<PAGE>
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 March 31, 1999
------------------------------------
[ ] 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
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D&N Capital Corporation
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(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 Number)
400 Quincy Street, Hancock, Michigan 49930
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(Address of principal executive offices)
(906) 482-2700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check 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
April 30, 1999)
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D&N CAPITAL CORPORATION
INDEX
Page No.
--------
PART I
Statements of condition -
March 31, 1999 and December 31, 1998 3
Statements of income -
three months ended March 31, 1999 and 1998 4
Statement of changes in Stockholders' Equity -
three months ended March 31, 1999 and 1998 5
Statement of cash flows -
three months ended March 31, 1999 and 1998 6
Notes to financial statements 7
Management's discussion and analysis of financial
condition and results of operations 9
PART II
Other information 14
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D&N CAPITAL CORPORATION
STATEMENTS OF CONDITION
(In thousands, except share data)
March 31 December 31
1999 1998
----------------- ---------------
(Unaudited)
Assets:
Loans receivable:
Residential mortgage loans $54,537 $52,858
Commercial mortgage loans 5,397 7,401
------- -------
Net loans receivable 59,934 60,259
Cash 2 2
Due from Parent 521 21
Other assets 20 5
Accrued interest receivable 343 358
------- -------
Total assets $60,820 $60,645
======= =======
Liabilities:
Other liabilities $ 22 $ 70
------- -------
Total liabilities 22 70
Stockholders' Equity:
Preferred stock, par value $25.00; 2,500,000
authorized, 1,210,000 issued and outstanding 30,250 30,250
Common stock, par value $300.00 per share;
250,000 shares authorized, 31,781 shares
issued and outstanding 9,534 9,534
Additional paid-in capital 20,716 20,716
------- -------
Total paid-in capital 60,500 60,500
Retained earnings 298 75
------- -------
Total stockholders' equity 60,798 60,575
------- -------
Total liabilities and stockholders' equity $60,820 $60,645
======= =======
See Notes to Financial Statements.
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D&N CAPITAL CORPORATION
STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended
March 31
1999 1998
---------------------------
Interest income:
Loans:
Residential mortgage loans $ 821 $ 884
Commercial mortgage loans 140 156
------------------------
Total loan interest income 961 1,040
Intercompany interest 7 2
------------------------
Total interest income 968 1,042
Noninterest expense:
Advisory fees 31 31
Other expenses 33 8
------------------------
Total noninterest expense 64 39
Net income 904 1,003
Preferred stock dividend requirements 681 681
------------------------
Net income applicable to common shares 223 322
Common stock dividends paid -- --
------------------------
Retained earnings increase $ 223 $ 322
========================
Net income per share $ 7.01 $ 10.14
========================
Weighted average common
shares outstanding 31,781 31,781
========================
See Notes to Financial Statements.
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D&N CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
(In thousands)
For the Three Months Ended
March 31,
1999 1998
---------------------------
PREFERRED STOCK:
Balance at beginning of period $ 30,250 $ 30,250
-------- --------
Balance at end of period 30,250 30,250
-------- --------
COMMON STOCK:
Balance at beginning of period 9,534 9,534
-------- --------
Balance at end of period 9,534 9,534
-------- --------
ADDITIONAL PAID IN CAPITAL:
Balance at beginning of period 20,716 20,716
-------- --------
Balance at end of period 20,716 20,716
-------- --------
RETAINED EARNINGS:
Balance at beginning of period 75 34
Net Income 904 1,003
Common dividends -- --
Preferred dividends (681) (681)
-------- --------
Balance at end of period 298 356
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 60,798 $ 60,856
======== ========
See Notes to Financial Statements.
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D&N CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Three Months Ended
March 31,
1999 1998
----------------------------
OPERATING ACTIVITIES
Net Income $ 904 $ 1,003
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in:
Accrued interest receivable 15 (5)
Due from Parent (500) (286)
Other assets (15) (20)
Accounts payable (48) (4)
-------- --------
Net cash provided by operating activities 356 688
-------- --------
INVESTING ACTIVITIES:
Purchase of mortgage loans (8,279) (7,352)
Principal payments received 8,604 7,345
-------- --------
Net cash provided (used) by investing activities 325 (7)
-------- --------
FINANCING ACTIVITIES:
Preferred stock dividends paid (681) (681)
Common stock dividends paid -- --
-------- --------
Net cash used by financing activities (681) (681)
-------- --------
NET CHANGE IN CASH -- --
CASH AT BEGINNING OF PERIOD 2 2
-------- --------
CASH AT MARCH 31, 1999 AND 1998 $ 2 $ 2
======== ========
See Notes to Financial Statements.
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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 was 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 federally chartered savings bank, which itself is wholly-
owned by D&N Financial Corporation ("D&N"), a financial services holding company
organized under the laws of the state of Delaware.
All shares of common stock are held by the Bank. The Series A Preferred Shares
are traded on NASDAQ under the symbol "DNFCP".
