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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 17, 1999
REPUBLIC BANCORP INC.
(Exact name of registrant as specified in its charter)
Michigan 0-15734 38-2604669
(State or other jurisdiction of (Commission File No.) (IRS Employer
incorporation) Identification No.)
1070 East Main Street, Owosso, Michigan 48867
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 725-7337
(Former name or former address, if changed since last report)
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Item 2. Acquisition or Disposition of Assets
Merger
On May 17, 1999, D&N Financial Corporation, a Delaware corporation
("D&N"), merged with and into Republic Bancorp Inc., a Michigan corporation
("Republic"), pursuant to the Agreement and Plan of Merger dated December 1,
1998 between D&N and Republic.
D&N stockholders will receive 1.82 shares of Republic common stock in
exchange for each share of D&N common stock, plus cash instead of any fractional
share. The cash paid for any fractional share will be in an amount equal to such
fraction multiplied by $12.25, the closing price of Republic common stock on May
14, 1999, the trading day immediately prior to the merger's completion. Republic
stockholders will continue to own their existing shares of Republic common
stock. D&N stockholders will own about 42% of the combined company's common
stock and Republic stockholders will own about 58% of the combined company's
common stock.
The merger will be treated as a "tax-free" reorganization and as a
pooling-of-interests for accounting purposes, which means that D&N and Republic
will be treated as if they had always been combined for accounting and financial
reporting purposes. Under pooling-of-interests accounting, D&N stockholders will
be deemed to have combined their existing interests in D&N with that of Republic
stockholders by exchanging their shares of D&N common stock for shares of
Republic common stock. Accordingly, the book value of the assets, liabilities
and stockholders' equity of D&N, as reported on its consolidated balance sheet,
will be carried over to the consolidated balance sheet of the combined company
at their recorded amounts and no goodwill will be created. The combined company
will be able to include in its consolidated income the consolidated income of
D&N and Republic for the entire fiscal year in which the merger occurs (however,
certain expenses incurred to effect the merger must be treated as current
charges against income rather than adjustments to the balance sheet), and the
reported income of the separate entities for prior periods will be combined and
restated as income of the combined company.
Directors following the merger
In connection with the merger, the size of Republic's Board of
Directors was increased to 25 persons. Upon completion of the merger all 10
directors of D&N, Joseph C. Bromley, George J. Butvilas, Mary P. Cauley, Steven
Coleman, Stanley A. Jacobson, Randolph P. Piper, Kenneth D. Seaton, B. Thomas M.
Smith, Jr., Peter Van Pelt and Steven E. Zack, were appointed to Republic's
Board of Directors to fill the directorships created by the increase in the size
of Republic's Board.
The size of the executive committee of Republic's Board of Directors
has been increased to nine. Its members are Jerry D. Campbell (Chairperson),
Dana M. Cluckey, Howard J. Hulsman, Gary Hurand, Dennis J. Ibold, Jeoffrey K.
Stross, M.D., George J. Butvilas, B. Thomas M. Smith, Jr. and Stanley A.
Jacobson. The Audit Committee of Republic's Board of Directors now consists of
ten directors. Its members are Howard J. Hulsman (Chairperson), Richard J.
Cramer (Vice-Chairperson), George A. Eastman, D.D.S., Gary Hurand, John J.
Lennon, Sam H. McGoun, Isaac J. Powell, M.D., Peter Van Pelt, B. Thomas M.
Smith, Jr., and Steven E. Zack. The Personnel, Compensation and Nominating
Committee of Republic's Board of Directors now consists of seven directors. Its
members are Jeoffrey K. Stross
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(Chairperson), George E. Eastman, D.D.S., Howard J. Hulsman, Dennis J. Ibold,
Kelley E. Miller, Mary P. Cauley, and Steven Coleman. Jerry D. Campbell is a
member ex officio.
Executive officers following the merger
Mr. Jerry D. Campbell is the Chairman of the Board and Chief Executive
Officer of Republic, Mr. George J. Butvilas is the Vice-Chairman of the Board of
Republic, and Mr. Dana M. Cluckey is the President and Chief Operating Officer
of Republic.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
(i) Included with this Current Report on Form 8-K as Exhibit 99.1
are (A) the report dated January 21, 1999 of PricewaterhouseCoopers LLP,
independent auditors, on the consolidated financial statements of D&N Financial
Corporation; (B) consolidated statements of condition of D&N Financial
Corporation as of December 31, 1998 and 1997; (C) consolidated statements of
income of D&N Financial Corporation for the years ended December 31, 1998, 1997
and 1996; (D) consolidated statements of stockholders' equity of D&N Financial
Corporation for the years ended December 31, 1998, 1997 and 1996; (E)
consolidated statements of cash flows of D&N Financial Corporation for the years
ended December 31, 1998, 1997 and 1996; and (F) notes to such consolidated
financial statements of D&N Financial Corporation.
(ii) Included with this Current Report on Form 8-K as Exhibit 99.2
are (A) unaudited condensed consolidated statements of condition of D&N
Financial Corporation as of March 31, 1999; (B) unaudited condensed
consolidated statements of income of D&N Financial Corporation for the three
months ended March 31, 1999 and 1998; (F) unaudited condensed consolidated
statements of changes in stockholders, equity of D&N Financial Corporation for
the three months ended March 31, 1999 and 1998; (D) unaudited condensed
consolidated statements of cash flows of D&N Financial Corporation for the three
months ended March 31, 1999 and 1998; and (E) notes to such unaudited condensed
consolidated financial statements of D&N Financial Corporation.
(b) Pro Forma Financial Information.
It is impracticable for the registrant to provide any of the
pro forma financial information with respect to the registrant and D&N Financial
Corporation required under Article 11 of Regulation S-X at this time. The
registrant shall file such pro forma financial information under cover of an
amendment to this Current Report on Form 8-K as soon as practicable, but in any
event not later than July 30, 1999.
(c) Exhibits.
Exhibit Reference
Number Exhibit Description
3.1 Second Restated Articles of Incorporation of
Republic Bancorp Inc.*
3.2 Bylaws, as amended, of Republic Bancorp Inc.*
23.1 Consent of PricewaterhouseCoopers LLP*
99.1 Financial statements of D&N Financial Corporation
as follows: (A) the report dated January 21, 1999
of PricewaterhouseCoopers LLP, independent
auditors, on the consolidated financial statements
of D&N Financial Corporation; (B) consolidated
statements of condition of D&N Financial
Corporation as of December 31, 1998 and 1997; (C)
consolidated statements of income of D&N Financial
Corporation for the years ended December 31, 1998,
1997 and 1996; (D) consolidated statements of
stockholders' equity of D&N Financial Corporation
for the years ended December 31, 1998, 1997 and
1996; (E) consolidated statements of cash flows of
D&N Financial Corporation for the years ended
December 31, 1998, 1997 and 1996; and (F) notes to
such consolidated financial statements of D&N
Financial Corporation.
99.2 Financial statements of D&N Financial Corporation
as follows: (A) unaudited condensed consolidated
statements of condition of D&N Financial
Corporation as of March 31, 1999; (B) unaudited
condensed consolidated statements of income of D&N
Financial Corporation for the three months ended
March 31, 1999 and 1998; (C) unaudited condensed
consolidated statements of changes in
stockholders' equity of D&N Financial Corporation
for the three months ended March 31, 1999 and
1998; and (E) notes to such unaudited condensed
consolidated financial statements of D&N Financial
Corporation.
99.3 Agreement and Plan of Merger dated as of December
1, 1998 by and between Republic Bancorp Inc. and
D&N Financial Corporation (incorporated by
reference to Exhibit 2.1 of the registrant's
Current Report on Form 8-K dated December 1, 1998
filed with the Securities and Exchange Commission
on December 4, 1998 (file no. 0-21223)).
- --------------------------------
* Filed herewith
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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 hereunto duly authorized.
REPUBLIC BANCORP INC.
Date: May 28, 1999 By: /s/ Thomas F. Menacher
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Name: Thomas F. Menacher
Its: Executive Vice President, Treasurer
and Chief Financial Officer
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EXHIBIT 3.1
George E. Parker III, Esq.
Republic Bancorp, Inc.
18720 Mack Avenue
Grosse Pointe Farms, MI 48238
(Document will be returned to
name and address indicated above)
SECOND RESTATED ARTICLES OF INCORPORATION
OF
REPUBLIC BANCORP INC.
Pursuant to the provisions of Act 284, Public Acts of 1972, the
undersigned corporation executes the following Second Restated Articles of
Incorporation:
1. The present name of the corporation is: Republic Bancorp Inc.
2. The corporation identification number (CID) assigned by the Bureau
is: 354-159.
3. All former names of the corporation are: Republic Bancorp Inc.
4. The date of filing the original Articles of Incorporation was:
March 8, 1985.
The following Second Restated Articles of Incorporation supersede the
Articles of Incorporation as amended and shall be the Articles of Incorporation
for the corporation:
Article I. The name of the corporation is Republic Bancorp Inc.
Article II. The purpose of the corporation is to engage in any lawful
act or activity for which corporations may be organized under the Business
Corporation Act of Michigan.
Article III. The total authorized capital stock of the corporation is
75,000,000 shares of Common Stock, par value of $5.00 per share (hereinafter
called the "Common Stock") and 5,000,000 shares of Preferred Stock, no par value
per share, issuable in series (hereinafter called the "Preferred Stock").
A statement of all or any of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions of
the Common Stock and the Preferred Stock of the corporation is as follows:
A. Common Stock.
(1) Dividends. The holders of Common Stock shall be
entitled to receive when and as declared by the Board of Directors, out
of the assets of the corporation which by law are available therefor,
dividends payable either in cash, in property, or in Common Stock. No
dividends (other than dividends payable in Common Stock) shall be paid
on Common Stock unless cash dividends in full on all outstanding
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Preferred Stock to which the holders thereof are entitled shall have
been paid or declared and set apart for payment or if any sinking fund
for the Preferred Stock is in arrears.
(2) Voting Rights. At every meeting of shareholders
the holders of Common Stock shall have the right to vote with the
holders of each series of Preferred Stock which has voting rights in
the election of directors and upon each other matter coming before any
meeting of the shareholders on the basis of one vote for each share of
Common Stock held. Except as otherwise provided by law, the holders of
Common Stock and the holders of such Preferred Stock shall vote
together as one class. At an election for directors each holder of
Common Stock may vote, in person or by proxy, the number of shares of
Common Stock owned by him for as many persons as there are directors to
be elected and for whose election he has a right to vote, or may
cumulate his votes by giving one candidate as many votes as the number
of such directors multiplied by the number of his shares, or by
distributing his votes on the same principle among any number of the
candidates.
(3) Liquidation Rights. In the event of any
liquidation, dissolution or winding up of the corporation, the holders
of Common Stock shall be entitled, after payment or provisions for
payment of the debts and other liabilities of the corporation and the
amounts to which the holders of the Preferred Stock shall be entitled,
to share ratably in the remaining net assets of the corporation.
(4) Preemptive Rights. The holders of shares of
Preferred Stock shall have no preemptive right to subscribe for any
additional shares of capital stock or other obligations convertible
into shares of capital stock which may hereafter be issued by the
corporation.
B. Preferred Stock
(1) Issuance of Preferred Stock in Series. The Board
of Directors shall have authority to divide and issue shares of
Preferred Stock into series and, within the limitations set forth in
the corporation's Articles of Incorporation, to fix and determine the
relative rights and preferences of the shares of any series so
established. Each series of Preferred Stock shall be so designated by
the Board of Directors as to distinguish the shares thereof from the
shares of all other series of Preferred Stock and other classes of
stock of the corporation. All shares of Preferred Stock will be
identical, except as to the following rights and preferences as to
which there may be variations between different series as fixed and
determined by the Board of Directors: (a) the right to vote, if any,
which may be limited or unlimited; (b) the rate of dividend, the
priority of payment thereof, the right to cumulation thereof, if any,
and the extent of further participation in dividend distribution, if
any; (c) the right to redemption, if any, and the terms and conditions
thereof; (d) the amount payable upon shares in event of voluntary or
involuntary liquidation, and the priority of payment thereof; (e)
sinking fund provisions, if any, for the redemption or purchase of
shares and (f) the right to conversion, if any, and the terms and
conditions thereof.
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(2) Dividends. The holders of Preferred Stock of each
series shall be entitled to receive out of any funds legally available
therefor, when and as declared by the Board of Directors, cash
dividends in such amount as may be fixed by the Board of Directors in
its resolution providing for the issuance of such series before any
dividend (other than dividends payable in Common Stock) shall be paid
on the Common Stock or other stock ranking junior to the Preferred
Stock. Dividends on cumulative Preferred Stock, if any, shall be
cumulative from the date or dates fixed by the Board of Directors in
its resolution providing for the issuance thereof. Accumulations shall
not bear interest.
(3) Voting Rights. At every meeting of shareholders
the holders of Preferred Stock of each series which has voting rights
in the election of directors and upon each other matter coming before
any meeting of the shareholders shall have the right to vote with the
holders of Common Stock to vote in the election of directors and upon
each other matter coming before any meeting of the shareholders on the
basis of one vote for each share of Preferred Stock held. Except as
otherwise provided by law, the holders of Preferred Stock with such
right to vote and the holders of Common Stock shall vote together as
one class.
(4) Preemptive Rights. The holders of shares of
Preferred Stock shall have no preemptive right to subscribe for any
additional shares of capital stock or other obligations convertible
into shares of capital stock which may hereafter be issued by the
corporation.
Prior to the date of filing of these First Restated
Articles of Incorporation, and pursuant to Section 302(4) of the
Business Corporation Act, as amended, three separate series of
Preferred Stock had been established. A conformed copy of the
certificate establishing and designating each of those series of
Preferred Stock and prescribing the relative rights and preferences
thereof are attached to these First Restated Articles of Incorporation
and incorporated herein by this reference.
Article IV. The address of its registered office in the State of
Michigan is 122 South Main Street, Ann Arbor, Michigan 48104. The name of its
registered agent at such address is Thomas F. Menacher.
Article V. The name and mailing address of the incorporator are as
follows:
Name Mailing Address
---- ---------------
Jerry D. Campbell 3200 Beecher Road, Suite 1
Flint, Michigan 48504
Article VI. When a compromise or arrangement or a plan of
reorganization of this corporation is proposed between this corporation and its
creditors or any class of them or between this corporation and its shareholders
or any class of them, a court of equity jurisdiction within the state, on
application of this corporation or of a creditor or shareholder thereof, or on
application of a receiver appointed for the corporation, may order a meeting of
the creditors or class of creditors or of the shareholders or a class of
shareholders to be affected by the proposed compromise or arrangement or
reorganization, to be summoned in such manner as the court
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directs. If a majority in number representing 3/4 in value of the creditors or
class of creditors, or of the shareholders or class of shareholders to be
affected by the proposed compromise or arrangement or a reorganization, agree to
a compromise or arrangement or a reorganization of this corporation as a
consequence of the compromise or arrangement, the compromise or arrangement and
the reorganization, if sanctioned by the court to which the application has been
made, shall be binding on all the creditors or class of creditors, or on all the
shareholders or class of shareholders and also on this corporation.
Article VII. Any action required or permitted by this act to be taken
at an annual or special meeting of shareholders may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, is signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take the action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to shareholders
who have not consented in writing.
Article VIII. (a) The corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a manner
which he reasonable believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such
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person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper. Any person entitled to indemnification against
expenses under this paragraph (b) shall, to the extent not prohibited by the
laws of Michigan and any other applicable law, also be entitled to
indemnification, and the corporation shall indemnify him, against judgments and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action or suit, upon the same terms and conditions and subject to the
same limitations as provided with respect to expenses.
(c) To the extent that a director, officer, employee or agent
of a corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in paragraphs (a) and (b) of this
Article or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under paragraphs (a) and (b) of this
Article (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in paragraphs (a) and (b).
Such determination shall be made (i) by the Board of Directors by a majority
vote of a quorum (as defined in the Bylaws of the corporation) consisting of
directors who were not parties to such action, suit or proceeding, or (ii) if
such quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(iii) by the shareholders. Notwithstanding the failure or refusal of the
directors, counsel and shareholders to make provision therefor, such
indemnification shall be made if a court of competent jurisdiction makes a
determination that the director, officer, employee or agent has a right to
indemnification hereunder in any specific case upon the application of such
director, officer, employee or agent.
(e) Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors in the specific case upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
corporation.
(f) The indemnification provided by this Article shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any statute, bylaw, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
(g) The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
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such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article.
(h) For the purposes of this Article, references to "the
corporation" include all constituent corporations absorbed in a consolidation or
merger as well as the resulting or surviving corporation so that any person who
is or was a director, officer, employee or agent of such a constituent
corporation or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise shall stand in the same position under
the provisions of this Article with respect to the resulting or surviving
corporation as he would if he had served the resulting or surviving corporation
in the same capacity.
(i) Neither the corporation nor its directors or officers nor
any person acting on its behalf shall be liable to anyone for any determination
as to the existence or absence of conduct which would provide a basis for making
or refusing to make any payment under this Article or for taking or omitting to
take any other action under this Article, in reliance upon the advice of
counsel.
Article VIII. The corporation reserves the right to amend, alter,
change or repeal any provisions contained in these Articles of Incorporation, in
the manner now or hereafter prescribed by the laws of Michigan, and all rights
conferred herein upon shareholders are granted subject to this reservation.
Article IX. A director of the corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) a violation of Section 551(1) of the Michigan
Business Corporation Act, or (iv) for any transaction from which the director
derived any improper personal benefit. If the Michigan Business Corporation Act
is amended after approval by the shareholders of this provision to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Michigan Business
Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the
shareholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
* * * * *
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These Second Restated Articles of Incorporation were duly adopted on
the 13th day of May, 1999, in accordance with the provisions of Section 642 of
the Act and were duly adopted by the Board of Directors without a vote of the
shareholders. These Second Restated Articles of Incorporation only restate and
integrate and do not further amend the provisions of the Articles of
Incorporation as heretofore amended and there is no material discrepancy between
those provisions and the provisions of these Second Restated Articles of
Incorporation.
