<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------------------
Commission file number 0-22767
-----------------------------------------
D&N Capital Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1517665
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Quincy Street, Hancock, Michigan 49930
------------------------------------------------------------------
(Address of principal executive offices)
(906) 482-2700
------------------------------------------------------------------
(Registrant's telephone number, including area code)
------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $300 par value 31,781
- ------------------------------------------- -----------------------------
Series A Preferred Shares, $25.00 par value 1,210,000
- ------------------------------------------- -----------------------------
(Class) (Shares Outstanding as of
October 31, 1997)
================================================================================
<PAGE> 2
D&N CAPITAL CORPORATION
INDEX
Page No.
--------
PART I Statement of Condition - September 30, 1997 3
Statement of Income - Three months ended
September 30, 1997 4
Statement of Changes in Stockholders' Equity -
Three months ended September 30, 1997 5
Statement of Cash Flows - Three months ended
September 30, 1997 6
Notes to Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II Other Information 13
- 2 -
<PAGE> 3
D&N CAPITAL CORPORATION
STATEMENT OF CONDITION (UNAUDITED)
At September 30, 1997
(In thousands)
<TABLE>
<S> <C>
ASSETS:
Loans receivable:
Residential mortgage loans $52,759
Commercial mortgage loans 7,674
-------
Net loans receivable 60,433
Cash 1
Due from Parent 20
Accrued interest receivable 370
-------
TOTAL ASSETS $60,824
=======
LIABILITIES:
Preferred dividends accrued $ 0
-------
TOTAL LIABILITIES $ 0
-------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $25.00; 2,500,000
authorized, 1,210,000 issued and outstanding. $30,250
Common stock, par value $300.00 per share ;
250,000 shares authorized, 31,781 shares issued
and outstanding. 9,534
Additional paid-in capital 20,716
-------
Total paid-in capital 60,500
Retained earnings 324
-------
TOTAL STOCKHOLDERS' EQUITY $60,824
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $60,824
=======
</TABLE>
See Notes to Financial Statements.
- 3 -
<PAGE> 4
D&N CAPITAL CORPORATION
STATEMENT OF INCOME (UNAUDITED)
For the Three Months Ended September 30, 1997
(In thousands)
<TABLE>
<S> <C>
INTEREST INCOME:
Loans:
Residential mortgage loans $ 765
Commercial mortgage loans 128
------
Total loan interest income 893
Intercompany interest 5
------
TOTAL INTEREST INCOME 898
NONINTEREST EXPENSE:
Advisory fees 26
Other expenses 11
------
TOTAL NONINTEREST EXPENSE 37
NET INCOME $ 861
PREFERRED STOCK DIVIDEND REQUIREMENTS 537
------
NET INCOME APPLICABLE TO COMMON SHARES $ 324
======
NET INCOME PER SHARE $10.19
======
</TABLE>
See Notes to Financial Statements
- 4 -
<PAGE> 5
D&N CAPITAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
For the Three Months Ended September 30, 1997
(In thousands)
<TABLE>
<S> <C>
PREFERRED STOCK:
Balance at beginning of period $- 0 -
Issuance of preferred stock 30,250
-------
Balance at end of period $30,250
-------
COMMON STOCK:
Balance at beginning of period $ 1
Issuance of common stock 9,533
-------
Balance at end of period $ 9,534
-------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period $- 0 -
Issuance of common stock 22,247
Less: Offering costs 1,531
-------
Balance at end of period $20,716
-------
RETAINED EARNINGS
Balance at beginning of period $ - 0 -
Net Income 861
Common dividends -0-
Preferred dividend (537)
-------
Balance of end of period $ 324
-------
TOTAL STOCKHOLDERS' EQUITY $60,824
=======
</TABLE>
See Notes to Financial Statements.
