treasury Strip          PO       5.33%   2/15/27        442,000       466,824
</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 2-3 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.

    (footnotes continued on following page)


                                      -6-
<PAGE>   7

(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 can be redeemed or sold at par value to the FHLBI as
    required from time to time.

(4) This Principal Only strip has an expected average life of six years.


         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, 1998.

         The financial statements of the BIDCO are presented using the
investment company method, and, accordingly, investments in stocks, stock
warrants, limited liability companies and loans ("BIDCO Investments") are
reported at fair value. BIDCO typically invests in companies for which current
market quotations are not readily available; therefore management estimates the
fair value of BIDCO Investments on a quarterly basis and the Board of Directors
approves the fair value estimates. In deriving its estimates, management reviews
the financial condition and operating performance of the investee companies, as
well as performance of the company with its contractual arrangements with BIDCO.
The fair value of BIDCO Investments is then estimated by the use of operating
cash flow multiples applicable to a company's industry, discounted cash flow
analyses, and other valuation techniques. Management and the Board of Directors
believe the procedures used and assumptions made are reasonable in the
circumstances; however, the fair value estimates may differ significantly from
the values that would have been used had current market quotations been
available.

         The Bank's investment in the BIDCO is accounted for under the equity
method, and $50,301, ($55,499) and $128,219 of income (loss) 




                                      -7-
<PAGE>   8

from the BIDCO was included in the results of operations for the years ended
December 31, 1996, 1997, and 1998, respectively. At December 31, 1998, the
Company owned $67,977 in bonds issued by the BIDCO. If there were a conversion
of outstanding convertible bonds, the Bank and the Company would together own
12.17% and 15.61% at December 31, 1998 and 1997. 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 29.4%. 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.
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, 1998, the BIDCO had made twenty-seven investments, amounting to
a total of $13,413,600 at original cost. At December 31, 1998, Michigan BIDCO
had total assets of $5,327,697.

         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, 1998, investments (at original investment cost) have been made in
the following types of businesses:





                                      -8-
<PAGE>   9

<TABLE>
<CAPTION>

         Michigan BIDCO, investments:          Total             Equity
         Industry                              Investment        Participation?

<S>                                          <C>                <C>
         ABC-TV affiliate                    $ 1,472,000         repurchased 
         Adult foster care                        40,000                  no
         Bridal shop                              64,000                  no  
         Cable TV                                545,000         repurchased 
         Children's clothing manufacturer        200,000         repurchased 
         Commercial laundry                      180,000                  no
         Environmental engineering               100,000         repurchased 
         Fishing supplies                         50,000                  no 
         Home health care                         20,000                  no 
         Hunting supplies                        100,000                  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                  no 
         Railroad boxcar leasing               1,500,000                  no 
         Recreational services                   160,000                  no 
         Recycled paper pulp mill                780,000                 yes 
         Residential mortgage subservicing       450,000         repurchased 
         Secured credit card issuer              540,000                  no 
         Tissue paper mill                       700,000         repurchased 
         Truck maintenance                        70,000                  no
                                             -----------
         Total                               $13,413,600
                                             ===========
</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 


                                       9
<PAGE>   10

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.

         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 depend 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 personal service, competitive rates and
fees, and a variety of savings programs including tax-deferred retirement
programs.

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

         The following table shows market share of deposits for Washtenaw County
by financial institution for June 1998, June 1997 and June 1996 (from the FDIC's
annual branch deposit survey:





                                      -10-
<PAGE>   11


         WASHTENAW COUNTY FINANCIAL INSTITUTION DEPOSITS:

<TABLE>
<CAPTION>
                                          1998       1997        1996 
<S>                                     <C>        <C>        <C>  
         Great Lakes Bancorp              16.2%      18.9%      18.2%
         National City Bank               14.4%      15.6%      17.0%
         Republic Bank                    11.1%       5.9%       5.8%
         Comerica Bank                     9.8%      10.1%      10.3%
         Bank One                          9.5%      10.2%      10.4%
         Key Bank                          7.1%       7.4%       9.4%
         Standard Federal FSB              4.1%       4.8%       5.0%
         Ann Arbor Commerce Bank           3.6%       3.0%       2.3%
         Citizens Bank                     3.3%       3.6%       3.6%
         Chelsea State Bank                3.1%       3.3%       3.0%
         University of Michigan CU         2.9%       3.0%       2.8%
         Huron River Area CU               2.5%       2.7%       2.5%
         Michigan Natl Bank                2.3%       2.5%       2.7%
         Bank of Ann Arbor                 2.2%       1.2%       0.6%
         Flagstar Bank FSB                 1.9%       1.4%       0.6%
         Midwest Financial CU              1.7%       1.9%       1.9%
         Automotive FCU                    1.2%       1.3%       1.4%
         University Bank                   1.0%       1.1%       0.3%
         Charter One FSB                   0.6%       0.7%       0.9%
         Old Kent                          0.5%       0.7%       0.6%
         5 Credit Unions, 2 Banks          1.0%       0.7%       0.7%
         Total Deposits (Bn)            $4.060     $3.604     $3.503  
</TABLE> 


         Total deposits in the county increased 12.7% from June 1997 to June
1998 and increased 2.9% from June 1996 to June 1997. In attracting deposits, the
Bank's primary competitors for deposits are mutual funds, other commercial
banks, credit unions, savings and loans and insurance companies.

         The Bank's main office is adjacent to the University of Michigan
Hospital Complex. The Complex employs a total of 7,800 persons. In mid-February
1999, the nearest competitor to the Bank's main office, a National City Bank
branch, was permanently closed. The other major competitor in the local deposit
market is Midwest Financial Credit Union, formerly known as 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 Medical Center 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 Huron River Area Credit Union, Midwest Financial Credit Union, Bank of Ann
Arbor, Automotive Federal Credit Union and several smaller credit unions.






                                      -11-
<PAGE>   12


         MORTGAGE BANKING

         Origination. The Bank's Ann Arbor community bank, Varsity Mortgage and
to a lesser extent Midwest Loan Services' retail origination division 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 Ohio. 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. An important element in the Bank's ability to
compete is master purchase agreements negotiated periodically with FNMA and
FHLMC with low and competitive loan guarantee fees, a wide variety of mortgage
programs, and a variety of flexible underwriting criteria. The Bank's ability to
secure these master purchase agreements is dependent upon the performance from a
quality perspective of loans previously sold to the agencies.

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

         The Bank also 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 




                                      -12-
<PAGE>   13

this time to expand its utilization of HUD or GNMA programs. However, Varsity
Mortgage's retail division does originate a small number of GNMA single family
residential loans utilizing the Bank's HUD seller/servicer licenses. The Bank
and Varsity Mortgage also are correspondents for several impaired credit
conduits and sell this type of residential mortgage on a non-recourse, servicing
released basis.

          Varsity Mortgage's retail origination operation also originates
secondary market conforming loans. Varsity Mortgage competes primarily with
other mortgage banking firms, insurance companies, commercial banks, and savings
and loans.

         Mortgage Subservicing and Servicing. Over the last three years, the
Bank has sold its portfolio of mortgage servicing rights, while selling all
newly originated secondary market mortgage loans, servicing released. In
December 1998 the Bank sold the final 1/3 of its retained FHLMC and FNMA
mortgage servicing rights portfolio for a loss of $121,224. 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 generally lower than the national
average. As a result, the Company believes that Midwest Loan Services' mortgage
servicing operation potentially offers its mortgage banking operations a
competitive advantage in the future. During 1998, growth in loans serviced for
third parties was offset by payoffs due to record low interest rates, sales of
Bank owned servicing and the end of an agreement to subservice a portfolio of
900 loans that had been sold by University Bank last year under a one year
subservicing agreement, so that the amount of loans serviced by Midwest fell by
approximately 19% during the year. Since the Bank has completed its plan of
selling 





                                      -13-
<PAGE>   14

servicing rights, if Midwest Loan Services adds additional subservicing
customers in the future, there may be an increase in overall loans serviced.
Previously, the Bank was selling servicing as Midwest gained additional
customers. At year-end 1998, 916 loans serviced by Midwest Loan Services were
serviced for the Bank or Midwest Loan Services' own account.

         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. Since year-end 1996, the BIDCO has pursued a strategy
of liquidating its existing investment portfolio to raise cash for for two
purposes: the buyout of some of the original minority investors in the BIDCO,
and two options in expanding its funds under management through other government
agency economic development programs.

         The BIDCO's staff manages under a management 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, 1998, 1997 and 1996 (in $000s)(1):


<TABLE>
<CAPTION>

Revenues:                                     1998       1997      1996
<S>                                        <C>        <C>      <C>  
         Banking
                  Mortgage banking             809        882      1,000
                  Retail banking             2,365      3,467      2,930
                  Midwest Loan Services        958        713        603
                  Varsity (2)                5,674      4,802      2,327
         Corporate Office                      179         61         84
         Total                               9,985      9,925      6,944
         Michigan BIDCO                        991        624      1,439
Expenses:
         Banking
                  Mortgage banking             974        759        826
                  Retail banking             3,148      4,954      4,169
                  Midwest Loan Services        943        808        601
                  Varsity (2)                5,073      4,539      2,125
         Corporate Office                      243        276        209
         Total                              10,381     11,336      7,890
         Michigan BIDCO                        634        864      1,389
Pre-tax income:
         Banking
                  Mortgage banking            (165)       123        174
                  Retail banking              (783)    (1,487)    (1,199)
                  Midwest Loan Services         15        (95)         2
                  Varsity (2)                  601        263        202
         Corporate Office                      (64)      (215)      (125)
         Total                                (396)    (1,411)      (896)
         Michigan BIDCO (1)                    357        (55)        50
Assets, at Dec. 31, 1998, 1997 and 1996:
         Banking
                  Retail banking &
                    Mortgage banking        40,704     39,084     53,016
                  Midwest Loan Services      1,387      1,340      2,391
                  Varsity                   12,242     15,902     22,379
         Corporate Office                      203      1,203        575
         Total                              54,536     57,529     78,361
         Michigan BIDCO                      5,327      5,684      6,526


</TABLE>

(table continued on following page)







                                      -15-
<PAGE>   16


Liabilities and Stockholders' Equity,
at Dec. 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<S>                                        <C>        <C>        <C>   
         Banking
                  Retail banking
                    & Mortgage banking     41,375     39,929     54,360
                  Midwest Loan Services       363        334      1,286
                  Varsity                  11,942     15,502     21,582
         Corporate Office                     855      1,764      1,133
         Total                             54,536     57,529     78,361
         Michigan BIDCO                     5,327      5,684      6,526
Intersegment Information, at
       Dec. 31, 1998, 1997 and 1996:
         Assets:
                  Retail banking
                   & Mortgage banking        (672)      (845)    (1,344)
                  Midwest Loan Services     1,024      1,006      1,105
                  Varsity                     300        400        797
         Corporate Office                    (652)      (561)      (558)
         Michigan BIDCO                        --         --         --
</TABLE>

NOTES TO CERTAIN FINANCIAL INFORMATION TABLE
for the years ended December 31, 1998, 1997 and 1996 (in thousands)

(1) Reflects only the Bank's share of Michigan BIDCO's net income in 1998, 1997
    and 1996 under the equity method which was 44.1%.

(2) 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 





                                      -16-
<PAGE>   17

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. 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 for
use as its main office. Beginning October 1, 1995 the Bank has leased a portion
of the building to the University of Michigan. Currently 42% of the building is
leased for approx. $68,000 (adjusted annually for inflation) plus a pro rata
share of the building's expenses. The lease is renewable each year.

         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 uses the historic
building as a multiple ATM drive-through location and an off-site storage
facility.

         The Bank leases an ATM location with an adjacent meeting room in
Dexter, Michigan under a three year lease.

         The Bank leases its former loan office in Sault Ste. Marie to an
unrelated third-party. Management has listed the property with a local
commercial realtor for sale.

         Varsity Mortgage leases an office in Farmington Hills, Michigan under a
one-year agreement. Varsity Mortgage's Retail Division leases a small office for
retail origination branches in Columbus, Ohio under a short term rental
agreement.



                                      -17-

<PAGE>   18



         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, 1998. 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 a recent appraisal and 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 of
$266,079 as of December 31, 1998. This property is carried as "other real estate
owned" in the Company's financial statements as of December 31, 1998 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     $789,564

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

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

Dexter ATM & Meeting Room
   Baker Road & Ann Arbor Road
   Dexter, Michigan                 1998     Leased         -

Varsity Mortgage
   33493 14 Mile Rd., Ste. 20
   Farmington Hills, Michigan       1995     Leased         -

Varsity Mortgage Retail Office
   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.




                                      -18-

<PAGE>   19


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.

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, 1999 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, 1998 are listed below. The quotations represent interdealer prices
only, without retail markups, markdowns or commissions, and may not necessarily
represent actual retail transactions:



<TABLE>
                                         High               Low
1998
<S>                                     <C>                <C> 
First Quarter                           $5 31/64           $2  2/3
Second Quarter                           5  1/8             2  3/8
Third Quarter                            4 19/32            3  1/16
Fourth Quarter                           3  7/16            1 31/32

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

         Not applicable.