Signed this 24th day of May, 1999.
By: /s/ Thomas F. Menacher
--------------------------------------
Name: Thomas F. Menacher
Title: Executive Vice President
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(Series A Preferred Stock - Originally filed with the
Michigan Department of Commerce on July 28, 1986)
CERTIFICATE PURSUANT TO SECTION 302(4) OF THE
BUSINESS CORPORATIONS ACT CONTAINING THE
RESOLUTIONS OF THE BOARD OF DIRECTORS
OF REPUBLIC BANCORP INC.
ESTABLISHING AND DESIGNATING A
SERIES OF PREFERRED STOCK AND PRESCRIBING
THE RELATIVE RIGHTS AND PREFERENCES THEREOF
WHEREAS, the Board of Directors of Republic Bancorp Inc. (the
"Company") has previously considered an intrastate public offering of
approximately $2,700,000 of convertible subordinated debentures, and 100,000
shares of its convertible preferred stock, no par value, $25 stated value, in
order to obtain funds for its corporate purposes and has previously entered into
a preliminary letter of intent with First of Michigan Corporation ("FOM") dated
June 12, 1986 (the "Letter of Intent"); and
WHEREAS, subsequent to the Letter of Intent the Board of Directors has
considered and now wishes to expand and approve the public offering to include
up to 184,000 shares of convertible preferred stock, 86,250 shares of common
stock, $5 par value ("Common Stock"), and $1,840,000 convertible subordinated
debentures, and also approve the execution of all instruments, agreements,
applications and other documents, and the performance of all acts appropriate to
effectuate such offerings; and
WHEREAS, in conjunction with said public offering the Board of
Directors is required to specifically authorize the series of preferred stock to
be issued and designate the rights, preferences and characteristics thereof;
1. NOW, THEREFORE, BE IT RESOLVED that the Company be and hereby is
authorized to issue a series of convertible preferred stock to be designated the
"Series A Convertible Preferred Stock" (hereinafter referred to as the "Series A
Preferred Stock"), having the following rights, preferences and characteristics:
a. Number of Shares; Stated Value.
The authorized number of Series A Preferred Stock is 184,000
shares, having no par value and having a stated value of $25 per share.
b. Dividends.
Holders of shares of the Series A Preferred Stock shall be
entitled to receive, when and if declared by the Board of Directors out of funds
of the Company legally available therefor, an annual cash dividend of $2.25 per
share, payable in quarterly installments on April 15, July 15, October 15 and
January 15 of each year commencing October 15, 1986. Dividends on the Series A
Preferred Stock shall be cumulative. Dividends shall be payable to holders of
record as they appear on the stock books of the Company on such record dates,
not
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more than 60 days nor less than 10 days preceding the payment dates, as shall be
fixed by the Board of Directors.
When dividends are not paid in full upon the Series A
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Series A Preferred Stock, all dividends declared upon shares
of Series A Preferred Stock and such other preferred stock will be declared pro
rata so that in all cases the amount of dividends declared per share on the
Series A Preferred Stock and such other preferred stock bear to each other the
same ratio that accumulated dividends per share on the shares of Series A
Preferred Stock and such other preferred stock bear to each other. Unless full
cumulative dividends on the Series A Preferred Stock have been paid, no
dividends (other than in Common Stock or any other stock ranking junior to the
Series A Preferred Stock as to dividends) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Company ranking junior to the Series A Preferred Stock as to
dividends, nor shall any Common Stock or any other stock of the Company ranking
junior to the Series A Preferred Stock as to dividends be redeemed, purchased or
otherwise acquired for any consideration (or any payment made to or available
for a sinking fund for the redemption of any shares of such stock) by the
Company (except by conversion into or exchange for stock of the Company ranking
junior to the Series A Preferred Stock as to dividends).
c. Conversion Privilege.
Each share of Series A Preferred Stock shall be convertible,
unless previously redeemed, at any time at the option of the holder upon written
notice to the Company in form satisfactory to the Company into 1.852 shares of
the Company's Common Stock, $5 par value (the "Common Stock") (equivalent to a
conversion price of $13.50 per share of Common Stock), except that, if shares of
Series A Preferred Stock are called for redemption, the conversion rights will
terminate at the close of business on the business day prior to the date fixed
for redemption. This conversion rate is subject to adjustment upon the issuance
of Common Stock as a stock dividend, the combination or subdivision of the
Common Stock, or the issuance to all holders of Common Stock of rights or
warrants entitling them (for a period expiring within 45 days of the record date
for determination of holders entitled to receive such rights or warrants) to
subscribe for or purchase Common Stock at less than the current Market Value (as
defined below) at such record date, such adjustment to be that adjustment which
the Board of Directors deems necessary to permit the holder of any shares of
Series A Preferred Stock thereafter converted to be entitled to receive the
number of shares of Common Stock after the happening of any event described
above which he would have received had his Series A Preferred Stock been
converted immediately prior to such event. No adjustment of the conversion price
shall be required unless such adjustment would require a change of at least 1%
in the price then in effect; however, any such adjustment that would otherwise
be required to be made shall be carried forward and taken into account in any
subsequent adjustment. Except as stated above, the conversion price will not be
adjusted for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock, or carrying the right to purchase any of the
foregoing, in exchange for cash, property or services.
The term Market Value shall mean that price per share which
the Company's Board of Directors determines to be the then current market price
per share of the Common Stock based upon the most recent arms length trade
reported to the Board of Directors if, in the
<PAGE>
Board's judgment, there exists an established trading market in the Company's
Common Stock or if, in the Board's judgment, no such trading market then exists,
upon such other factors the Board deems relevant and appropriate. Once
established the Market Value will continue until such time as the Board
determines a new Market Value. The Board will endeavor, but shall not be
obligated, to review and establish the Market Value once each quarter.
In case of any reclassification or change of outstanding
shares of the class of Common Stock issuable upon conversion of the Series A
Preferred Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), or in case of any merger or consolidation of the Company with one
or more other corporations (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock issuable upon
conversion of the Series A Preferred Stock), or in case of the merger of the
Company into another corporation, or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the holder of each share of Series A Preferred
Stock then outstanding shall have the right to convert such share into the kind
and amount of shares of capital stock or other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock into which such
share of Series A Preferred Stock might have been converted immediately prior to
such reclassification, change, consolidation, merger, sale or conveyance. In the
case of a cash merger of the Company into another corporation or any other cash
transaction of the type mentioned above, the effect of these provisions would be
that the conversion features of the Series A Preferred Stock would thereafter be
limited to converting the Series A Preferred Stock at the conversion price in
effect at such time into the same amount of cash per share that such holder
would have received had such holder converted the Series A Preferred Stock into
Common Stock immediately prior to the effective date of such cash merger or
transaction.
No fractional shares or securities representing fractional
shares of Common Stock shall be issued upon conversion; any fractional interest
resulting from conversion shall be paid in cash based on the current Market
Value of the Common Stock at the close of business on the business day next
preceding the date of conversion.
Shares of Series A Preferred Stock surrendered for conversion
after the record date for a dividend payment but before such dividend is paid
must be accompanied by payment of an amount equal to the dividend thereon which
the holder of record is to receive on such dividend payment date.
d. Liquidation Rights.
In the event of any liquidation, dissolution or winding up of
the Company, the holders of shares of Series A Preferred Stock shall be entitled
to receive out of assets of the Company available for distribution to
shareholders, before any distribution of assets is made to holders of Common
Stock or preferred stock ranking junior to the Series A Preferred Stock in
liquidation rights, liquidating distributions in the amount of $25 per share
plus accumulated and unpaid dividends. If upon any liquidation, dissolution or
winding up of the Company, the amounts payable with respect to the Series A
Preferred Stock and any other preferred stock ranking as to any such
distribution on a parity with the Series A Preferred Stock are not paid in
<PAGE>
full, the holders of the Series A Preferred Stock and of such other preferred
stock shall share ratably in any such distribution of assets in proportion to
the full respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of shares of Series A Preferred Stock shall not be
entitled to any further participation in any distribution of assets by the
Company.
e. Redemption.
The Series A Preferred Stock may be redeemed on at least 30
and not more than 60 days' prior written notice by first class mail addressed to
the holder at his address shown on the register maintained by the registrar at
the option of the Company, in whole or in part, at any time or from time to time
on or after July 15, 1989. Series A Preferred Stock redeemed during the 12-month
period beginning July 15 in each of the years set forth below, shall be redeemed
at the prices per share as follows:
Year Price
1989 ...........................$26.75
1990 ........................... 26.50
1991 ........................... 26.25
1992 ........................... 26.00
1993 ........................... 25.75
1994 ........................... 25.50
1995 ........................... 25.25
1996 and thereafter....... 25.00
together in each case with accumulated and unpaid dividends to the date fixed
for redemption. If full cumulative dividends on the Series A Preferred Stock
have not been paid, the Series A Preferred Stock shall not be redeemed in part
and the Company shall not purchase or acquire any share of Series A Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Series A Preferred Stock. If less than all the
outstanding shares of Series A Preferred Stock are to be redeemed, the Company
will select those to be redeemed by lot or a substantially equivalent method.
Holders of Series A Preferred Stock called for redemption will not be entitled
to any dividends payable to holders of record on and after the redemption date.
f. Voting Rights.
Except as indicated below, the holders of shares of Series A
Preferred Stock have no voting rights. If the equivalent of six quarterly
dividends payable on the Series A Preferred Stock, or on any other preferred
stock ranking on a parity with the Series A Preferred Stock as to dividends, is
in arrears, the number of directors of the Company will be increased by two and
the holders of all outstanding shares of such preferred stock, voting as a
single class without regard to series, shall be entitled to elect the additional
two directors until all dividends in arrears have been paid or declared and set
apart for payment.
Without the vote or consent of the holders of at least
two-thirds of the number of shares of the Series A Preferred Stock and all other
outstanding preferred stock ranking on a
<PAGE>
parity with the Series A Preferred Stock as to dividends, the Company shall not,
except for the series of preferred stock anticipated to be authorized and issued
in connection with the Company's acquisition of the Bellaire State Bank as
described in the Preliminary Prospectus dated June 19, 1986 (defined therein as
the "Series B Preferred Stock"), (i) create any class or classes of stock or
additional series of preferred stock ranking equal or prior to the Series A
Preferred Stock either as to dividends or upon liquidation or increase the
authorized number of shares of any class or classes of stock ranking equal or
prior to the Series A Preferred Stock either as to dividends or upon
liquidation, (ii) amend, alter or repeal any of the provisions of the Articles
of Incorporation of the Company or the resolutions of the Board creating the
Series A Preferred Stock so as to affect adversely the preferences or rights of
the Series A Preferred Stock, or (iii) authorize any reclassification of the
Series A Preferred Stock. In addition, without the vote or consent of the
holders of at least two-thirds of the number of shares of the Series A Preferred
Stock and all other outstanding preferred stock ranking on a parity with the
Series A Preferred Stock as to dividends then outstanding, the Company shall not
increase the authorized number of shares of the Series A Preferred Stock.
Upon the date of conversion of Series A Preferred Stock for
Common Stock, the rights of the holders of the Series A Preferred Stock as
holders of the Series A Preferred Stock of the Company shall terminate,
including all voting rights, and holders shall have only those rights afforded
to holders of Common Stock. Shares of Series A Preferred Stock which have been
converted shall be restored to the status of authorized but unissued preferred
stock.
g. No Preemptive Rights.
The holders of the Series A Preferred Stock shall not be
entitled, as of right, to purchase or subscribe for any shares of capital stock
of the Company, or to purchase or subscribe for any of its bonds, certificates
of indebtedness, debentures or other securities of any kind of the Company.
The undersigned, John M. Creighton, Vice President, Secretary
and Treasurer of Republic Bancorp Inc., does hereby certify that the foregoing
Certificate contains the resolutions of the Board of Directors of Republic
Bancorp Inc. establishing and designating its Series A Convertible Preferred
Stock and prescribing the relative rights and preferences thereof which were
duly adopted by the Board of Directors of Republic Bancorp Inc. at a duly
convened meeting thereof held on the 14th and 21st day of July, 1986, at which a
quorum was present and voting, and that the same have never been rescinded and
modified and that the same are in full force and in effect at the date hereof.
Adopted July 14, 1986 and July 21, 1986.
/s/ John M. Creighton
-----------------------------------------
John M. Creighton, Vice President,
Secretary and Treasurer
<PAGE>
(Series B Preferred Stock - Originally filed with the
Michigan Department of Commerce on September 29, 1988)
CERTIFICATE PURSUANT TO SECTION 302(4)
OF THE BUSINESS CORPORATION ACT
CONTAINING RESOLUTIONS OF THE
BOARD OF DIRECTORS OF REPUBLIC BANCORP INC.
ESTABLISHING AND DESIGNATING A SERIES OF PREFERRED STOCK
AND PRESCRIBING ITS RELATIVE RIGHTS AND PREFERENCES
RESOLVED that the Company is authorized to issue a series of
convertible preferred stock to be designated the "Series B Convertible Preferred
Stock," having the following rights, preferences and characteristics:
a. Number of Shares; Stated Value
The authorized number of Series B Preferred Stock is 150,000
shares, having no par value and having a stated value of $25.00 per share.
b. Dividends
Subject to the priority right of holders of the Series A
Preferred Stock to be paid all accumulated dividends payable thereon prior to
any dividends being paid on the Series B Preferred Stock, holders of shares of
the Series B Preferred Stock will be entitled to receive, when and if declared
by the Board of Directors, an annual cash dividend of $2.25 per share, payable
in quarterly installments on April 15, July 15, October 15 and January 15 of
each year commencing October 15, 1988. Dividends on the Series B Preferred Stock
are cumulative. Dividends will be payable to holders of record as they appear on
the stock books of the Company on such record dates, not more than 60 days nor
less than 10 days preceding the payment dates, as shall be fixed by the Board of
Directors.
When dividends are not paid in full upon the Series B
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Series B Preferred Stock, all dividends declared upon shares
of Series B Preferred Stock and such other preferred stock will be declared pro
rata so that in all cases the amount of dividends declared per share on the
Series B Preferred Stock and such other preferred stock bear to each other the
same ratio that accumulated dividends per share on the shares of Series B
Preferred Stock and such other preferred stock bear to each other. Unless full
cumulative dividends on the Series B Preferred Stock have been paid, no
dividends (other than in Common Stock or any other stock ranking junior to the
Series B Preferred Stock as to dividends) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Company ranking junior to the Series B Preferred Stock as to
dividends, nor may any Common Stock or any other stock of the Company ranking
junior to the Series B Preferred Stock as to dividends be redeemed, purchased or
otherwise acquired for any consideration (or any payment made to or available
for a sinking fund for the redemption of any shares of such stock) by the
Company (except by conversion into or exchange for stock of the Company ranking
junior to the Series B Preferred Stock as to dividends).
<PAGE>
The payment of dividends on the Series B Preferred Stock is
subject to the same restrictions as the payment of dividends on the Common
Stock.
c. Conversion Privilege
Each share of Series B Preferred Stock will initially be
convertible, unless previously redeemed, at any time at the option of the holder
upon written notice to the Company in form satisfactory to the Company into 2.5
shares of Common Stock (equivalent to a conversion price of $10.00 per share of
Common Stock). If any shares of Series B Preferred Stock are called for
redemption, the conversion rights terminate at the close of business on the
business day prior to the date fixed for redemption. The conversion rate for the
Series B Preferred Stock is subject to adjustment in certain cases, including
the issuance of Common Stock as a stock dividend; the combination or subdivision
of the Common Stock; or the issuance to all holders of Common Stock of rights or
warrants entitling them (for a period expiring within 45 days of the record date
for determination of holders entitled to receive such rights or warrants) to
subscribe for or purchase Common Stock at less than the current Market Value (as
defined below) at such record date. No adjustment of the conversion price will
be required unless such adjustment would require a change of at least 1% in the
price then in effect; however, any such adjustment that would otherwise be
required to be made will be carried forward and taken into account in any
subsequent adjustment. Except as stated above, the conversion price will not be
adjusted for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock, or carrying the right to purchase any of the
foregoing, in exchange for cash, property or services.
The term Market Value shall mean that price per share which
the Company's Board of Directors determines to be the then current market price
per share of the Common Stock based upon the most recent arms length trade
reported to the Board of Directors if, in the Board's judgment, there exists an
established trading market in the Company's Common Stock or if, in the Board's
judgment, no such trading market then exists, upon such other factors the Board
deems relevant and appropriate. Once established the Market Value will continue
until such time as the Board determines a new Market Value. The Board will
endeavor, but shall not be obligated, to review and establish the Market Value
once each quarter.
In case of any reclassification or change of outstanding
shares of the class of Common Stock issuable upon conversion of the Series B
Preferred Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), or in case of any merger or consolidation of the Company with one
or more other corporations (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock issuable upon
conversion of the Series B Preferred Stock), or in case of the merger of the
Company into another corporation, or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the holder of each share of Series B Preferred
Stock then outstanding shall have the right to convert such share into the kind
and amount of shares of capital stock or other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock into which such
share of Series B Preferred Stock might have been converted immediately prior to
such reclassification, change, consolidation, merger, sale or conveyance. In the
case of a cash merger of the Company
<PAGE>
into another corporation or any other cash transaction of the type mentioned
above, the effect of these provisions would be that the conversion features of
the Series B Preferred Stock would thereafter be limited to converting the
Series B Preferred Stock at the conversion price in effect at such time into the
same amount of cash per share that such holder would have received had such
holder converted the Series B Preferred Stock into Common Stock immediately
prior to the effective date of such cash merger or transaction. Depending upon
the terms of such cash merger or transaction, the aggregate amount of cash so
received on conversion could be more or less than the liquidation preference of
the Series B Preferred Stock.