- 5 -
<PAGE> 6
D&N CAPITAL CORPORATION
STATEMENT OF CASH FLOW (UNAUDITED)
For the Three months ended September 30, 1997
(In thousands)
OPERATING ACTIVITIES:
<TABLE>
<S> <C>
Net Income $ 861
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in:
Accrued interest receivable (370)
Due from Parent (20)
---------
Net cash provided by operating activities 471
---------
INVESTING ACTIVITIES:
Purchase of mortgage loans (63,188)
Principal payments received 2,755
---------
Net cash used by investing activities (60,433)
---------
FINANCING ACTIVITIES:
Proceeds from common stock issued 31,781
Proceeds from preferred stock issued 30,250
Offering costs (1,531)
Dividends paid (537)
---------
Net cash provided by financing activities 59,963
---------
NET INCREASE IN CASH --
CASH AT BEGINNING OF PERIOD 1
---------
CASH AT SEPTEMBER 30, 1997 $ 1
---------
</TABLE>
See Notes to Financial Statements.
- 6 -
<PAGE> 7
D&N CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
D&N Capital Corporation (the "Company"), is a Delaware corporation incorporated
on March 18, 1997 and created for the purpose of acquiring, holding and
managing real estate assets. The Company is a wholly-owned subsidiary of D&N
Bank (the "Bank"), a banking corporation organized under the laws of the State
of Michigan, which itself is wholly owned by D&N Financial Corporation, a
financial services holding company organized under the laws of the state of
Delaware.
On July 17, 1997, the Company offered to the public and sold, 1,210,000 shares
of the Company's 9.00% preferred stock, Series A, $25 par value per share,
totaling $30,250,000 (the "Series A Preferred Shares"), and sold to D&N Bank,
31,781 shares of the Company's common stock, $300 par value per share, totaling
$30,250,000 (the "Common Stock"). All shares of common stock are held by the
Bank. The Series A preferred shares are traded on NASDAQ as DNFCP.
The Company used the net proceeds raised from the initial public offering of
the Series A Preferred Shares and the sale of the Common Stock to the Bank to
purchase from the Bank, the Company's initial portfolio of $60,524,000, of
residential and commercial mortgage loans ("Mortgage Loans") at their estimated
fair values.
The unaudited financial statements of the Company are prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
financial position and the results of operations for the interim period
presented have been included.
NOTE 2: RELATED PARTY TRANSACTIONS
The Company has entered into an Advisory Agreement (the "Advisory Agreement")
with the Bank (the "Advisor") requiring an annual payment of $125,000. The
Bank provides advice to the Board of Directors and manages the operations of
the Company as defined in the Agreement. The Agreement has an initial term of
five years commencing on September 9, 1997 and automatically renews for
additional five year periods, unless the Company delivers a notice of
nonrenewal to the Bank as defined in the Advisory Agreement.
- 7 -
<PAGE> 8
Advisory fees totaled approximately $26,000 for the quarter ended September
30, 1997.
The Company also entered into two servicing agreements with the Bank for the
servicing of the commercial and residential mortgage loans. (The Bank in its
role as servicer under the terms of the servicing agreements is herein
referred to as the "Servicer"). Pursuant to each servicing agreement, the Bank
performs the servicing of the Mortgage Loans held by the Company, in accordance
with normal industry practice. The Servicing Agreements can be terminated
without cause upon a thirty day advance notice given to the Servicer. The
servicing fee is 0.375% of the outstanding principal balance for the
residential mortgage loans and commercial mortgage loans.
The $20,000 due from affiliates at September 30, 1997 consists primarily of
mortgage loan payments of principal received by the Servicer, for the benefit
of the Company.
NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Loans:
The book value and fair value of Mortgage Loans at September 30, 1997 are as
follows (in thousands):
<TABLE>
Book Value Fair Value
---------- ----------
<S> <C> <C>
Residential Mortgage Loans $52,759 $53,832
Commercial Mortgage Loans $7,674 $ 7,688
</TABLE>
Assets and liabilities in which fair value approximates carrying value:
The fair values of certain financial assets and liabilities carried at cost,
including cash, due from Parent, accrued interest receivable and accounts
payable, are considered to approximate their respective carrying value due to
their short-term nature and negligible credit losses.