                                      -19-
<PAGE>   20


ITEM 6. - SELECTED FINANCIAL DATA

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


<TABLE>
<CAPTION>

                                       1998        1997         1996         1995        1994
                                       ----        ----         ----         ----        ----
<S>                                 <C>       <C>          <C>          <C>          <C>     
SUMMARY OF OPERATIONS
Interest income                       4,011     $  4,736     $  3,724     $  2,379     $  3,987
Interest expense                      2,359        3,208        2,733        1,845        2,104
Net interest income                   1,652        1,528          991          534        1,883

Provision for loan losses               118          260          191           17          210
Net interest income after
  provision for loan losses           1,534        1,268          800          517        1,673

Net gain (loss) on investments           98            8          399           56         (178)
Profit from equity investment
  in Michigan BIDCO                     128          (55)          50           95          178
Other non-interest income             5,748        5,236        2,770          631          702
Gain: sale, branches & loans (1)         --           --           --           --        3,018
Non-interest expense                  7,904        7,868        4,915        1,699        2,782

Income (loss) before income tax        (396)      (1,411)        (896)        (402)       2,611
Income tax expense (benefit)           (198)        (293)        (359)        (107)         770

Net income (loss)                      (198)      (1,118)        (537)        (295)       1,841

Selected Year End Balances
Total assets                         54,536       57,529       78,366       38,275       31,827
Loans receivable, net                23,193       27,715       20,669        8,954        4,221
Loans held for sale                  11,863       18,157       30,534        7,983        4,129
Cash, cash equivalents
  and securities                     13,040        4,357       19,898       15,028       19,264
Deposits                             43,220       45,267       49,941       20,745       13,128
Note payable                            826          923          963        1,000        1,000
FHLB advances                            --           --           --       10,000        9,800
Minority interest                       205          201          201          201           --
Stockholders' equity                  3,083        3,398        3,913        4,651        4,096

Shares Outstanding and Per Share
 Data (2)
Common shares, year-end               1,989        1,984        1,943        1,914        1,800
Weighted average shares, year         1,991        1,922        1,866        1,802        1,779
Cash dividends                           --           --           --           --           --
Net income (loss)                  ($  0.10)    ($  0.58)    ($  0.29)    ($  0.17)    $   1.03
Book value                          $  1.55      $  1.81      $  2.01      $  2.43     $   2.27

Selected Ratios
Net average interest rate spread       2.96%        3.43%        2.09%        1.09%        3.03%
Net yield on average
  earning assets                       3.48%        3.07%        2.17%        1.69%        3.42%
Return on average assets              (0.35%)      (1.76%)      (1.08%)      (0.84%)       3.02%
Return on average equity              (6.22%)     (29.23%)     (13.85%       (6.94%)      54.47%
Avg. equity to asset ratio             5.79%        5.76%        7.77%       12.14%        5.55%
</TABLE>


[See the Note on the following page]




                                      -20-
<PAGE>   21

(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 reflect
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:

         NEW BUSINESS ENTERPRISE. The Company's Bank subsidiary operations were
relocated to Ann Arbor in 1996, and are not yet profitable and has incurred
substantial operating losses during the start-up phase. There is no assurance
that the Ann Arbor operation will grow to a size that will enable it to become
profitable.

         RELIANCE ON KEY PERSONNEL. The success of the Company is dependent upon
the services of certain of the senior executive officers. The loss of the
services of one or more of such individuals could have an adverse affect on the
Company. As the Company expands it will be necessary for the Company to continue
to be able to attract and retain additional qualified senior executives. The
unexpected loss of Stephen Lange Ranzini, President & CEO of the Company and the
Bank or Joseph L. Ranzini, Chairman of the Board of the Company, or any other
key executive of the Company or the inability to attract and retain qualified
personnel in the future could have an adverse affect on the business and
financial results of the Company. The Company does not maintain key man life
insurance on any executive officer nor has it entered into non-compete
agreements with any executive officer.

         DIVIDEND HISTORY. The Company has not previously paid any cash
dividends on its Common Stock, and the Company does not intend to pay dividends
in the near future. The payment of any cash dividends by the Company in the
future will depend to a large extent on the 




                                      -21-
<PAGE>   22

receipt of dividends from the Bank. The ability of the Bank to pay cash
dividends by the Bank to the Company and by the Company to its stockholders are
both subject to certain statutory and regulatory restrictions.

         COMPETITION FROM OTHER FINANCIAL INSTITUTIONS. There is significant
competition among banks and bank holding companies, many of which have far
greater assets and resources than the Company, in the areas in which the Company
operates. The Company also encounters intense competition in its commercial
banking business and mortgage banking business from savings and loan
associations, credit unions, mortgage brokers, insurance companies, commercial
and captive finance companies, and certain other types of financial institutions
many of which are larger in terms of capital, resources and personnel than the
Company. The Company believes that such competition will continue and increase
in the future. In addition, the manner in which and the means by which financial
services are delivered to customers have changed significantly in the past and
can be expected to continue to change in the future. It is not possible to
predict the manner in which existing technology, and changes in existing
technology, will affect the Company. Changes in technology are likely to require
additional capital investments to remain competitive. Although the Company has
invested in new technology in the past, there can be no assurance that the
Company will have sufficient financial resources or access to the proprietary
technology which might be necessary to remain competitive in the future.

         CREDIT RISK AND LOAN CONCENTRATIONS. The greatest risk facing lenders
generally is credit risk, that is, the risk of losing principal and interest due
to a borrower's failure to perform according to the terms of the loan agreement.
As of December 31, 1998, the Company's total loan portfolio was $35,055,767, or
64% of total assets. The two largest components of the loan portfolio are
residential mortgages held for sale to the secondary market, and portfolio
loans. The Company's credit risk with respect to its portfolio loans relates
principally to the collateral and the general creditworthiness of individuals
and small businesses in the Ann Arbor area. Management believes that the
allowance for possible loan losses is adequate. See Note 5 to the Company's
consolidated financial statements, incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.

         CAPITALIZED MORTGAGE SERVICING RIGHTS. At December 31, 1998, the
Company had an investment of $948,208 in capitalized mortgage servicing rights.
Record low interest rates in 1998 were responsible for a surge in refinancing of
mortgages. If interest rates were to drop back down to those levels,
refinancings and payoffs would likely increase over recent experience since a
significant portion of the fixed rate mortgages being serviced by the Company
carry interest rates within 1.0% of the current market rate. 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. If
interest rates were to decline to levels seen during 1998, the portfolio would
experience significant refinancings and payoffs, which would hurt income.




                                      -22-
<PAGE>   23

         GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY. The operating income
and net income of the Company depend to a substantial extent on "rate
differentials", i.e., the difference between the income the Company receives
from loans, securities and other earning assets, and the interest expense it
pays to obtain deposits and other liabilities. These rates are highly sensitive
to many factors which are beyond the control of the Company, including general
economic conditions and the policies of various governmental and regulatory
authorities. For example, in an expanding economy, loan demand usually increases
and the interest rates charged on loans increase. Increases in the federal funds
rate by the Federal Reserve System usually lead to rising interest rates, which
affect the Company's interest income, interest expense and investment portfolio.
Competition for deposits at banks can be increased or decreased by the relative
attraction of competitive alternatives such as stocks or bonds, or by tax policy
changes, such as changes in tax deductions for individual retirement accounts.

         VOTING CONTROL. The total number of shares of Common Stock held by the
Ranzini Group (Mr. Joseph L. Ranzini, Mr. Stephen Lange Ranzini, Mrs. Mildred
Ranzini, the two Ranzini Family Trusts) and the ESOP shares beneficially owned
by Stephen Lange Ranzini, is 1,313,362, or 66% of the issued and outstanding
shares at December 31, 1998.

         GOVERNMENT REGULATION AND SUPERVISION. The Company and the Bank are
subject to extensive federal and state regulation and supervision, which is
intended primarily for the protection of insured depositors and consumers. In
addition, the Company and the Bank are subject to changes in federal and state
law, as well as changes in regulations, governmental policies and accounting
principles. There exist risks that regulatory examiners give negative
examination ratings. The effects are any such potential changes or negative
ratings cannot be predicted, but could adversely affect the business and
operations of the Company and the Bank, or the Bank's subsidiaries.

         REGULATION OF CONTROL. Individuals, alone or acting in concert with
others, seeking to acquire more than 10% of any class of voting securities of
the Company must comply with the Change in Bank Control Act. Entities seeking to
acquire 5% or more of any class of voting securities of, or otherwise to
control, the Company must comply with the Bank Holding Company Act. Accordingly,
prospective investors need to be aware of these requirements and to comply with
these requirements, if applicable, in connection with any purchase of shares of
the Common Stock offered hereby.

         TRADING MARKET FOR THE COMMON STOCK. Although the Common Stock is
listed for trading on the NASDAQ Small-Cap Market, the trading market in the
Company's Common Stock on such exchange historically has been less active than
the average trading market for companies listed on such exchange. As a result,
the price of the Company's Common Stock has ranged from $1.96875 to $5.484375
during 1998. A public trading market having the desired characteristics of
depth, liquidity and orderliness depends upon the presence in the 




                                      -23-
<PAGE>   24

marketplace of willing buyers and sellers of Common Stock at any given time,
which presence is dependent upon the individual decisions of investors and
general economic and market conditions over which the Company has no control.
There can be no assurance that the liquidity or volume of trading in the Common
Stock will increase.

         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 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 1998, 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, 1998 amounted to $54.54
million compared to $57.53 million at December 31, 1997. Loans receivable, net
of reserves, decreased by $4.53 million to $23.19 million from $27.72 million.
Cash and cash equivalents (including Federal Funds sold on an overnight basis)
at the end of 1998 increased by $6.87 million from the prior year, while
securities increased by $1.81 million. Loans held for sale in the Bank's
mortgage banking division decreased by $6.30 million to $11.86 million from
$18.16 million. During 1998, management of the Bank continued to pursue a policy
of decreasing reliance on certain high cost deposits and borrowings and
increasing the rate at which loans held for sale were sold to improve
profitability. This policy has resulted in a reduction in total assets, loans
held for sale and deposits.

         University Bank, as an FDIC-insured bank, is subject to certain
regulations which require the maintenance of minimum liquidity 



                                      -24-
<PAGE>   25

levels of cash and eligible investments. The Bank has historically exceeded this
minimum as a result of its investments in Federal Funds sold, U.S. Government
and U.S. Agency securities and cash. In addition the bank holding company had
$122,007 in cash and equity securities at the end of 1998 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 $826,000 and $922,688
at year end 1998 and 1997. 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 1999. Management intends that the cash and securities on hand,
together with cash from the sale of common stock and the exercise of stock
options to be sufficient to cover the required principal reductions during 1999
on the holding company's loan.

         Total stockholders' equity of the Company at December 31, 1998 was
approximately $3.08 million (or 5.6% of total assets) compared to $3.40 million
(or 5.9% of total assets) the year earlier. The Bank's regulatory capital at
year end was $4.38 million or 8.02% of the Bank's total regulatory assets and
the risk-adjusted capital ratio of 13.1% exceeded the minimum regulatory
risk-based capital requirement of 8% of the risk-adjusted assets for the Bank.
The following table provides additional information about the risk-adjusted
assets of the Bank and the Company's actual capital percentages:




                                      -25-
<PAGE>   26

                                 University Bank
                         Risk-Based Capital Calculation
                                December 31, 1998

<TABLE>
<CAPTION>

                                                                Balance    Risk Weighted
0% RISK CATEGORY                                              Sheet (000)   Assets (000)
<S>                                                           <C>          <C>       
              U.S. Treasury Securities                              467               
              Mort-Backed Sec Guaran by GNMA                          2           --   
              Currency & Coin                                       233           --   
              Federal Reserve Balance                                29           --   
                                                                 --------------------- 
              TOTAL                                                 731           --   
                                                                                       
20% RISK CATEGORY                                                                      
              Interest-bearing Balances                              86             17 
              Fed Funds Sold                                      8,543          1,709 
              U.S. Gov't sponsored Agency Sec                     2,612            522 
              Cash Items                                            161             32 
              FHLB Stock                                            848            170 
              Balances due from depository Inst                     397             79 
                                                                 ---------------------
              TOTAL                                              12,647          2,529 
                                                                                       
50% RISK CATEGORY                                                                      
              Qualifying 1st liens on 1-4 family                 20,339         10,170 
                                                                 ---------------------
              TOTAL                                              20,339         10,170 
                                                                                       
100% RISK CATEGORY                                                                     
              ALL OTHER ASSETS                                   20,819         20,819 
                                                                                       
              TOTAL ASSETS                                       54,536         33,518 
                                                                 ===================== 
</TABLE>


<TABLE>
<CAPTION>

                             TIER 1 CAPITAL                     Balance
<S>                                                          <C>
              Common Stock                                          200
              Surplus                                             4,262
              Undivided Profits & Capital Reserves                 (625)
              Minority Interest                                     205
              Other identifiable Intangible Assets                  (95)
              Unrealized loss on Securities                         --
              TOTAL TIER 1 CAPITAL                                3,947

                             TIER 2 CAPITAL
              Allowance for loans & Lease losses                    459
              Excess LLR (limited to 1.25% gross risk-
              weighted assets                                       (30) 
              TOTAL TIER 2 CAPITAL                                  429

              TOTAL TIER 1 & TIER 2 CAPITAL                       4,376

              TIER 1/TOTAL ASSETS                                  7.24%
              TIER 1 & 2/TOTAL ASSETS                              8.02%

              TIER 1/TOTAL RISK-WEIGHTED ASSETS                   11.78%
              TIER 1 & 2/TOTAL RISK-WEIGHTED ASSETS               13.06%
</TABLE>




                                      -26-
<PAGE>   27



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 negative gap position will result in generally
lower earnings as long-term assets are repricing upward slower than short-term
liabilities. However during a declining rate environment, the opposite effect on
earnings is true, with earnings rising due to long-term assets repricing
downward slower than short-term liabilities.

         The following table presents the Bank's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities at December 31,
1998. The table is based upon various assumptions of management which may not
necessarily reflect future experience. The Bank performs a static gap analysis
which has limited value as a simulation because of competitive and other
influences that are beyond the control of the Bank. As a result, certain assets
and liabilities indicated as maturing or re-pricing within a stated period may,
in fact, mature or re-price in other periods or at different volumes. The
one-year static gap position at December 31, 1998 was estimated to be
($8,424,000) or -15.46%:




                                      -27-
<PAGE>   28

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

                                  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>  
Short term investments            8,543          0          0          0          0      8,543
Loans (1)                         2,462      3,270      6,765      2,245          0     14,742
Securities Available for Sale       792          0          2      3,000          0      3,794
Securities held for Sale              0          0          0          0          0          0
Loans held for Sale              11,863          0          0          0          0     11,863
Matured Loans                       264          0          0          0          0        264
Variable Rate Loans               7,744          0          0          0          0      7,744
                                -------    -------    -------    -------    -------    -------
  TOTAL ASSETS                   31,668      3,270      6,767      5,245          0     46,950

         LIABILITIES

CD's over $100,000                1,882      2,136        740          0          0      4,758
CD's under $100,000               6,932     10,576      2,543         58          0     20,109
MMDA                             13,212          0          0          0          0     13,212
NOW                               3,162          0          0          0          0      3,162
Demand                            1,801          0          0          0          0      1,801
Savings                             177          0          0          0          0        177
Other Liabilities                   141      1,583        933        512          0      3,169
Drafts Payable                    5,065          0          0          0          0      5,065
Borrowings                            0          0          0          0          0          0
                                -------    -------    -------    -------    -------    -------
  TOTAL LIABILITIES              32,372     14,295      4,216        570          0     51,453


         GAP                       (704)   (11,025)     2,551      4,675          0     (4,503)


         CUMULATIVE
         GAP                       (704)   (11,729)    (9,178)    (4,503)    (4,503)

         GAP
         PERCENTAGE               -1.37%    -22.80%    -17.84%     -8.75%     -8.75%
</TABLE>

    Notes:
     (1) Net of bad debt reserves.