No fractional shares or securities representing fractional
shares of Common Stock will be issued upon conversion; any fractional interest
resulting from conversion will be paid in cash based on the current Market Value
of the Common Stock at the close of business on the business day next preceding
the date of conversion.
Shares of Series B Preferred Stock surrendered for conversion
after the record date for a dividend payment but before such dividend is paid
must be accompanied by payment of an amount equal to the dividend thereon which
the holder of record is to receive on such dividend payment date. Therefore, if
a holder exercises conversion privileges between a record date and a payment
date for a Series B Preferred Stock dividend, such holder will forego such
dividend and will only be entitled to dividends paid on the Common Stock the
record date of which is on or after the conversion date.
d. Liquidation Rights
In the event of any liquidation, dissolution or winding up of
the Company, subject to the prior payment of liquidating distributions in the
amount of $25.00 per share of Series A Preferred Stock plus all accumulated and
unpaid dividends thereon, the holders of shares of Series B Preferred Stock will
be entitled to receive out of assets of the Company available for distribution
to shareholders, before any distribution of assets is made to holders of Common
Stock or preferred stock ranking junior to the Series B Preferred Stock in
liquidation rights, liquidating distributions in the amount of $25.00 per share
plus accumulated and unpaid dividends. If upon any liquidation, dissolution or
winding up of the Company, the amounts payable with respect to the Series B
Preferred Stock and any other preferred stock ranking as to any such
distribution on a parity with the Preferred Stock are not paid in full, the
holders of the Series B Preferred Stock and of such other preferred stock will
share ratably in any such distribution of assets in proportion to the full
respective preferential amounts to which they are entitled. After payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of shares of Series B Preferred Stock will not be entitled to any
further participation in any distribution of assets by the Company.
e. Redemption
Provided no Series A Preferred Stock is then outstanding,
Series B Preferred Stock may be redeemed on at least 30 and not more than 60
days' prior written notice by first class mail addressed to the holder at his
address shown on the register maintained by the registrar at the option of the
Company, in whole or in part, at any time or from time to time on or after July
15, 1991. Series B Preferred Stock redeemed during the 12-month period beginning
July 15 in each of the years set forth below, shall be redeemed at the prices
per share as follows:
<PAGE>
Series B Preferred Stock
Redemption Price
Year Price
1991 $26.75
1992 26.50
1993 26.25
1994 26.00
1995 25.75
1996 25.50
1997 25.25
1998 and thereafter 25.00
together in each case with accumulated and unpaid dividends to the date fixed
for redemption. If full cumulative dividends on the Series B Preferred Stock
have not been paid, the Series B Preferred Stock may not be redeemed in part and
the Company may not purchase or acquire any share of Series B Preferred Stock
otherwise than pursuant to a purchase or exchange offer made on the same terms
to all holders of the Series B Preferred Stock. If less than all the outstanding
shares of Series B Preferred Stock are to be redeemed, the Company will select
those to be redeemed by lot or a substantially equivalent method. Holders of
Series B Preferred Stock called for redemption will not be entitled to any
dividends payable to holders of record on and after the redemption date.
f. Voting Rights
Except as indicated below, the holders of shares of Series B
Preferred Stock have no voting rights. If the equivalent of six quarterly
dividends payable on the Series B Preferred Stock or on any other preferred
stock ranking on a parity with the Series B Preferred Stock as to dividends, is
in arrears, the number of directors of the Company will be increased by two and
the holders of all outstanding shares of such preferred stock, voting as a
single class without regard to series, will be entitled to elect the additional
two directors until all dividends in arrears have been paid or declared and set
apart for payment.
Without the vote or consent of the holders of at least
two-thirds of the number of shares of the Series B Preferred Stock and all other
outstanding preferred stock ranking on a parity with the Series B Preferred
Stock as to dividends, the Company shall not (i) create any class or classes of
stock or additional series of preferred stock ranking prior to the Series B
Preferred Stock either as to dividends or upon liquidation or increase the
authorized number of shares of any class or classes of stock ranking prior to
the Series B Preferred Stock either as to dividends or upon liquidation, (ii)
amend, alter or repeal any of the provisions of the Articles of Incorporation of
the Company or the resolutions of the Board creating the Series B Preferred
Stock so as to affect adversely the preferences or rights of the Series B
Preferred Stock, or (iii) authorize any reclassification of the Series B
Preferred Stock. In addition, without the vote or consent of the holders of at
least two-thirds of the number of shares of the Series B Preferred Stock and all
other outstanding preferred stock ranking on a parity with the Series B
Preferred Stock as to dividends then outstanding, the Company shall not increase
the authorized number of shares of the Preferred Stock. The Company reserves the
right to issue additional classes of
<PAGE>
stock or series of preferred stock ranking pari passu with the Series B
Preferred Stock as to dividends or upon liquidation up to the full amount of the
authorized but unissued preferred stock of the Company existing as of the date
hereof.
Upon the date of conversion of Series B Preferred Stock for
Common Stock, the rights of the holders of the Series B Preferred Stock as
holders of the Series B Preferred Stock of the Company shall terminate,
including all voting rights, and holders shall have only those rights afforded
to holders of Common Stock. Shares of Series B Preferred Stock which have been
converted shall be restored to the status of authorized but unissued preferred
stock.
g. No Preemptive Rights
The holders of the Series B Preferred Stock shall not be
entitled, as of right, to purchase, or subscribe for any shares of capital stock
of the Company, or to purchase or subscribe for any of its bonds, certificates
of indebtedness, debentures or other securities of any kind of the Company.
The undersigned, John M. Creighton, Secretary of Republic
Bancorp Inc., does hereby certify that the foregoing Certificate contains the
Resolutions of the Board of Directors of Republic Bancorp Inc. establishing and
designating its Series B Convertible Preferred Stock and prescribing the
relative rights and preferences thereof which were duly authorized by the Board
of Directors of Republic Bancorp Inc. at duly convened meetings held on July 15,
1988 and August 11, 1988 at which a quorum was present and voting, and that the
same have never been rescinded and modified and are in full force and in effect
at the date hereof.
/s/ John M. Creighton
-----------------------------
John M. Creighton, Secretary
Dated: September 23, 1988
<PAGE>
(Series C Preferred Stock - Originally filed with the
Michigan Department of Commerce on September 30, 1988)
CERTIFICATE PURSUANT TO SECTION 302(4)
OF THE BUSINESS CORPORATION ACT
CONTAINING RESOLUTIONS OF THE
BOARD OF DIRECTORS OF REPUBLIC BANCORP INC.
ESTABLISHING AND DESIGNATING A SERIES OF PREFERRED STOCK
AND PRESCRIBING ITS RELATIVE RIGHTS AND PREFERENCES
RESOLVED that the Company is authorized to issue a series of
convertible preferred stock to be designated the "Series C Convertible Preferred
Stock," having the following rights, preferences and characteristics:
a. Number of Shares; Stated Value
The authorized number of Series C Preferred Stock is 80,000
shares, having no par value and having a stated value of $25.00 per share.
b. Dividends
Subject to the priority right of holders of the Series A and
Series B Preferred Stock to be paid all accumulated dividends payable thereon
prior to any dividends being paid on the Series C Preferred Stock, holders of
shares of the Series C Preferred Stock will be entitled to receive, when and if
declared by the Board of Directors, an annual cash dividend of $2.25 per share,
payable in quarterly installments on April 15, July 15, October 15 and January
15 of each year commencing October 15, 1988. Dividends on the Series C Preferred
Stock are cumulative. Dividends will be payable to holders of record as they
appear on the stock books of the Company on such record dates, not more than 60
days nor less than 10 days preceding the payment dates, as shall be fixed by the
Board of Directors.
When dividends are not paid in full upon the Series C
Preferred Stock and any other preferred stock ranking on a parity as to
dividends with the Series C Preferred Stock, all dividends declared upon shares
of Series C Preferred Stock and such other preferred stock will be declared pro
rata so that in all cases the amount of dividends declared per share on the
Series C Preferred Stock and such other preferred stock bear to each other the
same ratio that accumulated dividends per share on the shares of Series C
Preferred Stock and such other preferred stock bear to each other. Unless full
cumulative dividends on the Series C Preferred Stock have been paid, no
dividends (other than in Common Stock or any other stock ranking junior to the
Series C Preferred Stock as to dividends) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Company ranking junior to the Series C Preferred Stock as to
dividends, nor may any Common Stock or any other stock of the Company ranking
junior to the Series C Preferred Stock as to dividends be redeemed, purchased or
otherwise acquired for any consideration (or any payment made to or available
for a sinking fund for the redemption of any shares of such stock) by the
Company (except by conversion into or exchange for stock of the Company ranking
junior to the Series C Preferred Stock as to dividends).
<PAGE>
The payment of dividends on the Series C Preferred Stock is
subject to the same restrictions as the payment of dividends on the Common
Stock.
c. Conversion Privilege
Each share of Series C Preferred Stock will initially be
convertible, unless previously redeemed, at any time at the option of the holder
upon written notice to the Company in form satisfactory to the Company into 2.5
shares of Common Stock (equivalent to a conversion price of $10.00 per share of
Common Stock). If any shares of Series C Preferred Stock are called for
redemption, the conversion rights terminate at the close of business on the
business day prior to the date fixed for redemption. The conversion rate for the
Series C Preferred Stock is subject to adjustment in certain cases, including
the issuance of Common Stock as a stock dividend; the combination or subdivision
of the Common Stock; or the issuance to all holders of Common Stock of rights or
warrants entitling them (for a period expiring within 45 days of the record date
for determination of holders entitled to receive such rights or warrants) to
subscribe for or purchase Common Stock at less than the current Market Value (as
defined below) at such record date. No adjustment of the conversion price will
be required unless such adjustment would require a change of at least 1% in the
price then in effect; however, any such adjustment that would otherwise be
required to be made will be carried forward and taken into account in any
subsequent adjustment. Except as stated above, the conversion price will not be
adjusted for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock, or carrying the right to purchase any of the
foregoing, in exchange for cash, property or services.
The term Market Value shall mean that price per share which
the Company's Board of Directors determines to be the then current market price
per share of the Common Stock based upon the most recent arms length trade
reported to the Board of Directors if, in the Board's judgment, there exists an
established trading market in the Company's Common Stock or if, in the Board's
judgment, no such trading market then exists, upon such other factors the Board
deems relevant and appropriate. Once established the Market Value will continue
until such time as the Board determines a new Market Value. The Board will
endeavor, but shall not be obligated, to review and establish the Market Value
once each quarter.
In case of any reclassification or change of outstanding
shares of the class of Common Stock issuable upon conversion of the Series C
Preferred Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), or in case of any merger or consolidation of the Company with one
or more other corporations (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock issuable upon
conversion of the Series C Preferred Stock), or in case of the merger of the
Company into another corporation, or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, the holder of each share of Series C Preferred
Stock then outstanding shall have the right to convert such share into the kind
and amount of shares of capital stock or other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock into which such
share of Series B Preferred Stock might have been converted immediately prior to
such reclassification, change, consolidation, merger, sale or conveyance. In the
case of a cash merger of the Company
<PAGE>
into another corporation or any other cash transaction of the type mentioned
above, the effect of these provisions would be that the conversion features of
the Series C Preferred Stock would thereafter be limited to converting the
Series C Preferred Stock at the conversion price in effect at such time into the
same amount of cash per share that such holder would have received had such
holder converted the Series C Preferred Stock into Common Stock immediately
prior to the effective date of such cash merger or transaction. Depending upon
the terms of such cash merger or transaction, the aggregate amount of cash so
received on conversion could be more or less than the liquidation preference of
the Series C Preferred Stock.
No fractional shares or securities representing fractional
shares of Common Stock will be issued upon conversion; any fractional interest
resulting from conversion will be paid in cash based on the current Market Value
of the Common Stock at the close of business on the business day next preceding
the date of conversion.
Shares of Series C Preferred Stock surrendered for conversion
after the record date for a dividend payment but before such dividend is paid
must be accompanied by payment of an amount equal to the dividend thereon which
the holder of record is to receive on such dividend payment date. Therefore, if
a holder exercises conversion privileges between a record date and a payment
date for a Series C Preferred Stock dividend, such holder will forego such
dividend and will only be entitled to dividends paid on the Common Stock the
record date of which is on or after the conversion date.
d. Liquidation Rights
In the event of any liquidation, dissolution or winding up of
the Company, subject to the prior payment of liquidating distributions in the
amount of $25.00 per share of Series A and Series B Preferred Stock plus all
accumulated and unpaid dividends thereon, the holders of shares of Series C
Preferred Stock will be entitled to receive out of assets of the Company
available for distribution to shareholders, before any distribution of assets is
made to holders of Common Stock or preferred stock ranking junior to the Series
C Preferred Stock in liquidation rights, liquidating distributions in the amount
of $25.00 per share plus accumulated and unpaid dividends. If upon any
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to the Series C Preferred Stock and any other preferred stock ranking as
to any such distribution on a parity with the Series C Preferred Stock are not
paid in full, the holders of the Series C Preferred Stock and of such other
preferred stock will share ratably in any such distribution of assets in
proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of shares of Series C Preferred Stock will
not be entitled to any further participation in any distribution of assets by
the Company.
e. Redemption
The Series C Preferred Stock may be redeemed on at least 30
and not more than 60 days' prior written notice by first class mail addressed to
the holder at his address shown on the register maintained by the registrar at
the option of the Company, in whole or in part, at any time or from time to
time, provided full cumulative dividends on the Series A and Series B Preferred
Stock have been paid. Each share of Series C Preferred Stock redeemed shall be
redeemed at its stated value plus all accumulated and unpaid dividends to the
date fixed for
<PAGE>
redemption. If full cumulative dividends on the Series C Preferred Stock have
not been paid, the Series C Preferred Stock may not be redeemed in part and the
Company may not purchase or acquire any share of Series C Preferred Stock
otherwise than pursuant to a purchase or exchange offer made on the same terms
to all holders of the Series C Preferred Stock. If less than all the outstanding
shares of Series C Preferred Stock are to be redeemed, the Company will select
those to be redeemed by lot or a substantially equivalent method. Holders of
Series C Preferred Stock called for redemption will not be entitled to any
dividends payable to holders of record on and after the redemption date.
f. Voting Rights
Except as indicated below, the holders of shares of Series C
Preferred Stock have no voting rights. If the equivalent of six quarterly
dividends payable on the Series C Preferred Stock or on any other preferred
stock ranking on a parity with the Series C Preferred Stock as to dividends, is
in arrears, the number of directors of the Company will be increased by two and
the holders of all outstanding shares of such preferred stock, voting as a
single class without regard to series, will be entitled to elect the additional
two directors until all dividends in arrears have been paid or declared and set
apart for payment.
Without the vote or consent of the holders of at least
two-thirds of the number of shares of the Series C Preferred Stock and all other
outstanding preferred stock ranking on a parity with the Series C Preferred
Stock as to dividends, the Company shall not (i) create any class or classes of
stock or additional series of preferred stock ranking prior to the Series C
Preferred Stock either as to dividends or upon liquidation or increase the
authorized number of shares of any class or classes of stock ranking prior to
the Series C Preferred Stock either as to dividends or upon liquidation, (ii)
amend, alter or repeal any of the provisions of the Articles of Incorporation of
the Company or the resolutions of the Board creating the Series C Preferred
Stock so as to affect adversely the preferences or rights of the Series C
Preferred Stock, or (iii) authorize any reclassification of the Series C
Preferred Stock. The Company reserves the right to issue additional classes of
stock or series of preferred stock ranking pari passu with the Series C
Preferred Stock as to dividends or upon liquidation up to the full amount of the
authorized but unissued preferred stock of the Company existing as of the date
hereof.
Upon the date of conversion of Series C Preferred Stock for
Common Stock, the rights of the holders of the Series C Preferred Stock as
holders of the Series C Preferred Stock of the Company shall terminate,
including all voting rights, and holders shall have only those rights afforded
to holders of Common Stock. Shares of Series C Preferred Stock which have been
converted shall be restored to the status of authorized but unissued preferred
stock.
g. No Preemptive Rights
The holders of the Series C Preferred Stock shall not be
entitled, as of right, to purchase or subscribe for any shares of capital stock
of the Company, or to purchase or subscribe for any of its bonds, certificates
of indebtedness, debentures or other securities of any kind of the Company.
The undersigned, John M. Creighton, Secretary of Republic
Bancorp Inc., does hereby certify that the foregoing Certificate contains the
Resolutions of the Board of Directors of
<PAGE>
Republic Bancorp Inc. establishing and designating its Series C Convertible
Preferred Stock and prescribing the relative rights and preferences thereof
which were duly authorized by the Board of Directors of Republic Bancorp Inc. at
a duly convened meeting held on September 15, 1988 at which a quorum was present
and voting, and that the same have never been rescinded and modified and are in
full force and in effect at the date hereof.
/s/ John M. Creighton
-----------------------------
John M. Creighton, Secretary
Dated: September 29, 1988
<PAGE>
EXHIBIT 3.2
BYLAWS
OF REPUBLIC BANCORP INC.
(As Revised through May 17, 1999)
ARTICLE I
Offices
The Corporation may have such offices, within or without the State of Michigan,
as the Board of Directors may from time to time establish.
ARTICLE II
Meetings of Shareholders
Section 1. Annual Meetings. The annual meeting of the shareholders for the
election of directors and for the transaction of any other business as may
properly come before the meeting shall be held on the fourth Wednesday in April
of each year at ten o'clock in the forenoon or at such other date and hour as
from time to time may be designated by the Board of Directors.
