<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, 2000
[ ] 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
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Series A Preferred Shares, $25 par value 1,210,000
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(Class) (Shares Outstanding as of
April 30, 2000)
<PAGE>
D&N CAPITAL CORPORATION
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Condition - As of
March 31, 2000 and December 31, 1999 2
Statements of Income - For the three months
ended March 31, 2000 and 1999 3
Statements of Cash Flows - For the three months
ended March 31, 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 - 9
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)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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(Unaudited)
<S> <C> <C>
ASSETS:
Loans receivable:
Residential mortgage loans $ 53,520 $ 52,133
Commercial mortgage loans 6,098 8,062
-------- --------
Net loans receivable 59,618 60,195
Cash 12 12
Due from Parent 989 150
Other assets - 5
Accrued interest receivable 356 354
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TOTAL ASSETS $ 60,975 $ 60,716
======== ========
LIABILITIES:
Other liabilities $ 62 $ 70
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TOTAL LIABILITIES 62 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 413 146
-------- --------
TOTAL STOCKHOLDERS' EQUITY 60,913 60,646
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,975 $ 60,716
======== ========
</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
March 31,
2000 1999
----------------------
<S> <C> <C>
INTEREST INCOME:
Loans:
Residential mortgage loans $ 871 $ 821
Commercial mortgage loans 137 140
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Total loan interest income 1,008 961
Intercompany interest 11 7
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TOTAL INTEREST INCOME 1,019 968
NONINTEREST EXPENSE:
Advisory fees 31 31
Other expenses 40 33
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TOTAL NONINTEREST EXPENSE 71 64
NET INCOME 948 904
PREFERRED STOCK DIVIDEND REQUIREMENTS 681 681
------- -------
NET INCOME APPLICABLE TO COMMON SHARES $ 267 $ 223
======= =======
NET INCOME PER COMMON SHARE $ 8.40 $ 7.01
======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 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>
Three Months Ended
March 31,
2000 1999
-----------------------
OPERATING ACTIVITS
<S> <C> <C>
Net Income $ 948 $ 904
Adjustments to reconcile net income to net cash provided by operating
activities:
Net change in:
Accrued interest receivable (2) 15
Due from Parent (839) (500)
Other assets 5 (15)
Accounts payable (8) (48)
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Net cash provided by operating activities 104 356
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INVESTING ACTIVITIES:
Purchase of loans (3,311) (8,279)
Principal payments received 3,890 8,604
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Net cash used by investing activities 577 325
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FINANCING ACTIVITIES:
Preferred stock dividends paid (681) (681)
Common stock dividends paid -- --
------- -------
Net cash used by financing activities (681) (681)
------- -------
NET INCREASE IN CASH -- --
CASH AT BEGINNING OF PERIOD 12 12
------- -------
CASH AT END OF PERIOD $ 12 $ 12
======= =======
</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 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 March 31, 2000 and December 31, 1999, 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 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 month periods ended March 31, 2000 and 1999, the
Company paid dividends on Series A Preferred Shares in the amount of $680,625.
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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 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 March
31, 2000 of $1,008,000, compared to $961,000 for the first quarter of 1999.
Interest income from residential and commercial mortgage loans was $871,000 and
$137,000, respectively, for the first quarter of 2000, compared to $821,000 and
$140,000, respectively for the first quarter of 1999. After a deduction of
$31,000 in advisory fees and $40,000 in other administrative expenses, the
Company reported net income of $267,000 for the quarter ended March 31, 2000,
compared to $223,000 for the quarter ended March 31, 1999.
For the three month periods ended March 31, 2000 and March 31, 1999, the
Company reported net income per common share of $8.40 and $7.01, respectively.
For both the quarters ended March 31, 2000 and 1999, the Company paid
$680,625 in preferred stock dividends. 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").
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<PAGE>
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 periods ended March 31, 2000 and March 31, 1999, the
Company purchased replacement mortgage loans from D&N Bank of $3,311,000 and
$8,279,000. In addition, the Company received $3,890,000 and $8,604,000,
respectively, of principal payments on its portfolio for the three month periods
ended March 31, 2000 and March 31, 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.
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.
- 8 -
<PAGE>
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 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 mortgagees. The Company does not have and does not
anticipate having any material capital expenditures.
OTHER MATTERS
As of March 31, 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 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 2000 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:
The Company filed a report on Form 8-K dated March 10,
2000 reporting a change in certifying accountants.
- 10 -
<PAGE>
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: May 15, 2000 /s/ Richard E. West
-------------- -------------------------------
Richard E. West, President and
Chief Executive Officer
/s/ Thomas F. Menacher
-------------------------------
Thomas F. Menacher,
Principal Accounting 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
<PAGE>
EXHIBIT 12(a)
D&N CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
For the Three Months Ended March 31, 2000
(In thousands, except ratio)
<TABLE>
<CAPTION>
<S> <C>
Net income $ 948
Fixed charges:
Advisory fees 31
Total fixed charges 31
Earnings before fixed charges $ 979
Fixed charges, as above $ 31
Ratio of earnings to fixed charges 31.6
</TABLE>
<PAGE>
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, 2000
(In thousands, except ratio)
<TABLE>
<CAPTION>
<S> <C>
Net income $ 948
Fixed charges:
Advisory fees 31
Total fixed charges 31
Earnings before fixed charges $ 979
Fixed charges, as above 31
Preferred stock dividend requirement 681
Fixed charges including preferred stock dividends $ 712
Ratio of earnings to fixed charges and preferred
stock dividends requirements 1.38
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS CONDTION SHEET AS OF MARCH 31, 2000, STATEMENT OF INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2000, SCHEDULE AND OTHER REQUIRED DISCLOSURES AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S MARCH 31, 2000 FORM
10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 12
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 59,618
<ALLOWANCE> 0
<TOTAL-ASSETS> 60,975
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 62
<LONG-TERM> 0
0
30,250
<COMMON> 30,250
<OTHER-SE> 413
<TOTAL-LIABILITIES-AND-EQUITY> 60,975
<INTEREST-LOAN> 1,008
<INTEREST-INVEST> 0
<INTEREST-OTHER> 11
<INTEREST-TOTAL> 1,019
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 1,019
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 71
<INCOME-PRETAX> 948
<INCOME-PRE-EXTRAORDINARY> 948
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 948
<EPS-BASIC> 8.40
<EPS-DILUTED> 8.40
<YIELD-ACTUAL> 7.15
<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>