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting solely of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the full year.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Loans:
Mortgage loans are carried at the principal amount outstanding, plus premium or
discount, upon purchase from the Bank. Interest income is recognized using the
interest method, which approximates a level rate of return over the term of the
loan.
Allowance for Loan Losses:
The allowance for possible losses on loans is maintained at a level believed
adequate by management to absorb potential losses from impaired loans as well as
from the remainder of the portfolio. Management's determination of the level of
the allowance is based upon evaluation of the portfolio, past experience,
current economic conditions, size and composition of the portfolio, collateral
location and values, cash flow positions, industry concentrations, delinquencies
and other relevant factors. At March 31, 1999, and 1998, there was no allowance
for losses on loans.
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Dividends:
Preferred Stock. Dividends on the Series A Preferred Shares are noncumulative
from issuance (July 17, 1997) and are payable quarterly on the last day of
March, June, September and December at a rate of 9.00% per annum of the
liquidation preference ($25.00 per share).
Common Stock. The Bank, as shareholder, is entitled to receive dividends when,
as and if declared by the Board of Directors from funds legally available after
all preferred dividends have been paid.
Net Income Per Common Share:
Net income per common share is computed by dividing net income after preferred
dividends by the weighted average number of common shares outstanding. Diluted
earnings per share is not presented, as there are no outstanding dilutive
securities.
The Company has elected to be treated as a Real Estate Investment Trust
("REIT"), pursuant to provisions of the Internal Revenue Code of 1986, as
amended (the "Code"). As a result, the Company will not be subject to federal
income tax on its taxable income to the extent it distributes at least 95% of
its taxable income to its shareholders and it meets certain other requirements
as defined in the Code. The Company intends to maintain its qualification as a
REIT for federal income tax purposes. The Company intends to make qualifying
dividends (for federal income tax purposes) of all of its taxable income to its
Common and Preferred Stock shareholders, a portion of which may be in the form
of "consent" dividends, as defined under the Code. As a result, the Company has
made no provision for income taxes in the accompanying financial statements.
NOTE 3: DIVIDENDS
For each of the three month periods ended March 31, 1999 and 1998, the Company
paid dividends on Series A Preferred Shares in the amount of $680,625,
respectively.
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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, 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.
All shares of common stock are held by D&N Bank. The Series A preferred shares
are traded on NASDAQ under the symbol "DNFCP".
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 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 March 31, 1999 of
approximately $968,000. Interest income from residential and commercial
mortgage loans were $821,000 and $140,000, respectively. After a deduction of
approximately $31,000 in advisory fees and $33,000 in other administrative
expenses, the Company reported net income of approximately $904,000 for the
quarter ended March 31, 1999.
Net interest income for the quarter ended March 31, 1998 was $1,042,000.
Interest income from residential and commercial mortgage loans were $884,000 and
$156,000, respectively. After deductions of approximately $31,000 in advisory
fees and $8,000 in other administrative expenses, the Company reported net
income of approximately $1,003,000 for the quarter ended March 31, 1998.
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For the quarter ended March 31, 1999, the Company paid $680,625 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 three month period ended March 31, 1999, the Company purchased
replacement mortgage loans from the Bank of approximately $8,279,000. In
addition, the Company received approximately $8,604,000 of principal payments on
its portfolio from the Servicer for the three month period ended March 31, 1999.
For the three month period ended March 31, 1998, the Company purchased
replacement mortgage loans from the Bank of approximately $7,352,000. In
addition, the Company received approximately $7,345,000 of principal payments on
its portfolio from the Servicer for the three month period ended March 31, 1998.
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.
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
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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.
YEAR 2000 COMPLIANCE
The Company relies on D&N Bank for data processing services, through its loan
servicing operations and for maintenance for financial and other records
involved in the management of D&N Capital Corporation. The following disclosure
discusses D&N Bank's year 2000 project and its associated costs.
D&N utilizes various electronic computer systems for the delivery of its
financial services products such as deposit accounts and loans, for the
maintenance of its financial and other business records, and for general
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management purposes. Some of these systems include legacy procedures that may
have been designed and historic data that may have been stored in such a manner
that inconsistencies or failures might occur when dates from the new millennium
are considered. Commonly known as the Year 2000 problem, a myriad of related
potential computing difficulties face entities that rely extensively upon
computer systems. D&N's major computer system include deposit accounts,
commercial lending, consumer lending, financial control, and sales platform
support applications provided by M&I Data Services, Inc.; mortgage lending
applications provided by ALLTEL Information Services, Inc. and FiTech, Inc.; and
internally maintained microcomputer and network systems which support management
functions and communications.
D&N's Year 2000 project is progressing on schedule. The project is addressing
computer hardware, software, procedures, large borrowers and facilities. This
project began in October 1996 and is scheduled for completion by June 1999. To
date all at-risk computer hardware has been tested and confirmed Year 2000
compliant.
