<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 September 30, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
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(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)
(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 par value 1,210,000
- ------------------------------------------ -------------------------
(Class) (Shares Outstanding as of
October 31, 1999)
<PAGE>
D&N CAPITAL CORPORATION
INDEX
Page No.
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PART I Financial Information
Item 1. Financial Statements (Unaudited)
Statements of Condition - As of
September 30, 1999 and December 31, 1998 3
Statements of Income - For the three and nine
months ended September 30, 1999 and 1998 4
Statements of Cash Flows - For the nine months
ended September 30, 1999 and 1998 5
Notes to Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 12
PART II Other Information 13
Signature 14
Exhibits 15 - 18
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<PAGE>
D&N CAPITAL CORPORATION
STATEMENTS OF CONDITION
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Assets:
Loans receivable:
Residential mortgage loans $53,222 $52,858
Commercial mortgage loans 7,128 7,401
------- -------
Net loans receivable 60,350 60,259
Cash 2 2
Due from Parent 642 21
Other assets 10 5
Accrued interest receivable 346 358
------- -------
Total assets $61,350 $60,645
======= =======
Liabilities:
Other liabilities $ 46 $ 70
------- -------
Total liabilities 46 70
STOCKHOLDERS' EQUITY:
Preferred stock, $25 par value; 2,500,000 shares
authorized, 1,210,000 shares issued and outstanding 30,250 30,250
Common stock, $300 par value; 250,000 shares
authorized, 31,781 shares issued and outstanding 9,534 9,534
Additional paid-in capital 20,716 20,716
Retained earnings 804 75
------- -------
Total stockholders' equity 61,304 60,575
------- -------
Total liabilities and stockholders' equity $61,350 $60,645
======= =======
</TABLE>
See Notes to Financial Statements.
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<PAGE>
D&N CAPITAL CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------- -------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans:
Residential mortgage loans $ 860 $ 869 $ 2,509 $ 2,659
Commercial mortgage loans 123 152 405 463
------- ------- ------- -------
Total loan interest income 983 1,021 2,914 3,122
Intercompany interest 12 17 39 29
------- ------- ------- -------
Total interest income 995 1,038 2,953 3,151
Noninterest expense:
Advisory fees 31 31 94 94
Other expenses 29 14 88 39
------- ------- ------- -------
Total noninterest expense 60 45 182 133
Net income 935 993 2,771 3,018
Preferred stock dividend requirements 681 681 2,042 2,042
------- ------- ------- -------
Net income applicable to common shares $ 254 $ 312 $ 729 $ 976
======= ======= ======= =======
Net income per common share $ 8.00 $ 9.81 $ 22.94 $ 30.71
======= ======= ======= =======
Weighted average common
shares outstanding 31,781 31,781 31,781 31,781
======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
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<PAGE>
D&N CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities
Net Income $ 2,771 $ 3,018
Adjustments to reconcile net income
to net cash provided by operating activities:
Net change in:
Accrued interest receivable 12 --
Due from Parent (621) (1,074)
Other assets (5) (10)
Accounts payable (24) 6
-------- --------
Net cash provided by operating activities 2,133 1,940
-------- --------
Investing activities:
Purchase of mortgage loans (18,700) (20,815)
Principal payments received 18,609 20,917
-------- --------
Net cash used by investing activities (91) 102
-------- --------
Financing activities:
Preferred stock dividends paid (2,042) (2,042)
Common stock dividends paid -- --
-------- --------
Net cash used by financing activities (2,042) (2,042)
-------- --------
Net increase in cash -- --
Cash at beginning of period 2 2
-------- --------
Cash at end of period $ 2 $ 2
======== ========
</TABLE>
See Notes to Financial Statements.
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<PAGE>
D&N CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 ("D&N"), a state chartered savings bank, which itself
became a wholly-owned subsidiary of Republic Bancorp Inc., a Michigan bank
holding company, on May 17, 1999.
All shares of common stock are held by D&N Bank. The Series A Preferred
Shares are traded on The Nasdaq Stock Market 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
necessary for a comprehensive presentation of financial position, results of
operations and cash flow activity required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
normal recurring adjustments necessary for a fair presentation of results have
been included. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report of Form 10-K for the
year ended December 31, 1998.
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 D&N 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 loan losses 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 an 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 September 30, 1999 and December 31, 1998, there were
no allowances for loan losses.
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<PAGE>
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. D&N 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 and nine month periods ended September 30, 1999 and
1998, the Company paid dividends on Series A Preferred Shares in the amount of
$680,625, and $2,041,875, respectively.
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<PAGE>
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 D&N 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.
D&N Bank administers the day-to-day activities of the Company in its role as
Advisor under the Advisory Agreement. D&N Bank also services the Company's
mortgage loans under each of the Servicing Agreements.