- 8 -
<PAGE> 9
D&N CAPITAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal business of the Company is to acquire and hold and manage
residential and commercial mortgage loans ("Mortgage Loans") that will generate
net income for distribution to stockholders. The Company currently intends to
continue to acquire all its Mortgage Loans from The Bank consisting of whole
loans secured by first mortgages or deeds of trust on single-family residential
real estate properties or on commercial real estate properties.
On July 17, 1997, the Company offered and sold 1,210,000 shares of the
Company's 9.00% preferred stock, Series A, $25 par value per share, totaling
$30,250,000 (the "Series A Preferred Shares"), and sold to D&N Bank 31,781
shares of the Company's common stock, $300 par value per share, totaling
$30,250,000 (the "Common Stock"). All shares of common stock are held by the
D&N Bank. The Series A preferred shares are traded on NASDAQ as DNFCP.
The Company used the net proceeds raised from the initial public offering
of the Series A Preferred Shares and the sale of the Common Stock to the Bank,
to purchase from the Bank, the Company's initial portfolio of $60,524,000, of
residential and commercial mortgage loans ("Mortgage Loans") at their estimated
fair values.
The Bank administers the day-to-day activities of the Company in its role
as Advisor under the Advisory Agreement. The Bank also services the Company's
Mortgage Loans under each of the Servicing Agreements.
It is the intention of the Company and the Bank that any agreements and
transactions between the Company, and the Bank, are consistent with market
terms, including the price paid and received for Mortgage Loans, upon their
acquisition or disposition by the Company, or in connection with the servicing
of such Mortgage Loans. The requirement in the Certificate of Designation
establishing the Series A Preferred Shares that certain actions of the Company
be approved by a majority of the Independent Directors is also intended to
ensure fair dealing between the Company and the Bank.
RESULTS OF OPERATIONS
The Company reported net interest income for the quarter ended September
30,1997 of approximately $898,000. Interest income from residential and
commercial mortgage loans was $765,000 and $128,000, respectively. After a
deduction of approximately $26,000 in advisory fees and $11,000 in other
administrative expenses, the Company reported net income of approximately
$861,000 for the quarter ended September 30, 1997.
- 9 -
<PAGE> 10
The Company reported net income per common share of $10.19 for the quarter
ended September 30, 1997.
For the quarter ended September 30, 1997, the Company paid $537,000 in
preferred stock dividends. Dividends on the common stock are paid to the Bank
when, as and if declared by the Board of Directors of the Company out of funds
available. The Company expects to pay common stock dividends at least annually
in amounts necessary to continue to preserve its status as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code").
MORTGAGE LOANS
Residential mortgage loans consist of Adjustable Rate Mortgages ("ARMs"), and
Fixed Rate Mortgages ("FRM's"). The commercial mortgage loans consist of fixed
and variable rate loans, a majority of which have balloon payments.
Reinvestments in mortgage loans have been and will continue to be consistent in
maintaining an approximate 90% and 10% ratio between residential and
commercial mortgage loans, respectively. All Mortgage Loans are purchased
from the Bank.
For the quarter ended September 30, 1997, the Company purchased replacement
mortgage loans having an outstanding principal balance of approximately
$2,646,000 from the Bank. In addition, the Company received approximately
$2,755,000 of principal payments on its portfolio from the Servicer.
INTEREST RATE RISK
The Company's income consists primarily of interest payments on Mortgage
Loans. If there is a decline in interest rates (as measured by the indices
upon which the interest rates of the residential ARM and variable rate
commercial mortgage loans are based), then the Company will experience a
decrease in income available to be distributed to its shareholders. There can
be no assurance that an interest rate environment in which there is a
significant decline in interest rates over an extended period of time would not
adversely affect the Company's ability to pay dividends on the Series A
Preferred Shares.
