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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000 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 Number)
400 Quincy Street, Hancock, Michigan 49930
(Address of principal executive offices)
(906) 482-2700
(Registrant's telephone number)
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 [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock Outstanding as of October 31, 2000:
Common Stock, $300 par value...................... 31,781 shares
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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, 2000
and December 31, 1999 2
Statements of Income for the three and nine
months ended September 30, 2000 and 1999 3
Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 4
Notes to Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 10
PART II Other Information 10
Signatures 11
Exhibits 12 - 15
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D&N CAPITAL CORPORATION
STATEMENTS OF CONDITION
(In thousands, except share data)
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
Assets:
Loans receivable:
Residential mortgage loans $ 52,467 $ 52,133
Commercial mortgage loans 5,865 8,062
-------- --------
Net loans receivable 58,332 60,195
Cash 10 12
Due from Parent 2,830 150
Other assets 12 5
Accrued interest receivable 347 354
-------- --------
Total assets $ 61,531 $ 60,716
======== ========
Liabilities:
Other liabilities $ 54 $ 70
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Total liabilities 54 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 977 146
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Total stockholders' equity 61,477 60,646
-------- --------
Total liabilities and
stockholders' equity $ 61,531 $ 60,716
======== ========
See Notes to Financial Statements.
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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,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Loans:
Residential mortgage loans $ 873 $ 860 $2,634 $2,509
Commercial mortgage loans 110 123 359 405
------ ------ ------ ------
Total loan interest income 983 983 2,993 2,914
Intercompany interest 43 12 71 39
------ ------ ------ ------
Total interest income 1,026 995 3,064 2,953
Noninterest expense:
Advisory fees 32 32 94 94
Other expenses 28 28 97 88
------ ------ ------ ------
Total noninterest expense 60 60 191 182
Net income 966 935 2,873 2,771
Preferred stock dividend requirements 681 681 2,042 2,042
------ ------ ------ ------
Net income applicable to common shares $ 285 $ 254 $ 831 $ 729
====== ====== ====== ======
Net income per common share $ 8.97 $ 8.00 $26.15 $22.94
====== ====== ====== ======
Weighted average common
shares outstanding 31,781 31,781 31,781 31,781
====== ====== ====== ======
</TABLE>
See Notes to Financial Statements.
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D&N CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
September 30,
2000 1999
-------- --------
Operating activities
Net Income $ 2,873 $ 2,771
Adjustments to reconcile net income
to net cash provided by operating activities:
Net change in:
Accrued interest receivable 7 12
Amortization of premiums 231 290
Due from Parent (2,680) (621)
Other assets (7) (5)
Accounts payable (16) (24)
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Net cash provided by operating activities 408 2,423
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Investing activities:
Purchase of loans (8,046) (18,700)
Principal payments received 9,678 18,319
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Net cash used by investing activities 1,632 (381)
-------- --------
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 decrease in cash (2) --
Cash at beginning of period 12 2
-------- --------
Cash at end of period $ 10 $ 2
======== ========
See Notes to Financial Statements.
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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 and
holding 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, 1999.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Loans:
Mortgage loans consist of residential and commercial mortgage loans and
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, 2000 and December 31, 1999, there
were no allowances for loan losses.
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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. D&N Bank, as sole common shareholder, is entitled to
receive dividends when 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.
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, 2000
and 1999, the Company paid dividends on Series A Preferred Shares in the amount
of $680,625 and $2,041,875, 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 and hold
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, 2000 of $1,026,000, compared to $995,000 for the third quarter of
1999. Interest income from residential and commercial mortgage loans was
$873,000 and $110,000, respectively, for the third quarter of 2000, compared to
$860,000 and $123,000, respectively for the third quarter of 1999. After a
deduction of $32,000 in advisory fees and $28,000 in other administrative
expenses, the Company reported net income of $966,000 for the quarter ended
September 30, 2000, compared to $935,000 for the quarter ended September 30,
1999.
The Company reported total interest income for the nine months ended
September 30, 2000 of $3,064,000, compared to $2,953,000 for the same period of
1999. Interest income from residential and commercial mortgage loans was
$2,634,000 and $359,000, respectively, for the nine months ended September 30,
2000, compared to $2,509,000 and $405,000, respectively for the nine months
ended September 30, 1999. After a deduction of $94,000 in advisory fees and
$97,000 in other administrative expenses, the Company reported net income of
$2,873,000 for the nine months ended September 30, 2000, compared to $2,771,000
for 1999.
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For the three month periods ended September 30, 2000 and 1999, the
Company reported net income per common share of $8.97 and $8.00, respectively.
For the nine month periods ended September 30, 2000 and 1999, the Company
reported net income per common share of $26.15 and $22.94, respectively.
For the three and nine month periods ended September 30, the Company paid
$680,625 and $2,041,875, respectively, for both 2000 and 1999. Dividends on the
common stock are paid to D&N Bank when 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 nine month periods ended September 30, 2000 and 1999, the
Company purchased replacement mortgage loans from D&N Bank of $8,046,000 and
$18,700,000, respectively. In addition, the Company received $9,678,000 and
$18,319,000, respectively, of principal payments on its portfolio for the nine
month periods ended September 30, 2000 and 1999.
INTEREST RATE RISK
The Company's income consists primarily of interest payments on
mortgage loans. Currently, the Company does not use any derivative products to
manage interest rate risk. If there is a decline in interest rates (as measured
by the indices upon which the interest rates of adjustable rate mortgages 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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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 80% 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 residential mortgage loans in the event of
adverse economic, political or business developments and natural hazards in
Michigan that may affect the ability of residential property owners in Michigan
to make payments of principal and interest on the underlying mortgages.
In addition, the majority of the commercial mortgage properties
underlying the Company's commercial mortgage loans are located in Michigan.
Consequently, these commercial mortgage loans may be subject to greater risk of
default than other comparable commercial mortgage loans in the event of adverse
economic, political or business developments in Michigan that may affect the
ability of businesses in the area to make payments of principal and interest on
the underlying mortgages.
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 on the following page 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 mortgagees. The Company does not have and does not
anticipate having any material capital expenditures.
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OTHER MATTERS
As of September 30, 2000, the Company believed that it was in full
compliance with the REIT tax rules and it will continue to quality as a REIT for
federal income tax purposes. The Company calculated that (a) its Qualified REIT
Assets to be 100% of total assets, compared to the federal tax requirements of
75%; and (b) that 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 2000 annual
distribution and administrative requirements.
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:
There were no reports filed on Form 8-K during the
third quarter of 2000.
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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
-----------------------
(Registrant)
Date: November 13, 2000 /s/ Leonard M. Bolduc
----------------------------------
Leonard M. Bolduc, President and
Chief Executive Officer
/s/ Thomas F. Menacher
-----------------------------------
Thomas F. Menacher,
Principal Accounting Officer
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INDEX TO EXHIBITS
Exhibit No. Exhibits
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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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