Section 2. Special Meetings. A special meeting of the shareholders may be called
at any time by the Board of Directors, the Chairman of the Board, the President,
the Vice Chairman of the Board or the Secretary, and shall be called by the
Secretary upon the written request of shareholders of record holding in the
aggregate twenty-five (25%) per cent or more of the outstanding shares of stock
of the Corporation entitled to vote, such written request to state the purpose
or purposes of the meeting and to be delivered to the Secretary.
Section 3. Place of Meetings. The Board of Directors may designate any place,
either within or without the State of Michigan, as the place of meeting for any
annual meeting or for any special meeting of shareholders.
Section 4. Notice of Meetings. Written notice stating the place, date and hour
of the meeting and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, shall be given by or under the direction of the
Secretary, to each shareholder of record entitled to vote at such meeting.
Except as otherwise required by statute, the written notice shall be given not
less than ten nor more than fifty days before the date of the meeting. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail, postage prepaid, directed to the shareholder at his address as it
appears on the records of the Corporation. Attendance of a person at a meeting
of shareholders shall constitute a waiver of notice of such meeting, except when
the shareholder attends for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
<PAGE>
Section 5. Adjourned Meetings. When a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each shareholder of record entitled to vote at the meeting.
Section 6. Voting Lists. The officer who has charge of the stock ledger or stock
transfer books of the Corporation shall prepare and certify before every meeting
of shareholders a complete list of the shareholders of record entitled to vote
at the meeting, arranged in alphabetical order within each class and series, and
showing the address of each shareholder and the number of shares registered in
the name of each shareholder. The list shall be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected by
any shareholder of record during the whole time of the meeting.
Section 7. Quorum. Except as otherwise required by statute, the presence at any
meeting, in person or by proxy, of the holders of record of a majority of the
shares then issued and outstanding and entitled to vote shall be necessary and
sufficient to constitute a quorum for the transaction of business. In the
absence of a quorum, the shareholders of record entitled to vote, present in
person or by proxy, may adjourn the meeting from time to time until a quorum is
present.
Section 8. Proxies. Each shareholder of record entitled to vote at a meeting of
shareholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy.
Section 9. Voting Rights. Except as otherwise provided by statute or by the
Articles of Incorporation, and subject to the provisions of Article VII of these
Bylaws, each shareholder of record shall at every meeting of the shareholders be
entitled to one vote for each share of the capital stock having voting power
held by such shareholder.
Section 10. Required Vote. Except as otherwise required by statute or by the
Articles of Incorporation, the holders of record of a majority of the capital
stock having voting power, present in person or by proxy, shall decide any
question brought before a meeting of the shareholders at which a quorum is
present. Directors shall be elected by a plurality of the votes cast pursuant to
Article III of the Articles of Incorporation.
<PAGE>
ARTICLE III
Board of Directors
Section 1. General Powers. The business of the Corporation shall be managed by
the Board of Directors, except as otherwise provided by statute or by the
Articles of Incorporation.
Section 2. Number. The number of directors which shall constitute the whole
Board shall be not less than six (6) or more than thirty (30). The initial
number of directors shall be the number selected by the incorporator as the
first board. Within the limitation specified in this section, the number
constituting the full Board shall be determined from time to time by resolution
of the Board of Directors.
Section 3. Election and Term of Office. Except as otherwise provided in these
Bylaws, directors shall be elected at the annual meeting of the shareholders. In
the interim between annual meetings of the shareholders, any vacancy in the
Board of Directors or any newly created directorship resulting from any increase
in the number of members of the whole Board may be filled by the vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. Each director shall hold office until the next annual
meeting of shareholders and until his successor is elected and qualified or
until his death, resignation or removal.
Section 4. First Meetings. The first meeting of each newly elected Board of
Directors shall be held without notice immediately after the annual meeting of
the shareholders for the purpose of the organization of the Board, the election
of officers, and the transaction of such other business as may properly come
before the meeting.
Section 5. Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such times and at such places, within or without the
State of Michigan, as shall from time to time be determined by the Board.
Section 6. Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the President, the Vice Chairman of the
Board or the Secretary, and shall be called by the Secretary on the written
request of five directors. Such meetings shall be held at such times and at such
places, within or without the State of Michigan, as shall be determined by the
officer calling or by the directors requesting the meeting. Notice of the time
and place thereof shall be mailed to each director, addressed to him at his
address as it appears on the records of the Corporation, at least two days
before the day on which the meeting is to be held, or sent to him at such place
by telegraph, radio or cable, or telephoned or delivered to him personally, not
later than the day before the day on which the meeting is to be held. Such
notice need not state the purposes of the meeting. Any or all directors may
waive notice of any meeting, either before or after the meeting. Attendance of a
director at a meeting shall constitute a waiver of notice of such meeting,
except when the director attends for the express purpose of
<PAGE>
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
Section 7. Quorum, Required Vote, and Adjournment. The presence, at any meeting,
of a majority of the whole Board shall be necessary and sufficient to constitute
a quorum for the transaction of business. Except as otherwise required by
statute or by the Articles of Incorporation, the vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. In the absence of a quorum, a majority of the directors
present at the time and place of any meeting may adjourn such meeting from time
to time until a quorum be present.
Section 8. Consent of Directors in Lieu of Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors or any committee
thereof may be taken without a meeting if all the members of the Board or
committee consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board or committee.
Section 9. Participation Meeting by Telephone. A member of the Board or any
committee thereof may participate in a meeting of such Board or committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this subsection shall constitute presence
in person at such meeting.
Section 10. Compensation. The Board of Directors may authorize the payment to
directors of a fixed fee and expenses for attendance at meetings of the Board or
any committee thereof, and annual fees for service as directors. No such payment
shall preclude any director from serving the Corporation in any other capacity
and receiving compensation therefor.
ARTICLE IV
Executive Committee
Section 1. Number and Qualifications. There shall be a committee composed of not
less than three nor more than ten members of the Board of Directors appointed by
the Board which shall be known as the Executive Committee. Provision may be made
by the Board of Directors for the appointment of alternates from among the
directors, to act for members in the event of their absence or disability.
Section 2. Presiding Officer. The Chairman of the Board shall act as presiding
officer of any meeting of the Executive Committee. In the event of the absence
or disability of the Chairman of the Board, the President shall act as presiding
officer. In the event of the absence or disability of the Chairman of the Board
and the President another officer-director, if present, shall act as the
presiding officer. If no officer-
<PAGE>
director is present, the other members present at the meeting shall elect one of
their number as presiding officer.
Section 3. Quorum. A majority of the persons who are members or alternate
members of the Executive Committee shall constitute a quorum for the transaction
of business at any meeting of the Executive Committee.
Section 4. Powers and Duties. The Executive Committee shall function from day to
day or such other short intervals as shall be found requisite and expedient in
carrying on of the business and affairs of the Corporation, and between meetings
of the Board of Directors, said Committee shall have and may exercise, so far as
may be permitted by law, all power and authority of the Board of Directors
(including the right to authorize the seal of the Corporation to be affixed to
all instruments on which the same may be required or appropriate). A record of
the meetings of the Committee shall be kept, which shall be accessible to
inspection by the Directors at all times, and the Committee shall, at each
regular meeting of the Board of Directors and at such other times as the Board
of Directors may request, submit in writing a full report of its actions. The
Board of Directors shall approve or disapprove the report of the Executive
Committee, such action to be recorded in the minutes of the meeting; provided,
however, that no rights of third parties shall be affected by any action of the
Board of Directors, if such rights have attached by virtue of action of the
Executive Committee.
ARTICLE V
Other Committees
The Board of Directors may, by resolution, designate one or more other regular
and special committees, consisting of one or more directors, which shall have
and may exercise such powers and functions, so far as may be permitted by law,
as the Board may prescribe in the management of the business and affairs of the
Corporation. Such committees shall keep regular minutes of their proceedings and
report the same to the Board of Directors when required.
The Board of Directors may from time to time suspend, alter, continue or
terminate any such committee or the powers and functions thereof.
ARTICLE VI
Officers
Section 1. Number, Election, Term of Office and Qualification. The number,
titles and duties of the officers shall be determined by the Board of Directors
from time to time, subject to the provisions of applicable law, the Articles of
Incorporation, and these Bylaws. Each officer shall be elected by the Board of
Directors and shall hold office until his successor is elected and qualified or
until his death, resignation or removal. The election of officers shall be
annually at the first meeting of the Board of Directors held
<PAGE>
after each annual meeting of shareholders, subject to the power of the Board of
Directors to designate any office at any time and elect any person thereto. The
officers shall include a Chairman of the Board, a President, a Secretary and a
Treasurer and may include a Vice Chairman, one or more Vice Presidents and such
other officers as the Board of Directors may determine. The same person may not
fill the offices of Chairman and Secretary or President and Secretary. The
Chairman, President and Vice Chairman shall be directors of the Corporation, but
no other officer need be a director of the Corporation.
Section 2. Removal. Any officer or agent may be removed at any time, with or
without cause, by the Board of Directors.
Section 3. Compensation. The compensation of officers of the Corporation shall
be fixed by the Board of Directors.
Section 4. Vacancies. Any vacancy occurring in any office of the Corporation may
be filled for the unexpired term in the manner prescribed by these Bylaws for
the regular election to such office.
Section 5. Chairman of the Board. The Chairman of the Board shall preside at all
meetings of the Board of Directors and shareholders, and shall perform such
other duties and exercise such other authority as the Board of Directors shall
approve or direct from time to time.
Section 6. Vice Chairman of the Board. In the absence of the Chairman of the
Board, the Vice Chairman of the Board shall preside at all meetings of the Board
of Directors and shareholders, and shall perform such other duties and exercise
such other authority as the Board of Directors or Chairman of the Board shall
approve or direct from time to time.
Section 7. President. Unless another officer shall be so designated by the Board
of Directors, the President shall be the Chief Executive Officer of the
Corporation. The Chief Executive Officer shall have general and active
management of the business of the Corporation; and shall see that all orders and
resolutions of the Board of Directors are carried into effect. He shall be a
member of and Chairman of the Executive Committee and shall be ex officio a
member of all other standing committees. In the absence of both the Chairman of
the Board and the Vice Chairman of the Board, the President shall preside at all
meetings of the Board of Directors or of the shareholders. He shall have
authority to employ such employees and agents other than officers to be
appointed by the Board as the business of the Corporation may require and to fix
their compensation, and shall have such other duties and authorities as the
Board of Directors may from time to time assign to him. The Board of Directors
shall otherwise prescribe the officers who shall, successively, perform the
duties of the Chief Executive Officer in his absence. Any power expressly by
statute conferred exclusively upon the President shall be performed by him.
<PAGE>
Section 8. Vice President. A Vice President shall act under the direction of the
President, and subject to the direction of the Board of Directors, in the
absence or disability of the President shall perform the duties and exercise the
powers of the President and shall have such other duties as the Board of
Directors or the President may from time to time assign to him.
Section 9. Secretary. The Secretary shall keep the minutes of the proceedings of
the shareholders and of the Board of Directors in one or more books to be kept
for that purpose. He shall have custody of the seal of the Corporation and shall
have authority to cause such seal to be affixed to, or impressed or otherwise
reproduced upon, all documents the execution and delivery of which on behalf of
the Corporation shall have been duly authorized. He shall in general, perform
all duties and have all powers incident to the office of Secretary and shall
perform such other duties and have such other powers as may from time to time be
assigned to him by these Bylaws, by the Board of Directors or by the Chief
Executive Officer.
Section 10. Treasurer. The Treasurer shall have custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation. He shall cause all moneys
and other valuable effects to be deposited in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
He shall cause the funds of the Corporation to be disbursed when such
disbursements have been duly authorized, taking proper vouchers for such
disbursements, and shall render to the Chief Executive Officer and the Board of
Directors, whenever requested, an account of all his transactions as Treasurer
and of the financial condition of the Corporation. He shall, in general, perform
all duties and have all powers incident to the office of Treasurer and shall
perform such other duties and have such other powers as may from time to time be
assigned to him by these Bylaws, by the Board of Directors or by the Chief
Executive Officer.
ARTICLE VII
Fixing Record Date
In order that the Corporation may determine the shareholders entitled to notice
of or to vote at any meeting of shareholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than fifty nor less than ten days before the date of such meeting, nor more
than sixty days prior to any other action. If no record date is fixed, the
record date for determining shareholders entitled to notice of or to vote at a
meeting of shareholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is held
and the record date for determining shareholders for any other purpose shall be
at the close of business on the day on which the Board of
<PAGE>
Directors adopts the resolution relating thereto. A determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
ARTICLE VIII
Execution of Instruments
Section 1. Execution of Instruments Generally. All documents, instruments or
writings of any nature, including notes, drafts, acceptances, checks,
endorsements and evidences of indebtedness, shall be signed, executed, verified,
acknowledged and delivered by such officer or officers or such agent or agents
of the Corporation and in such manner as the Board of Directors from time to
time may determine. Endorsements for deposit to the credit of the Corporation in
any of its duly authorized depositories shall be made in such manner as the
Board of Directors from time to time may determine.
Section 2. Proxies. Proxies to vote with respect to shares of stock of other
corporations owned by or standing in the name of the Corporation may be executed
and delivered from time to time on behalf of the Corporation by two officers,
one of whom shall be the Chairman, President, Vice Chairman, or a Vice President
and the other of whom shall be the Secretary or an Assistant Secretary of the
Corporation; or by any other person or persons duly authorized by the Board of
Directors.
ARTICLE IX
Capital Stock
Section 1. Stock Certificates. The interest of every holder of stock in the
Corporation shall be evidenced by a certificate or certificates signed by, or in
the name of the Corporation by the Chairman, President, Vice Chairman or a Vice
President, and by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer of the Corporation certifying the number of shares owned by
him in the Corporation and in such form not inconsistent with the Articles of
Incorporation or applicable law as the Board of Directors may from time to time
prescribe. If such certificate is countersigned (1) by a transfer agent, whether
or not a subsidiary of the Corporation, other than the Corporation or its
employee, or (2) by a registrar, whether or not a subsidiary of the Corporation,
other than the Corporation or its employee, the signatures of the officers of
the Corporation may be facsimiles. In case any officer who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of
issue.
Section 2. Transfer of Stock. Shares of stock of the Corporation shall only be
transferred on the books of the Corporation by the holder of record thereof or
by his attorney duly authorized in writing, upon surrender to the Corporation of
the certificates for such shares
<PAGE>
endorsed by the appropriate person or persons, with such evidence of the
authenticity of such endorsement, transfer, authorization and other matters as
the Corporation may reasonably require, and accompanied by all necessary stock
transfer tax stamps. In that event it shall be the duty of the Corporation to
issue a new certificate to the person entitled thereto, cancel the old
certificate, and record the transaction on its books.
Section 3. Rights of Corporation with Respect to Registered Owners. Prior to the
surrender to the Corporation of the certificates for shares of stock with a
request to record the transfer of such shares, the Corporation may treat the
registered owner as the person entitled to receive to dividends, to vote, to
receive notifications, and otherwise to exercise all the rights and powers of an
owner.
Section 4. Transfer Agents and Registrars. The Board of Directors may make such
rules and regulations as it may deem expedient concerning the issuance and
transfer of certificates for shares of the stock of the Corporation and may
appoint transfer agents or registrars or both, and may require all certificates
of stock to bear the signature of either or both. Nothing herein shall be
construed to prohibit the Corporation or any subsidiary of it from acting as its
own transfer agent or registrar at any of its officer
Section 5. Lost, Destroyed and Stolen Certificates. Where the owner of a
certificate for shares claims that such certificate has been lost, destroyed or
wrongfully taken, the Corporation shall issue a new certificate in place of the
original certificate if the owner satisfies such reasonable requirements,
including evidence of such loss, destruction, or wrongful taking, as may be
imposed by the Corporation, including but without limitation, the delivery to
the Corporation of an indemnity bond satisfactory to it.
ARTICLE X
Indemnification of Directors and Officers
The Corporation shall, to the fullest extent authorized or permitted by the
Michigan Business Corporation Act, (a) indemnify any person, and his or her
heirs, executors, administrators and legal representatives, who was, is, or is
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative) by
reason of the fact that such person is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (collectively, "Indemnified Matters"); and
(b) pay or reimburse the reasonable expenses incurred by such person and his or
her heirs, executors, administrators and legal representatives in connection
with any Indemnified Matter in advance of final disposition of such Indemnified
Matter. The Corporation may provide such other indemnification to directors,
officers, employees and agents by insurance, contract or otherwise as is
permitted by law and authorized by the Board of Directors.
<PAGE>
ARTICLE XI
Seal
The corporate seal, subject to alteration by the Board of Directors, shall be in
the form of a circle and shall bear the name of the Corporation and the year of
its incorporation and shall indicate its formation under the laws of the State
of Michigan. Such seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
ARTICLE XII
Fiscal Year
The fiscal year of the Corporation shall be the calendar year except as
otherwise provided by the Board of Directors.
ARTICLE XIII
Amendments
The Bylaws of the Corporation may be amended or repealed, or new Bylaws not
inconsistent with law or any provision of the Articles of Incorporation, as
amended, may be made and adopted by a majority vote of the whole Board of
Directors at any regular or special meeting of the Board or by the shareholders.
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]
Consent of Independent Accountants
We consent to the incorporation by reference in (1) the Registration Statement
(Form S-8 No. 33-55336) pertaining to the Republic Bancorp Inc. Tax-Deferred
Savings Plan; (2) the Registration Statement (Form S-8 No. 33-55304) pertaining
to the Republic Bancorp Inc. Non-Qualified Stock Option Plan; (3) the
registration Statement (Form S-8 No. 33-62508) pertaining to the Republic
Bancorp Inc. Directors Compensation Plan; (4) the Registration Statement (Form
S-3 No. 33-61842); and (5) The Registration Statement (Form S-8 No. 333-26515)
pertaining to the Republic Bancorp Inc. 1997 Stock Option Plan and the related
Prospectuses of our report dated January 21, 1999 with respect to the
consolidated financial statements of D&N Financial Corporation included in this
Form 8-K of Republic Bancorp Inc.