- 10 -
<PAGE> 11
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Concentration of credit risk arises when a number of customers engage in
similar business activities, or activities in the same geographical region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Concentration of credit risk indicates the relative sensitivity of
the Company's performance to both positive and negative developments affecting
a particular industry.
Approximately 90% of the Company's total Mortgage Loan portfolio are loans
secured by residential real estate properties located in Michigan.
Consequently, these residential mortgage loans may be subject to a greater risk
of default than other comparable, geographically diverse, residential mortgage
loans in the event of adverse economic, political or business developments and
natural hazards in Michigan.
In addition, the majority of the commercial mortgage properties underlying the
Company's commercial mortgage loans are located in the Detroit metropolitan
area. Consequently, these commercial mortgage loans may be subject to greater
risk of default in the event of adverse economic, political or business
developments in the Detroit metropolitan area.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments and to
capitalize on opportunities for the Company's business expansion. In managing
liquidity, the Company takes into account various legal limitations placed on a
REIT as discussed below in Other Matters.
The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional Mortgage Loans as Mortgage Loans
currently in the portfolio mature, or prepay, and to pay dividends on the
Series A Preferred Shares. The acquisition of additional Mortgage Loans is
intended to be funded with the proceeds obtained from the repayment of
principal balances by individual borrowers. The Company does not have and does
not anticipate having any material capital expenditures.
- 11 -
<PAGE> 12
OTHER MATTERS
As of September 30, 1997, the Company believed that it was in full compliance
with the REIT tax rules and that it will continue to qualify as a REIT under
the provision of the Code. The Company calculates that:
* its Qualified REIT Assets, as defined in the Code, are approxiametly
100% of its total assets, as compared to the federal tax requirements
that at least 75% of its total assets must be Qualified REIT assets.
* 97% of its revenues qualify for the 75% source of income test and 100% of
its revenues qualify for the 95% source of income test under the REIT
rules.
* none of the revenue was subject to the 30% income limitation under the
REIT rules.
The Company also met all REIT requirements regarding the ownership of its
common and preferred stocks and anticipates meeting the 1997 annual
distribution and administrative requirements.
-12-
<PAGE> 13
D&N CAPITAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(11) Computation of net income per share
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter
Ended September 30, 1997.
- 13 -
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
D&N CAPITAL CORPORATION
/s/ Kenneth R. Janson
-------------------------------------
Kenneth R. Janson, President and
Chief Executive Officer
/s/ Daniel D. Greenlee
-------------------------------------
Daniel D. Greenlee,
Chief Financial Officer and Treasurer
Date: November 13, 1997
---------------------------
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibits
- ----------- --------
<S> <C>
11 Computation of net income per share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
D&N CAPITAL CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(Unaudited)
Net income for primary earnings per share are computed by subtracting from the
applicable earnings the dividend requirements on preferred stock to arrive at
earnings applicable to common stock and dividing this amount by the weighted
average number of shares of common stock outstanding during the period.
<TABLE>
<CAPTION>
Quarter Ended
September 30, 1997
---------------------------------------
(In thousands,except per share amounts)
<S> <C>
EARNINGS
Net income $ 861
Less: preferred stock dividend requirements 537
Net income applicable to common stock $ 324
SHARES
Weighted average number of common shares
outstanding 31,781
NET INCOME PER SHARE $ 10.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-18-1997
<PERIOD-END> SEP-30-1997
<CASH> 21
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 60,433
<ALLOWANCE> 0
<TOTAL-ASSETS> 60,824
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
30,250
<COMMON> 30,250
<OTHER-SE> 324
<TOTAL-LIABILITIES-AND-EQUITY> 60,824
<INTEREST-LOAN> 893
<INTEREST-INVEST> 0
<INTEREST-OTHER> 5
<INTEREST-TOTAL> 898
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 898
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 37
<INCOME-PRETAX> 861
<INCOME-PRE-EXTRAORDINARY> 861
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324
<EPS-PRIMARY> 10.19
<EPS-DILUTED> 10.19
<YIELD-ACTUAL> 7.55
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