The four primary business applications (deposit account processing, installment
loan account processing, general ledger and mortgage loan processing) have been
certified Year 2000 compliant. The remaining applications systems are being
tested and contingency plans have been developed to mitigate business
operational risk.
D&N's internally maintained systems, consisting primarily of a Lotus Notes
server array and various workstation-based business suite software, are Year
2000 compliant as currently installed.
All newly acquired software is being tested for Year 2000 compliance before
acceptance. Software testing has been done to verify date changes for 1999 to
2000, the identification and correct processing of leap years, along with
numerous date projections from 1999 through the next millennium using day, month
and year increments.
Manual procedures have been reviewed and scheduled for change where date
specific actions occur. Necessary changes to supporting forms to properly
record dates in the new millennium have been identified and are being made.
Costs associated with addressing the Year 2000 issue as it affects D&N's third
party applications is implicitly included in the contractual arrangements for
those applications. D&N's total Year 2000 estimated project cost, which is
based upon currently available information, included expenses for the review and
testing of third parties including governmental applications. However, there
can be no guarantee that the hardware, software and systems of such third
parties will be without unfavorable Year 2000 issues and therefore not present a
material adverse impact upon the Bank.
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Year 2000 compliance costs incurred during 1998 totaled approximately $26,000.
This figure does not include the implicit costs associated with the reallocation
of internal staff hours to Year 2000 project related efforts. At this time,
management currently estimated Year 2000 compliance costs will not exceed
$100,000. This estimate does not include normal ongoing costs for computer
hardware, software, terminals and related devices that would be replaced with
the Bank's ongoing programs for updating its delivery infrastructure without the
presence of the Year 2000 issue. The aforementioned Year 2000 project cost
estimate may change as the Bank progresses in its Year 2000 programs and obtains
additional information associated with, and conducts further testing concerning
third parties. At this time no significant projects have been delayed as a
result of D&N's Year 2000 effort. Management of the Bank believes it has an
effective program in place to resolve the Year 2000 issue in a timely manner.
As noted above, the Bank has not yet completed all necessary phases of the Year
2000 program. In the event that the Bank does not complete any additional
phases, under the most reasonable likely worst case scenario, the Bank would be
required to process certain transactions manually, which may effect customer
service. In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially effect the Bank. The Bank could be subject to
litigation for equipment shutdown or failure to properly date customer records.
The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
OTHER MATTERS
As of March 31, 1999, the Company believed that it was in full compliance with
the REIT tax rules and it will continue to quality as a REIT under the provision
of the Code. The Company calculates that:
* its Qualified REIT Assets, as defined in the Code, are approximately 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.
* 99% 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.
The Company also met all REIT requirements regarding the ownership of its common
and preferred stocks and anticipates meeting the 1999 annual distribution and
administrative requirements.
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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 exhibits is included herein:
12(a) Computation of Ratio of Earnings to Fixed Charges
12(b) Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividend Requirements
(27) Financial Data Schedule
(b) Reports to Form 8-K:
No reports on Form 8-K have been filed during the quarter
ended March 31, 1999.
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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: May 11, 1999
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INDEX TO EXHIBITS
Exhibit No. Exhibits
---------- --------
12(a) Computation of ratio of earnings to fixed charges
12(b) Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements
27 Financial data schedule
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EXHIBIT 12(a)
D&N CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
For the Three Months Ended
March 31,
1999 1998
----------------------------
(In thousands, except ratio)
Net income $ 904 $ 1,003
Fixed charges:
Advisory fees 31 31
Total fixed charges 31 31
Earnings before fixed charges $ 935 $ 1,034
Fixed charges, as above 31 31
Ratio of earnings to fixed charges 30.2 33.4
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EXHIBIT 12(b)
D&N CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements
For the Three Months Ended
March 31,
1999 1998
----------------------------
(In thousands, except ratio)
Net income $ 904 $ 1,003
Fixed charges:
Advisory fees 31 31
Total fixed charges 31 31
Earnings before fixed charges 935 1,034
Fixed charges, as above 31 31
Preferred stock dividend requirement 681 681
Fixed charges including preferred stock dividends $ 712 $ 712
Ratio of earnings to fixed charges and preferred
stock dividends requirements 1.31 1.45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 59,934
<ALLOWANCE> 0
<TOTAL-ASSETS> 60,820
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 22
<LONG-TERM> 0
0
30,250
<COMMON> 30,250
<OTHER-SE> 298
<TOTAL-LIABILITIES-AND-EQUITY> 60,820
<INTEREST-LOAN> 961
<INTEREST-INVEST> 0
<INTEREST-OTHER> 7
<INTEREST-TOTAL> 968
<INTEREST-DEPOSIT> 0
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<LOAN-LOSSES> 0
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<EXPENSE-OTHER> 64
<INCOME-PRETAX> 904
<INCOME-PRE-EXTRAORDINARY> 904
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904
<EPS-PRIMARY> 7.01
<EPS-DILUTED> 7.01
<YIELD-ACTUAL> 7.15
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
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