                                      -28-
<PAGE>   29

         The following additional information is provided with respect to the
Bank's investment portfolio, at book value, as of December 31, 1998:

         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
Treasuries and
Gov't Agencies
<S>                                 <C>       <C>         <C>        <C>
  - Amount                          $1,273    $   2       $           $  444
  - Yield                             7.14%    7.38%          --%       5.34%

All Other Securities
  - Amount                          $  506    $  -0-      $   -0-     $1,549
  - Yield                            5.94%        --%         --%      4.15%
</TABLE>

         Additional information regarding the Bank's investments as of December
31, 1998 and 1997 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, 1998:

         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        $3,050   $2,426    $2,504
Agricultural                  $   -0-  $   -0-   $   -0-
Real Estate:
  Construction                $1,573   $   -0-   $   -0-
  Mortgage (1)                $2,279   $3,678    $4,232
Consumer                      $  166   $  907    $2,837
                              ------   ------   -------
     Total                    $7,068   $7,011    $9,573

<CAPTION>

                              Maturity  Maturity
                                Under   One Year    Total
                              One Year  or More     Loans
                             -------- ---------  -------
<S>                           <C>      <C>       <C>   
Total Variable Rate Loans      $5,350   $ 4,008    $ 9,358
Total Fixed Rate Loans         $1,718   $12,576    $14,294

Total Loans (1)                $7,068   $16,584    $23,652
                              =======   =======    =======
</TABLE>

(1) Excludes residential loans held for sale of $11,863, and the allowance for
    loan losses.




                                      -29-
<PAGE>   30

SUMMARY OF RESULTS OF OPERATIONS

         The net loss from operations of the Company was $198,049 in 1998,
$1,117,924 in 1997 and $536,758 in 1996. Earnings (loss) per share for 1998,
1997 and 1996 were $(0.10), $(0.58) and $(0.29), respectively.

         The decreased loss in 1998 versus 1997 was principally due to decreased
losses at the Bank's new Ann Arbor main office. During the year non-interest
expenses at the retail bank division were decreased by $890,139, and certain
aspects of underlying operating results including key indicators such as net
interest income improved so that the Bank acheived a break-even result during
the year from ongoing operations. Unusual or non-recurring expenses exceeded
unusual or non-recurring profits and decreased the Bank's income by $342,000.
The Bank's mortgage banking and other specialized financial subsidiaries had
total increased profits of $581,381 in 1998, a 33% return on average investment
and offset a portion of the losses from the retail banking operations.

         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.

RECENT EVENTS

         The Company recently received permission orally from the Michigan
Financial Institutions Bureau for the BIDCO to repurchase the shares and
convertible bonds held by certain minority shareholders of the BIDCO. Written
permission is expected shortly. The transaction is contemplated to be effective
in the near future. As a result of the transaction it is anticipated that the
Company's ownership of the BIDCO will increase to 80% from 44.1%, and that the
BIDCO will then become part of the Company's tax filing group for federal income
tax purposes. As a result, certain deferred tax assets are expected to be
realized during 1999, as the BIDCO's taxable income is sheltered by the
Company's net operating tax loss carryforward. Since the purchase price for the
shares is at a discount to the BIDCO's per share book value, the transaction is
anticipated to generate an immediate gain for the Company of approximately
$70,000.

NET INTEREST INCOME

         Net interest income represents the dollar amount by which interest
income generated by interest-earning assets exceeds the cost of funds.
Interest-earning assets consist primarily of loans, short term investments and
investment securities, and the principal cost of 




                                      -30-
<PAGE>   31

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 $0.09 million in 1998, $0.11 million in
1997 and $0.09 million in 1996.

         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:





                                      -31-
<PAGE>   32


<TABLE>
<CAPTION>
                                             0                  Net Interest Income

                                             At                       Years Ended December 31,
                                                         -----------------------------------------
                                          31-Dec-98            1998           1997         1996
                                       ---------------   -----------------------------------------
                                            Average          Average         Interest      Average          
                                             Yield           Balance         Inc(Exp)       Yield           
Interest Earning Assets:
     Loans:
<S>                                        <C>            <C>            <C>             <C>   
          Commercial                          9.01%          9,680,308      1,010,205       10.44%
          Real Estate Construction            8.56%            644,430         65,269       10.13%
          Real Estate Mortgage                6.76%         28,476,557      2,192,636        7.70%
          Installment/Consumer               10.42%          4,590,026        464,041       10.11%
                                                                                                  
     Total Loans                              8.69%         43,391,322      3,732,151        8.60%
                                                                                                  
     Investment Securities(1)                 5.59%          1,796,853        154,648        8.61%
     Federal Funds & Bank Deposits            4.75%          2,255,064        123,810        5.49%
                                                                                                  
          Total Interest Bearing Assets       7.07%         47,443,238      4,010,609        8.45%
                                                                                                  
Interest Bearing Liabilities:                                                                     
     Deposit Accounts:                                                                            
         Now/S-Now                            2.81%          2,956,611        118,622        4.01%
         Savings                              2.46%            140,501          3,504        2.49%
         Canadian Dollar Savings              0.00%             17,849            396        2.22%
         Time                                 5.66%         24,238,176      1,444,236        5.96%
         Borrowed Funds                       5.78%          1,481,112         85,604        5.78%
         Money Markets                        4.40%         13,218,519        617,431        4.67%
                                                                                                  
             Total                            5.03%         42,052,768      2,269,793        5.40%
                                                                                                  
     Holding Company Debt                     9.00%            884,764         88,893       10.05%
                                                                                                  
          Total Interest Bearing                                                                  
               Liabilities                    5.17%         42,937,532      2,358,686        5.49%
                                                                                                  
Net Earning Assets, net interest                                                                  
   income, and interest rate spread           1.90%          4,505,706      1,651,923        2.96%
                                                            
Net yield on interest-earning assets          3.64%



<CAPTION>
                                                                         Years Ended December 31,
                                          -------------------------------------------------------------------------------------
                                                              1997                                         1996
                                          -------------------------------------------------------------------------------------
                                             Average         Interest      Average         Average        Interest       Yield/
                                             Balance         Inc(Exp)       Yield          Balance        Inc(Exp)        Rate 

<S>                                        <C>            <C>            <C>             <C>           <C>            <C>       
Interest Earning Assets:
     Loans:
          Commercial                       12,051,647      1,092,970       9.07%           5,783,396       598,353      10.35%
          Real Estate Construction            828,157         65,665       7.93%             145,197        13,134       9.05%
          Real Estate Mortgage             24,323,766      2,444,817      10.05%          22,337,028     1,930,956       8.64%
          Installment/Consumer              4,786,743        471,542       9.85%           2,647,155       278,564      10.52%
                                                                                                                              
     Total Loans                           41,990,313      4,074,994       9.70%          30,912,776     2,821,007       9.13%
                                                                                                                              
     Investment Securities(1)               2,272,225        305,966      13.47%           9,908,962       623,854       6.30%
     Federal Funds & Bank Deposits          5,498,798        355,151       6.46%           4,903,898       278,665       5.68%
                                                                                                                              
          Total Interest Bearing Assets    49,761,336      4,736,111       9.52%          45,725,636     3,723,526       8.14%
                                                                                                                              
Interest Bearing Liabilities:                                                                                                 
     Deposit Accounts:                                                                                                        
         Now/S-Now                          3,360,913        156,902       4.67%             906,551        45,578       5.03%
         Savings                              126,081          3,113       2.47%              77,600         1,910       2.46%
         Canadian Dollar Savings              446,470         10,632       2.38%             989,805        49,948       5.05%
         Time                              27,885,534      1,672,477       6.00%          25,052,321     1,537,908       6.14%
         Borrowed Funds                     3,256,164        424,419      13.03%           8,193,989       534,500       6.52%
         Money Markets                     16,686,401        832,345       4.99%           8,918,471       477,002       5.35%
                                                                                                                              
             Total                         51,761,563      3,099,888       5.99%          44,138,737     2,646,846       6.00%
                                                                                                                              
     Holding Company Debt                     937,363        108,195      11.54%             977,500        85,867       8.78%
                                                                                                                              
          Total Interest Bearing                                                                                              
               Liabilities                 52,698,926      3,208,083       6.09%          45,116,237     2,732,713       6.06%
                                                                                                                              
Net Earning Assets, net interest                                                                                              
   income, and interest rate spread        (2,937,590)     1,528,028       3.43%             609,399       990,813       2.09%
                                                                                                                              
Net yield on interest-earning assets                                                            3.48%         3.07%      2.17%
                                                                                          
</TABLE>



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


                                      -32-

<PAGE>   33



         The table above does not specify the average level of non-interest
bearing demand deposits, which were $2,626,160, $3,510,337 and $3,377,101 for
the years ended December 31, 1998, 1997 and 1996, respectively, as computed
using month-end balances for such years.

         Net interest income of the Bank increased to $1.65 million in 1998 from
$1.53 million in 1997, mainly as a result of a larger decrease in
interest-earning liabilities than the decrease in interest-earning assets, which
was only partially offset by a decline in the yield on interest-earning assets,
which fell faster than the decline in the cost of interest-earning liabilities.
During the year ended December 31, 1998, the Bank's average interest-earning
asset base fell by $2.32 million or 4.7% over 1997, while average
interest-bearing liabilities decreased by $9.71 million or 18.8%. Due to a
restructuring of the interest rate earned on loans held for sale charged to the
Bank's Varsity subsidiaries, the average yield on interest-earning assets
decreased to 8.45% from 9.52% in 1997. Due to the decrease of wholesale deposits
in the mix of interest-earning liabilities, the average cost of deposits
decreased from 5.99% in 1997 to 5.40 in 1998. As a result of the decrease in
yield on interest-earning assets in an amount greater than the decline in the
cost of interest-earning liabilities, which more than offset an expansion in
interest-earning assets relative to interest-earning liabilities, the net
interest margin decreased to 2.96% in 1998 from 3.43% in 1997. Interest rates
were mostly stable until September 1998, and short term interest rates declined
for the balance of the year.

         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.

         At December 31, 1998, the net yield on the Bank's interest-earning
assets was 3.64% up from the average net spread for the 1998 year of 3.48%,
principally as a result of 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.

         The following table presents information regarding fluctuations in
interest income and interest expense of the Company 





                                      -33-
<PAGE>   34

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:







                                      -34-
<PAGE>   35

<TABLE>
<CAPTION>
                                          Rate / Volume Analysis
 
                                                     Years Ended December 31,
                                                       1998                         1997                                     
                                         ------------------------------------------------ 
                                         Volume        Rate          Total         Volume
                                         ------        ----          -----         ------
<S>                                     <C>            <C>           <C>           <C>    
Interest Income
     Loans:
          Commercial                    (215,058)      132,293       (82,765)      648,516
          Real Estate Construction       (14,568)       14,172          (396)       61,778
          Real Estate Mortgage           417,403      (669,584)     (252,181)      171,746
          Installment/Consumer           (19,379)       11,877        (7,501)      225,152
                                      ----------    ----------    ----------    ----------
     Total Loans                         168,399      (511,241)     (342,843)    1,107,193

     Investment Securities               (64,011)      (87,307)     (151,318)     (480,798)
     Federal Funds                      (209,503)      (21,838)     (231,341)       33,805
                                      ----------    ----------    ----------    ----------
Total Interest Income                   (105,116)     (620,386)     (725,502)      660,200

Interest Bearing Liabilities:
     Deposit Accounts:
         Now/S-Now                       (18,875)      (19,406)      (38,280)      123,396
         Savings                             356            35           391         1,193
         Canadian Dollar Savings         (10,207)          (29)      (10,236)      (27,418)
         Time                           (218,756)       (9,485)     (228,241)      173,925
         Borrowed Funds                 (231,366)     (107,449)     (338,815)     (322,098)
         Money Markets                  (172,984)      (41,930)     (214,914)      415,466
                                      ----------    ----------    ----------    ----------
     Total Deposit Interest Expense     (651,831)     (178,264)     (830,095)      364,464

     Holding Company Debt Interest        (6,071)      (13,231)      (19,302)       (3,526)
                                      ----------    ----------    ----------    ----------
          Total Interest Expense        (657,902)     (191,495)     (849,397)      360,938
                                      ----------    ----------    ----------    ----------
Net Interest Income                      552,787      (428,891)      123,895       299,262
                                      ==========    ==========    ==========    ==========

<CAPTION>
                                          Rate / Volume Analysis
 
                                                          Years Ended December 31,
                                                1997                                1996
                                         ------------------------------------------------------------- 
                                          Rate         Total         Volume         Rate         Total
                                          ----         -----         ------         ----         -----

<S>                                    <C>          <C>           <C>            <C>          <C>
Interest Income
     Loans:
          Commercial                    (153,899)      494,617       (54,781)       55,178           397
          Real Estate Construction        (9,247)       52,531        (6,179)       (2,057)       (8,236)
          Real Estate Mortgage           342,115       513,861      (123,348)      (78,899)     (202,247)
          Installment/Consumer           (32,174)      192,978       (60,079)       95,428        35,349
                                      ----------    ----------    ----------    ----------    ----------
     Total Loans                         146,794     1,253,987      (244,387)       69,650      (174,737)

     Investment Securities               162,910      (317,888)      396,094      (113,243)      282,851
     Federal Funds                        42,681        76,486           470        26,517        26,987
                                      ----------    ----------    ----------    ----------    ----------
Total Interest Income                    352,385     1,012,585       152,177       (17,076)      135,101

Interest Bearing Liabilities:
     Deposit Accounts:
         Now/S-Now                       (12,072)      111,324          (878)       (5,695)       (6,573)
         Savings                              10         1,203        (2,080)       (5,347)       (7,427)
         Canadian Dollar Savings         (11,898)      (39,316)       48,818        23,222        72,040
         Time                            (39,356)      134,569       (30,237)      (42,577)      (72,814)
         Borrowed Funds                  212,017      (110,081)      168,031        91,360       259,391
         Money Markets                   (60,123)      355,343       (36,894)      183,102       146,208
                                      ----------    ----------    ----------    ----------    ----------
     Total Deposit Interest Expense       88,578       453,042       146,760       244,065       390,825

     Holding Company Debt Interest        25,854        22,328        16,937        36,445        53,382
                                      ----------    ----------    ----------    ----------    ----------
          Total Interest Expense         114,432       475,370       163,697       280,510       444,207
                                      ----------    ----------    ----------    ----------    ----------
Net Interest Income                      237,953       537,215       (11,520)     (297,586)     (309,106)
                                      ==========    ==========    ==========    ==========    ==========
</TABLE>









                                      -35-
<PAGE>   36


LOAN PORTFOLIO

         Information regarding the Bank's loan portfolio as of December 31, 1998
and 1997 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 inherent in the
Bank's portfolio. Each year's provision reflects management's analysis of the
amount necessary to maintain the allowance for possible loan losses at a level
adequate to absorb anticipated losses. In its evaluation, management considers
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 Notes 5
and 6 of the Consolidated Financial Statements for additional information
regarding impaired and past due loans.