It is the intention of the Company and D&N Bank that any agreements and
transactions between the Company and D&N 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.
RESULTS OF OPERATIONS
The Company reported total interest income for the quarter ended September
30, 1999 of approximately $995,000. Interest income from residential and
commercial mortgage loans were $860,000 and $123,000, respectively. After a
deduction of approximately $31,000 in advisory fees and $29,000 in other
administrative expenses, the Company reported net income of approximately
$935,000 for the quarter ended September 30, 1999.
The Company reported total interest income for the nine months ended
September 30, 1999 of approximately $2,953,000. Interest income from
residential and commercial mortgage loans were $2,509,000 and $405,000,
respectively. After a deduction of approximately $94,000 in advisory fees and
$88,000 in other administrative expenses, the Company reported net income of
approximately $2,771,000 for the nine months ended September 30, 1999.
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<PAGE>
For the three month and nine month periods ended September 30, 1999, the
Company reported net income per common share of $8.00 and $22.94, respectively.
For the quarter ended September 30, 1999, the Company paid $680,625 in
preferred stock dividends. Dividends on the common stock are paid to D&N 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 loans are purchased from D&N Bank.
For the three month and nine month periods ended September 30, 1999, the
Company purchased replacement mortgage loans from D&N Bank of approximately
$6,535,000 and $18,700,000. In addition, the Company received approximately
$5,104,000 and $18,609,000, respectively, of principal payments on its portfolio
for the three and nine month periods ended September 30, 1999.
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.
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<PAGE>
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, Michigan
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.
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<PAGE>
YEAR 2000 COMPLIANCE
The Company relies on D&N Bank for data processing services, through its loan
servicing operations and for maintenance of 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 and loan accounts, for the
maintenance of its financial and other business records, and for general
management purposes. Some of these systems include legacy procedures and
historic data that may have been stored in such a manner that inconsistencies or
failures could 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 systems 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 has completed all phases of their Year 2000 project. The project has
addressed computer hardware, software, procedures, large borrowers and
facilities. This project began in October 1996. 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 by the third party provider, as Year 2000
compliant. The remaining applications systems have been 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 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.
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<PAGE>
Manual procedures have been reviewed and changed 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 D&N Bank.
Year 2000 compliance costs incurred have 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 no
significant projects have been delayed as a result of D&N's Year 2000 effort.
Management of D&N Bank believes it has an effective program in place to resolve
the Year 2000 issue without business interruption. In the event of vendor
failures, under the most reasonable likely worst case scenario, D&N 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 D&N Bank. D&N 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 September 30, 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.
* 98% 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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<PAGE>
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 September 30, 1999.
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<PAGE>
SIGNATURE
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
-----------------------
(Registrant)
Date: November 15, 1999 /s/ Richard E. West
----------------- ------------------------------
Richard E. West, President and
Chief Executive Officer
/s/ Thomas F. Menacher
------------------------------
Thomas F. Menacher,
Chief Financial Officer
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<PAGE>
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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<PAGE>
EXHIBIT 12(A)
D&N CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
For the Nine Months Ended September 30, 1999
(In thousands, except ratio)
Net income $2,771
Fixed charges:
Advisory fees 94
Total fixed charges 94
Earnings before fixed charges $2,865
Fixed charges, as above 94
Ratio of earnings to fixed charges 30.5
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<PAGE>
EXHIBIT 12(B)
D&N CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements
For the Nine Months Ended September 30, 1999
(In thousands, except ratio)
Net income $2,771
Fixed charges:
Advisory fees 94
Total fixed charges 94
Earnings before fixed charges 2,865
Fixed charges, as above 94
Preferred stock dividend requirement 2,042
Fixed charges including preferred stock dividends $2,136
Ratio of earnings to fixed charges and preferred
stock dividends requirements 1.34
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF CONDITION SHEET AS OF SEPTEMBER 30, 1999, STATEMENT OF INCOME FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1999, SCHEDULES AND OTHER REQUIRED
DISCLOSURES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S
SEPTEMBER 30, 1999 FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<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> 60,350
<ALLOWANCE> 0
<TOTAL-ASSETS> 61,350
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 46
<LONG-TERM> 0
0
30,250
<COMMON> 30,250
<OTHER-SE> 804
<TOTAL-LIABILITIES-AND-EQUITY> 61,350
<INTEREST-LOAN> 2,914
<INTEREST-INVEST> 0
<INTEREST-OTHER> 39
<INTEREST-TOTAL> 2,953
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 2,953
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 182
<INCOME-PRETAX> 2,771
<INCOME-PRE-EXTRAORDINARY> 2,771
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,771
<EPS-BASIC> 22.94
<EPS-DILUTED> 22.94
<YIELD-ACTUAL> 7.09
<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>