/s/ PricewaterhouseCoopers LLP
May 28, 1999
<PAGE>
EXHIBIT 99.1
[PRICEWATERHOUSECOOPERS LETTERHEAD]
Report of Independent Auditors
To the Board of Directors and Stockholders of
D&N Financial Corporation:
In our opinion, the accompanying Consolidated Statements of Condition and the
related Consolidated Statements of Operations, Stockholders' Equity and of Cash
Flows present fairly, in all material respects, the financial position of D&N
Financial Corporation and its Subsidiary at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 21, 1999
1
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
December 31
-------------------------
1998 1997
----------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,945 $ 16,239
Federal funds sold -- 300
Interest-bearing deposits in other banks 34 3,958
---------- ----------
Total cash and cash equivalents 15,979 20,497
Investment securities
(market value of $28,678,000 in 1998 and $56,594,000 in 1997) 28,678 56,524
Investment securities available for sale (at market value) 101,394 46,112
Mortgage-backed securities
(market value of $42,025,000 in 1998 and $199,525,000 in 1997) 41,446 198,050
Mortgage-backed securities available for sale (at market value) 452,766 160,246
Loans receivable (including loans held for sale of $8,801,000 in 1998
and $5,275,000 in 1997) 1,340,143 1,311,508
Allowance for loan losses (10,995) (10,549)
---------- ----------
Net loans receivable 1,329,148 1,300,959
Other real estate owned, net 857 1,474
Federal income taxes 2,721 1,129
Office properties and equipment, net 19,005 16,621
Other assets 26,160 13,703
---------- ----------
$2,018,154 $1,815,315
========== ==========
LIABILITIES
Checking and NOW accounts $ 166,802 $ 119,412
Money market accounts 103,878 92,314
Savings deposits 237,600 163,119
Time deposits 754,317 667,204
Accrued interest 1,543 1,118
---------- ----------
Total deposits 1,264,140 1,043,167
Securities sold under agreements to repurchase 18,153 149,092
FHLB advances and other borrowed money 559,982 470,431
Advance payments by borrowers and investors held in escrow 25,416 17,585
Other liabilities 6,284 8,239
---------- ----------
Total liabilities 1,873,975 1,688,514
PREFERRED STOCK OF SUBSIDIARY 28,719 28,719
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share (1,000,000 shares authorized;
none issued) -- --
Common stock, $.01 par value per share (shares authorized - 25,000,000;
shares outstanding - 9,318,089 in 1998 and 9,197,224 in 1997) 93 92
Additional paid-in capital 78,375 77,025
---------- ----------
Total paid-in capital 78,468 77,117
Retained earnings - substantially restricted 35,265 21,042
Less: Cost of treasury stock (none in 1998 and 98,129 in 1997) -- (1,581)
Accumulated other comprehensive income 1,727 1,504
---------- ----------
Total stockholders' equity 115,460 98,082
---------- ----------
$2,018,154 $1,815,315
========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
D&N Financial Corporation
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-------------------------------------------------
(Dollars in thousands, except earnings per share)
INTEREST INCOME
<S> <C> <C> <C>
Loans $ 105,777 $ 98,560 $ 86,151
Mortgage-backed securities 27,568 19,085 10,930
Investments and deposits 6,629 8,048 7,228
-------- -------- --------
Total interest income 139,974 125,693 104,309
INTEREST EXPENSE
Deposits 51,206 47,961 43,859
Securities sold under agreements to repurchase 4,521 5,571 2,193
FHLB advances and other borrowed money 31,558 23,222 15,494
-------- -------- --------
Total interest expense 87,285 76,754 61,546
-------- -------- --------
Net interest income 52,689 48,939 42,763
Provision for loan losses 2,500 1,350 1,100
-------- -------- --------
Net interest income after provision for loan
losses 50,189 47,589 41,663
NONINTEREST INCOME
Loan administrative fees 1,850 1,916 1,914
Deposit related fees 4,389 4,080 3,621
Gain on sale of loans held for sale 3,521 1,728 1,031
Gain on sale of securities available for sale 2,830 539 188
Other income 1,230 657 470
-------- -------- --------
Total noninterest income 13,820 8,920 7,224
NONINTEREST EXPENSE
Compensation and benefits 19,643 17,881 16,881
Occupancy 3,362 3,110 2,834
Other expense 13,357 11,655 11,863
-------- -------- --------
General and administrative expense 36,362 32,646 31,578
Other real estate owned, net 167 (81) 71
FDIC insurance 794 658 7,894
-------- -------- --------
Total noninterest expense 37,323 33,223 39,543
-------- -------- --------
Income before income tax expense 26,686 23,286 9,344
Federal income tax expense 7,901 7,743 349
-------- -------- --------
Income before preferred stock dividends 18,785 15,543 8,995
Preferred stock dividend of subsidiary 2,723 1,218 --
-------- -------- --------
NET INCOME $ 16,062 $ 14,325 $ 8,995
======== ======== ========
Earnings per share:
Basic $ 1.75 $ 1.58 $ 1.08
======== ======== ========
Diluted $ 1.69 $ 1.53 $ 1.01
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
D&N Financial Corporation
<TABLE>
<CAPTION>
Treasury Accumulated
Additional Stock & Leveraged Other Total
Common Paid-in Retained Treasury ESOP Comprehensive Stockholders'
Stock Capital Earnings Warrants Debt Income Equity
---------- --------- ---------- --------- -------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $ 75 $ 49,936 $ 20,573 $ (257) $ (63) $ 1,715 $ 71,979
Comprehensive Income:
Net income -- -- 8,995 -- -- -- 8,995
Change in value of securities
available for sale -- -- -- -- -- (472) (472)
------
Total comprehensive income 8,523
Issuance of common stock
upon exercise of stock options
and warrants - 960,508 shares 9 9,046 -- -- -- -- 9,055
Purchase of treasury stock
and warrants -- -- -- (3,499) -- -- (3,499)
Reissuance of 256,251 treasury shares -- (3,530) -- 3,350 -- -- --
Reduction of leveraged ESOP debt -- -- -- -- 63 -- 63
---------- ------- --------- -------- ----- ------------- --------
Balance December 31, 1996 $ 84 $ 55,452 $ 29,568 $ (226) $ -- $ 1,243 $ 86,121
Comprehensive Income:
Net income -- -- 14,325 -- -- -- 14,325
Change in value of securities
available for sale -- -- -- -- -- 261 261
--------
Total comprehensive income 14,586
Cash dividends, common stock
($0.10 per share) -- -- (826) -- -- -- (826)
10% common stock dividend, at
fair market value 8 22,017 (22,025) -- -- -- --
Issuance of common stock upon
exercise of stock options -
98,681 shares -- 1,196 -- -- -- -- 1,196
Purchase of treasury stock -- -- -- (2,995) -- -- (2,995)
Reissuance of 96,681 treasury shares -- (1,640) -- 1,640 -- -- --
---------- ------- --------- -------- ----- ------------- --------
Balance December 31, 1997 $ 92 $ 77,025 $ 21,042 $ (1,581) $ -- $ 1,504 $ 98,082
Comprehensive Income:
Net income -- -- 16,062 -- -- -- 16,062
SFAS 133 transition adjustment -- -- -- -- -- 2,432 2,432
Change in value of securities
available for sale -- -- -- -- -- (2,209) (2,209)
--------
Total comprehensive income 16,285
Cash dividends, common stock
($0.20 per share) -- -- (1,839) -- -- -- (1,839)
Issuance of common stock upon
exercise of stock options -
235,224 shares 1 3,314 -- -- -- -- 3,315
Purchase of treasury stock -- -- -- (383) -- -- (383)
Reissuance of 114,359 treasury shares -- (1,964) -- 1,964 -- -- --
---------- ------- --------- -------- ----- ------------- ------------
Balance December 31, 1998 $ 93 $ 78,375 $ 35,265 $ -- $ -- $ 1,727 $115,460
========== ========= ========= ======== ===== ============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 16,062 $ 14,325 $ 8,995
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,500 1,350 1,100
Depreciation and amortization of office properties and equipment 2,323 1,987 1,954
Amortization of net premiums (discounts) on purchased
loans and securities (520) (925) (73)
Originations and purchases of loans held for sale (106,167) (47,928) (56,132)
Proceeds from sales of loans held for sale 231,097 89,889 73,658
Gain on securities available for sale (2,830) (539) (188)
Gain on sale of loan servicing rights (207) -- --
Amortization and writedowns of mortgage servicing rights 1,866 543 300
Increase in originated mortgage servicing rights (4,554) (1,236) (543)
(Increase) decrease in income taxes deferred (1,367) 5,357 (662)
Increase in prepaid dealer reserves (2,635) (3,223) (1,918)
(Increase) decrease in core deposit intangible (6,791) 113 113
Other (1,026) (37) 635
--------- --------- ---------
Net cash provided by operating activities 127,751 59,676 27,239
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale -- 20 298
Proceeds from maturities of investment securities 231,353 202,066 83,970
Purchases of investment securities to be held to maturity (259,044) (184,903) (107,012)
Proceeds from sales of mortgage-backed securities available for sale 112,168 24,094 --
Principal collected on mortgage-backed securities 175,549 64,150 54,951
Purchases of mortgage-backed securities (337,029) (107,400) (58,661)
Loans purchased (193,778) (234,886) (148,405)
Net change in loans receivable (45,029) (137,882) (94,006)
(Increase) decrease in other real estate owned 617 (4) (151)
Sales of loan servicing rights 207 -- --
Purchases of office properties and equipment (5,229) (3,279) (3,128)
--------- --------- ---------
Net cash used by investing activities (320,215) (378,024) (272,144)
FINANCING ACTIVITIES
Increase in time deposits 87,113 50,102 23,058
Increase in other deposits 133,435 28,748 18,666
Proceeds from notes payable, securities sold under agreements
to repurchase and other borrowed money 340,285 513,052 309,040
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money (381,811) (297,717) (121,482)
Net change in advance payments by borrowers and investors
held in escrow 7,831 5,777 479
Common stock cash dividend (1,839) (826) --
Net proceeds from issuance of stock 3,315 1,196 9,055
Purchases of treasury stock/warrants (383) (2,995) (3,499)
Proceeds from issuance of subsidiary preferred stock -- 28,719 --
Reduction of leveraged ESOP debt -- -- (63)
--------- --------- ---------
Net cash used by investing activities 187,946 326,056 235,254
Increase (Decrease) in cash and cash equivalents (4,518) 7,708 (9,651)
Cash and cash equivalents at beginning of year 20,497 12,789 22,440
--------- --------- ---------
Cash and cash equivalents at end of year $ 15,979 $ 20,497 $ 12,789
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 87,487 $ 75,416 $ 61,689
Income taxes paid $ 8,740 $ 2,027 $ 299
Noncash investing activities:
Transfer of loans to other real estate owned $ 359 $ 961 $ 3,373
Securitization of loans into mortgage-backed securities $ 82,856 $ 86,066 $ 119,717
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D&N FINANCIAL CORPORATION, DECEMBER 31, 1998
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
D&N Financial Corporation ("the Company") is a financial services holding
company whose sole subsidiary is D&N Bank ("the Bank"), a federally-chartered
stock savings bank. D&N Financial Corporation's primary business is the
delivery of financial services to consumers and businesses through its network
of 53 community banking and financial services offices in Michigan.
Principles of Consolidation: The consolidated financial statements include
the accounts and transactions of the Company and the Bank and the Bank's
wholly-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
Cash and Cash Equivalents: Cash and cash equivalents represent short-term
highly liquid investments with original maturities of three months or less and
include cash, demand deposits in other banks and interest-bearing deposits in
other banks.
Investment Classifications: Securities are classified as either held to
maturity (amortized cost), trading (fair value, with unrealized gains and losses
reported in income), or available for sale (fair value, with unrealized gains
and losses reported directly in equity, net of taxes).
Investment and Mortgage-Backed Securities: Investment and mortgage-backed
securities which the Company has the ability and the intent to hold until
maturity are stated at amortized cost. Investment and mortgage-backed
securities available for sale are carried at fair value. Fair value adjustments
are included in stockholders' equity, net of tax. Gains or losses realized on
the sale of investment and mortgage-backed securities are determined by the
specific identification method and are included in securities gains (losses).
Interest income is adjusted using the level-yield method for amortization of
premiums and accretion of discounts.
Allowance for Loan Losses: The allowance for loan losses represents the
Company's estimate of probable credit losses related to specifically identified
loans as well as probable credit losses inherent in the remainder of the
Company's loan portfolio that have been incurred as of the balance sheet date.
The allowance for loan loss is maintained at an adequate level through additions
to the provision for loan losses. An appropriate level of the general allowance
is determined based on the application of projected risk percentages to graded
loans by categories. In addition, specific reserves are established for
individual loans when deemed necessary by management. Management also considers
other factors when determining the unallocated allowance, including loan
quality, changes in the size and character of the loan portfolio, consultation
with regulatory authorities, amount of nonperforming loans, delinquency trends,
economic conditions and industry trends.
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as
amended by SFAS No. 118, considers a loan impaired when it is probable that
payment of principal and interest will not be collected in accordance with the
contractual terms of the original loan agreement. Consistent with this
definition, all non-accrual and restructured loans (with the exception of
residential mortgage and consumer installment loans) are impaired. An impaired
loan for which it is deemed necessary to record a specific allowance is,
typically, written down to the fair value of the underlying collateral at the
time it is placed on non-accrual status via a direct charge-off against the
allowance for loan losses. Consequently, those impaired loans not requiring a
specific allowance represent loans for which the fair value of the underlying
collateral equaled or exceeded the recorded investment in the loan. All impaired
loans were evaluated using the fair value of the underlying collateral as the
measurement method.
It must be understood, however, that inherent risks and uncertainties
related to the operation of a financial institution require management to depend
on estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial
prospects of borrowers may result in abrupt changes to the estimates, appraisals
or evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Each element of the general allowance for December 31, 1998 was determined
as adequate by applying the following risk percentages to each grade: Pass -
residential: 0%, commercial: 0%, consumer: 0.80%; Special mention - residential:
0%, commercial:
6
<PAGE>
0%, consumer: 0.83%; Substandard - residential: 0%, commercial: 0%, consumer:
1.66%; Doubtful - 50%; and Loss - 100%. The risk percentages are developed by
the Company in consultation with regulatory authorities, actual loss experience
and peer group loss experience, and are adjusted for current economic
conditions. The risk percentages are considered a prudent measurement of the
risk of the Company's loan portfolio. The general allowances for December 31,
1997 and December 31, 1996 were determined as adequate based on this same rating
system, using different risk percentages.
The Company periodically reviews each commercial loan and assigns a grade
based on loan type, collateral value, financial condition of the borrower and
payment history. Delinquent residential mortgage and installment loans are
reviewed and assigned a rating based on their payment history, financial
condition of the borrower and collateral values. Specific mortgage and
installment loans are also reviewed in conjunction with the previously described
review of any related commercial loan.
Based upon these reviews, the Company determines the grades for its loan
portfolio on a quarterly basis and computes the allowance for loan losses.
Management believes this periodic review provides a mechanism that results in
loans being graded in the proper category and accordingly, assigned the proper
risk loss percentage in computing the general or specific reserve.
Mortgage Loans Held for Sale: The Bank enters into commitments to
originate and does originate mortgage loans for sale to investors and in the
secondary market.
Loans held for sale are carried at the lower of cost or market value,
determined on an aggregate basis. Commitment fees are amortized either over the
commitment period or the combined commitment and loan period depending upon the
probability of performance under the commitment.
Interest on Loans: Interest on loans is credited to income when earned.
An allowance for interest on loans is provided when management considers the
collection of these loans doubtful and the accrual of interest is usually
suspended when a loan becomes more than 90 days past due.
Loan Fees: Loan origination and commitment fees and certain direct loan
origination costs are deferred and recognized over the lives of the related
loans as an adjustment of the yields using the level-yield method.
Other Real Estate Owned: Real estate acquired through foreclosure and
similar proceedings is recorded at estimated fair value of the property, less
cost to dispose of, at the acquisition date. Operating expenses of such
properties, net of any income, are charged to expense.
Depreciation: Provisions for depreciation are computed using the straight-
line method over the estimated useful lives of office properties and equipment,
as follows: buildings - 40 years; leasehold improvements - life of lease;
furniture and fixtures - 15 years; and computers - 3 years.
Securities Sold Under Agreements to Repurchase: The Company enters into
sales of investment and mortgage-backed securities under agreements to
repurchase the same or essentially identical securities. The agreements are
short-term and are accounted for as secured borrowings. The obligations to
repurchase securities sold are reflected as a liability and the securities which
collateralize the agreements are reflected as an asset in the Consolidated
Statements of Condition.
Capitalized Mortgage Servicing Rights: The Company services mortgage loans
for investors. Fees earned for and in connection with this activity are
recognized as income when the related mortgage payments are received. Mortgage
servicing costs are charged to expense as incurred.
As the Company acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells or securitizes those loans
with servicing rights retained, it must allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. Capitalized mortgage
servicing rights are reported in Other Assets. The capitalized cost of mortgage
servicing rights is amortized in proportion to, and over the period of,
estimated net servicing income (servicing revenue in excess of servicing costs),
into noninterest income.
Capitalized mortgage servicing rights are periodically assessed for
impairment based on the fair value of those rights on a disaggregate basis,
stratified by mortgage type, term and rate. Identified impairments are
recognized through a valuation allowance.