         Non-performing loans amounted to $471,832 and $1,121,605 at December
31, 1998 and 1997, respectively. The decrease in non-performing loans during
1998 is the result of an improvement in the Bank's non-residential loan
portfolio, and the transfer to REO of some non-performing residential properties
that were foreclosed on during the year.

         The provision for loan losses in 1998 was $118,433, a decrease of
$141,567 from the 1997 level, which in turn was an increase of $69,500 from the
1996 level of $190,500. Loans charged off net of recoveries were $180,385,
$36,830 and $209,432 in 1998, 1997 and 1996, respectively. The allowance for
possible loan losses totaled $459,001, $520,953 and $297,783 at the end of 1998,
1997, and 1996, respectively.

         A summary of loan loss expense for the Bank for the years indicated is
presented below:






                                      -36-
<PAGE>   37


                    Analysis of the Allowance for Loan Losses
                                ($ in thousands)
<TABLE>
<CAPTION>
                                           Years Ending December 31,
                                             1998    1997    1996

<S>                                          <C>     <C>     <C> 
Balance at beginning of period               $521    $298    $317
Chargeoffs:
  Domestic:
 Commercial, financial and agricultural        25      55     178
 Real estate-construction                       0       0       0
 Real estate-mortgage                         165       0       0
 Installment loans to individuals              66      28      47
 Lease financing                                0       0       0
  Foreign                                       0       0       0
                                             ----    ----    ----
                                              256      83     225
                                             ----    ----    ----
Recoveries:
  Domestic:
 Commercial, financial and agricultural        10       3      10
 Real estate-construction                       0       0       0
 Real estate-mortgage                          42      24       0
 Installment loans to individuals              24      19       5
 Lease financing                                0       0       0
  Foreign                                       0       0       0
                                             ----    ----    ----
                                               76      46      15
                                             ----    ----    ----
Net charge-offs                               180      37     210
                                             ----    ----    ----
Provision for loan losses                     118     260     191
                                             ----    ----    ----
Balance at end of period                      459    $521    $298
                                             ====    ====    ====
Ratio of net charge-offs during period
to average loans outstanding during period   0.42%   0.09%   0.68%
                                             ====    ====    ====
</TABLE>






                                      -37-
<PAGE>   38


                    Analysis of the Allowance for Loan Losses
                                ($ in thousands)
<TABLE>
<CAPTION>

                                  DECEMBER 31,
                                                 PERCENT OF LOANS
BALANCE AT END OF PERIOD                         IN EACH CATEGORY
  APPLICABLE TO:                AMOUNT           TO TOTAL LOANS
----------------                ------           --------------

                                1998   1997      1998     1997
<S>                            <C>    <C>     <C>      <C>  
Domestic
  Commercial, financial,
   agricultural                $158   $177       34.4%    34.0%
  Real estate-construction        8      3        1.8%     0.6%
  Real estate-mortgage          185    163       40.3%    31.3%
  Installment loans to
   individuals                   68     68       14.8%    13.0%
Unallocated                      40    110        8.7%    21.1%
                               ----   ----    -------  -------
                                459    521      100.0%   100.0%
                               ====   ====    =======  =======
</TABLE>

<TABLE>
<CAPTION>
                            December 31,        December 31,
                               1998                 1997
                            -----------         ------------
<S>                          <C>                  <C>   
Total loans (1)              23,652               28,236
Allowance for loan losses       459                  521
Allowance/Loans, % (1)         1.94%                1.85%
</TABLE>

(1) Excludes loans held for sale.

         The monthly provision for loan loss remained at $7,500 during 1998,
although management added a special provision of $35,933 in the third quarter of
1998 to create a new allowance for loan losses at Varsity Funding and Midwest
Loan Services for portfolio loans at these subsidiaries.

         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.

         Management believes that the current reserve level is adequate to
absorb losses inherent in the loan portfolio, although the ultimate adequacy of
the allowance for loan losses is dependent upon future economic factors beyond
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 


                                      -38-

<PAGE>   39

difficulties. A general nationwide business expansion could conversely tend to
diminish the severity of any such difficulties.

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

         There were several one-time, non-recurring losses and gains included in
the retail banking division's 1998 results. For example, the financial results
of the Bank in December 1998 included a one-time, non-recurring loss of $121,224
which was related to the sale a substantial majority of the Bank's mortgage
servicing rights. Management expects this sale of the Bank's mortgage servicing
rights to end a drain (a loss of $286,000 in 1998) on the retail bank division's
profitability. During 1998 the Bank also sold its Newberry and Saline offices at
a profit and consolidated all Bank operations (excluding offsite ATMs) into the
Ann Arbor site.

         Non-interest income. Non-interest income in 1998 rose to $5,973,899
from $5,189,104 in 1997, an increase of $784,795, or 15.1%. The increase in 1998
was mainly the result of mortgage banking income, which increased 7.4%, or
$364,807, but all categories increased, including increased gains from
securities sales, gains from the sale of excess property, increased service
charges and fees, and net income from Michigan BIDCO.

         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.

         Mortgage Banking. Mortgage banking, servicing and origination fees
increased to $5,291,622 in 1998 from $4,926,815 in 1997. The increase in
mortgage banking fee income was the result of a 31% increase in loan purchase
and origination volumes during 1998 and profits from the Bank's mortgage banking
subsidiaries, Varsity Mortgage and Midwest Loan Services.

         The servicing rights portfolio totaled $95,588,808 of FHLMC and FNMA
mortgages for others at December 31, 1998, versus $124,719,166 at December 31,
1997. All servicing done in 1998 was done by Midwest Loan Services. The amount
decreased as a result of a portfolio sale of servicing rights by the Bank in
December 1998, and payoff and refinancing of existing rights throughout the
year. The following table summarizes the portfolio by type and mortgage note
rate:






                                      -39-
<PAGE>   40



Interest Rate Stratification of the Bank's Servicing


<TABLE>
<CAPTION>

($ thousands)                        FIXED RATE - BY MATURITY (in years)
                                     -----------------------------------
Mortgage Rate (%)      ARMs          UNDER 10       10-25        OVER 25

<S>                 <C>             <C>            <C>          <C>   
9.00 and up            267              --            105          1,581 
8.50 - 8.99          1,564              --            470          3,401
8.00 - 8.49          6,285              --            785          9,924
7.50 - 7.99          1,507              63          2,840         30,955
7.00 - 7.49            116              --          7,385         16,295
6.50 - 6.99            285              --          4,897          5,518
6.00 - 6.49             --              --            934            405
under 6.00              --              --             --              7
                    ------          ------         ------         ------
                    10,024              63         17,416         68,086
                                                            
Current market
  interest rates      6.25%           6.88%          7.00%          7.38%
Average annual
  servicing fee       0.38%           0.38%          0.26%          0.27%
</TABLE>

         Mortgage interest rates declined during late 1998 to levels briefly
seen during the Summer of 1993 and the Winter of 1995, and as a result, the
portfolio experienced increased refinancings and payoffs. The Bank in particular
amortized $286,000 in 1998 of servicing rights, in addition to a $121,224 loss
on the sale of the bulk of the Bank's remaining portfolio of servicing rights in
December 1998.

         Based on recent comparable sales and indications of market value from
industry brokers, management believes that the current market value of the
Bank's portfolio of mortgage servicing rights approximates cost. Market interest
rate conditions can quickly affect the value of mortgage servicing rights in a
positive or negative fashion, as long term interest rates rise and fall.


<TABLE>
<CAPTION>

                                 Servicing Rights Held by University Bank
(amounts in $ thousands)              December 31,    December 31,
                                         1998            1997
                                      -----------------------------
<S>                                    <C>            <C>     
Total servicing                         95,589         124,719 
Book value of servicing                    948           1,430 
Estimated market value of servicing:
  Management estimate (1)                  950           1,440
  Discounted cash flow (2)               1,066           1,583
Estimated excess of market
  over book value (3)                   118- 2         153- 10
</TABLE>

(1) Assumes a price based upon market transactions at December 31, 1998 of 4.3x
(4.3 times the servicing fee) for 30-year servicing, 3.6x for 15-year servicing,
2.6x for Balloon servicing and 1.8x for ARM servicing. The market value of
servicing at December 31, 1997 [Footnotes continued on following page]




                                      -40-
<PAGE>   41


was based on a price of 4.6x for 30-year servicing, 3.5x for 15-year servicing,
1.9x for Balloon servicing and 2.0x for ARM servicing. Excess servicing is
discounted from these amounts at a multiple of one times the servicing fee. 
(2) Uses net present value analysis of future cash flows, discounted back at
    rates ranging from 10 to 12% in 1998 and 1997.
(3) Range based upon the two methods used in (1) and (2), above. During 1998
    purchases and sales of mortgage servicing rights by third-parties evidenced
    a declining trend in price as long term interest rates declined in towards
    the end of 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, 1998, the BIDCO had made twenty-seven
such investments, amounting to a total of $13,413,600 at original cost (before
repayments or participations sold). At December 31, 1998, Michigan BIDCO had
total assets of $5,327,697 versus $5,683,808 at December 31, 1997. As discussed
above under "ITEM 1.- Business, Lines of Business, Michigan BIDCO", the
financial statements of the BIDCO are presented using the investment company
method, and, accordingly, investments in stocks, stock warrants, limited
liability companies and loans ("BIDCO Investments") are reported at fair value.

         The BIDCO's financial results for 1998 reflect net income in the amount
of $259,238 versus a net loss of 163,539 in 1997. Operating expenses declined
$167,637 or 38.9%, as expenses were well controlled and the expense
reimbursement from Northern Michigan Foundation increased $80,000 to $190,000.
Net interest income recovered to $13,310, an increase of $233,698 from the prior
year. Realized gains on the sale of two major investments in the amount of
$720,000 had no impact on income as the valuations had been taken into account
in the year-end 1997 valuation. Additional market value provisions were recorded
on the mixed office recycled paper pulp mill investment, because continued
record low paper prices decreased the revenue that had been anticipated from a
royalty on sales.

         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 and a write-off of accrued but unpaid interest
that resulting in negative net interest income for the year of ($220,388). Two
BIDCO investments run into financial difficuly during 1997 and the carrying
value was decreased. One was restructured during 1997, with the BIDCO's
investment reduced in value by approximately half. The second was still in the
process of being restructured, and the BIDCO took a substantial write-down on
its investment there.

         At December 31, 1998, the BIDCO had no outstanding conditional
commitments to lend.




                                      -41-
<PAGE>   42

         Securities. Proceeds from sales of marketable equity securities
(included in proceeds from sales of investment securities) were $121,037,
$166,498 and $631,278 for the years ended December 31, 1998, 1997 and 1996,
respectively. Gross gains of approximately $97,993, $41,155 and $346,495 and no
gross losses were realized on 1998, 1997 and 1996 sales, respectively.

         Proceeds from sales of available for sale securities were $140,449,
$5,740,991 and $10,888,145 for the years ended December 31, 1998, 1997 and 1996,
respectively (including sales of marketable equity securities and excluding
sales associated with the Bank's mortgage banking operation). There was no gain
or loss on 1998 sales. 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.

          At December 31, 1998, gross unrealized losses in the Bank's
available-for-sale securities were $156,993 and gross unrealized gains were
$3,776. 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. Sales of loans pooled into mortgage backed securities in connection
with the Bank's mortgage banking activities were $48,236,448 in 1998,
171,639,196 in 1997 and $54,137,028 in 1996.

         Non-interest expense. Non-interest expense for the Company increased by
$36,156 or 0.5% in 1998. During the year non-interest expenses at the retail
bank division were decreased by $890,139 as a result of a variety of cost
cutbacks in an effort to streamline the operation. During the year, the Newberry
and Saline operation centers were sold and all operations centralized in the Ann
Arbor main office. Excess personnel costs were reduced, and a variety of other
efficiencies realized. This decrease was offset by ongoing growth at the Bank's
mortgage subsidiaries, Varsity and Midwest Loan Services. In addition, legal and
audit expenses remained high as a result of various projects including
approximately $75,000 spent on the unsuccessful litigation against the RTC, and
a variety of Year 2000 expenses were incurred and expensed. Holding company
total expense decreased $13,963 primarily as a result of decreases in public
listing expense and audit and legal expense as certain projects finished in
1997. Partially offsetting this decrease at the holding company was an increase
in ESOP benefits expense and salary and expenses reimbursed to a consultant in
connection with a special project.

           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 




                                      -42-
<PAGE>   43

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 reduced 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.

         Year 2000 Readiness. The following statements are Year 2000 Readiness
Disclosures for purposes of the Federal Year 2000 Information and Readiness
Disclosure Act, and you are entitled to protection in accordance with that act.
The Year 2000 issue concerns the potential impact of computer software code that
only utilizes two digits to represent the calendar year (e.g. "99" for "1999").
Software of this type, if not corrected, could produce inaccurate or
unpredictable results at any time, and especially after January 1, 2000, when
current and future dates have a lower two digit year number than dates in this
century. The Company, similar to most financial services providers, is
significantly subject to the potential of the Year 2000 issue due, among other
matters, to the nature of financial information. Potential impacts to the
Company may arise from software, computer hardware, and other equipment both
within the Company's direct control and outside of the Company's ownership, yet
with which the Company electronically or operationally interfaces. Financial
institution regulators have focused intensively on Year 2000 exposures in the
institutions they regulate, issuing guidance concerning the responsibilities of
senior management and directors. Year 2000 testing and certification is being
addressed as a key safety and soundness issue in conjunction with regulatory
exams. The failure to implement an adequate Year 2000 program can be identified
as an unsafe and unsound banking practice.

         In order to address the Year 2000 issue, the Bank has formed a Year
2000 coordination committee with key members of management from the Bank and
each operating subsidiary and appointed its Compliance Officer as Year 2000
Coordinator. The Bank and Midwest rely on mainframe computers, which are IBM A/S
400s, and are certified and tested as Year 2000 compliant. The Bank's main bank
software application is a product of Peerless Group, which has also been
upgraded to a Year 2000 compliant version which has been tested and certified as
Year 2000 compliant. Midwest's main application software is LSAMS servicing
software which has been upgraded to a Year 2000 compliant version which has been
tested and certified as Year 2000 compliant. The Bank, Varsity Mortgage and
Varsity Funding also rely on Novell Local Area Networks, which have been
upgraded to a Year 2000 certified version of Novell Local Area Network software,
which has also been tested and certified as Year 2000 compliant. All PC systems
and PC software at the Bank and its subsidiaries have been tested and certified
as Year 2000 compliant.

         Approximately all of the $93,000 Year 2000 readiness budget has been
spent in the process of upgrading and certifying the systems as being Year 2000
compliant. The bulk of the Year 2000 budget was allocated to capital
expenditures for software upgrades for software updates and hardware updates and
Year 2000 testing which was expensed 




                                      -43-
<PAGE>   44

in 1998. At this point in time, the Company and its subsidiaries have renovated,
tested and certified as Year 2000 compliant all systems identified as mission
critical. The focus of the Company's Year 2000 effort is now shifting towards
less critical systems and contingency planning to deal with unforseen events
external to the Company.

         Actual and budgeted Year 2000 readiness costs do not include the
implicit costs associated with the reallocation of internal staff hours to Year
2000 readiness related efforts. These costs are not included because the Bank
does not separately track those expenses. Budgeted costs also do not include
normal ongoing costs for computer hardware and software that would be replaced
even without the presence of the Year 2000 issue in conjunction with the
Company's ongoing programs for updating its infrastructure. Additional Year 2000
costs may be incurred as the Company progresses in its Year 2000 program and
obtains additional information and conducts further testing regarding the Year
2000 readiness of third parties.

         The Company has communicated and will continue to communicate with
various significant suppliers and major borrowers and customers to determine the
extent to which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company is requesting that such third
party vendors indicate whether their products and services are Year 2000
compliant, whether they have a program to test for that compliance, and the
status of the program. However, the activities of third parties in responding to
the Year 2000 issue is beyond the control of the Company.

         Despite the Company's activities to address the Year 2000 issue, there
is no assurance that certain mission critical vendors such as the Federal
Reserve Bank of Chicago, the Bank's correspondent banks (Bank One, the Federal
Home Loan Bank of Indianapolis and Associated Bank), the Bank's credit card
processor (Equifax), the Bank's ATM processor (Magic Line), or local power
(Detroit Edison Electric) and phone utilities (Ameritech and ATT) will be Year
2000 compliant by year-end 1999, and if not this could have a material adverse
effect on the Company's operations, and the Company's borrowers and customers.
There can also be no assurance that partial or total systems interruptions or
the costs necessary to implement contingency plans, or Year 2000 systems
failures affecting borrowers, customers or third party vendors would not have a
material adverse effect on the Company's operations and business prospects.
Further, the Company cannot estimate the additional cost, if any, of
implementing any such contingency plan.

         The Bank has evaluated the Year 2000 readiness of its major borrowers
and determined that it has a below average risk (relative to its peer group)
from Year 2000 related potential loan losses, due to its primary focus on real
estate secured lending. All business loans and loan renewals by the Bank are
being evaluated in the context of the Year 2000 readiness of each business.
However, it is impossible for the Company to know with any certainty that the
Bank or its subsidiaries will not sustain Year 2000 related credit losses, and
whether or not such losses would be material.




                                      -44-
<PAGE>   45

         The Bank and its subsidiaries have established back-up contingency
plans to continue operations in the event of a Year 2000 systems failure, based
on the assumption that all mission critical computer systems are Year 2000
certified and tested but that non-traditional power sources may be required for
a short period of time. In addition, a final contingency plan has been
established to conduct manual operations using paper forms until such time as a
systems failure can be corrected. A full scale live contingency plan test is
currently planned to occur in April. Management believes that as a temporary
measure, it is feasible with the volume of current activity to continue
operations in this manner, but there is no assurance that it is possible or that
the cost would not be material.

INCOME TAXES

         Income tax expense (benefit) in 1998 was $(198,592) versus $(292,818)
in 1997 and $(358,758) in 1996. The effective tax (benefit) rate was (50.1)% in
1998, (33.9)% in 1997 and (40.1)% in 1996. A tax benefit was realized in 1998,
1997 and 1996 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 deferred federal income tax assets in 1998, 1997
and 1996 and is expected to decrease the amount of federal income taxes the
Company would otherwise pay annually through 2005.

         At December 31, 1998, the Company had available federal income tax loss
carryforwards that could be utilized to shelter approximately $2,100,000 in
taxable income, and carried a deferred tax asset on its books of $377,088, net
of a deferred tax asset reserve of $360,000. If the Company is able to generate
sufficient taxable income in future years, the reserve against the Company's
deferred tax asset could be reversed, resulting in an increase in future net
income. However, if the Company does not generate income in the future to
utilize the existing deferred tax assets, the amount of the reserve could be
increased, resulting in a decrease in future net income. See above, "Recent
Events".





                                      -45-
<PAGE>   46
















                            UNIVERSITY BANCORP, INC.


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

                       CONSOLIDATED FINANCIAL STATEMENTS


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


                         DECEMBER 31, 1998, 1997, 1996




<PAGE>   47
                         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, 1998, and 1997 and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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 the above
present fairly, in all material respects, the financial position of University
Bancorp, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.


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

Grand Rapids, Michigan
March 18, 1999


                                       47

<PAGE>   48

Part 1. - Financial Information
Item 1.- Financial Statements



                            UNIVERSITY BANCORP, INC.
                           Consolidated Balance Sheets
                            December 31,1998 and 1997



<TABLE>
<CAPTION>
ASSETS                                                       1998                1997
                                                        ---------------     ---------------
<S>                                                     <C>                 <C>
Cash and due from banks                                 $      703,015      $    2,062,307
Short term investments                                       8,543,000             314,652
                                                        ---------------     ---------------
     Total cash and cash equivalents                         9,246,015           2,376,959

Securities available for sale at market                      2,945,832           1,131,927
Federal Home Loan Bank Stock                                   848,400             848,400

Loans held for sale                                         11,862,665          18,156,671

Loans                                                       23,652,103          28,236,183
Allowance for Loan Loss                                       (459,001)           (520,953)
                                                        ---------------     ---------------
     Loans, net                                             23,193,102          27,715,230

Premises and equipment                                       1,439,440           1,955,919
Mortgage servicing rights                                      948,208           1,430,190
Investment in and advances to
    Michigan BIDCO                                             725,733             742,669
Other real estate owned                                        707,730             433,003
Net tax assets                                                 377,088             100,217
Accounts receivable                                          1,198,661           1,198,259
Other assets                                                 1,042,684           1,439,341
                                                        ---------------     ---------------

      TOTAL ASSETS                                      $   54,535,558      $   57,528,785
                                                        ===============     ===============
</TABLE>




                                   -Continued-




                                      -48-



<PAGE>   49

                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                     Consolidated Balance Sheets (continued)
                            December 31,1998 and 1997


<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                         1998                1997
                                                        ---------------     ---------------
<S>                                                   <C>                 <C>
Liabilities
Deposits:
  Demand - non interest bearing                         $    1,801,347      $    2,458,211
  Demand - interest bearing                                 16,373,832          19,120,122
  Savings                                                      177,093             143,604
  Time                                                      24,867,369          23,545,234
                                                        ---------------     ---------------
     Total Deposits                                         43,219,641          45,267,171

Mortgage escrow                                                140,673              86,686
Short term borrowings                                          277,000           2,744,188
Long term borrowings                                         1,196,097           1,749,070
Deferred noncompete income                                      32,068              67,072
Drafts payable                                               5,065,281           3,555,565
Accounts payable                                               744,928              66,636
Accrued interest payable                                       415,060             207,432
Other Liabilities                                              157,081             185,372
                                                        ---------------     ---------------
     Total Liabilities                                      51,247,829          53,929,192

Minority Interest                                              204,949             201,149

Stockholders' equity:
  Preferred Stock, $0.001 par value;
   Authorized - 500,000 shares;
    Issued -  0 shares in both 1998 and 1997                         -                   -
  Common stock, $0.01 par value;
   Authorized - 2,500,000 shares;
    Issued - 2,104,323 shares in 1998
    and 1,391,907 shares in 1997                                21,043              13,919
  Treasury Stock - 115,184 shares in 1998
    and 68,977 in 1997                                        (340,530)           (302,446)
  Additional Paid-in-Capital                                 3,539,474           3,493,154
  Retained earnings (deficit)                                  (16,500)            181,549
  Net unrealized gain/(loss) on securities
   available for sale, net of tax
   of $62,182 in 1998, and
   $6,320 in 1997.                                            (120,707)             12,268
                                                        ---------------     ---------------

     Total Stockholders' equity                              3,082,780           3,398,444
                                                        ---------------     ---------------
     TOTAL LIABILITIES AND
       STOCKHOLDERS' EQUITY                             $   54,535,558      $   57,528,785
                                                        ===============     ===============
</TABLE>


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

                                      -49-


<PAGE>   50

                            UNIVERSITY BANCORP, INC.
                      Consolidated Statements of Operations
              For the Years Ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                        1998               1997               1996
                                                   ----------------   ----------------   ----------------
Interest income:
<S>                                              <C>                <C>                <C>
  Interest and fees on loans                       $     3,732,151    $     4,074,994    $     2,821,007
  Interest on securities:
   U.S. Treasury Securities                                      -                  -             34,310
   U.S. Government agencies                                 85,482            238,190            568,141
   Other securities                                         67,936             67,776             21,403
  Interest on bank deposits                                  1,230             50,458             41,212
  Interest on short term investments                       123,810            304,693            237,453
                                                   ----------------   ----------------   ----------------
     Total interest income                               4,010,609          4,736,111          3,723,526
                                                   ----------------   ----------------   ----------------

Interest expense:
  Interest on deposits:
   Demand deposits                                         736,053            989,247            522,580
   Savings deposits                                          3,900             13,745             51,858
   Time certificates of deposit                          1,444,236          1,672,477          1,537,908
  Bank and other short term borrowings                      85,604            424,419            480,189
  Long Term Notes Payable                                   88,893            108,195            140,178
                                                   ----------------   ----------------   ----------------
     Total interest expense                              2,358,686          3,208,083          2,732,713
                                                   ----------------   ----------------   ----------------

     Net interest income                                 1,651,923          1,528,028            990,813

Provision for loan losses                                  118,433            260,000            190,500
                                                   ----------------   ----------------   ----------------

     Net interest income after
       provision for loan losses                         1,533,490          1,268,028            800,313
                                                   ----------------   ----------------   ----------------

Other income:
  Net security gains                                        97,993              7,715            399,282
  Service charges and fees                                  43,082             17,910              9,428
  Mortgage banking income                                5,291,622          4,926,815          2,363,080
  Gain on sale of servicing rights                        -                  -                   256,840
  Profit(loss) from equity investment in
    Michigan BIDCO                                         128,219            (55,499)            50,301
  Other                                                    412,983            292,163            140,589
                                                   ----------------   ----------------   ----------------
     Total other income                                  5,973,899          5,189,104          3,219,520
                                                   ----------------   ----------------   ----------------
</TABLE>

                                   -Continued-












                                      -50-
<PAGE>   51

                            UNIVERSITY BANCORP, INC.
                Consolidated Statements of Operations (continued)
              For the Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                        1998               1997               1996
                                                   ----------------   ----------------   ----------------
<S>                                              <C>                <C>                <C>
Other expenses:
  Salaries and wages                               $     3,955,812    $     4,228,467    $     2,431,561
  Employee benefits                                        561,288            523,771            346,059
  Occupancy, net                                           558,858            499,838            355,950
  Taxes other than income                                   39,740             96,009             26,475
  Data processing and equipment expense                    284,000            269,820            351,796
  Correspondent bank service charges                        26,270             44,133             20,756
  Advertising                                               93,845            103,332            138,957
  Net expense of other real estate owned                    44,281               (782)             7,016
  Legal and audit expense                                  364,969            274,093            293,862
  Other operating expenses                               1,974,967          1,829,193            942,917
                                                   ----------------   ----------------   ----------------
     Total other expenses                                7,904,030          7,867,874          4,915,349
                                                   ----------------   ----------------   ----------------

Income (Loss) before income taxes                         (396,641)        (1,410,742)          (895,516)
                                                   ----------------   ----------------   ----------------

Income taxes (benefit)                                    (198,592)          (292,818)          (358,758)
                                                   ----------------   ----------------   ----------------

     Net Income (Loss)                             $      (198,049)   $    (1,117,924)   $      (536,758)
                                                   ================   ================   ================

Basic and diluted (loss) per common share          $         (0.10)   $         (0.58)   $         (0.29)
                                                   ================   ================   ================

Weighted average shares outstanding                      1,990,509          1,921,721          1,866,519
                                                   ================   ================   ================
</TABLE>



                            UNIVERSITY BANCORP, INC.
                        Statement of Comprehensive Income
              For the Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                        1998               1997               1996
                                                   ----------------   ----------------   ----------------
<S>                                                <C>              <C>                  <C>
Net Loss                                                 ($198,049)       ($1,117,924)         ($536,758)
Other comprehensive income:
          Unrealized gains/(losses) arising
          during period                                   (201,477)            26,411           (223,062)
          Less:  reclassification adjustment
          for accumulated gains/(losses)
          included in net income                           (97,993)            (7,715)          (399,282)
                                                   ------------------------------------------------------
                Other comprehenisve income/(loss),
                before tax effect                         (299,470)            18,696           (622,344)
          Income tax effect on unrealized
         gains/(losses) arising during period               68,502             (8,979)            75,840
         Income tax effect on reclassification
         adjustments                                        33,318              2,623            135,756
                                                   ------------------------------------------------------
                Other comprehensive income/(loss),
                net of tax                                (197,650)            12,340           (410,748)
                                                   ------------------------------------------------------
Comprehensive loss                                        (395,699)        (1,105,584)          (947,506)
                                                   ======================================================
</TABLE>


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


                                      -51-




<PAGE>   52
           UNIVERSITY BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                      Common Stock $.01                  Treasury Stock                           
                                                          Par Value                                                               
                                              -------------------------------------------------------------------    Additional   
                                                 Number of              Par           Number of                        Paid In    
                                                   Shares              Value            Shares           Cost          Capital    
                                              ------------------------------------------------------------------------------------
<S>                                           <C>                  <C>                <C>           <C>             <C>
Balance January 1, 1996                              1,276,125          $ 12,761        (37,282)     $ (139,808.00) $ 2,799,656   

Issuance of Shares at $5.56 per share                   19,241               193              -               -         106,733   

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

     Net change in unrealized                                
     gain(loss) on securities                                -                 -              -               -               -    
 available for sale, net of tax               
                                              