7
<PAGE>
Income Taxes: The Company uses the liability method in accounting for
income taxes. Under this method, deferred income taxes result from temporary
differences between the tax bases of assets and liabilities and the bases
reported in the consolidated financial statements. The deferred taxes are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Per Share Data: The Company adopted SFAS 128 "Earnings per Share", for the
year ended December 31, 1997. The earnings per share for the year 1996 has been
restated to comply with this standard.
Basic earnings per share is calculated by dividing net income by the
average number of shares outstanding during the applicable period.
The Company has issued stock options and warrants which are considered to
be potentially dilutive to common stock. Diluted earnings per share is
calculated by dividing net income by the average number of shares outstanding
during the applicable period adjusted for these potentially dilutive options and
warrants.
The following table sets forth the computation of per share earnings as
provided in SFAS 128, and illustrates the dilutive effect of options and
warrants outstanding:
<TABLE>
<CAPTION>
Year Ending December 31
---------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------
Earnings Earnings Earnings
Shares per share Shares per share Shares per share
-------- ---------- -------- ----------- ------ ----------
(In thousands, except per share earnings)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS: 9,158 $ 1.75 9,094 $ 1.58 8,337 $ 1.08
Net dilutive effect of:
Stock options outstanding 349 (0.06) 271 (0.05) 167 (0.02)
Warrants outstanding -- -- -- -- 402 (0.05)
----- ------ ----- ------ ----- ------
Diluted EPS: 9,507 $ 1.69 9,365 $ 1.53 8,906 $ 1.01
===== ====== ===== ====== ===== ======
</TABLE>
Options to purchase 170,234 shares of common stock at $24.38 to $25.50 per
share were outstanding at December 31, 1998. Options to purchase 107,800
shares of common stock at $19.26 to $24.37 per share were outstanding at
December 31, 1997. These options were not included in the computation of
diluted earnings per share because the exercise prices were greater than the
average annual market price of the common stock in 1998 and 1997, respectively.
Reclassifications: Certain amounts in previously issued consolidated
financial statements have been reclassified to conform with the current year
presentation.
Comprehensive Income: The Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, as of January 1,
1998. SFAS No. 130 established standards for reporting and display of
comprehensive income and its components. The Company displays comprehensive
income in the statement of stockholders' equity and has reclassified all prior
periods as required.
Segment Reporting: In 1998, the Company adopted SFAS 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS 131 supersedes SFAS 14,
Financial Reporting for Segments of a Business Enterprise, replacing the
"industry segment" approach with the "management" approach which designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS 131 also requires disclosure about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information (see "Segment Information" Note W).
Accounting for Derivative Instruments and Hedging Activities: The Company
elected to adopt Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, on July 1, 1998, which
constituted early adoption. In accordance with the transition provision of SFAS
133, the Company reclassified $163.4 million of "held-to-maturity" securities as
"available-for-sale". This reclassification resulted in a net-of-tax cumulative-
effect-type adjustment of approximately $2.4 million in other comprehensive
income. Under the provision of SFAS 133, such reclassification does not call
into question the Company's intent to hold current or future debt securities to
their maturity.
8
<PAGE>
NOTE B: BUSINESS COMBINATION
On April 10, 1996, Macomb Federal Savings Bank ("Macomb") was merged into
the Company. The Company issued 716,497 shares of common stock and cash in lieu
of fractional shares for all of the outstanding shares of Macomb. At the time
of the merger, Macomb had assets and stockholders' equity (unaudited) of
$41,932,000 and $6,268,000, respectively. The merger was accounted for as a
pooling-of-interests and accordingly, the financial statements have been
restated to include the results of Macomb.
A reconciliation of previously reported net interest income and net income
is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
-----------------------
(Dollars in thousands)
<S> <C>
Net interest income (as previously reported) $9,465
Macomb Federal Savings Bank - net interest income 217
------
Total net interest income $9,682
======
Net income (as previously reported) $3,497
Macomb Federal Savings Bank - net income (9)
------
Total net income $3,488
======
A reconciliation of per share income is as follows:
Three Months Ended
March 31, 1996
----------------------
Basic earnings per share
Net income (as previously reported) $ 0.47
Macomb Federal Savings Bank (0.05)
------
Basic earnings per share $ 0.42
======
Diluted earnings per share
Net income (as previously reported) $ 0.44
Macomb Federal Savings Bank (0.04)
------
Diluted earnings per share $ 0.40
======
</TABLE>
NOTE C: REAL ESTATE INVESTMENT TRUST
D&N Capital Corporation ("D&N Capital") is a Delaware corporation
incorporated on March 18, 1997 for the purpose of acquiring and holding real
estate assets and is a Real Estate Investment Trust ("REIT"). All shares of
common stock of D&N Capital are owned by D&N Bank.
On July 17, 1997, D&N Capital sold 1.21 million shares of its 9.0%
noncumulative preferred stock, Series A with a liquidation preference of $25.00
per share (totaling $30,250,000). As part of this transaction, D&N Capital
received $28,719,000 in net proceeds, after offering costs of $1,531,000. The
Series A Preferred Shares are generally not redeemable prior to July 21, 2002.
On or after July 21, 2002, the Series A Preferred Shares may be redeemed for
cash at the option of the Bank, in whole or in part, at a redemption price of
$25.00 per share.
The preferred shares are treated as Tier-1 Capital by the Bank, and are
traded on Nasdaq as DNFCP. During 1998 and 1997, D&N Capital declared and paid
preferred dividends totaling $2,722,500 and $1,217,563, respectively.
NOTE D: RESTRICTIONS ON CASH AND NONINTEREST-BEARING BALANCES
The Company is required to maintain reserve balances with the Federal
Reserve Bank. The average amounts of those reserve balances for the years ended
December 31, 1998 and December 31, 1997 were $1,235,000 and $452,000,
respectively.
9
<PAGE>
NOTE E: INVESTMENT SECURITIES
Investment securities consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------
Book Market Book Market
Value Value Value Value
---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ -- $ -- $ 33,299 $ 33,369
Investment in Federal Home Loan Bank stock 28,651 28,651 23,200 23,200
Other equity securities 27 27 25 25
-------- -------- -------- --------
Held to maturity 28,678 28,678 56,524 56,594
U.S. Treasury securities 10,237 10,246 44,764 44,860
Commercial paper 89,851 89,851 -- --
Municipal bonds 141 141 148 148
Other securities 1,141 1,156 1,088 1,104
Valuation allowances 24 -- 112 --
-------- -------- -------- --------
Available for sale 101,394 101,394 46,112 46,112
-------- -------- -------- --------
$130,072 $130,072 $102,636 $102,706
======== ======== ======== ========
An analysis of gross unrealized gains and losses is as follows:
1998 1997
-----------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ---------- ---------- ----------
(Dollars in thousands)
Held to maturity $ -- $ -- $ 70 $ --
-------- -------- -------- --------
U.S. Treasury securities -- -- 70 --
Available for sale 9 -- 97 (1)
U.S. Treasury securities 15 -- 16 --
-------- -------- -------- --------
Other securities 24 -- 113 (1)
-------- -------- -------- --------
$ 24 $ -- $ 183 $ (1)
======== ======== ======== ========
</TABLE>
There were no sales of investment securities during 1998 or 1997. Proceeds
from sales of investment securities available for sale during 1996 were
$298,000. Gross gains of $188,000 were realized on those sales.
The book value, market value and average yield of U. S. Treasury securities
available for sale with contractual maturities under one year available for sale
at December 31, 1998 were $10,237,000, $10,246,000 and 6.03% respectively.
10
<PAGE>
NOTE F: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------------
1998 1997
--------------------- ---------------------
Book Market Book Market
Value Value Value Value
---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Government agency securities $ 5,528 $ 5,694 $112,156 $113,253
Collateralized mortgage obligations 35,824 35,992 84,788 84,987
Accrued interest receivable 339 339 1,285 1,285
Net discounts (245) -- (179) --
-------- -------- -------- --------
Held to maturity 41,446 42,025 198,050 199,525
Government agency securities 95,590 96,652 86,658 88,145
Collateralized mortgage obligations 350,213 353,055 69,104 69,715
Interest-only certificates 153 620 378 1,422
Accrued interest receivable 2,439 2,439 964 964
Net premiums 1,738 -- 940 --
Valuation allowances 2,633 -- 2,202 --
-------- -------- -------- --------
Available for sale 452,766 452,766 160,246 160,246
-------- -------- -------- --------
$494,212 $494,791 $358,296 $359,771
======== ======== ======== ========
</TABLE>
Mortgage-backed securities with a carrying value of $109,125,000 are
specifically pledged as collateral for advances from the Federal Home Loan Bank
of Indianapolis and other borrowings.
An analysis of gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1998 1997
---------- ----------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Government agency securities $ 167 $ -- $1,238 $(368)
Collateralized mortgage obligations 422 (8) 675 (70)
------ ----- ------ -----
Held to maturity 589 (8) 1,913 (438)
Government agency securities 1,027 -- 743 (1)
Collateralized mortgage obligations 1,342 (203) 424 (8)
Interest only certificates 467 -- 1,044 --
------ ----- ------
Available for sale 2,836 (203) 2,211 (9)
------ ----- ------ -----
$3,425 $(211) $4,124 $(447)
====== ===== ====== =====
</TABLE>
Proceeds from sales of mortgage-backed securities available for sale
during 1998 were $112,557,000. Gross gains of $2,830,000 were realized on
those sales. Proceeds from sales of mortgage-backed securities available for
sale during 1997 were $30,154,000. Gross gains of $543,000 and gross losses of
$4,000 were realized on those sales. There were no sales of mortgage-backed
securities during 1996.
11
<PAGE>
The book value and market value of mortgage-backed securities at December 31,
1998, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------ -----------------------------
Book Market Average Book Market Average
Value Value Yield Value Value Yield
-------- -------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Government agency securities
Less than one year $ -- $ -- --% $ -- $ -- --%
One to five years 835 843 6.76 -- -- --
Five to ten years 679 695 7.55 -- -- --
After ten years 4,014 4,156 7.54 95,625 96,652 6.40
------- ------- ----- -------- -------- --------
5,528 5,694 7.42 95,625 96,652 6.40
Collateralized mortgage obligations
Less than one year -- -- -- -- -- --
One to five years -- -- -- -- -- --
Five to ten years 3,996 4,039 6.82 -- -- --
After ten years 31,583 31,953 7.00 351,916 353,055 6.33
------- ------- ----- -------- -------- --------
35,579 35,992 6.98 351,916 353,055 6.33
Interest-only certificates
Less than one year -- -- -- -- -- --
One to five years -- -- -- -- -- --
Five to ten years -- -- -- 2 10 1411.67
After ten years -- -- -- 151 610 143.30
------- ------- ----- -------- -------- --------
-- -- -- 153 620 168.18
------- ------- ----- -------- -------- --------
$41,107 $41,686 7.04% $447,694 $450,327 6.40%
======= ======= ===== ======== ======== ========
</TABLE>
Mortgage-backed securities will mature according to the repayment
characteristics of the underlying mortgage loans which collateralize the
securities. Expected maturities for mortgage-backed securities will differ from
contractual maturities because borrowers have the right to prepay.
The aggregate book value and aggregate market value of the securities of
any one issuer, other than U.S. Government agencies, did not exceed 10% of
stockholders' equity at December 31, 1998 or 1997.
NOTE G: LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable consisted of the
following:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1998 1997
---------- ----------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential mortgages $ 638,725 $ 643,103 $ 694,902 $ 706,459
Residential mortgages held for sale 8,801 8,804 5,275 5,275
Mortgages on income producing property 94,009 93,869 81,304 79,007
Construction loans 55,122 54,986 56,176 55,901
Consumer loans 501,062 501,208 446,710 449,276
Commercial loans 51,022 50,819 38,164 37,706
Accrued interest receivable 7,023 7,023 7,311 7,311
---------- ---------- ---------- ----------
1,355,764 1,359,812 1,329,842 1,340,935
Less:
Discounts on purchased loans (2,312) -- (2,356) --
Allowance for loan losses 10,995 -- 10,549 --
Undisbursed portion of loan proceeds 17,679 -- 20,315 --
Deferred income 254 -- 375 --
---------- ---------- ---------- ----------
$1,329,148 $1,359,812 $1,300,959 $1,340,935
========== ========== ========== ==========
</TABLE>
12
<PAGE>
Credit is extended based on evaluation of the borrower's financial
condition, the value of the collateral and, in the case of income producing
property, the sufficiency of net cash flows from the property's operation to
service the debt. When loans are made to businesses, personal guarantees may
also be required of owners or partners.
Loans collateralized by income producing property are categorized as
follows:
<TABLE>
<CAPTION>
December 31
-------------------------------
1998 1997
------------------------------
(Dollars in thousands)
<S> <C> <C>
Shopping centers $24,020 $22,185
Offices 18,355 6,905
Multi-family apartments 12,238 19,913
Motels/hotels 11,270 11,491
Nursing Homes 9,498 5,291
Condominium Development 6,945 4,240
Industrial 6,830 4,774
Mobile home parks 4,262 2,118
Other 591 4,387
----------------------------
$94,009 $81,304
============================
</TABLE>
Loans collateralized by income producing property categorized by state are
as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1998 1997
-------------------------
(Dollars in thousands)
<S> <C> <C>
Michigan $85,017 $65,697
California 6,261 11,008
New York -- 805
Pennsylvania 241 405
Other 2,490 3,389
-------------------------
$94,009 $81,304
=========================
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $10,549 $11,042 $10,081
Provisions for loan losses 2,500 1,350 1,100
Net charge-offs (2,054) (1,843) (139)
-----------------------------
Balance at end of year $10,995 $10,549 $11,042
=============================
</TABLE>
At December 31, 1998 and 1997, the total recorded investment in impaired
loans, as defined by SFAS 114 "Accounting by Creditors for Impairment of a
Loan", was $9,667,000 and $4,779,000, respectively. In 1998 and 1997 the amount
of the recorded investment for which there is a related allowance for loan
losses is $1,145,000 and $145,000, respectively, and the amount of the recorded
investment for which there is no related allowance for loan losses is $8,522,000
and $4,634,000, respectively. Interest income on impaired loans is recognized
primarily on a cash basis. During 1998 and 1997, the amount of interest income
recognized on impaired loans was insignificant.
Changes in capitalized mortgage servicing rights, included in other assets
in the Consolidated Statements of Condition, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,136 $1,443 $1,113
Originations and acquisitions 4,552 1,236 630
Amortizations, sales, and writedowns (1,866) (543) (300)
---------------------------
Balance at end of year $ 4,822 $2,136 $1,443
===========================
</TABLE>
13
<PAGE>
Changes in the valuation allowance for mortgage servicing rights are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 321 $ 221 $ 291
Additions:
Purchased mortgage servicing right -- 38 151
Originated mortgage servicing rights 464 154 55
---------------------------
Total additions 464 192 206
Reductions:
Purchased mortgage servicing rights 177 69 158
Originated mortgage servicing rights 99 23 118
---------------------------
Total reductions 276 92 276
---------------------------
Balance at end of year $ 509 $ 321 $ 221
===========================
</TABLE>
At December 31, 1998 and 1997, the fair value of capitalized mortgage
servicing rights was $4,897,000 and $2,389,000, respectively.
Loans serviced for others amounted to $575,818,000, $518,877,000, and
$415,156,000 at December 31, 1998, 1997 and 1996, respectively.
NOTE H: OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------
1998 1997
--------------------
(Dollars in thousands)
<S> <C> <C>
Real estate acquired through foreclosure $ 680 $ 742
Real estate in judgment 177 732
---------------
$ 857 $1,474
===============
</TABLE>
Changes in the allowance for possible losses on OREO are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ 133
Provision for losses -- -- --
Net charge-offs -- -- (133)
-------------------------
Balance at end of year $ -- $ -- $ 0
=========================
</TABLE>
The Company recorded writedowns of other real estate owned amounting to
$61,000 during 1998 and $75,000 during 1996. The Company did not record any
writedowns of other real estate owned in 1997.
The Company recognized net gains on sale of OREO amounting to $68,000,
$132,000 and $164,000 during 1998, 1997 and 1996, respectively.
14
<PAGE>
NOTE I: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Cost:
Land $ 2,651 $ 2,565
Buildings and improvements 19,348 17,653
Furniture and equipment 17,214 18,749
-------------------
39,213 38,967
Less accumulated depreciation 20,208 22,346
-------------------
$19,005 $16,621
===================
</TABLE>
Depreciation and amortization expense was $2,323,000, $1,987,000 and
$1,954,000 in 1998, 1997 and 1996, respectively.
Rental expense for leased properties and equipment was $1,424,000,
$1,150,000 and $938,000 in 1998, 1997 and 1996, respectively. The aggregate
minimum annual rental commitments under these leases are approximately
$1,323,000 in 1999, $1,208,000 in 2000, $1,082,000 in 2001, $837,000 in 2002,
$539,000 in 2003 and $2,422,000 thereafter.
NOTE J: DEPOSITS
The carrying amounts and fair values of deposits and the nominal rates of
interest paid were as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
Weighted Weighted
Carrying Fair Average Carrying Fair Average
Amount Value Rate Amount Value Rate
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts $ 79,415 $ 79,415 --% $ 56,473 $ 56,473 --
NOW accounts 87,387 87,387 1.66 62,939 62,939 1.51
Money market accounts 103,878 103,878 3.27 92,314 92,314 4.02
Savings deposits 237,600 237,600 3.14 163,119 163,119 3.16
Certificates of deposit 754,317 764,584 5.55 667,204 673,314 5.93
Accrued interest 1,543 1,543 -- 1,118 1,118 --
---------------------------------------------------------------------
$1,264,140 $1,274,407 4.29% $1,043,167 $1,049,277 4.74%
=====================================================================
</TABLE>
Included in deposits are $228,468,000 and $144,426,000 of deposit accounts
with balances in excess of $100,000 as of December 31, 1998 and 1997,
respectively.