         Net Income (Loss)                                   -                 -              -               -               -   
                                              ------------------------------------------------------------------------------------
     Balance December 31, 1996                       1,295,366            12,954        (68,765)       (300,883)      2,906,389   

     Issuance of shares weighted                        
      average at $6.43 per share                        86,541               865              -               -         555,615   
                                                        
Exercised option shares at $3.13 per share              10,000               100                                         31,150   
                                                             
Purchase of shares at $7.37 per share                        -                 -           (212)         (1,563)              -   
                                                             
     Net change in unrealized                                -                 -              -               -               -   
     gain(loss) on securities                 
   available for sale, net of tax             
                                              
       Net Income (Loss)                                     -                 -              -               -               -   
                                              ------------------------------------------------------------------------------------
     Balance December 31, 1997                       1,391,907            13,919        (68,977)       (302,446)      3,493,154   
                                       
        3 for 2 stock split                            695,972             6,960        (34,489)                         (6,960)

   Issuance of shares weighted                          
    average at $3.25 per share                          16,444               164              -               -          53,280   
                                                             
Purchase of shares at $3.25 per share                        -                 -        (11,718)        (38,084)              -   
                                                                                                                                  
     Net change in unrealized                                                                                                     
     gain(loss) on securities                                -                 -              -               -               -   
   available for sale, net of tax
                                                                                                                                    
        Net Income (Loss)                                    -                 -              -               -               -   
                                              ------------------------------------------------------------------------------------
   Balance December 31, 1998                         2,104,323          $ 21,043       (115,184)     $ (340,530)    $ 3,539,474   
                                              ====================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                            Unrealized
                                                           gain/(loss)
                                                          on securities       Total
                                              Retained      available    Stockholders'
                                              Earnings       for sale        Equity
                                              ------------------------------------------
<S>                                          <C>            <C>           <C>
Balance January 1, 1996                       $ 1,836,231      $ 142,058    $ 4,650,898

Issuance of Shares at $5.56 per share                   -              -        106,926

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

     Net change in unrealized                 
     gain(loss) on securities                           -       (147,222)      (147,222)   
 available for sale, net of tax               
                                              
         Net Income (Loss)                       (536,758)             -       (536,758)
                                              ------------------------------------------
     Balance December 31, 1996                  1,299,473         (5,164)     3,912,769

     Issuance of shares weighted              
      average at $6.43 per share                        -              -        556,480
                                              
Exercised option shares at $3.13 per share                                       31,250
                                              
Purchase of shares at $7.37 per share                   -              -         (1,563)
                                              
     Net change in unrealized                           -         17,432         17,432
     gain(loss) on securities                 
   available for sale, net of tax             
                                              
       Net Income (Loss)                       (1,117,924)             -     (1,117,924)
                                              ------------------------------------------
     Balance December 31, 1997                    181,549         12,268      3,398,444
                                       
        3 for 2 stock split                   

   Issuance of shares weighted                
    average at $3.25 per share                          -              -         53,444
                                              
Purchase of shares at $3.25 per share                   -              -        (38,084)
                                                                                         
     Net change in unrealized                                                            
     gain(loss) on securities                           -       (132,975)      (132,975)
   available for sale, net of tax
                                                                                            
        Net Income (Loss)                        (198,049)             -       (198,049)
                                              ------------------------------------------
   Balance December 31, 1998                    $ (16,500)    $ (120,707)   $ 3,082,780
                                              ==========================================
</TABLE>


                                      -52-
<PAGE>   53
                            UNIVERSITY BANCORP, INC.
                      Consolidated Statements of Cash Flows For the years ended
              December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                              1998                1997               1996
                                                                         ----------------    ---------------    ---------------
<S>                                                                      <C>                 <C>                <C>
      Cash flow from operating activities:
      Net income (loss)                                                  $      (198,049)    $   (1,117,924)    $     (536,758)
      Adjustments to reconcile net loss to net cash from Operating 
        Activities:
          Depreciation and amortization                                          321,275            663,076            562,141
          Compensation Expense                                                    53,455             36,322             15,056
          Provision for loan loss                                                118,433            260,000            190,500
          Gain on sale of mortgage servicing rights                             -                  -                  (256,840)
          Mortgage loans originated for sale and securitization             (525,438,872)      (396,723,436)      (193,356,147)
          Proceeds from sale of loans and mortgage backed trading
            securities                                                       534,353,849        413,672,875        171,985,016
          Net loss/(gain) on loan sales and securitization                    (2,620,971)        (2,564,188)        (1,180,289)
          Gain on sale of home equity loans                                     -                  (429,260)          -
          Gain on disposal of fixed assets                                      (114,199)          -                  -
          Net amortization/accretion on securities                               (23,718)            14,856            (18,932)
          Loss/(Gain) on sale of securities available for sale                   (97,993)            (7,715)          (399,282)
          Change in:
            Investment in Michigan BIDCO, Inc.                                    16,936             73,121            (50,301)
            Other real estate                                                   (274,727)          (166,924)          (135,483)
            Increase/(Decrease) in other assets                                  187,886         (2,736,723)          (717,937)
            Increase/(Decrease) in other liabilities                           2,282,686         (1,204,317)           512,506
                                                                         ----------------    ---------------    ---------------
             Net cash from (used in) operating activities                $     8,565,991     $    9,769,763     $  (23,386,750)
                                                                         ----------------    ---------------    ---------------

          Cash flow from investing activities:
            Purchase of securities available for sale                         (2,175,534)        (1,890,921)       (11,701,033)
            Proceeds from sales of securities available for sale                 142,088          5,879,886         10,888,145
            Proceeds from maturities and paydowns of securites
              available for sale                                                 139,775          1,396,835          6,751,784
            Capitalized mortgage servicing rights                                (48,484)          (275,680)          (616,436)
            Proceeds from sale of servicing rights                               530,466            835,396          1,216,952
            Loans granted net of repayments                                    4,403,695         (6,877,463)       (11,905,489)
            Proceeds from disposal of assets                                     390,012           -                  -
            Premises and equipment expenditures                                  (80,609)          (439,280)          (876,561)
                                                                         ----------------    ---------------    ---------------
             Net cash from (used in) investing activities                      3,301,409         (1,371,227)        (6,242,638)
                                                                         ----------------    ---------------    ---------------

          Cash flow used in financing activities:
            Net increase (decrease) in deposits                               (2,047,530)        (4,673,360)        32,361,195
            Proceeds from FHLB advances                                         -                                    7,000,000
            Payments of FHLB advances                                           -                (6,000,000)       (11,000,000)
            Net increase(decrease) in mortgage escrow accounts                    53,987               (866)             9,313
            Net increase (decrease) in other short term borrowings            (2,467,188)        (9,234,578)        11,978,766
            Principal payment/borrowings on notes payable                       (552,973)           786,570            (37,500)
            Issuance of common stock                                              53,444            551,408             91,870
            Purchase of treasury stock                                           (38,084)            (1,563)          (161,075)
                                                                         ----------------    ---------------    ---------------
             Net cash from financing activities                               (4,998,344)       (18,572,389)        40,242,569
                                                                         ----------------    ---------------    ---------------

                Net change in cash and cash equivalents                        6,869,056        (10,173,853)        10,613,181
         Cash and cash equivalents:
           Beginning of period                                                 2,376,959         12,550,812          1,937,631
                                                                         ----------------    ---------------    ---------------
           End of period                                                 $     9,246,015     $    2,376,959     $   12,550,812
                                                                         ================    ===============    ===============

          Supplemental disclosure of cash flow information:

          Cash paid for interest expense                                 $  2,151,058        $    3,356,692     $    2,599,547

          Supplemental disclosure of noncash investing activities:
          Par value of mortgage loans securitized                        $ 48,236,448        $  171,639,196     $   54,137,028
</TABLE>

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



                                      -53-



<PAGE>   54

                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

1.      Summary of significant accounting policies

        Principles of Consolidation and Nature of Operations The consolidated
        financial statements of University Bancorp, Inc. (the Company) include
        the operations of its wholly-owned subsidiary, University Bank (the
        Bank), the Bank's wholly-owned 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 its 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
        $54,535,558 as of December 31, 1998, 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 $95,000,000 as of December 31, 1998, are not included in the
        Company's consolidated balance sheet. The Bank uses brokers to arrange
        time deposits, and during 1998, a significant portion of the Bank's time
        deposits were brokered deposits (See Note 8).

        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 Note 4.) 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 housing tax credits through 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 Washtenaw
        County, Michigan. While the loan portfolio is diversified, the
        customers' ability to honor their debts is partially dependent on the
        local economy. The Ann Arbor area is primarily dependent on the
        education, healthcare, services, and manufacturing (automotive and
        other) industries. Most real estate loans are secured by 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.




                                      -54-
<PAGE>   55


                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

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, 1998, which began
        operations in May, 1993. At December 31, 1998, the Company owned $67,977
        in bonds issued by the BIDCO. If there were a conversion of outstanding
        convertible bonds, the Bank and the Company would together own 12.17%
        and 15.61% at December 31, 1998 and 1997. 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 29.4%. 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 $1,486,239 at December 31, 1998.

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




                                      -55-
<PAGE>   56


                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998


1.      Summary of significant accounting policies (continued)

        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.

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

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

        Premises and equipment
        Bank premises and equipment are stated at cost less accumulated
        depreciation. 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.




                                      -56-

<PAGE>   57



                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998


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 allows an employee to contribute up to 15% of salary
        pre-tax, to the allowable limit prescribed by the Internal Revenue
        Service. Management has discretion to make matching contributions to the
        Plan. However, no matching contributions were made by the Bank for the
        years ended December 31, 1998, 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. In
        addition, the Bank cannot pay a dividend until it has net retained
        earnings. The retained earnings deficit of the Bank at December 31,1998
        and 1997 was $624,615 and $490,509 respectively.

        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.

        Comprehensive Income (Loss):
        Under a new accounting standard, comprehensive income is now reported
        for all periods. Comprehensive income (loss) includes both net income
        and other comprehensive income. Other comprehensive income includes the
        change in unrealized gains and losses on securities available for sale.

        Reclassifications
        Certain amounts for 1997 and 1996 have been reclassified to conform with
        the 1998 presentation.

        Segment Reporting

        The Corporation's segments are determined by the products and services
        offered, primarily distinguished between banking and mortgage banking
        operations. Loans, investments, and deposits provide the revenues in the
        banking operation, and servicing fees, underwriting fees and loan sales
        provide the revenues in mortgage banking. All operations are domestic.



                                      -57-
<PAGE>   58



                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998


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.


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, 1998 and 1997:


<TABLE>
<CAPTION>

                                December 31, 1998
                                                       -----------------
                                        Amortized       Gross Unrealized         Fair
                                           Cost         Gains      Losses        Value
----------------------------------------------------------------------------------------
<S>                                   <C>               <C>     <C>           <C>
        U.S. agency mortgage-backed   $2,191,000        4,000   $ (136,000)   $2,059,000
        Other mortgage-backed            421,000        4,000           --       425,000
        U.S. Treasury                    467,000           --      (25,000)      442,000
        U.S. agency equity               848,000           --      848,000
        Other equity                      50,000           --      (30,000)       20,000
----------------------------------------------------------------------------------------
        Total securities
          available for sale          $3,977,000   $    8,000   $ (191,000)   $3,794,000
                                      ==========   ==========   ==========    ==========
<CAPTION>

                                December 31, 1997
                                                       -----------------
                                       Amortized        Gross Unrealized          Fair
        (in thousands)                 Cost             Gains      Losses         Value
----------------------------------------------------------------------------------------
<S>                                   <C>         <C>          <C>           <C>
         U.S. agency mortgage-backed    $509,000   $    9,000   $       --    $  518,000
         Other mortgage-backed           561,000           --      (28,000)      533,000
         U.S. agency equity              848,000           --           --       848,000
         Other equity                     44,000       37,000           --        81,000
----------------------------------------------------------------------------------------
         Total securities
         available for sale           $1,962,000   $   46,000   $  (28,000)   $1,980,000
                                      ==========   ==========   ==========    ==========
</TABLE>

        Investment securities with an amortized cost of approximately $3,077,000
        at December 31, 1998 and $1,068,000 at December 31, 1997 were pledged to
        secure certain borrowings.
<TABLE>
<CAPTION>

        Sales of available for sale securities             1998               1997                 1996
                                                           ----               ----                 ----
<S>                                                    <C>                <C>                <C>
                 Proceeds                              $  142,088         $5,907,489         $10,888,145
                 Realized gains                            97,993             70,881             433,222
                 Realized losses                                -             63,166              33,940
</TABLE>

        The scheduled maturity date of the securities available for sale at
December 31, 1998 is:

<TABLE>
<CAPTION>
                                                   Amortized               Fair
                                                     Cost                 Value
<S>                                           <C>                   <C>
                            1999                $          0          $          0
                       2000-2003                       2,000                 2,000
                       2004-2008                     503,000               506,000
                     After  2008                   3,472,000             3,794,000
                                                ------------          ------------
                                                $  3,977,000          $  3,794,000
</TABLE>

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

                                      -58-
<PAGE>   59
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

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,
                                                  -----------------------------------------
                                                      1998           1997           1996
                                                      ----           ----           ----
<S>                                               <C>            <C>            <C>
Origination and other fees                        $ 2,154,871    $ 1,521,292    $   609,499
Gain on sale and securitization of
  mortgages                                         2,620,971      2,993,448      1,180,289
Loan servicing and subservicing fees, net             515,780        412,075        573,292
                                                  -----------    -----------    -----------

Mortgage banking income reflected in statements
  of operations                                     5,291,622      4,926,815      2,363,080
Gain on sale of servicing rights                            -              -        256,840

Market value adjustments  included in other
  operating expense                                       983             -               -

Interest income allocation                          2,020,265      1,699,400      1,310,062
Interest expense allocation                        (1,269,149)
                                                                  (1,332,100)      (927,578)
Operating expense allocation                       (5,590,558)    (5,003,798)    (2,625,456)
                                                  -----------    -----------    -----------
Pretax profit (loss) from secondary
market activities                                 $   453,162    $   290,317    $   376,948
                                                  ===========    ===========    ===========
</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,
                                         ------------------------
                                  1998             1997             1996
                                  ----             ----             ----
<S>                           <C>           <C>              <C>
Loans held for sale,
 January 1                      18,156,671    $  30,534,574    $   7,983,154

Origination or acquisition
 of loans held for sale        525,438,872      401,294,972      193,356,147

Sale of loans originated
 for sale                     (483,496,430)    (242,033,679)    (116,667,699)
Securitization of loans        (48,236,448)    (171,639,196)     (54,137,028)
                             -------------    -------------    -------------


Loans held for sale,
 December 31                 $  11,862,665    $  18,156,671    $  30,534,574
                             =============    =============    =============
</TABLE>

        The bank and third parties will alternatively provide funding sources
        for the mortgage banking pipeline. Included within other liabilities at
        December 31, 1998 and 1997 are $5,065,281 and $3,300,000 of recently
        closed loans which the Bank is funding internally.


                                      -59-
<PAGE>   60

                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998



4.      Secondary mortgage market operations (continued)
        The aggregate market value of the loans held for sale exceeded the cost
        at December 31, 1998, 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 $95,000,000, $125,000,000, and $214,000,000
        at December 31, 1998, 1997 and 1996, 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 $116,179,291 in 1998 and $321,896,000 in
        1997.

        Custodial balances maintained in connection with the foregoing loan
        servicing were $1,670,138, $425,756, and $1,064,650 at December 31,
        1998, 1997 and 1996, respectively.

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

<TABLE>
<S>                                              <C>
        Balance, January 1, 1996                   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
        Additions                                     48,484
        Bulk sale of servicing                             0
        Amortization                                (530,466)
                                                 -----------
        Balance, December 31, 1998               $   948,208
                                                 ===========
</TABLE>

        There was no valuation allowance necessary at December 31, 1998, 1997 or
        1996. Additions to mortgage servicing rights in 1998 consisted of
        purchased rights of $0 and originated rights of $48,484. 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, 1998
and 1997:

<TABLE>
<CAPTION>
                                                     1998                         1997
                                                 ------------                ------------
<S>                                              <C>                         <C>
                Commercial                       $  7,931,824                $ 11,056,374
                Real estate - mortgage              8,658,285                   8,836,241
                Real estate - construction          1,572,522                   1,584,390
                Installment                         5,489,472                   6,759,178
                                                 ------------                ------------
                                                   23,652,103                  28,236,183
                Allowance for loan losses            (459,001)                   (520,953)
                                                 ------------                ------------
                Net loans                        $ 23,193,102                $ 27,715,230
                                                 ============                ============
</TABLE>

                                      -60-



<PAGE>   61

                  UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                  Notes to Consolidated Financial Statements
                              December 31, 1998






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

<TABLE>
<CAPTION>
                                                                1998                    1997                     1996
                                                             ---------                ---------                ---------
<S>                                                          <C>                      <C>                      <C>
        Balance at beginning of period                       $ 520,953                $ 297,783                $ 317,185
        Provision charged to operating expense                 118,433                  260,000                  190,500
        Recoveries                                              76,283                   46,435                   14,757
        Charge-offs                                           (256,668)                 (83,265)                (224,659)
                                                             ---------                ---------                ---------
        Balance, end of year                                 $ 459,001                $ 520,953                $ 297,783
                                                             =========                =========                =========
</TABLE>

        Past due and non accrual loans are as follows:

<TABLE>
<CAPTION>
                                                               1998                   1997
                                                             --------               --------
<S>                                                          <C>                    <C>
        Past due loans
          90 days and more and still accruing:
             Real estate                                     $  4,430               $233,697
             Installment loans                                     --                  5,556
             Commercial loans                                $     --                 95,643
                                                             --------               --------
                                                             $  4,430               $534,896
                                                             ========               ========

        Non accrual loans:
             Real estate                                     $467,402               $532,821
             Installment loans                                     --                 44,409
             Commercial loans                                      --                  9,479
                                                             --------               --------
                                                             $467,402               $586,709
                                                             ========               ========
</TABLE>


6.      Impaired Loans
        Information regarding impaired loans for the years ended December 31, is
as follows:

<TABLE>
<CAPTION>
                                                                           1998                  1997
                                                                           ----                  ----
<S>                                                                      <C>                   <C>
        Impaired loans:
             Loans with no allowance allocated                           $     -               $ 34,255
        Loans with allowance allocated                                         -                314,201
             Amount of allowance for loan losses allocated                     -                 10,085
</TABLE>

<TABLE>
<CAPTION>
                                                                 1998                  1997
                                                                 ----                  ----
<S>                                                           <C>                    <C>
        Impaired loans:
             Average balance during the year                  $ 92,687               $227,345
             Interest Income recognized thereon                  7,079                  1,097
        Cash-basis interest income recognized                    7,079                  1,097
</TABLE>



7.      Premises and equipment
        Premises and equipment classifications at December 31, 1998 and 1997 are
        summarized as follows:

<TABLE>
<CAPTION>
                                                            1998                        1997
                                                         -----------                -----------
<S>                                                      <C>                        <C>
        Land                                             $   133,290                $   163,290
        Buildings and improvements                           991,007                  1,184,292
        Furniture, fixtures, and equipment                 1,272,126                  1,407,928

                                                           2,396,423                  2,755,510
        Less accumulated depreciation                       (956,983)                  (916,315)
                                                         -----------                -----------
        Net                                              $ 1,439,440                $ 1,955,919
                                                         ===========                ===========
</TABLE>


        Depreciation expense amounted to $269,698, $242,376, and $279,807 for
        the years ended December 31, 1998, 1997 and 1996, respectively.


                                      -61-


<PAGE>   62

                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

7.        Premises and equipment (continued)

        The Bank leases its ATM Drive-thru location in Ann Arbor for $24,000 per
        year. Varsity Funding and Varsity Mortgage lease space for their offices
        for $44,771 and $61,533 per year, respectively, and Midwest leases its
        space for a nominal amount from the city of Houghton. Total rental
        expense for the operating leases was $156,633 in 1998, $131,774 in 1997,
        and $74,831 in 1996. As of December 31, 1998, the Corporation had no
        minimum rental commitments under noncancelable operating leases. The
        Bank had an annual minimum rent as of December 31, 1998 of $24,000, with
        a total minimum amount of future rent payable over the next 7 years of
        $168,000. Varsity had an annual minimum rent as of December 31, 1998 of
        $106,304, with a total minimum amount of future rent payable over the
        next two years of $174,182.

        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, 1998, 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 $154,000.

        In May 1995, the Bank purchased a building in Ann Arbor, Michigan. The
        Bank leases 42% of the building to the University of Michigan. The lease
        calls for minimum payments of $68,000 (adjusted annually for inflation)
        plus the pro rata share of the building's expenses. The lease was
        renewed in 1998 for another three years.

8.      Time deposits

        Time deposit liabilities issued in denominations of $100,000 or more at
        December 31, 1998 and 1997, were $15,445,336 and $12,208,952,
        respectively.

        At year-end 1998, stated maturities of time deposits were:

<TABLE>
<S>                                                         <C>
                                   1999                        $21,526,094
                                   2000                          2,493,084
                                   2001                            438,550
                                   2002                            346,137
                                   2003                              5,204
                             thereafter                             58,300
                                                               -----------
                                                               $24,867,369
                                                               ===========
</TABLE>

        At December 31, 1998 and 1997, the Bank had issued through brokers
        $10,687,000 and $5,334,000 of time deposits with a maturity of 1-60
        months which are included in the table above.

        Related party deposits totaled $278,003 and $473,978 at year-end 1998
and 1997.


9.      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. No options were exercised in 1998. Options
        covering 15,000 shares were exercised during 1997. Options granted on
        45,000 shares remain outstanding under this plan at December 31, 1998.


                                      -62-
<PAGE>   63


                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

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

        Granted - 1998 ($0.47 Fair Value)                         67,500                    3.00
        Exercised - 1998                                              --                   --
        Forfeited - 1998                                        (346,697)                   3.16
                                                              ----------                --------
        Outstanding at December 31, 1998                         180,750                $   2.83
                                                              ==========                ========
</TABLE>


        Options outstanding have been restated for a 3 for 2 stock split in
        1998. Options allowable for grant under the plan are not adjusted
        without shareholder approval. Due to forfeitures in 1998 prior to the
        split, the number of shares allowable for grant did not require
        adjustment, and the number of options has remained within allowable
        amounts.

<TABLE>
<S>                                                                          <C>
        At December 31, 1998
        Number of options immediately exercisable                                     119,250
        Weighted average exercise price of immediately
           exercisable options                                                          $2.72
        Range of exercise price of options outstanding                          $2.08 - $3.33
        Weighted-average remaining life of options outstanding                      3.5 years
</TABLE>


                                      -63-

<PAGE>   64


                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

9.      Stock options (continued)
        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 1998 and 1997, because options were
        granted at exercise prices equal to the underlying stock prices at date
        of grant. At year-end 1998, 169,370 shares were authorized for future
        grants.

<TABLE>
<CAPTION>
                                                                          1998                      1997
                                                                          ----                      ----
<S>                                                                    <C>                      <C>
        Estimated fair value stock options granted:
              Assumptions used:
                Risk-free interest rate                                     4.55%                     5.7%
                Expected option life                                    3.5 years                      2 years
                Expected stock price volatility                             3.6%                       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                                                (210,799)                 (1,154,765)
                Loss per share                                            $(0.11)                  $(0.60)
</TABLE>

10.     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 $144,000 and $205,000 as of December 31, 1998
        and 1997, respectively. The assets of the plan are comprised entirely of
        shares of the Corporation, 67,800 and 63,074 shares at December 31, 1998
        and 1997, respectively, all of which were fully allocated at December
        31, 1998. 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, 1998, 1997 and 1996 of 16,445, 9,906, and 4,050
        shares of common stock with an approximate fair market value at the time
        of the contribution of $53,445, $36,322, and $15,056, respectively.

11.     Commitments and contingencies
        The Bank and Varsity Mortgage are 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, 1998 and
        1997:

<TABLE>
<CAPTION>
                                                    1998                     1997
                                                    ----                     ----
<S>                                             <C>                       <C>
        Commitments to buy loans                $31,111,200               $35,356,400
        Unused lines of credit                    7,010,000                 5,364,049
        Commitments to sell loans               $22,861,600               $21,184,400
</TABLE>


                                      -64-
<PAGE>   65

                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

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 purchased participations from the BIDCO and 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>
                                                    1998                     1997                     1996
                                                  --------                 ---------                --------
<S>                                              <C>                      <C>                      <C>
        Current expense (benefit)                $  71,691                $(257,738)               $(329,533)
        Deferred expense (benefit)                (270,283)                 (35,080)                 (29,225)
        Total year                               $(198,592)               $(292,818)               $(358,758)
</TABLE>

        The net deferred tax asset at December 31, 1998 and 1997 is comprised of
the following:

<TABLE>
<CAPTION>
                                                                           1998                     1997
                                                                         --------                 --------
<S>                                                                     <C>                      <C>
        Loans available for sale                                        $     358                $   8,134
        Core deposit intangible                                                --                      190
        Allowance for loan losses                                          92,042                  121,232
        Temporary differences from LLCs                                    32,582                    6,450
        Nonaccrual loan interest income                                    12,164                    7,395
        Net Operating Loss Carryforward                                   222,092                  172,417
        Tax Credit Carryforward                                           400,511                  278,197
        Unrealized loss on investment available for sale                   62,216                        -
                                                                        ---------                ---------
        Deferred tax assets                                               821,965                  594,015
                                                                        =========                =========
        Unrealized gain on investments available for sale                       -                   (6,320)
        Servicing rights                                                  (65,971)                (153,886)
        Other                                                             (18,906)                  (8,682)
                                                                        ---------                ---------
        Deferred tax liabilities                                          (84,877)                (168,798)
                                                                        =========                =========
        Net deferred tax asset                                            737,088                  426,217
        Valuation allowance for deferred tax assets                      (360,000)                (325,000)
        Net Deferred Tax Asset                                          $ 377,088                $ 100,217
                                                                        =========                =========
</TABLE>

        The Company has net operating loss carryforwards of approximately
        $620,000 which expire 2017; and general business credit carryforwards of
        approximately $320,000 which expire in 2017. In addition, the Company
        has an alternative minimum tax (AMT) credit carryforward of
        approximately $83,000. Under current tax regulations, the AMT credit can
        be carried forward indefinitely. Management has established an allowance
        for deferred tax assets that are not considered realizable at both
        December 31, 1997 and 1998.


                                      -65-

<PAGE>   66


                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

        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>
                                                                        1998                      1997                    1996
                                                                      ---------                ---------                ---------
<S>                                                                   <C>                      <C>                      <C>
        Statutory rate applied to income before taxes                 $(134,858)               $(479,652)               $(304,475)
        Add (Deduct)
           Undistributed earnings of
             unconsolidated subsidiary                                  (38,837)                  24,495                  (17,102)
           Tax Credits                                                 (122,314)                (118,742)                       -
           Change in valuation allowance                                 35,000                  185,000                        -
           Other                                                         62,416                   96,081                  (37,181)
                                                                      ---------                ---------                ---------
        Current year provision (benefit) for income tax               $(198,592)               $(292,818)               $(358,758)
                                                                      =========                =========                =========
</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 $826,000 and $922,688
        at December 31, 1998 and 1997. 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:

<TABLE>
<S>                                                              <C>
                           1999                                     $132,000
                           2000                                     $132,000
                           2001                                     $132,000
                           2002                                     $132,000
                           2003                                     $132,000
                           Thereafter                               $166,000
                                                                    --------
                           Total                                    $826,000
</TABLE>

        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 $647,097 at December 31, 1998
        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:

<TABLE>
<S>                                                             <C>
                           1999                                    $ 145,000
                           2000                                     $142,000
                           2001                                     $140,000
                           2002                                     $137,000
                           2003                                     $ 85,097
                                                                  ----------
                           Total                                    $647,097
</TABLE>

15.     Federal Home Loan Bank advances
        At December 31, 1998, the Bank has a line of credit from the Federal
        Home Loan Bank (the FHLB) in the amount of $6,500,000. There were no
        outstanding advances from the FHLB at December 31, 1998.

        Advances are secured by the pledge of specific mortgage loans held for
        investment with unpaid principal balances of $4,880,656 and
        available-for-sale securities with a balance of $3,076,709.

16.    Earnings per share
       Due to the net losses in 1998, 1997, and 1996, 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.


                                      -66-
<PAGE>   67

                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

17.     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>
1998      10%         13.1%    $  4.4            6%        11.8%    $  3.9          5%        7.2%    $  3.9
1997      10%         11.3%    $  4.5            6%        10.0%    $  4.0          5%        7.1%    $  4.0
</TABLE>

        At year-end 1998, the Bank was categorized as well capitalized.


18.     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 commitments to
       extend credit and the fair value of letters of credit are considered
       immaterial.