Certificates of deposit had the following maturities at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Amount Average Rate
---------------------------
(Dollars in thousands)
<S> <C> <C>
1999 $605,344 5.52%
2000 91,464 5.63
2001 24,801 5.68
2002 9,737 6.06
2003 and beyond 22,971 5.76
----------------------
$754,317 5.55%
======================
</TABLE>
15
<PAGE>
The average balance, interest expense and average rate on deposits were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Checking accounts $ 62,935 $ -- -- % $ 47,680 $ -- -- % $ 40,349 $ -- $ --
NOW and money
market accounts 168,545 4,841 2.87 152,615 4,547 2.98 146,863 4,490 3.06
Savings deposits 196,502 6,581 3.35 154,541 4,623 2.99 153,701 4,446 2.89
Certificates of deposit 686,017 39,784 5.80 657,401 38,791 5.90 597,571 34,923 5.84
------------------------------------------------------------------------------------------------------
$1,113,999 $ 51,206 4.60% $1,012,237 $ 47,961 4.74% $ 938,484 $ 43,859 4.67%
======================================================================================================
</TABLE>
NOTE K: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, in which the Company
will repurchase identical securities, consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1998 1997
-------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Collateral pledged:
Mortgage-backed securities and Treasury
notes with a book value including accrued
interest of $18,715,000 and a market value
of $18,997,000 in 1998, and a book value
including accrued interest of $151,761,000
and a market value of $152,766,000 in 1997. $18,153 $18,153 $149,092 $149,092
=====================================
</TABLE>
Securities sold under agreements to repurchase averaged $80,106,000 and
$98,471,000 during 1998 and 1997, respectively, and the maximum amounts
outstanding at any month-end during 1998 and 1997 were $148,639,000 and
$181,055,000, respectively.
The securities underlying the agreements were delivered to the dealers who
arranged the transactions. The dealers may have sold, loaned or otherwise
disposed of such securities to other parties in the normal course of their
operations, and have agreed to resell to the Company essentially identical
securities at the maturities of the agreements.
As of December 31, 1998, the only agreement to repurchase was with Bear
Stearns in the amount of $18,153,000 at an interest rate of 5.50%, with a
maturity date of January 8, 1999.
16
<PAGE>
NOTE L: FHLB ADVANCES AND OTHER BORROWED MONEY
The carrying amounts and fair values of Federal Home Loan Bank of
Indianapolis ("FHLB") advances and other borrowed money consisted of the
following:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ----------------- -------------------
Year of Weighted Carrying Fair Carrying Fair
Maturity Average Rate Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Advances from FHLB:
Variable rate of interest:
5.69 - 5.88% 1998 --% 5.76% $ -- $ -- $ 61,000 $ 61,001
Fixed rate of interest:
5.47 - 5.98% 1998 -- 5.88 -- -- 153,000 153,190
5.81 - 6.20 1999 5.99 5.99 179,000 179,801 179,000 179,927
5.35 - 5.97 2000 5.78 5.92 145,000 146,608 70,000 70,509
5.21 - 5.94 2001 5.64 -- 205,000 207,831 -- --
4.00 2005 4.00 4.00 1,003 925 1,003 888
-------------------------------------------------------------------
530,003 535,165 464,003 465,515
Other borrowed money:
Overnight funds 5.36 -- 25,285 25,285 -- --
Collateralized mortgage obligation. 10.60 10.04 4,694 5,207 6,428 6,974
--------------------------------------------------------
$559,982 $565,657 $470,431 $472,489
======================================
</TABLE>
The Company is required to maintain qualifying loans, investments and
mortgage-backed securities as collateral for the FHLB advances.
The collateralized mortgage obligation ("CMO") was issued through a special
purpose finance subsidiary established in 1986. The CMO is secured by mortgage-
backed securities with unpaid principal balances of $5,241,000 and $7,154,000 at
December 31, 1998 and December 31, 1997, respectively. The note underlying the
obligations bears interest, payable quarterly, at a rate of 7.27%, with a
contractual maturity date of 2010.
NOTE M: FEDERAL INCOME TAXES
Federal income tax expense (credit) consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Current $7,138 $4,634 $ --
Deferred 763 3,109 3,228
Change in valuation allowance
for deferred tax assets -- -- (2,879)
------------------------
$7,901 $7,743 $ 349
========================
</TABLE>
Deferred income tax expense (credit) included in stockholders' equity
related to the change in unrealized holding gains (losses) on securities
available for sale for 1998, 1997 and 1996 amounted to $262,000, $141,000, and
$(181,000), respectively.
17
<PAGE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Effect of:
Change in valuation allowance
for deferred tax assets -- -- (30.8)
Other, net (2.0) 0.1 (0.5)
--------------------
Effective tax rate 33.0% 35.1% 3.7%
====================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred and other tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $3,031 $3,086
Net deferral required by SFAS 91 17 79
Pension and other benefit obligations 676 700
Other, net 281 398
------------------
Total deferred tax assets 4,005 4,263
Deferred tax liabilities:
Securities marked to market for tax purposes* 147 (13)
Fixed assets 644 588
FHLB stock 1,075 1,075
Valuation adjustment on CMO residuals 1,459 1,431
Other, net 52 53
------------------
Total deferred tax liabilities 3,377 3,134
------------------
Total net deferred tax assets 628 1,129
Current income tax receivable due to overpayments 2,093 --
------------------
Total net federal income tax assets $2,721 $1,129
==================
</TABLE>
* The amount shown is net of the $930,000 and $810,000 tax effect of SFAS 115
unrealized holding gains at December 31, 1998 and December 31, 1997,
respectively.
NOTE N: STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
OTS regulations governing the payment of dividends by savings institutions
provide that an institution may only pay dividends with regulatory approval.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its stockholders. However, the source of future
dividends may depend upon the payment of dividends from the Bank to the Company.
In December 1993, the Company issued 1,003,219 units in a shareholder
rights offering. Each unit consisted of three shares of common stock and one
warrant. Each warrant entitled the holder thereof to purchase one share of
common stock at an exercise price of $8.25 at any time no later than December
31, 1996. During 1996, 1995 and 1994, 996,369, 2,553 and 390 warrants were
exercised, respectively. The warrant period ended with 3,907 warrants
unexercised.
During 1996, the Company paid a one-time charge of $5.5 million pretax,
($3.6 million after tax) as the mandated contribution of D&N Bank, to replenish
the Federal Deposit Insurance Corporation's depleted Savings Association
Insurance Fund ("SAIF"). This charge is the result of federal legislation
passed and signed into law on September 30, 1996, which required all thrifts to
pay a one-time assessment to restore the SAIF fund to its statutory reserve
level. The assessment was 65.7 basis points (b.p.) of the institution's
deposits as of March 31, 1995.
18
<PAGE>
Macomb had a leveraged Employee Stock Ownership Plan ("ESOP") which was
terminated subsequent to the merger with the Company. The related ESOP debt was
paid in full in 1996.
In December, 1996, D&N Financial Corporation's Board of Directors
authorized a program to acquire up to 440,000 shares of D&N Financial
Corporation common stock for the Company's treasury. In 1996, 257,222 shares
were acquired and 256,251 were reissued as holders of D&N Financial Corporation
warrants (issued in 1993) presented their maturing warrants for conversion to
common stock. In 1997, the authorized program was completed when an additional
182,050 shares were acquired for general corporate purposes, including the
satisfaction of its obligation to issue shares upon the exercise of employees'
and directors' stock options. By December 31, 1998, 100% of these shares had
been reissued upon the exercise of stock options.
On December 10, 1997, the Company declared a $.05 per share cash dividend
and a 10% stock dividend. Both were paid on January 13, 1998, to holders of
record on December 23, 1997. The liability for the cash dividend is shown in
Other Liabilities on the accompanying financial statements. All per share data
have been adjusted to include the effect of the stock dividend.
During 1998, the Company declared and paid a $0.05 per share cash dividend,
quarterly. The fourth quarter's dividend was paid on January 12, 1999, to
holders of record December 23, 1998. The liability for the cash dividend is
shown in Other Liabilities on the accompanying financial statements.
Regulatory standards, as dictated by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") impose the following capital
requirements: a risk-based capital standard expressed as a percent of risk-
adjusted assets, a leverage ratio of core capital to total adjusted assets, and
a tangible capital ratio expressed as a percent of total adjusted assets. As of
December 31, 1998, the Bank exceeded all regulatory capital standards.
The table below summarizes as of December 31, 1998, the Bank's capital
requirements under FIRREA and its actual capital ratios at that date:
<TABLE>
<CAPTION>
Regulatory Bank Actual
Requirements Capital
---------------------------------------------
Amount Percent Amount Percent
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Risk-based capital $101,933 8.00% $139,380 10.94%
Tier 1 risk-based capital 76,450 6.00 129,530 10.17
Core capital 60,720 3.00 129,530 6.40
Tangible capital 30,360 1.50 129,530 6.40
</TABLE>
The FDIC Improvement Act of 1992 ("FDICIA") requires each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. The OTS has adopted rules, based upon FDICIA's five capital tiers:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under FDICIA, the OTS is
required to take supervisory action against institutions that are not deemed
either well capitalized or adequately capitalized.
The rules generally provide that a savings institution is well capitalized
if its risk-based capital ratio is 10% or greater, its ratio of core capital to
risk-based assets ("tier 1 risk-based capital") is 6% or greater, its core
capital ("leverage") ratio is 5% or greater, and the institution is not subject
to a capital directive. At December 31, 1998, the Bank was considered well
capitalized.
NOTE O: EMPLOYEE BENEFIT PLANS
The Company sponsors an employee savings and investment plan in which all
employees may participate after completing a minimum of 1,000 hours in an
eligibility period. The plan allows participants to make contributions by
salary deductions equal to 19% or less of their salary pursuant to Section
401(k) of the Internal Revenue Code. Employee contributions are matched by the
Company at the rate of 100 cents per dollar, up to 6% of the employee's salary.
Employees vest immediately in their own contributions and over a five-year
period in the Company's contributions. Employee contributions may be invested
in a variety of instruments, including the
19
<PAGE>
Company's common stock and preferred stock of D&N Capital Corporation. The
Company's matching contribution is invested at the direction of the participant.
The Company's contributions to the plan were $688,000, $653,000 and $621,000 in
1998, 1997, and 1996, respectively.
The Company terminated its noncontributory defined benefit retirement plan
during 1996, with all assets being distributed to participants. No gain or loss
was recorded on this transaction.
NOTE P: POSTRETIREMENT BENEFITS
The Company has a contributory unfunded benefit plan which provides
postretirement medical benefits to certain employees who have retired prior to
September 30, 1995. The Company is recognizing its accumulated postretirement
benefit obligation over a prospective 20-year period.
The following table sets forth the change in accumulated postretirement
benefit obligation for the years ended 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-----------------------
(Dollars in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation,
beginning of year $1,187 $1,241
Interest cost 95 84
Employee contribution 27 20
Benefits paid (183) (180)
Actuarial loss 303 22
-------------------
Accumulated postretirement benefit obligation,
end of year $1,429 $1,187
===================
</TABLE>
The following table sets forth the plan's status and amounts recognized in
the Company's Consolidated Statements of Condition:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------
(Dollars in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation $1,429 $1,187
Unrecognized net loss (418) (141)
Unrecognized transition obligation (732) (780)
-----------------------
Accrued postretirement benefit cost $ 279 $ 266
=======================
</TABLE>
Postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $ -- $ -- $ --
Interest cost 95 84 97
Amortization of transition obligation 48 48 48
-------------------
$ 143 $ 132 $ 145
===================
</TABLE>
A weighted average discount rate of 6.50% in 1998 and 7.25% in 1997 was
used in determining the accumulated post retirement benefit obligation. The
1998 health care trend rate was projected to be 8.5% for participants under the
age of 65, and this rate is assumed to trend downward until it reaches 5.5% and
remains at that level thereafter. This trend rate assumption does not have a
significant effect on the plan; therefore, a one percent change in the trend
rate is not material in the determination of the accumulated postretirement
benefit obligation or the ongoing expense.
20
<PAGE>
NOTE Q: STOCK OPTION PLAN
The Company has stock option plans in which 1,214,000 shares of common
stock have been reserved for issuance as of December 31, 1998. Under the plans,
the exercise price of any option will not be less than the fair market value of
the common stock on the date of grant. The dates on which the options are first
exercisable is determined by the Stock Option Committee of the Board of
Directors and have generally vested over a two year period from the date of
grant. The term on any option may not exceed ten years from the date of grant.
The Company has elected to continue to measure compensation cost using the
intrinsic value method, in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, since
all options are granted at a fixed price not less than the fair market value of
the Company's common stock on the date of grant, no compensation cost has been
recognized for its stock option plans. Had stock option costs of these plans
been determined based on the fair value at the 1998, 1997 and 1996 grant dates
for awards under those plans consistent with the methodology of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation", the pro forma effects on the Company's net income and earnings
per share would be as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C>
Net income (as reported) $16,062 $14,325 $8,995
Stock option compensation cost (994) (761) (396)
------------------------------------------
Pro forma net income $15,068 $13,564 $8,599
==========================================
Basic earnings per share (as reported) $ 1.75 $ 1.58 $ 1.08
Stock option compensation cost (0.10) (0.08) (0.05)
------------------------------------------
Pro forma basic earnings per share $ 1.65 $ 1.50 $ 1.03
==========================================
Diluted earnings per share (as reported) $ 1.69 $ 1.53 $ 1.01
Stock option compensation cost (0.10) (0.08) (0.04)
------------------------------------------
Pro forma diluted earnings per share $ 1.59 $ 1.45 $ 0.97
==========================================
</TABLE>
The fair value of each option grant in 1998, 1997 and 1996 was estimated
using the Black-Scholes option pricing model with the following assumptions
used:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Estimated weighted average fair value
per share of options granted $11.19 $ 7.63 $ 4.61
Assumptions:
Annualized dividend yield .9% .8% --
Common-stock price volatility 37.4% 32.5% 25.1%
Weighted average risk
free rate of return 5.7% 6.5% 5.9%
Weighted average
expected option term (in years) 7 5 5
</TABLE>
The following table sets forth changes in options outstanding:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Amount Avg. Price Amount Avg. Price Amount Avg. Price
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at beginning
of year 949,346 $12.07 820,943 $ 9.31 653,956 $ 7.56
Granted 77,834 25.41 261,087 19.55 315,929 12.26
Forfeited (8,253) 21.90 (34,003) 12.27 (21,836) 9.45
Canceled -- -- -- -- (6,353) 14.60
Exercised (227,852) 9.15 (98,681) 9.05 (120,753) 7.22
----------------------------------------------------------------------------
Outstanding at end of
year 791,075 14.14 949,346 12.07 820,943 9.31
----------------------------------------------------------------------------
Exercisable at end of
year 661,620 $12.61 738,092 $11.25 590,858 $ 8.40
----------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth details of options outstanding at December 31, 1998:
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.45 - 7.62 226,212 4.9 Years $ 6.98 226,212 $ 6.98
10.17 - 12.05 199,147 6.4 Years 11.47 199,147 11.47
12.95 - 14.04 55,186 7.9 Years 14.03 55,186 14.03
16.36 - 25.50 310,530 8.7 Years 21.08 181,075 20.46
- -----------------------------------------------------------------------------------------------------
$ 5.45 - 25.50 791,075 7.0 Years $14.14 661,620 $12.61
======================================================================================================
</TABLE>
NOTE R: LITIGATION
The Company is a defendant in a number of matters of litigation,
substantially all of which have arisen in the ordinary course of business. It
is the opinion of management that the resulting liabilities, if any, from these
actions will not materially affect the Consolidated Financial Statements.
D&N Bank is a plaintiff, like approximately 120 other institutions, in a
currently pending claim in the United States Court of Federal Claims seeking
substantial damages as a result of the 1989 Financial Institutions Reform,
Recovery and Enforcement Act's mandatory phase-out of the regulatory capital
treatment of supervisory goodwill. The ultimate outcome of this matter as it
relates to D&N, cannot be determined at this time.
NOTE S: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
(in the normal course of its business) to meet the financial needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments may include commitments to originate or purchase
loans, standby letters of credit, recourse arrangements on sold assets, and
forward commitments. The instruments involve, to varying degrees, elements of
credit and interest rate risk in addition to the amounts recognized in the
Consolidated Statements of Condition. The contract amounts of those instruments
reflect the extent of the Company's involvement in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as for on-balance sheet instruments.
For forward commitments, the contract amounts do not represent exposure to
credit loss. The Company controls the credit risk of those instruments through
credit approvals, limits and monitoring procedures.
22
<PAGE>
The following table sets forth financial instruments with off-balance sheet
risk and their contract amounts and fair values:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1998 1997
---------------------------------------
Contract Fair Contract Fair
Amount Value Amount Value
---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to originate and purchase loans $ 82,029 $ (820) $78,710 $(787)
Unused lines of credit 107,087 (1,071) 93,709 (937)
Standby letters of credit 4,922 (49) 3,907 (39)
Loans sold with recourse 921 (46) 2,155 (108)
Financial instruments whose contract amounts
exceed the amount of credit risk:
Forward commitments to sell loans 14,200 (71) 6,400 (64)
</TABLE>
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn on, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's evaluation of the borrower's creditworthiness.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Additionally, the Company has
retained credit risk on certain residential and commercial mortgage loans sold
with recourse with outstanding balances at December 31, 1998 of $921,000 and
none, respectively. These balances as of December 31, 1997 were $1,310,000 and
$845,000, respectively. The maximum amount of loss to which the Company is
subject, under the recourse provisions, is $921,000 at December 31, 1998.
Management does not believe the recourse provisions subject the Company to any
material risk of loss. This credit risk is considered to be no more onerous than
that existing on similar loans in the Company's loan portfolio.