                                      -67-
<PAGE>   68

                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998


18. Fair Value of Financial Instruments (continued)

        The carrying amounts and fair values of the Company's financial
instruments were as follows:

<TABLE>
<CAPTION>
                                                                                       December 31, 1998
                                                                                       -----------------
                                                                                   Carrying               Fair
                                                                                   Amount                Value
                                                                                   ------                -----
<S>                                                                              <C>               <C>
        Financial Assets
        Cash and short term investments                                          $ 9,246,000       $  9,246,000
        Securities Available for sale                                              2,946,000          2,946,000
        Federal Home Loan Bank stock                                                 848,000            848,000
        Loans held for sale                                                       11,863,000         12,007,000
        Loans, net                                                                23,193,000         23,452,000
        Mortgage servicing rights                                                    948,000            950,000
        Accrued interest receivable                                                  116,000            116,000

        Financial Liabilities
        Deposits                                                                  43,220,000         43,364,000
        Mortgage escrow                                                              141,000            141,000
        Short term borrowings                                                        277,000            277,000
        Long term borrowings                                                       1,239,000          1,239,000
        Drafts Payable                                                             5,065,000          5,065,000
        Accrued interest payable                                                     415,000            415,000
</TABLE>

<TABLE>
<CAPTION>
                                                                                       December 31, 1997
                                                                                       -----------------
                                                                                   Carrying             Fair
                                                                                   Amount              Value
                                                                                   ------              -----
<S>                                                                             <C>                <C>
        Financial Assets
        Cash and short term investments                                         $  2,377,000       $  2,377,000
        Securities Available for sale                                              1,980,000          1,980,000
        Loans held for sale                                                       18,157,000         18,246,000
        Loans, net                                                                27,715,000         27,835,000
        Mortgage servicing rights                                                  1,430,000          1,583,000
        Accrued interest receivable                                                  184,000            184,000

        Financial Liabilities
        Deposits                                                                  45,267,000         45,404,000
        Mortgage escrow                                                               87,000             87,000
        Short term borrowings                                                      2,744,000          2,744,000
        Long term borrowings                                                       1,749,000          1,749,000
        Drafts Payable                                                             3,556,000          3,556,000
        Accrued interest payable                                                     211,000            211,000
</TABLE>



19.     Segment Reporting

        The Corporation's operations include two primary segments: banking and
        mortgage banking. Through its banking subsidiary's branch in Ann Arbor,
        the Corporation provides traditional community banking services such as
        accepting deposits, making loans, and providing cash management services
        to individuals and local businesses. Mortgage banking activities include
        the origination and purchase of residential mortgage loans for sale to
        various investors as well as providing servicing of mortgage loans for
        others.
                                      -68-

<PAGE>   69
                    UNIVERSITY BANCORP, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 1998

19.     Segment Reporting (continued)

        The Corporation's two reportable segments are strategic business units
        that are separately managed as they offer different products and
        services and have different marketing strategies. In addition, the
        mortgage banking segment services a different customer base than the
        banking segment.

        The segment financial information provided below has been derived from
        the internal profitability reporting system used by management to
        monitor and manage the financial performance of the Corporation. The
        accounting policies of the two segments are the same as those described
        in the summary of significant accounting principles. The Corporation
        evaluates segment performance based on profit or loss before income
        taxes, not including nonrecurring gains and losses. Certain indirect
        expenses have been allocated based on actual volume measurements and
        other criteria, as appropriate. The Corporation accounts for
        intersegment revenue and transfers at current market prices.


Operating Segment Data
Information about reportable segments follows.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                        Mortgage
                                         Banking        Banking               Other         Totals
------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>               <C>            <C>
 Interest revenue                        $1,990,345     $2,020,265                 $0     $4,010,610
 Other  revenue  ---  external            7,185,638      2,670,651            128,219      9,984,508
         customers
 Interest expense                         1,089,537      1,269,149                  0      2,358,686
 Depreciation and amortization              225,618         95,657                  0        321,275
 Other significant noncash items:
 Provision for loan losses                  423,068         35,932                  0        459,000
 Net gain on sale of loans                        0      2,620,971                         2,620,971
 Impairment of mortgage
         servicing rights
 Income tax expense                        (88.592)                                 0       (88,592)
 Segment profit                           (779,430)        453,162            128,219      (198,049)
 Segment assets                          23,789,544     30,033,543            657,756     54,480,843
 Expenditures for additions to               51,437         29,172                  0         80,609
         premises
------------------------------------------------------------------------------------------------------
</TABLE>

Amounts presented in the "other" column reflect the Corporation's investment in
Michigan BIDCO. Segment profit is measured before allocation of corporate
overhead and income tax expense. Transactions between segments are reported at
cost (fair value.) Refer to note 4 for mortgage banking segment information
provided for prior periods.


                                      -69-

<PAGE>   70

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

                             CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                                   December 31,       December 31,
                                                                                      1998               1997
                                                                                 ---------------   ---------------
<S>                                                                            <C>               <C>
          ASSETS
          Cash and cash equivalents                                              $       33,702    $       41,676
          Securities available for sale (Note 2)                                         20,328            81,504
          Michigan BIDCO senior convertible debentures                                   67,977           200,916
          Investment in subsidiary Bank                                               3,736,157         3,958,927
          Tax Assets                                                                     78,890           869,462
          Other Assets                                                                    2,458             9,866
                                                                                 ---------------   ---------------
            Total Assets                                                         $    3,939,512 $       5,162,351
                                                                                 ===============   ===============



          LIABILITIES AND SHAREHOLDERS' EQUITY
          Note payable                                                           $      826,000 $         922,688
          Accounts payable                                                               13,325            57,216
          Accrued interest payable                                                       15,654            15,459
          Tax Liabilities                                                                     0           768,544
                                                                                 ---------------   ---------------
          Total Liabilities                                                             854,979         1,763,907
          Stockholders Equity                                                         3,084,533         3,398,444
                                                                                 ---------------   ---------------
           Total Liabilities and Stockholders Equity                             $    3,939,512    $    5,162,351
                                                                                 ===============   ===============
</TABLE>


                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                   1998               1997              1996
                                                              ----------------   ---------------   ---------------
<S>                                                           <C>                <C>               <C>
          Income:
             Dividends from subsidiary                                      -                 -                 -
             Interest & dividends on investments                       21,190            20,048            19,635
             Net security gains                                        97,993            41,155            44,598
             Other income                                     $        59,743    $           88    $       19,272
                                                              ----------------   ---------------   ---------------
                         Total Income                                 178,926            61,291            83,505
          Expense:
             Interest                                                  88,894           108,195            85,867
             Salaries & benefits                                       35,509             1,866                 0
             ESOP contributions                                        53,595            37,818            15,056
             Public listing                                            23,806            59,123            33,498
             Audit & legal                                             23,749            47,519            52,321
             Other taxes                                                2,634             2,507             3,020
             Occupancy & other miscellaneous                           14,682            19,106            18,574
                                                              ----------------   ---------------   ---------------
                         Total Expense                                242,869           276,133           208,335
</TABLE>


                                      -70-

<PAGE>   71



20.       University Bancorp (Parent Company Only) Condensed Financial
Information (continued)

<TABLE>
<S>                                                           <C>                <C>               <C>
          Income (loss) before federal income taxes
              (benefit) and equity in undistributed
              net income (loss) of subsidiaries                       (63,943)         (214,842)         (124,830)
          Federal income taxes (benefit)                                    0           (70,472)          (35,000)
                                                              ----------------   ---------------   ---------------
          Income (loss) before equity in
               undistributed net income of subsidiaries               (63,943)         (144,370)          (89,830)
          Equity in undistributed net income (loss)
               of subsidiaries.                                      (134,106)         (973,554)         (446,928)
                                                              ----------------   ---------------   ---------------
          Net Loss                                            $      (198,049)   $   (1,117,924)   $     (536,758)
                                                              ================   ===============   ===============
</TABLE>


                                      -71-


<PAGE>   72
           UNIVERSITY BANCORP, INC. (The Parent)

           Condensed Statement of Cash Flows

<TABLE>
<CAPTION>
                                                                                            For Year Ended
                                                                              1998               1997               1996
                                                                         ---------------    ---------------    ---------------
<S>                                                                    <C>                <C>                <C>
           Reconciliation of net income (loss) to net cash used in
             operating activities:
              Net Income (Loss)                                        $       (198,049)  $     (1,117,924)  $       (536,758)
             Contribution to ESOP                                                53,595             37,818             15,056
             Loss(gain) on sale of investments                                  (97,993)           (41,155)           (44,598)
              Decrease/(Increase) in receivable from affiliate                  790,572            675,465                  0
              Decrease/(Increase) in Other Assets                                 7,408           (660,594)          (138,698)
              Increase(Decrease) in interest payable                                195              5,175            (14,196)
              Increase(Decrease) in other liabilities                          (938,635)           (90,022)           206,192
              Decrease(Increase) investment in subsidiaries                     222,771            920,576            446,928
                                                                         ---------------    ---------------    ---------------
                Net cash provided by (used in) operating activities            (160,136)          (270,661)           (66,074)
                                                                         ---------------    ---------------    ---------------

          Cash flow from investing activities:
            Subsidiary dividends received                                             0                  0                  0
            Contributions of capital to subsidiary                                    0           (350,000)           (66,750)
            Advances to Michigan BIDCO                                          157,436                  0                  0
            Purchase of available for sale securities                           (50,000)           (55,309)           (97,442)
            Proceeds from sale of available for sale securities                 179,497            166,498            138,216
                                                                         ---------------    ---------------    ---------------
                Net cash provided by (used in) investing activities             286,933           (238,811)           (25,976)
                                                                         ---------------    ---------------    ---------------

          Cash flow from financing activities:
            Principal payment on notes payable                                  (96,687)           (39,812)           (37,500)
            Proceeds from sale of common stock                                        0            551,410             91,870
            Purchase of treasury stock                                          (38,084)            (1,563)          (161,075)
                                                                         ---------------    ---------------    ---------------
                Net cash provided by (used in) financing activities            (134,771)           510,035           (106,705)
                                                                         ---------------    ---------------    ---------------

              Net changes in cash and cash equivalents                           (7,974)               563           (198,755)

          Cash and cash equivalents:
            Beginning of year                                                    41,676             41,113            239,868
                                                                         ---------------    ---------------    ---------------

            End of period                                                $       33,702     $       41,676     $       41,113
                                                                         ===============    ===============    ===============

         Supplemental disclosure of cash flow information: Cash paid during the
          year for:
            Interest                                                     $       88,699     $       92,736     $      100,062
            Income Tax                                                                0                  0                  0
</TABLE>



                                      -72-
<PAGE>   73


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.

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 1999 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





                                      -73-
<PAGE>   74


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, 1998
and December 31, 1997, and consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996, of
the Company.

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

         (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")).

                  3.1.1 Certificate of Amendment, dated June 10, 1998, of the
Company's Certificate of Incorporation (incorporated by reference to Exhibit
3.1.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 (the "June 30, 1998 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 (incorporated by reference to Exhibit
10.1 to the Company's Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 10-K")).

                  10.2 University Bancorp, Inc. Employee Stock Ownership Plan
(the "ESOP"), as amended November 27, 1990 (incorporated by reference to Exhibit
10.2 to the Company's Annual Report on Form 10-K for the year ended December 31,
1990 10-K). *

                  10.2.1 Amendment to the ESOP, effective as of December 31,
1991 (incorporated by reference to Exhibit 10.2.A to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991 10-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")). *



                                      -74-
<PAGE>   75


                  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 Company's Annual Report on Form 10-K for the
year ended December 31, 1992 (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 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).

                  10.9.1 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).

                  10.9.2 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).

                  10.10 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). *



                                      -75-
<PAGE>   76

                  10.10.1 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). *

                  10.11 Revised Net Branch Agreement, dated October 1, 1997,
regarding Varsity Funding Services, L.L.C., among University Bank, Jess
Monticello and William Cook (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the
"1997 10-K")). *

                  10.12 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"). *

                  10.13 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.

         (27) Financial Data Schedule (EDGAR version only)




                                      -76-
<PAGE>   77


                                   SIGNATURES

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


                              UNIVERSITY BANCORP, INC.


                              By:      /s/Stephen Lange Ranzini
                                       -----------------------------------
                                       Stephen Lange Ranzini,
                                       President, Chief Executive
                                         Officer and
                                       Chief Accounting Officer


                              Date: March 30, 1999
                                    --------------

         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.


<TABLE>
<CAPTION>

         Signature                        Title                            Date
         ---------                        -----                            ----
<S>                               <C>                                <C>
/s/Stephen Lange Ranzini           Director, President,               March 30, 1999
--------------------------         Chief Executive Officer,
Stephen Lange Ranzini              Chief Accounting Officer


/s/Joseph L. Ranzini               Director, Secretary,               March 30, 1999
--------------------------
Joseph L. Ranzini Chairman

/s/Keith Brenner                   Director                           March 30, 1999
--------------------------
Keith E. Brenner

/s/Mildred Lange Ranzini           Director                           March 30, 1999
--------------------------
Mildred Lange Ranzini

/s/Michael Talley                  Director                           March 30, 1999
--------------------------
Michael Talley

/s/Robert Goldthorpe               Director                           March 30, 1999
--------------------------
Robert Goldthorpe

/s/Dr. Joseph L. Ranzini           Director                           March 30, 1999
--------------------------
Dr. Joseph Lange Ranzini

/s/Paul Lange Ranzini              Director                           March 30, 1999
--------------------------
Paul Lange Ranzini
</TABLE>






                                      -77-
<PAGE>   78


                               Index of Exhibits

<TABLE>
<CAPTION>
                                                                              Sequentially
       Exhibit No. and Description                                            Numbered Page
       ---------------------------                                            -------------
<S>    <C>                                                                          <C>
(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 June 30, 1996 10-Q").

3.1.1    Certificate of Amendment, dated June 10, 1998, of the Company's
         Certificate of Incorporation (incorporated by reference to Exhibit
         3.1.1 to the June 30, 1998 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 (incorporated by reference to Exhibit 10.1
         to the 1997 10-K"))

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).
</TABLE>


                                      -78-
<PAGE>   79


<TABLE>
<S>     <C>
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).

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     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).

10.9.1   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).

10.9.2   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).

10.10    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).

10.10.1  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).

10.11    Revised Net Branch Agreement, dated October 1, 1997, regarding Varsity
         Funding Services, L.L.C., among University Bank, Jess Monticello and
         William Cook (incorporated by reference to Exhibit 10.12 to the 1997
         10-K")).

</TABLE>



                                      -79-
<PAGE>   80

<TABLE>
<S>     <C>                                                                         <C>
10.12    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).

10.13    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.                                                 81

(27)     Financial Data Schedule                                                     82


</TABLE>



                                      -80-