Forward commitments to sell loans are contracts the Company negotiates for
the purpose of reducing the market risk associated with rate lock agreements
with customers for new loan applications that have not yet been closed. In order
to fulfill a forward commitment, the Company typically exchanges through FNMA,
FHLMC or GNMA, its current production of loans for mortgage-backed securities
which are then delivered to a national securities firm at a future date at
prices or yields specified by the contracts. Risks may arise from the possible
inability of the Company to originate loans to fulfill the contracts, in which
case the Company would normally purchase securities in the open market to
deliver against the contracts.
NOTE T: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of
financial instruments at the dates indicated. SFAS 107, "Disclosures about Fair
Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
23
<PAGE>
<TABLE>
<CAPTION>
December 31
------------------------------------------------------
1998 1997
------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15,979 $ 15,979 $ 20,497 $ 20,497
Investment securities (Note E) 130,072 130,072 102,636 102,706
Mortgage-backed securities (Note F) 494,212 494,791 358,296 359,771
Loans receivable (Note G) 1,329,148 1,359,812 1,300,959 1,340,935
Deposits (Note J) (1,264,140) (1,274,407) (1,043,167) (1,049,277)
Securities sold under agreement
to repurchase (Note K) (18,153) (18,153) (149,092) (149,092)
Debt (Note L) (559,982) (565,657) (470,431) (472,489)
Commitments to originate and
purchase loans (Note S) -- (820) -- (787)
Unused lines of credit (Note S) -- (1,071) -- (937)
Standby letters of credit (Note S) -- (49) -- (39)
Loans sold with recourse (Note S) -- (46) -- (108)
Forward commitments to sell loans (Note S) -- (71) -- (64)
</TABLE>
Estimation of Fair Values
SFAS 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the Statement of Condition, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts reported in the Statement of Condition for cash and
cash equivalents approximate those assets' fair value. Fair values for
investment securities and mortgage-backed securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. Fair values for the
Company's loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The carrying amount of accrued interest approximates
its fair value.
The fair values of checking and NOW accounts, money market accounts and
savings deposits are the amounts payable on demand at the reporting date. The
fair value for fixed-maturity time deposits is estimated using a discounted cash
flow analyses using the rates currently offered for deposits with similar
remaining maturities. The fair values of securities sold under agreement to
repurchase and the Company's debt are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for debt
with similar terms and remaining maturities. Fair values for the Company's off-
balance sheet instruments (guarantees and credit commitments) are based on
current settlement or termination values and on fees currently charged to enter
into similar agreements, given the remaining terms of the agreements and the
counterparties' credit standing.
NOTE U: SEGMENT INFORMATION
D&N Financial Corporation's two reportable segments are Community Banking
and Wholesale Banking. Community Banking includes our network of full service
banking offices and provides a full range of deposit products and residential,
commercial and consumer loans. Wholesale Banking includes residential and
consumer loan servicing and underwriting operations, mortgage lending through
correspondents, and D&N Mortgage Corporation, and the origination of consumer
installment loans through automobile and other durable goods dealers. All
Other includes the Bank's insurance subsidiary, a seasoned portfolio of out-of-
market purchased
24
<PAGE>
commercial real estate loans, and the treasury which facilitates inter-segment
funds transfers and manages the corporation's external borrowing and
interest-rate-risk management activities.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. D&N Financial Corporation
evaluates performance based on average balances and net profit or loss including
income taxes. The performance evaluation is completed on a full allocation
basis and therefore corresponds to the Corporation's consolidated net income.
Inter-segment income and expense items are charged at either the current market
rate or an estimate of actual expense incurred to provide a service to other
business lines.
The measurement of the performance of the business segments is based on
the management structure of the Corporation and is not necessarily comparable
with similar information for any other financial institution. The information
presented is also not necessarily indicative of the segments' financial
condition and results of operations if they were independent entities.
The following table sets forth the reportable segments for the years ending
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Community Banking Wholesale Banking
1998 1997 1996 1998 1997 1996
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest
income 37,709 34,994 30,675 14,076 10,578 7,893
Provision for
loan losses 994 1,056 1,579 1,506 348 563
Noninterest income:
From external
customers 10,176 6,618 5,377 2,491 1,539 1,272
Inter-segment 5 4 172 0 0 0
Inter-segment
noninterest expense 2,407 2,887 1,877 (1,598) (1,936) (1,878)
Depreciation and
amortization 2,060 1,627 1,590 2,150 914 558
Federal income tax 6,275 4,909 1,642 2,297 2,149 833
Segment profit
(loss) 12,676 8,918 6,627 4,579 3,903 3,358
============================================================================
Segment average
assets 1,182,677 997,991 794,567 665,809 539,307 452,951
============================================================================
Capital
expenditures 4,449 2,279 2,465 701 888 468
============================================================================
<CAPTION>
All Other Total
1998 1997 1996 1998 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest
income 904 3,367 4,195 52,689 48,939 42,763
Provision for
loan losses 0 (54) (1,042) 2,500 1,350 1,100
Noninterest income:
From external
customers 1,221 895 787 13,888 9,052 7,436
Inter-segment (5) (4) (172) 0 0 0
Inter-segment
noninterest expense (809) (951) 1 0 0 0
Depreciation and
amortization 96 90 198 4,306 2,631 2,346
Federal income tax (671) 685 (2,126) 7,901 7,743 349
Segment profit
(loss) (1,193) 1,504 (990) 16,062 14,325 8,995
============================================================================
Segment average
assets 57,547 88,924 86,718 1,906,033 1,626,222 1,334,236
============================================================================
Capital
expenditures 79 112 194 5,229 3,279 3,128
============================================================================
</TABLE>
25
<PAGE>
NOTE V: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Income
Before
Net Provision Income Income
Interest Interest Interest For Loan Gain on Tax Tax Net Earnings Per Share
Income Expense Income Losses Securities Expense Expense Income Basic Diluted
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share and stock price)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st
Quarter
1998 $ 34,547 $ 21,342 $ 13,205 $ 525 $ -- $ 6,786 $ 2,208 $ 3,897 $ 0.43 $ 0.41
1997 28,335 17,000 11,335 300 -- 5,075 1,781 3,294 0.36 0.35
2nd
Quarter
1998 34,368 21,049 13,319 550 -- 6,325 1,663 3,982 0.44 0.42
1997 30,293 18,484 11,809 300 539 5,505 1,926 3,579 0.39 0.38
3rd
Quarter
1998 35,588 22,416 13,172 650 1,360 6,889 2,160 4,048 0.44 0.43
1997 32,142 19,626 12,516 300 -- 6,262 2,003 3,722 0.41 0.40
4th
Quarter
1998 35,471 22,478 12,993 775 1,470 6,686 1,870 4,135 0.45 0.43
1997 34,923 21,644 13,279 450 -- 6,444 2,033 3,730 0.41 0.40
Year
1998 139,974 87,285 52,689 2,500 2,830 26,686 7,901 16,062 1.75 1.69
1997 125,693 76,754 48,939 1,350 539 23,286 7,743 14,325 1.58 1.53
<CAPTION>
Stock Price
Range
High Low
--------------------
<S> <C> <C>
1st
Quarter
1998 28 1/2 23 1/2
1997 16 15/16 14 57/64
2nd
Quarter
1998 29 3/4 25 1/4
1997 17 1/2 15 33/64
3rd
Quarter
1998 27 1/4 15 1/4
1997 19 49/64 16 13/16
4th
Quarter
1998 29 1/2 16
1997 26 3/4 19 13/64
Year
1998 29 3/4 15 1/4
1997 26 3/4 14 57/64
</TABLE>
26
<PAGE>
NOTE W: D&N FINANCIAL CORPORATION - PARENT COMPANY ONLY
FINANCIAL INFORMATION CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31
------------------------------
1998 1997
------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2 $ 2
Amounts receivable from subsidiary 3,289 3,523
Investments in subsidiary 112,654 94,994
---------------------------
$115,945 $98,519
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 466 $ 414
Other liabilities 19 23
Stockholders' equity 115,460 98,082
---------------------------
$115,945 $98,519
===========================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1998 1997 1996
-----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income from subsidiary $ 135 $ 228 $ 64
Equity in undistributed net income of subsidiary 16,272 14,388 9,378
Noninterest expense:
Compensation and benefits 12 10 13
Other 333 281 434
-------------------------------
Total noninterest expense 345 291 447
-------------------------------
Income before income tax expense 16,062 14,325 8,995
Federal income tax expense -- -- --
-------------------------------
Net income $ 16,062 $ 14,325 $ 8,995
===============================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1998 1997 1996
-------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 16,062 $ 14,325 $ 8,995
Items not affecting cash:
Equity in undistributed net income of subsidiary (16,272) (14,388) (9,378)
Other 47 438 115
-------------------------------
Net cash provided (used) by operating activities (163) 375 (268)
Investing activities
Change in intercompany receivable 234 2,581 (5,225)
Financing activities
Proceeds from exercise of stock options 2,151 865 9,055
Purchases of treasury stock (383) (2,995) (3,499)
Common stock cash dividends (1,839) (826) --
Payment of ESOP debt -- -- (63)
-------------------------------
Net cash provided (used) by financing activities (71) (2,956) 5,493
-------------------------------
Net change in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of year 2 2 2
-------------------------------
Cash and cash equivalents at end of year $ 2 $ 2 $ 2
===============================
</TABLE>
27
<PAGE>
EXHIBIT 99.2
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
---------------------------------------
(In thousands)
---------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,451 $ 15,945
Federal funds sold 900 --
Interest-bearing deposits in other banks 23,708 34
---------- ----------
Total cash and cash equivalents 37,059 15,979
Investment securities
(market value of $28,676,000 in 1999 and $28,678,000 in 1998 28,676 28,678
Investment securities available for sale (at market value) 58,298 101,394
Mortage-backed securities
(market value $32,061,000 in 1999 and $42,025,000 in 1998) 31,552 41,446
Mortgage-backed securities available for sale (at market value) 533,590 452,766
Loans receivable (including loans held for sale of $8,134,000 in 1999
and $8,801,000 in 1998) 1,329,159 1,340,143
Allowance for loan losses (11,044) (10,995)
---------- ----------
Net loans receivable 1,318,115 1,329,148
Other real estate owned, net 1,402 857
Federal income taxes 637 2,721
Office properties and equipment, net 18,818 19,005
Other assets 26,820 26,160
---------- ----------
Total Assets $2,054,967 $2,018,154
========== ==========
LIABILITIES
Checking and NOW accounts $ 154,276 $ 166,802
Money market accounts 97,868 103,878
Savings deposits 244,347 237,600
Time deposits 774,183 754,317
Accrued interest 1,713 1,543
---------- ----------
Total deposits 1,272,387 1,264,140
Securities sold under agreements to repurchase 78,049 18,153
FHLB advances and other borrowed money 533,325 559,982
Advance payments by borrowers and investors held in escrow 18,164 25,416
Other liabilities 6,155 6,284
---------- ----------
Total liabilities 1,908,080 1,873,975
PREFERRED STOCK OF SUBSIDIARY 28,719 28,719
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share (1,000,000 shares authorized;
none issued) -- --
Common stock, $.01 par value per share (shares authorized - 25,000,000;
shares outstanding - 9,394,273 in 1999 and 9,318,089 in 1998) 94 93
Additional paid-in capital 79,323 78,375
---------- ----------
Total paid-in capital 79,417 78,468
Retained earnings - substantially restricted 38,857 35,265
Accumulated other comprehensive income (loss) (106) 1,727
---------- ----------
Total stockholders' equity 118,168 115,460
---------- ----------
Total Liabilities and Stockholders' Equity $2,054,967 $2,018,154
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
------------------------------
(In thousands, except per share)
<S> <C> <C>
Interest Income:
Loans $25,870 $26,829
Mortgage-backed securities 8,341 6,145
Investments and deposits 1,288 1,573
------- -------
TOTAL INTEREST INCOME 35,499 34,547
Interest expense:
Deposits 13,367 11,985
Securities sold under agreements to repurchase 796 1,991
FHLB advances and other borrowed money 7,727 7,366
------- -------
TOTAL INTEREST EXPENSE 21,890 21,342
------- -------
NET INTEREST INCOME 13,609 13,205
Provision for loan losses 675 525
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,934 12,680
Nointerest income:
Loan administrative fees 699 535
Deposit related fees 1,337 1,045
Gain on sale of loans available for sale 841 885
Gain on sale of mortgage-backed securities available for sale 737 --
Other income 199 736
------- -------
TOTAL NONINTEREST INCOME 3,813 3,201
Nointerest income:
Compensation and benefits 5,350 4,822
Occupancy 975 816
Other expense 3,353 3,196
------- -------
GENERAL AND ADMINISTRATIVE EXPENSE 9,678 8,834
Other real estate owned, net 30 18
Federal deposit insurance premiums 188 243
------- -------
TOTAL NONINTEREST EXPENSE 9,896 9,095
------- -------
INCOME BEFORE INCOME TAX EXPENSE 6,851 6,786
Federal income tax expense 2,151 2,208
------- -------
INCOME BEFORE PREFERRED STOCK DIVIDENDS 4,700 4,578
Preferred stock dividends of subsidiary 681 681
------- -------
NET INCOME $ 4,019 $ 3,897
======= =======
Earnings per share:
BASIC $ 0.43 $ 0.43
======= =======
DILUTED $ 0.42 $ 0.41
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------------------------
(In thousands)
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 4,019 $ 3,897
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 675 525
Depreciation and amortization of office properties and equipment 628 541
Amortization of discounts on purchased loans and securities (1,144) (675)
Originations and purchases of loans held for sale (16,527) (37,607)
Proceeds from sales of loans held for sale 64,376 52,097
Gain on loans and mortgage-backed securities available for sale (737) --
Gain on sale of loan servicing rights -- (193)
Amortization and writedowns of mortgage servicing rights 250 187
Other 2,415 708
--------- ---------
Net cash provided by operating activities 53,955 19,480
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 154,989 14,986
Purchases of investment securities to be held to maturity (111,575) (2,450)
Proceeds from sales of mortgage-backed securities available for sale 40,785 --
Principal collected on mortgage-backed securities 51,926 32,530
Purchases of mortgage-backed securities (164,800) (24,894)
Loans purchased (63,196) (69,219)
Net change in loans receivable 25,408 (24,123)
(Increase) decrease in other real estate owned (545) 183
Sales of loan servicing rights -- 193
Purchases of office properties and equipment 421 (978)
--------- --------
Net cash used by investing activities (67,429) (73 ,772)
FINANCING ACTIVITIES
Net change in time deposits 19,866 (22,767)
Net change in other deposits 11,789 17,956
Proceeds from notes payable, securities sold under agreements
to repurchase and other borrowed money 119,896 115,000
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money (86,689) (67,127)
Net change in advance payments by borrowers and investors
held in escrow (7,252) 2,313
Common stock cash dividend (470) (457)
Proceeds from issuance of stock 992 655
Purchases of treasury stock/warrants -- (364)
--------- --------
Net cash provided by financing activities 34,554 45,209
--------- --------
Increase(Decrease) in cash and cash equivalents 21,080 (9,083)
Cash and cash equivalents at beginning of period 15,979 20,497
--------- --------
Cash and cash equivalents at end of period $ 37,059 $ 11,414
========= ========
Noncash transactions:
Issuance of treasury stock on exercise of stock options $ -- 884
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
D&N FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated 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 interim periods are not
necessarily indicative of the results that may be expected for the full year.
NOTE 2: EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the average
number of shares outstanding during the applicable period.
The company had stock options which are considered to be potentially dilutive to
common stock. Diluted earnings per share is calculated by dividing net income
by the average number of shares outstanding during the applicable period
adjusted for these potentially dilutive options.
The following table sets forth the computation of per share earnings as provided
in SFAS 128, and illustrates the dilutive effect of options outstanding.
Three months ended
March 31, 1999 March 31, 1998
------------------ -----------------------
Earnings Earnings
Shares per share Shares per share
------ ---------- ------ ----------
(In thousands, except per share earnings)
Basic EPS 9,357 $ 0.43 9,115 $ 0.43
Net dilutive effect of stock
options outstanding 236 (0.01) 380 (0.02)
------ --------- ------ ---------
Diluted EPS 9,593 $ 0.42 9,495 $ 0.41
====== ====== ====== =========
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<PAGE>
NOTE 3: ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the Company's loan portfolio that
have been incurred as of the balance sheet date. The allowance for loan losses
is maintained at an adequate level through additions to the provisions for loan
losses. An appropriated level of the general allowance is determined based on
the application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. Management also considers other factors when size and
character of the loan portfolio, consultation with regulatory authorities,
amount of nonperforming loans, delinquency trends, economic conditions and
industry trends.
Changes in the allowance for loan losses are summarized as follows:
Three Months Ended
March 31,
1999 1998
---------------------------
(In thousands)
Balance at beginning of period $ 10,995 $ 10,549
Charge-offs:
Mortgage loans 53 10
Commercial loans 12 --
Consumer loans 664 458
-------------------
Total 729 468
Recoveries:
Commercial loans 2 --
Consumer loans 101 73
-------------------
Total 103 73
-------------------
Net charge-offs 626 395
Provision charged to operations 675 525
-------------------
Balance at end of period $11,044 $10,679
===================
NOTE 4: COMPREHENSIVE INCOME
The Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", as of January 1, 1998. SFAS No. 130
established standards for reporting and display of comprehensive income and its
components. Total Comprehensive Income for the three month period ended March
31, 1999 and 1998 was as follows:
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<PAGE>
Three Months Ended
March 31,
1999 1998
--------------------
(In thousands)
--------------------
Net income $ 4,019 $ 3,897
Other comprehensive income:
Unrealized holding gains and losses
on debt securities available for sale,
net of tax (1,833) (159)
------- -------
Total accumulated other comprehensive
income (1,833) (159)
------- -------
Total Comprehensive Income $ 2,186 $ 3,738
======= =======
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